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Daniels Ib11 Ch12

  1. 1. International Business Chapter Twelve Country Evaluation and Selection
  2. 2. Chapter Objectives <ul><li>To grasp company strategies for sequencing the penetration of countries </li></ul><ul><li>To see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areas </li></ul><ul><li>To discern the major opportunity and risk variables a com-pany should consider when deciding whether and where to expand abroad </li></ul><ul><li>To know the methods and problems when collecting and comparing information internationally </li></ul><ul><li>To understand some simplifying tools for helping to decide where to operate </li></ul><ul><li>To consider how companies allocate emphasis among the countries where they operate </li></ul><ul><li>To comprehend why location decisions do not necessarily compare different countries ’ possibilities </li></ul>12-
  3. 3. The Basics of Country Selection <ul><li>Because firms lack sufficient resources to pursue all potential (international) opportunities, they must: </li></ul><ul><li>determine the order of country entry </li></ul><ul><li>establish the rates of resource allocation across countries </li></ul><ul><li>In selecting geographic sites, firms must decide: </li></ul><ul><li>where to market their products </li></ul><ul><li>where to produce their products </li></ul><ul><li>If 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. </li></ul>12-
  4. 4. Fig. 12.2: Place of Location Decisions in International Business Operations 12-
  5. 5. Scanning vs. Detailed Examination <ul><li>Scanning techniques are based on broad vari- ables that identify both opportunities and risks. </li></ul><ul><li>Scanning techniques help to assure that firms consider neither too many nor two few alternative countries. </li></ul><ul><li>[For the most part, scanning requires information that is readily available, inexpensive, and fairly comparable.] </li></ul><ul><li>Detailed examination generally requires on-site visits to collect and analyze specific information that increasingly contributes to the final location decision process. </li></ul><ul><li>A feasibility study should have clear-cut decision points to guide managers in the decision-making process. </li></ul><ul><li> 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. </li></ul>12-
  6. 6. Fig. 12.3: Flowchart for Choosing Where to Operate 12-
  7. 7. The Environmental Climate: Country Opportunities <ul><li>• Country o pportunities are determined by competitiveness and profitability factors. </li></ul><ul><li>• Factors that have the greatest influence on country selection are: </li></ul><ul><ul><li>m arket size [sales potential] </li></ul></ul><ul><ul><li>ease and compatibility of operations </li></ul></ul><ul><ul><li>c osts and resource availability </li></ul></ul><ul><ul><li>red tape and corruption </li></ul></ul><ul><ul><li>Some factors are more important for the market location decision, others for the production location decision. Some factors affect both decisions. </li></ul></ul>12-
  8. 8. Country Opportunities: Market Attractiveness <ul><li>Market size, i.e., sales potential, is probably the most important market selection variable. </li></ul><ul><li>Market size predictors include: </li></ul><ul><ul><li>past and present sales data </li></ul></ul><ul><ul><li>socioeconomic data [GDP, per capita income, population size, population growth rates, etc.] </li></ul></ul><ul><li>Other factors to be considered include: </li></ul><ul><ul><li>the obsolescence and leapfrogging of products </li></ul></ul><ul><ul><li>price levels and elasticity </li></ul></ul><ul><ul><li>income levels and elasticity </li></ul></ul><ul><ul><li>income inequalities </li></ul></ul><ul><ul><li>substitutability of products </li></ul></ul><ul><ul><li>existence of trading blocs </li></ul></ul><ul><ul><li>taste and other cultural factors </li></ul></ul>12-
  9. 9. Fig. 12.4: Aluminum Consumption and GDP per Capita 12-
  10. 10. Country Opportunities: Ease and Compatibility of Operations <ul><li>Firms are attracted to countries that: </li></ul><ul><li>are located nearby </li></ul><ul><li>share a common language </li></ul><ul><li>have market conditions similar to those in their home countries </li></ul><ul><li>present few market restrictions </li></ul><ul><li>Firms ’ decision points regarding country selection may include: </li></ul><ul><li>the ability to operate with product types, technologies, and plant sizes familiar to their managers </li></ul><ul><li>permissible levels of ownership and profit repatriation </li></ul><ul><li>the availability of local resources [capital, viable partners, etc.] </li></ul>12-
  11. 11. Country Opportunities: Costs and Resource Availability <ul><li>• Firms go abroad to secure resources that are either unavailable or too expensive at home. </li></ul><ul><li>• 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. </li></ul><ul><li>• Productivity-related decision factors include: </li></ul><ul><ul><li>t he cost of labor ̶ utility costs </li></ul></ul><ul><ul><li>tax rates ̶ real estate costs </li></ul></ul><ul><ul><li>available capital costs ̶ transportation costs </li></ul></ul><ul><ul><li>the cost of other inputs and supplies </li></ul></ul><ul><ul><li>[continued] </li></ul></ul>12-
  12. 12. <ul><li>• Labor costs are a particularly important factor in production location decisions. However, </li></ul><ul><li>̶ labor is not homogeneous </li></ul><ul><li>̶ capital intensity may reduce the differences in production costs from one location to another </li></ul><ul><li>̶ there may be sector and/or geographic differences in wage rates within countries </li></ul><ul><li>When companies move to emerging economies because of labor cost savings, their advantages may be short-lived because: </li></ul><ul><li>• competitors follow leaders to low-wage locations </li></ul><ul><li>• there is little first-in advantage for this type of production migration </li></ul><ul><li>• costs in emerging economies may rise quickly as a result of pressures on wages and/or exchange rates </li></ul>12-
  13. 13. Country Opportunities: Red Tape and Corruption <ul><li>Red tape: obstructive bureaucracy, i.e., disincentives related to the clarity of laws and whether and how they are enforced </li></ul><ul><li>Red tape includes government obstacles with respect to: </li></ul><ul><ul><li>beginning and continuing operations </li></ul></ul><ul><ul><li>hiring and/or firing workers </li></ul></ul><ul><ul><li>the use of expatriate personnel </li></ul></ul><ul><ul><li>producing and marketing goods </li></ul></ul><ul><ul><li>satisfying local agencies on matters such as taxes, labor conditions, and environmental compliance </li></ul></ul><ul><ul><li>[continued] </li></ul></ul>12-
  14. 14. <ul><li>Corruption: the illegal sale of rights by govern-ment officials for their personal gain </li></ul><ul><li>Corruption, i.e., the extortion of income or resources, may include: </li></ul><ul><ul><li>requirements of illegal payments to win a contract </li></ul></ul><ul><ul><li>requirements of illegal payments to receive govern-ment services </li></ul></ul><ul><ul><li>requirements of illegal payments to operate in a particular location or industry </li></ul></ul><ul><li>Firms are likely to avoid operating countries in which legal transparency is low and corruption is high. </li></ul>12-
  15. 15. The Environmental Climate: Country Risks <ul><li>Risk: the possibility of suffering harm or loss, or a course involving uncertain danger or hazard </li></ul><ul><li>Returns tend to be higher in countries where operating risks are higher. </li></ul><ul><li>Firms may balance operations in low-return, low-risk countries with operations in high-return, high-risk countries. </li></ul><ul><li>Firms may guard against currency fluctuations by locating operations in countries whose exchange rates are not closely correlated. </li></ul><ul><li>Adverse situations may heighten the perceived needs for certain products. </li></ul>12-
  16. 16. Country Risks: Risk and Uncertainty <ul><li>Companies use a variety of financial techniques to compare potential projects, including: </li></ul><ul><ul><li>discounted cash flow ̶ return on assets employed </li></ul></ul><ul><ul><li>economic value added ̶ internal rate of return </li></ul></ul><ul><ul><li>payback period ̶ accounting rate of return </li></ul></ul><ul><ul><li>net present value ̶ return on equity </li></ul></ul><ul><ul><li>return on sales </li></ul></ul><ul><li>Given the same expected return, most decision makers prefer a more certain outcome to a less certain one. </li></ul><ul><li>Firms may acquire insurance to reduce risk and uncertainty. </li></ul>12-
  17. 17. Comparison of ROI Certainty <ul><li> INVESTMENT A INVESTMENT B </li></ul><ul><li> WEIGHTED WEIGHTED </li></ul><ul><li>ROI PROBABILITY VALUE PROBABILITY VALUE </li></ul><ul><li>0% .15 0.0 0 0.0 </li></ul><ul><li>5% .20 1.0 .30 1.5 </li></ul><ul><li>10% .30 3.0 .40 4.0 </li></ul><ul><li>15% .20 3.0 .30 4.5 </li></ul><ul><li>20% .15 3.0 0 0.0 </li></ul><ul><li>Est. ROI 10.0% 10.0% </li></ul><ul><li>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 . </li></ul>12-
  18. 18. Country Risks: Liability of Foreignness <ul><li>Liability of foreignness: the lower survival rate of foreign firms in their initial years of operation </li></ul><ul><li>Firms may reduce the associated risks by: </li></ul><ul><ul><li>first entering countries similar to their home countries </li></ul></ul><ul><ul><li>enlisting experienced intermediaries to handle operations for them </li></ul></ul><ul><ul><li>using operational forms that require a lower commitment of foreign resources </li></ul></ul><ul><ul><li>initially moving to fewer, rather than more, foreign countries </li></ul></ul><ul><ul><li>Foreign firms that manage to survive their early years of operation actually have long-term survival rates comparable to those of local competitors. </li></ul></ul>12-
  19. 19. Fig. 12.5: The Usual Pattern of Internationalization 12-
  20. 20. Country Risks: Competitive Risk <ul><li>Strategies designed to deal with the risks posed by competition include: </li></ul><ul><li>the imitation lag: exploiting temporary innovative advantages by moving first into those countries most likely to catch up </li></ul><ul><li>the 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 suppliers </li></ul><ul><li>the oligopolistic reaction: purposely crowding a market to prevent competitors from gaining advantages they might use to improve their competitive positions elsewhere </li></ul><ul><li>clustering: locating in places where competitors are present to gain access to multiple suppliers, skilled personnel, an existing customer base, and information regarding innovations </li></ul>12-
  21. 21. Country Risks: Monetary Risk <ul><li>Liquidity preference: the theory that presumes that investors generally want some of their holdings in highly liquid assets </li></ul><ul><li>• When considering monetary risk, firms must carefully evaluate a country ’ s: </li></ul><ul><ul><li>present capital controls </li></ul></ul><ul><ul><li>exchange rate stability </li></ul></ul><ul><ul><li>balance-of-payments accounts </li></ul></ul><ul><ul><li>inflation rates </li></ul></ul><ul><ul><li>levels of government spending </li></ul></ul><ul><ul><li>Investors are willing to accept a lower rate of return on liquid assets in order to be able to move them easily. </li></ul></ul>12-
  22. 22. Country Risks: Political Risk <ul><li>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 deteriorate </li></ul><ul><li>Firms can evaluate the potential political risk of a given country by: </li></ul><ul><ul><li>examining the country ’ s past patterns of political risk </li></ul></ul><ul><ul><li>evaluating the direction of change in the views of government decision makers </li></ul></ul><ul><ul><li>employing expert analysts </li></ul></ul><ul><ul><li>tracking economic and social conditions </li></ul></ul><ul><li>Political 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. </li></ul>12-
  23. 23. Data Collection and Analysis <ul><li>Firms conduct research to: </li></ul><ul><ul><li>reduce uncertainties at all levels in their decision processes </li></ul></ul><ul><ul><li>expand or narrow the alternatives they consider </li></ul></ul><ul><ul><li>assess the merits of their existing programs </li></ul></ul><ul><li>The cost of data collection must be weighed against the probable payoff in terms of: </li></ul><ul><ul><li>revenue gains </li></ul></ul><ul><ul><li>cost savings </li></ul></ul><ul><ul><li>When firms conduct original studies in foreign countries, they may have to be extremely imaginative and observant and analyze indirect and/or complementary indicators. </li></ul></ul>12-
  24. 24. Problems with International Data and Research Results <ul><li>The lack, obsolescence, and/or inaccuracy of data regarding many countries make much research difficult and expensive to undertake. </li></ul><ul><li>Reasons for data inaccuracies include: </li></ul><ul><ul><li>the inability of governments to collect the needed information </li></ul></ul><ul><ul><li>the publication of false or purposely inaccurate information designed to mislead constituencies </li></ul></ul><ul><ul><li>the publication of conclusions based on too few observations, non-representative samples, and/or poorly designed research instruments </li></ul></ul><ul><ul><li>[continued] </li></ul></ul>12-
  25. 25. <ul><li>Data comparability problems are rooted in: </li></ul><ul><ul><li>definitional differences across countries [e.g., family categories, literacy levels, accounting rules] </li></ul></ul><ul><ul><li>differences in base years and time periods </li></ul></ul><ul><ul><li>distortions in foreign currency conversions </li></ul></ul><ul><ul><li>differences in the measurement of investment flows </li></ul></ul><ul><ul><li>the presence of black market activities </li></ul></ul><ul><ul><li>Many countries have agreed to similar standards for collecting and publishing various categories of national data in response to a recommendation of the IMF. </li></ul></ul>12-
  26. 26. External Sources of Information <ul><li>The major types of external, secondary information sources include: </li></ul><ul><ul><li>individualized reports from market research and business consulting firms [commissioned for a fee] </li></ul></ul><ul><ul><li>specialized studies from research organizations regarding countries, regions, industries, issues, etc. </li></ul></ul><ul><ul><li>service firm reports regarding relevant business topics </li></ul></ul><ul><ul><li>government agency socioeconomic and other reports </li></ul></ul><ul><ul><li>international organization and agency reports [e.g., the UN, the IMF, the World Bank, and the OECD] </li></ul></ul><ul><ul><li>trade association reports </li></ul></ul><ul><ul><li>information service company reports [fee-based databases] </li></ul></ul><ul><li>Both the specificity and the cost of information will vary by source. </li></ul>12-
  27. 27. Country Comparison Tools <ul><li>Grids can be used to: </li></ul><ul><ul><li>depict acceptable or unacceptable conditions [e.g., ownership rights] </li></ul></ul><ul><ul><li>rank countries according to selected, weighted variables [e.g., return or risk] </li></ul></ul><ul><li>Matrices can be used to: </li></ul><ul><ul><li>incorporate weighted indicators of a firm ’ s risks and opportunities in specific countries </li></ul></ul><ul><ul><li>plot the scores to more clearly reveal respective positions for comparative purposes </li></ul></ul><ul><ul><li>It 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. </li></ul></ul>12-
  28. 28. Simplified Country Comparison Grid: Three Types of Information <ul><li> COUNTRY </li></ul><ul><li>VARIABLE WEIGHT I II III IV V </li></ul><ul><li>1. Ownership </li></ul><ul><li>a. Sole — No Yes Yes Yes Yes </li></ul><ul><li>b. Jt. venture — Yes Yes Yes Yes Yes </li></ul><ul><li>2. Return [higher number preferred] </li></ul><ul><li>a. Investment 0-5 — 4 3 3 3 </li></ul><ul><li>b. Direct costs 0-3 — 3 1 3 2 </li></ul><ul><li> Total 7 4 6 5 </li></ul><ul><li>3. Risk [lower number preferred] </li></ul><ul><li>a. Exchange risk 0-3 — 0 0 3 3 </li></ul><ul><li>b. Political risk 0-3 — 0 1 2 3 </li></ul><ul><li> Total 0 1 5 6 </li></ul>12-
  29. 29. Fig. 12.7: Opportunity-Risk Matrix 12-
  30. 30. Country Resource Allocation: Reinvestment vs. Harvesting <ul><li>Reinvestment: the use of retained earnings to replace depreciated assets or to add to a firm ’ s existing stock of capital </li></ul><ul><li>Over 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. </li></ul><ul><li>Harvesting: the reduction in the amount of an invest-ment, either by simply harvesting earnings or by divesting assets as well </li></ul><ul><li>If 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. </li></ul><ul><li>Managers are more likely to propose investments than divestments. </li></ul>12-
  31. 31. Country Resource Allocation: Diversification vs. Concentration <ul><li>Geographic diversification: moving rapidly into numerous foreign countries and then gradually building a presence in each </li></ul><ul><li>Geographic concentration: moving into a limited number of countries and developing a strong competitive position in each </li></ul><ul><li>• Factors to be considered when selecting a strategy (or perhaps a hybrid of the two) include: </li></ul><ul><li>̶ market growth rates ̶ the need for adaptation </li></ul><ul><li>̶ market sales stability ̶ program control </li></ul><ul><li>̶ competitive lead time requirements </li></ul><ul><li>̶ spillover effects ̶ constraints </li></ul>12-
  32. 32. Diversification vs. Concentration Strategies: Product and Market Factors <ul><li> Prefer Prefer </li></ul><ul><li>Factor Diversification Concentration </li></ul><ul><li> if: if: </li></ul><ul><li>1. Market growth rate low high </li></ul><ul><li>2. Market sales stability low high </li></ul><ul><li>3. Competitive lead time short long </li></ul><ul><li>4. Spillover effects high high </li></ul><ul><li>5. Need for product adaptation low high </li></ul><ul><li>6. Need for promotion low high </li></ul><ul><li>and distribution adaptation </li></ul><ul><li>7. Program control requirements low high </li></ul><ul><li>8. Constraints low high </li></ul><ul><li>Source: “ Marketing Expansion Strategies in International Marketing, ” Journal of Marketing, Spring 1979, p.89. </li></ul>12-
  33. 33. Final Country Selection Details and Non-comparative Decision Making <ul><li>For new investments, firms must: </li></ul><ul><ul><li>make on-site visits </li></ul></ul><ul><ul><li>generate detailed estimates of all costs </li></ul></ul><ul><ul><li>consider different locations within a given country </li></ul></ul><ul><ul><li>evaluate partnership prospects </li></ul></ul><ul><li>For acquisitions firms must examine financial statements and operations in detail. </li></ul><ul><li>For expansion within countries, decisions will most likely be made on the basis of capital budget requests. </li></ul><ul><li>[continued] </li></ul>12-
  34. 34. <ul><li>Major factors restricting companies from compar-ing country investment opportunities in great detail are: </li></ul><ul><li>costs — the additional time and resources required may increase costs to unacceptable levels </li></ul><ul><li>time —f irms may need to react quickly in order to capture first-mover advantages or respond to competitive threats </li></ul><ul><ul><li>Many firms consider proposals one at a time and accept them if they meet minimum threshold criteria. </li></ul></ul>12-
  35. 35. Implications/Conclusions <ul><li>Firms use both qualitative and quantitative information to determine which markets to serve and where to locate production. </li></ul><ul><li>Because each firm has unique competitive capabilities and objectives, the factors affecting the country selection decision will differ for each. </li></ul>12-
  36. 36. <ul><li>• 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. </li></ul><ul><li>• The interdependence of a firm ’ s operations may obscure the real impact of a given operation on overall corporate activity and profitability. </li></ul>12-