IB Lecture 4

8/13/2019 IB Lecture 4

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International Business

Imcost

Risk analysis

Decisions to overcome or managingrisk


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Economic Factors

Size and growth rate of GDP

Foreign exchange rate fluctuations

Size of market for your product

Level of disposable income (available for spending)

Propensity of people to spend (change in spendingdivided by change in disposable income)

Interest and inflation rates

Unemployment rates

Fiscal and monetary policies


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Economic Risk

A countrys level of economic developmentgenerally determines its economic stability

Economic risk falls into 2 categories Government changes its fiscal policies

Government modifies its foreign-investment

policies Managers are constantly reassessing economic

risk


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Political Factors

Form and stability of government

Attitude toward private investment by

government, customers, and competition

Degree of anti-foreign discrimination

Amount of red tape

Amount of corruption Deregulation and/or regulation


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Political Risk7 Typical risk events Expropriation of corporate assets without prompt and

adequate compensation Forced sale of equity to host-country nationals, usually

at or below depreciated book value

Discriminatory treatment against foreign firms in the

application of regulations or laws

Barriers to repatriation of funds (profits or equity)

Loss of technology or other intellectual property (such

as patents, trademarks, or trade names) Interference in managerial decision making

Dishonesty by government officials, including cancellingor altering contractual agreements, extortion demands,

and so forth


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Managing Political Risk

Avoidanceeither the avoidance orwithdrawal of investment in a particularcountry

Adaptationadjust to the politicalenvironment

Dependencykeeping the host nation

dependent on the parent corporation Hedgingminimizing the losses associated

with political risk events


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The Legal Environment Managers will comply with the host countrys legal system

Common Lawpast court decisions act as precedents tothe interpretation of the law

Civil Lawcomprehensive set of laws organized into codes,

interpretation is based on reference to codes and statues

The global legal environment refers to the legal

environment in international business. The legal

environment regulates the operations of firms in

international markets. It is sufficient for a firm operating atthe domestic level to stick to regulations of the land, but

organizations operating in different countries need to

know and comply with the laws of the domestic country as

well as all the host countries they operate in.


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The Technological Environment

Corporations must consider the accelerating

macro-environmental phenomenon of techno

globalism (rapid developments in information

and communication technologies)

Corporations must consider the

appropriability of technology


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Other factors

Geographic Factors

Availability and efficiency oftransport

Proximity of site towardmarkets

Availability of local rawmaterials

Availability of power, water,

gas Availability of suppliers and

services

Labor Factors

Availability and costs of

managers and workers

Degree of skill and disciplineat all levels

Presence and strength of

unions

Literacy and trainability ofworkers

Degree of labor mobility


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Other factors

Tax Factors

Amount of taxes and tax

rate trends

Tax treaties

Amount of tax evasion

Duty when goods are

exported

Availability of tariffprotection

Capital Factors

Cost of local borrowing

Local availability ofconvertible currencies

Modern banking systems

Government credit aid to

new businesses

Venture capital industry

Regulation of banking

industry


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Other factors

Business Factors

State of marketing and

distribution system

Normal profit margin in

the industry

Competitive situation

Quality of life for

expatriates

Social Factors

Education of consumers

Age of population, life

expectancy Number of divorces,

births, deaths

Immigration and

emigration rates Influence of minorities

Changes in life styles


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Country evaluation and selection

WHY TO EVALUATE COUNTRY

Limited Resources with company.

Taking one opportunity is = loss of anotheropportunity

what may be a very attractive country for one

company may , at the same time , be

unattractive for another.


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Steps 1

Choosing Sites for Marketing and Production

Market-location

where to market Production Location

where to produce.

where to locate specialized units as R&Ddepartments

Where to make regional headquarters


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Step 2.

Deciding Overall Geographic Strategy

Company needs to decide

where to operate what portion of operations to place within

each country


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Why to Scan for Alternatives1. Risk of Overlooking Opportunities

.Company can overlook or disregard some promising options.

.Certain locations sometimes are taken together and rejected

before being sufficiently examined for expansion possibilities.

2. Risk of Examining too Many Opportunities

.Too many oppurtunity = Too much cost of anlysis = Decrease in

profit

3. The Environmental Climate

. Only if management thinks the country is feasible and

environment OK then a detailed feasibility study will be

undertaken


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How to choose a country

Investment decisions are made on the basis of

expected (opportunities v/s risks.)

Opportunities, are determined by (revenues -

costs.)

Examining key variables helps companies:

a) Determine the order of entry

b) Set the rates of resource allocation among

Countries


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Factors affecting country selection

Based On Opportunity offered by Country:

A. Market Size

B. Ease and Compatibility of Operations

C. Costs and Resource Availability

. Based on Risk Faced in the Country

A. Risk and Uncertainty

B. Competitive Risk

C. Monetary Risk

D. Political Risk


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Based On Opportunity offered by Country

A - Market Size

Sales potential most important.

Indicators of Market Size: GNP, per capita income,growth rates, size of the middle class, and level of

industrialization.

Ex: The trade market of the United States, Japan, and

Western Europe accounts for about half the worlds

total consumption, and an even higher proportion of

purchases of computers, consumer electronics, and

machine tools.


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B - Ease and Compatibility of Operations

Geographic, Language and Market Similarities

located nearby, share the same language, and have

similar market conditions.

Fit with Company Capabilities and Policies

location offers size, technology and other factor

familiar to a company personnel

Allows ownership

Impose no restrictions on remittance of profits


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C - Costs and Resource Availability

labour costs

Other costs: raw materials, capital, taxes

Availability of specific skills

Availability of infrastructure

Availability of banks, universities, insurance groups,public accountants, customs brokers, etc.

Product Image also dictate location of investment

Red Tape


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Based on Risk Faced in the Country

A - Risk and Uncertainty

Should return on investment be calculated on

the basis of the entire earnings of a foreignsubsidiary or just on the earnings that can be

remitted to the parent?

Does it make sense to accept a low return inone country if doing so will help the companys

competitive position elsewhere?


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B - Competitive Risk

A company's innovative advantage may be short-

lived.

develop strategies to find countries in which there is

least likely to be significant competition.

C - Monetary Risk access to the invested capital

exchange rate on its earnings.

Liquidity Preference


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D - Political Risk

political climate will change in such a way that their

operating position will deteriorate.

Ex: during the period of apartheid in South Africa,

many foreign investors were affected by boycotts

How to do Predicting Political Risk:a) Analysis of Past Patterns

b) Opinion Analysis

c) Instability Assessment


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Business Research WHY DONE:

to reduce uncertainties in the decision process,

to expand or narrow the alternatives under consideration,

to assess the merits of existing programs.

HOW MUCH RESERCH TO DO:

compare the cost of information with its value.

PROBLEM IN DOING RESERCH:

Lack of data

Old data

Inaccurate data


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Tools for Comparing Countries

1. - Grids

A grid may be used to compare countries on

whatever factors are deemed important.

Both the variables and the weights will vary

by product and company.

Grids rank countries by important variables


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2.- Opportunity-Risk Matrix

Company decides parameters to reflect risk and

opportunity

Attach Weight to the parameters based on its importance

Calculate for each country the wheighted parameter Evaluate the country accordingly.

Make a matrix where each country is placed relative to

another PROBLEM with this Model:

It is up to the company to determine the parameters

hence very subjective


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3. - Country Attractiveness " Company Strength Matrix

Highlights the fit of a companys product to the country.

Two Factors are used to evalaute any country.

a) Country Factors: market size, growth prospects, pricecontrols, red tape, requirements for local content and

exports, inflation, trade balance, political stability

b) Company Strength: market share, market share

position, product fit to the countrys needs, absolute profit

per unit, percentage profit on cost, quality of products, fit

of the companys promotion program to the country in

comparison with that of its competitors


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Problems of the Model

a) a company may choose to stay in a market

to prevent competitors from using their

dominance there to fund expansion elses

where,

b) often difficult to separate the attractiveness

of country from a companys position, and

c) some of the recommended take a defeatist

attitude to a companys competitive position


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Types Of Strategies

1. DIVERSIFICATION v/s CONCENTRATION

STRATEGIES

Strategies for ultimately reaching a high level of

commitment in many countries are: Diversification: fast expansion in many markets

OR

Concentration: go to one or a few and build up fastbefore going to others.

FACTORS TO CHOOSE THE STRATGY


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FACTORS TO CHOOSE THE STRATGY Growth Rate in Each Market: Fast growth favors concentration

because companies must use resources to maintain marketshare.

Sales Stability in Each Market: The more stable that sales and

profits are within a single market, the less advantage there is

from a diversification strategy. Competitive Lead Time: the first to enter a market often gains

advantage in terms of brand recognition and because it can line

up the best suppliers, distributors, and local partners.

Spillover Effects: marketing program in one country results inawareness of the product in other countries. In this case a

diversification strategy has positive impacts.

Need for Product, Communications, and Distribution

IB Lecture 4

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