9-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides...

9-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Chapter 9

Country Market Analysis 9


Lecture/Chapter Topics

• Foreign Direct Investment

• The Promise And Pitfalls Of Exporting

• Improving Export Performance

• Basic Entry Decisions


Foreign Direct Investment• The Shift to Services

– In the past two decades, the sector composition of FDI has shifted sharply away from extractive industries and manufacturing and towards services.

– The composition of FDI in services has also changed.– Until recently it was concentrated in trade and financial

services.


Foreign Direct Investment• The Shift to Services (Cont’d)

– The shift to services is being driven by four factors: 1. First, the shift reflects the general move in many developed

economies away from manufacturing and towards service industries.

2. Second, many services cannot be traded internationally.


Foreign Direct Investment• The Shift to Services (Cont’d)

– The shift to services is being driven by four factors: (cont’d)3. Third, many countries have liberalised their regimes governing

FDI in services.

4. Finally, the rise of internet-based global telecommunications networks has allowed some service enterprises to relocate some of their value-creation activities to different nations to take advantage of favourable costs.


Foreign Direct Investment• Gross Fixed Capital Formation

– Gross fixed capital formation summarises the total amount of capital invested in factories, stores, office buildings and the like.

– Other things being equal, the greater the capital investment in an economy, the more favourable its future growth prospects are likely to be.

– FDI can be seen as an important source of capital investment and a determinant of the future growth rate of an economy.


Foreign Direct Investment• Inward FDI as a percentage of Gross Fixed Capital

Formation


Promise and Pitfalls of Exporting• Exporting provides opportunities for smaller firms to

benefit from international trade.• The great promise of exporting is that large revenue

and profit opportunities can be found in foreign markets for most firms in most industries.

• Exporting can enable a firm to achieve economies of scale, thereby lowering its unit costs.


Promise and Pitfalls of Exporting• Many medium-sized and small firms are very reactive

about seeking opportunities for profitable exporting.• Reactive firms do not even consider exporting until

their domestic market is saturated and the emergence of excess productive capacity at home forces them to look for growth opportunities in foreign markets.


Promise and Pitfalls of Exporting• Many small and medium-sized firms tend to wait for

the world to come to them, rather than going out into the world to seek opportunities.

• Common pitfalls include poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure to customise the product offering to the needs of foreign customers, lack of an effective distribution program, a poorly executed promotional campaign and problems securing financing.


Promise and Pitfalls of Exporting• Number of Australian Exporters by Destination


Improving Export Performance• An International Comparison

– One big impediment to exporting is simply a lack of knowledge of the opportunities available.

– Countries are separated from the firm’s home base by culture, language, distance and time — the firm does not know of them.

– Identifying export opportunities is made even more complex because more than 200 countries with widely differing cultures compose the world of potential opportunities.


Improving Export Performance• An International Comparison (Cont’d)

– The way to overcome ignorance is to collect information with governments’ assistance.

– In Germany, for example, trade associations, government agencies and commercial banks gather information, helping small firms identify export opportunities.

– A similar function is provided by the Japanese Ministry of International Trade and Industry (MITI), which is always on the lookout for export opportunities.


Improving Export Performance• An International Comparison (Cont’d)

– In the United States the most comprehensive source of information is the US Department of Commerce and its district offices all over the country.

– In Australia and New Zealand all levels of government are very keen to promote exports.

– Many of the international sources also permit open access to their data.


Improving Export Performance• Export Promotion Agencies

– Australian Trade Commission (Austrade) is a statutory agency within the Department of Foreign Affairs and Trade (DFAT) given the task of promoting Australian exports.

– In New Zealand, New Zealand Trade and Enterprise is the Government’s national economic development agency.


Improving Export Performance• Export Promotion Agencies (Cont’d)

– In Australia, every state and territory government has set up organisations to promote business and international trade.

– These government departments and agencies can be a useful source of information for exporters.

– These agencies (both federal and state) provide a multitude of services to potential and existing exporters in initiating or expanding exports.


Improving Export Performance• Government Export Promotion Agencies


Improving Export Performance• Government Export Promotion Agencies (Cont’d)

– Austrade also administers the Export Market Development Grants (EMDG) scheme.

– This scheme is the Australian government’s financial assistance program for novice and established exporters.

– The purpose of the scheme is to encourage small and medium-sized Australian businesses to develop export markets.


Improving Export Performance• Export Credit Insurance

– An exporter who insists on a letter of credit will lose an order to one who does not require a letter of credit.

– Not having a letter of credit exposes the exporter to the risk that the foreign importer will default on payment.

– The exporter can insure against this possibility by buying export credit insurance.


Improving Export Performance• Export Credit Insurance (Cont’d)

– In Australia, export credit insurance is provided by Export Finance and Insurance Corporation (EFIC) and in New Zealand by the New Zealand Export Credit Office (NZECO).

– EFIC is a self-funded statutory corporation, owned and guaranteed by the Australian government. While exporters face many risks — from currency risks to transport and contract risks — the role of EFIC is to provide services to assist exporters manage the payment risk in exporting.


Improving Export Performance• Utilising Export Management Companies

– One way for first-time exporters to identify the opportunities associated with exporting and to avoid many of the associated pitfalls is to hire an export management company (EMC).

– EMCs are export specialists that act as the export marketing department or international department for their client firms.


Improving Export Performance

• Utilising Export Management Companies (Cont’d)– EMCs normally accept two types of export assignments:

1. They can start exporting operations for a firm with the

understanding that the firm will take over operations after they

are well established.

1. Another arrangement is where start-up services are performed

with the understanding that the EMC will have continuing responsibility for selling the firm’s products.


Improving Export Performance• Utilising Export Management Companies (Cont’d)

– The advantage of utilising EMCs is that they are experienced specialists who can help the neophyte exporter identify opportunities and avoid common pitfalls.

– The quality of EMCs varies.– Relying solely on EMCs can mean that a company fails to

develop its own exporting capabilities.


Improving Export Performance• Export Strategy

– 3M’s experience: Entering on a small scale to reduce risks Adding additional product lines once the exporting operations

start to become successful Hiring locals to promote the firm’s products

– Sirromet Wines’ experience: Entering familiar markets Choosing the appropriate distributor and building long-term

relationships when trying to build an export business


Improving Export Performance• Export Strategy (Cont’d)

– Simple strategic steps to increase the probability of exporting success:

Hiring an EMC or at least an experienced export consultant to help identify opportunities and navigate the paperwork and regulations so often involved in exporting

Focusing initially on one market or a handful of markets and learning what is required to succeed in those markets before moving on to other markets




Entering a foreign market on a small scale to reduce the costs of any subsequent failure; the exporter needs to recognise the time and managerial commitment involved in building export sales and should hire additional personnel to oversee this activity




Devoting a lot of attention to building strong and enduring relationships with local distributors or customers

Hiring local personnel to help a company establish itself in a foreign market

Being proactive about seeking export opportunities Retaining the option of local production


Basic Entry Decisions• Which Foreign Markets?

– The variables that are important to the analysis are: the objectives of the firm the type of products it has to sell its size and resources available whether it has prior experience, or a subsidiary, in the

country in question


Basic Entry Decisions• Macroeconomic Overview

– The first stage of the analysis is an overview examining the broader economic indicators to gain an impression of the type of economy the firm is seeking to undertake business in, its economic potential and its degree of risk.

– By considering important factors, a firm can rank countries in terms of their attractiveness and long-run profit potential.


Basic Entry Decisions• Timing of Entry

– Timing is about when a business enters a foreign market — said to be early when it does so before other firms, and late when it does so after other businesses have already established themselves.

– The advantages frequently associated with entering a market early are commonly known as first-mover advantages.


Basic Entry Decisions• Timing of Entry (Cont’d)

– First-Mover Advantages Ability to pre-empt rivals and capture demand by establishing a

strong brand name Ability to build sales volume in that country and ride down the

experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants

Ability of early entrants to create switching costs that tie customers into their products or services


Basic Entry Decisions• Timing of Entry (Cont’d)

– First-Mover Disadvantages A primary disadvantage is that an early entry may entail

pioneering costs. The liability for being a foreigner is greater for foreign firms that

enter a national market early. An early entrant may be put at a severe disadvantage, relative

to a later entrant, if regulations change in a way that diminishes the value of an early entrant’s investments.


Basic Entry Decisions• Scale of Entry and Strategic Commitments

– Entering a new market on a smaller scale is preferred even by large firms.

– Most firms prefer to build up the scale slowly as they become more familiar with the market.

– A strategic commitment has a long-term impact and is difficult to reverse.

– Deciding to enter a foreign market on a significant scale is a major strategic commitment on the part of an entering firm.


Basic Entry Decisions• Scale of Entry and Strategic Commitments (Cont’d)

– Strategic commitments can have an important influence on the nature of competition in a market, which will have several effects:

On the positive side, it will make it easier for the company to attract customers and distributors (such as insurance agents).

On the negative side, by committing itself heavily to one market the firm may have fewer resources available to support expansion in other desirable markets.



– Evidence suggests that significant strategic commitments are neither unambiguously good nor bad. Rather, they tend to change the competitive playing field and unleash a number of changes, some of which may be desirable and others not.

– It is important for a firm to think through the implications of large-scale entry into a market and act accordingly.



– The large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages.

– But strategic inflexibility can also have value.– The value of the commitments that flow from rapid large-

scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments.



– Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of a small-scale entry.

– Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market.

– Small-scale entry is a way to gather information about a foreign market and how best to enter it before deciding whether to enter on a significant scale.



– Small-scale entry reduces the risks associated with a subsequent large-scale entry.

– The lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early-mover advantages.



– The risk-averse firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages.

– Entering a large developing nation such as China or India before most other international businesses in the firm’s industry, and doing so on a large scale, will be associated with high levels of risk.



– The liability of being foreign is increased by the absence of prior foreign entrants whose experience can be a useful guide.

– The potential long-term rewards associated with such a strategy are great.

– An early large-scale entrant in a major developing nation may be able to capture significant first-mover advantages that will bolster its long-run position in that market.



– Entering developed nations such as Ireland or Canada after other international businesses in the firm’s industry, and doing so on a small scale to first learn more about those markets, will be associated with much lower levels of risk.

– But the potential long-term rewards are also likely to be lower.


Summary of Main Themes

• The main function of this chapter is to integrate the issues

examined so far to assist in the process of identifying suitable country markets for firms interested in exporting or

considering foreign direct investment (FDI).• The chapter introduced a means of assessing market

desirability by examining FDI inflows and expressing them as

a percentage of gross fixed capital formation. • This chapter also examined the aspects of improving export

performance, namely to identify the appropriate international

markets and sources of government programs to assist

exporters.

9-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides...

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