Download - 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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Factors affecting country selection
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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Factors affecting country selection
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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Factors affecting country selection
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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Based on Risk Faced in the Country
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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Based on Risk Faced in the Country
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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Tools for Comparing Countries
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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Tools for Comparing Countries
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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Tools for Comparing Countries
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