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8/13/2019 Country Evaluation
1/24
2001 Prentice Hall 13-1
International BusinessbyDaniels and Radebaugh
Chapter 13
Country Evaluation andSelection
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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 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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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
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Choose and Weight Variables (cont.)Opportunities (cont.)
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