Country Analysis Chapter 13

Location decision Where to produce and where to sellWhere to produce and where to sell Determined by interactions of objectives, environments and competitiveness.Determined by interactions of objectives, environments and competitiveness. Companies need to determine the order of country entry and resource allocation among countriesCompanies 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.International expansion tends to be passive in its early stage and active later.

Steps in Country selection Scan for alternativesScan for alternatives –Why scan? –To avoid risks of overlooking opportunities and examining too many opportunities Consider opportunities and risksConsider opportunities and risks Collect data and analyze dataCollect data and analyze data Use tools to narrow down alternativesUse tools to narrow down alternatives

Opportunities Profit = revenue – costProfit = revenue – cost Revenue-determining variablesRevenue-determining variables –Market size GNP, per capita GNP, middle class size, level of industrializationGNP, per capita GNP, middle class size, level of industrialization –Compatibility of operations Geography, language, cultureGeography, language, culture –FDI laws (ownership and remittance) Cost-determining variablesCost-determining variables –Resource availability and cost Labor costs, raw material costs, transportation costs, tax rates, technology level, bureaucracy and red tapesLabor costs, raw material costs, transportation costs, tax rates, technology level, bureaucracy and red tapes

Risks UncertaintyUncertainty –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 risksType of risks – competitive risk – monetary risk – political risk

Competitive risk Losing innovative advantageLosing innovative advantage StrategiesStrategies Imitation lag: move first to the country mostly likely to catch up and later to another countryImitation 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 no competitors (security) Moving to the country with existing competitors (free rider)Moving to the country with existing competitors (free rider)

Monetary risk Access to and conversion of invested capital are key considerationAccess to and conversion of invested capital are key consideration Liquidity preference: investors’ preference of having their holdings in highly liquid assetsLiquidity preference: investors’ preference of having their holdings in highly liquid assets Capital controls and exchange rate stability are useful indicators of monetary riskCapital controls and exchange rate stability are useful indicators of monetary risk

Political risk CausesCauses –Leadership change –Political unrest and civil disorder –Animosity between host and home governments PredictionPrediction –Analysis of past patterns –Opinion analysis (particularly expert analysis) –Instability assessment

Data collection Information is needed at all levels of control.Information is needed at all levels of control. Compare cost and value of information.Compare cost and value of information. Problems in data collectionProblems in data collection –Timeliness –Inaccuracy –Incompatibility Sources of informationSources of information

Country comparison tools Grid AnalysisGrid Analysis –Depict acceptable and unacceptable conditions –Rank countries by important variables Opportunity-risk matrixOpportunity-risk matrix –Selection of indicators of opportunity- risk and their weights –Evaluation of each country on the weighted indicators –Plot each country on the matrix

Tools - continued Country attractiveness – company strength matrixCountry attractiveness – company strength matrix –Analyzing the fit of a firm’s product to individual countries –Invest/grow vs. harvest/divest choices Environmental scanningEnvironmental scanning – Systematic assessment of external conditions that might affect a firm’s operations

FDI strategies Diversification vs. concentration (sequencing entry)Diversification vs. concentration (sequencing entry) –Factors affecting the decision Growth rate, sales stability, competitive lead time, spillover effects, etc.Growth rate, sales stability, competitive lead time, spillover effects, etc. Investment, reinvestment, and divestmentInvestment, reinvestment, and divestment Minimum threshold criteria (commonly practiced method)Minimum threshold criteria (commonly practiced method) –Examining individual proposals on at a time and accept them if they meet minimum threshold criteria