Foreign location evaluation and selection (chapter 16) Flashcards
Different firms will place different emphasis on host country characteristics, dependent on:
The products/services provided by the firm;
The motives for ‘going international’;
The business functions to be transferred to the foreign location (production, sales, R&D, etc - i.e. which parts of the value chain);
Management’s perception of psychic distance, risk, etc.;
Management’s preferences.
Host market
May transcend national borders (e.g. free trade area);
Large countries may contain different regional markets for the same product/service.
Identifying the ‘right’ market…
Can determine success or failure;
Influences the nature of foreign marketing programmes;
The nature of the geographic location will affect the firm’s ability to coordinate operations.
Uppsala theory
Increasing market commitment over time; more spatially distant markets entered over time; more physically distant markets entered over time. Firms will gradually accumulate experience of operating internationally and knowledge about foreign markets.
OLI theory and “L” advantages
Firms will only make an investment when it is profitable for them to combine their “O” factors with factor endowments in the host market.
“L” advantages are those location specific market features/factors of production that enable a firm to achieve an improved financial outcome from the provision of the same product/service in relation to alternative locations.
Porter’s Diamond
Demand conditions: composition of demand; size and growth of demand.
Factor conditions: labour; natural resources; knowledge; capital; infrastructure.
Related and supporting industries: internationally competitive supplier industries and related industries present in the country.
Firm strategy, structure, and rivalry: ways incumbent firms are managed and compete; corporate goals and objectives; level of domestic rivalry (i.e. competitive forces).
The smile curve
Both ends of the value chain command higher values added to the product than the middle part of the value chain (creates a ‘smile’ on a graph).
‘Where’ questions for the firm
Where can we best leverage our existing competencies?
Where can we go to best sustain, improve, or extend our competencies?
Which markets should we serve?
Where should we place production to serve those markets?
Limited resources mean that are must be taken to ensure that…
Opportunities and risks are not overlooked;
Costs of market surveys, feasibility studies, and data collection are kept to a minimum;
Not too many or too few possibilities are considered.
Other factors to consider during the foreign location selection process:
The sequence for entering different countries;
The amount of resources and effort to allocate to each country in which they operate;
Ensuring that opportunities elsewhere aren’t lost.
Scanning and screening a number of countries - what factors are important?
Opportunities: market-seeking motives (sales expansion); resource acquisition (availability of natural resources and strategic asset seeking motives).
Costs: labour, infrastructure, transport and communications.
Risks: political risk, economic risk, competitive risk.
Sales potential indicators
GDP; GDP per capita; growth rate of GDP; size of population; rate of population growth; income distribution; purchasing power; degree of urbanisation; population density and distribution; age structure and composition.`
Income inequality
Even in areas where per capita incomes are low, there may be middle-/upper-income people with substantial income to spend due to income inequality.
Cultural factors and taste
Countries with similar income levels may exhibit different demand patterns because of differences in cultural values and tastes.
Existence of trading blocs
Countries with small populations and/or low per capita incomes may have a much larger (foreign) market as a production base due to participation in a regional trading bloc.
Obsolescence and leapfrogging of products
Consumers in some countries skip entire generations of technology in favour of more recent technologies.
Market-seeking firms tend to focus on…
Market size and potential;
Per capita income levels;
Country-specific consumer preferences/demographics;
Competitive environment;
Quality of the local business environment.
Natural resource seeking firms tend to focus on…
Availability, cost, and quality of local inputs (physical resources and labour);
Level of political risk (due to high sunk costs);
Local legislative/regulatory environment;
Quality of local physical infrastructure;
Proximity to large markets.
Strategic asset seeking firms tend to focus on…
The host country firm (i.e. the target market for a M&A):
Where it is;
What it brings (i.e. intellectual capital);
Technological capability;
Socio-cultural characteristics (of firm and country);
Local competitive business environment;
The markets the target firm brings.
Costs: labour
In the scanning process, factors such as labour market size, salary levels, minimum wages, customary and required fringe benefits, and unemployment rates can be used for comparison.
Costs: infrastructure
In many developing countries, infrastructure is both poor and unreliable, which adds to operation costs.
Ease of transportation and communications
For managing and coordinating with customers and suppliers. Other factors to consider are country isolation, trade restrictions, and transportation and communication options that are available.
Governmental incentives and disincentives
Countries compete to attract investors, offering lower taxes, employee training, loan guarantees, low interest loans, exemptions on import duties, and subsidised energy and transportation costs.
Disincentives: taxes, stringent labour laws/conditions, government corruption, environmental compliance.
Minimising location risks
Choosing locations where local policies and norms are compatible with the firm’s competitive advantages;
Diversifying locations;
Following competitors or customers;
Heading off competitors.
Rational economic factors
e.g. GDP
Behavioural economic factors
e.g. uncertainty, psychic distance
