Country Analysis
Chapter 13
Location decision
• Where to produce and where to sell
• Determined by interactions of
objectives, environments and
competitiveness.
• Companies need to determine the
order of country entry and resource
allocation among countries
• International expansion tends to be
passive in its early stage and active
later.
Steps in Country
selection
• Scan for alternatives
– Why scan?
– To avoid risks of overlooking
opportunities and examining too many
opportunities
• Consider opportunities and risks
• Collect data and analyze data
• Use tools to narrow down
alternatives
Opportunities
• Profit = revenue – cost
• Revenue-determining variables
– Market size
• GNP, per capita GNP, middle class size, level
of industrialization
– Compatibility of operations
• Geography, language, culture
– FDI laws (ownership and remittance)
• Cost-determining variables
– Resource availability and cost
• Labor costs, raw material costs,
transportation costs, tax rates, technology
level, bureaucracy and red tapes
Risks
• Uncertainty
– Given the same expected return, lower
uncertainty is preferred.
– Given the same uncertainty, higher
return is preferred.
– Liability of foreignness: tendency that
foreign firms’ survival rate is lower than
local firms.
• Type of risks
– competitive risk
– monetary risk
– political risk
Competitive risk
• Losing innovative advantage
• Strategies
• Imitation lag: move first to the country
mostly likely to catch up and later to
another country
• Moving to the country with no
competitors (security)
• Moving to the country with existing
competitors (free rider)
Monetary risk
• Access to and conversion of invested
capital are key consideration
• Liquidity preference: investors’
preference of having their holdings in
highly liquid assets
• Capital controls and exchange rate
stability are useful indicators of
monetary risk
Political risk
• Causes
– Leadership change
– Political unrest and civil disorder
– Animosity between host and home
governments
• Prediction
– Analysis of past patterns
– Opinion analysis (particularly expert
analysis)
– Instability assessment
Data collection
• Information is needed at all levels of
control.
• Compare cost and value of
information.
• Problems in data collection
– Timeliness
– Inaccuracy
– Incompatibility
• Sources of information
Country comparison
tools
• Grid Analysis
– Depict acceptable and unacceptable
conditions
– Rank countries by important variables
• Opportunity-risk matrix
– Selection of indicators of opportunityrisk and their weights
– Evaluation of each country on the
weighted indicators
– Plot each country on the matrix
Tools - continued
• Country attractiveness – company
strength matrix
– Analyzing the fit of a firm’s product to
individual countries
– Invest/grow vs. harvest/divest choices
• Environmental scanning
– Systematic assessment of external
conditions that might affect a firm’s
operations
FDI strategies
• Diversification vs. concentration
(sequencing entry)
– Factors affecting the decision
• Growth rate, sales stability, competitive lead
time, spillover effects, etc.
• Investment, reinvestment, and
divestment
• Minimum threshold criteria
(commonly practiced method)
– Examining individual proposals on at a
time and accept them if they meet
minimum threshold criteria