International Business

1
International Business

• Chapter Twelve
• Country Evaluation and Selection

2
Objectives

• Review how companies scan, research and evaluate
  which country to select for new sites.
• Lecture
• Case Study
• Movie
• Article

3
How to Pick the Right Country

• Since a company cant pursue all opportunities,
  they must decide
• Which country/countries to go into first
• How to allocate resources across countries
• Where to market their products
• Where to produce their products

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How to Pick the Right Country

• Step 1 Scanning
• Broad search that identifies opportunities and
  risks.
• Narrow down the list with easy access
  information.
• Step 2 Detailed Examination
• 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.

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Flowchart of Picking the Right Country
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Looking for Opportunities

• Country opportunities are determined by
  competitiveness and profitability factors.
• 1. Market size
• 2. Ease and compatibility of operations
• 3. Costs and resource availability
• 4. Red tape and corruption

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1. Opportunities in Market

• Determining sales potential is probably the most
  important selection variable.
• How to determine market size
• past and present sales data
• socioeconomic data GDP, per capita income,
  population size, population growth rates,
  etc.
• Detailed Examination Questions
• the obsolescence and leapfrogging of products
• income inequalities
• substitutability of products
• existence of trading blocs
• taste and other cultural factors

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2. Ease Compatibility

• Will compatibility make it an easy fit?
• located nearby
• share a common language
• have market conditions similar to ours
• present few market restrictions in a trade
  agreement
• Detailed Examination Questions
• Are we able to operate with product types,
  technologies, and plant sizes familiar to
  their managers?
• What are the permissible levels of ownership and
  profit repatriation?
• What is the availability of local resources
  capital, viable partners, etc.?

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3. Costs Resource

• Does the country have resources that are either
  unavailable or too expensive at home?
• Can we find a country closer to customers and
  suppliers with an efficient infrastructure and
  trade restrictions are minimal?
• Opportunities for cheaper production cost
• labor ? utility
• tax rates ? real estate
• available capital ? transportation

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More on Cost Cutting Opportunities

• Detailed Examination of Cheaper Labor costs
• Will quality be lost with cheaper cost?
• Will savings in labor be off set by capital
  intensity of production costs from one location
  to another?
• Is there a sector and/or geographic differences
  in wage rates within countries?
• Warning! Cheap Labor May Not Last Forever!
• competitors follow and drive prices up
• costs in emerging economies may rise quickly as a
  result of pressures on wages and/or exchange rates

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4. Risks in Red Tape Corruption

• Red tape (government paperwork)
• 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
• Corruption
• requirements of illegal payments to get permits,
  win a contract or receive government services,
• Look Out For Countries in which legal
  transparency is low tend to be more corrupt.

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Looking for The Risks

• How to manage risks as a part of business
• Step 1 Balance Risk
• Put some operations in low-return, low-risk
  countries
• Put other operations in high-return, high-risk
  countries
• Step 2 Guard Against Risk
• locating operations in countries whose exchange
  rates are not closely correlated and will
  fluctuate differently
• Step 3 Find Opportunity in Risk
• Adverse situations may heighten the perceived
  needs for certain products. (water, plywood,
  candles before hurricane)

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Risks Liability of Foreignness

• Bad News Foreign firms have a lower
• Survival rate in their initial years of
• operation.
• How to reduce the risk
• Start in 1 or 2 countries that are similar to
  home.
• enlist experienced intermediaries to handle
  operations.
• Use operational forms that require a lower
  commitment of foreign resources.
• Good News Foreign firms that manage to survive
  their early years you will have the same
  long-term survival rates as your local
  competitors.

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Political Risk

• How can you tell if the political climate will
  change in such a way
• that a firms operating position will
  deteriorate?
• Employee expert analysis to perform a Detailed
  Examination of
• the countrys past patterns of political risk
• the direction of change in the views of
  government decision makers
• economic and social conditions
• Note Political risk doesnt always arise from
  civil disorder or war. It may also include the
  expropriation of property, changes in political
  leaders opinions and/or animosity between a home
  and host country.

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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.

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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

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Why Country A is an Apple and Country B is a
Banana

• Why comparison data is not comparabile
• 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.

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External Sources of Information

• Where do I go if I cant Google it?
• 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.

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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.

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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

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Choices in Resource Allocation

• Option A Reinvest earnings back into the foreign
  location. This may be necessary for the first
  few years of operations.
• Option B Harvest also known as divesting, takes
  whatever resources the firm has in the
  nonproductive location and allocates them to a
  location with a better opportunity.

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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

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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

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Final Country Selection Details and
Non-comparative Decision Making

• What limits the final analysis?
• 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.

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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.

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• 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.

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Homework

• Use the simplified grid for market penetration
  (12.2) to compare South Africa, Ireland and
  Argentina for a investment in setting up a Wing
  Stop franchise. Email me which one you think
  would be the best investment, and why?
• Data sources that might help
• www.doingbusin ess.org
• www.worldbank.org
• www.nationmaster.com