International Business

by Daniels and Radebaugh

Chapter 13

Country Evaluation and Selection

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Objectives
To discuss company strategies for sequencing the penetration of countries and committing resources To explain how clues from the environmental climate can help managers limit geographic alternatives To examine the major variables a company should consider when deciding whether and where to expand abroad To overview methods and problems of collecting and comparing information internationally To describe some simplifying tools for determining a global geographic strategy To introduce how managers make final investment, reinvestment, and divestment decisions

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Introduction
Companies lack resources to take advantage of all international opportunities Choice of where to operate an important business strategy appealing countries are those with similar economic, political, cultural, and geographic conditions Companies must: determine the order of entry into potential countries set the allocation of resources and rate of expansion among countries

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Choosing Marketing and Production Sites and Geographic Strategy

Companies must determine where to market and where to produce Decisions on market and production locations may be highly interdependent Process of determining overall geographic strategy must be flexible Country conditions change Plan must allow company to: respond to new opportunities withdraw from less-profitable operations Managers can use several geographic strategies

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Place of Location Decisions in IB Operations

EXTERNAL INFLUENCES

OPERATIONS
OBJECTIVES

PHYSICAL AND SOCIETAL FACTORS STRATEGY MEANS COMPETITIVE ENVIRONMENT Modes Functions Overlaying Alternatives Choice of countries Organization and control mechanisms

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Flowchart for Choosing Where to Operate

OBJECTIVES

STRATEGIES
Overlaying Tactic: Choice of Countries

Choosing new locations Scan for alternatives Choose and weight variables Collect and analyze data for variables Use tools to compare variables and narrow alternatives

Allocating among locations Analyze effects of reinvestment versus harvesting in existing operating locations Appraise interdependence of locations on performance Examine needs for diversification versus concentration of foreign operations

Making final decisions Conduct detailed feasibility for new locations Estimate expected outcome for reinvestment Make location and allocation decisions based on companys financial decision-making tools 2001 Prentice Hall 13-6

Scan for Alternatives

Scanning techniques based on broad variables indicate opportunities and risks Without scanning a company may: overlook opportunities examine too many possibilities Cost of too many studies may erode profits Choose and Weight Variables Environmental climateconditions in a host country that could affect success of foreign enterprise opportunitiesdetermined by revenues less costs Market sizesales potential most important managers may have to estimate current demand indicators of market size and future sales GNP per capita income growth population growth rates level of industrialization
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Choose and Weight Variables (cont.)

Opportunities (cont.) Ease and compatibility of operations companies are attracted to countries that are located nearby share the same language share similar legal, cultural, and economic systems escalation of commitmentthe greater the investment in examining a foreign investment opportunity, the more likely it will be accepted, regardless of its merit companies often limit consideration of proposals to countries that: offer size, technology, and other factors familiar to company personnel allow acceptable percentage of ownership permit sufficient profits to be remitted

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Choose and Weight Variables (cont.)

Opportunities (cont.) Costs and resource availability companies go abroad to secure resources that are unavailable at home companies must consider a variety of costs of factors of production trade-offs between labor costs and capital intensity companies with rapidly evolving technologies try to locate production close to product-development activities companies need to be near suppliers and customers corporate tax rates on income affect location decisions cost comparisons among countries difficult complicated by technology differences

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Choose and Weight Variables (cont.)

Opportunities (cont.) Red tapeincreases operating costs degree of red tape is not directly measurable subjective evaluation is necessary Risksmost investors prefer certainty to uncertainty, given the same expected return Return on investment (ROI)average of the various returns deemed possible for investments greater uncertainty increases investors requirements for ROI Insurance may reduce companys risk Foreign investments generally have greater risk than domestic investments less familiar with foreign environments liability of foreignnessforeign companies have a lower survival rate than local companies

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Comparison of ROI Certainty

INVESTMENT A
ROI AS PERCENTAGE 0 5 10 15 20 PROBABILITY .15 .20 .30 .20 .15 WEIGHTED VALUE 0 1.0 3.0 3.0 3.0

INVESTMENT B WEIGHTED VALUE 0 1.5 4.0 4.5 0

PROBABILITY 0 .30 .40 .30 0

Estimated ROI

10%

10%

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Choose and Weight Variables (cont.)

Competitive riskcompanys innovative advantage may be short lived Initiation lagstrategy for exploiting temporary innovative advantage Companies may try to find countries in which significant competition is least likely Advantages of locating where competitors are competitors bear costs of evaluating location competitors attract suppliers and personnel competitors attract buyers clusters of competitors may provide access to information about new developments Monetary riskmust estimate countrys monetary situation and predict future exchange rates and controls Liquidity preferenceinvestors want some holdings to be liquid, even with lower returns

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Choose and Weight Variables (cont.)

Political Riskdue to changes in political leaders opinions and policies, civil disorder, and animosity between host and home countries May result in property takeovers, damaged property, disrupted operations, and changed rules governing business Companies assess political risks based on: past patterns of political risk foreign investors may be compensated for asset takeover or property damage examination of governmental decision makers cross-section of opinions use of expert analysts examination of countries social and economic conditions frustration among local populace may cause 13-13 2001 Prentice Hall disruptions in business

Collect and Analyze Data

Companies undertake business research to: Reduce uncertainties in the decision process Narrow the alternatives they consider Assess the merits of their existing programs Must compare the cost of information with its value

Problems with Research Results and Data

Data on many countries is lacking, obsolescent, or inaccurate Reasons for inaccuracies Inability of governments to collect data Educational qualifications of government officials limit collection and analysis of data Economic factors hamper retrieval and analysis Publication of false or purposely misleading data peoples desire and ability to cover up data on themselves

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Problems with Research Results and Data (cont.)

Comparability problems Problems with information comparability arise from: differences in collections methods, definitions, and base years accounting rules differ variance in measures of investment flow differences in activities taking place outside the market economy distortions in currency conversions exchange rates

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External Sources of Information

Individualized reportsconsultants conduct studies for a fee Specialized studiesresearch organizations prepare specific studies that are sold to interested firms Service companiespublished reports of firms that provide services to international clients Reports usually lack specificity Governmental agenciesstatistical reports on a variety of topics International organizations and agencieshave large research staffs that compile data and publish reports and recommendations Trade associationspublish data on technical and competitive factors for a specific industry Information service companiesmaintain data bases The Internetinformation expanding rapidly Concerns about reliability of the information

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Internal Generation of Data

MNEs may have to conduct studies
May simply involve being observant and asking questions

Country Comparison Tools

Used for narrowing alternatives and allocating operational emphasis among countries Gridstools that May depict acceptable or unacceptable conditions Rank countries by important variables

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Simplified Grid to Compare Countries for Market Penetration

VARIABLE V 1. Acceptable (A), Unacceptable (U) factors a. Allows 100% ownership A b. Allows licensing to majority-owned subsidiary A 2. Return (higher number = preferred rating) a. Size of investment needed b. Direct costs c. Tax rate 0-2 -d. Market size, present 0-4 -e. Market size, 310 years f. Market share, immediate potential (02 years) 0-2 -g. Market share, 310 years WEIGHT ---I II III IV

U A

A A

A A

A A

0-5 0-3

0-3

--2 3 -2

4 3 1 2 2 1

3 1 2 4 1 2

3 2 2 1 3 1

3 2

0-2

--

TOTAL
3. Risk (lower number = preferred rating) a. Market loss, 310 years b. Exchange problems c. Political-unrest potential d. Business laws, present e. Business laws, 310 years TOTAL

2 18

1 10

2 18

0 10

0-4
0-3 0-4 -0-3 -0-2

-0 -1 --

2 0 0 0 0

1 3 1 4 1

3 3 2 3 2

2
3 2

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Country Comparison Tools (cont.)

Opportunity-risk matrixused to: Decide on indicators and weight them Evaluate each country on the weighted indicators Plot to see relative placements Key element is the projection of the future country location Country attractiveness-company strength matrix Highlights the companys product advantage country by country Must be used with caution Environmental scanningthe systematic assessment of external conditions that might affect a companys operations MNEs conduct scanning continuously sophisticated companies tie scanning to the planning process

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Opportunity-Risk Matrix
10
C
F Decreased risk A E

B D

0
= No operations in the country = Current operations = Future placement = World average rating, present = World average rating, future

5 Increased opportunity

10

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Country Attractiveness-Company Strength Matrix

High Dominate/divest Joint venture

Invest/grow

Country attractiveness

Medium

Individualized strategies

Individualized strategies Low High Medium Competitive strength

Harvest/divest Combine/license

Low

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Allocating among Locations

Reinvestment decisionsinvolve replacing depreciated assets or adding to the existing stock of capital Most of the value of a foreign investment comes from reinvestment once committed to a locale, company may not have option to move its assets elsewhere Experienced personnel in a country best judges of what is needed in the locale may be delegated certain investment decisions Harvesting (divesting)advisable when investment outlook is better in other countries Reduces commitments in countries with poorer performance outlooks Ought to be planned Takes place by selling or closing facilities Government may require performance contracts that make divestment difficult
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Allocating Among Locations (cont.)

Interdependence of locationsprofit figures from individual operations may obscure the real impact those operations have on overall company activities Also difficult to ascertain returns from subsidiaries sales and purchases of subsidiaries may be made from and to units of parent company Diversification strategycompany moves into many foreign markets, increasing commitments within each Concentration strategycompany moves to only one or a few foreign countries until it develops a strong involvement and competitive position there

Making Final Country Selections

Most companies examine proposals one at a time Proposal accepted if it meets minimum threshold criteria Proposal comparison limited by time and cost

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Product and Market Factors Affecting Choice Between Diversification and Concentration Strategies

PRODUCT OR MARKET FACTOR 1. Growth rate of each market 2. Sales stability 3. Competitive lead time 4. Spillover effects 5. Need for product adaptation 6. Need for communication adaptation 7. Economies of scale in distribution 8. Extent of constraints

PREFER DIVERSIFICATION IF: Low Low Short High Low Low Low

PREFER CONCENTRATION IF: High High Long Low High High High

Low

High

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