Subsidiary Establishment in Emerging Markets - A Unified Framework for Risk Analysis

Abstract

Starting from the traditional capital budgeting models, the aim of my dissertation is to analyze how MNCs incorporate (or should incorporate) the main risk factors affecting their decision to establish a subsidiary in an emerging country. The risks addressed (e.g. political, country-level, HR-related, tax-related, corporate governance-related, etc.) are both qualitative and quantitative, as well as exogenous and endogenous. After having been mapped, their impact on the overall risk position of the company will be evaluated and weighted considering both the effects on the MNC and on each other, ending up with a unified framework. In order to prevent any “paralysis by analysis” as well as inconclusive outcomes, the study will develop through three different steps with a progressively higher degree of detail. The starting point is represented by the distinction between exogenous and endogenous risk factors, the former including the elements of the external environment that are likely to have a sizeable impact on the going-global company’s risk position, the latter focusing on the firm-specific features expected to affect the viability and the outcome of the investment concerning the subsidiary establishment. The second stage involves the in-depth analysis of the main risk factors typologies and the way they are expected to affect the investment decisions of the MNC. Thirdly, these main risk factors will be further studied having special regards for various sub-types whereby they manifest in practice, deriving the likely consequences on the variables and parameters building the models applied for valuation purposes, ending up with a unified framework grounded on the connections between the risk sources. The work is structured as follows: the Chapter 3 addresses the main topics regarding the entry strategies and paths that MNCs follow when they expand in foreign emerging markets; the array of risks factors (qualitative/quantitative and endogenous/exogenous) contingent to this kind of investment will be analyzed in Chapter 4 and 5; in Chapter 6, their impact on the overall risk position of the company will be evaluated and weighted considering both the effects on the MNC and on each other, ending up with a unified framework. Fundamentally, the ultimate aim of the present work is not to provide an ultimate and ever-valid value for the discount rate to be applied (or for other variables constituting the valuation model), as it varies sensibly when different countries as well as different MNCs are considered, or when different levels, kinds and combinations of risks are evaluated. Conversely, the goal is to construct a tool and a framework to support the management in avoiding the pitfalls concealed in the valuation process when numerous (and often not straightforward) risk factors are considered, building a unified view.