632598256894

and so will the value of the liabilities. The reverse is also true. In our China example, Small Co. could
have borrowed the CNY 831.490 million in China. Since the assets and the liabilities are equal, there
would be no effect on the equity of the parent from translating the values in the balance sheet to
dollars.
Many companies look to find places to manufacture with very favorable conditions. This serves to
minimize the risk of adverse currency movements. These advantages might include a significant cost
savings over manufacturing in the home country, tax savings, having a skilled and stable workforce,
and a culture of hospitability toward the nation making the investment.
Exhibit 7.14 Index of Economic Freedom 2008.
Source: www.heritage.org/research/features/index/countries.cfm.
The use of local partners can be a third way to help minimize the risk. Their investment can spread
the risk of currency and perhaps, more important, can lower political risk. Often the right local partner
is better able to deal with emerging situations that could have an impact on the project.
Therefore, it is important to understand the culture of the country. In some countries, business
practices differ from the United States. Just as we leave tips for waitstaff, in some parts of the world it
is expected that companies make payments to government officials in order to do business. The
Foreign Corrupt Practices Act of 1978 makes it illegal for a U.S. company to pay a bribe. The local
partner can often advise how to avoid situations that would put the venture into an unlawful situation.
In some cases, this may mean forgoing an investment in a country that otherwise seems to hold great
potential.
There is a practical reason as well as a legal reason for avoiding payments to officials. These
officials may be resented by the local citizens. If there is a change in the government, companies
closely associated with the prior political leadership may be penalized. From time to time, there are
news stories about attacks on American businesspeople and companies in countries in political
turmoil.
It is possible to find information on country risk by looking to the Heritage Foundation‟s Index of
Economic Freedom (www.heritage.org). The following information comes from the 2008 index:
China has an overall score of 52.8%, which ranks it 126th in the world. This score rates China
“mostly unfree.” The U.S. score is 80.6%, which ranks it 5th and rated “free.” Dead last, ranked
157th, is North Korea with a score of 3.0%. Exhibit 7.14 shows the categories of economic freedom,
which put China‟s score into perspective. Clearly China has a long way to go before it can be rated
“free” or even “mostly free.”