STEP B: PERFORM A COMPARATIVE ANALYSIS

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Conducting what is conventionally known as a feasibility analysis is step B. This analysis has three interrelated elements: a profit contribution analysis, a risk analysis, and a nonprofit objectives analysis. A two-tiered approach is followed. First, profit, risk, and nonprofit objectives are analyzed for each entry mode (vertical analysis). Then a comparative analysis is performed for all feasible modes (horizontal analysis).
Profit contribution is simply an expression of the difference between expected revenues and expected costs for an entry mode, adjusted to take into account the time value of money. All entry modes will bring two types of revenues: direct (primary) and indirect (secondary). All entry modes will subject the firm to two types of costs: direct (sunk) costs and operating costs. To estimate the net profit contribution, managers must identify and estimate all revenues and costs that are likely to arise from the use of the entry mode.

Risk refers to the likelihood of unanticipated changes that will have a negative impact on the firm's cash flow, value, or profitability. There are three types of macroeconomic risks. Financial risk refers to the likelihood of changes in interest rates and in the costs of different sources of capital in a particular currency. Currency risk refers to the likelihood of unanticipated changes in exchange rates and inflation rates ( that is, in the value of foreign and domestic money). Country risk (which includes political risk) refers to the likelihood of unanticipated changes in a country's productive development or in the "rules of the game," including laws, regulations, and monetary and fiscal policies. In addition to these macroeconomic risks, one must consider a firm's commercial risk, which refers to the likelihood of unanticipated changes in firm-specific and industry-specific prices and demand conditions.

Nonprofit objectives include goals related to market share, sales volume targets, concentration ratio, reversibility (ease of disinvestment), corporate image, and so on.

Table 10.3 Checklist for Evaluating the Investment Climate of a Foreign Country
General political stability Past political behavior Form of government Strength/ideology of government Strengths/ideologies of rival political groups Political, social, ethnic, and other conflicts Government policies toward foreign investment Past experience of foreign investors Attitude toward foreign investment Foreign investment treaties and agreements Restrictions on foreign ownership Local content requirements Restrictions on foreign staff Incentives for and restrictions on foreign investment Investment entry regulations Other government policies and legal factors Enforceability of contracts Fairness of courts Corporate business law Labor laws Taxation Import duties and restrictions Patent/trademark protection Antitrust/restrictive practices laws Attitudes of public officials Macroeconomic environment Role of government in the economy Government development plans/programs Size/growth rate of gross national product, population, per capita income Distribution of personal income Distribution of industry, agriculture, and services Transportation / communications system Rate of inflation Government fiscal/monetary policies Price cOl1trols Availability/cost of local capital Management-labor relations Membership in customs unions or free trade areas International payments Balance of payments Foreign exchange position/external indebtedness Repatriation restrictions Exchange rate behavior
SOURCE : Adapted from Root, Foreign Market Entry Strategies, pp. 1 44-45.

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