COUNTRY EVALUATION AND SELECTION
SCANNING
Scanning is useful as a company might otherwise consider either too few or too
many possibilities. Through the use of scanning, decision makers can perform a
detailed analysis of a manageable number of geographic locations. Managers can
usually complete the scanning process without having to incur the expense of
visiting foreign countries. Instead they rely on analyzing information found on the
Internet and other publicly available sources, as well as communicating with people
familiar with the foreign countries they are interested in.
Escalation of Commitment :The more time and money companies invest in
examining an alternative, the more likely they are to accept it regardless of its merit.
This phenomenon is known as escalation of commitment. Companies should be
careful about taking forced actions based on peer and/or media pressure and should
instead carefully weigh important variables when comparing countries of interest.
134
WHAT INFORMATION IS IMPORTANT?
Opportunities and Risk
A. Opportunities
Opportunities are determined by competitiveness and profitability factors.
Variables weighing heavily on the selection of market and production sites
would include market size, ease and compatibility of operations, costs, resource
availability and red tape.
1. Market Size. Market size is determined by sales potential. In some
instances, past and current sales for either an existing product or a similar
are available on a country-by-country basis. In addition, data such as GNP,
per capita income, population, income distribution, economic growth rates,
and levels of economic development will also be useful. Other important
economic variables pertaining to market size include:
• Leapfrogging of products. Consumers in some emerging economies
skip entire generations of technology in favor of more recent
technologies, for example : Chinese consumers going from having no
telephones to using cellular phones almost exclusively.
• Prices. The relative prices of essential and non-essential good can have
a significant impact on consumption patterns. Higher prices for
necessary goods leave less flexible income for non-essentials.
• Income elasticity. Income elasticity varies by product and income
level, with demand for necessities being less elastic than demand for
luxuries.
• Substitution. Depending on local conditions, consumers in some
countries may be more willing to substitute some products or services
for others. For example, people in high population density areas
typically substitute mass transit for automobiles.
• Income inequality. Even in areas where per capita incomes are low,
there may be middle- and upper-income people with substantial income
to spend due to income inequality.
• Cultural factors and taste. Countries with similar income levels may
exhibit different demand patterns based on differences in cultural
values and tastes .For example: Consumers in Asia are still not keen for
coffee based products and chocolate as compared to Western Nations.
• Existence of trading blocs. Even if a country has small populations and
low per capita incomes it may still have a much larger market due to
participation in a regional trading block.
2. Ease and Compatibility of Operations. Companies are naturally
attracted to countries that are located nearby, share the same language and
offer market conditions similar to those in their home countries. For
example , Carrefour initially moved to immediate neighboring countries
because of similarities. Beyond that, proposals may then be limited to those
countries that offer, among other factors, the appropriate plant size, the local
availability of resources, an acceptable percentage of ownership.
135
3. Costs and Resource Availability. Costs are a critical factor in
production-location decisions. Productivity-related factors include the cost
of labor, the cost of inputs, tax rates, and available capital, utilities, real
estate, and transportation. It’s not the cost alone; other significant factor
such as the quality of a country’s infrastructure can be very important in
location decisions. Firms often need to locate in an area that will allow
them to move supplies and finished products very efficiently. If a given
production site will be used to serve multiple markets, the cost and ease of
moving materials and products in and out the country will be especially
important.
4. Red Tape and Corruption. Red tape includes the difficulty of getting
permission to operate, bringing in the country, expatriate human resource,
obtaining licenses to produce and market goods and satisfying government
agencies on matters such as taxes, labor conditions and environmental
compliance.
Government corruption may include requirements of payments to win a
contract or receive government services, such as mail delivery or visa
issuance. Although not always a directly measurable cost, red tape and
corruption increase the cost of doing business.
B. Risks
Is it ever rational for a firm to invest in a country with high economic and
political risk ratings? Such questions must be carefully weighed when
making international capital-investment decisions.
1. Risk and Uncertainty. Firms usually experience higher risk and
uncertainty when they operate abroad. Firms use a variety of financial
techniques to compare potential investments, including discounted cash
flows, economic value added, payback period, net present value, return on
sales, return on equity, return on assets employed, internal rate of return and
the accounting rate of return. Most decision makers prefer a more certain
outcome to a less certain one. As part of a feasibility study, the degree of
acceptable risk should be determined so a firm does not incur unacceptable
costs.
2. Liability of Foreignness. The liability of foreignness refers to the fact
that foreign firms have a lower rate of survival than local firms for the
initial years after the start of operations.
3. Competitive Risk. A firm’s innovative advantage may be short-lived.
When pursuing a strategy known as imitation lag, a firm moves first to
those countries most likely to catch up to the advantage. In some instances
firms may seek those countries where they are least likely to confront
significant competition; in others they may gain advantages by moving into
countries where competitors are already present. By being the first major
competitor in a market, companies can more easily gain the best partners,
best locations, and best suppliers—a strategy to gain first mover
advantage. Companies may also reduce risk by avoiding overcrowded
markets, or conversely, they may purposely crowd a market to prevent
136
competitors from gaining advantages therein that they can use to improve
their competitive positions Firms may also seek “clusters” like Silicon
Valley that attract multiple suppliers, customers and highly trained
personnel in order to gain access to new products, technologies, and
markets.
4. Monetary Risk. If a firm’s expansion occurs through foreign-direct
investment, foreign-exchange rates and access to investment capital and
earnings are key considerations. Liquidity preference refers to the theory
investors want some of the holdings to be in highly liquid assets on which
they are willing to take a lower return. Firms must carefully evaluate a
country’s present capital controls, recent exchange-rate stability, balanceof-payments account, inflation rate, and level of government spending.
5. Political Risk. Political risk reflects the expectation the political climate
in a given country will change in such a way that a firm’s operating position
will deteriorate. It relates to changes in political leaders’ opinions and
policies, civil disorder, and animosity between a home and host country.
When evaluating political risk, decision makers refer to past patterns in a
given country, expert opinions and country analysts. They also look for
economic and social conditions that could lead to political instability, but
there is no consensus as to what constitutes dangerous instability or how it
can be predicted.
COLLECT AND ANALYZE DATA
Firms perform research to reduce uncertainties in their decision processes, to expand
or narrow the alternatives they consider and to assess the merits of their existing
programs. The costs of data collection should always be weighed against the
probable payoffs in terms of revenue gains or cost savings.
Problems with Research Results and Data
Numerous countries have agreed to standards for collecting and publishing
various categories of national data. However, the lack, oldness and inaccuracy of
data on other countries can make research difficult and expensive to undertake.
Further, data discrepancies further increase uncertainty in decision-making.
1. Reasons for Inaccuracies. For the most part, incomplete or inaccurate
data result from the inability of governments to collect the needed
information. Both economic and educational factors will affect the quantity
and quality of available data. Of equal concern, however, is the publication
of false or purposely misleading information, as well as the non-reporting or
under-reporting of information people wish to hide or distort.
2. Comparability Problems. Comparability problems result from
definitional differences across countries (e.g., family categories, literacy
levels, accounting rules), differences in base years, distortions in foreign
currency conversions, the measurement of investment flows, the presence of
black market activities, etc.
137
A. External Sources of Information
Both the specificity and cost of information will vary by source.
1. Individualized Reports. Market research and business consulting firms
conduct country studies for a fee. The fact that a firm can specify the
information it wants may make the cost worthwhile.
2. Specialized Studies. Certain research organizations generate specific
studies about countries, regions, industries, issues, etc., that they make
available for general purchase. The price is much lower than for an
individualized study.
3. Government Agencies. Governments and their agencies publish tomes
of information designed to stimulate business activity both at home and
abroad.
4. International Organizations and Agencies. The UN, the WTO, the
IMF, the OECD, and the EU are but a few of the multilateral organizations
and agencies that collect and disseminate data. Many of the international
development banks even help fund investment feasibility studies.
5. Trade Associations. Many trade associations collect, evaluate, and
disseminate a wide variety of data dealing with competitive and technical
factors in their industries. Their reports may or may not be available to nonmembers.
B .Internal Generation of Data
When firms have to conduct studies in foreign countries, they may find
traditional data gathering and analytical methods do not reveal critical insights.
In that case, a researcher must be extremely imaginative and observant. In some
instances, useful information may be found by analyzing indirect or
complementary indicators.
138
V. COUNTRY COMPARISON TOOLS
Two common tools for analyzing information collected via scanning are grids and
matrices. Also, once a firm commits to a location, it will need continuous updates
regarding external conditions that might affect its operations there.
A. Grids
A grid can be used to make country comparisons according to a wide variety of
relevant factors, such as ownership rules, potential returns, and perceived risk.
Variables can be ranked and weighted according to specific criteria that reflect a
firm’s situation and objectives. Although useful for establishing minimum
scores and for ranking countries, grids often obscure interrelationships among
countries.
139
B. Matrices
One matrix frequently used when doing country comparisons is the opportunityrisk matrix. Matrices can be used to: incorporate weighted indicators of a firm’s
risks and opportunities in specific countries
plot the scores to more clearly reveal respective positions for comparative
purposes
140
MAKING FINAL COUNTRY SELECTIONS
At some point, firms must make resource allocation decisions. For new investments
they will need to develop detailed estimates of all costs and expenses and consider
whether to enter a particular venture alone or with a partner. For acquisitions, firms
will need to examine financial statements in great detail. For expansion within
countries where they are already operating, country managers will most likely submit
capital budget requests that include details of expected returns. To maximize
expected gains, decisions must be made in a timely fashion.
141