MSC Strategy Presentation
Chapter 6: Assessing Countries’
Attractiveness
1
4
3
5
1
2
COUNTRY OPPORTUNITIES
COUNTRY RISK ANALYSIS
COMPETITIVE ANALYSIS
ENTRY MODE
DEVELOPMENT PATHS
ORGANIZATION:CONTROL
6
Analysis
(Assessing
Country
Attractiveness)
Implementation
External
Internal
Foreign Market Entry Decision-Making
‹#›
What Makes a Country Attractive for Foreign Firms?
Country
Industry
Size and Growth
Risks
Incentives
Resources
Market
Competition
- Economic
Factors
- Demographic
Factors
- Public Policy
Factors
- Sociological
Factors
- Is the country a critical source of:
Skilled personnel?
Raw materials?
Labor?
Technological
innovation?
Learning?
- Quality of
infrastructure and
support services - Location
-Taxes - Subsidies
- Regulations
- Government contracts
Ease of doing
business
-Political
-Economical
-Competitive
-Operational
Nature of the
demand in
this country?
Life cycle
Segmentation
-Quality of demand
Intensity of rivalry
-Entry barriers
- Bargaining power
of suppliers and
customers
‹#›
Size and Growth: Broad Assessment 1
GDP per capita 2010(US$)
Sales of
smartphones
per 100 people
Data from World Bank (2009) and BMI Indicators (2016).
‹#›
Developing World Segmentation
Substantial low-end commodity market
Rising middle class - but still relatively small
Tiny, highly wealthy segment
Lower End
Middle Class
Higher Low End
Top End
Generic Segmentation
HIGH END:
Differentiated
Products
Functionality
and Performance
Less Price
Sensitive
LOW END:
Undifferentiated Products
Mass Production and Distribution
Price Sensitive
Top End
Lower High End
Lower End
Higher Low End
Industrialized Countries Segmentation
Higher Low End
Top End
Lower Top End
Higher End
Lower High End
Lower End
Diverse segmentation
Middle class markets dominate
Advantages
Higher Margin
Higher Switching
costs
Disadvantages
Lower Volume
Advantages
High Volume
Cost-based
advantages
Disadvantages
Lower Margin
Price rivalry
Size and Quality of Markets
‹#›
Middle Class Effect in Brazil
Source: : Data from World Bank Development Indicators, BMI Research 2016, Cunha et a 2013
Growth
2000-2010
‹#›
Poulation Growth GDP growth Middle class household (number) Middle Class Income Pssenger cars units PC Motorbike Units Mobile phones Digital Cameras Flat TV Panel TV 1.6E-2 3.7600000000000001E-2 0.05 0.05 6.4000000000000001E-2 0.11 0.15 0.15 0.2 0.69
Infrastructures
World Economic Forum (2015–2016)
‹#›
Fiscal incentives include:
reduced tax rate
tax holiday for a certain period
accelerated depreciation
However, empirical evidence often suggests that:
fiscal incentives do not effectively counterbalance unattractive investment climate conditions such as poor infrastructure, macroeconomic instability, and weak governance and markets.
FISCAL INCENTIVES
‹#›
| Cultural distance | Administrative distance | Geographical distance | Economic distance | |
| Between two countries (Bilateral) | Different languages Different ethnicities Different religions Lack of trust Different values, norms | Lack of colonial ties Lack of shared regional trading bloc Lack of common currency | Physical distance Lack of land border Time zone difference Climatic differences Disease environment difference | Rich/ poor differences Differences in resources: Natural Financial Human Infrastructure Information Knowledge |
| Between a country and the rest of the world (Multilateral) | Insularity Traditionalism | Non-market or closed economy Protectionism Lack of membership in international organizations Weak institutions Corruption | Landlocked geography Lack of internal navigability Territorial size Weak transportation or communication links | Economic size Per capita income |
The CAGE Distance Model
‹#›
1) Investing across Sectors
Allowing foreign ownership in the primary, manufacturing, and service sectors
2) Starting a Foreign Business
- Equal treatment of foreign and domestic investors - Simple and transparent establishment process
3) Accessing Industrial Land
- Clear laws that provide fair and equal treatment for foreign and domestic companies
- Accessible land information
- Efficient land acquisition procedures
Joint Research from the World Bank and the International Finance Corporation found that four policy factors strongly influence investors:
4) Arbitrating Commercial Disputes
- Strong arbitration laws in line with arbitration practice
- Autonomy to tailor arbitration proceedings
- Supportive local courts
- Adherence to international conventions
EASE OF DOING BUSINESS - 1
‹#›
Ease of Doing Business - 2
Selected Rankings
(Higher score = less easy to do business)
Source: Data from World Bank, http://www.doingbusiness.org/EconomyRankings/
‹#›
2
Is the Business Profitable?
Porter’s Five Forces
New
entrants
Substitutes
Suppliers
Buyers
Barriers to entry
Legal: licenses
Partnering
Distribution
Complexity of competitive context
Intensity of
rivalry and
competition
The ‘sixth force’: Government
Source: Based on ideas of Michael E. Porter
Imitative behavior: when a business is perceived as lucrative many competitors jump on it, leading to:
Overcapacity
Undifferentiated competitive approaches
Price-based competition
Protected local firms
Intricate networks
Too few suppliers often act as monopolies
Protected suppliers give
them high bargaining power
Protectionism
Import substitution
Strong regulation
Price conscious
Competitive Context
‹#›
In-class Group Exercise: Industry Environment
Do existing firms’ potential profitability increase or decrease when:
New entrants can have easy access to distribution channels
There are only a few suppliers (e.g., Qualcomm as a supplier of chips to many smartphones)
Buyers can switch to another product/service without incurring high switching costs
There are substitute products/services that are cheap and of high quality
1-13
13
POLITICAL RISKS
ECONOMIC
RISKS
COMPETITIVE
COUNTRY
RISK
RISKS
OPERATIONAL RISKS
SHAREHOLDERS' EXPOSURE
Asset destruction (e.g., war, riots)
Asset exploitation (e.g., expropriation)
Asset inflexibility (e.g., transfer, freeze)
EMPLOYEES’ EXPOSURE
Kidnapping
Gangsterism
Harassment
OPERATIONAL EXPOSURE
Market disruption
Labor unrest
Supplies shortage
BUSINESS LOGICS:
Corruption
Cartels
Networks
INFRASTRUCTURE
Power, telecoms, transport
Suppliers
REGULATIONS
Nationalistic preferences
Constraints on local capital, local content, local employment taxes
Economic growth
Variability
Inflation
Costs of inputs
Exchange rates
Is the Business Risky?
Risks
‹#›
RELATIONSHIP between COUNTRY RISKS
and FOREIGN DIRECT INVESTMENT
FDI per Capita
$US average
yearly inflow
2000-2014
(Log Scale)
Country Risk BMI Index (90= Low Risks, 0= High Risks)
Source: Author’s own figure, based on data from UNCTAD (2016) and BMI (2016).
R= -0.44
‹#›
Quality of roads
(5
best
)
Quality of railroad
infrastructure
(5
best)
Quality of port
infrastructure
(5
best)
Quality
of air
transport
infrastructure
(5
best
)
Quality of
electricity supply
(5
best
)
Quality of l
ocal
supplier
s
(5
best)
United Arab
Emirates
Portugal
Austria
France
Netherland
Japan
Switzerland
Hong Kong
Spain
Finland
Netherlands
Singapore
United Arab
Emirates
Hong Kong
Finland
Singapore
United Arab
Emirates
Hong Kong
Netherlands
Finland
Switzerland
Hong Kong
Finland
Norway
Denmark
Japan
Switzerland
Austria
Germany
Belgium
5
Lowest
5
Lowest
5
Lowest
5
Lowest
5
Lowest
5
Lowest
Bolivia
Honduras
Lesotho
Montenegro
Malawi
Brazil
Argentina
Ethiopia
Cambodia
Venezuela
Cameroon
Zimbabwe
Cambodia
Rwanda
Guyana
Cape Verde
Mali
Guyana
Estonia
Ukraine
Kenya
Côte d'Ivoire
Lesotho
Honduras
South Africa
Venezuela
Burundi
Algeria
Timor
-
Lete
Myanmar