© 2001 prentice hall13-1 international business by daniels and radebaugh chapter 13 country...

© 2001 Prentice Hall 13-1

International Businessby

Daniels and Radebaugh

Chapter 13Country Evaluation andSelection


ObjectivesTo discuss company strategies for sequencing the penetration

of countries and committing resourcesTo explain how clues from the environmental climate can help

managers limit geographic alternativesTo examine the major variables a company should consider

when deciding whether and where to expand abroadTo overview methods and problems of collecting and

comparing information internationallyTo describe some simplifying tools for determining a global

geographic strategyTo introduce how managers make final investment,

reinvestment, and divestment decisions


IntroductionCompanies 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


Choosing Marketing and Production Sites and Geographic StrategyCompanies must determine where to market and where

to produce• Decisions on market and production locations may

be highly interdependentProcess 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


OPERATIONS

OBJECTIVES

STRATEGY

Modes Functions OverlayingAlternatives• Choice of countries• Organization and control mechanisms

MEANS

EXTERNAL INFLUENCES

COMPETITIVE ENVIRONMENT

PHYSICAL AND SOCIETAL FACTORS

Place of Location Decisions in IB Operations


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 company’s financial decision-making tools

Flowchart for Choosing Where to Operate


Scan for AlternativesScanning 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 profitsChoose and Weight Variables

Environmental climate—conditions in a host country that could affect success of foreign enterprise opportunities—determined by revenues less costs

• Market size—sales 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


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 commitment—the 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



• 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



• Red tape—increases operating costs– degree of red tape is not directly measurable

» subjective evaluation is necessaryRisks—most 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 company’s risk• Foreign investments generally have greater risk than

domestic investments– less familiar with foreign environments– liability of foreignness—foreign companies have a

lower survival rate than local companies


ROI ASPERCENTAGE

05

101520

INVESTMENT A

WEIGHTEDPROBABILITY VALUE .15 0 .20 1.0 .30 3.0 .20 3.0 .15 3.0

Estimated ROI 10%

INVESTMENT B

WEIGHTEDPROBABILITY VALUE 0 0 .30 1.5 .40 4.0 .30 4.5 0 0

10%

Comparison of ROI Certainty


Choose and Weight Variables (cont.)Competitive risk—company’s innovative advantage may be

short lived• Initiation lag—strategy 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 developmentsMonetary risk—must estimate country’s monetary situation and

predict future exchange rates and controls• Liquidity preference—investors want some holdings to be

liquid, even with lower returns


Choose and Weight Variables (cont.)Political Risk—due 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

disruptions in business


Collect and Analyze DataCompanies 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 DataData on many countries is lacking, obsolescent, or inaccurateReasons 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

– people’s desire and ability to cover up data on themselves


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


External Sources of InformationIndividualized reports—consultants conduct studies for a feeSpecialized studies—research organizations prepare specific

studies that are sold to interested firmsService companies—published reports of firms that provide

services to international clients• Reports usually lack specificity

Governmental agencies—statistical reports on a variety of topics

International organizations and agencies—have large research staffs that compile data and publish reports and recommendations

Trade associations—publish data on technical and competitive factors for a specific industry

Information service companies—maintain data bases The Internet—information expanding rapidly

• Concerns about reliability of the information


Internal Generation of DataMNEs may have to conduct studies

• May simply involve being observant and asking questions

Country Comparison ToolsUsed for narrowing alternatives and allocating operational

emphasis among countriesGrids—tools that

• May depict acceptable or unacceptable conditions• Rank countries by important variables


VARIABLE WEIGHT I II III IV V1. Acceptable (A), Unacceptable (U) factors -- a. Allows 100% ownership -- U A A A A b. Allows licensing to majority-owned subsidiary -- A A A A A

3. Risk (lower number = preferred rating) a. Market loss, 3–10 years 0-4 -- 2 1 3 2 b. Exchange problems 0-3 -- 0 0 3 3 c. Political-unrest potential 0-3 -- 0 1 2 3 d. Business laws, present 0-4 -- 1 0 4 3 e. Business laws, 3–10 years 0-2 -- 0 1 2 2 TOTAL 3 3 14 13

2. Return (higher number = preferred rating) a. Size of investment needed 0-5 -- 4 3 3 3 b. Direct costs 0-3 -- 3 1 2 2 c. Tax rate 0-2 -- 2 1 2 2 d. Market size, present 0-4 -- 3 2 4 1 e. Market size, 3–10 years 0-3 -- 2 1 3 1 f. Market share, immediate potential (0–2 years) 0-2 -- 2 1 2 1 g. Market share, 3–10 years 0-2 -- 2 1 2 0 TOTAL 18 10 18 10

Simplified Grid to Compare Countries for Market Penetration


Country Comparison Tools (cont.)Opportunity-risk matrix—used 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

locationCountry attractiveness-company strength matrix

• Highlights the company’s product advantage country by country

• Must be used with cautionEnvironmental scanning—the systematic assessment of

external conditions that might affect a company’s operations• MNEs conduct scanning continuously

– sophisticated companies tie scanning to the planning process


Opportunity-Risk Matrix

5 10

Increased opportunity

0

10

D

ecre

ased

ris

k A

B

C

D

E

F

= No operations in the country

= Current operations

= Future placement

= World average rating, present

= World average rating, future


High Medium Low

Competitive strength

Invest/grow

Individualizedstrategies

Individualizedstrategies

Harvest/divestCombine/license

Dominate/divestJoint venture

High

Medium

Low

Cou

ntr

y at

trac

tive

nes

s

Country Attractiveness-Company Strength Matrix


Allocating among LocationsReinvestment decisions—involve 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


Allocating Among Locations (cont.)Interdependence of locations—profit 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 companyDiversification strategy—company moves into many foreign

markets, increasing commitments within eachConcentration strategy—company moves to only one or a few

foreign countries until it develops a strong involvement and competitive position there

Making Final Country SelectionsMost companies examine proposals one at a time

• Proposal accepted if it meets minimum threshold criteria• Proposal comparison limited by time and cost


PREFER PREFERPRODUCT OR MARKET FACTOR DIVERSIFICATION IF: CONCENTRATION IF: 1. Growth rate of each market Low High2. Sales stability Low High3. Competitive lead time Short Long4. Spillover effects High Low5. Need for product adaptation Low High6. Need for communication adaptation Low High7. Economies of scale in distribution Low

High8. Extent of constraints Low High

Product and Market Factors Affecting ChoiceBetween Diversification and Concentration Strategies