What Is Micro Risk?

Micro risk is a type of political risk that refers to actions in a host country that can adversely affect selected foreign operations of a company that does business internationally. Micro risk can come about from events that may or may not be in the reigning government's control. These micro risks may make it challenging for companies to generate revenue in certain countries outside their own borders. Before companies decide to do business in a foreign market, they may conduct a 澳洲幸运5官方开奖结果体彩网:risk analysis to determine what political riꦓsks they might encounter once they establish their business in a particular foreign co𒁃untry.

Understanding Micro Risk

Micro risks are 澳洲幸运5官方开奖结果体彩网:firm-specific political risks that affect businesses that conduct operations outside their home country borders. These risks do not impact all companies or industries doing business in a foreign country but instead impact a specific firm. Micro risks can also occur at thꦑe project level, thus impacting a specific project a company is attempting to implement in a foreign country. These risks can stem from political, economic, governmental, or societal changes or events that have occurred in the host country.

For example, suppose Company A establishes a manufacturing facility in another country to take advantage of lower labor costs in that country. After a period of time, the workers in that facility decide to go on strike for better wages and benefits. Company A then suffers 澳洲幸运5官方开奖结果体彩网:reduced revenue as the manufacturing plant is id🅺led during the strike. In this example, only operations from Company A were faced with an adverse situation. Operations from other companies were not affected.

Micro Risk vs. Macro Risk

澳洲幸运5官方开奖结果体彩网:Macro political risk differs from micro risk because it refers to the risk across all businesses or industries for entire geographic regions or countries. Unlike micro risk, it is not firm-specific. Macro risks can stem from changes in a government's leadership, political and civil unrest, 澳洲幸运5官方开奖结果体彩网:monetary policy shifts, and changes in goꦬvernment regulations and taxation.

For example, a country's government might enact new environmental regulations that impact factories. The legislation could include new fees and taxes imposed on all factories in order to discourage pollution, such as a 澳洲幸运5官方开奖结果体彩网:carbon tax. It could require factories to redesign their facilities to reduce their imဣpact on the environment. These new regulations represent a macro risk that wou🍌ld not target just one company but would affect all companies operating in the industrial sector.

Political Risk

Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers, or military control. Political risk is also known as "geopolitical risk" and becomes more of a factor as the 澳洲幸运5官方开奖结果体彩网:time horizon of investment gets longer.

Companies that operate internationally, known as 澳洲幸运5官方开奖结果体彩网:multinational corporations (MNCs), can purchase political risk insurance to remove or mitigate certain political risks. This allows management and investors to concentrate ไon the busines♒s fundamentals while knowing losses from political risks are avoided or limited. Typical actions covered include war and terrorism.

Country Risk

A related concept is a country risk, which refers to a set of risks associated with investing in a particular country. Country risk varies from one country to the next and can include political risk, exchange-rate risk, economic risk, and 澳洲幸运5官方开奖结果体彩网:transfer risk. In particular, country risk denotes the risk that a foreign government will default on its bonds or other financial commitments. In a broader sense, country risk is the degree to which political and economic unrest affects the securities of issuers doing business in a parওticular country.

Country risk is critical to consider when investing outside of the United States. Because factors such as political instability can cause great turmoil in financial markets, country risk can reduce the expected 澳洲幸运5官方开奖结果体彩网:return on investment (ROI) of securities. Nearly all mꦛultinational companies face these risks, and many of them insure to what extent they can against th🍨em.

Special Considerations

A company will list the micro and macro risks they face in their filings with the Securities and Exchange Commission (SEC). For example, in their 2019 Form 10-K filing, Apple Inc. lists a variety of risks that impact the company's bottom line. Under risk factors, Apple states that a majority of the company's 澳洲幸运5官方开奖结果体彩网:supply chain, manufacturing, and assembly activities are located outside the United States. This results in a good portion of the company's performance and operations significantly dependent upon global and regional economic and political factors. Apple faces the ongoing risk that an adverse micro or macro event in another country could disrupt its ability to manufacture its products.