Chapter 15
Country Evaluation and Selection
Chapter 15
Country Evaluation and Selection
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
Country Evaluation and Selection
MINI CASE 1
Caterpillar Inc. 1
Caterpillar, with a history dating back to 1925, is the world's leading manufacturer of
construction and mining equipment, diesel and natural gas engines and industrial
gas turbines. The company also provides financial, remanufacturing and logistical
services. Its global revenues in 2008 stood at US$ 51.3 Billion.
Caterpillar's contributions to World War II were many. Caterpillar tractors worked in
battle zones repairing damaged roads, building new ones, and bulldozing tank traps.
In the postwar period, Caterpillar experienced enormous growth rather than
recession, because of the massive rebuilding campaigns which had begun both in
Europe and Japan, with the use of Marshall Plan and other funds. In the United
States itself, demand seemed limitless. Caterpillar could not get its products to its
customers fast enough. Consequently, it launched an expansion program in 1949
that was the first step toward becoming a truly international firm with a major impact
on the world earth moving equipment industry.
The recession of 1982 hit Caterpillar especially hard. The economic downturn
caused sales to drop to $6.5 billion that year. Caterpillar laid off employees. Trying to
cut overheads, Cat also proposed pay freezes and a cut in benefits, prompting a
seven-month UAW strike.
In 1983 it faced its first annual loss in earnings. Sales slumped to low of $5.4 billion.
Yet after the new contract was signed with the UAW, Caterpillar acquired a new
direction and strategy that made things look better.
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Chapter 15
Country Evaluation and Selection
Caterpillar bounced back from its problems by marketing a new automated lift truck,
which had the potential to secure part of a multibillion-dollar market for Caterpillar. In
1993 Caterpillar completed the factory modernization program and at the same time
began to benefit from its results, leading to a record sale of $11.62 billion in 1993. In
1994, Caterpillar recorded sales of $14.33 billion and profits of $955 million.
From the early 1990s Caterpillar looked to the east and south for its future growth.
The company strongly supported both the North American Free Trade Agreement
(NAFTA) and the General Agreement on Tariffs and Trade (GATT), concluding that
the elimination of trade barriers could add $350 million in Cat sales a year by 2000.
James W. Owens took over as CEO in 2003. Under his leadership, Caterpillar was
targeting emerging markets, particularly China, India, and Russia, for future growth.
More recently, the $787 billion economic stimulus plan that President Barack Obama
signed into law in February 2009 contained about $70 billion in infrastructure
spending that could be disbursed in 2009. On the other hand, the Chinese have
been more aggressive. Although their stimulus package is smaller, a much larger
chunk of it is going to public works building. As a result, Owens said sales of
hydraulic excavators in China rebounded to near-record levels in April 2009.
Reuters, Chicago, reports (in August 2009), Jim Owens as stating “he believes there
will be another round of U.S. stimulus spending on infrastructure because the first
was not big enough to offset the decline in private-sector building activity”.
Caterpillar manufactures more than 300 products in 23 countries and serves
customers in 200 countries worldwide. Our global presence extends to every
continent and includes over 480 facility locations — almost half of which are outside
the U.S.
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Chapter 15
Country Evaluation and Selection
MINI CASE 2
Mittal Steel2
Mittal Steel was formed consequent on the merger of LNM Holdings and ISPAT
International, in 2004.
In June 2006 it made history by creating the world's largest steel company. Mittal
Steel and Arcelor merged and the combined group, headquartered in Luxembourg,
2
was named Arcelor Mittal . It had a net income of UD$ 9.4 Billion for 2008.
The world’s eighth richest man, Lakshmi Niwas Mittal was born in Rajasthan, India in
1950. He began his career working in the family’s steel making business in India,
and over the years garnered immense experience working in steel and related
industries. Mittal founded the company Mittal Steel in 1976 and has been
responsible for the development of its businesses ever since. It has operations in 14
countries.
Mittal pioneered the development of integrated mini-mills and the use of Direct
Reduced Iron or “DRI” as a scrap substitute for steel making and led the
consolidation process of the global steel industry. Mittal Steel is the largest steel
maker in the world.
He set out to establish its international division, beginning with the buying of a rundown plant in Indonesia in 1976 and managing it for the next 14 years.
Indonesia was chosen for its growth potential and the fact that there were fewer
governmental and economic restrictions compared to India. The plant was inefficient
and faced significant production issues, including reliable access to electricity. Mittal
managed to secure a reliable source of energy to operate the plant.
His Indonesian experience enabled him to identify the vulnerability of the industry as
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
its dependence on an uncertain supply and means to rectify this drawback. He also
realized that good-quality scrap, one of the raw material for making steel, could be
both difficult to source and costly. He supplemented his supplies with a financially
and technologically viable substitute, direct-reduced iron (DRI). His search for a
supplier of DRI led him to the Caribbean, and his first of many big breaks came in
1989 with the acquisition of the Iron & Steel Company of Trinidad and Tobago, and
renamed Caribbean Ispat.
The new management raised production, broadened the product mix and customer
base, improved processes and cuts costs. Caribbean Ispat made a profit in its first
year. Over the following 15 years, steel production, using the integrated mini-mill
process, trebles with steel shipments of 1.0 million tonnes in 2003.
Mexico had embarked on a privatization program for its steel industry in the early
1990s. Mittal’s track record in Indonesia and his pioneering use of DRI technology
cast a good impression on the Mexican authorities. A deal was thus struck and Mittal
acquired Sibalsa, renaming it Ispat Mexicana in 1992.
Built by the Mexican government at a cost of US$ 2.2 billion, the integrated mini-mill
complex while modern, was operating at only 25% of capacity at the time of
acquisition.
Operating
improvements
achieved
a
dramatic
turnaround.
A sevenfold increase compared with the year before the company's acquisition
The dramatic turnaround and generation of high-profit margins by Ispat Mexicana
funded a series of acquisitions thereafter in Kazakhstan, USA, France, Romania,
Algeria, Macedonia, Poland, Canada and investments in India and China.
In 2005, Mittal Steel made its first move into China, by becoming the first foreign
steel maker to have a production presence in China. It then buys 36.67% of Hunan
Valin Steel Tube & Wire for cost of US$ 338 million, one of China's top ten steel
makers with annual capacity of 8.5 million tons.
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
Mittal has clearly demonstrated that the strategy of operating globally, which means
having proximity to raw materials and growing markets, is highly lucrative.
How do companies such as Caterpillar and Mittal evaluate and select countries to
do business in? Do they leverage the opportunities provided by the environment or
countries such as the world wars, the postwar reconstruction, or the much required
roadways and infrastructure in a geographically spread out country with a dispersed
population such as the United States? Are the opportunities created by the from
bailout packages to cope with the downturn and recession necessitating heavy
spending on infrastructure? Or are they drawing on their own internal capabilities
and strengths to capitalize on opportunities that countries offer them?
Learning Objectives
We need to learn from their successes, the following:
1. How countries are analyzed in order to make an evaluation and selection
based on opportunities?
2. To analyze an organization’s competitive advantage and distinctive
competencies that would allow it to leverage these opportunities.
3. To shortlist, screen and prioritize countries in order to identify target markets.
4. To make an assessment of the market potential and demand for an
organization’s products and services in these target markets.
1. Country Analysis
In Chapter 2 we looked at how countries compete with each other to, amongst other
things, improve the standard of living and quality of life of their citizens, grow
economically, attract foreign investments and tourists, maintain political stability and
build their own brand image. We analyzed the ‘competitive advantage of nations’
using Porter’s ‘National Diamond’ and ‘The Twelve Pillars’ as developed at the
World Economic Forum in 2008. Reproduced below in Exhibit 15.1 is the overall
Global Competitiveness Index (GCI). 3
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Chapter 15
Country Evaluation and Selection
In the emerging economies, Chile, China, Czech Republic, Hungary, India,
Indonesia, Israel, Malaysia, Mexico, Poland, Russia, South Korea, Taiwan and
Thailand appear to have a comparative competitive advantage over the rest.
1.1. Top ten Economies to Invest in
The Top ten Economies to Invest in, according to KPMG’s November, 2008 study4
(see Exhibit 15.2 below) - in
the next five years has found that five of the ten are
from Asia. These are China, India, Singapore, Hong Kong and Japan.
China was ranked the world’s best place to invest in the next year and over the next
five years. In Asia-Pacific, this was followed by India, Singapore, Hong Kong,
Australia and Japan. Notably, India overtook the U.S as the 2nd best investment
destination in five years’ time.
Exhibit 15.1: Global Competitiveness Index3
Overall Index
7
6
5
4
3
2
1
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Chapter 15
Country Evaluation and Selection
Exhibit 15.2: Top 10 Economies to Invest In
Rank Next Year
In Five Years
1
China
China
2
United States
India
3
India
United States
4
Singapore
Singapore
5
Hong Kong
Hong Kong
6
Australia
Japan
7
United Kingdom
United Kingdom
8
Japan
Australia
9
Germany
Germany
10
Switzerland
Spain
Source: KPMG, November 2008
4
1.2. Corporate Tax Rates
It has also been found that a country’s Corporate Tax Rates are viewed as another
important criterion.
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
Exhibit 15.3: Corporate Tax Rates, Asia Pacific, 20084
In
a
survey,
conducted
from
September-October, 2008 and covering
260 MNCs in 12 economies globally, is
KPMG’s first report4 on the influence of
tax policies and
demographics
on
international business locality decisions.
The study also tracked the investment
intentions of firms over the next five
years.
70% of respondents said the tax regime
is an important factor in choosing where
to locate their business. The survey
found that half of all respondents
indicated that the tax policy of a country
(See Exhibit 15.3) is more important
than an educated workforce in deciding
where
to
locate
their
business
operations.
Macau, Hong Kong and Singapore
certainly have advantageous corporate
tax rates. The rest range from China at
25% and Philippines at 35%.
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Chapter 15
Country Evaluation and Selection
1.3. GDP forecasts
GDP forecasts are yet another good indicator in evaluating a country for the
purposes of conducting business there.
Exhibit 15.4: Prospects for the Global Economy6
GDP FORECASTS
10
8
6
4
2
% age
GDP 2008
GDP 2009
GDP 2010
0
World
Japan
USA
China
Indonesia Thailand
Russia
Brazil
Mexico
India
South
Africa
-2
-4
-6
-8
Source: Extracted from World Bank: Prospects for the Global Economy: Global Economic
6
Prospects 2009 http://web.worldbank.org
The World Bank’s estimates of GDP forecasts for the year 2010 and shown above in
Exhibit 15.4: Prospects for the Global Economy, China , India and Indonesia are
forerunners with Thailand, Mexico , Brazil and South Africa close behind in showing
promise.
1.4. Number of Days required to start a business
On the other hand another simple indicator would be the number of Days required to
start a business in various countries as shown in Exhibit 15.5.
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
While the figures appear very conducive for Australia (2), USA (5) and UK (18), the
number of days required to start a business in figures for South Korea (22), Malaysia
(30), Thailand (33), India & China at 35 are not unfavourable compared to that of 97
for Indonesia and 152 for Brazil.
Exhibit 15.5: Days required to start a business6
Days required to start a business
160
140
120
100
80
60
40
20
0
Czec
d
ines
31
46
esia mbia
h
co
o
y
12
27
9
Thaila Malay South Austr
South
Egypt
Brazil India
Peru
Russi Hung
Moroc Mexic Turke
Polan Phillip Indon Colo
China Israel Chile
a
ary
28
38
Repu Africa
nd
sia Korea alia
33
30
USA
UK
5
18
blic
Days required to start a business
72
97
44
152
35
19
24
35
35
34
27
22
2
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Chapter 15
Country Evaluation and Selection
1.5. Foreign Direct Investment (FDI) Confidence Index5
AT Kearney’s Foreign Direct Investment (FDI) Confidence Index5, 2007 as shown
below in Exhibit 15.6, is a survey of senior executives from 1000 Global population
of the largest companies in terms of revenues spread over 60 countries and 17
industry sectors. These companies accounted for more than 75% of FDI flows. The
survey was conducted in August 2007 at the onset of the sub prime market crises.
Exhibit 15.6: Foreign Direct Investment (FDI) Confidence Index, 20075
China and India rank the highest. Other destinations in Asia and the Emerging
markets are Hong Kong, Singapore, UAE and Russia, constituting six of the top ten.
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
1.6. A Framework for Country Analysis and Evaluation
Do we conclude that Chile, China, Czech Republic, Hungary, India, Indonesia,
Israel, Malaysia, Mexico, Poland, Russia, South Korea, Taiwan and Thailand are the
most likely countries for businessmen wishing to enter or continue doing business in
? What conclusions can we draw as to how to carry out a country analysis? Table
15.7 summarizes these in a Framework for Country Analysis that consists of
Contextual and Strategic and Policy factors.
Exhibit 15.7: A Framework for Country Analysis
Contextual Factors
Strategic & Policy Factors
Population & Natural Resources
GNP, GDP Growth, Monetary & Fiscal
Policies
Geography, Topography, Climate
Prices
Culture (see Chapter 3)
Inflation
Legal Framework (see Chapter 4)
Unemployment, Literacy,
Political Climate (see Chapter 4)
Income Distribution
State of Technological Preparedness Exchange Rates, BOP
(see Chapter 5)
Ethics and Governance(see Chapter 7)
Tariffs & Quotas
International & Regional Integration
(see Chapters 11 &12)
Drawing from the two mini cases cited at the beginning of this, take a look at Exhibits
15.9
and 15.10. These depict the location and names of the world’s top ten
countries that are major iron ore producers and showing the presence of
Arcelormittal2.
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
Exhibit 15.9: Major Iron Ore Producers in the World
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Chapter 15
Country Evaluation and Selection
Exhibit 15.10: Arcelormittal’s2 Global Steel Production
Estimated iron ore production
in million metric tons for 2006
according to U.S. Geological
Survey
Country
Production
China
520
Australia
270
Brazil
250
India
150
Russia
105
Ukraine
73
United States
54
South Africa
40
Canada
33
Source: Adapted from Corporate Brochure ‘Transforming
Tomorrow’ http://www.arcelormittal.com
In respect of Caterpillar1, Exhibit 15.11 shows the geographical area (the top ten
ranked by size) and population density. Caterpillar has presence in The Americas
(US, Canada, Brazil , Mexico and Chile) , Europe ( Belgium, Netherlands, Germany,
Spain, France, Ireland, Italy, Poland and Sweden), Asia ( China, India,
Middle East, Indonesia, South Korea and Taiwan), Australia and Africa.
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Japan,
Chapter 15
Country Evaluation and Selection
Exhibit 15.11: Caterpillar’s World Wide Presence
Source:http://commons.wikimedia.org/wiki/File:D
Source: Adapted from
http://www.mongabay.com/igapo/worl
d_ statistics
eveloped_and_Emerging_markets.This image
has been released into the public domain by its
author, Alex Covarrubias. This applies
worldwide.
In the case of Mittal, the sources of raw material and for Caterpillar, the geography
and population density, and for both Investments in development of infrastructure,
roads & highways, mining etc coupled with their own strengths or competitive
advantage and distinctive competencies ( discussed below) allow them to make
strategic choices in respect of global growth.
These can also be viewed from the perspective of The opportunity matrix
shown in Exhibit 15.12 below. Essentially an organization must view the
level of attractiveness of the opportunity as being high and their own
internal capability of ensuring a high probability of success (quadrant 1).
Quadrant 2 and 3 offer some attractions and organizations should
examine these to determine whether or not scope exists to improving the
attractiveness and of the probability of success. Quadrant 4, on the other
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
hand represents opportunities that are too small or the organization’s
ability to leverage the probability of success may be weak.
Exhibit 15.12: The Opportunity Matrix
Probability of Success
High
Low
1
2
High
Attractiveness
Low
2.
Analysis
3
an
organization’s
4
competitive
advantage
and
distinctive
competencies
In order to effectively convert opportunities offered by countries an organization
needs to possess a competitive advantage and sets of distinctive competencies.
These can be defined as clusters of extraordinary abilities or related ‘excellences’
that a firm has inherited, acquired or developed ; is demonstrated repeatedly and
consistently in delivering value to its customer and; cannot be easily be imitated, or
substituted. This quite different to comparative advantage which merely indicates an
organization’s ability to produce goods or service more efficiently (cost wise) than its
competitors or gain a marginal edge through efficient deployment of some of the
factors of production.
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Chapter 15
Country Evaluation and Selection
2.1. Areas for Obtaining Competitive Advantage
Some of the areas where organizations can seek out competitive advantage are
listed below in Exhibit 15.13. this list is not exhaustive, but illustrative.
Exhibit 15.13: The Areas for Obtaining Competitive Advantage
1 Organizational Advantage
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Ownership Structure
Reputation and Public Image
Culture
Leadership and Risk Appetite
Strategic capability in responding to Environmental Changes
Managerial Skills and Capabilities
Size
Financial Strength
Organizational Agility
Past Performance
Speed in Responding
Flexibility & Adaptability
Environmental Concern
CSR practices
Competitive Response
Reputation in Alliances
Law suits pending
2 Functional & Operational Advantage
Marketing
•
•
•
•
•
•
•
•
•
•
•
•
•
Customer Base
Customer Knowledge
Customer Loyalty
Past Performance
Product Quality
Breadth & Depth of Product Range
Response to Product Modification & Adaptation
Unique Selling Proposition
Brand Equity
Market Share
Geographical Spread & Coverage
New Product Skills
Pricing
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
•
•
•
•
Country Evaluation and Selection
Marketing Channels & Network
Marketing Communication
Sales Force
Service support & Reputation
Innovation, Technology and R&D
•
•
•
•
•
•
Innovative Culture
Patents & Trade Marks
New Products Developed
Technology & Technical Skill
Access to Research Data and Institutions/Universities
Academic Alliances
Manufacturing & Operations
•
•
•
•
•
•
•
Technology & Technical Skill
Economies of Scale
Experience
Quality
Flexibility
Process Efficiency
Delivery Capability
Supply Chain
•
•
•
•
•
•
Raw Material Advantage
JIT and other Practices
Vendor Development , Relations and Loyalty
Supplier sourcing Flexibility
Efficiency of Logistics and Support
Efficiency of Buying Centers
Finance
•
•
•
•
•
•
•
Net Worth
Liquidity
Cash Flow
Profitability & Profits
Financial Stability
Access to Capital
Ability to raise capital Competitively
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
Human Resources
•
•
•
•
•
•
Employee-Management Relations
Flexibility and Mobility
Turnover & Retention
Preferred Employer
Learning Culture
Academic Alliances
3 External Stakeholder Advantage
•
•
•
•
•
•
•
•
•
Customer Loyalty
Control on Supply Channels
Control on Distribution Channels
Preferential Political & Legislative Treatment
Beneficial Tariff, non-tariff and Tax structures
Location Benefits
Government Support and Respective Foreign Policy Issues
Local Community Support
Alliances, Associations and Cartels
2.2. The need to have multiple layer/ sets of competitive advantage
It must be noted that a single source of competitive advantage may not be enough
for an organization to successfully (and on a sustainable basis) leverage
opportunities offered by the environment. Moreover, a single set of competitive
advantage may be easily replicated by a competitor. Caterpillar promised that it
would supply spare parts for its earth moving equipment within 48 hours anywhere in
the world or it could had free of cost. It did not take much time for Komatsu to offer
the same level of service. Hence organizations need to have multiple layer/ sets of
competitive advantage to ensure their sustainability.
In the case of Mittal, his managerial skills and capabilities to structure and
successfully implement turn around strategies, past performance, access to capital,
technology coupled with Local Government and Community Support gave them a
multi layered competitive advantage.
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
2.3. The TOWS Matrix
Exhibit 15.14: The TOWS Matrix10
Internal
Organizational
Strengths
Organizational
Weaknesses
External
Strategic Options
Environmental
Opportunities
Environmental
Threats
WO: The strategies
developed need to
overcome
organizational
weaknesses if
existing or emerging
opportunities
SO: Strengths can be
used to capitalize or
build upon existing or
emerging opportunities
ST: Strengths in the
Organization can be
used to minimize
existing or emerging
threats
WT: The strategies
pursued must
minimize or
overcome
weaknesses and, as
far as possible, cope
with threats
Adapted form Weihrich, H (1982), ‘The TOWS Matrix: A Tool for situational
Analysis’, Long Range Planning Vol.15, No. 2 pg. 60
Mittal’s competitive advantages (stated above) or organizational strengths can be
taken along with opportunities in the environment such as low cost raw material (for
application of DRI technology), low cost labor, many foreign government’s
embarking on a privatization program (of State Owned Enterprises) to create a
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
strategic option or ‘SO’ strategy, whereby the organization’s strengths can be used
to capitalize or build upon existing or emerging opportunities.
Similarly ‘ST’ strategies denote strengths in the organization that can be used to
minimize existing or emerging threats, such as Caterpillar’s financial strength was
deployed to minimize the impact of its many labor unrest/strikes.
‘WO’ strategies are those developed in order to overcome organizational
weaknesses if existing or emerging opportunities. An example of this is McDonald’s.
Traditionally, and in the rest of the world, its burgers are made from ‘beef’. While
making a business entry into India, where the vast majority of the population hold the
‘cow’ as sacred, warranted a change in their product mix. Neither beef nor lamb
meat is used in any of their products. Furthermore, some of their local products have
a distinct Indian name and taste. This has proved to be successful in India.
Coke and Pepsi have revamped their product (by introducing healthier substitutes to
carbonated soft drinks and snack items) and promotion (adaptation of their
advertising themes) mix. Thus their ‘WT’ strategies are such that they minimize or
overcome weaknesses and, as far as possible, cope with the threats. Some of these
being health consciousness level of people, accusations of pesticides contamination
etc.
3. Short listing, Screening and prioritizing countries in order to identify target
markets.
The Heritage Foundation, an US based policy think tank founded in 1973 publishes
an index for economic freedom11 which has provided an analyzes of 183 countries
across ten specific freedoms such as Business and Trade Freedom, Fiscal and
Monetary Freedom, Financial and Investment Freedom.
Brief explanations for each of the dimensions of ‘Economic Freedom’ are provided
hereunder:
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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Chapter 15
Country Evaluation and Selection
Exhibit 15.15: Index of Economic Freedom, 200911
Index of Economic Freedom 2009
90
80
70
60
50
40
30
20
10
Adapted
from
The
Heritage
Foundation-
2009
Index
of
Economic
Freedom
http://www.heritage.org/index/ranking.aspx
3.1. Business Freedom
It is a measure of the ease with which and entrepreneur can conceive, create,
operate and close a business in a country. It measures how cumbersome some of
its regulations, whether in the form of licensing or taxation etc. are.
3.2. Trade Freedom
It is the degree to which Government’s restrict the freedom of trade in the forms of
import and export of goods and services with taxes, tariffs, duties, quotas, bans and
other regulatory barriers. It reflects the prices that consumers pay for imported
International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath
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U
K
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nd
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Chapter 15
Country Evaluation and Selection
goods and the distortions created by production incentives for local manufacturers.
The degree of protectionism when local producers lack competitive advantage. In
short it is the degree to which businesses can interact freely as buyers and sellers in
the international marketplace.
3.3. Fiscal Freedom
Fiscal freedom for individuals and business organizations is the freedom to use and
control their earned wealth for themselves. Fiscal burdens can be imposed by the
government on economic activity to generate revenue for itself, via taxation and
debt, which in turn has to be paid off through taxation. Hence this becomes an
important indicator.
3.4. Government Size
Regarding issues of generating revenues and issues of expenditure (see fiscal
freedom); the burden of excessive government becomes the main issue in economic
freedom. “Public goods” is the term used to justify government expenditures, which
are provided efficiently by the state rather than by the market. Through government
action, there is also a justification for correcting market failures. But a government
not being as disciplined as the market, further escalates inefficiency, bureaucracy,
leading to even lowered productivity. Government expenditures compete with private
ones and tend to interfere with market prices by over-stimulating demand and
diverting resources through a crowding-out effect. In some cases, governments
coerce goods and capital out of markets totally, escalating the interest rates and
inflation.
3.5. Monetary Freedom
What free speech is to democracy, monetary freedom (reflected in a stable currency
and market-determined prices), is to an economy.
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People living in freedom need a steady and reliable currency as a medium of
exchange and as a store of value. One cannot create long-term value without
monetary freedom.
The monetary policy of a government is controlled by the value of a country’s
currency. The monetary policy that can maintain stability can encourage
people to rely on market prices for a foreseeable future leading to individuals
enjoying a greater economic freedom towards investment, savings, and other
longer-term plans. On the other hand inflation not only confiscates wealth like an
invisible tax, but also distorts pricing, misallocates resources, raises the cost of
doing business, and undermines a free society.
3.6. Investment Freedom
Inflows and outflows of capital can be limited by restrictions on foreign investment.
The returns are greatest in a free environment, and capital will flow to its best use
where it is most needed.
The freedom of the investor and the freedom of the
people seeking capital feel restricted when the flow of capital is redirected. The more
restrictions imposed on investment in a country, the lower becomes its level of
entrepreneurial activity and economic growth.
3.7. Financial Freedom
Most of the countries provide some type of prudential supervision of banks and other
financial services. Firstly, this ensures the safety and soundness of the financial
system and secondly, it also ensures that financial services firms meet
basic fiduciary responsibilities.
3.8. Property Rights
Accumulating private property is the main motivating force in a market economy.
Secure property rights give citizens the confidence to undertake commercial
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activities, save their income, and make long-term plans because they know that their
income and savings are safe from expropriation or theft. All this requires an effective
and honest judicial system that is available to all without any discrimination.
3.9. Freedom from Corruption
Corruption is dishonesty or decay in a system. It is a distortion in the system and
failure of integrity by which individuals are able to gain personally at the expense of
the country as a whole. Political corruption has been a sad part of human endeavors
since long, and it manifests itself in many forms such as bribery, extortion, nepotism,
cronyism, patronage, embezzlement, and (most commonly) graft in which the public
officials steal or make profit illegitimately from public funds.
3.10. Labor Freedom
Labor freedom means that an individual can work as much as they want and
wherever they want. Similarly, the choice of businesses to contract labor freely and
to fire workers when they are no longer needed is a vital mechanism for increasing
productivity and sustaining economic growth. Free and voluntary exchange is the
core principle of any market. The labor market should be based on the principle of
voluntary choice and free competition.
Countries such as Peru, Poland, Colombia, Mexico, Turkey, Hungary, Czech
Republic, South Africa, Israel, Chile, Thailand, Malaysia, South Korea, and Taiwan
certainly figure better than the BRIC countries.
While this may be true as far as the overall index goes - organizations need to look
carefully and deeply at specifics with respect to each country.
A country such as Indonesia, which ranks comparatively low on the index of
economic freedom, including freedom from corruption, proved advantageous for
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Mittal. It all began with his buying a run-down plant in Indonesia in 1976 and, Mittal
managed it for the next 14 years. He received greater governmental support and
faced fewer restrictions in Indonesia as compared to India. The plant was inefficient
and faced significant production issues, including reliable access to electricity. Mittal
managed to overcome these and operate the plant.
Mittal’s Indonesian experience enabled him to identify the vulnerability of the
industry as its dependence on an uncertain supply and means to rectify this
drawback. He also realized that good-quality scrap, one of the raw material for
making steel, could be both difficult to source and costly. He supplemented his
supplies with a financially and technologically viable substitute, direct-reduced iron
(DRI). His search for a supplier of DRI led him to the Caribbean, and his first of
many big breaks came in 1989 with the acquisition of the Iron & Steel Company of
Trinidad and Tobago, and renamed Caribbean Ispat.
4. Making an assessment of the market potential and demand for an
organization’s products and services in these target markets.
For both new businesses and existing ones, a very important assessment is that of
the ‘Market Potential’. Global Edge at Michigan State University12 has computed an
index for market potential. Exhibit 15.16 A is an adapted version of this for emerging
markets for 2008. In computing the overall index – consideration has been given to:
1. Market Size- which has been given a 20% weightage and takes into account the
size of the urban population13 and the consumption of electricity (International
Energy Annual), 2. Market Growth Rate, given a 12% weightage takes into account
GDP growth rate13 and the annual growth rate of primary energy use, 3. Market
Intensity - having a weightage of 14% factors in GNI per capita estimates using
purchasing power parity and private consumption as a percentage of GDP13. 4.
Market Consumption Capacity, having a ten percent weightage which takes into
account Percentage share of middle class in consumption/income13. 5. Commercial
Infrastructure, with a weightage of 14% takes into account Telephone lines per 100
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habitants, mobile subscribers, number of personal computers, paved road density,
internet users, percentage of households with TV. 6. Economic Freedom takes into
account ‘The Economic Freedom Index’11 and ‘Political Freedom Index’ and has a
ten percent weightage. 7. Market Receptivity, which has a 12 % weightage takes
into account per capita imports from the US and trade as a percent of GDP13, and
finally 8. Country Risk which takes into account Country Risk Rating (Country Risk
Survey) and has a weightage of eight percent.
4.1. Overall index for the top 25 countries and Market Size
Exhibits15.16 A looks at the overall index for the top 25 countries and Exhibits15.16
B in respect of “Market Size’ for 20 of them. The highest scores are in respect of
China, India, Russia and Brazil.
In analyzing and judging market potential, this (Market Potential and Market Size)
becomes an important consideration.
4.2. Caterpillar1
Caterpillar1 forecasts more than $ 750 Billion of infrastructure projects in India, over
the next ten years. Hence it has invested in India and set up manufacturing facilities
producing quarry and off highway construction trucks, backhoe and wheel loaders,
engines power generator for both Indian and Global customers.
In keeping with its goal to support manufacturing growth in China, Caterpillar, Inc.
unveiled its new manufacturing operation in the Jiangsu province in East China, in
May 2007. The Wuxi campus, home to Caterpillar (China) Machinery Components
Co. Ltd, (CCMC) sits on 47 acres. It will manufacture a range of components to be
used primarily in Caterpillar machines and to be sold to original equipment
manufacturers (OEMs).
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"As demand for Caterpillar products continues to increase, the development of our
operations in Wuxi will play an important role in supplying state-of- the-art, worldclass components for the Caterpillar machines used by our customers and by
discriminating OEMs," said Chris Schena, Caterpillar vice president with
responsibility for the Motion & Power Control Division.
Caterpillar core products manufactured in China include hydraulic excavators, tracktype tractors, motor graders and paving products, large diesel engines used
primarily for marine and power generation applications and generator sets for use in
China and the Asia Pacific region. Caterpillar also manufactures components at
several facilities in China1.
Exhibit 15.16 A: Market Potential Index- 2008
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Exhibit 15.16 B: Market Potential Index- 2008
MARKET POTENTIAL INDEX: TOP 25
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Exhibit 15.16 C: Market Potential Index- 2008
MARKET SIZE: TOP 20
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Adapted from Market Potential Index for Emerging Markets – 2008,globalEDGE Created by IBC at
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Chapter 15
Country Evaluation and Selection
Michigan State University http://globaledge.msu.edu/ResourceDesk/mpi/
4.3. Arcelor Mittal2
Arcelor Mittal2, hopes to start building a 12 million ton steel plant in the eastern
Indian state of Orissa next year. The first phase of the project is likely to be
commissioned by 2011-12.
ArcelorMittal2 manufactures steel in Hunan Valin, China with an output of 11 million
tons and has Investments in China of over 1.5 billion US dollars. It also has
commercial offices in Beijing, Shanghai, Chengdu, Urumqi, Guangzhou, and Hong
Kong and projects in Shanghai, Guangzhou, Tianjin and Wuhan.
Consequent on the Mexican government’s privatization program, Sibalsa, an
integrated mini-mill complex, while modern, was operating at only 25% of capacity.
Post acquisition and renamed Ispat Mexican, after operating improvements achieved
a dramatic turnaround. A sevenfold increase compared with the year prior to the
company's acquisition.
This dramatic turnaround and generation of high-profit margins by Ispat Mexicana
funded a series of acquisitions- in Kazakhstan, USA, France, Romania, Algeria,
Macedonia, Poland, Canada and investments in India and China. See Exhibit 15.10:
Arcelormittal’s2 Global Steel Production.
4.4.
Markets of a high-end brand in low-income nations
The potential of a market need not be judged only by market size as indicated by the
numbers in respect of its urban population, but the presence of niche market
segments.
China has more billionaires than any country except the United States, as soaring
stock and property prices helped boost wealth among the country's super-rich,
according to researcher Rupert Hoogewerf15.
.
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The number of Chinese persons in the Chinese mainland worth $1 billion or more
jumped to 130, from 101 last year, Hoogewerf said in his 2008 "Hurun Rich List," 15
which ranks the 800 wealthiest individuals in the Chinese mainland.
The average wealth of those on the list doubled from a year earlier to $562 million.
There are 24 Indians in the Forbes’16 list of world’s richest people. Forbes has said.
that India no longer has maximum number of billionaires in Asia, ceding that title to
China, which now has 28 richest people.
4.5. Louis Vuitton17 in Asia
Rated as one of the most valuable brands Louis Vuitton (LVMH) is an international
French fashion house specializing in trunks, leather goods, ready-to-wear, shoes,
watches, jewelry, accessories, sunglasses, and books. LVMH, a $13 billion group of
companies with operations across the world--1,500 retail stores in about 60
countries--had conquered the luxury goods market successfully in Europe, the
United States, and some parts of Asia. In the 1990s, LVMH decided to expand its
operations in China and South Korea and in early 2000, made its entry into India. In
2004, Asia accounted for about 40% of the sales of LVMH.
The expansion of Louis Vuitton into Asia and China and India in particular
represents the marketing of a high-end brand into low-income nations, where select
niche markets and pockets of buying power exist.
Conclusion
As organizations we need to evaluate countries on some basis and make a selection
of those that we wish to do business in a profitable manner.
To this end we have studied a number of indexes, ratings, models, parameters and
sub parameters under them. We have also seen it from the perspectives of a
number of organizations that have successfully done business in emerging and
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other world markets.
One can conclude that success for a business in a particular market is determined
by a host of factors in the environment that offer opportunities and pose threats. It is
incumbent on the organizations to leverage its own competitive advantage and
distinctive capabilities in a manner that they can be skillfully and successfully
leverage these to cash in on the opportunities and threats.
Simplistic parameters such as GDP growth rate, market size and demand, freedom
to conduct business, business infrastructure, level of technology, availability of
skilled manpower and cheap finance, investment priorities etc are prone to reflect a
country in positive light – for an organization to select it as one to do business with.
Many internal weaknesses and threats at a country level- political instability, being in
a state of war or turmoil, high levels of corruption, economic and financial crisis, and
other shortages give rise to opportunities for organizations to respond to.
Whatever the type of uncertainty or crisis be, there is always a need for food and
commodities. Caterpillar and Komatsu, as well as Coke benefited from the World
Wars, banks and financial institutions have been there to respond to countries in
economic and financial crisis with substantial profits.
Seizing opportunities in a favorable environment, and leveraging these with internal
sources of advantage of the organization, is a relatively easier task.
The major decision lies in the selection of countries, from a business perspective, is
the ability to sense and read the signs of business opportunities from what would
prima facie appear to be unfavorable or risky or non-existent and to respond to them
with timing and speed.
The age old story of two shoe company salesman visiting Africa for the first time, will
serve as an example. One responds by informing his head office, that as people do
not wear shoes, there is no market potential. The other declares, since no one wears
shoes- the market has immense potential and asks for a shipload of shoes!
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It is this conversion and development of internal competitive advantages and distinct
competencies and leverage them profitably in countries with both overt and covert
opportunities and threats, in time that would reflect well on the score card.
. KEY TERMS
Business Freedom
Fiscal Freedom
Market Size
Competitive Advantage
Freedom from
Monetary Freedom
Country Analysis
Corruption
Operational Advantage
Distinctive
Functional Advantage
Opportunity Matrix
Competencies
Government Size
Organizational-
Economic Freedom
Investment Freedom
Advantage
FDI Confidence Index
Labor Freedom
TOWS Matrix
Financial Freedom
Market Potential Index
CHAPTER SUMMARY
1. At the beginning of this chapter we set out our learning objectives by asking some
relevant questions: how countries are analyzed by organizations in order to make an
evaluation and selection based on opportunities; how they analyze their own
competitive advantage and distinctive competencies that would allow them to
leverage these opportunities; how they shortlist; screen and prioritize countries in
order to identify target markets and finally on what basis do they make an
assessment of the market potential and demand for their products and services in
these target markets.
2. We started out by revisiting the ‘competitive advantage of nations’ using Porter’s
‘National Diamond’ and ‘The Twelve Pillars’ as developed at the World Economic
Forum in 2008 and constituted the Global Competitiveness Index (GCI).
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3. The Top 10 Economies to invest in, according to KPMG’s November, study and
found that in the next five years, five of the ten are from Asia. These were China,
India, Singapore, Hong Kong and Japan.
We also found that a country’s Corporate Tax Rates are viewed as another
important criterion in the evaluation and selection of countries, together with GDP
forecasts and Number of Days required to start a business.
4.
We then took a look at the AT Kearney’s Foreign Direct Investment (FDI)
Confidence Index, 2007, which ranked China and India the highest. Other
destinations in Asia and the Emerging markets were Hong Kong, Singapore, UAE
and Russia, constituting six of the top ten.
5. We then summarized these in a Framework for Country Analysis that consisted of
Contextual and Strategic and Policy factors and related them to the two mini cases
cited at the beginning of the chapter viz. Caterpillar and ArcelorMittal.
6. We then studied the Opportunity Matrix, which viewed a country’s Attractiveness
versus an organization’s Probability of Success. Thereafter we Analyzed an
organization’s competitive advantage and distinctive
competencies in terms of
Organizational Advantage, Functional & Operational Advantage (being Marketing,
Innovation, Technology and R&D, Manufacturing & Operations, Supply Chain,
Finance and Human Resources) and, the External Stakeholder Advantage. This
exercise culminated with the TOWS matrix which allowed us to view Strategic
Options in relation to Environmental Opportunities and Threats.
7. The process of Short listing, Screening and Prioritizing countries in order to
identify target markets, we studied the ten dimensions of The Heritage Foundation2009 Index of Economic Freedom. We discovered, through examples that while this
may be true as far as the overall index goes- organizations need to look carefully
and deeply at specifics in respect of each country.
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8. Finally, in making an assessment of the market potential and demand for an
organization’s products and services, we took a look at the Market Potential Index
for Emerging Markets – 2008. In computing the overall index we found that
consideration had been given to: 1. Market Size, 2. Market Growth Rate, 3. Market
Intensity, 4. Market Consumption Capacity, 5. Commercial Infrastructure, 6.
Economic Freedom, 7. Market Receptivity, and finally 8. Country Risk. We once
again related them to the two mini cases cited at the beginning of the chapter viz.
Caterpillar and ArcelorMittal. We also took into account a contra case of the
expansion of Louis Vuitton into Asia and China and India in particular representing
the marketing of a high-end brand into low-income nations, where select niche
markets and pockets of buying power exist.
___________________________________________________________________
References:
1. www.caterpillar.com
2. www.arcelormittal.com
3.World Economic Forum, Global Competitiveness Report 2008-09
4. KPMG, November 2008
5. AT Kearney’s Foreign Direct Investment (FDI) Confidence Index,
2007
6. World Bank: Prospects for the Global Economy: Global
Economic Prospects 2009
7. Maps by Google
8. http://www.mongabay.com/igapo/world_ statistics
9.http://commons.wikimedia.org/wiki/File:Developed_and_Emerging
_markets.
10. Weihrich, H (1982), ‘The TOWS Matrix: A Tool for situational
Analysis’, Long Range Planning Vol.15, No. 2 pg. 60
11. Heritage Foundation- 2009 Index of Economic Freedom
http://www.heritage.org/index/ranking.aspx
12. Market Potential Index for Emerging Markets – 2008,globalEDGE Created by
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IBC at Michigan State University http://globaledge.msu.edu/ResourceDesk/mpi/
13. World Bank: World Development Indicators 2009
14. Kumar Nirmalya etal, 2009, India’s Global Power Houses: How
they are taking on the World, Harvard Business School Publishing,
2009
15. http://www.hurun.net/listrelease
16. Forbes List: http://www.forbes.com/lists/2009/10/billionaires
17. www.Louis Vuitton.com
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