Country Evaluation and Selection - Suresh Vishwanath Chapter 15 Country... · ·...

Chapter 15 Country Evaluation and Selection

Chapter 15

Country Evaluation and Selection

International/ Global Business: An Emerging Markets Perspective by Prof Suresh Vishwanath 1

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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.



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.



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,

was named Arcelor Mittal2. 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 run-

down 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



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.



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



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

0

1

2

3

4

5

6

7

USAJa

pan

Australi

aUK

Brazil

ChileChina

Colombia

Czech

Rep

ublicEgyp

t

Hungary India

Indones

iaIsr

ael

Malays

ia

Mexico

Morocc

oPeru

Phillipines

Poland

Russia

South Afri

ca

South Korea

Taiwan

Thailan

d

Turke

y



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 20084

1.2. Corporate Tax Rates It has also been found that a country’s Corporate Tax Rates are viewed as another

important criterion.



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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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

-8

-6

-4

-2

0

2

4

6

8

10

World Japan USA China Indonesia Thailand Russia Brazil Mexico India SouthAfrica

% a

ge

GDP 2008GDP 2009GDP 2010

Source: Extracted from World Bank: Prospects for the Global Economy: Global Economic

Prospects 20096 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.



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

0

20

40

60

80

100

120

140

160

Days required to start a business 72 31 46 97 44 152 35 12 27 9 19 28 38 24 35 35 34 27 33 30 22 2 5 18

PeruPolan

d

Phillip

ines

Indon

esia

Colo

mbiaBrazil India

Moroc

co

Mexic

o

Turke

yEgypt

Russi

a

Hung

ary

Czec

h

Repu

blic

South

AfricaChina Israel Chile

Thaila

nd

Malay

sia

South

Korea

Austr

aliaUSA UK



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.



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

(see Chapter 5)

Exchange Rates, BOP

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.



Exhibit 15.9: Major Iron Ore Producers in the World



Exhibit 15.10: Arcelormittal’s2 Global Steel Production

Estimated i roduction ron ore pin million metric tons for 2006 ac o U.S. Geological cording t

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

s, Germany,

Spain, France, Ireland, Italy, Poland and Sweden), Asia ( China, India, Japan,

iddle East, Indonesia, South Korea and Taiwan), Australia and Africa.

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, Netherland

M



Exhibit 15.11: Caterpillar’s World Wide Presence

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 wit

Source:http://commons.wikimedia.org/wiki/File:D

eveloped_and_Emerging_markets.This im

has been rele

Source: Adapted from

http://www.mongabay.com/igapo/worl

d

age

ased into the public domain by its

author, Alex Covarrubias. This applies

worldwide.

_ statistics

h their own strengths or competitive

advantage and distinctive competencies ( discussed below) allow them to make

examine these to determine whether or not scope exists to improving the

attractiveness and of the probability of success. Quadrant 4, on the other

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



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

2. Analysis an organization’s 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.

Low

Attractiveness

3 4



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



• 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



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.



2.3. The TOWS Matrix

Exhibit 15.14: The TOWS Matrix10

Strategic Options

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

Organizational Strengths

Organizational Internal

External

Weaknesses

SO: Strengths can be used to capitalize or build upon existing or emerging opportunities

WO: The strategies developed need to overcome organizational weaknesses if existing or emerging opportunities

Environmental Opportunities

WT: The strategies pursued must minimize or overcome weaknesses and, as far as possible, cope with threats

ST: Strengths in the Organization can be used to minimize existing or emerging threats

Environmental Threats



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:



Exhibit 15.15: Index of Economic Freedom, 200911

Index of Economic Freedom 2009

0

10

20

30

40

50

60

70

80

90

Peru

Poland

Phillip

ines

Indon

esia

Colombia

Brazil

India

Morocc

o

Mexico

Turke

yEgy

pt

Russia

Hunga

ry

Czech

Rep

ublic

South

Africa

China

Israe

lChil

e

Thail

and

Malays

ia

South

Korea

Taiw

an

Austra

liaUSA UK

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


http://www.heritage.org/index/ranking.aspx


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.



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



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



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).



"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, world-

class 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, track-

type 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



Exhibit 15.16 B: Market Potential Index- 2008

MARKET POTENTIAL INDEX: TOP 25

0

20

40

60

80

100

120

Hong K

ong

China

Singap

ore

Taiwan

Korea,

South

Czech

Rep

.

Hunga

ry

Mexico

Israe

l

Poland

India

Russia

Turkey

Malays

iaChil

e

Thaila

nd

Argenti

na

Philipp

ines

Indon

esia

Saudi

Arabia

Egypt

South

Africa

Brazil

Pakist

anPeru

Exhibit 15.16 C: Market Potential Index- 2008

MARKET SIZE: TOP 20

0

20

40

60

80

100

120

China

India

Russia

Brazil

Indon

esia

Korea,

South

Mexico

South

Africa

Turkey

Pakist

an

Argenti

na

Philipp

ines

Taiwan

Egypt

Poland

Saudi

Arabia

Thaila

nd

Colombia

Malays

ia

Venez

uela

Adapted from Market Potential Index for Emerging Markets – 2008,globalEDGE Created by IBC at



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



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!



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

Market Size

Monetary Freedom

Operational Advantage

Opportunity Matrix

Organizational-

Advantage

TOWS Matrix

Business Freedom

Competitive Advantage

Country Analysis

Distinctive

Competencies

Economic Freedom

FDI Confidence Index

Financial Freedom

Fiscal Freedom

Freedom from

Corruption

Functional Advantage

Government Size

Investment Freedom

Labor 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).



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 Foundation-

2009 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.



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


12. Market Potential Index for Emerging Markets – 2008,globalEDGE Created by


http://www.caterpillar.com/

http://www.arcelormittal.com/

http://www.mongabay.com/igapo/world_%20statistics




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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