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Chapter 11

GMS 724 Chapter Notes - Chapter 11: Exchange Rate, Oligopoly

Global Management Studies
Course Code
GMS 724
Lori Anne Heckbert

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The world oers dierent locales, opportunities, and risks as
companies try to create value from increasing sales or acquiring
competitively useful assets
Because all companies have limited resources, they must be careful in
making the following decisions:
oWhere to locate sales, production, and administrative/auxiliary
oThe sequence for entering dierent countries
oThe portion of resources/eorts to allocate to each country
where they operate
Committing human, technical, and #nancial resources to one locale
may mean forgoing or delaying projects elsewhere
Flexibility in locations is important because country and competitive
conditions change
oA company needs to respond to new opportunities and withdraw
from less pro#table ones
How Does Scanning Work?
Managers use scanning techniques to examine and compare countries
on broad indicators of opportunities and risks
Without scanning, a company may overlook opportunities and risks, or
examine too many or too few possibilities
Scanning: examining a variety of variables for dierent countries that
may aect foreign investment alternatives
oCompare country information that is readily available,
inexpensive, and fairly compatible (online, communicate with
educated people)
Detailed Analysis
oOnce managers narrow their consideration to the most
promising countries, they need to compare the feasibility and
desirability of each, and almost always need to go on location to
analyze and collect more speci#c information
oEscalation of Commitment: the more time and money
companies invest in examining an alternative, the more likely
they are to accept it regardless of its merits
What Information Is Important in Scanning?
oSales expansion is probably the most important factor
motivating companies to engage in international business
because of the assumption that more sales will lead to more
oExamining economic and demographic variables:
Obsolescence and leapfrogging of products
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Income elasticity
Income inequality
Cultural factors and taste
Existence of trading blocs
oCompanies undertake international business to secure resources
that are either too expensive or not su2ciently available in their
home countries
oA company’s total cost is made up of numerous sub-costs, many
of which are industry- or company-speci#c
Ease of transportation and communications
Governmental incentives and disincentives
A caveat
oFactors to consider in analyzing risk
Companies and their managers dier in their perceptions
of what is risky
One company’s risk may be another company’s
There are means by which companies may reduce their
risks other than avoiding locations
There are tradeos among risks
oPolitical Risk: may occur because of changes in political leaders’
opinions and policies, civil disorder, and animosity between the
host and #rm’s home country
Analyzing past patterns
Analyzing opinions
Examining social and economic conditions
oForeign Exchange Risk: changes in exchange rates or the ability
to move funds out of a country may also aect an MNE
Exchange rate changes
Mobility of funds
Liquidity Preference: investors are willing to take
less return in order to be able to shift the resources
to alternative uses
oCompetitive Risk: the comparison of likely success among
countries is largely contingent on competitor’s actions
Making operations compatible
Liability of Foreignness: foreign companies’ lower
survival rate in comparison to local companies for
many years after they begin operations
Spreading risk
Following competitors or customers
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