International Business

1
International Business

• Chapter Twelve
• Country Evaluation and Selection

2
Chapter Objectives

• 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 com-pany should consider when
  deciding whether and where to expand abroad
• To know the methods and problems when collecting
  and comparing information internationally
• To understand some simplifying tools for helping
  to 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

3
The Basics of Country Selection

• Because firms lack sufficient resources to pursue
  all potential (international) opportunities, they
  must
• determine the order of country entry
• establish the rates of resource allocation across
  countries
• In selecting geographic sites, firms must decide
• where to market their products
• where to produce their products
• 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.

4
Fig. 12.2 Place of Location Decisions in
International Business Operations
5
Scanning vs. Detailed Examination

• Scanning techniques are based on broad vari-
  ables that identify both opportunities and
  risks.
• Scanning techniques help to assure that firms
  consider neither too many nor two few alternative
  countries.
• For the most part, scanning requires
  information that is readily
  available, inexpensive, and fairly comparable.
• Detailed examination generally requires on-site
  visits to collect and analyze specific
  information that increasingly contributes to the
  final location decision process.
• A feasibility study should have clear-cut
  decision points to guide managers in the
  decision-making process.
• Escalation of commitment the more time
  and money a
  firm invests in examining an alternative, the
  more likely it is to
  accept itregardless of its merits.

6
Fig. 12.3 Flowchart for Choosing Where to Operate
7
The Environmental Climate Country Opportunities

• Country opportunities are determined by
  competitiveness and profitability factors.
• Factors that have the greatest influence
  on country selection are
• market size sales potential
• ease and compatibility of operations
• costs and resource availability
• red tape and corruption
• Some factors are more important for the market
  location decision, others for the production
  location decision. Some factors affect
  both decisions.

8
Country Opportunities Market
Attractiveness

• Market size, i.e., sales potential, is probably
  the most important market selection variable.
• Market size predictors include
• past and present sales data
• socioeconomic data GDP, per capita income,
  population size, population growth rates,
  etc.
• Other factors to be considered include
• the obsolescence and leapfrogging of products
• price levels and elasticity
• income levels and elasticity
• income inequalities
• substitutability of products
• existence of trading blocs
• taste and other cultural factors

9
Fig. 12.4 Aluminum Consumption and GDP per Capita
10
Country Opportunities Ease and
Compatibility of Operations

• Firms are attracted to countries that
• are located nearby
• share a common language
• have market conditions similar to those in their
  home countries
• present few market restrictions
• Firms decision points regarding country
  selection may include
• the ability to operate with product types,
  technologies, and plant sizes familiar to
  their managers
• permissible levels of ownership and profit
  repatriation
• the availability of local resources capital,
  viable partners, etc.

11
Country Opportunities Costs and
Resource Availability

• Firms go abroad to secure resources that are
  either unavailable or too expensive at home.
• 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.
• Productivity-related decision factors include
• the cost of labor ? utility costs
• tax rates ? real estate costs
• available capital costs ? transportation
  costs
• the cost of other inputs and supplies
• continued

12

• Labor costs are a particularly important factor
  in production location decisions. However,
• ? labor is not homogeneous
• ? capital intensity may reduce the
  differences in production costs from one
  location to another
• ? there may be sector and/or geographic
  differences in wage rates within countries
• When companies move to emerging economies
  because of labor cost savings, their advantages
  may be short-lived because
• competitors follow leaders to low-wage
  locations
• there is little first-in advantage for this
  type of production migration
• costs in emerging economies may rise quickly
  as a result of pressures on wages and/or
  exchange rates

13
Country Opportunities Red Tape and
Corruption

• Red tape obstructive bureaucracy, i.e.,
  disincentives related to the clarity of laws
  and whether and how they are enforced
• Red tape includes government obstacles with
  respect to
• beginning and continuing operations
• hiring and/or firing workers
• the use of expatriate personnel
• producing and marketing goods
• satisfying local agencies on matters such as
  taxes, labor conditions, and environmental
  compliance
• continued

14

• Corruption the illegal sale of rights by
  govern-ment officials for their personal gain
• Corruption, i.e., the extortion of
  income or resources, may include
• requirements of illegal payments to win a
  contract
• requirements of illegal payments to receive
  govern-ment services
• requirements of illegal payments to operate in a
  particular location or industry
• Firms are likely to avoid operating countries in
  which legal transparency is low
  and corruption is high.

15
The Environmental Climate Country Risks

• Risk the possibility of suffering harm or loss,
  or a course involving uncertain danger or hazard
• Returns tend to be higher in countries where
  operating risks are higher.
• Firms may balance operations in low-return,
  low-risk countries with operations in
  high-return, high-risk countries.
• Firms may guard against currency fluctuations by
  locating operations in countries whose exchange
  rates are not closely correlated.
• Adverse situations may heighten the perceived
  needs for certain products.

16
Country Risks Risk and
Uncertainty

• Companies use a variety of financial techniques
  to compare potential projects, including
• discounted cash flow ? return on assets
  employed
• economic value added ? internal rate of
  return
• payback period ? accounting rate of return
• net present value ? return on equity
• return on sales
• Given the same expected return, most decision
  makers prefer a more certain outcome to a less
  certain one.
• Firms may acquire insurance to reduce risk and
  uncertainty.

17
Comparison of ROI Certainty

• INVESTMENT A INVESTMENT B
• WEIGHTED WEIGHTED
• ROI PROBABILITY VALUE
  PROBABILITY VALUE
• 0 .15 0.0 0 0.0
• 5 .20 1.0 .30 1.5
• 10 .30 3.0 .40 4.0
• 15 .20 3.0 .30 4.5
• 20 .15 3.0 0 0.0
• Est. ROI 10.0 10.0
• 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.

18
Country Risks Liability of
Foreignness

• Liability of foreignness the lower survival
  rate of foreign firms in their initial years of
  operation
• Firms may reduce the associated risks by
• first entering countries similar to their home
  countries
• enlisting experienced intermediaries to handle
  operations for them
• using operational forms that require a lower
  commitment of foreign resources
• initially moving to fewer, rather than more,
  foreign countries
• Foreign firms that manage to survive their early
  years of operation
  actually have long-term survival rates
  comparable to those of local competitors.

19
Fig. 12.5 The Usual Pattern of
Internationalization
20
Country Risks Competitive Risk

• Strategies designed to deal with the risks posed
  by competition include
• the imitation lag exploiting temporary
  innovative advantages by moving first into those
  countries most likely to catch up
• 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
• the oligopolistic reaction purposely crowding a
  market to prevent competitors from gaining
  advantages they might use to improve their
  competitive positions elsewhere
• clustering locating in places where competitors
  are present to gain access to multiple suppliers,
  skilled personnel, an existing customer base, and
  information regarding innovations

21
Country Risks Monetary Risk

• Liquidity preference the theory that presumes
  that investors generally want some of their
  holdings in highly liquid assets
• When considering monetary risk, firms must
  carefully evaluate a countrys
• present capital controls
• exchange rate stability
• balance-of-payments accounts
• inflation rates
• levels of government spending
• Investors are willing to accept a lower rate of
  return on liquid assets in order
  to be able to move them easily.

22
Country Risks Political Risk

• Political risk the expectation that the
  political climate in a given country will change
  in such a way that a firms operating position
  will deteriorate
• Firms can evaluate the potential political risk
  of a given country by
• examining the countrys past patterns of
  political risk
• evaluating the direction of change in the views
  of government decision makers
• employing expert analysts
• tracking economic and social conditions
• 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.

23
Data Collection and Analysis

• Firms conduct research to
• reduce uncertainties at all levels in their
  decision processes
• expand or narrow the alternatives they consider
• assess the merits of their existing programs
• The cost of data collection must be weighed
  against the probable payoff in terms of
• revenue gains
• cost savings
• When firms conduct original studies in foreign
  countries, they may have to be extremely
  imaginative and observant and analyze
  indirect and/or complementary indicators.

24
Problems with International Data and Research
Results

• The lack, obsolescence, and/or inaccuracy of data
  regarding many countries make much research
  difficult and expensive to undertake.
• Reasons for data inaccuracies include
• the inability of governments to collect the
  needed information
• the publication of false or purposely inaccurate
  information designed to mislead constituencies
• the publication of conclusions based on too few
  observations, non-representative samples, and/or
  poorly designed research instruments
• continued

25

• Data comparability problems are rooted in
• definitional differences across countries e.g.,
  family categories, literacy levels, accounting
  rules
• differences in base years and time periods
• distortions in foreign currency conversions
• differences in the measurement of investment
  flows
• the presence of black market activities
• Many countries have agreed to similar standards
  for collecting and publishing various
  categories of national data in response
  to a recommendation of the IMF.

26
External Sources of Information

• The major types of external, secondary
  information sources include
• individualized reports from market research and
  business consulting firms commissioned for a
  fee
• specialized studies from research organizations
  regarding countries, regions, industries, issues,
  etc.
• service firm reports regarding relevant business
  topics
• government agency socioeconomic and other reports
• international organization and agency reports
  e.g., the UN, the IMF, the World Bank,
  and the OECD
• trade association reports
• information service company reports fee-based
  databases
• Both the specificity and the cost of information
  will vary by source.

27
Country Comparison Tools

• Grids can be used to
• depict acceptable or unacceptable conditions
  e.g., ownership rights
• rank countries according to selected, weighted
  variables e.g., return or risk
• Matrices can be used to
• incorporate weighted indicators of a firms risks
  and opportunities in specific countries
• plot the scores to more clearly reveal respective
  positions for comparative purposes
• 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.

28
Simplified Country Comparison Grid Three Types
of Information

• COUNTRY
• VARIABLE WEIGHT I II III IV V
• 1. Ownership
• a. Sole No Yes
  Yes Yes Yes
• b. Jt. venture Yes Yes Yes
  Yes Yes
• 2. Return higher number preferred
• a. Investment 0-5 4 3 3 3
• b. Direct costs 0-3 3 1 3 2
• Total 7 4 6 5
• 3. Risk lower number preferred
• a. Exchange risk 0-3 0 0 3 3
• b. Political risk 0-3 0 1 2
  3
• Total 0 1 5 6

29
Fig. 12.7 Opportunity-Risk Matrix
30
Country Resource Allocation Reinvestment vs.
Harvesting

• Reinvestment the use of retained earnings to
  replace depreciated assets or to add to a firms
  existing stock of capital
• Over time, most of the value of a firms FDI
  comes from reinvestment it may take several
  years and even the allocation of additional funds
  to meet stated objectives.
• Harvesting the reduction in the amount of an
  invest-ment, either by simply harvesting
  earnings or by divesting assets as well
• If an operation no longer fits a firms overall
  strategy, or if better opportunities exist
  elsewhere, a firm must determine how to exit that
  operation.
• Managers are more likely to propose investments
  than divestments.

31
Country Resource Allocation Diversification vs.
Concentration

• Geographic diversification moving rapidly into
  numerous foreign countries and then gradually
  building a presence in each
• Geographic concentration moving into a limited
  number of countries and developing a strong
  competitive position in each
• Factors to be considered when selecting a
  strategy (or perhaps a hybrid of the two)
  include
• ? market growth rates ? the need for
  adaptation
• ? market sales stability ? program control
• ? competitive lead time requirements
• ? spillover effects ? constraints

32
Diversification vs. Concentration Strategies
Product and Market Factors

• Prefer Prefer
• Factor Diversification Concentration
• if if
• 1. Market growth rate low high
• 2. Market sales stability low high
• 3. Competitive lead time short long
• 4. Spillover effects high high
• 5. Need for product adaptation low
  high
• 6. Need for promotion low high
• and distribution adaptation
• 7. Program control requirements low
  high
• 8. Constraints low high
• Source Marketing Expansion Strategies in
  International Marketing, Journal of Marketing,
  Spring 1979, p.89.

33
Final Country Selection Details and
Non-comparative Decision Making

• For new investments, firms must
• make on-site visits
• generate detailed estimates of all costs
• consider different locations within a given
  country
• evaluate partnership prospects
• For acquisitions firms must examine financial
  statements and operations in detail.
• For expansion within countries, decisions will
  most likely be made on the basis of capital
  budget requests.
• continued

34

• Major factors restricting companies from
  compar-ing country investment opportunities in
  great detail are
• coststhe additional time and resources required
  may increase costs to unacceptable levels
• timefirms may need to react quickly in order to
  capture first-mover advantages or respond to
  competitive threats
• Many firms consider proposals one at a time and
  accept them if they meet minimum threshold
  criteria.

35
Implications/Conclusions

• Firms use both qualitative and quantitative
  information to determine which markets to serve
  and where to locate production.
• Because each firm has unique competitive
  capabilities and objectives, the factors
  affecting the country selection decision will
  differ for each.

36

• 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.
• The interdependence of a firms operations may
  obscure the real impact of a given operation on
  overall corporate activity and profitability.