Chapter Eleven

1. Chapter Eleven Choosing Where to Operate

2. Chapter Objectives • To grasp how companies should and do decide where to allocate their resources and efforts internationally • To realize that any location decision involves risk-opportunity considerations • To recognize the major factors that influence location decisions for both market-seeking and resource-seeking international operations • To understand sources of information on different countries and the limits of the information from different sources • To appreciate the dynamics of international companies’ location of sales and production

3. Introduction • Managers must set geographic strategies so that their operating locations can shift as conditions change and as results deviate from expectations • Managers must not only decide where to operate, but also the order of entry among countries and how much of their operations to place within each

4. The Location Decision Process • To make optimum location decisions, managers normally take three steps: • Scan globally to choose a reasonable number of countries that seem to offer the best possibilities • Scanning: involves comparing countries on the basis of broad variables • Scanning is useful because managers might otherwise consider too few or too many alternatives • Examine the prioritized countries in much greater detail • Once managers determine the most promising countries, they need to compare the feasibility and desirability of each • Personal visits • Form entry plans

5. The Location Decision Process • Managers should decide where to allocate resources by estimating the combinations of opportunities and risks that exist in different countries

6. The Location Decision Process • Some types of information are more important to one company or for one product than another • Political risk: refers to political actions that may affect company operations adversely • Economic risk: refers to economic conditions that may adversely affect a company’s ability to operate profitably and use its funds to meet its strategies • Managers may rely on different indicators of opportunity and risk, depending on whether they are deciding where to sell or where to produce

7. The Location Decision Process • Many conditions affect both sales and production locations: • Higher personal income levels • Infrastructure • Workforce • In addition to risk and opportunity, managers usually put some weight on how easy it will be to operate in different countries

8. The Location Decision Process • The ease of operating is usually based on: • The degree of closeness of countries to companies’ home country • Physical proximity facilitates communication • The ability of companies to use their preferred operating methods • Managers need to ensure that country-specific conditions allow the company to use its competencies and preferred operating practices to achieve objectives • The ability of companies to get local resources to complement their own • Managers should consider the local availability of resources in relation to the company’s needs because companies must often combine local inputs with resources they bring • The number of government hurdles to cross in order to operate • These hurdles can increase operating costs

9. The Location Decision Process • Managers may move their companies along different paths to reach a point where they have a sizable presence and commitment in other countries: • Diffusion path: move the company rapidly into most foreign markets and gradually increase commitment within each of them • Concentration path: move the company to only one or a few foreign countries until they develop a strong commitment and competitive position there before moving to other countries

10. Specific Market-Seeking Considerations • Although managers consider some of the same conditions when deciding where to sell and where to produce, there are some specific considerations for sales locations: • Sales potential: • Probably the most important reason that managers choose one country over another when determining where to expand their company’s sales abroad • Experience in other countries • Sales of a product in one country may follow earlier patterns from other countries because of sequential conditions affecting demand • Competitive risk • A company’s innovative advantage may be short-lived • Responding to unsolicited requests for their products • In actuality, many market location decisions are made passively due to requests from other companies or individuals who have seen or heard of their products

11. Specific Production Location Considerations • Although managers consider many of the same conditions when deciding where to sell and where to produce, there are some specific considerations for production locations: • Cost and availability of resources • As trade restrictions have diminished, companies have more alternatives for locating their production because they can more easily export into markets

12. Specific Production Location Considerations • Location of competitors • Increasingly, suppliers and industrial customers need to locate near each other and in an area in which the infrastructure will allow them to move their supplies and finished products efficiently • Existence of governmental incentives • Corporate income tax rates affect location decisions, especially when they differ among countries in the same trading group

13. Data Collection and Analysis • Before committing resources to a foreign location, managers will probably collect information from external sources and from studies they themselves make abroad • Major types of external information sources include: • Individualized reports • Specialized studies • Service companies • Governmental agencies • International organizations and agencies • Trade associations • Information service companies • The internal generation of data may be accomplished by managers conducting studies abroad themselves • Although managers may examine thousands of information sources, the information they get from these sources may be inaccurate or not comparable with what they collect from other countries

14. Noncomparative Strategies • Although managers compare locations before expanding abroad, they also decide to expand abroad on a noncomparative basis • Noncomparative location decisions occur primarily in two types of situations: • Go-no-go decisions • Managers often must make a commitment or not on stand-alone proposals • Reinvestment decisions • A company may need to expand there or risk losing market share and incurring higher unit costs than its competitors

15. Dynamics of Locational Emphasis • Managers need to reassess their companies’ locations continuously • Companies commonly divest some products or country operations because their managers see better performance prospects elsewhere • Reasons for divestment include: • Divestment shifts companies’ emphasis among countries • Better performance opportunities in other countries • Political pressure • In an international divestment, managers reduce a company’s presence in a foreign country • Cost is usually the driving force