Do you think the financial risk associated with Thailand is higher or lower for a manufacturer of leisure products such as Blades as opposed to$,$ say, a food producer? That is$,$ conduct a micro$-$assessment of financial risk for Blades, Inc. Do you think a leisure product manufacturer such as Blades will be more affected by political or financial risk factors?

Answer based on this information;

Case Study, Part $4($Chapter $16)$

Country Risk Assessment

Recently, Ben Holt, Blades$$ chief financial officer, has assessed whether it would be more beneficial for Blades to establish a subsidiary in Thailand to manufacture roller blades or to acquire an existing manufacturer, Skates$$n$$Stuff$,$ which has offered to sell its business to Blades for $1$ billion Thai baht. In Holt$$s view, establishing a subsidiary in Thailand yields a higher net present value than acquiring the existing business. Furthermore, the Thai manufacturer has rejected an offer by Blades, Inc., of $900$ million baht. A purchase price of $900$ million baht for Skates$$n$$Stuff would make the acquisition as attractive as the establishment of a subsidiary in Thailand in terms of NPV$,$ but Skates$$n$$Stuff has indicated that it is not willing to accept less than $950$ million baht.

Although Holt is confident that the NPV analysis was conducted correctly, he is troubled by the fact that the same discount rate, $25$ percent, was used in each analysis. In his view, establishing a subsidiary in Thailand may be associated with a higher level of country risk than acquiring Skates$$n$$Stuff$.$ Although either approach would result in approximately the same level of financial risk, the political risk associated with establishing a subsidiary in Thailand may be higher than the political risk of operating Skates$$n$$Stuff$.$ If the establishment of a subsidiary in Thailand is associated with a higher level of country risk overall, then the MNC should use a higher discount rate in the analysis. Based on these considerations, Holt wants to measure the country risk associated with Thailand on both a macro and a micro level, and then reexamine the feasibility of both approaches.

Holt has gathered some more detailed political information for Thailand. For example, he believes that consumers in Asian countries prefer to purchase goods produced by Asians, which might limit the success of a subsidiary in Thailand. This cultural characteristic might not prevent an acquisition of Skates$$n$$Stuff from succeeding, however, especially if Blades retains the company$$s management and employees. Furthermore, the subsidiary would have to apply for various licenses and permits to be allowed to operate in Thailand, whereas Skates$$n$$Stuff obtained these licenses and permits long ago. However, the number of licenses required for Blades$$ industry is relatively low compared to other industries. Moreover, there is a high possibility that the Thai government will implement capital controls in the near future, which would prevent funds from leaving Thailand. Because Blades plans to remit all earnings generated by its subsidiary or by Skates$$n$$Stuff back to the United States, regardless of which approach to direct foreign investment the company ultimately takes, capital controls may force Blades to reinvest funds in Thailand.

Holt has also gathered some information regarding the financial risk of operating in Thailand. Thailand$$s economy has been weak lately, and recent forecasts indicate that a recovery may be slow. A weak economy may affect the demand for Blades$$ products, roller blades. The state of the economy is of particular concern to Blades because it produces a leisure product. In the case of an economic turndown, consumers will eliminate these types of purchases first. In addition, Holt is worried about the high interest rates in Thailand, which may further slow economic growth if Thai citizens begin saving more. Furthermore, Holt is aware that inflation levels in Thailand are expected to remain high. These high inflation levels may affect the purchasing power of Thai consumers, who may adjust their spending habits to purchase more essential p