Exporting and Trading info

SUMMARY ■ Because companies do not have sufficient resources to exploit all opportuni- ties apparent to them, two of the major considerations facing firms are (1) which markets to serve and (2) where to locate the production to serve those markets. ■ The market- and production-location decisions are often highly interdependent because of requirements that markets be served from local production, because firms seek nearby outlets for excess capacity, and because firms may be unwilling to invest in those production locations necessary to serve a desired market. ■ Scanning techniques are useful to aid decision makers in considering alternatives that might otherwise have been overlooked. They also help limit the final detailed feasibility studies to a manageable and promising number. ■ The prioritizing of countries is useful for determining the order of entry into potential markets and in setting the allocation and rate of expansion among different markets. ■ Because each company has...

LOOKING TO THE FUTURE International geographic expansion is a two-tiered consideration: How much of a firm's sales and production should be outside its home country? Of that outside, how should sales and production be allocated among countries? As yet there is no comprehensive model to answer these questions, and perhaps differences among companies and dynamic environmental conditions make such a model impractical. Meanwhile, companies are simply apt to place more emphasis on certain areas of the world than on other areas as they see opportunities evolving. Typical of this was a prediction by Procter & Gamble's CEO in 1989 that more than half of P&G's sales would flow from outside the United States within the next few years, up from just 27 percent in 1985, while sales would grow more rapidly in the Far East than elsewhere.45 For large U.S. firms, an intriguing question is whether they are approaching an optimum ratio between domestic and foreign operations. Some ...

DIVESTMENT DECISIONS In much of the preceding discussions we showed that firms should consider decreasing their commitments to certain areas in order to free resources for a better fit with corporate objectives. It is now common to read that a firm is terminating its ownership in an investment in a foreign country, usually involving the sale of operations that have poor performance prospects compared to alternative opportunities. Studies of the divestment experience conclude that most firms might have fared better had they been more experienced and developed divestment specialists. There has been a tendency to wait too long by trying expensive means of improving performance. Local managers, who fear loss of their own positions if the MNE abandons an operation, propose additional capital expenditures. In fact, this question of who has something to gain or lose is a factor that sets apart decisions to invest from decisions to divest. Both types of decisions should be highly interrelat...

INVESTMENT PROPOSAL EVALUATION Thus far we have examined comparative opportunities on a very broad basis. At some point it is necessary for firms to do a much more detailed analysis of specific projects and proposals in order to make allocation decisions. Firms use a variety of financial criteria to evaluate foreign investments, internal rate of return and accounting rate of return being the measurements most frequently used.40 Measurement Problems The derivation of meaningful rate-of-return figures is no easy task when foreign operations are concerned. Profit figures from individual operations may obscure the real impact those operations have on overall company activities. For example, if a U.S. company were to establish an assembly operation in Australia, this assembly operation could either increase or decrease exports from the United States. Management would have to make assumptions about the changed profits in the United States and elsewhere as a result of the Australian proje...

SOME TOOLS FOR COMPARING COUNTRIES Environmental Scanning The preceding discussions dealt with indicators of opportunity and risk. But do firms generally seek out information? What information do they deem most important? Where do they get their information? Between the mid-1970s and the late 1980s, international companies became much more sophisticated in their environmental scanning, the systematic assessment of external conditions that might affect their operations. A majority of international firms now employ at least one executive continuously to conduct environmental scanning, and the most sophisticated of these tie the scanning to the planning process and integrate information on a worldwide basis. Companies are most likely to seek economic and competitive information in their scanning process, and they depend heavily on managers based abroad to supply them with information. Their primary concerns are with profit repatriation and devaluation.33  Grids  A grid may ...

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 proje...

INFLUENTIAL VARIABLES The following discussion highlights the factors mentioned most often as influencing where sales and production emphasis will be placed. Some of the variables are more important for the sales-allocation decision; others are more important for the production-location decision. Some, of course, affect both decisions, especially when foreign investment is necessary for serving a given foreign market. The ranking, or prioritizing, of countries is useful for aiding decision makers in (1) determining the order of entry into potential markets and (2) setting the allocation and rate of expansion among the different markets. The former determination assumes that a firm cannot or does not want to go everywhere at once; consequently, it chooses to allocate its resources first to those more desirable locations. The latter assumes that a firm already is selling or producing in many locales, perhaps even in all that are feasible, but wishes to decide how much of its effort sh...

SCANNING FOR ALTERNATIVES In the opening case, Ford used scanning techniques so that decision makers could perform a much more detailed analysis among a manageable number of geographic alternatives that looked most promising. This is a useful exercise because otherwise a company might consider too few or too many possibilities. Risk of Overlooking Opportunities As a company tries to optimize its sales or minimize its costs, it easily can overlook or disregard some promising options. Rather than being rejected, potential projects in many countries may not be carried out simply because managers never think of them. A U.S. manager pondering foreign operations may consider countries such as Canada, Japan, and Germany while overlooking some very small countries that actually may offer better opportunities. Even if they are considered, certain locales may be eliminated almost immediately before they are sufficiently examined for expansion possibilities. Whole groups of countries are som...

Choosing Geographic Sites in choosing geographic There are two interrelated questions concerning geographic areas of emphasises, a company must de- sis: (i) which markets should be served? (2) Where should production be Clde, located to serve these markets? Frequently the answer to these two questions • Where to sell • where to produce De the same, particularly if transportation costs or governmental regula- tions require local production for serving the chosen market. In other cases, however, the sales and production may be in different countries. For example, Ford serves the French market in vehicles produced primarily in its German production facilities. The market and production location decisions may be highly interdependent for other reasons as well. For example, a company may have excess production capacity already in place that will influence its relative capabilities of serving different country markets, or a firm may find a given market very attractive but forgo sales t...

Ford Fotor Company In 1974 the Northern Petrochemical Company (NPC), a subsidiary of Northern National Gas (now named Internorth), decided to get into polypropylene production. The decision was based on an analysis of NPC's production capabilities and on a forecast of future market demand. From a production standpoint, NPC was already making propylene, which is a precursor of and building block for polypropylene. The parent company could supply many of the raw materials for the new product. From a market standpoint, NPC estimated that, since the introduction of polypropylene in the early 1960s, the compound growth rate of sales had been somewhere between 15 and 20 percent. The firm also estimated that future growth would be even more rapid because of high benzene prices and possible shortages, which would depress sales of polystyrene. In many cases polypropylene could substitute for polystyrene. The polypropylene market could be divided into two segments depending on the propert...