How Firms in Developing Countries Manage Risk

Abstract

This paper considers the use of risk management techniques and instruments by firms in developing countries. Increased financial market volatility in recent years has led to the development of a number of new financial instruments for managing the risks associated with specific transactions. In most developing countries, however, firms face substantial obstacles to using these instruments. Despite that, developing country managers are becoming more and more aware of the need to manage risk. In many cases, they have turned to the International Finance Companies as a source of information on risk management and for assistance in accessing new risk management instruments.

In addition to the financial risks that often accompany transactions, many firms in developing countries suffer from exposure to other economic risks, especially the risk of long-run overvaluation/undervaluation of their local currency. This type of exposure is more difficult to measure and manage than purely transactional exposures, but can have very significant effects on competitiveness. Unlike the management of transaction exposure, which most often involves use of financial instruments, management of economic exposure requires operational and marketing strategies in order to be effective.

JEL Classification: G31, G32, O12