Chapter 13 – Country Evaluation and Selection

 

 

Multiple Choice Questions

 

WHAT IS THE RELATIONSHIP BETWEEN COMPANIES’ INTERNATIONAL MARKET AND PRODUCTION LOCATION DECISIONS?

 

1.      Which of the following industries is least likely to be required to locate production facilities near their foreign customers?

a.      Internet (easy, page 382)

b.      hotels

c.       construction

d.      retailing

 

2.      Which of the following statements concerning international geographic strategy is FALSE?

a.       Companies must determine where to sell and where to produce.

b.      The Internet is an industry where companies must locate facilities near their foreign customers, so decisions on market and production location are connected.  (difficult, page 382)

c.       Companies may have excess production capacity already in place that will influence their ability to serve markets in different countries.

d.      The process of determining an overall geographic strategy must be flexible because country conditions change.

 

3.      Which of the following statements regarding geographic expansion strategies is FALSE?

a.       A company may expand its international sales by marketing more of its existing product line, by adding products to its line, or by some combination of these two.

b.      A company needs to decide where to operate (produce and sell) and what portion of operations to place within each location.

c.       Most companies begin by asking “What new product can we make to maximize sales in a given market?” instead of “Where can we sell more of our products?”  (difficult, page 382)

d.      There is little agreement on a comprehensive theory or technique for choosing the best combination of international sales and production locations.

 

WHEN DECIDING WHERE TO LOCATE PRODUCTION AND SALES EFFORTS, HOW AND WHY MIGHT COMPANIES USE SCANNING TECHNIQUES?

 

4.      Which of the following best describes the external conditions in a host country that could significantly affect the success or failure of a foreign business enterprise?

a.      the environmental climate (moderate, page 383)

b.      the management hierarchy

c.       the informal communication channel

d.      the  amount of capital a company invests

 

5.      The _______________ reveals both opportunities and risks.

a.      management hierarchy

b.     environmental climate (moderate, page 383)

c.      informal communication channel

d.     the amount of capital a company invests

6.      Which of the following statements regarding scanning techniques for country location decisions is FALSE?

a.       A detailed analysis of every alternative might result in maximized sales or a least-cost production location, but the cost of so many studies would erode profits.

b.      Companies should examine any  inexpensively and simply determined conditions that would enhance the probability of making an investment before they perform a more detailed feasibility study.

c.       A company with 1,000 products that might locate in any of 150 countries could make optimum final location decisions through scanning techniques and without conducting detailed feasibility studies.   (difficult, page 383)

d.      Scanning is useful in that a company might otherwise consider too few or too many possibilities.

 

WHAT ARE THE MAJOR INDICATORS/VARIABLES THAT MOST COMPANIES CONSIDER WHEN DECIDING WHERE TO OPERATE ABROAD?

 

7.      The factors that have the most influence on the placement of marketing and production emphasis include all of the following EXCEPT:

a.      whether the country is a member of the United Nations. (moderate, page 383)

b.      market size.

c.       ease and compatibility of operations.

d.      costs.

 

8.      Which of the following is probably the most important variable managers’ use in determining where and whether to make an investment?

a.       incidence of natural disasters

b.      sales potential (moderate, page 383)

c.       growth rates

d.      population

 

9.      All of the following are good indicators of market size and future sales EXCEPT:

a.       GNP.

b.      per capita income.

c.       cultural values toward organizational relationships.  (moderate, page 383)

d.      level of industrialization.

 

WHAT IS MEANT BY LIABLITY OF FOREIGNNESS?  HOW MIGHT THIS INFLUENCE LOCATION DECISIONS FOR FOREIGN OPERATIONS?

 

10.    The liability of foreignness refers to:

a.       tougher legal requirements for foreign than for domestic companies.

b.      unwarranted ethnocentric attitudes.

c.       expropriation of foreign-owned assets.

d.      foreign companies’ lower survival rate than local companies for many years after they begin operations

 

11.    A situation in which foreign companies have a lower survival rate than local companies for many years after they begin operations is known as:

a.       foreign infrastructure.

b.      liability of foreignness. (moderate, page 388)

c.       foreign expropriation.

d.      liability of locality.

 

12.       Which of the following statements regarding liability of foreignness is FALSE?

a.       As a company gains experience in operating in a particular country or in similar countries, it improves its assessments of consumer, competitor, and government actions—thereby reducing its uncertainty.

b.      Foreign companies have a lower survival rate than local companies for many years after they begin operations.

c.       When a company operates abroad, it usually has more early success than domestic competitors because of the new ideas and technologies it brings to its foreign operations. (difficult, page 388)

d.      The learning process helps explain why companies often evaluate reinvestments or expanded investments within a country very differently than investments in a country where they lack experience.

 

COMPARE THE ADVANTAGES OF LOCATING FOREIGN OPERATIONS TO AVOID WHERE COMPETITORS HAVE GONE VERSUS LOCATING WHERE COMPETITORS ARE.

 

13.    Which of the following helps explain why companies often evaluate reinvestments or expanded investments within a country very differently than investments in a country where they lack experience?

a.      the learning process (moderate, page 388)

b.      appropriability theory

c.       expropriation

d.      privatization

 

14.    A strategy for a company’s selection of a country for operations by exploiting its temporary innovative advantages is known as:

a.       abbreviation.

b.      imitation lag. (moderate, page 388)

c.       technological gap.

d.      strategic tooling.

 

15.    If a company first moves to those countries where local companies are most likely to adopt and catch up to its innovative advantages, the company is following a strategy of:

a.       abbreviation.

b.      gap analysis.

c.       imitation lag. (moderate, page 388)

d.      strategic tooling.

 

16.    Which of the following statements is FALSE regarding why companies would go where competitors are located?

a.       Competitors may have performed the costly task of evaluating locations, so a follower may get a “free ride.”

b.      There are clusters of competitors in various locations that attract multiple suppliers and personnel with specialized skills.

c.       The more competitors that exist in a country, the higher the probability of receiving subsidies from the local government.  (difficult, page 388)

d.      There are clusters of competitors in various locations that attract buyers who want to compare potential suppliers but don’t want to travel great distances between them.

 

17.    Which of the following statements regarding the advantages of locating near a cluster of competitors is FALSE?

a.       These clusters attract multiple suppliers and personnel  with specialized skills.

b.      Clusters of competitors attract buyers who want to compare potential suppliers but don’t want to travel great distances between them.

c.       Companies operating in the cluster area may gain better access to information about new developments because of coming in contact frequently with personnel from the other companies.

d.      Areas with clusters of competitors are most likely operated under a democratic government.  (difficult, page 388)

 

HOW DOES THE CONCEPT OF LIQUIDITY PREFERENCE INFLUENCE INTERNATIONAL LOCATION DECISIONS?

 

18.    The concept of _______________ says that companies will accept a lower expected return on their investments when they can more easily sell them and convert proceeds to convertible currencies.

a.      liquidity preference (moderate, page 389)

b.      risk avoidance behavior

c.       agglomeration

d.      diversification strategy

 

19.    Which of the following is the theory in which investors usually want some of their holdings to be in highly liquid assets, on which they are willing to take a lower return?

a.       fixed asset preference

b.      liquidity preference (moderate, page 389)

c.       continuous preference

d.      quality preference

 

20.    _______________ is needed to make near-term payments, cover unexpected contingencies, and have the ability to shift funds to even more profitable opportunities.

a.       Expropriation

b.      Privatization

c.       Liquidity (moderate, page 389)

d.      Nationalism

 

21.    Investors are willing to accept a lower projected ROI for projects in countries with ______________ than in countries with ______________.

a.       weak currencies; strong currencies

b.      less political stability; more political stability

c.       less economic stability; more economic stability

d.      strong currencies; weak currencies (moderate, page 389)

 

WHAT PROBLEMS MIGHT MANAGERS ENCOUNTER WHEN EXAMINING AND COMPARING PUBLISHED DATA ON DIFFERENT COUNTRIES?

 

22.    Which of the following factors affect the competence of governmental officials to maintain and correctly analyze accurate records?

a.      All the answers are correct (moderate, page 393)

b.      economic factors

c.       political factors

d.      cultural factors

 

23.    Because hand calculations may be used instead of costly electronic data-processing systems, _______________ factors hamper record retrieval and analysis of published data in some countries.

a.       education

b.      economic (moderate, page 393)

c.       political

d.      cultural

 

24.    Which of the following factors most likely affects the unwillingness of subjects to respond to questions conducted for market research purposes?

a.       education factors

b.      economic factors

c.       cultural factors (moderate, page 393)

d.      political factors

25.    All of the following represent problems with comparing data from different countries EXCEPT:

a.       how a country defines family income.

b.      how a country measures investment inflows.

c.       how a data user converts reports in a local currency to reports in a common currency.

d.      how data are presented due to the dominant  religion of the country (moderate, page 394)

 

WHAT ARE THE MAJOR TYPES OF PUBLISHED DATA THAT MANAGERS CAN USE TO COMPARE COUNTRIES, AND HOW DO THEY DIFFER IN TERMS OF COST AND SPECIFICITY?

 

26.    Which of the following sources of published data is generally the most costly information source?

a.      Individualized reports  (moderate, page 394)

b.      Service companies

c.       Governmental agencies

d.      International organizations

 

27.    Different countries’ statistical reports vary in all of the following EXCEPT:

a.       subject matter.

b.      quantity.

c.       quality.

d.      all the answers are correct.  (difficult, page 395)

 

28.    Which of the following statements regarding the internal generation of data is FALSE?

a.       Sometimes research may consist of no more than observing keenly and asking many questions.

b.      Internally generated date is significantly more accurate than data generated by service companies.  (difficult, page 395)

c.       Often a company must be extremely imaginative, extremely observant, or both in its research implementation.

d.      MNE’s may have to conduct many studies abroad themselves.

 

EXPLAIN HOW GRIDS AND MATRICIES CAN BE USED AS TOOLS TO COMPARE COUNTRIES.

 

29.    Two types of matrices that managers may use to compare countries are

a.      opportunity-risk and country attractiveness-company strength matrices. (difficult, page 396)

b.      SWOT matrices and environmental scanning matrices.

c.       imitation lag matrices and subsidy matrices.

d.      industrialized-nonindustrialized country matrices and competitive strength matrices.

 

30.    In which of the following types of matrices to compare countries can a company decide on indicators and weight them?

a.       liquidity  matrix

b.      opportunity-risk matrix (moderate, page 396)

c.       imitation lag matrix

d.      subsidy matrix

 

31.    In an opportunity-risk matrix to compare countries, a company can do all of the following EXCEPT:

a.       decide on indicators and weight them.

b.      evaluate each country on the weighted indicators.

c.       determine net present value of a project. (moderate, page 396)

d.      plot to see countries’ relative placements.

 

32.    Which of the following types of matrices highlights the fit of a company’s product to the country?

a.       opportunity-risk matrix

b.      imitation lag matrix

c.       subsidy matrix

d.      country attractiveness-company strength matrix (moderate, page 398)

 

HOW DOES THE INTERDEPENDENCE OF OPERATIONS IN DIFFERENT COUNTIRES COMPLICATE MANAGERS’ COMPARATIVE EVALUATION OF COUNTRIES?

 

33.    Which of the following statements regarding the interdependence of operations in different countries is FALSE?

a.      Sales and purchases of foreign subsidiaries cannot be made from and to units of the same parent company.  (difficult, page 401)

b.      The derivation of meaningful and comparable financial figures is not easy when foreign operations are concerned.

c.       Profit figures from individual operations may obscure the real impact those operations have on overall company activities.

d.      By stating a high value of a foreign investment in order to gain a government’s permission to repatriate a larger portion of its earnings, the financial figures are not comparable to those in other countries.

 

34.    By stating a _____________ value of a foreign investment, a government may permit the company to repatriate a larger portion of its earnings.

a.       negative

b.      high  (easy, page 401)

c.       zero

d.      low

 

35.     Which of the following statements regarding the interdependence of operations in different countries is FALSE?

a.       The prices a company charges on transactions between parent company and its foreign subsidiary will affect the relative profitability of one unit compared to another.

b.      A company may not set the net value of a foreign investment realistically, particularly if it bases part of the net value on exported capital equipment that is obsolete at home.

c.       By stating a low value of a foreign investment, a government may permit the company to repatriate a larger portion of its earnings.  (difficult, page 401)

d.      Profit figures from individual operations may obscure the real impact those operations have on overall company activities.

 

WHY DO COMPANIES OFTEN TREAT FOREIGN REINVESTMENT DECISIONS DIFFERENTLY THAN NEW FOREIGN INVESTMENT DECISIONS?

 

36.    Which of the following statements is FALSE regarding why reinvestment decisions are treated differently by companies?

a.       Once committed to a given locale, a company may find it doesn’t have the option of moving a substantial portion of the earnings elsewhere.

b.      A company may need several years of almost total reinvestment and allocation of new funds to one area in order to meet its objectives.

c.       Once a company has experienced personnel with a given country, it may believe they are the best judges of what is needed for that country.

d.      Reinvestment decisions have a higher failure rate than new foreign investment decisions.  (difficult, page 399)

 

37.    A company may treat international reinvestment decisions differently than decisions for new country entries because

 a.    governments prefer that subsidiaries pay dividends to their parents than to reinvest the funds.

b.       it is likely to be more confident about projections for new than for expanded operations.

c.       reinvestment decisions have a higher failure rate than new investment decisions.

d.      It may need several years of almost total reinvestment and allocation of new funds to one area in order to meet its objectives.   (moderate, page 399)

 

38.    A company may treat international reinvestment decisions differently than decisions for new country entries because

a.      once a company has experienced personnel with a given country, it may believe they are the best judges of what is needed for that country.

b.      governments prefer that subsidiaries pay dividends to their parents than to reinvest the funds.

c.       reinvestment decisions have a higher failure rate than new investment decisions.

d.    governments prefer that subsidiaries pay dividends to their parents than to reinvest the funds.

 

WHY DO COMPANIES ENGAGE IN INTERNATIONAL HARVESTING OR DIVESTMENT?

 

39.    Which of the following statements is FALSE regarding international harvesting or divestment?

a.      A company that considers divesting because of a country’s political or economic situation is likely to find many investors who are willing to purchase the company at high prices.  (difficult, page 400)

b.      Companies have tended to wait too long before divesting, trying instead expensive means of improving performance.

c.       Local managers, who fear losing their positions if the company abandons an operation, typically propose additional capital expenditures rather than divestment.

d.      Companies may divest by selling or closing facilities.

 

40.    A company that considers divesting because of a country’s political or economic situation is likely to find:

a.       many investors who will purchase the company at high prices.

b.      few potential buyers except at very low prices.  (difficult, page 400)

c.       that external financing will be an easy task.

d.      intense competition from abroad entering the local market.

 

41.    Which of the following statements regarding international harvesting or divestment is FALSE?

a.       Companies commonly reduce commitments in some countries because those countries have poorer performance prospects than do others.

b.      Some indications suggest that companies might benefit by planning divestments better and by developing divestment specialists.

c.       Ideas for investment projects typically originate with top executives who are enthusiastic about collecting information to accompany a proposal as it moves downward in the organization.  (difficult, page 400)

d.      Companies have tended to wait too long before divesting, trying instead expensive means of improving performance.

 

42.    The process of reducing commitments in countries because those countries have poorer performance prospects than do others is known as:

a.      harvesting or divesting. (moderate, page 400)

b.      diversion or creation.

c.       privatization or nationalization.

d.      imitation.

 

WHAT ARE MEANT BY DIVERSIFICATION VERSUS CONCENTRATION STRATEGIES FOR INTERNATIONAL LOCATION DECISIONS?  UNDER WHAT CIRCUMSTANCES WOULD ONE STRATEGY BE PREFERABLE TO THE OTHER?

 

43.    Which of the following strategies involves a company’s rapid move into many foreign markets, gradually increasing its commitments within each?

a.      diversification strategy (moderate, page 401)

b.      concentration strategy

c.       digression strategy

d.      creation strategy

 

44.    With a _______________, the company will move to only one or a few foreign countries until it develops a very strong involvement and competitive position those countries.

a.       diversification strategy

b.      concentration strategy (moderate, page 401)

c.       digression strategy

d.      creation strategy

 

45.    Fast growth favors a_______________ strategy for foreign expansion because companies must use resources to maintain market share.

a.       diversification

b.      digression

c.       concentration (moderate, page 401)

d.      creation

 

46.    The more a company needs to control its operations in a foreign country, the more it should develop a:

a.       diversification strategy.

b.      digression strategy.

c.       creation strategy.

d.      concentration strategy. (moderate, page 401)

 

WHY DO MOST COMPANIES EXAMINE EXPANSION PROPOSALS ONE AT A TIME RATHER THAN COMPARING VARIOUS EXPANSION PROPOSALS?

 

47.    __________________________ are two major factors restricting companies from comparing investment opportunities.

a.      Cost and time (moderate, page 403)

b.      Expertise and cost

c.       Regulations and time

d.      Time and corporate culture

 

48.    Which of the following statements regarding the independent examination of expansion proposals is FALSE?

a.       When a company does not compare among locations, a positive decision about a single proposal usually means the project meets some minimum-threshold criteria.

b.      Two major factors restricting companies from comparing investment opportunities are time and corporate culture.  (difficult, page 403)

c.       Governmental regulations that require a decision within a given period is an example of a time-inhibiting problem.

d.      Companies tend to evaluate and decide on investment proposals separately.

 

49.    Which of the following statements regarding the importance of making final country selections is FALSE?

a.       For new investments, companies need to make on-site visits and detailed estimates of costs and expenses.

b.      For acquisitions, companies need to examine financial statements in detail.

c.       Companies need only to focus on quantitative analysis to properly evaluate whether to make foreign investments.  (difficult, page 403)

d.      For expansion within countries where they are already operating, managers within those countries will most likely submit capital budget requests that include details of expected returns.

 

 

Essay Questions

 

50.    What is the relationship between companies’ international market and production location decisions?

 

Answer

If a company develops a product that consumers find attractive, it must still find production and transportation cost advantages so that it can price the product favorably enough to sell it.  These production cost advantages may come from abroad allowing the company to sustain a long-term competitive advantage.

(easy, page 381)

 

51.    When deciding where to locate production and sales efforts, how and why might companies use scanning techniques?

 

         Answer

To compare countries, managers use scanning techniques based on broad variables that indicate opportunities and risk.  That way, decision makers can perform a detailed analysis of a manageable number of geographic locations.  Scanning is useful in that a company might otherwise consider too few or too many possibilities.  When scanning, managers will take the environmental climate into consideration. The environmental climate is the external conditions in a host country that could significantly affect the success or failure of a foreign enterprise. It can determine whether a company will make a detailed study, as well as the terms under which it will initiate a project. The environmental climate reveals both opportunities and risks.

(moderate, page 383)

 

52.    What are the major indicators/variables that most companies consider when deciding where to operate abroad?

 

Answer

a.       Opportunities—Revenues less costs determine opportunities. 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, and resource availability. Sales potential is probably the most important variable managers’ use in determining where and whether to make and investment.

b.      Risks—Companies use a variety of financial techniques to compare potential projects, including discounted cash flow, economic value added, payback period, net present value, return on sales, return on assets employed, internal rate of return, accounting rate of return, and return on equity. Given the same expected return, most decision makers prefer a more certain outcome to a less certain one. Often, companies may reduce risk or uncertainty by insuring. However, insuring against nonconvertibility of funds or expropriation is apt to be costly. In the initial process of scanning to develop a manageable number of alternatives, the company should give some weight to the elements of risk and uncertainty. And the later and more detailed state of the feasibility study, management should determine whether the degree of risk is acceptable without incurring additional costs.

            (moderate, page 383)

 

53.    What is meant by liability of foreignness?  How might this influence location decisions for foreign operations?

 

Answer

Liability of foreignness describes the situation in which foreign companies have a lower survival rate than local companies for many years after they begin operations.  When a company operates abroad, it usually has higher uncertainty than at home because the foreign operations are in environments with which it is less familiar.  As a company gains experience in operating in a particular country or in similar countries, it improves its assessments of consumer, competitor, and government actions—thereby reducing its uncertainty.  The learning process helps explain why companies often evaluate reinvestments or expanded investments within a country very differently than investments in a country where they lack experience.

(moderate, page 388)


 

54.    Compare the advantages of locating foreign operations to avoid where competitors have gone versus locating where competitors are.

 

         Answer

By being the first major competitor in a market, a company can gain the best partners, locations, and suppliers.  Companies may gain advantages in locating where competitors are.  To begin with, the competitors may have performed the costly task of evaluating locations, so a follower may get a “free ride.”  Moreover, there are clusters of competitors in various locations. 

(easy, page 388)

 

55.    In a short essay, discuss liquidity preference as it relates to monetary risk.

 

         Answer

If a company’s expansion occurs through direct investment abroad, exchange rates on and access to the invested capital and earnings are key considerations. The concept of liquidity preference is a common theory that helps explain companies’ capital budgeting decisions in general and can be applied to their international expansion decisions. Liquidity preference is the theory that investors usually want some of their holdings to be in highly liquid assets, on which they are willing to take a lower return. Liquidity is needed in part to make near-term payments, such as paying out dividends; in part to cover unexpected contingencies, such as stockpiling materials if a strike threatens supply; and in part to be able to shift funds to even more profitable opportunities, such as purchasing materials at a discount during a temporary price depression.

         (moderate, page 389)

 

56.    What problems might managers encounter when examining and comparing published data on different countries?

 

         Answer

For the most part, incomplete or inaccurate published data result from the inability of many governments to collect the needed information. Poor countries may have such limited resources that other projects necessarily receive priority in the national budget. Education affects the competence of government officials to maintain and analyze accurate records. Economic factors also hamper record retrieval and analysis, as hand calculations may be used instead of costly electronic data-processing systems. The result may be information that is years old before it is made public. Finally, cultural factors affect responses. Mistrust of how the data will be used may lead respondents to answer incorrectly, particularly if questions probe financial results. However, not all inaccuracies are due to governmental collection and dissemination procedures. A large proportion of the studies by academicians describing international business practices are based on broad generalizations that may be drawn from too few observations, on representative samples, and from poorly designed questionnaires. People’s desire and ability to cover up data on themselves—such as unrecorded criminal activity—may distort published figures substantially.

         (moderate, page 392)

 

57.    What are the major types of published data that managers can use to compare countries, and how do they differ in terms of cost and specificity?

 

         Answer

a.       Individualized reports—Market research and business consulting companies conduct studies for a fee in most countries. However, the quality and cost of these studies vary widely. This type of data is generally the most costly information source because the individualized nature restricts proration among the number of companies. However, the fact that a company can specify what information it wants often makes the expense worthwhile.

b.      Specialized studies—Some research organizations prepare fairly specific studies that they sell to any interested company at costs much lower than for individualized studies. These specialized studies sometimes are printed as directories of companies that operate in a given locale, perhaps with financial or other information about the companies.

c.       Service companies—Most companies that provide services to international clients publish reports. These reports usually are geared toward either the conduct of business in a given area or some specific subject of general interest, such as tax or trademark legislation.

d.      Government agencies—Governments and their agencies are another source of information. Different countries’ statistical reports vary in subject matter, quantity, and quality. When a government or governmental agency wants to stimulate foreign business activity, the amount and type of information it makes available may be substantial.

e.       International organizations and agencies—Numerous organizations and agencies are supported by more than one country. These include the United Nations, the World Trade Organization, the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Union. All of these organizations have large research staffs that compile basic statistics as well as prepare reports and recommendations concerning common trends and problems.

f.           Trade associations—Trade associations connected to various product lines collect, evaluate, and disseminate a wide variety of data dealing with technical and competitive factors in their industries. Many of these data are available in the trade journals published by such associations.

g.      Information service companies—A number of companies have information-retrieval services that maintain databases from hundreds of different sources. For a fee, or sometimes for free at public libraries, a company can obtain access to such computerized data and arrange for an immediate printout of studies of interest.

h.      The Internet—Printed publications are quickly becoming archives that are older than information one may find on the Internet. This is because the Internet changes can appear immediately and be “up-to-the-minute”; it is a “live medium”, whereas changes for periodicals must be printed, disseminated, catalogued, and shelved before they are available. As with other sources, one must be concerned about the reliability of information from Internet sources.

         (difficult, page 394)

 

58.    In a short essay, discuss how grids and matrices are used as country comparison tools.

 

         Answer

Once companies collect information on possible locations through scanning, they need to analyze the information. Two common tools for analysis are grids and matrices. However, once companies commit to locations, they need continual updates, which they commonly make through environmental scanning. A company may use a grid to compare countries on whatever factors it deems important. The grid technique is useful even when a company does not compare countries because it can set a minimum score necessary for either investing additional resources or committing further funds to a more detailed feasibility study. Grids do tend to get cumbersome as the number of variables increases. And although they are useful in ranking countries, they often obscure interrelationships among countries.

 

Generally, managers use two matrices when comparing countries: opportunity-risk matrices and country attractiveness-country strength matrices. The matrix is important as a reflection of the placement of a country in comparison to other countries. The companies must determine which factors are good indicators of its risk and opportunity and weigh them to reflect their importance. Another matrix highlights a company’s specific product advantage on a country-by-country basis. Although this type of matrix may serve to guide decision-making, managers must use it with caution. First, it is often difficult to separate the attractiveness of a country from a company’s position. Second, some of the recommended actions take a defeatist attitude to a company’s competitive position. Third, a company may choose to stay in a market to prevent competitors from using their dominance there to fund expansion elsewhere.

         (difficult, page 396)

 

59.    Why do companies often treat foreign reinvestment decisions differently than new foreign investment decisions?

 

         Answer

Companies treat decisions to replace depreciated assets or add to the existing stock of capital from retained earnings in a foreign country somewhat differently from original investment decisions. Once committed to a given locale, a company may find it doesn’t have the option of moving a substantial portion of the earnings elsewhere—to do so would endanger the continued success of an operation in a given foreign facility. Aside from competitive factors, a company may need several years of almost total reinvestment and allocation of new funds to one area in order to meet its objectives. Another reason a company treats reinvestment decisions differently is that once it has experienced personnel within a given country; it may believe they are the best judges of what is needed for that country, so headquarters managers may delegate certain investment decisions to them.

         (moderate, page 399)

 

60.    How does the interdependence of operations in different countries complicate managers’ comparative evaluation of countries?

 

Answer

The derivation of meaningful financial figures is not easy where foreign operations are concerned.  Profit figures from individual operations may obscure the real impact those operations have on overall company activities.  Much of the sales and purchases of a foreign subsidiary may be made from and to units of the same parent company.  The prices the company charges on these transactions will affect the relative profitability of one unit compared to another.  Furthermore, a company may not set the net value of a foreign investment realistically, particularly if it bases part of the net value on exported capital equipment that is obsolete at home and useless except in the country where it is being shipped.  By stating a high value, a government may permit the company to repatriate a larger portion of its earnings.

         (moderate, page 400)

 

61.    Why do companies engage in international harvesting or divestment?

 

Answer

Companies commonly reduce commitments in some countries because those countries have poorer performance prospects than do others, a process known as harvesting or divesting. Companies may divest by selling or closing facilities. They usually prefer selling because they receive some compensation.  A company that considers divesting because of a country’s political or economic situation may find few potential buyers except at very low prices.  In such situations, the company may try to delay divestment, hoping the situation will improve.  If it does, the firm that “waits out” the situation generally is in a better position to regain markets and profits than one that forsakes its operations.

         (moderate, page 400)

 

62.    In a short essay, compare the differences between diversification versus concentration and provide examples of situations in which each would be used.

 

         Answer

Ultimately, a company may gain a sizable presence and commitment in most countries; however, there are different paths to that position. Although any move abroad means some geographic diversification, the term diversification is when the company moves rapidly into many foreign markets, gradually increasing its commitments within each. At the other extreme, with a concentration strategy, the company will move to only one or a few foreign countries until it develops a very strong involvement and competitive position there. When the growth rate in each market is high, a company usually should concentrate on a few markets because it will cost a great deal to expand output sufficiently in each market. The more stable that sales and profits are within a single market, the less advantage there is from a diversification strategy. Similarly, the more interrelated markets are, the less smoothing is achieved by selling in each. If a company determines that it has a long lead time before competitors are likely to be able to copy or supersede its advantages, then it may be able to follow a concentration strategy and still beat competitors into other markets. When marketing programs reach many countries, such as by cable television or the Internet, a diversification strategy has advantages. Companies may have to alter products and their marketing to sell in foreign markets, a process that, because of cost, favors a concentration strategy. The more a company needs to control its operations in a foreign country, the more it should develop a concentration strategy. If a company is constrained by the resources it needs to expand internationally compared to the resources it can muster, it will likely follow a concentration strategy.

         (difficult, page 401)

 

63.    Why do most companies examine expansion proposals one at a time rather than comparing various expansions proposals?

 

Answer

         One factor is that an overriding consideration may cause one location to be considered above all others.  When a company does not compare among locations, a positive decision usually means the project meets some minimum-threshold criteria.  Two major factors restricting companies from comparing investment opportunities are cost and time.  Clearly, some companies cannot afford to conduct very many investigations simultaneously.  If they are conducted simultaneously, they are apt to be in various stages of completion at a given time.

         (moderate, page 403)