Country Evaluation

8/13/2019 Country Evaluation

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2001 Prentice Hall 13-1

International BusinessbyDaniels and Radebaugh

Chapter 13

Country Evaluation andSelection


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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 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 comparinginformation 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 toproduce

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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OPERATIONS

OBJECTIVES

STRATEGY

Modes Functions Overlaying

Alternatives

Choice ofcountries

Organization

and control

mechanisms

MEANS

EXTERNAL INFLUENCES

COMPETITIVE

ENVIRONMENT

PHYSICAL AND

SOCIETALFACTORS

Place of Location Decisions in IB Operations


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OBJECTIVES

STRATEGIES

Overlaying Tactic: Choice of Countries

Choosing new locationsScan for alternatives

Choose and weight variables

Collect and analyze data for variables

Use tools to compare variables and

narrow alternatives

Allocating among locationsAnalyze 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

Flowchart for Choosing Where to Operate


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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 profits

Choose and Weight VariablesEnvironmental 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 inexamining 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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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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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 returnsdeemed 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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ROI AS

PERCENTAGE

0

5

10

15

20

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


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Choose and Weight Variables (cont.)Competitive riskcompanys innovative advantage may be short lived

Initiation lagstrategy for exploiting temporary innovativeadvantage

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 homecountries

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 causedisru tions in business


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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 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 marketeconomy

distortions in currency conversions

exchange rates


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External Sources of InformationIndividualized reportsconsultants conduct studies for a fee

Specialized studiesresearch organizations prepare specific studiesthat 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 topicsInternational 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 ToolsUsed 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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VARIABLE WEIGHT I II III IV

V

1. 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, 310 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, 310 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 2c. Tax rate 0-2 -- 2 1 2 2

d. Market size, present 0-4 -- 3 2 4 1

e. Market size, 310 years 0-3 -- 2 1 3 1

f. Market share, immediate potential (02 years) 0-2 -- 2 1 2 1

g. Market share, 310 years 0-2 -- 2 1 2 0

TOTAL 18 10 18 10

Simplified Grid to Compare Countries for Market Penetration


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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

5 10

Increased opportunity

0

10

Decreasedrisk A

B

C

D

E

F

= No operations in the country

= Current operations

= Future placement

= World average rating, present

= World average rating, future


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High Medium Low

Competitive strength

Invest/grow

Individualized

strategies

Individualizedstrategies

Harvest/divest

Combine/license

Dominate/divest

Joint venture

High

Medium

Low

Countryattracti

veness

Country Attractiveness-Company Strength Matrix


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Allocating among LocationsReinvestment 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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PREFER PREFER

PRODUCT OR MARKET FACTOR DIVERSIFICATION IF: CONCENTRATION IF:

1. Growth rate of each market Low High2. Sales stability Low High

3. Competitive lead time Short Long

4. Spillover effects High Low

5. Need for product adaptation Low High

6. Need for communication adaptation Low High

7. Economies of scale in distribution Low High

8. Extent of constraints Low High

Product and Market Factors Affecting Choice

Between Diversification and Concentration Strategies

Documents

Country Evaluation