CHAPTER 12: Country evaluation and selection What is the need for ongoing country evaluation and selection

by MNEs? The world is changing continuously. There have been many events which have brought about these changes. While the 40s saw the 2nd World War, the 50s saw the rise of Russia as a superpower. By the 80s Japan was giving stiff competition to the dominant powers. The 90s saw the fall of the Berlin Wall as well as India taking the step towards a liberalized economy. With the 2001 attacks on the USA, the market came crashing down and the world changed. Countries were affected by these incidents. Some countries became more attractive in due course. E.g. Doing business in Poland, gives access to EU, and cheaper rates of production. Thus evaluating a country for business becomes important for MNEs. MNEs might have to prioritize country entry and exit as well, that is, to enter a new country, an MNE might have to exit another. By means of a diagram, briefly explain MNEs country strategies. The diagram explaining MNEs country strategies is given below: Corporate Strategy Country 1 Strategy SBU 1 Strategy SBU 2 Strategy Country 2 Strategy

1) Corporate Strategy: It deals with what the company wants to be, and how it wants to stay competitive, whether as a market leader, cost leader, global market etc. 2) SBU Strategy: Various SBUs operate in different countries. For each SBU, the company needs to set the strategy about how it is going to be competitive, whether it is for the niche or the mass market. 3) Country Strategy: The company strategies involve: a) Evaluation of countries to see which country to enter based on economic and political risk. b) How to enter the country, either through FDI or as a supply chain. c) What the company wants from the country. d) Company objectives: i) Market seeking behavior ii) Resource seeking behavior iii) Reducing risk iv) Some countries good for investment

Distribution facility. E.g. Singapore for distribution in ASEAN countries. What are the country attractiveness parameters for an MNE? To make the framework comprehensible, the parameters are divided into 2: 1) Invariant (Natural): Does not change 2) Acquired: Can be changed 1) Invariant: a) Location: There are 3 parameters: i) Closeness to the market. E.g. Australia is far away from major markets, hence high transportation cost ii) Time Zone. E.g. India is a good centre for World Trade. It has a 12 hour gap with the US, they give inputs, we work and send them back the outputs by the time they come to work next day. iii) Good neighbours. E.g. Saudi Arabia has good neighbours like Dubai, a major centre of world trade. b) Climate: It is determined by location, and affects sectors like agriculture. c) Coastline: Gives access to port facilities, which reduces transportation cost. If a country is landlocked, it has procedural risk. Coastline gives access to offshore oil, seafood etc. E.g. Australia has an isolated coastline with well developed ports, which is favourable. d) Topography: It affects ease of access to markets. E.g. Mountains, even though they give security to the country, increase costs. Deserts and presence of good soil affect sectors like agriculture. Forests are the source of timber, paper pulp, rubber, natural herbs etc. Natural resources provide the raw materials depending on the industry or sector. In other words, topography affects logistics, and has an effect on advertising and promotional costs. E.g. Australia is partly deserts, and has coal, iron and manganese ore. e) Livestock: Source of dairy products, wool, leather etc. f) Population in number: In the short term, it is invariant. If it is too high, it may lead to unemployment and political risk. g) History: History moulds culture and culture has a long term impact on the companys operation. It affects the present relations with the country, e.g. in the case of occurrence of wars in the past, the country needs to be more careful, while dealing with the other. History is required to understand the political environment and the economic environment. It becomes important to trace who the philosophical leaders of the country were. E.g. Confucius for China. In China, people are used to being governed. USA is free to open market. Australia was a British colony, thus industrialization was delayed. It is also not a part of any trade block, which is a disadvantage. 2) Acquired: It comprises of those features which are acquired, and can be changed. It is partly the duty of the government and partly the duty of the companies to improve

v)

attractiveness in these fields, and make the country stronger. People of the country also play an important role in it. i) Infrastructure: Better infrastructure implies better power resources, good roads, highways and facilities leading to low transportation cost. ii) Level of technology: If a country is in the lead market, it cant compete, but it is learning and getting new alliances. On the other hand, it can bring in new technology and innovation, acquired from other countries. iii) Level of economic development: In terms of GDP, growth rate, PPP. Emerging markets are more attractive. Importance of World Bank in developing countries is that they are able to get more loans for development. iv) HDI: Human Development Index is an important parameter for country attractiveness. It involves education levels, working population, knowledge and skill sets and health. Not just a high population, but young and skillful people willing to work and grow is of importance v) Political Risk: High political risk makes the country unattractive. The catch is that past trends might not reflect the future trends. vi) Economic Risk: Balance of payments and debts and GDP, BOP, deficit, surplus and inflation affect country attractiveness parameters. It is the central governments duty to improve BOP by facilitating more business, open up business, open up markets, and change policies that benefit export companies. To reduce economic risks, partnerships between government and MNEs to improve. vii) Membership of Multilateral organizations: Countries policies will have to comply with WTO, WB, UN, IMF etc. It helps if the country is a member of these multilateral organizations. The policies will be standardized, and this brings in transparency as rule of law comes into play. viii) Membership of Trade Blocks: More the membership of trade blocks, more the access to other countries, more beneficial it is. E.g. Countries going to Mexico, because more scope, easy access to US market, low transportation costs. This also includes trade agreements between countries, e.g. India and Thailand. State the parameters taken into consideration for opportunities and risk assessment for a country The parameters are as follows: 1) Market size and potential: a) MNEs go to a country for sales expansion b) The parameters considered for comparison are market size, latent potential, market growth rate, buyers willingness to pay and ability to pay, GDP per capita at PPP c) Competition is considered, i.e. how competitive is the market. If there is more competition, then the MNE should be there. Some countries like Africa are difficult to operate in, since there is a lot of risk. d) Technology e) Government influence (Individualistic vs. Collectivistic) 2) Familiarity and ease of operations:

3) a) b) c) d) e) 4) a) b)

a) Culture similar to home country, which leads to ease of operations. E.g. Toyota familiar with Japanese culture, GE with American culture, so now they are comfortable and confident to operate there and with similar kind of countries. b) Ease of operations is facilitated by 3 factors: i) Infrastructure: Roads, power, internet connectivity. These make market reach and penetration easier. ii) Govt. policies and procedures: Involves procedural risk and corruption. In terms of procedural risk, lesser the time and cost to start up, the more preferred it is. Less corruption is better. However India is high on the corruption index. iii) HDI: Better education, better health. Costs and Productivity: Developing countries still on learning curve. The labour may be cheaper but the productivity should also be considered. Productivity is more important. Cost of resources is a source of competitive advantage for the country. It includes the cost of oil reserves, transportation costs, natural resources, technology (initial costs can be high for this), power cost, power availability, water cost. Land cost to set up factory (abundant land supply then better) Finance cost pertaining to availability of credit. Developed countries have low interest rates (cash available), octroi and state duties. E.g. India has low labour costs but it is a high cost economy. Taxes: Corporate tax rate is zero in few countries. E.g. Dubai Monetary Risk: Imports and Exports: Govt. would put controls to decrease imports and increase exports. E.g. Africa imports more than it exports, which has lead to lack of foreign reserves, thus increasing monetary risk. In an MNE, they may not take back the profits to the home country, but might take them to other 3rd country for investment. Hence the attractiveness of the present host country becomes less.

What are the steps involved in country evaluation and selection for doing business? There are about 200 countries in the world, so a proper process needs to be followed for evaluation and selection of a country for business: 1) Scanning countries 2) Data collection 3) Grid Approach 4) Matrices Approach 1) Scanning countries: The process of selecting a country for doing business starts with scanning countries first. It is a preliminary analysis based on secondary information such as the internet, World Bank Reports, Embassy Reports, Banks Reports, Govt. surveys, economic surveys including sector wise reports and CMIE Reports. Based on certain criteria, a few countries are shortlisted and then evaluated. This is followed by country visits, for which consultancy firms are

hired. This gives rise to primary information about the country which is obtained by visiting the country, talking to the people and getting information from the government. Primary information is a much expensive process. 2) Data collection: It involves collection of primary and secondary data by quantitative and qualitative methods (judgments). E.g. Political Risk 3) Grid Approach: It tells you if the country is good for business or not, but the company also needs to see the future trends as the business is to be done there for a long term. It studies the basic requirements for investments and evaluates the countries based on that. If a country does not fulfill those requirements, then drop the country. It involves the study of both negotiable and non-negotiable factors, the joint evaluation of which is done y cross-functional teams. This approach is used to rank the countries by giving them scores and weightages on various factors. The sensitivity report has to be considered as most of the parameters are judgmental. Past and the present is known, future must be predicted. 4) Matrices Approach: It uses the results of data collection and plots the countries based on parameters like opportunity, risks, attractiveness and strength. The two matrices in use are: a) Opportunity-Risk Matrix: i) Looking at increasing opportunities ii) Least Risk iii) One can decide about the opportunities and risks from various data and analysis. Diagram I: Opportunity-Risk Matrix (Fig 12.6, Pg 476)

b) GE Matrix: Used to analyze if the country is attractive or not. If MNE is in the High-High grid, then you can plan long term business there. If company is in the Low-High grid, then country is attractive but you need strength, and hence you can have an alliance with the local companies in that country. MNE should be flexible when it enters a country. A company should not go too deep into a country; maybe it is not that attractive in the future. Diagram II: GE Country Attractiveness-Company Strength Matrix (Fig 14.7, Pg 566)

How does a country Internationalize? The company is first in the domestic market, later it plans to go international. There are 4 dimensions to evaluate internationalization. 1) Degree of similarity between foreign and domestic countries 2) Internal versus external handling of foreign operations 3) Mode of operations 4) Number of foreign countries in which a firm does business Initially the countries rely on external handling and then become more confident of handling the operations internally. It gives the pace of internationalization adopted by a company. The difference between globalization and internationalization is that globalization is external to the company, while internationalization is a companys decision as to at what pace to expand. It is a part of corporate strategy. E.g. Nokia has a company philosophy of relying more on exports and imports, while GE believes in slow expansion to other countries. Diagram III: Pattern of Internationalization (Fig 12.7, Pg 477)

What are the factors that determine the companys geographic concentration and diversification strategy? The aim of the company is to capture the world market. Licensing helps to recover R&D costs faster but increases the number of competitors. It involves geographic concentration i.e. to build the companys market share in certain parts of the world as well as diversification i.e. starts operations in all regions of the world. The factors involved are:

1) Market/Sales Growth: If the market is growing, the MNE invests more resources and hence will have to concentrate on that countrys market 2) Stability: Market is there, if stability is high i.e. fluctuation is low, then the company should build brand diversification. 3) Competitive lead time: It is the time which the competitor of the MNE would take to catch up with it. If lead time for competitor is low then the company needs to diversify more. 4) Spillover effects: If spillover effects are high, then MNE should diversify in that country 5) Adaptation: MNEs need to adapt to the tastes and preferences of the country, and to its policies and functions. If adaptation requirement is high then concentrate and if it is low, then diversify. 6) Program Control Requirement: If program control requirement is high, then MNE should concentrate. Explain in detail about the country selection process for Entry and Exit. Countries are evaluated one at a time and sometimes 2-3 countries relative to each other for both entry and exit. It is an ongoing process. If a country meets the MNEs requirements and the market conditions are good, the company should jump into it, otherwise time to market increases. The company cannot analyse too much and waste time as the company will lose out the opportunity somewhere else, the competitor will beat it, and it will lose the first mover advantage. # Reinvestment: MNEs can reinvest from FDI from the home country or by investing the dividends back. #