Academic journal article Journal of Business Strategies

The PCI-A Global Risk Index for the Simultaneous Assessment of Macro and Company Individual Investment Risks

Academic journal article Journal of Business Strategies

The PCI-A Global Risk Index for the Simultaneous Assessment of Macro and Company Individual Investment Risks

Article excerpt

INTRODUCTION

Companies often have difficulty determining which criteria to choose for their investment decisions in different countries and specific locations. Due to the fact that location decisions cannot be easily revised (Cheng and Kwan 2000; Morschett, Schramm-Klein and Swoboda 2010), it is expected that companies use in a wide range of criteria for their considerations and review of possible sites (Moran 2001; Berlemann and Tilgner 2006).

Foreign direct investment (FDI) is the financial participation by an investor in a company located in another country that aims to have a lasting impact on the management of that company. According to international standards a lasting influence is to be expected, if the investment represents at least 10% of the company's capital stock in the target country (UNCTAD 2006: 294; IMF (Ed.) 1993: 86).

To consider a FDI decision several risk indices are available. The PCI (Peren-Clement-Index) was published in its original form in 1998 (Peren/Clement 1998). The index is firmly established in the literature as an instructional tool (Wankel 2009: 137; Roebuck 2011: 472; Hiram 2012). The PCI has been further revised into version 2.0 with the following three objectives:

1. Creating a process for dynamic adjustment of criteria and consideration of recent changes in the international environment. These include:

* Intensification of globalized economic relations, which have led to technology and knowledge transfers in emerging and developing countries.

* The emergence of outsourcing and offshoring in many industrial sectors.

* Increasing openness and transparency of corporate decisions due to globally available information and communications technologies.

* Progress in reduction of tariff and other trade barriers

2. Critics claim that risk indices do not consider the specificities of a company or its industrial sector (Daum, Greife and Przywara 2009: 186). This problem has now been addressed by a two-dimensional presentation, which ensures a customized assessment.

3. Unlike other indices, the PCI uses a theoretical basis to consolidate investment decisions. Fundamentally, it combines two main streams of thought within the strategic planning: combining a resource- and a market-oriented view (Barney, Wright and Ketchen 2001; Newbert 2007).

* The resource based view looks at the uniqueness of the resources of a site as the basis for competitive advantage. These resources have limited mobility and tradability. They interact with the internal resources of an enterprise (inside-out perspective).

* The market-based view takes an outside-in perspective. Thus the industry structure (production and sales) affects how a company can be positioned in a market.

These two perspectives are not mutually exclusive, but complement each other. Ultimately companies must address both perspectives in the context of an international investment decision and consider them as complementary elements in their strategic planning.

The quality of location of a region can neither be observed nor easily measured. Attempting to measure quality with an empirical study requires that appropriate indicators (variables) need to be identified. As part of an econometric analysis, the market entry motive and the identification of the local production conditions can be identified as significant motives for FDI. Additionally, the political and legal frameworks of a site are important (Tallmann 1988; Chung and Alcacer 2002; Yeaple 2003; Berlemann and Gothel 2008).

FRAMEWORK FOR DECISION MAKING

Investment decisions of companies should correspond to a systematic and structured order. A differentiation must be drawn between the macro-environment and company-individual micro-environment. On the site-specific micro-level, core competencies can be identified that have a positive impact on the individual competitiveness of a company. …

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