Portfolio Diversification for International Leaders A Risk Analysis of the Pacific Rim and Eastern European Nations

International lending has been slowed by the repeated loan reschedulings of less developed countries (LDCs) during the 1980s. However, commercial banks recognize that they must provide international loans in order to generate other business from foreign governments and multinational corporations. For this reason, banks must continue to assess the country risk of target countries, especially those in emerging regions such as the Pacific Rim and Eastern Europe. The risk of any country within an emerging region is much higher than the risk of the industrialized countries. Tliis paper addresses the potential benefits from diversifying business within or across these emerging regions. There is much potential for reducing exposure to country risk in Pacific Rim countries through diversification. For Eastern European countries, the benefits are not as substantial. Some banks may still consider some Eastern European businesses to generate higher returns, yet diversify their international portfolio across regions so that exposure to country risk is tolerable.