Country Analysis

1. Country Analysis Chapter 13

2. 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.

3. 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

4. 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

5. 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

6. 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)

7. 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

8. 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

9. 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

10. Country comparison tools • Grid Analysis • Depict acceptable and unacceptable conditions • Rank countries by important variables • Opportunity-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

11. 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

12. 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