Management of Dedeede Foods Ltd, a company based in Ghana, is planning to operate a wholly owned subsidiary in a foreign country. The research department of the company carried out a feasibility and risk assessment study concerning the intended operation in the target foreign country. The findings of the research show that the country has a high unemployment rate and as a result labour costs are generally low. However, this situation is expected to change as the new government has reiterated its promise to adjust the minimum wage upward by a whopping 300%. The new government in its campaign for power promised to introduce high employer contributions to pension funds for local employees. Apart from the unemployment problem, the country is suffering from balance of trade related problems which have caused its currency to depreciate by an estimated 100% on the average against major trading currencies. Discussions with some financial experts in the country disclosed that the new government is likely to devalue its currency and thereafter introduce a pegged exchange rate regime. There are few citizens and businesses in the tax net and so tax rates are high. Limited tax incentives are available for investments in certain industries particularly information technology, manufacturing and assembly of vehicles and industrial machines, agro-processing for export, waste management and real estate. The exemptions are only for limited periods of time up to 5 years. There is provision in the countrys tax law that gives the Commissioner of taxes the power to extend exemption period if that would be in the interest of the country. The research department also studied the countrys regulatory framework for financial accounting and reporting. The study revealed that the country has its own set of accounting standards which differ in some areas from the accounting standards applicable in Ghana (i.e. the International Financial Reporting Standards).

Required: (a) Explain whether Dedeede Foods Ltd will be exposed to the following forms of risk if it operates the proposed subsidiary in the foreign country:

i) Political risk

ii) Financial risk