Country Evaluation
Content
International Business
by Daniels and Radebaugh
Chapter 13
Country Evaluation and Selection
© 2001 Prentice Hall 13-1
Objectives
To discuss company strategies for sequencing the penetration of countries and committing resources To 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 comparing information internationally To describe some simplifying tools for determining a global geographic strategy To introduce how managers make final investment, reinvestment, and divestment decisions
© 2001 Prentice Hall
13-2
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
© 2001 Prentice Hall
13-3
Choosing Marketing and Production Sites and Geographic Strategy
Companies must determine where to market and where to produce • 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
© 2001 Prentice Hall
13-4
Place of Location Decisions in IB Operations
EXTERNAL INFLUENCES
OPERATIONS
OBJECTIVES
PHYSICAL AND SOCIETAL FACTORS STRATEGY MEANS COMPETITIVE ENVIRONMENT Modes Functions Overlaying Alternatives • Choice of countries • Organization and control mechanisms
© 2001 Prentice Hall
13-5
Flowchart for Choosing Where to Operate
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 © 2001 Prentice Hall 13-6
Scan for Alternatives
Scanning 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 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 13-7
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
13-8
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
13-9
Choose and Weight Variables (cont.)
Opportunities (cont.) • Red tape—increases operating costs – degree of red tape is not directly measurable » subjective evaluation is necessary Risks—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
13-10
Comparison of ROI Certainty
INVESTMENT A
ROI AS PERCENTAGE 0 5 10 15 20 PROBABILITY .15 .20 .30 .20 .15 WEIGHTED VALUE 0 1.0 3.0 3.0 3.0
INVESTMENT B WEIGHTED VALUE 0 1.5 4.0 4.5 0
PROBABILITY 0 .30 .40 .30 0
Estimated ROI
10%
10%
© 2001 Prentice Hall
13-11
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 developments Monetary 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
13-12
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 13-13 © 2001 Prentice Hall disruptions in business
Collect and Analyze Data
Companies 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 Data
Data 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 – people’s desire and ability to cover up data on themselves
© 2001 Prentice Hall
13-14
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
13-15
External Sources of Information
Individualized reports—consultants conduct studies for a fee Specialized studies—research organizations prepare specific studies that are sold to interested firms Service 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
13-16
Internal Generation of Data
MNEs may have to conduct studies
• May simply involve being observant and asking questions
Country Comparison Tools
Used for narrowing alternatives and allocating operational emphasis among countries Grids—tools that • May depict acceptable or unacceptable conditions • Rank countries by important variables
© 2001 Prentice Hall
13-17
Simplified Grid to Compare Countries for Market Penetration
VARIABLE V 1. Acceptable (A), Unacceptable (U) factors a. Allows 100% ownership A b. Allows licensing to majority-owned subsidiary A 2. Return (higher number = preferred rating) a. Size of investment needed b. Direct costs c. Tax rate 0-2 -d. Market size, present 0-4 -e. Market size, 3–10 years f. Market share, immediate potential (0–2 years) 0-2 -g. Market share, 3–10 years WEIGHT ---I II III IV
U A
A A
A A
A A
0-5 0-3
0-3
--2 3 -2
4 3 1 2 2 1
3 1 2 4 1 2
3 2 2 1 3 1
3 2
1
0-2
--
TOTAL
3. Risk (lower number = preferred rating) a. Market loss, 3–10 years b. Exchange problems c. Political-unrest potential d. Business laws, present e. Business laws, 3–10 years TOTAL
2 18
1 10
2 18
0 10
0-4
0-3 0-4 -0-3 -0-2
-0 -1 --
2 0 0 0 0
1 3 1 4 1
3 3 2 3 2
2
3 2
3 © 2001 Prentice Hall
3
14 13-18
13
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 location Country attractiveness-company strength matrix • Highlights the company’s product advantage country by country • Must be used with caution Environmental 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
13-19
Opportunity-Risk Matrix
10
C
F Decreased risk A E
B D
0
= No operations in the country = Current operations = Future placement = World average rating, present = World average rating, future
5 Increased opportunity
10
© 2001 Prentice Hall
13-20
Country Attractiveness-Company Strength Matrix
High Dominate/divest Joint venture
Invest/grow
Country attractiveness
Medium
Individualized strategies
Individualized strategies Low High Medium Competitive strength
Harvest/divest Combine/license
Low
© 2001 Prentice Hall
13-21
Allocating among Locations
Reinvestment 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 13-22
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 company Diversification strategy—company moves into many foreign markets, increasing commitments within each Concentration strategy—company moves to only one or a few foreign countries until it develops a strong involvement and competitive position there
Making Final Country Selections
Most 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
13-23
Product and Market Factors Affecting Choice Between Diversification and Concentration Strategies
PRODUCT OR MARKET FACTOR 1. Growth rate of each market 2. Sales stability 3. Competitive lead time 4. Spillover effects 5. Need for product adaptation 6. Need for communication adaptation 7. Economies of scale in distribution 8. Extent of constraints
PREFER DIVERSIFICATION IF: Low Low Short High Low Low Low
PREFER CONCENTRATION IF: High High Long Low High High High
Low
High
© 2001 Prentice Hall
13-24
by Daniels and Radebaugh
Chapter 13
Country Evaluation and Selection
© 2001 Prentice Hall 13-1
Objectives
To discuss company strategies for sequencing the penetration of countries and committing resources To 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 comparing information internationally To describe some simplifying tools for determining a global geographic strategy To introduce how managers make final investment, reinvestment, and divestment decisions
© 2001 Prentice Hall
13-2
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
© 2001 Prentice Hall
13-3
Choosing Marketing and Production Sites and Geographic Strategy
Companies must determine where to market and where to produce • 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
© 2001 Prentice Hall
13-4
Place of Location Decisions in IB Operations
EXTERNAL INFLUENCES
OPERATIONS
OBJECTIVES
PHYSICAL AND SOCIETAL FACTORS STRATEGY MEANS COMPETITIVE ENVIRONMENT Modes Functions Overlaying Alternatives • Choice of countries • Organization and control mechanisms
© 2001 Prentice Hall
13-5
Flowchart for Choosing Where to Operate
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 © 2001 Prentice Hall 13-6
Scan for Alternatives
Scanning 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 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 13-7
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
13-8
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
13-9
Choose and Weight Variables (cont.)
Opportunities (cont.) • Red tape—increases operating costs – degree of red tape is not directly measurable » subjective evaluation is necessary Risks—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
13-10
Comparison of ROI Certainty
INVESTMENT A
ROI AS PERCENTAGE 0 5 10 15 20 PROBABILITY .15 .20 .30 .20 .15 WEIGHTED VALUE 0 1.0 3.0 3.0 3.0
INVESTMENT B WEIGHTED VALUE 0 1.5 4.0 4.5 0
PROBABILITY 0 .30 .40 .30 0
Estimated ROI
10%
10%
© 2001 Prentice Hall
13-11
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 developments Monetary 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
13-12
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 13-13 © 2001 Prentice Hall disruptions in business
Collect and Analyze Data
Companies 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 Data
Data 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 – people’s desire and ability to cover up data on themselves
© 2001 Prentice Hall
13-14
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
13-15
External Sources of Information
Individualized reports—consultants conduct studies for a fee Specialized studies—research organizations prepare specific studies that are sold to interested firms Service 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
13-16
Internal Generation of Data
MNEs may have to conduct studies
• May simply involve being observant and asking questions
Country Comparison Tools
Used for narrowing alternatives and allocating operational emphasis among countries Grids—tools that • May depict acceptable or unacceptable conditions • Rank countries by important variables
© 2001 Prentice Hall
13-17
Simplified Grid to Compare Countries for Market Penetration
VARIABLE V 1. Acceptable (A), Unacceptable (U) factors a. Allows 100% ownership A b. Allows licensing to majority-owned subsidiary A 2. Return (higher number = preferred rating) a. Size of investment needed b. Direct costs c. Tax rate 0-2 -d. Market size, present 0-4 -e. Market size, 3–10 years f. Market share, immediate potential (0–2 years) 0-2 -g. Market share, 3–10 years WEIGHT ---I II III IV
U A
A A
A A
A A
0-5 0-3
0-3
--2 3 -2
4 3 1 2 2 1
3 1 2 4 1 2
3 2 2 1 3 1
3 2
1
0-2
--
TOTAL
3. Risk (lower number = preferred rating) a. Market loss, 3–10 years b. Exchange problems c. Political-unrest potential d. Business laws, present e. Business laws, 3–10 years TOTAL
2 18
1 10
2 18
0 10
0-4
0-3 0-4 -0-3 -0-2
-0 -1 --
2 0 0 0 0
1 3 1 4 1
3 3 2 3 2
2
3 2
3 © 2001 Prentice Hall
3
14 13-18
13
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 location Country attractiveness-company strength matrix • Highlights the company’s product advantage country by country • Must be used with caution Environmental 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
13-19
Opportunity-Risk Matrix
10
C
F Decreased risk A E
B D
0
= No operations in the country = Current operations = Future placement = World average rating, present = World average rating, future
5 Increased opportunity
10
© 2001 Prentice Hall
13-20
Country Attractiveness-Company Strength Matrix
High Dominate/divest Joint venture
Invest/grow
Country attractiveness
Medium
Individualized strategies
Individualized strategies Low High Medium Competitive strength
Harvest/divest Combine/license
Low
© 2001 Prentice Hall
13-21
Allocating among Locations
Reinvestment 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 13-22
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 company Diversification strategy—company moves into many foreign markets, increasing commitments within each Concentration strategy—company moves to only one or a few foreign countries until it develops a strong involvement and competitive position there
Making Final Country Selections
Most 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
13-23
Product and Market Factors Affecting Choice Between Diversification and Concentration Strategies
PRODUCT OR MARKET FACTOR 1. Growth rate of each market 2. Sales stability 3. Competitive lead time 4. Spillover effects 5. Need for product adaptation 6. Need for communication adaptation 7. Economies of scale in distribution 8. Extent of constraints
PREFER DIVERSIFICATION IF: Low Low Short High Low Low Low
PREFER CONCENTRATION IF: High High Long Low High High High
Low
High
© 2001 Prentice Hall
13-24
