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CHAPTER TWELVE COUNTRY EVALUATION AND SELECTION
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DescriptionCHAPTER TWELVE COUNTRY EVALUATION AND SELECTION
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.
Grids [See Table 12.2]
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 firmís situation and objectives. Although useful for establishing minimum scores and for ranking countries, grids often obscure interrelationships among countries.
Matrices [See Figure 12.7]
One matrix frequently used when doing country comparisons is the opportunity-risk matrix. When using this matrix, the manager plots a country according to the perceived value of the opportunity the country offers, on the one hand, and the expected level of risk associated with operating in that country on the other. Which factors are good indicators of risk and opportunity and the weight assigned to each must be identified and assigned by the firm. Once scores are determined for each country being considered, they can be plotted and reviewed from a comparative perspective. A useful application of this technique is to develop both present and future scores for countries (e.g., five years hence) because a significant shift in a score in the future could have serious implications with respect to the country selection process.
VI. ALLOCATING AMONG LOCATIONS
Over time, most of the value of a firmís FDI comes from reinvestment. Thus, in deciding where to invest, firms must consider whether to reinvest or harvest, to what degree there is interdependence among their locations and whether they should diversify or concentrate their activities.
Reinvestment versus Harvesting
Once a firm makes an initial investment, it will then need to decide whether to continue investing in that operation or to harvest the earnings (and possibly divest the assets) and use them elsewhere.
1. Reinvestment Decisions. Reinvestment refers to the use of retained earnings to replace depreciated assets or to add to a firmís existing stock of capital. Aside from competitive factors, a company may need several years of almost total reinvestment (and often allocation of additional funds) in order to realize its objectives at a given location.
2. Harvesting. Harvesting or divesting refers to the reduction in the amount of an investment; a firm may choose to simply harvest the earnings of an operation or divest the assets there as well. If an operation no longer fits a companyís overall strategy, or if better opportunities exist elsewhere, it must determine how to exit that operation. When selling or closing facilities, firms must consider possible government performance contracts as well as potential adverse publicity, plus the possible difficulty in re-establishing operations in that country in the future.
Interdependence of Locations
It is often difficult to assess the true impact a particular foreign subsidiary has on other operations within an MNE if several operations are interdependent. In the case of intra-firm sales, transfer pricing strategy will definitely affect the relative profitability of one unit as compared to another. Likewise, the net value of a particular operation may be similarly distorted for corporate profit maximization purposes.
Geographic Diversification versus Concentration
A firm may take different paths en route to gaining a sizable presence in most countries. At one end of the spectrum is a diversification strategy, whereby a firm moves rapidly into many foreign countries and then gradually builds its presence in each. At the other end of the spectrum is a concentration strategy, whereby a firm moves into a limited number of countries and develops a strong competitive position there before moving into others. When deciding which strategy, or perhaps some hybrid of the two, is desirable, a firm must consider a number of variables (see Table 12.3).
1. Growth Rate in Each Market. When the growth rate in each market is high, a firm will likely concentrate on a few markets because of the cost of keeping up with market expansion.
2. Sales Stability in Each Market. The more stable sales and profits are within a single market, the less advantageous a diversification strategy will be.
3. Competitive Lead Time. Sequential entry into multiple markets is more common than simultaneous entry. If a firm has a long lead time before competitors can copy or supercede its advantages, then it may be able to follow a concentration strategy and still beat competitors to other markets.
4. Spillover Effects. Spillover effects represent situations in which a marketing program in one country results in the awareness of a product in other countries. When a single marketing program can reach many countries (via cross-country media, for example), a diversification strategy is advantageous.
5. Need for Product, Communication, and Distribution Adaptation. When companies find it necessary to alter products, promotion and/or distribution strategies in foreign markets, a concentration strategy will be advantageous because the associated costs cannot be spread over sales in other countries to capture economies of scale.
6. Program Control Requirements. The more a company needs control over a foreign operation, the more appropriate a concentration strategy because additional resources will be required to maintain that control.
7. Extent of Constraints. When a firm is constrained by limited resources, it will likely follow a concentration strategy because spreading resources too thinly can be a recipe for failure.
VII. NONCOMPARATIVE DECISION MAKING
Companies often examine one opportunity at a time rather than ranking a set of foreign operating proposals using predetermined criteria. This sequential process leads to go-no-go decisions and is often necessary due to the speed with which companies need to respond to opportunities as they arise. Decision makers often need to react quickly for both offensive and defensive motives. The cost of conducting an extensive analysis of multiple opportunities simultaneously can also sometimes be prohibitive.
VIII. 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.
LOOKING TO THE FUTURE:
Will the Prime Locations Change?
There are several important demographic shifts that are expected to occur over the next several decades. Population growth in high income countries is expected to slow and populations are actually expected to decline in countries such as Japan and Italy. Meanwhile, population growth in low-income countries is expected to be robust. Since there is a positive relationship between the changes in the size of the working-age population and per capita GDP, the growth in per capita GDP should be higher in todayís emerging economies than in todayís high-income countries. These changes could have significant implications for the location of markets and the location of labor forces. Another trend that could influence country selection is the propensity of innovative people to converge on places that develop reputations for facilitating creativity and innovation. Even with technologies that allow people to work from home or in virtual office environments, face-to-face contact will continue to be importantóespecially among the best and brightest.
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