IB Lecture 4

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  • 8/13/2019 IB Lecture 4


    International Business


    Risk analysis

    Decisions to overcome or managingrisk

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  • 8/13/2019 IB Lecture 4


  • 8/13/2019 IB Lecture 4


  • 8/13/2019 IB Lecture 4


  • 8/13/2019 IB Lecture 4


  • 8/13/2019 IB Lecture 4


  • 8/13/2019 IB Lecture 4


  • 8/13/2019 IB Lecture 4


  • 8/13/2019 IB Lecture 4


    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


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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


    Labor Factors

    Availability and costs of

    managers and workers

    Degree of skill and disciplineat all levels

    Presence and strength of


    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


    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


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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


    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


    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


    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


    3. The Environmental Climate

    . Only if management thinks the country is feasible and

    environment OK then a detailed feasibility study will be


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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 -


    Examining key variables helps companies:

    a) Determine the order of entry

    b) Set the rates of resource allocation among


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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


    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-


    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.


    compare the cost of information with its value.


    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


    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


    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



    Strategies for ultimately reaching a high level of

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


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


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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