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
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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
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Place of Location Decisions in IB Operations
OPERATIONS
EXTERNAL INFLUENCES
OBJECTIVES
PHYSICAL AND
SOCIETAL FACTORS
STRATEGY
MEANS
COMPETITIVE
ENVIRONMENT
Modes
© 2001 Prentice Hall
Functions
Overlaying
Alternatives
• Choice of
countries
• Organization
and control
mechanisms
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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
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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
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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
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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
Estimated ROI
PROBABILITY
.15
.20
.30
.20
.15
WEIGHTED
VALUE
0
1.0
3.0
3.0
3.0
10%
© 2001 Prentice Hall
INVESTMENT B
PROBABILITY
0
.30
.40
.30
0
WEIGHTED
VALUE
0
1.5
4.0
4.5
0
10%
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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
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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
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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
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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
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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
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Simplified Grid to Compare Countries for Market Penetration
VARIABLE
WEIGHT
I
II
III
IV
---
U
A
A
A
--
A
A
A
A
0-5
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
--
2
18
1
10
2
18
0
10
-0
-1
--
2
0
0
0
0
1
3
1
4
1
3
3
2
3
2
2
3
3
14
13
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
0-3
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
0-4
0-3
-0-3
0-4
-0-2
© 2001 Prentice Hall
1
3
2
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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
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Opportunity-Risk Matrix
10
C
Decreased risk
F
A
E
B
D
0
= No operations in the country
= Current operations
= Future placement
= World average rating, present
= World average rating, future
5
10
Increased opportunity
© 2001 Prentice Hall
13-20
Country Attractiveness-Company Strength Matrix
High
Dominate/divest
Joint venture
Country attractiveness
Invest/grow
Individualized
strategies
Medium
Individualized
strategies
Harvest/divest
Combine/license
Low
High
Medium
Low
Competitive strength
© 2001 Prentice Hall
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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
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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
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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
Low
© 2001 Prentice Hall
PREFER
CONCENTRATION IF:
High
High
Long
Low
High
High
High
High
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