International Business Imcost

Risk analysis Decisions to overcome or managing risk

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 spending divided by change in disposable income) Interest and inflation rates Unemployment rates Fiscal and monetary policies

Economic Risk
A countrys level of economic development generally 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

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

Political Risk 7 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 cancelling or altering contractual agreements, extortion demands, and so forth

Managing Political Risk

Avoidance either the avoidance or withdrawal of investment in a particular country Adaptation adjust to the political environment Dependency keeping the host nation dependent on the parent corporation Hedging minimizing the losses associated with political risk events

The Legal Environment

Managers will comply with the host countrys legal system Common Law past court decisions act as precedents to the interpretation of the law Civil Law comprehensive 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 at the 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.

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

Other factors
Geographic Factors Availability and efficiency of transport Proximity of site toward markets Availability of local raw materials Availability of power, water, gas Availability of suppliers and services Labor Factors Availability and costs of managers and workers Degree of skill and discipline at all levels Presence and strength of unions Literacy and trainability of workers Degree of labor mobility

Other factors
Tax Factors Amount of taxes and tax rate trends Tax treaties Amount of tax evasion Duty when goods are exported Availability of tariff protection Capital Factors Cost of local borrowing Local availability of convertible currencies Modern banking systems Government credit aid to new businesses Venture capital industry Regulation of banking industry

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

Country evaluation and selection

WHY TO EVALUATE COUNTRY Limited Resources with company. Taking one opportunity is = loss of another opportunity what may be a very attractive country for one company may , at the same time , be unattractive for another.

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&D departments Where to make regional headquarters

Step 2.
Deciding Overall Geographic Strategy Company needs to decide where to operate what portion of operations to place within each country

Why to Scan for Alternatives

1. 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

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

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

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.

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

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

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 foreign subsidiary or just on the earnings that can be remitted to the parent? Does it make sense to accept a low return in one country if doing so will help the companys competitive position elsewhere?

Based on Risk Faced in the Country

B - Competitive Risk A company's innovative advantage may be shortlived. 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

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

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

Business Research
External Sources of Information: Country Reports: The Economist Intelligence Unit Specialized Studies Service Companies Governmental Agencies International Agencies Trade Associations Information Service Companies PROBLEM WITH THE SOURCE: > Not comparable: differences in collection methods, definitions, distortion in currency conversions

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

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

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, price controls, 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

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

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 fast before going to others.

FACTORS TO CHOOSE THE STRATGY

Growth Rate in Each Market: Fast growth favors concentration because companies must use resources to maintain market share. 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 in awareness of the product in other countries. In this case a diversification strategy has positive impacts. Need for Product, Communications, and Distribution Adaptation: favors concentration