INTERNATIONAL BUSINESS MANAGEMENT

COUNTRY RISK AND EVALUATION

Prof Soumitra Mookherjee Lecture 21

Significance of Country Evaluation & Selection

International expansion of a firms activities requires identification of business opportunities across the borders, evaluating, and selecting one or a few countries for its operations.

A business enterprise needs to deploy its resources most gainfully and efficiently in countries where it gets optimum returns to fulfill its goals and objectives.

International Business Research

The research conducted in more than one country, which involves gathering, and analyzing of data to resolve business problems. Primary Information: Field survey and investigation through team work and collecting data (telephone interviews, mail surveys, and personal surveys), collating, compiling and analyzing information for suitable interpretation of findings. Secondary information: Since carrying out overseas field surveys involves considerable cost and time which is saved considerably by secondary information available in published material like newspapers, journals, Periodicals, Magazines, On line data, etc Limitation of secondary information include: Availability Reliability Comparability Validity
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Types of Business Research Designs

Exploratory research: To gather preliminary information

that will help better define problems and suggest

hypothesis. Descriptive research: To describe situations, business environment , market competition, consumer behaviour or markets Causative research: To test hypothesis to establish cause and effect relationship

Types of Business Research Designs

Qualitative research: To gather information concerning

qualitative feedback from respondents expressed as How,

when, why, what, etc of a situation Quantitative research: To gather information and then apply

usage of numbers, numerical calculations, quantitative data and

analyze the same to derive findings. Observation research: Collect and gather information based on

the observations made by the surveyor, his opinion, his

impressions based on observation of a specific situation.
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Sampling Equivalence
It involves comparability of samples and samples representativeness to the population, in a manner to ensure that the geographical area is well represented and scope of biased response is minimal. The sample size would depend on the sub areas being covered. The countryculture biases needs to be taken into account while applying uniform analytical techniques. Overall, there should be no major compromise on the sample size as it must reflect the population characteristics suitably and appropriately Sampling types and methods include the following: 1. Random Sampling randomly selected from the population mjix 2. Stratified sampling sample selected from groups and sub groups 3. Cluster Sampling sample selected from certain clusters of the geographical areas covered in the survey
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COUNTRY EVALUATION Scanning the Global Economic Environment

Population and Income

The population of a country broadly gives a rough estimation of work-force characteristics, age wise occupation pattern, and market potential, although it has to be used with some other indicators.

Consumption patterns are significantly influenced by level of income. The Gross Domestic Product of a country provides a better estimate of the market size compared to its population.

Macroeconomic Overview
Distribution of resources and wealth (GDP) is highly skewed among the nations. Thirty advanced countries in the world with only 15.3 per cent of worlds total population accounts for about 52 per cent of the worlds total GDP and 67.3 per cent of exports of goods and services. Need to assess and monitor the following parameters:
1. 2. 3. 4. 5. 6. Inflation and interest rates Unemployment Fiscal, Monetary, and Trade Policies Business Cycles, and growth patterns Currency fluctuations and Balance of Payments Capacity Utilization and confidence Index
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Assessing Market Potential

MARKET ANALYSIS GROWTH, SIZE, CUSTOMERS

INDUSTRY COMPETITION RESOURCE MAPPING Skilled manpower Raw Materials Capital Technology

Framework for assessing market and industry attractiveness

Rivalry Entry Barriers Bargaining Power Viability of venture Threat of Substitutes Import threats

GOVERNMENT POLICY Taxation Infrastructure Subsidies Regulatory environment

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OPPORTUNITY INDICATORS
Opportunities are determined by revenues less costs. From a broad scanning perspective, there are variables that indicate the amount of revenue, cost factors, and risk that might be forthcoming from one country to another. The factors that have the most influence on the placement of marketing and production emphasis are market size, ease and compatibility of operations, costs, resource availability, and red tape. Market Size Sales potential is probably the most important variable managers use when determining where and whether to make an investment. The assumption, of course, is that sales will occur at a price above cost, so that where there are sales, there are profits.
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INVESTMENT PREFERENCE
Companies are highly attracted to countries that Are located nearby Share the same language Have market conditions similar to those in heir home countries
Companies often pare proposals to those countries that

Offer size, technology, and other advantages familiar to company personnel Allow an acceptable percentage of ownership Permit sufficient profits to be easily emitted

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Evaluating Country Competitiveness

Competitiveness of a nation is referred to a set of institutions, policies, and factors that determine the level of productivity of a country.

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Factors Influencing Country Competitiveness

Institutions Infrastructure

Macro-economic stability
Health and primary education Higher education and training Goods market efficiency Labour market efficiency Financial market sophistication Technological readiness

Market size
Business sophistication Innovation
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Business Competitiveness Index (BCI)

Brought out by the World Economic Forum, BCI provides a conceptual framework to rank business competitiveness across countries. The BCI is based on two sub-indices:

Company operation and strategy

National business environment

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Assessing Business Environment

crosscountry

comparison

of

business

environment facilitates international managers not only in country selection but also in development of business strategy across countries.

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Tools for Country Evaluation and Selection

Trade analysis and similarity methods

Market size = Production + Imports Exports

In the analogy method, a country at similar stage of economic

development and comparable consumer behaviour is selected

whose market size is known.

Finally, evaluate, compare, short list and select

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Assessing country risk and uncertainties

POLITICAL RISKS Policies, Laws, regulations Nationalism preferences Unrest and disorders Party instability COMPETITIVE RISKS ECONOMIC RISKS Inflation Interest rates Exchange rates Growth Macro parameters

COUNTRY RISK ANALYSIS

Cartels Networks Threat of Substitutes Import threats

OPERATIONAL RISKS Poor Infrastructure Inadequate telecom and transport systems Shortage of capital, land
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CATEGORIES OF RISKS
Competitive Risk: A companys innovative advantage may be short-lived. There could be cartels, networks which may erode new firms competitive advantage Business Risks: Favourable business, economic and market environment may not be durable for too long or there could be a sudden expected development leading to an economic and business slowdown Monetary/ Exchange Rate Risk: If a companys expansion occurs through direct investment abroad, exchange rates on and access to the invested capital and earnings are key considerations. Sharp fluctuations in exchange rates may lead to high transaction risk exposure for the international firm. Fiscal Gap Risk: The recent euro zone crises is a clear indication how performances of firms got hampered due to sharp economic depression and bankruptcy of the government calls for austerity measures and thereby affect business prospects.
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CATEGORIES OF RISKS
Liquidity Risks: Investors usually want some holdings to be in liquid assets, as it is needed in part to make near-term payments, paying dividends; cover unexpected contingencies like stockpiling materials following supply shocks Political Risk: It occurs because of political instability, changes in political leaders opinions and adverse policies, civil disorders and unrest, and animosity between the host and other countries particularly with the companys home country. Also, nationalism preferences and high tariffs may limit opportunities for foreign firms Operational Risks: Disruptions in raw material supply, lack of access to basic resources, and poor infrastructure, transport systems, telecom facilities enhances operational difficulties for the firm.

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INVESTMENT FRAMEWORK
RISKS
LOW High OPPORRTUNITIES HIGH

HIGH ATTRACTIVESS

HIGH RISK HIGH RETURN

MARKET / COMPETITIVE

(INVESTMENT PRIORITY)
LOW RISK LOW RETURN (ON HOLD)

(MAY CONSIDER INVESTING)

LOW ATTRACTIVENESS (AVOID/ IGNORE)
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Low

Country Attractiveness-Company Strength Matrix

COMPANIES BUSINESS STRENGTH Strong Medium Weak

Country Attractiveness

High

INVEST/ GROW

Selective Strategy

Medium

Selective Strategy

Selective Strategy

Low

Harvest/ Divest/ Exit/ License

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