Unit One

Countrys attractiveness

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Managerial Implications
Two broad implications for IB - Political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business - The political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site

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Attractiveness
Figure 2.1: Country Attractiveness
Benefits Size of Economy Likely Economic Growth Costs Corruption Lack of Infrastructure Legal Costs Overall Attractiveness

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Risks Political Risks: Social Unrest/Anti-Business Trends Economic Risks: Economic Mismanagement Legal Risks: Failure to Safeguard Property Rights
Return
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Framework for individual assignment

HYPOTHETICAL BUSINESS SCENARIO Product Business Company

Market or industry
Country LEARNING TASK 1: COUNTRY FACTOR ANALYSIS Country factors Benefits Risks Costs Trade off

Economic
Legal Political Cultural Religious
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Return
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Educational

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General investment frameworks

High
High risk High return Market and competitive opportunities Low attractiveness Low risk Low return High attractiveness

Low
High
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Risks

Low

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Country attractiveness analysis

1. A country attractiveness assessment is based on two dimensions Market and industry opportunities Country risks (many organizations publish country assessment results based on various economic/political/social factors)

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Country attractiveness analysis

2. Market opportunities Market opportunities assessment measures the potential demand in the country for a firms products or services based on: Market size Growth Quality of demand. 3. Industry opportunities Industry opportunities assessment determines profitability potential of a companys presence in a country given the following factors: Quality of industry competitive structure (Porters five-force Industry Analysis Framework) Resource availability (Porters diamond framework)
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Framework for country market and industry attractiveness assessment

MARKET - How important is the demand in this country? + Growth? + Size? + Customer quality

RESOURCES - Is the country a critical source of + Skilled personnel? + Raw materials? + Components? + Labor? + Technology? + Innovation? - Quality of infrastructure supporting services - Location

COMPETITION
COUNTRY MARKETS AND INDURTRIES OPPORTUNITIES + Intensity of rivalry + Entry barriers + Bargaining power of suppliers & customers - Is the business + Profitable short-term? + Profitable long-term?

INCENTIVES

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+ Tax + Subsidies + Infrastructures + Government contracts + Does a presence in this country 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. increase competitiveness?

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Country attractiveness analysis

4. Country risk
Political risks Political risks are probable disruptions owing to internal or external events or regulations resulting from political action of governments or societal crisis and unrest. Economic risks Economic risks expose business performance to the extent that the economic business drivers can vary and therefore put profitability at stake. Competitive risks Competitive risks are related to non-economic distortion of the competitive context owing to cartels and networks as well as corrupt practices. The competitive battlefield is not even and investors who base their competitive advantage on product quality and economics are at disadvantage. Operational risks. Operational risks are those that directly affect the bottom line, either because government regulations and bureaucracies add costly taxation or constraints McGraw-Hill/Irwin to foreign investors or because the infrastructure is not Companies, reliable. International Business, 6/e 2007 The McGraw-Hill Inc., All Rights Reserved.

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Framework for country risk analysis

POLITICAL RISKS
SHAREHOLDERS EXPOSURE
EMPLOYEES EXPOSURE

Assets destruction (war, riots...)

Kidnapping

Assets spoilation (expropriation) Assets immobility (transfer, freeze) ECONOMIC RISKS

Economic growth Variability Inflation Cost of inputs Exchange rates

Gangsterism Harassment COUNTRY RISK ANALYSIS

OPERATIONAL EXPOSURE Market disruption

Labor unrest Racketing Supply shortages

COMPETITIVE RISKS
BUSINESS LOGICS: Corruption Cartels Networks REGULATIONS

OPERATIONAL RISKS

INFRASTRUCTURE

- Power, telecommunication, transport - Supplier McGraw-Hill/Irwin

International Business, 6/e

- Nationalistic preferences

- Constraints on local capital, local content, local employment 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. -Taxes