CHAPTER 7 - Country Evaluation and Selection LEARNING OBJECTIVES CHAPTER 7 - Country Evaluation and Selection LEARNING OBJECTIVES After reading this chapter, you should be able to: To grasp company strategies for sequencing the penetration of countries To see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areas To discern the major opportunity and risk variables a company should consider when deciding whether and where to expand abroad To know the methods and problems of collecting and comparing international information To understand some simplifying tools for helping decide where to operate To consider how companies allocate emphasis among the countries where they operate To comprehend why location decisions do not necessarily compare different countries’ possibilities Copyright © 2011 Pearson Education

Introduction Because all companies have limited resources, they must be careful in making the following decisions: 1. In which countries to locate sales, production, and administrative and auxiliary services 2. The sequence for entering different countries 3. The amount of resources and efforts to allocate to each country where they operate Copyright © 2011 Pearson Education

Location Decisions Affecting International Operations Copyright © 2011 Pearson Education

Scanning versus Detailed Analysis Without scanning, a company may: Overlook opportunities and risks Examine too many or too few possibilities Scanning allows managers to examine most or all countries broadly and then narrow them to the most promising ones. In scanning, managers compare country information that is readily available, inexpensive, and fairly comparable—usually without having to incur the expense of visiting foreign countries. Instead they analyze publicly available information, such as from the Internet, and they communicate with experienced people e.g. http://www.doingbusiness.org Once managers narrow their consideration to the most promising countries, they need to compare the feasibility and desirability of each. At this point, unless they are satisfied enough to outsource all their production and sales, they almost always need to go on location to analyze and collect more specific information. Scanning allows managers to examine most or all countries broadly and then narrow them to the most promising ones. In scanning, managers compare country information that is readily available, inexpensive, and fairly comparable—usually without having to incur the expense of visiting foreign countries. Instead they analyze publicly available information, such as from the Internet, and they communicate with experienced people. Once managers narrow their consideration to the most promising countries, they need to compare the feasibility and desirability of each. At this point, unless they are satisfied enough to outsource all their production and sales, they almost always need to go on location to analyze and collect more specific information.

What Information is Important in Scanning? Opportunities Sales Expansion Resource Acquisition Risks Political Risk Monetary Risk Competitive Risk Copyright © 2011 Pearson Education

Examining Economic and Demographic Variables 1.Obsolescence and leapfrogging of products Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively. 2. Prices If prices of essential products are high, consumers may spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. Expansion of sales is probably the most important factor motivating companies to engage in international business, because they assume that more sales will lead to more profits. Thus it is vital for them to decide where best to make those sales. Companies must consider variables other than income and population when estimating potential demand for their products in different countries. Obsolescence and leapfrogging of products. Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively. Prices. If prices of essential products are high, consumers may spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. Income elasticity. A common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs. Substitution. Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles. Income inequality. Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India. Cultural factors and taste. Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian. Existence of trading blocs. Although a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR).

Examining Economic and Demographic Variables 3. Income elasticity A common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs. Substitution Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles. Expansion of sales is probably the most important factor motivating companies to engage in international business, because they assume that more sales will lead to more profits. Thus it is vital for them to decide where best to make those sales. Companies must consider variables other than income and population when estimating potential demand for their products in different countries. Obsolescence and leapfrogging of products. Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively. Prices. If prices of essential products are high, consumers may spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. Income elasticity. A common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs. Substitution. Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles. Income inequality. Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India. Cultural factors and taste. Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian. Existence of trading blocs. Although a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR).

Examining Economic and Demographic Variables Income Inequality Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India. Cultural Factors and Taste Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian. Expansion of sales is probably the most important factor motivating companies to engage in international business, because they assume that more sales will lead to more profits. Thus it is vital for them to decide where best to make those sales. Companies must consider variables other than income and population when estimating potential demand for their products in different countries. Obsolescence and leapfrogging of products. Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively. Prices. If prices of essential products are high, consumers may spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. Income elasticity. A common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs. Substitution. Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles. Income inequality. Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India. Cultural factors and taste. Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian. Existence of trading blocs. Although a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR).

Examining Economic and Demographic Variables Trading Blocs Although a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR). Expansion of sales is probably the most important factor motivating companies to engage in international business, because they assume that more sales will lead to more profits. Thus it is vital for them to decide where best to make those sales. Companies must consider variables other than income and population when estimating potential demand for their products in different countries. Obsolescence and leapfrogging of products. Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively. Prices. If prices of essential products are high, consumers may spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. Income elasticity. A common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs. Substitution. Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles. Income inequality. Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India. Cultural factors and taste. Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian. Existence of trading blocs. Although a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR). Copyright © 2011 Pearson Education

Cost Considerations of Resource Acquisition Companies undertake international business to secure resources that are either not sufficiently available or too expensive in their home countries. They may purchase these resources from another organization, or they may establish foreign investments to exploit them. In either case, they must prioritize where they can best secure what they want such as in term of: Labor Infrastructure Ease of Transportation and Communications Government Incentives and Disincentives Companies undertake international business to secure resources that are either not sufficiently available or too expensive in their home countries. They may purchase these resources from another organization, or they may establish foreign investments to exploit them. In either case, they must prioritize where they can best secure what they want. LABOR Although capital intensity is growing in most industries, labor compensation remains an important cost for most companies. In the scanning process, you can examine such factors as labor market size, labor compensation, minimum wages, customary and required fringe benefits, education levels, and unemployment rates to compare labor cost, skills, and availability. Labor, however, is not homogeneous. Neither are companies’ labor needs. INFRASTRUCTURE Poor internal infrastructure may easily negate cost differences in labor rates. In many developing countries, infrastructure is both poor and unreliable, which adds to companies’ costs of operating. EASE OF TRANSPORTATION AND COMMUNICATIONS Related to infrastructure is the advantage of locating near customers and suppliers. For example, companies with rapidly evolving technologies need to tightly coordinate product, process, and production technologies to speed new products to market and diminish competitors’ opportunity to copy them. This tends to push more production for this type of company into developed countries, where they conduct most of their R&D. Government practices may increase or decrease companies’ costs. Because countries compete to attract investors, many offer incentives, through regulations or negotiations, that lower companies’ costs of operating. These incentives include such things as lower taxes, training of employees, loan guarantees, low-interest loans, exemption of import duties, and subsidized energy and transportation. Differences in tax rates are particularly important when deciding where to produce within a regional trading bloc, inasmuch as companies can serve the entire region from any country within the bloc. Copyright © 2011 Pearson Education

Factors to Consider in Analyzing Risk Companies and their managers differ in their perceptions of what is risky. One company’s risk may be another’s opportunity. There are means by which companies may reduce their risks other than avoiding locations. There are trade-offs among risks. Keep in mind several factors as we discuss specific types of risk: 1. Companies and their managers differ in their perceptions of what is risky, how tolerant they are of taking risk, what they expect returns should be for the risk they take, and the portion of their assets they are willing to put at risk. 2. One company’s risk may be another’s opportunity. For example, companies offering security solutions (e.g., alarm systems, guard services, insurance, weapons) may find their biggest sales opportunities where other companies find only operating risks. 3. There are means by which companies may reduce their risks other than avoiding locations, such as by insuring, but all these options incur costs that decision makers should take into account. 4. There are trade-offs among risks. For instance, avoidance of a country where political risk is high may leave a company more vulnerable to competitive risk if another company earns good profits there. Finally, returns are usually higher where risk is higher. Copyright © 2011 Pearson Education

Political Risk Analyzing Past Patterns Analyzing Opinions Examining Social and Economic Conditions Predicting foreign companies’ risk on the basis of past political occurrences is problematic because situations may change for better or worse. Further, examining a country’s overall situation masks political risk differences within countries and among companies. For example, unrest that leads to property damage and disruption of supplies or sales may be limited geographically. Moreover, with few exceptions, government takeovers of companies have been highly selective, primarily affecting operations that have a visible widespread effect on the country because of their size or monopoly position. Because influential people may sway future political events affecting business, managers should access statements by political leaders both in and out of office to determine their philosophies toward private business, foreign business relations, the means of effecting economic changes, and their feelings toward given foreign countries. They should also access polls showing different leaders’ likelihood of gaining political office. Modern technology has improved access to global newspapers and television so that managers can retrieve reports quickly. Countries’ social and economic conditions may lead to unrest if population segments have unmet aspirations. Frustrated groups may disrupt business by calling general strikes and destroying property and supply lines. Moreover, political leaders might harness their support by blaming problems on foreigners and foreign companies. This may lead to boycotts or rule changes for foreign companies or even expropriation of their properties. Copyright © 2011 Pearson Education

Monetary Risk Exchange Rate Changes Mobility of Funds Differences in the exchange rates can create gains or losses Mobility of Funds Liquidity among countries varies If a company is to invest abroad, then the ability to get funds out of the country is a factor when comparing countries. A theory that helps to explain this is liquidity preference, which is much like option theory in that it states that investors usually want some of their holdings to be in highly liquid assets on which they are willing to take a lower return. They need liquidity in part to make near-term payments, such as paying out dividends; in part to cover unexpected contingencies, such as stockpiling materials if a strike threatens supply; and in part to be able to shift funds to even more profitable opportunities, such as purchasing materials at a discount during a temporary price depression. The comparative liquidity among countries varies because of the activity of capital markets and because of governmental exchange control. An active capital market, particularly a stock market, helps a company sell its assets, especially if it wishes to sell shares on a local exchange or sell the entire operation. Thus, when comparing countries, you may wish to include the existence of an active stock market as a favorable variable. Copyright © 2011 Pearson Education

Competitive Risk Making Operations Compatible (see Distance Framework table). Spreading Risk Following Competitors of Customers Heading Off Competition Making Operations Compatible Because companies operating abroad encounter less familiar environments, they encounter operating risks relative to local companies. Thus companies initially prefer to operate where they perceive conditions to be more similar to their home countries, provided, of course, that the countries additionally offer sufficient opportunities in terms of sales or resource acquisition. Spreading Risk By operating in diverse countries, companies may be able to smooth their sales and profits, which may give them a competitive advantage in raising funds. They may further guard against the effects of currency value changes by locating in countries whose exchange rates are not closely correlated with each other. Following Competitors or Customers Managers may purposely crowd a market to prevent competitors from gaining advantages therein that they can use to improve their competitive positions elsewhere—a situation known as oligopolistic reaction. These clusters attract multiple suppliers and personnel with specialized skills. They also attract buyers who want to compare potential suppliers but don’t want to travel great distances between them. Companies operating in the cluster area may also gain better access to information about new developments, because they frequently come in contact with personnel from the other companies. Heading Off Competition A company may try to reduce competitive risk by getting a strong foothold in markets before competitors do, by avoiding strong competitors altogether, or, when its innovative advantage may be short lived, by moving quickly into markets before competitors can copy the innovation. Copyright © 2011 Pearson Education

Administrative Distance Distance Framework The distance framework helps managers identify and assess the impact of distance of different types (Pankaj, 2001). Cultural Distance Administrative Distance Geographic Distance Economic Distance Attitude Creating Distance Different language Different ethnicities: lack of connective ethnic or social networks Different religions Different social norms Absence of colonial ties Absence of shared monetary/political association Political hostility Government policies Institutional weaknesses Physical remoteness Lack of a common border Lack of sea or river access Size of country Weak transportation or communication links Different in climates Difference consumer incomes Different costs and quality of: natural resources financial resources human resources infrastructure intermediate input information or knowledge Making Operations Compatible Because companies operating abroad encounter less familiar environments, they encounter operating risks relative to local companies. Thus companies initially prefer to operate where they perceive conditions to be more similar to their home countries, provided, of course, that the countries additionally offer sufficient opportunities in terms of sales or resource acquisition. Spreading Risk By operating in diverse countries, companies may be able to smooth their sales and profits, which may give them a competitive advantage in raising funds. They may further guard against the effects of currency value changes by locating in countries whose exchange rates are not closely correlated with each other. Following Competitors or Customers Managers may purposely crowd a market to prevent competitors from gaining advantages therein that they can use to improve their competitive positions elsewhere—a situation known as oligopolistic reaction. These clusters attract multiple suppliers and personnel with specialized skills. They also attract buyers who want to compare potential suppliers but don’t want to travel great distances between them. Companies operating in the cluster area may also gain better access to information about new developments, because they frequently come in contact with personnel from the other companies. Heading Off Competition A company may try to reduce competitive risk by getting a strong foothold in markets before competitors do, by avoiding strong competitors altogether, or, when its innovative advantage may be short lived, by moving quickly into markets before competitors can copy the innovation.

Collecting and Analyzing Data Companies undertake business research to reduce outcome uncertainties from their decisions and to assess their operating performance. Questions such as: Can we hire qualified personnel? Will the economic & political climate allow us to reasonable foresee our future? What is our market share? To answer those questions, information is needed at all levels of control and companies should compare the cost of information with its value. Copyright © 2011 Pearson Education

Problems With Research Results and Data Limited Resources Misleading Data Reliance on Legally Reported Market Activities Poor Research Methodology Noncomparable Information Countries may have such limited resources that other projects necessarily receive priority in the national budget, such as spending to improve the literacy rate rather than spending to measure it. Of equal concern to the researcher is the publication of false or purposely misleading information designed to mislead government superiors, the country’s rank and file, or companies and institutions abroad. Further distortions may occur because nationally reported income figures include only legal and reported market activities. Thus illegal income from such activities as the drug trade, theft, bribery, and prostitution is not included in national income figures, or it appears in other economic sectors because of money laundering. Finally, many inaccuracies are due to poor collection and analysis by researchers both within and outside the government. Too often, broad generalizations are drawn from too few observations on non-representative samples and on poorly designed questionnaires. Problems in information comparability arise from: • Differences in definitions and base years • Distortions in currency conversions Copyright © 2011 Pearson Education

External Sources of Information Individualized Reports e.g. sold by consulting firms like Frost & Sullivan, etc. Specialized Studies e.g. directories of companies that operate in a given locale Service Companies e.g. most companies providing services to international clients like bank, transportation firms, etc. publish reports. Government Agencies e.g. US Dept. of Commerce compiles news about individual foreign countries, in Malaysia, info can be sought at MITI and MATRADE. International Organizations and Agencies e.g. info can be gathered from United Nations, WTO, IMF, OECD Trade Associations e.g. trade journals publish by the associations like FAMA, MPOB, etc. Copyright © 2011 Pearson Education

Country Comparison Tools There are 2 most common tools in scanning 1. Grids May depict acceptable or unacceptable conditions Rank countries by important variables 2. Matrices allow companies to: Decide on indicators and weight them Evaluate each country on the weighted indicators Both the variables and the weights differ by product and company depending on the company’s internal situation and its objectives. For instance, managers in a company selling a low-priced consumer product might heavily weigh population size as an indicator of market opportunity, whereas those in a company selling tire retreading services might heavily weigh the number of vehicles registered. The grid technique is useful even when a company does not compare countries, because it can set the minimum score needed for either investing additional resources or committing further funds to a more detailed feasibility study. To more clearly show the opportunity and risk relationship, managers can plot values on a matrix. They must determine which factors are good indicators of their companies’ risk and opportunity and weight them to reflect their importance. Copyright © 2011 Pearson Education

Simplified Market-Penetration Grid Variable Weight Country A B C Acceptable (A) or Unacceptable (B) 1. Allow 100% ownership Return (higher rating is better) Size of investment Direct Cost Tax rate Market size Market share Total 0 - 5 4 2 3 1 Risk (lower rating is better) Exchange problems Political instability Loose business laws Corruption Index Both the variables and the weights differ by product and company depending on the company’s internal situation and its objectives. For instance, managers in a company selling a low-priced consumer product might heavily weigh population size as an indicator of market opportunity, whereas those in a company selling tire retreading services might heavily weigh the number of vehicles registered. The grid technique is useful even when a company does not compare countries, because it can set the minimum score needed for either investing additional resources or committing further funds to a more detailed feasibility study. To more clearly show the opportunity and risk relationship, managers can plot values on a matrix. They must determine which factors are good indicators of their companies’ risk and opportunity and weight them to reflect their importance. Copyright © 2011 Pearson Education

OPPORTUNITY RISK MATRIX Which country is most desirable? F A Decreased Risk E D C Which country is most desirable? Country E & F are more desirable because the boast a combination of a high level of opportunity and a low level of risk To more clearly show the opportunity and risk relationship, managers can plot values on a matrix. They must determine which factors are good indicators of their companies’ risk and opportunity and weight them to reflect their importance. B Increased Opportunity Copyright © 2011 Pearson Education

Allocating Among Locations There are three complementary strategies for international expansion. Alternative Gradual Commitments Geographic Diversification versus Concentration Reinvestment and Harvesting Copyright © 2011 Pearson Education

Alternative Gradual Commitments Companies may reduce risks from the liability of foreignness by: • Going first to countries with characteristics similar to those of their home countries e.g. Malaysia & Indonesia • Having experienced intermediaries handle operations for them. • Operating in formats requiring commitment of fewer resources abroad. • Moving initially to one or a few, rather than many, foreign countries. Copyright © 2011 Pearson Education

Geographic Diversification versus Concentration Growth rate in each market Sales stability in each market Competitive lead time Spillover Effects Need for product, communication, and distribution adaptation Program control requirements Growth Rate in Each Market When the growth rate in each market is high or needs to be high, a company should usually concentrate on a few markets, because it will cost a great deal to expand output sufficiently in each one. However, slower growth or the need for growth in each market may result in the company’s having enough resources to build and maintain a market share in several different countries. Sales Stability in Each Market A company may smooth its earnings and sales because of operations in various parts of the world. The more stable sales and profits are within each market, the less advantage there is from a diversification strategy. Similarly, the more correlated markets are, the less smoothing is achieved by selling in each. Spillover effects are situations in which the marketing program in one country results in awareness of the product in other countries. These effects are advantageous because additional customers may be reached with little additional cost. Need for Product, Communication, and Distribution Adaptation Companies may have to alter products and their marketing to sell abroad, a process that, because of cost, favors a concentration strategy. The adaptation cost may limit the resources the company has for expanding in many different markets. Further, if the adaptations are unique to each country, the company cannot easily spread adaptation costs over sales in more than one country to reduce total unit costs. Program Control Requirements The more a company needs to control its operations in a foreign country, the more favorable a concentration strategy is. This is because the company will need to use more of its resources to maintain that control, such as by taking a larger percentage of ownership in the operation. Copyright © 2011 Pearson Education

Reinvestment and Harvesting FDI-financial and human capital invested abroad Depending on the success of the investment, the company may reinvest or consider using the capital elsewhere Companies treat decisions to replace depreciated assets or to add to the existing stock of capital from retained earnings in a foreign country somewhat differently from original investment decisions. This is because companies may have to make new commitments to maintain competitiveness abroad. Companies commonly reduce commitments in some countries because those countries have poorer performance prospects than do others—a process known as harvesting (or divesting). Companies must decide how to get out of operations if: • They no longer fit the overall strategy. • There are better alternative opportunities. Companies may divest by selling or closing facilities. They usually prefer selling because they receive some compensation. A company that considers divesting because of a country’s political or economic situation may find few potential buyers except at very low prices. A company cannot always simply abandon an investment either. Governments frequently require performance contracts, such as substantial severance packages to employees, that make a loss from divestment greater than the direct investment’s net value. Further, the length of time to go through insolvency (up to 10 years in some countries) alters the percentage of value recovered from a divestment. Copyright © 2011 Pearson Education

Noncomparative Decision Making Most companies examine proposals one at a time and accept them if they meet minimum threshold criteria. Managers make go-no-go decisions by examining one opportunity at a time and pursuing it if it meets some threshold criteria. To begin with, companies sometimes need to respond quickly to prospects they had not anticipated. For example, many companies need to respond to unsolicited proposals to sell abroad or sign joint venture or licensing contracts. Undertakings may be onetime possibilities because a government or another company solicits requests, such as the government of India’s announcement that foreign companies could invest in Indian newspapers, but would have to apply quickly. Copyright © 2011 Pearson Education

Future: Will Prime Locations Change? Future growth rates will have implications for locations of markets and labor forces Technological innovation allows for new trends in urbanization as more people are able to work from locations of their choosing Population growth should remain robust in many developing economies, particularly those in sub-Saharan Africa. The projection is that the percentage of people living in currently developed countries is expected to fall to 13.7 percent from a 2000 figure of 19.7 percent. Further, because the world’s population will continue to age, the share of what we now consider the working age population should fall for developed countries and increase in many developing countries. Technology may permit more people to work from anywhere as they e-mail and teleconference with their colleagues, customers, and suppliers elsewhere. Thus they can live anywhere in the world and work from their homes, as is already occurring within some professions. However, if people can work from their homes, they may move their homes where they want to live rather than living where their employers are now located. Because we’re talking here about highly creative and highly innovative self-motivated people, they can usually get permission to live in almost any country of the world. Copyright © 2011 Pearson Education