RETURN ON INVESTMENT: COUNTRY COMPARISON CONSIDERATIONS
RETURN ON INVESTMENT:
COUNTRY COMPARISON CONSIDERATIONS
Is a projected rate of return of 9 percent in Nigeria the same as a 9 percent rate in France? Should return on investment be calculated on the basis of the entire earnings of a foreign subsidiary or just on the earnings that can be remitted to the parent? Does it make sense to accept a low return in one country if this will help the firm's competitive position elsewhere? Is it ever rational to invest in a country with an uncertain political and economic future? These are but a few of the unresolved questions that firms must debate when making international capital budgeting decisions.
Risk and Uncertainty
Most investors prefer cer- Given the same expected return, most decision makers prefer a more certain tainty to uncertainty. to a iess certain outcome. An estimated rate of return on investment
(ROI) is calculated by averaging the various returns deemed possible for investments. Table 16.1 shows that two identical projected ROIs may have very different certainties of achievement as well as differing probabilities around the expected return. In the table, the certainty of the 10 percent projected ROI for investment B is higher than for investment A. Furthermore, the probability of earning at least 10 percent is also higher (70 percent versus 65 per
TABLE 16.1 | COMPARISON OF ROI CERTAINTY To determine the estimated ROI, (1) multiply each ROI as percentage by its probability to derive a weighted value and (2) add the weighted values.
Investment A Investment B
ROI as Weighted Weighted
percentage Probability value Probability value
0 .15 0 0 0
5 .20 1.0 .30 1.5
10 .30 3.0 .40 4.0
15 .20 3.0 .30 4.5
20 .15 3.0 0 .0
Estimated ROI 10.0% 10.0%
cent) for that alternative. Experience shows that most, but not all, investors would choose alternative B over alternative A. In fact, as uncertainty increases, investors may require a higher estimated ROI.
Often it is possible to reduce risk or uncertainty, such as by insuring against the possibility of nonconvertibility of funds. However, any such actions are apt to be costly for the firm. In the first process of scanning to develop a manageable number of alternatives, it is useful to give some weight to the elements of risk and uncertainty. At a later and more detailed stage of feasibility study, management should determine whether the degree of risk is acceptable or not without the incurring of additional costs. If it is not, then management would need to calculate an ROI that includes expenditures to increase the outcome certainty of the operation.17
National boundaries play a role in the degree of certainty of return that investors perceive for alternative investments. As long as the investors are conducting business entirely within one country, the alternative investment projects fall within similar political and economic environments. Furthermore, the experience of having already operated within that country, as well as operating abroad in general, increases the probability that the company will make accurate assessments of consumer, competitor, and governmental actions.18 This is consistent with our earlier description of how firms generally go first to those foreign environments that they perceive to be more similar to the home country. It also helps to explain the fact that reinvestments or expanded investments within a country where the company has extensive operations often are evaluated very differently than proposed moves into a country. (The reinvestment decision will be discussed later in the chapter.)
Multidomestic versus Global Strategies
The comparison of rates of return among countries as a means of making geographic capital budgeting decisions is most appropriate when operations in one country have little effect elsewhere. In such a situation, a company may effectively allocate resources among countries from the highest to lowest expected ROI, accounting of course for risk and uncertainty. But as we will show later in this chapter, it is not easy to separate the operating results in one country from those in other countries.
If a firm faces the same competitors in different markets, it may be appropriate to take a low ROI or even a negative one in some markets in order to counteract what would otherwise be a competitor's advantage. Although this strategy may overcrowd the market and lower profits for all firms in some markets, it nevertheless prevents any one company from making a high profit that it can use for advantages elsewhere in the world. For example, Caterpillar established a joint venture with Mitsubishi in Japan, the home market of Komatsu, Caterpillar's major global competitor. This move lowered Komat-su's profits within the Japanese market, which had been accounting for 80 percent of its worldwide cash flow.19
Competitive Risk
We have explained that one of the reasons for using nonequity arrangements is to spread business to many markets rapidly when a firm perceives that its innovative advantage may be short-lived. Even when the firm assesses that it has a substantial competitive lead time, this may vary in different markets. One of the strategies to take advantage of temporary monopoly advantages is known as the imitation lag, which holds that a company should move first to those countries most likely to develop local production themselves and later to other countries.20 Local technology and high international freight costs generally result in a more rapid move to local production. If technology is available, local producers may start manufacturing well before foreign companies are willing to sell the technology. If freight costs are high for exports to the country, a local producer may, despite inefficiencies, be able to gain an advantage in cost over imported goods.
Firms also may develop strategies to find countries where there is least likely to be significant competition. When Japanese automobile producers first began selling in the European market, they shied away from countries with established national producers, such as France and the former West Germany. Instead, they targeted smaller countries, such as Denmark and Portugal, where they were able to gain significant market shares before the producers in larger European countries were able to react to them. L. M. Ericsson, the Swedish telephone-equipment producer, has developed technology aimed at the needs of small countries, partially because this fits its home market and partially because its competitors have concentrated their efforts more on the larger markets.21 Ericsson has taken this strategy a step further by putting most of its developing country investments in those nations that lack colonial ties to Europe because its major competitors have longstanding distributional advantages and the support of the home government where there were colonial relationships.
Monetary Risk
If the firm's expansion is via direct investment, access to and the exchange rate on the invested capital and its earnings are key considerations. The concept of liquidity preference is a common theory to help explain capital budgeting decisions in general and can be applied to the international expansion decision.
Investors usually want some of their holdings to be in highly liquid assets, on which they are willing to take a lower return. Part of the liquidity need is for near-term payments, such as dividends; part is for unexpected contingencies, such as to purchase stockpile materials if a strike threatens supply; and part is so that funds may be shifted to even more profitable opportunities, such as purchasing materials at a discount during a temporary price depression.
There are some differences in liquidity by country of investment. One is the local availability of buyers for equity that one owns so that the funds may be used for other types of expansion endeavors. The ability to find buyers varies substantially among countries, depending largely on the existence of a local capital market.
Assuming that a foreign investor does find a local purchaser, chances are the intent is to use the funds in another country. If the funds are not convertible, then the foreign investor will be forced to spend them in the host country. Of more pressing concern for most investors is the ability to convert earnings from operations abroad, since earnings generally are used not only for expansion but also for dividend payment to stockholders in the home country. The ability to convert varies substantially among countries, and so does the cost of convertibility. It is not surprising that most investors are willing to accept a lower projected ROI for projects in countries with strong currencies than they are in countries with weak currencies.22
Political Risk
One of the major concerns of international firms is that the political climate wjn change in such a way that their operating position deteriorates. Political
that may affect company operations adversely are governmental takeovers of property, either with or without compensation; through operational restrictions that impede the ability of the firm to take actions it would otherwise have taken; and damage to property or personnel. These types of risks were illustrated in the opening case of this chapter. Ford's operation in Hungary was taken over by the government; the one in Mexico was given very different operating requirements; and the one in France was bombed.
The following discussion centers on only one type of political risk—the governmental takeover of foreign facilities—because the methods to evaluate this type of risk are not fundamentally different from those used to make other political-risk predictions. Three approaches to predict political risk will be discussed here: the analysis of past patterns, the use of expert opinion, and the building of models based on instability measurements.
Analysis ot Past Patterns Firms cannot help but be influenced by what has been happening within a country. There are many dangers in predicting political risk on the basis of past patterns, though. Political situations in specific countries may change rapidly for the better or worse as far as foreign investors are concerned. However, the historical evolution is indicative of the broad climate for operations. Studies that have examined large numbers of government takeovers in the post-World War II period give some clues about what to expect.23
Almost all of the takeovers were in LDCs, with Latin American countries accounting for about half. In terms of percentage of investments affected, however, Africa and the Middle East were riskier, whereas Asia was the low-
est risk area by all measurements. Even these regional categories obscure country-by-country differences. Approximately fifty countries had no takeovers, and three alone (Argentina, Chile, and Peru) accounted for about one third of the takeovers.
Governmental takeovers, except in a few countries, have been highly selective and have usually involved land, natural resources, financial institutions, and utilities.24 Since the early 1970s, however, manufacturing investments have been the most vulnerable. The selectivity is illustrated by the experience of investors in Peru: Cerro's mining interests and ITT's telephone company were nationalized; however, Cerro's manufacturing companies and ITT's hotel were not. Even among manufacturing industries, there are differences. Those most likely to be nationalized are the ones that may have a substantial and visible widespread effect on a given country because of their size, monopoly position, necessity for national defense, or because other industries depend on them.
Both among and within industries there are variances in local need for foreign resources. Companies that hold assets badly needed in a given country and for which that country has little alternative source are much less vulnerable to political actions. This emphasizes the need for internal assessment in order to design types and places for foreign operations that minimize the risk of governmental control. Thus far, firms with a high technological input that produce a large amount of component parts outside the countries where investments are made have been less prone to takeovers.25
The takeover of assets does not necessarily mean a full loss to investors. In fact, most takeovers have been preceded by a formal declaration of intent by the government with a subsequent legal process to determine compensation to the foreign investor. In addition to the book value of assets, some other factors must be considered when determining the adequacy of compensation. First, the compensation may earn a different return when invested elsewhere. Second, other agreements (such as purchase and management contracts) may create additional benefits for the former investor. For example, the Saudi Arabian purchase price to the four U.S. oil partners in Aramco was only part of the total package. The oil companies have continued to receive other financial benefits from Aramco operations through contracts for petroleum, management services, and exploration. Although investors receive compensation in more than 90 percent of takeovers, it is difficult to determine how adequate the compensation is.
Opinion Analysis A second approach for political risk analysis is to analyze the opinions of knowledgeable people about the situation in a country.26 In this approach one attempts to ascertain the evolving opinions of people who may influence future political events affecting business. The first step involves reading statements made by political leaders both in and out of office to determine their philosophies on business in general, foreign input to business, the means of effecting economic changes, and their feelings toward given
foreign countries. Although published statements are readily available, the} may appear too late for a firm to have time to react.
Management should analyze the context of statements to determine whether they express true intentions or were made merely to appease particular interest groups or social strata. It is not uncommon, for example, for political leaders to make emotional appeals to the poor based on allegations that foreign business is draining wealth from the country while, at the same time, these leaders quietly negotiate entry and give incentives to new foreign firms. Examination of investment plans offers further insights to the political climate.
Visits to the country in order to "listen" are very important for firms in determining opinions and attitudes. Embassy officials and other foreign and local businesspeople are useful for obtaining opinions as to the probability and direction of change. Journalists, academicians, middle-level local governmental authorities, and labor leaders usually reveal their own attitudes, which often reflect changing political conditions that may affect the business sector.
A more systematic method of relying on opinions is to use a panel of analysts with experience in a country and have them rate categories of political conditions over different time frames. For example, they might rate a country in terms of the fractionalization of political parties that could lead to disruptive changes in government at the present time as well as for future periods, such as one, five, and ten years. A firm may commission this rating individually, or it may rely on commercially available risk-assessment services.27
Instability Assessment A third method being used to predict political risk is to build models based on instability measurements. The greater the political instability, the greater the possibility of change in the political climate. Although political instability has been found to be one of the major concerns of businesspeople, it is difficult to reach a consensus as to what constitutes dangerous instability or how such instability can be predicted. The lack of consensus is illustrated by the diverse reaction of companies to the same political situations. For example, in the late 1980s Peru had an inflation rate of over 4000 percent, guerrilla warfare, political assassinations, and a fall in industrial output; yet many foreign firms perceived the time to be opportune to invest in Peru.28 Then there are other uncertainties, such as the time lag necessary between a political event and an investor's ability to react. Furthermore, similar symptoms of social unrest may result in different political consequences in different countries. For instance, an antiregime demonstration occurring in Iran may have different political consequences on investors than one in Mexico.29 Political parties may change rapidly at times with little effect on business; on the other hand, sweeping changes for business may occur without a change in government. Nevertheless, there are services that measure and weight different types of political stability, differentiating, for example, among institutionally prescribed elections, the fall of a cabinet, the outlawing of significant groups, the execution of a significant political figure, the assassination of a chief of state, a coup d'etat accompanied by a mild amount of violence, and a civil war.30 Rather than political stability itself, the direction of change in government seems to be very important; takeovers have occurred most frequently within three years after a leftist government took office.31
One theory, which has been used in predictive models, is that frustration—the difference between the level of aspirations and the level of welfare and expectations—develops and that foreign investment is a scapegoat when a country's frustration level is high.32 Since frustration, aspiration, welfare, and expectations cannot be measured directly, it is necessary to use substitutes for these. For example, a growth in urbanization, literacy, radios per capita, and labor unionization are all measurable indicators of growth in aspirations; such variables as infant survival rate, caloric consumption, hospital beds per capita, piped water supply per capita, and per capita income are measurable indicators of welfare. Variables such as the change in per capita income and in gross investment rates are indicators of expectations. This approach to predicting actions toward foreign investors has considerable possibilities, since it predicts future trends rather than looking to the past and is predicated on a lead time that might be sufficient for management to adjust operations in order to minimize losses.
COUNTRY COMPARISON CONSIDERATIONS
Is a projected rate of return of 9 percent in Nigeria the same as a 9 percent rate in France? Should return on investment be calculated on the basis of the entire earnings of a foreign subsidiary or just on the earnings that can be remitted to the parent? Does it make sense to accept a low return in one country if this will help the firm's competitive position elsewhere? Is it ever rational to invest in a country with an uncertain political and economic future? These are but a few of the unresolved questions that firms must debate when making international capital budgeting decisions.
Risk and Uncertainty
Most investors prefer cer- Given the same expected return, most decision makers prefer a more certain tainty to uncertainty. to a iess certain outcome. An estimated rate of return on investment
(ROI) is calculated by averaging the various returns deemed possible for investments. Table 16.1 shows that two identical projected ROIs may have very different certainties of achievement as well as differing probabilities around the expected return. In the table, the certainty of the 10 percent projected ROI for investment B is higher than for investment A. Furthermore, the probability of earning at least 10 percent is also higher (70 percent versus 65 per
TABLE 16.1 | COMPARISON OF ROI CERTAINTY To determine the estimated ROI, (1) multiply each ROI as percentage by its probability to derive a weighted value and (2) add the weighted values.
Investment A Investment B
ROI as Weighted Weighted
percentage Probability value Probability value
0 .15 0 0 0
5 .20 1.0 .30 1.5
10 .30 3.0 .40 4.0
15 .20 3.0 .30 4.5
20 .15 3.0 0 .0
Estimated ROI 10.0% 10.0%
cent) for that alternative. Experience shows that most, but not all, investors would choose alternative B over alternative A. In fact, as uncertainty increases, investors may require a higher estimated ROI.
Often it is possible to reduce risk or uncertainty, such as by insuring against the possibility of nonconvertibility of funds. However, any such actions are apt to be costly for the firm. In the first process of scanning to develop a manageable number of alternatives, it is useful to give some weight to the elements of risk and uncertainty. At a later and more detailed stage of feasibility study, management should determine whether the degree of risk is acceptable or not without the incurring of additional costs. If it is not, then management would need to calculate an ROI that includes expenditures to increase the outcome certainty of the operation.17
National boundaries play a role in the degree of certainty of return that investors perceive for alternative investments. As long as the investors are conducting business entirely within one country, the alternative investment projects fall within similar political and economic environments. Furthermore, the experience of having already operated within that country, as well as operating abroad in general, increases the probability that the company will make accurate assessments of consumer, competitor, and governmental actions.18 This is consistent with our earlier description of how firms generally go first to those foreign environments that they perceive to be more similar to the home country. It also helps to explain the fact that reinvestments or expanded investments within a country where the company has extensive operations often are evaluated very differently than proposed moves into a country. (The reinvestment decision will be discussed later in the chapter.)
Multidomestic versus Global Strategies
The comparison of rates of return among countries as a means of making geographic capital budgeting decisions is most appropriate when operations in one country have little effect elsewhere. In such a situation, a company may effectively allocate resources among countries from the highest to lowest expected ROI, accounting of course for risk and uncertainty. But as we will show later in this chapter, it is not easy to separate the operating results in one country from those in other countries.
If a firm faces the same competitors in different markets, it may be appropriate to take a low ROI or even a negative one in some markets in order to counteract what would otherwise be a competitor's advantage. Although this strategy may overcrowd the market and lower profits for all firms in some markets, it nevertheless prevents any one company from making a high profit that it can use for advantages elsewhere in the world. For example, Caterpillar established a joint venture with Mitsubishi in Japan, the home market of Komatsu, Caterpillar's major global competitor. This move lowered Komat-su's profits within the Japanese market, which had been accounting for 80 percent of its worldwide cash flow.19
Competitive Risk
We have explained that one of the reasons for using nonequity arrangements is to spread business to many markets rapidly when a firm perceives that its innovative advantage may be short-lived. Even when the firm assesses that it has a substantial competitive lead time, this may vary in different markets. One of the strategies to take advantage of temporary monopoly advantages is known as the imitation lag, which holds that a company should move first to those countries most likely to develop local production themselves and later to other countries.20 Local technology and high international freight costs generally result in a more rapid move to local production. If technology is available, local producers may start manufacturing well before foreign companies are willing to sell the technology. If freight costs are high for exports to the country, a local producer may, despite inefficiencies, be able to gain an advantage in cost over imported goods.
Firms also may develop strategies to find countries where there is least likely to be significant competition. When Japanese automobile producers first began selling in the European market, they shied away from countries with established national producers, such as France and the former West Germany. Instead, they targeted smaller countries, such as Denmark and Portugal, where they were able to gain significant market shares before the producers in larger European countries were able to react to them. L. M. Ericsson, the Swedish telephone-equipment producer, has developed technology aimed at the needs of small countries, partially because this fits its home market and partially because its competitors have concentrated their efforts more on the larger markets.21 Ericsson has taken this strategy a step further by putting most of its developing country investments in those nations that lack colonial ties to Europe because its major competitors have longstanding distributional advantages and the support of the home government where there were colonial relationships.
Monetary Risk
If the firm's expansion is via direct investment, access to and the exchange rate on the invested capital and its earnings are key considerations. The concept of liquidity preference is a common theory to help explain capital budgeting decisions in general and can be applied to the international expansion decision.
Investors usually want some of their holdings to be in highly liquid assets, on which they are willing to take a lower return. Part of the liquidity need is for near-term payments, such as dividends; part is for unexpected contingencies, such as to purchase stockpile materials if a strike threatens supply; and part is so that funds may be shifted to even more profitable opportunities, such as purchasing materials at a discount during a temporary price depression.
There are some differences in liquidity by country of investment. One is the local availability of buyers for equity that one owns so that the funds may be used for other types of expansion endeavors. The ability to find buyers varies substantially among countries, depending largely on the existence of a local capital market.
Assuming that a foreign investor does find a local purchaser, chances are the intent is to use the funds in another country. If the funds are not convertible, then the foreign investor will be forced to spend them in the host country. Of more pressing concern for most investors is the ability to convert earnings from operations abroad, since earnings generally are used not only for expansion but also for dividend payment to stockholders in the home country. The ability to convert varies substantially among countries, and so does the cost of convertibility. It is not surprising that most investors are willing to accept a lower projected ROI for projects in countries with strong currencies than they are in countries with weak currencies.22
Political Risk
One of the major concerns of international firms is that the political climate wjn change in such a way that their operating position deteriorates. Political
that may affect company operations adversely are governmental takeovers of property, either with or without compensation; through operational restrictions that impede the ability of the firm to take actions it would otherwise have taken; and damage to property or personnel. These types of risks were illustrated in the opening case of this chapter. Ford's operation in Hungary was taken over by the government; the one in Mexico was given very different operating requirements; and the one in France was bombed.
The following discussion centers on only one type of political risk—the governmental takeover of foreign facilities—because the methods to evaluate this type of risk are not fundamentally different from those used to make other political-risk predictions. Three approaches to predict political risk will be discussed here: the analysis of past patterns, the use of expert opinion, and the building of models based on instability measurements.
Analysis ot Past Patterns Firms cannot help but be influenced by what has been happening within a country. There are many dangers in predicting political risk on the basis of past patterns, though. Political situations in specific countries may change rapidly for the better or worse as far as foreign investors are concerned. However, the historical evolution is indicative of the broad climate for operations. Studies that have examined large numbers of government takeovers in the post-World War II period give some clues about what to expect.23
Almost all of the takeovers were in LDCs, with Latin American countries accounting for about half. In terms of percentage of investments affected, however, Africa and the Middle East were riskier, whereas Asia was the low-
est risk area by all measurements. Even these regional categories obscure country-by-country differences. Approximately fifty countries had no takeovers, and three alone (Argentina, Chile, and Peru) accounted for about one third of the takeovers.
Governmental takeovers, except in a few countries, have been highly selective and have usually involved land, natural resources, financial institutions, and utilities.24 Since the early 1970s, however, manufacturing investments have been the most vulnerable. The selectivity is illustrated by the experience of investors in Peru: Cerro's mining interests and ITT's telephone company were nationalized; however, Cerro's manufacturing companies and ITT's hotel were not. Even among manufacturing industries, there are differences. Those most likely to be nationalized are the ones that may have a substantial and visible widespread effect on a given country because of their size, monopoly position, necessity for national defense, or because other industries depend on them.
Both among and within industries there are variances in local need for foreign resources. Companies that hold assets badly needed in a given country and for which that country has little alternative source are much less vulnerable to political actions. This emphasizes the need for internal assessment in order to design types and places for foreign operations that minimize the risk of governmental control. Thus far, firms with a high technological input that produce a large amount of component parts outside the countries where investments are made have been less prone to takeovers.25
The takeover of assets does not necessarily mean a full loss to investors. In fact, most takeovers have been preceded by a formal declaration of intent by the government with a subsequent legal process to determine compensation to the foreign investor. In addition to the book value of assets, some other factors must be considered when determining the adequacy of compensation. First, the compensation may earn a different return when invested elsewhere. Second, other agreements (such as purchase and management contracts) may create additional benefits for the former investor. For example, the Saudi Arabian purchase price to the four U.S. oil partners in Aramco was only part of the total package. The oil companies have continued to receive other financial benefits from Aramco operations through contracts for petroleum, management services, and exploration. Although investors receive compensation in more than 90 percent of takeovers, it is difficult to determine how adequate the compensation is.
Opinion Analysis A second approach for political risk analysis is to analyze the opinions of knowledgeable people about the situation in a country.26 In this approach one attempts to ascertain the evolving opinions of people who may influence future political events affecting business. The first step involves reading statements made by political leaders both in and out of office to determine their philosophies on business in general, foreign input to business, the means of effecting economic changes, and their feelings toward given
foreign countries. Although published statements are readily available, the} may appear too late for a firm to have time to react.
Management should analyze the context of statements to determine whether they express true intentions or were made merely to appease particular interest groups or social strata. It is not uncommon, for example, for political leaders to make emotional appeals to the poor based on allegations that foreign business is draining wealth from the country while, at the same time, these leaders quietly negotiate entry and give incentives to new foreign firms. Examination of investment plans offers further insights to the political climate.
Visits to the country in order to "listen" are very important for firms in determining opinions and attitudes. Embassy officials and other foreign and local businesspeople are useful for obtaining opinions as to the probability and direction of change. Journalists, academicians, middle-level local governmental authorities, and labor leaders usually reveal their own attitudes, which often reflect changing political conditions that may affect the business sector.
A more systematic method of relying on opinions is to use a panel of analysts with experience in a country and have them rate categories of political conditions over different time frames. For example, they might rate a country in terms of the fractionalization of political parties that could lead to disruptive changes in government at the present time as well as for future periods, such as one, five, and ten years. A firm may commission this rating individually, or it may rely on commercially available risk-assessment services.27
Instability Assessment A third method being used to predict political risk is to build models based on instability measurements. The greater the political instability, the greater the possibility of change in the political climate. Although political instability has been found to be one of the major concerns of businesspeople, it is difficult to reach a consensus as to what constitutes dangerous instability or how such instability can be predicted. The lack of consensus is illustrated by the diverse reaction of companies to the same political situations. For example, in the late 1980s Peru had an inflation rate of over 4000 percent, guerrilla warfare, political assassinations, and a fall in industrial output; yet many foreign firms perceived the time to be opportune to invest in Peru.28 Then there are other uncertainties, such as the time lag necessary between a political event and an investor's ability to react. Furthermore, similar symptoms of social unrest may result in different political consequences in different countries. For instance, an antiregime demonstration occurring in Iran may have different political consequences on investors than one in Mexico.29 Political parties may change rapidly at times with little effect on business; on the other hand, sweeping changes for business may occur without a change in government. Nevertheless, there are services that measure and weight different types of political stability, differentiating, for example, among institutionally prescribed elections, the fall of a cabinet, the outlawing of significant groups, the execution of a significant political figure, the assassination of a chief of state, a coup d'etat accompanied by a mild amount of violence, and a civil war.30 Rather than political stability itself, the direction of change in government seems to be very important; takeovers have occurred most frequently within three years after a leftist government took office.31
One theory, which has been used in predictive models, is that frustration—the difference between the level of aspirations and the level of welfare and expectations—develops and that foreign investment is a scapegoat when a country's frustration level is high.32 Since frustration, aspiration, welfare, and expectations cannot be measured directly, it is necessary to use substitutes for these. For example, a growth in urbanization, literacy, radios per capita, and labor unionization are all measurable indicators of growth in aspirations; such variables as infant survival rate, caloric consumption, hospital beds per capita, piped water supply per capita, and per capita income are measurable indicators of welfare. Variables such as the change in per capita income and in gross investment rates are indicators of expectations. This approach to predicting actions toward foreign investors has considerable possibilities, since it predicts future trends rather than looking to the past and is predicated on a lead time that might be sufficient for management to adjust operations in order to minimize losses.
Comments
Post a Comment