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INTERNATIONAL BUSINESS
MANAGEMENT
Prof Soumitra MookherjeeLecture 21
COUNTRY RISK ANDEVALUATION
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Significance of Country Evaluation & Selection
International expansion of a firmsactivities requiresidentification of business opportunities across theborders, evaluating, and selecting one or a fewcountries for its operations.
A business enterprise needs to deploy its resourcesmost gainfully and efficiently in countries where itgets optimum returns to fulfill its goals and
objectives.
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Types of Business Research Designs
Exploratory research: To gather preliminary information
that will help better define problems and suggest
hypothesis.
Descriptive research: To describe situations, business
environment , market competition, consumer behaviour
or markets
Causative research: To test hypothesis to establish cause
and effect relationship
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Types of Business Research Designs
Qualitative research: To gather information concerning
qualitative feedback from respondents expressed as How,
when, why, what, etc of a situation
Quantitative research: To gather information and then apply
usage of numbers, numerical calculations, quantitative data and
analyze the same to derive findings.
Observation research:
Collect and gather information based onthe observations made by the surveyor, his opinion, his
impressions based on observation of a specific situation.
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COUNTRY EVALUATION
Scanning the Global Economic Environment
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Population and Income
The population of a country broadly gives a roughestimation of work-force characteristics, age wise
occupation pattern, and market potential, although it
has to be used with some other indicators.
Consumption patterns are significantly influenced by
level of income. The Gross Domestic Product of a
country provides a better estimate of the market size
compared to its population.
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Macroeconomic Overview
Distribution of resources and wealth (GDP) is highly
skewed among the nations.
Thirty advanced countries in the world with only 15.3 percent of worlds total population accounts for about 52 per
cent of the worlds total GDP and 67.3 per cent of exportsof goods and services.
Need to assess and monitor the following parameters:1. Inflation and interest rates
2. Unemployment3. Fiscal, Monetary, and Trade Policies
4. Business Cycles, and growth patterns5. Currency fluctuations and Balance of Payments
6. Capacity Utilization and confidence Index
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Assessing Market Potential
Framework for
assessing market and
industry
attractiveness
MARKET ANALYSIS
GROWTH, SIZE,CUSTOMERS
RESOURCE MAPPING
Skilled manpower
Raw Materials
Capital
Technology
GOVERNMENT POLICY
Taxation
Infrastructure
Subsidies
Regulatory
environment
INDUSTRY COMPETITION
Rivalry Entry Barriers
Bargaining Power
Viability of venture
Threat of Substitutes
Import threats
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Opportunities are determined by revenues less costs. From a broad
scanning perspective, there are variables that indicate the amountof revenue, cost factors, and risk that might be forthcoming from
one country to another.
The factors that have the most influence on the placement of
marketing and production emphasis are market size, ease and
compatibility of operations, costs, resource availability, and red
tape.
Market Size Sales potential is probably the most important variablemanagers use when determining where and whether to make an
investment.
The assumption, of course, is that sales will occur at a price above
cost, so that where there are sales, there are profits.
OPPORTUNITY INDICATORS
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Companies are highly attracted to countries that
Are located nearby
Share the same language
Have market conditions similar to those in heir home
countries
Companies often pare proposals to those countries that
Offer size, technology, and other advantages familiar to
company personnel
Allow an acceptable percentage of ownership
Permit sufficient profits to be easily emitted
INVESTMENT PREFERENCE
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Evaluating Country Competitiveness
Competitiveness of a nation is referred to a set of institutions,
policies, and factors that determine the level of productivity
of a country.
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Factors Influencing Country Competitiveness
Institutions
Infrastructure
Macro-economic stability
Health and primary education
Higher education and training
Goods market efficiency
Labour market efficiency
Financial market sophistication
Technological readiness
Market size
Business sophistication
Innovation
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Business Competitiveness Index(BCI)
Brought out by the World Economic Forum, BCI provides a
conceptual framework to rank business competitiveness
across countries. The BCI is based on two sub-indices:
Company operation and strategy
National business environment
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Tools for Country Evaluation and Selection
Trade analysis and similarity methods
Market size = Production + ImportsExports
In the analogy method, a country at similar stage of economic
development and comparable consumer behaviour is selected
whose market size is known.
Finally, evaluate, compare, short list and select
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Assessing country risk and uncertainties
COUNTRY RISK
ANALYSIS
POLITICAL RISKS
Policies, Laws, regulations
Nationalism preferences
Unrest and disorders
Party instability
ECONOMIC RISKS
Inflation
Interest rates
Exchange rates
Growth
Macro parameters
OPERATIONAL RISKS
Poor Infrastructure
Inadequate telecom and
transport systems
Shortage of capital, land
COMPETITIVE RISKS
Cartels Networks
Threat of Substitutes
Import threats
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Competitive Risk: A companysinnovative advantage may be short-lived. There
could be cartels, networks which may erode new firms competitive advantage
Business Risks: Favourable business, economic and market environment may
not be durable for too long or there could be a sudden expected development
leading to an economic and business slowdown
Monetary/ Exchange Rate Risk: If a companysexpansion occurs through directinvestment abroad, exchange rates on and access to the invested capital and
earnings are key considerations. Sharp fluctuations in exchange rates may lead
to high transaction risk exposure for the international firm.
Fiscal Gap Risk: The recent euro zone crises is a clear indication howperformances of firms got hampered due to sharp economic depression and
bankruptcy of the government calls for austerity measures and thereby affect
business prospects.
CATEGORIES OF RISKS
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Liquidity Risks: Investors usually want some holdings to be in liquid assets, as it
is needed in part to make near-term payments, paying dividends; coverunexpected contingencies like stockpiling materials following supply shocks
Political Risk: It occurs because of political instability, changes in political
leadersopinions and adverse policies, civil disorders and unrest, and animosity
between the host and other countries particularly with the companyshomecountry. Also, nationalism preferences and high tariffs may limit opportunities
for foreign firms
Operational Risks: Disruptions in raw material supply, lack of access to basic
resources, and poor infrastructure, transport systems, telecom facilities
enhances operational difficulties for the firm.
CATEGORIES OF RISKS
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INVESTMENT FRAMEWORK
MARKET/
C
OMPETITIVE
O
PPORRTUNITIE
S
LOW HIGH
RISKS
Low
HIGH
ATTRACTIVESS
(INVESTMENT
PRIORITY)
HIGH RISK
HIGH RETURN
(MAY CONSIDER
INVESTING)
LOW RISKLOW RETURN
(ON HOLD)
LOWATTRACTIVENESS
(AVOID/ IGNORE)
High
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Country Attractiveness-Company Strength Matrix
Strong Weak
COMPANIES BUSINESS STRENGTH
Low
INVEST/ GROW Selective Strategy
Selective Strategy
Selective Strategy Harvest/ Divest/
Exit/ License
High
Medium
Medium
CountryAttr
activeness