Presentation on theme: "International Business"— Presentation transcript:
1 International Business Chapter TwelveCountry Evaluation and Selection
2 Chapter ObjectivesTo grasp company strategies for sequencing the penetration of countriesTo see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areasTo discern the major opportunity and risk variables a com-pany should consider when deciding whether and where to expand abroadTo know the methods and problems when collecting and comparing information internationallyTo understand some simplifying tools for helping to decide where to operateTo consider how companies allocate emphasis among the countries where they operateTo comprehend why location decisions do not necessarily compare different countries’ possibilities
3 The Basics of Country Selection Because firms lack sufficient resources to pursue all potential (international) opportunities, they must:determine the order of country entryestablish the rates of resource allocation across countriesIn selecting geographic sites, firms must decide:where to market their productswhere to produce their productsIf transportation costs are high and/or government regulations require local production, a firm may be forced to produce a product in the same country in which it sells it.
4 Fig. 12.2: Place of Location Decisions in International Business Operations
5 Scanning vs. Detailed Examination Scanning techniques are based on broad vari ables that identify both opportunities and risks.Scanning techniques help to assure that firms consider neither too many nor two few alternative countries.[For the most part, scanning requires information that is readily available, inexpensive, and fairly comparable.]Detailed examination generally requires on-site visits to collect and analyze specific information that increasingly contributes to the final location decision process.A feasibility study should have clear-cut decision points to guide managers in the decision-making process.Escalation of commitment: the more time and money a firm invests in examining an alternative, the more likely it is to accept it—regardless of its merits.
6 Fig. 12.3: Flowchart for Choosing Where to Operate
7 The Environmental Climate: Country Opportunities • Country opportunities are determined by competitiveness and profitability factors.• Factors that have the greatest influence on country selection are:market size [sales potential]ease and compatibility of operationscosts and resource availabilityred tape and corruptionSome factors are more important for the market location decision, others for the production location decision Some factors affect both decisions.
8 Country Opportunities: Market Attractiveness Market size, i.e., sales potential, is probably the most important market selection variable.Market size predictors include:past and present sales datasocioeconomic data [GDP, per capita income, population size, population growth rates, etc.]Other factors to be considered include:the obsolescence and leapfrogging of productsprice levels and elasticityincome levels and elasticityincome inequalitiessubstitutability of productsexistence of trading blocstaste and other cultural factors
9 Fig. 12.4: Aluminum Consumption and GDP per Capita
10 Country Opportunities: Ease and Compatibility of Operations Firms are attracted to countries that:are located nearbyshare a common languagehave market conditions similar to those in their home countriespresent few market restrictionsFirms’ decision points regarding country selection may include:the ability to operate with product types, technologies, and plant sizes familiar to their managerspermissible levels of ownership and profit repatriationthe availability of local resources [capital, viable partners, etc.]
11 Country Opportunities: Costs and Resource Availability • Firms go abroad to secure resources that are either unavailable or too expensive at home.• Increasingly, firms need to be near customers and suppliers in locations where (i) the infrastructure permits the efficient movement of people, materials, and products and (ii) trade restrictions are minimal.• Productivity-related decision factors include:the cost of labor ̶ utility coststax rates ̶ real estate costsavailable capital costs ̶ transportation coststhe cost of other inputs and supplies[continued]
12 • Labor costs are a particularly important factor in production location decisions. However, ̶ labor is not homogeneous̶ capital intensity may reduce the differences in production costs from one location to another̶ there may be sector and/or geographic differences in wage rates within countriesWhen companies move to emerging economies because of labor cost savings, their advantages may be short-lived because:• competitors follow leaders to low-wage locations• there is little first-in advantage for this type of production migration• costs in emerging economies may rise quickly as a result of pressures on wages and/or exchange rates
13 Country Opportunities: Red Tape and Corruption Red tape: obstructive bureaucracy, i.e., disincentives related to the clarity of laws and whether and how they are enforcedRed tape includes government obstacles with respect to:beginning and continuing operationshiring and/or firing workersthe use of expatriate personnelproducing and marketing goodssatisfying local agencies on matters such as taxes, labor conditions, and environmental compliance[continued]
14 Corruption, i.e., the extortion of income or resources, may include: Corruption: the illegal sale of rights by govern-ment officials for their personal gainCorruption, i.e., the extortion of income or resources, may include:requirements of illegal payments to win a contractrequirements of illegal payments to receive govern-ment servicesrequirements of illegal payments to operate in a particular location or industryFirms are likely to avoid operating countries in which legal transparency is low and corruption is high.
15 The Environmental Climate: Country Risks Risk: the possibility of suffering harm or loss, or a course involving uncertain danger or hazardReturns tend to be higher in countries where operating risks are higher.Firms may balance operations in low-return, low-risk countries with operations in high-return, high-risk countries.Firms may guard against currency fluctuations by locating operations in countries whose exchange rates are not closely correlated.Adverse situations may heighten the perceived needs for certain products.
16 Country Risks: Risk and Uncertainty Companies use a variety of financial techniques to compare potential projects, including:discounted cash flow ̶ return on assets employedeconomic value added ̶ internal rate of returnpayback period ̶ accounting rate of returnnet present value ̶ return on equityreturn on salesGiven the same expected return, most decision makers prefer a more certain outcome to a less certain one.Firms may acquire insurance to reduce risk and uncertainty.
17 Comparison of ROI Certainty INVESTMENT A INVESTMENT BWEIGHTED WEIGHTEDROI PROBABILITY VALUE PROBABILITY VALUE0%5%10%15%20%Est. ROI % %During the initial scanning stage a firm should weight the elements of risk and uncertainty; during a later feasibility study, the firm must determine whether the degree of risk is acceptable.
18 Country Risks: Liability of Foreignness Liability of foreignness: the lower survival rate of foreign firms in their initial years of operationFirms may reduce the associated risks by:first entering countries similar to their home countriesenlisting experienced intermediaries to handle operations for themusing operational forms that require a lower commitment of foreign resourcesinitially moving to fewer, rather than more, foreign countriesForeign firms that manage to survive their early years of operation actually have long-term survival rates comparable to those of local competitors.
19 Fig. 12.5: The Usual Pattern of Internationalization
20 Country Risks: Competitive Risk Strategies designed to deal with the risks posed by competition include:the imitation lag: exploiting temporary innovative advantages by moving first into those countries most likely to catch upthe first mover advantage: becoming the first major com-petitor to enter a country in order to gain the best partners, the best locations, and the best suppliersthe oligopolistic reaction: purposely crowding a market to prevent competitors from gaining advantages they might use to improve their competitive positions elsewhereclustering: locating in places where competitors are present to gain access to multiple suppliers, skilled personnel, an existing customer base, and information regarding innovations
21 Country Risks: Monetary Risk Liquidity preference: the theory that presumes that investors generally want some of their holdings in highly liquid assets• When considering monetary risk, firms must carefully evaluate a country’s:present capital controlsexchange rate stabilitybalance-of-payments accountsinflation rateslevels of government spendingInvestors are willing to accept a lower rate of return on liquid assets in order to be able to move them easily.
22 Country Risks: Political Risk Political risk: the expectation that the political climate in a given country will change in such a way that a firm’s operating position will deteriorateFirms can evaluate the potential political risk of a given country by:examining the country’s past patterns of political riskevaluating the direction of change in the views of government decision makersemploying expert analyststracking economic and social conditionsPolitical risk may arise from war, the expropriation of property, changes in political leaders’ opinions and policies, civil disorder, and/or animosity between a home and host country.
23 Data Collection and Analysis Firms conduct research to:reduce uncertainties at all levels in their decision processesexpand or narrow the alternatives they considerassess the merits of their existing programsThe cost of data collection must be weighed against the probable payoff in terms of:revenue gainscost savingsWhen firms conduct original studies in foreign countries, they may have to be extremely imaginative and observant and analyze indirect and/or complementary indicators.
24 Problems with International Data and Research Results The lack, obsolescence, and/or inaccuracy of data regarding many countries make much research difficult and expensive to undertake.Reasons for data inaccuracies include:the inability of governments to collect the needed informationthe publication of false or purposely inaccurate information designed to mislead constituenciesthe publication of conclusions based on too few observations, non-representative samples, and/or poorly designed research instruments[continued]
25 Data comparability problems are rooted in: definitional differences across countries [e.g., family categories, literacy levels, accounting rules]differences in base years and time periodsdistortions in foreign currency conversionsdifferences in the measurement of investment flowsthe presence of black market activitiesMany countries have agreed to similar standards for collecting and publishing various categories of national data in response to a recommendation of the IMF.
26 External Sources of Information The major types of external, secondary information sources include:individualized reports from market research and business consulting firms [commissioned for a fee]specialized studies from research organizations regarding countries, regions, industries, issues, etc.service firm reports regarding relevant business topicsgovernment agency socioeconomic and other reportsinternational organization and agency reports [e.g., the UN, the IMF, the World Bank, and the OECD]trade association reportsinformation service company reports [fee-based databases]Both the specificity and the cost of information will vary by source.
27 Country Comparison Tools Grids can be used to:depict acceptable or unacceptable conditions [e.g., ownership rights]rank countries according to selected, weighted variables [e.g., return or risk]Matrices can be used to:incorporate weighted indicators of a firm’s risks and opportunities in specific countriesplot the scores to more clearly reveal respective positions for comparative purposesIt is useful to develop both present and future scores for countries; a significant shift in a future score could have serious implications with respect to the country selection process.
28 Simplified Country Comparison Grid: Three Types of Information VARIABLE WEIGHT I II III IV V1. Ownershipa. Sole — No Yes Yes Yes Yesb. Jt. venture — Yes Yes Yes Yes Yes2. Return [higher number preferred]a. Investment —b. Direct costs —Total3. Risk [lower number preferred]a. Exchange risk —b. Political risk —Total
30 Country Resource Allocation: Reinvestment vs. Harvesting Reinvestment: the use of retained earnings to replace depreciated assets or to add to a firm’s existing stock of capitalOver time, most of the value of a firm’s FDI comes from reinvestment; it may take several years and even the allocation of additional funds to meet stated objectives.Harvesting: the reduction in the amount of an invest-ment, either by simply harvesting earnings or by divesting assets as wellIf an operation no longer fits a firm’s overall strategy, or if better opportunities exist elsewhere, a firm must determine how to exit that operation.Managers are more likely to propose investments than divestments.
31 Country Resource Allocation: Diversification vs. Concentration Geographic diversification: moving rapidly into numerous foreign countries and then gradually building a presence in eachGeographic concentration: moving into a limited number of countries and developing a strong competitive position in each• Factors to be considered when selecting a strategy (or perhaps a hybrid of the two) include:̶ market growth rates ̶ the need for adaptation̶ market sales stability ̶ program control̶ competitive lead time requirements̶ spillover effects ̶ constraints
32 Diversification vs. Concentration Strategies: Product and Market Factors Prefer PreferFactor Diversification Concentrationif: if:1. Market growth rate low high2. Market sales stability low high3. Competitive lead time short long4. Spillover effects high high5. Need for product adaptation low high6. Need for promotion and low highdistribution adaptation7. Program control requirements low high8. Constraints low highSource: “Marketing Expansion Strategies in International Marketing,” Journal of Marketing, Spring 1979, p.89.
33 Final Country Selection Details and Non-comparative Decision Making For new investments, firms must:make on-site visitsgenerate detailed estimates of all costsconsider different locations within a given countryevaluate partnership prospectsFor acquisitions firms must examine financial statements and operations in detail.For expansion within countries, decisions will most likely be made on the basis of capital budget requests.[continued]
34 Major factors restricting companies from compar-ing country investment opportunities in great detail are:costs—the additional time and resources required may increase costs to unacceptable levelstime—firms may need to react quickly in order to capture first-mover advantages or respond to competitive threatsMany firms consider proposals one at a time and accept them if they meet minimum threshold criteria.
35 Implications/Conclusions Firms use both qualitative and quantitative information to determine which markets to serve and where to locate production.Because each firm has unique competitive capabilities and objectives, the factors affecting the country selection decision will differ for each.
36 • When allocating resources across countries, a company must consider its need for reinvestment vs. divestment, its preference for diversification vs. concentration, as well as the interdependence of its operations.• The interdependence of a firm’s operations may obscure the real impact of a given operation on overall corporate activity and profitability.