Course number: 22D1BUS50316202

Course name: Quản trị kinh doanh quốc tế - EN

Full name: Tran Ngoc Thien Kim
Student number: 31201020435

Five Criteria for IMS decisions

1) Country risk:
Why should we consider country risk?
Country risk analysis describes in general the international business risks, reflecting the
overall situation and the cumulative effects of these risks on the profitability of
investments and returns in the country. Hence it diagnoses the socio-economic potential
of the country receiving international economic flows which makes the analysis crucial to
investors enabling the economic agents to make rational decisions, minimizing the risks
and increasing the profitability of overseas investment. Country risk analysis is the
primary step in the process of building an international portfolio. Investors are expected
to foresee how macro conditions would change as rating agencies are slow in
downgrading country credit ratings when a crisis spreads. When investors evaluate a
country risk, they base their assessment on the political, economic and socio-cultural
factors, those factors can help businesses with foreign direct investment operations avoid
lots of undesirable financial outcome.
Example of country risk:
The 1997 Asian Financial Crisis - which began with the Thai baht devaluation which led
to severe balance of payments problems in Asia, Russia, and Latin America - underlined
the broad definition of international risk. In the wake of the Asian crisis, international
lenders began to perceive country risk as any event that caused a borrower default, due to
out-of-control macroeconomic developments. Investors need to be more discerning and
study the environment of a country more carefully to consider investing in as much risk
as possible.
2) Network relationships
Why should we consider network relationships?
There are lots of impacts of the network relationships on the international market. First,
when faced with some difficulties in penetrating an established and competitive target
market, particularly in highly developed countries, such as the United States, a company
from a developing country could still penetrate the market indirectly by first choosing
another similar but smaller foreign market where it would be easier for the firm to
overcome or mitigate the initial negative country-of-origin perception, as well as the lack
of credibility problem. Once it has successfully penetrated this alternative market, it
would then be easier for the firm to expand its business to its eventual target market.
Second, network relationships helped the company in securing initial business, thus
encouraging them to engage in higher commitment entry modes (i.e., establishment of a
sales subsidiary). Third, in certain countries with a greater incidence of red tape or the
presence of somewhat different business norms or practices, network relationships were
used by firms to smoothen their dealing with government officials. Finally, comanies
with broader networking relationships around the world were able to internationalize
faster (into more countries in a shorter time), compared to those with limited networking
relationships.
Examples:
Before beginning the China-initiative, ELFI had two connections to the Chinese market.
The previously mentioned customer of ELFI, Blue Air, played a role in ELFI’s decision
to enter the Chinese market. Blue Air had earlier entered the Chinese market and was
selling the “Swedish quality” products of ELFI there since 2003. The relationship
between ELFI and Blue Air was close and had been of great importance. However, the
relationship had somewhat changed since ELFI recognized that Blue Air was making up
a too large part of their revenue. Today Blue Air is less significant as a customer but still
the collaboration is important.
Since 2003 the company was importing parts to the production of their existing products
from a Chinese supplier. The relationship could be characterized as stable and with
frequent contact between the two. Wallin emphasized the importance of stable long-term
relationships with suppliers; “One does not switch for as little as a 5-10% lower prices, it
takes more.” The Chinese suplier had, according to Wallin, also in general influenced
decisions within their organization.
These two relationships made ELFI aware of the dual potential of the Chinese market;
cheap production due to the possibility of mass production, and great consumer interest
combined with strong purchasing power of consumers favoring sales of “Swedish quality
technology”.
3) Education level:
Why should we consider education level?
Education directly affects economic growth insofar as it is essential to improve human
capital. To be more specific, an economy’s production capacity depends on different
factors. These include physical capital, technology and the number of workers, as well as
their quality. This quality is largely determined by what is called human capital (the stock
of knowledge, skills and habits). An increase in workers’ educational level improves their
human capital, increasing the productivity of these workers and the economy’s output.
Numerous studies in the field of labour economics have attempted to measure this
relationship between a worker’s education and its productivity, called the private return
to education and the findings have been incredibly positive. Another vital effect, more
substantial and therefore more difficult to resolve, is whether such studies actually
measure the effect of education on productivity or rather the result of talent and those
studies have found that one additional year of schooling results in an increase in earnings,
and therefore productivity. In addition to education’s direct effect on a worker’s
productivity, numerous economists also point to important education externalities for
growth, larger than private returns.
Examples:
The equation developed by Jacob Mincer in 1974, known as the Mincer Equation. This
relates workers’ earnings (seen as a way of measuring their productivity) with their years
of schooling and work experience. It goes without saying that equating a worker’s
education with their years of schooling is highly flawed since it assumes that one
additional year of primary education has the same effect on a worker’s productivity as an
additional year of university education.
Paul Romer, suggests that societies with a large number of highly skilled workers
generate more ideas and consequently grow more. In a recent work, Aghion et al present
a theoretical model and some empirical evidence that shows more advanced economies
benefit from workers with a university education since this promotes technological
innovation, augmenting the productivity of both physical capital and the workforce as a
whole. On the other hand, developing economies benefit from workers with a primary
and secondary education as this helps them imitate the technologies developed in richer
countries, thereby also increasing the productivity of their physical capital and workforce.
4) Competitive landscape:
Why should we consider competitive landscape?
You always need to know your competitive landscape well to understand your
competitors’ strengths and weaknesses in comparison to your own and to find a gap in
the market.
All of the information that you gather from a competitive landscape analysis will work
towards:
- Recognising how you can enhance your own business strategy.
 - Telling you how you can out-do your competitors in these areas to keep your
customer attention.
- Resulting in a competitive edge over others in your sector.
Examples:
Samsung is a company founded in South Korea that specializes in electronic and smart
appliance technology. Their competitors include Apple, Sony, Huawei, Intel, and many
more, which is why Samsung's team tries to create a product that is better than
competitors' alternatives using innovations that can attract prospects.
Changes in technology or the way customers buy products can influence the types of
competitive environments. For example, Amazon changed products' distribution and
customer expectations. Introduced innovations influenced the number of consumer goods
companies and opened markets for small firms that previously had no opportunity to
compete with more prominent companies.
5) Market consumption, middle class
Why should we consider middle class consumption?
We should understand the importance of the middle class in creating sufficient demand to
stimulate growth.The wealthy in unequal societies simply do not consume enough to
drive a modern economy. The wealthy save more than the middle class and they consume
less. This means that when incomes are stagnant or declining for most people, there isn’t
enough demand in the economy to encourage productive investment—unless this demand
is debt-fueled.
A strong middle class leads to higher levels of trust. When a society is largely middle
class, strangers are more willing to try to work with one another in business and in life,
and people are more likely to be optimistic and believe that they can control their
circumstances. In addition, people feel they share a similar fate and form stronger social
bonds. Trust reduces transaction costs because less time and resources are spent verifying
and policing. And trusting people see the world as full of opportunities. With higher
levels of trust, people are more likely to innovate, seek out trade and new technologies,
and generally take economically sound risks.
A strong middle class, as thinkers from Aristotle to James Madison to modern political
scientists have noted, fosters better governance by helping ensure government is well-
run, increasing citizen participation, minimizing factional fighting, and promoting
policies for the benefit of all of society rather than special interests. In contrast, economic
inequality and a weak middle class make the political system imbalanced and depress the
political participation of the non-wealthy, reducing voting, discussion, and interest in
public policy.
Examples:
As Tocqueville observed in the early 1800s, Americans, because they were largely
middle class and not aristocrats who could conscript others, needed to trust one another
enough to work together to achieve common goals.
In a 2007 article in The Review of Economics and Statistics, economists Alberto Chong
and Mark Gradstein developed a theoretical model explaining the relationship between
inequality and governance and then empirically tested it, finding that economic inequality
has a harmful effect on bureaucratic quality, government stability, and democratic
accountability. Moreover, actual corruption in government becomes much more common
without a strong middle class.