IBE NDIM Country Risk and Evaluation Lecture 21

8/13/2019 IBE NDIM Country Risk and Evaluation Lecture 21

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INTERNATIONAL BUSINESS

MANAGEMENT

Prof Soumitra MookherjeeLecture 21

COUNTRY RISK ANDEVALUATION


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Significance of Country Evaluation & Selection

International expansion of a firmsactivities requiresidentification of business opportunities across theborders, evaluating, and selecting one or a fewcountries for its operations.

A business enterprise needs to deploy its resourcesmost gainfully and efficiently in countries where itgets optimum returns to fulfill its goals and

objectives.


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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


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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 onthe observations made by the surveyor, his opinion, his

impressions based on observation of a specific situation.


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COUNTRY EVALUATION

Scanning the Global Economic Environment


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Population and Income

The population of a country broadly gives a roughestimation 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.


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Macroeconomic Overview

Distribution of resources and wealth (GDP) is highly

skewed among the nations.

Thirty advanced countries in the world with only 15.3 percent of worlds total population accounts for about 52 per

cent of the worlds total GDP and 67.3 per cent of exportsof goods and services.

Need to assess and monitor the following parameters:1. Inflation and interest rates

2. Unemployment3. Fiscal, Monetary, and Trade Policies

4. Business Cycles, and growth patterns5. Currency fluctuations and Balance of Payments

6. Capacity Utilization and confidence Index


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Assessing Market Potential

Framework for

assessing market and

industry

attractiveness

MARKET ANALYSIS

GROWTH, SIZE,CUSTOMERS

RESOURCE MAPPING

Skilled manpower

Raw Materials

Capital

Technology

GOVERNMENT POLICY

Taxation

Infrastructure

Subsidies

Regulatory

environment

INDUSTRY COMPETITION

Rivalry Entry Barriers

Bargaining Power

Viability of venture

Threat of Substitutes

Import threats


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Opportunities are determined by revenues less costs. From a broad

scanning perspective, there are variables that indicate the amountof 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 variablemanagers 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.

OPPORTUNITY INDICATORS


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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

INVESTMENT PREFERENCE


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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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Tools for Country Evaluation and Selection

Trade analysis and similarity methods

Market size = Production + ImportsExports

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

COUNTRY RISK

ANALYSIS

POLITICAL RISKS

Policies, Laws, regulations

Nationalism preferences

Unrest and disorders

Party instability

ECONOMIC RISKS

Inflation

Interest rates

Exchange rates

Growth

Macro parameters

OPERATIONAL RISKS

Poor Infrastructure

Inadequate telecom and

transport systems

Shortage of capital, land

COMPETITIVE RISKS

Cartels Networks

Threat of Substitutes

Import threats


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Competitive Risk: A companysinnovative 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 companysexpansion occurs through directinvestment 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 howperformances of firms got hampered due to sharp economic depression and

bankruptcy of the government calls for austerity measures and thereby affect

business prospects.

CATEGORIES OF RISKS


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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; coverunexpected contingencies like stockpiling materials following supply shocks

Political Risk: It occurs because of political instability, changes in political

leadersopinions and adverse policies, civil disorders and unrest, and animosity

between the host and other countries particularly with the companyshomecountry. 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.

CATEGORIES OF RISKS


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INVESTMENT FRAMEWORK

MARKET/

C

OMPETITIVE

O

PPORRTUNITIE

S

LOW HIGH

RISKS

Low

HIGH

ATTRACTIVESS

(INVESTMENT

PRIORITY)

HIGH RISK

HIGH RETURN

(MAY CONSIDER

INVESTING)

LOW RISKLOW RETURN

(ON HOLD)

LOWATTRACTIVENESS

(AVOID/ IGNORE)

High


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Country Attractiveness-Company Strength Matrix

Strong Weak

COMPANIES BUSINESS STRENGTH

Low

INVEST/ GROW Selective Strategy

Selective Strategy

Selective Strategy Harvest/ Divest/

Exit/ License

High

Medium

Medium

CountryAttr

activeness

IBE NDIM Country Risk and Evaluation Lecture 21

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