Five steps are involved in estimating the probable rate of return on investment and thus determining which foreign market to enter: –
- Estimate of current Market Potential: – The first step is to estimate total industry sales in each market. This task calls for using published data and primary data collated through company surveys.
- Forecast of Future Market Potential and Risk: – Te firm also needs to forecast future industry sales. It requires Predicting economic and Political developments and their impact on industry sales.
- Forecast of Sales Potential: – Estimating the company’s sales requires forecasting its probable market share based on its competitive advantages.
- Forecast of cast of Costs and Profits: – Costs will depend n the company’s contemplated entry strategy. If it exports or licenses, its costs will be spelled out in the contracts. If it locates manufacturing facilities in the country, its cost estimation will require understanding local labor conditions, taxes trade practices and so on. The company subtracts estimated costs from estimated sales to derive company subtracts estimated cost from estimated sales to derive company profits each year of the planning horizon.
- Estimate of Rate of Return in Investment: – The forecast income stream should be related to the investment stream to derive the implied at the rate of return. This should be high enough to cover the company’s normal target return on its investment and risk of marketing in that country.