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© 2001 Prentice Hall 13-1
International Businessby
Daniels and Radebaugh
Chapter 13Country Evaluation andSelection
© 2001 Prentice Hall 13-2
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
© 2001 Prentice Hall 13-3
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
© 2001 Prentice Hall 13-4
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
© 2001 Prentice Hall 13-5
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
© 2001 Prentice Hall 13-6
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
© 2001 Prentice Hall 13-7
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
© 2001 Prentice Hall 13-8
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
© 2001 Prentice Hall 13-9
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
© 2001 Prentice Hall 13-10
Choose and Weight Variables (cont.)Opportunities (cont.)
• 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
© 2001 Prentice Hall 13-11
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
© 2001 Prentice Hall 13-12
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
© 2001 Prentice Hall 13-13
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
© 2001 Prentice Hall 13-14
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
© 2001 Prentice Hall 13-15
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
© 2001 Prentice Hall 13-16
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
© 2001 Prentice Hall 13-17
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
© 2001 Prentice Hall 13-18
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
© 2001 Prentice Hall 13-19
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
© 2001 Prentice Hall 13-20
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
© 2001 Prentice Hall 13-21
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
© 2001 Prentice Hall 13-22
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
© 2001 Prentice Hall 13-23
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
© 2001 Prentice Hall 13-24
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
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