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CHAPTER THIRTEEN
COUNTRY EVALUATION AND SELECTION
OBJECTIVES
13-1 Elaborate on the significance of location in IB operations
13-2 Illustrate why comparing countries through scanning is important and how it
connects to final location choices
13-3 Discern major opportunity and risk variables and how to prioritize and relate them
when deciding whether and where to expand abroad
13-4 Summarize the sources and shortcomings of comparative country information
13-5 Explain alternative considerations and means for companies to allocate resources
among countries
13-6 Recognize why companies make noncomparative decisions when choosing where to
operate abroad
CHAPTER OVERVIEW
The country evaluation and selection process determines the geographical opportunities
firms choose to pursue. Chapter Thirteen first discusses the challenges of marketing and
production site location. It goes on to carefully examine the process by describing the
choice and weighting of variables used for opportunity and risk analysis as well as the
inherent problems associated with data collection and analysis. The chapter then
introduces the use of grids and matrices for country comparison purposes, discusses
resource allocation possibilities, and concludes by noting the different factors considered
as part of start-up, acquisition, and expansion decisions.
CHAPTER OUTLINE
OPENING CASE: Burger King
[see Fig 13.1]
In 2016 Burger King Worldwide (referred to hereafter as Burger King) was the world’s
largest flame-broiled fast-food hamburger chain. Beginning in the early 1960s the
company expanded internationally to the Bahamas and Puerto Rico. Then it entered
Europe, Asia, and Latin America in the 1970s. Some of its international moves turned out
to be highly successful, and a few did not. In seeking new places to enter, Burger King
looks most favorably at countries with large populations (especially young people), high
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consumption of beef, availability of capital to franchisees for growth, a safe pro-business
environment, growth in shopping centers, and availability of a potential franchisee with
experience and resources. Recently its model has been to grant franchise rights by pairing
a private equity firm with an experienced restaurant operator in a joint venture (JV). In
some cases, Burger King has become the third party in the JV without committing capital
to it. The possibilities in the BRIC countries are too great to ignore. Burger King opened
its first Brazilian and Chinese restaurants in 2004. While Burger King has had success in
both these countries, it has been able to expand much faster in the former due largely to
its recognition advantage in Brazil. Burger King’s recent growth in its U.S. and Canada
region has lagged its growth elsewhere. Burger King is planning unprecedented
expansion. The fact that some of its competitors have expanded abroad much more than
Burger King may indicate that it has untapped international potential.
I. THE IMPORTANCE OF LOCATION
The adage that “location, location, and location” are the three most important factors
for business success rings true for IB. The world has a bit more than 200 countries,
each offering distinct opportunities and risks. Because companies have limited
resources, they must be careful in choosing among countries when making the
following decisions: (1) the location of sales, production, and administrative and
auxiliary services, such as R&D, (2) the sequence for entering different countries and
(3) the portion of resources and efforts to allocate to each country where they
operate.
II. COMPARING COUNTRIES THROUGH SCANNING
Managers use scanning techniques to examine and compare countries on broad
indicators of opportunities and risks.
A. Why Is Scanning Important?
Scanning is like seeding widely and then weeding out; it is useful insofar as a
company might otherwise consider too few or too many possibilities. However,
comparison among countries is not always practical.
B. Scanning Versus Detailed Analysis
1. Step 1: Scanning. Through the use of scanning, decision makers can
perform a detailed analysis of a manageable number of geographic
locations. Managers can usually complete the scanning process without
having to incur the expense of visiting foreign countries. Instead, they rely
on analyzing information found on the Internet and other publicly available
sources, as well as communicating with people familiar with the foreign
countries they are interested in.
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2. Step 2: Detailed Analysis. Once managers narrow their consideration to the
most promising countries, they need to compare the feasibility and
desirability of each. The more time and money companies invest in
examining an alternative, the more likely they are to accept it regardless of
its merits—a phenomenon known as escalation of commitment. Companies
should be careful about taking forced actions based on peer and/or media
pressure and should instead carefully weigh important variables when
comparing countries of interest.
III. OPPORTUNITY AND RISK VARIABLES
Managers should consider country conditions that could significantly affect success
or failure. These conditions should reveal both opportunities and risks.
1. Opportunities: Sales Expansion
Sales expansion is probably the single most important motive for international
business. It is often difficult to estimate sales potential in a new market, and
managers may have to rely on sales of similar or complementary goods, or use
economic or demographic data to estimate market potential.
1. Examining Economic and Demographic Variables. Some primary
considerations when examining economic and demographic variables
include:
Obsolescence and leapfrogging of products
Demand for necessities versus discretionary products
Substitution
Income inequality
Cultural factors and taste
Existence of trading blocs
2. Opportunities: Resource Acquisition
When undertaking IB to secure resources (e.g., labor, raw materials,
knowledge), companies are limited to those locales that likely have what they
want, such as securing petroleum only where there are prospective reserves.
1. Cost Considerations. Total cost is made up of numerous sub-costs
that need to be considered. Many of these are industry or company specific,
which must be examined in the detailed onsite visitations. Several costs that
apply to a large cross section of companies are outlined below.
a. Labor. Labor compensation remains an important cost for most
organizations. In the scanning process, factors such as labor market size,
labor compensation, minimum wages, customary and required fringe
benefits, and unemployment rates can be used for comparison. When
companies move into emerging economies because of labor cost
differences alone, their advantages may be short-lived. Competitors
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often follow leaders into low-wage areas, there is little first-mover
advantage for low-labor-cost production migration, and the costs can rise
quickly because of pressure on wage or exchange rates.
b. Infrastructure. Poor internal infrastructure and social services may
easily negate cost differences in labor rates. In many developing
countries, infrastructure is both poor and unreliable, which adds to
companies’ cost of operating.
c. External Connections. The need to integrate operations among
countries influences location decisions
d. Governmental Incentives and Disincentives. Countries often compete
to attract investors, offering incentives such as lower taxes, training of
employees, loan guarantees, low-interest loans, exemptions on import
duties, and subsidized energy and transportation costs. There may also be
disincentives such as taxes, labor conditions, and environmental
compliance. Government corruption may also be present and represent a
disincentive.
C. Risks
Is it ever rational for a firm to invest in a country with high economic and
political risk ratings? Such questions must be carefully weighed when making
international capital-investment decisions.
1. Factors to Consider in Analyzing Risk. There are a number of factors to
consider when analyzing risk:
Companies and their managers differ in their perceptions of what is risky
One company’s risk may be another’s opportunity
Companies may reduce their risks by means other than avoiding
locations
There are trade-offs among risks
Risks may occur for suppliers and within suppliers’ supply chains
2. Political Risk. Political risk reflects the expectation the political climate in
a given country will change in such a way that a firm’s operating position
will deteriorate. It relates to changes in political leaders’ opinions and
policies, civil disorder, and animosity between a home and host country.
When evaluating political risk, decision makers refer to past patterns in a
given country, expert opinions, and country analysts. They also look for
economic and social conditions that could lead to political instability, but
there is no consensus as to what constitutes dangerous instability or how it
can be predicted.
a. Analyzing Past Patterns. Predicting risk based on past patterns can
be problematic in that situations change. Also, the overall situation in a
country may mask political risks with the country.
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b. Evaluating Opinions. Managers should study the statements made by
political leaders and access political polls to attempt to determine the
likelihood of a candidate gaining political office. Managers should visit
short-listed countries for a cross-section of opinions. Analysts and
commercial political risk assessment services can also be used.
c. Examining Social and Economic Conditions. Countries’ social and
economic conditions may lead to unrest if large sectors of the population
have unmet needs. Frustrated groups may disrupt business and destroy
property. Foreign leaders may place blame on foreign companies.
3. Foreign Exchange Risk. Companies may be affected by either changes in
exchange rates or ability to move funds out of a country.
a. Exchange Rate Changes. Changing exchange rates may be a benefit
or a disadvantage, depending upon the direction of the change and if the
firm is seeking to sell or acquire resources. If the U.S. dollar depreciates it
makes American products abroad; however, it will cost firms more to
acquire foreign resources.
b. Immobility of Funds. When a company exports to or invests in a
foreign country, it prefers international mobility of its sales receipts,
earnings, and capital there. Without the mobility, many firms either forgo
operations or expect a higher rate of return there than elsewhere.
4. Natural Disaster Risk. Natural disasters and debilitating diseases upset
operations and are spread unevenly around the world.
5. Competitive Risk. The comparison of likely success among countries is
largely contingent on competitors’ actions. Four competitive factors that
should be considered when comparing countries are discussed below.
a. Compatibility for Companies’ Operations. Companies are highly
attracted to countries that are located nearby, share the same language, and
have market conditions similar to those in their home countries.
a. Diversification of Locations. Operating in economically diverse
countries whose business cycles are not highly interrelated may enable
companies to smooth their sales and profits, which, in turn, is an advantage
in raising funds.
c. Following Competitors or Customers. Companies may also
reduce risk by avoiding overcrowded markets, or conversely, they may
purposely crowd a market to prevent competitors from gaining advantages
therein that they can use to improve their competitive positions elsewhere, a
situation known as oligopolistic reaction. Firms may also seek “clusters”
of competitors (also known as agglomeration) that attract multiple
suppliers, customers, and highly trained personnel in order to gain access to
new products, technologies, and markets. One example of this would be the
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computer firms clustered in California’s Silicon Valley.
d. Heading Off or Avoiding Competition. A company may try to reduce
competitive risk by either getting a strong foothold in markets before
competitors do or by avoiding strong competitors altogether. A company’s
innovative advantage may be short lived. When pursuing a strategy known
as imitation lag, a firm moves first to those countries most likely to adapt
and catch up to the advantage. In some instances firms may seek those
countries where they are least likely to confront significant competition; in
others, they may gain advantages by moving into countries where
competitors are already present. By being the first major competitor in a
market, companies can more easily gain the best partners, best locations,
and best suppliers—a strategy to gain first-mover advantage.
D. Analyzing and Relating the Opportunity and Risk Variables
Two common tools for analyzing information collected via scanning are grids and
matrices.
1. Grids [see Table 13.1]
A grid can be used to make country comparisons according to a wide variety of
relevant factors, such as ownership rules, potential returns, and perceived risk.
Variables can be ranked and weighted according to specific criteria that reflect a
firm’s situation and objectives. Although useful for establishing minimum scores
and for ranking countries, grids often obscure interrelationships among
countries.
2. Matrices [see Fig 13.3]
One matrix frequently used when doing country comparisons is the
opportunity-risk matrix. When using this matrix, the manager plots a country
according to the perceived value of the opportunity the country offers, on the
one hand, and the expected level of risk associated with operating in that country
on the other. Factors that are good indicators of risk and opportunity and the
weight assigned to each must be identified and assigned by the firm. Once
scores are determined for each country being considered, they can be plotted and
reviewed from a comparative perspective. A useful application of this technique
is to develop both present and future scores for countries (e.g., five years hence)
because a significant shift in a score in the future could have serious
implications with respect to the country selection process.
IV. SOURCES AND SHORTCOMINGS OF COMPARATIVE COUNTRY
INFORMATION
Firms perform research to reduce uncertainties in their decision processes and to
assess their operating performance. The costs of data collection should always be
weighed against the probable payoffs in terms of revenue gains or cost savings.
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A. Some Problems with Research Results and Data
Numerous countries have agreed to standards for collecting and publishing
various categories of national data. However, the lack, obsolescence, and
inaccuracy of data on other countries can make research difficult and expensive
to undertake.
1. Inaccurate Information. We list six basic reasons why reported
information may be inaccurate:
a. Governmental resources may limit accurate data collection
b. Governments must depend on estimates and revisions
c. Governments may omit or purposely publish misleading information
d. Respondents may give false information to data collectors
e. Official data may include only legal and reported market activities
f. Questionable methodology may be used
2. Noncomparable Information. Comparability problems result from
definitional differences across countries (e.g., family categories, literacy
levels, accounting rules), differences in base years, distortions in foreign
currency conversions, the measurement of investment flows, the presence of
black market activities, etc.
B. External Sources of Information
Apart from the Internet, the most costly sources are marketing research and
consulting companies, but the advantage is that they can target more closely
what companies want. Some of the major Internet sources are prepared by
service companies, government agencies, international organizations, and trade
associations. In any case, it is wise to know how sources generate their
information and, in the case of those offering advice (e.g., a risk-assessment
company), what their past success rates have been.
C. Internally Generated Data
When firms have to conduct studies in foreign countries, they may find
traditional data gathering and analytical methods do not reveal critical insights.
In that case, a researcher must be extremely imaginative and observant. In some
instances, useful information may be found by analyzing indirect or
complementary indicators.
POINT—COUNTERPOINT:
Should Companies Operate in and Send Employees to Violent Areas?
POINT: Where there’s risk, there are usually rewards. Companies need to take risks, as
they have in the past, to develop markets. Violence is only one of many risks and should
not be looked at in isolation. Risks from activities such as terrorism are the same whether
you are in London, Madrid, Caracas, or New York. All areas have their risks, and many
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countries traditionally viewed as risky may actually be less risky than the United States or
England. Some industries, such as petroleum, have to operate in violent areas because
that is where the resources are. MNEs should operate anywhere there are opportunities,
and develop plans to manage and react to risks as effectively as possible.
COUNTERPOINT: MNEs should not make investments in violent areas because it puts
MNE personnel at risk. MNEs are visible and therefore vulnerable to attack by
anti-globalization groups, kidnappers, and groups opposed to foreigners, as well as
others. It is unethical to put employees in excessively dangerous situations. Employees
who will take dangerous assignments are usually either difficult to control, excessively
naïve, or addicted to the thrill of danger. Any country subject to extreme violence is not
the kind of country to do business in.
V. ALTERNATIVES FOR ALLOCATING RESOURCES AMONG LOCATIONS
We now examine three complementary strategies for international expansion:
alternative gradual commitments, geographic diversification versus concentration,
and reinvestment
A. Alternative Gradual Commitments
Companies favor operations in countries similar to their home country.
Nevertheless, there are alternative means of risk-minimization expansion patterns
that can be undertaken as seen in Fig 13.7. A company does not necessarily move
at the same speed along each axis. A slow movement along one axis may free up
resources that allow faster expansion along another.
B. Geographic Diversification versus Concentration
A firm may take different paths en route to gaining a sizable presence in most
countries. At one end of the spectrum is a diversification strategy, whereby a
firm moves rapidly into many foreign countries and then gradually builds its
presence in each. At the other end of the spectrum is a concentration strategy,
whereby a firm moves into a limited number of countries and develops a strong
competitive position there before moving into others. There are, of course,
hybrids of the two strategies—for example, moving rapidly to most markets but
increasing commitment in only a few. The following are the reasons for using one
strategy versus the other.
Need for Rapid Growth in Country
Competitive Lead Time
Need for Product, Communication, and Distribution Adaptation
Program Control Requirements
C. Reinvestment and Harvesting
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Once a firm makes an initial investment, it will then need to decide whether to
continue investing in that operation or to harvest the earnings (and possibly
divest the assets) and use them elsewhere.
1. Reinvestment Decisions. Reinvestment refers to the use of retained
earnings to replace depreciated assets or to add to a firm’s existing stock of
capital. Aside from competitive factors, a company may need several years
of almost total reinvestment (and often allocation of additional funds) in
order to realize its objectives at a given location.
2. Harvesting. Harvesting or divesting refers to the reduction in the amount
of an investment; a firm may choose to simply harvest the earnings of an
operation or divest the assets there as well. If an operation no longer fits a
company’s overall strategy, or if better opportunities exist elsewhere, it must
determine how to exit that operation. When selling or closing facilities,
firms must consider possible government performance contracts as well as
potential adverse publicity, plus the possible difficulty in re-establishing
operations in that country in the future.
VI. NONCOMPARATIVE DECISION-MAKING
One might expect companies to maintain a storehouse of ranked foreign operating
proposals, undertaking the best, second best, etc. until they could make no further
commitments, but this is usually not the case. They make go-no-go decisions by
examining one opportunity at a time and pursuing it if it meets some threshold
criteria.
LOOKING TO THE FUTURE:
Conditions That May Cause Prime Locations to Change
Demographers expect a slowing in the growth of global population through 2050, with
some countries experiencing declining populations, particularly in developed, and the
most robust growth in developing economies, particularly those in sub-Saharan Africa.
Given the importance of population size for sales potential, these changes, if they
materialize, will be profound. Further, because the world’s population will continue
to age and people will pursue education for more years, the share of what we now
consider the working-age population should fall for developed countries and increase in
many developing ones. As a result, the growth in per capita GDP should be higher in
today’s developing economies than in today’s developed countries unless we redefine
working age. If these demographic changes occur, they will affect the location of both
markets and labor forces. An intriguing possibility is the near-officeless headquarters for
international companies as technology allow people to communicate without traveling as
much.
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