Chapter 9
Country Market
Analysis
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PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.
9
9-1
Lecture/Chapter Topics
•
Foreign Direct Investment
•
The Promise And Pitfalls Of Exporting
•
Improving Export Performance
•
Basic Entry Decisions
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Foreign Direct Investment
• The Shift to Services
– In the past two decades, the sector composition of FDI has
shifted sharply away from extractive industries and
manufacturing and towards services.
– The composition of FDI in services has also changed.
– Until recently it was concentrated in trade and financial
services.
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9-3
Foreign Direct Investment
•
The Shift to Services (Cont’d)
– The shift to services is being driven by four factors:
1. First, the shift reflects the general move in many developed
economies away from manufacturing and towards service
industries.
2. Second, many services cannot be traded internationally.
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9-4
Foreign Direct Investment
•
The Shift to Services (Cont’d)
– The shift to services is being driven by four factors: (cont’d)
3. Third, many countries have liberalised their regimes governing
FDI in services.
4. Finally, the rise of internet-based global telecommunications
networks has allowed some service enterprises to relocate
some of their value-creation activities to different nations to
take advantage of favourable costs.
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Foreign Direct Investment
• Gross Fixed Capital Formation
– Gross fixed capital formation summarises the total
amount of capital invested in factories, stores, office
buildings and the like.
– Other things being equal, the greater the capital investment
in an economy, the more favourable its future growth
prospects are likely to be.
– FDI can be seen as an important source of capital
investment and a determinant of the future growth rate of
an economy.
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9-6
Foreign Direct Investment
• Inward FDI as a percentage of Gross Fixed Capital
Formation
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Promise and Pitfalls of Exporting
• Exporting provides opportunities for smaller firms to
benefit from international trade.
• The great promise of exporting is that large revenue
and profit opportunities can be found in foreign
markets for most firms in most industries.
• Exporting can enable a firm to achieve economies of
scale, thereby lowering its unit costs.
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Promise and Pitfalls of Exporting
• Many medium-sized and small firms are very reactive
about seeking opportunities for profitable exporting.
• Reactive firms do not even consider exporting until
their domestic market is saturated and the
emergence of excess productive capacity at home
forces them to look for growth opportunities in foreign
markets.
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9-9
Promise and Pitfalls of Exporting
• Many small and medium-sized firms tend to wait for
the world to come to them, rather than going out into
the world to seek opportunities.
• Common pitfalls include poor market analysis, a poor
understanding of competitive conditions in the foreign
market, a failure to customise the product offering to
the needs of foreign customers, lack of an effective
distribution program, a poorly executed promotional
campaign and problems securing financing.
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9-10
Promise and Pitfalls of Exporting
• Number of Australian Exporters by Destination
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9-11
Improving Export Performance
• An International Comparison
– One big impediment to exporting is simply a lack of
knowledge of the opportunities available.
– Countries are separated from the firm’s home base by
culture, language, distance and time — the firm does not
know of them.
– Identifying export opportunities is made even more complex
because more than 200 countries with widely differing
cultures compose the world of potential opportunities.
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9-12
Improving Export Performance
• An International Comparison (Cont’d)
– The way to overcome ignorance is to collect information
with governments’ assistance.
– In Germany, for example, trade associations, government
agencies and commercial banks gather information, helping
small firms identify export opportunities.
– A similar function is provided by the Japanese Ministry of
International Trade and Industry (MITI), which is always on
the lookout for export opportunities.
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9-13
Improving Export Performance
• An International Comparison (Cont’d)
– In the United States the most comprehensive source of
information is the US Department of Commerce and its
district offices all over the country.
– In Australia and New Zealand all levels of government are
very keen to promote exports.
– Many of the international sources also permit open access
to their data.
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9-14
Improving Export Performance
• Export Promotion Agencies
– Australian Trade Commission (Austrade) is a statutory
agency within the Department of Foreign Affairs and Trade
(DFAT) given the task of promoting Australian exports.
– In New Zealand, New Zealand Trade and Enterprise is the
Government’s national economic development agency.
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Improving Export Performance
• Export Promotion Agencies (Cont’d)
– In Australia, every state and territory government has set up
organisations to promote business and international trade.
– These government departments and agencies can be a
useful source of information for exporters.
– These agencies (both federal and state) provide a multitude
of services to potential and existing exporters in initiating or
expanding exports.
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9-16
Improving Export Performance
• Government Export Promotion Agencies
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9-17
Improving Export Performance
• Government Export Promotion Agencies (Cont’d)
– Austrade also administers the Export Market Development
Grants (EMDG) scheme.
– This scheme is the Australian government’s financial
assistance program for novice and established exporters.
– The purpose of the scheme is to encourage small and
medium-sized Australian businesses to develop export
markets.
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9-18
Improving Export Performance
• Export Credit Insurance
– An exporter who insists on a letter of credit will lose an order
to one who does not require a letter of credit.
– Not having a letter of credit exposes the exporter to the risk
that the foreign importer will default on payment.
– The exporter can insure against this possibility by buying
export credit insurance.
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9-19
Improving Export Performance
• Export Credit Insurance (Cont’d)
– In Australia, export credit insurance is provided by Export
Finance and Insurance Corporation (EFIC) and in New
Zealand by the New Zealand Export Credit Office (NZECO).
– EFIC is a self-funded statutory corporation, owned and
guaranteed by the Australian government. While exporters
face many risks — from currency risks to transport and
contract risks — the role of EFIC is to provide services to
assist exporters manage the payment risk in exporting.
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9-20
Improving Export Performance
• Utilising Export Management Companies
– One way for first-time exporters to identify the opportunities
associated with exporting and to avoid many of the
associated pitfalls is to hire an export management company
(EMC).
– EMCs are export specialists that act as the export marketing
department or international department for their client firms.
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9-21
Improving Export Performance
•
Utilising Export Management Companies (Cont’d)
– EMCs normally accept two types of export assignments:
1.
1.
They can start exporting operations for a firm with the
understanding that the firm will take over operations after they
are well established.
Another arrangement is where start-up services are performed
with the understanding that the EMC will have continuing
responsibility for selling the firm’s products.
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9-22
Improving Export Performance
• Utilising Export Management Companies (Cont’d)
– The advantage of utilising EMCs is that they are experienced
specialists who can help the neophyte exporter identify
opportunities and avoid common pitfalls.
– The quality of EMCs varies.
– Relying solely on EMCs can mean that a company fails to
develop its own exporting capabilities.
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9-23
Improving Export Performance
• Export Strategy
– 3M’s experience:



Entering on a small scale to reduce risks
Adding additional product lines once the exporting operations
start to become successful
Hiring locals to promote the firm’s products
– Sirromet Wines’ experience:


Entering familiar markets
Choosing the appropriate distributor and building long-term
relationships when trying to build an export business
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9-24
Improving Export Performance
• Export Strategy (Cont’d)
– Simple strategic steps to increase the probability of exporting
success:


Hiring an EMC or at least an experienced export consultant to
help identify opportunities and navigate the paperwork and
regulations so often involved in exporting
Focusing initially on one market or a handful of markets and
learning what is required to succeed in those markets before
moving on to other markets
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9-25
Improving Export Performance
• Export Strategy (Cont’d)
– Simple strategic steps to increase the probability of exporting
success:

Entering a foreign market on a small scale to reduce the costs
of any subsequent failure; the exporter needs to recognise the
time and managerial commitment involved in building export
sales and should hire additional personnel to oversee this
activity
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9-26
Improving Export Performance
• Export Strategy (Cont’d)
– Simple strategic steps to increase the probability of exporting
success:
 Devoting a lot of attention to building strong and enduring
relationships with local distributors or customers
 Hiring local personnel to help a company establish itself in a
foreign market
 Being proactive about seeking export opportunities
 Retaining the option of local production
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9-27
Basic Entry Decisions
• Which Foreign Markets?
– The variables that are important to the analysis are:




the objectives of the firm
the type of products it has to sell
its size and resources available
whether it has prior experience, or a subsidiary, in the
country in question
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9-28
Basic Entry Decisions
• Macroeconomic Overview
– The first stage of the analysis is an overview examining the
broader economic indicators to gain an impression of the
type of economy the firm is seeking to undertake business
in, its economic potential and its degree of risk.
– By considering important factors, a firm can rank countries in
terms of their attractiveness and long-run profit potential.
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Basic Entry Decisions
• Timing of Entry
– Timing is about when a business enters a foreign market —
said to be early when it does so before other firms, and late
when it does so after other businesses have already
established themselves.
– The advantages frequently associated with entering a
market early are commonly known as first-mover
advantages.
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9-30
Basic Entry Decisions
• Timing of Entry (Cont’d)
– First-Mover Advantages
 Ability to pre-empt rivals and capture demand by establishing a
strong brand name
 Ability to build sales volume in that country and ride down the
experience curve ahead of rivals, giving the early entrant a cost
advantage over later entrants
 Ability of early entrants to create switching costs that tie
customers into their products or services
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9-31
Basic Entry Decisions
• Timing of Entry (Cont’d)
– First-Mover Disadvantages
 A primary disadvantage is that an early entry may entail
pioneering costs.
 The liability for being a foreigner is greater for foreign firms that
enter a national market early.
 An early entrant may be put at a severe disadvantage, relative
to a later entrant, if regulations change in a way that diminishes
the value of an early entrant’s investments.
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9-32
Basic Entry Decisions
• Scale of Entry and Strategic Commitments
– Entering a new market on a smaller scale is preferred even
by large firms.
– Most firms prefer to build up the scale slowly as they
become more familiar with the market.
– A strategic commitment has a long-term impact and is
difficult to reverse.
– Deciding to enter a foreign market on a significant scale is a
major strategic commitment on the part of an entering firm.
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9-33
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– Strategic commitments can have an important influence on
the nature of competition in a market, which will have several
effects:
 On the positive side, it will make it easier for the company to
attract customers and distributors (such as insurance agents).
 On the negative side, by committing itself heavily to one market
the firm may have fewer resources available to support
expansion in other desirable markets.
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9-34
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– Evidence suggests that significant strategic commitments
are neither unambiguously good nor bad. Rather, they tend
to change the competitive playing field and unleash a
number of changes, some of which may be desirable and
others not.
– It is important for a firm to think through the implications of
large-scale entry into a market and act accordingly.
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9-35
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– The large-scale entrant is more likely than the small-scale
entrant to be able to capture first-mover advantages.
– But strategic inflexibility can also have value.
– The value of the commitments that flow from rapid largescale entry into a foreign market must be balanced against
the resulting risks and lack of flexibility associated with
significant commitments.
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9-36
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– Balanced against the value and risks of the commitments
associated with large-scale entry are the benefits of a smallscale entry.
– Small-scale entry allows a firm to learn about a foreign
market while limiting the firm’s exposure to that market.
– Small-scale entry is a way to gather information about a
foreign market and how best to enter it before deciding
whether to enter on a significant scale.
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9-37
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– Small-scale entry reduces the risks associated with a
subsequent large-scale entry.
– The lack of commitment associated with small-scale entry
may make it more difficult for the small-scale entrant to build
market share and to capture first-mover or early-mover
advantages.
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9-38
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– The risk-averse firm that enters a foreign market on a small
scale may limit its potential losses, but it may also miss the
chance to capture first-mover advantages.
– Entering a large developing nation such as China or India
before most other international businesses in the firm’s
industry, and doing so on a large scale, will be associated
with high levels of risk.
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9-39
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– The liability of being foreign is increased by the absence of
prior foreign entrants whose experience can be a useful
guide.
– The potential long-term rewards associated with such a
strategy are great.
– An early large-scale entrant in a major developing nation
may be able to capture significant first-mover advantages
that will bolster its long-run position in that market.
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9-40
Basic Entry Decisions
• Scale of Entry and Strategic Commitments (Cont’d)
– Entering developed nations such as Ireland or Canada after
other international businesses in the firm’s industry, and
doing so on a small scale to first learn more about those
markets, will be associated with much lower levels of risk.
– But the potential long-term rewards are also likely to be
lower.
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Summary of Main Themes
• The main function of this chapter is to integrate the issues
examined so far to assist in the process of identifying suitable
country markets for firms interested in exporting or
considering foreign direct investment (FDI).
• The chapter introduced a means of assessing market
desirability by examining FDI inflows and expressing them as
a percentage of gross fixed capital formation.
• This chapter also examined the aspects of improving export
performance, namely to identify the appropriate international
markets and sources of government programs to assist
exporters.
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