CHAPTER 7 - Country Evaluation and Selection LEARNING OBJECTIVES After reading this chapter, you should be able to: To grasp company strategies for sequencing.

CHAPTER 7 - Country Evaluation and Selection

LEARNING OBJECTIVESAfter reading this chapter, you should be able to:

To grasp company strategies for sequencing the penetration of countries

To see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areas

To discern the major opportunity and risk variables a company should consider when deciding whether and where to expand abroad

To know the methods and problems of collecting and comparing international information

To understand some simplifying tools for helping decide where to operate

To consider how companies allocate emphasis among the countries where they operate

To comprehend why location decisions do not necessarily compare different countries’ possibilities

Copyright © 2011 Pearson Education 12-1

Introduction

Because all companies have limited resources,

they must be careful in making the following decisions:

1. In which countries to locate sales, production, and administrative and auxiliary services

2. The sequence for entering different countries

3. The amount of resources and efforts to allocate to each country where they operate


Location Decisions Affecting International Operations


Scanning versus Detailed Analysis

Without scanning, a company may: Overlook opportunities and risks Examine too many or too few possibilities

Scanning allows managers to examine most or all countries broadly and then narrow them to the most promising ones. In scanning, managers compare country information that is readily available, inexpensive, and fairly comparable—usually without having to incur the expense of visiting foreign countries.

Instead they analyze publicly available information, such as from the Internet, and they communicate with experienced people e.g. http://www.doingbusiness.org

Once managers narrow their consideration to the most promising countries, they need to compare the feasibility and desirability of each. At this point, unless they are satisfied enough to outsource all their production and sales, they almost always need to go on location to analyze and collect more specific information.

What Information is Important in Scanning?

Opportunities◦Sales Expansion◦Resource Acquisition

Risks◦Political Risk◦Monetary Risk◦Competitive Risk


Examining Economic and Demographic Variables

1.Obsolescence and leapfrogging of products

Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively.

2. Prices If prices of essential products are high, consumers may

spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. 12-

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3. Income elasticityA common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs.

4. Substitution

Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles.

Examining Economic and Demographic Variables5. Income Inequality

Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India.

6. Cultural Factors and Taste

Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian.

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7. Trading BlocsAlthough a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR).


Cost Considerations of Resource Acquisition

Companies undertake international business to secure resources that are either not sufficiently available or

too expensive in their home countries. They may purchase these resources from another organization, or they

may establish foreign investments to exploit them. In either case, they must prioritize where they can best secure what they want such as in term of: Labor Infrastructure Ease of Transportation and Communications Government Incentives and Disincentives


Factors to Consider in Analyzing RiskCompanies and their managers differ in

their perceptions of what is risky.One company’s risk may be another’s

opportunity.There are means by which companies may

reduce their risks other than avoiding locations.

There are trade-offs among risks.


Political Risk

Analyzing Past PatternsAnalyzing OpinionsExamining Social and Economic

Conditions


Monetary Risk

Exchange Rate Changes◦Differences in the exchange rates can

create gains or losses Mobility of Funds

◦Liquidity among countries varies


Competitive Risk

Making Operations Compatible (see Distance Framework table).

Spreading RiskFollowing Competitors of CustomersHeading Off Competition


Distance Framework

Cultural Distance

Administrative Distance

Geographic Distance

Economic Distance

Attitude Creating Distance

Different languageDifferent ethnicities: lack of connective ethnic or social networksDifferent religionsDifferent social norms

Absence of colonial tiesAbsence of shared monetary/politicalassociationPolitical hostilityGovernment policiesInstitutional weaknesses

Physical remotenessLack of a common borderLack of sea or river accessSize of countryWeak transportation or communication linksDifferent in climates

Difference consumer incomesDifferent costs and quality of:• natural resources• financial resources• human resources• infrastructure• intermediate input• information or knowledge

The distance framework helps managers identify and assess the

impact of distance of different types (Pankaj, 2001).

Collecting and Analyzing Data

Companies undertake business research to reduce

outcome uncertainties from their decisions and to

assess their operating performance. Questions such as: Can we hire qualified personnel? Will the economic & political climate allow us to

reasonable foresee our future? What is our market share?

To answer those questions, information is needed at all

levels of control and companies should compare the cost

of information with its value.


Problems With Research Results and DataLimited ResourcesMisleading DataReliance on Legally Reported Market

ActivitiesPoor Research MethodologyNoncomparable Information


External Sources of Information Individualized Reports e.g. sold by consulting firms like

Frost & Sullivan, etc. Specialized Studies e.g. directories of companies that

operate in a given locale Service Companies e.g. most companies providing services

to international clients like bank, transportation firms, etc. publish reports.

Government Agencies e.g. US Dept. of Commerce compiles news about individual foreign countries, in Malaysia, info can be sought at MITI and MATRADE.

International Organizations and Agencies e.g. info can be gathered from United Nations, WTO, IMF, OECD

Trade Associations e.g. trade journals publish by the associations like FAMA, MPOB, etc.


Country Comparison Tools

There are 2 most common tools in scanning

1. Grids◦ May depict acceptable or unacceptable

conditions◦ Rank countries by important variables

2. Matrices allow companies to:◦ Decide on indicators and weight them◦ Evaluate each country on the weighted

indicators


Simplified Market-Penetration Grid


Variable Weight

Country A

Country B

CountryC

Acceptable (A) or Unacceptable (B)1. Allow 100% ownership

B A A

Return (higher rating is better)1. Size of investment2. Direct Cost3. Tax rate4. Market size5. Market shareTotal

0 - 542341

33422

34134

Risk (lower rating is better)1. Exchange problems2. Political instability3. Loose business laws4. Corruption IndexTotal

0 - 51243

3212

2322

OPPORTUNITY RISK MATRIX Which country is most desirable?


Dec

reas

ed R

isk

Increased Opportunity

AF

E

B

CD

Allocating Among Locations

There are three complementary strategies for international expansion.1. Alternative Gradual Commitments2. Geographic Diversification versus

Concentration3. Reinvestment and Harvesting


Alternative Gradual Commitments

Companies may reduce risks from the liability offoreignness by:• Going first to countries with characteristics similar to

those of their home countries e.g. Malaysia & Indonesia

• Having experienced intermediaries handle operations for them.

• Operating in formats requiring commitment of fewer resources abroad.

• Moving initially to one or a few, rather than many,foreign countries.


Geographic Diversification versus ConcentrationGrowth rate in each marketSales stability in each marketCompetitive lead timeSpillover EffectsNeed for product, communication, and

distribution adaptationProgram control requirements


Reinvestment and Harvesting

FDI-financial and human capital invested abroad

Depending on the success of the investment, the company may reinvest or consider using the capital elsewhere


Noncomparative Decision Making

Most companies examine proposals one at a time and accept them if they meet minimum threshold criteria.


Future: Will Prime Locations Change?Future growth rates will have

implications for locations of markets and labor forces

Technological innovation allows for new trends in urbanization as more people are able to work from locations of their choosing


CHAPTER 7 - Country Evaluation and Selection LEARNING OBJECTIVES After reading this chapter, you should be able to: To grasp company strategies for sequencing.

Documents

promising countries

penetration of countries

foreign countries

higherincome countries

pearson education

possibilities scanning

country information

international information