Negocios Internacionales

Edwin B. Melendez, SID # 57844 April 10, 2010
BAM 514 - International Business Management
Unit # 1

Question # 1: Describe political risk insurance and local debt financing. Given thechoice between political risk insurance and local debt financing, which would be most appropriate to use?
Political risk occurred when governments in specific country make a decision that will affectbusiness investment. Political Risk Insurance (PRI) is the type of cover that some businesses used to deal with risks that comes from the adverse actions or inactions of governments. The OverseasPrivate Investment Corporation (OPIC) and the Foreign Credit Insurance Association (FCIA) are some of the sources to mitigate the political risk on Multinational Corporations (MNC) assets. Some of therisks insured in less developed countries include the following:
1. Inconvertibility (risk of not being able to convert profits, royalties, fees, or other income, as well as the original capitalinvested)
2. Expropriation (risk of host government preventing the investing firm to take control over the use of property for one year)
3. War, revolution, insurrection, civil strife (risk ofdamages to the property and activity of investor and firm’s inability to repay a loan)
4. Business income (risk of loss of business income resulting from damages incurred due to political violence)Local debt financing is when the corporation borrows money in the host country to avoid terminating operations without compensation. Because of their losses the firm withholds debt repayments.
Edwin B.Melendez, SID # 57844 April 10, 2010
BAM 514 - International Business Management
Unit # 1

In conclusion given the choice between political risk insurance and local debt financing, itwould be most appropriate to use Political Risk Insurance because it will attract investors with the fact that you are mitigating their risks and will provides comfort to banks, suppliers, customers,...