CHAPTER 6

Assessing
Countries
Attractiveness

Global Strategic Management: Philippe Lasserre

Introduction
International trade theory
explains why it is beneficial for countries to
engage in international trade
helps countries formulate their economic policy
explains the pattern of international trade in the
world economy

Global Strategic Management: Philippe Lasserre

The Pattern of
International Trade
International trade theory helps explain trade patterns
Some patterns of trade are fairly easy to explain - it is
obvious why Saudi Arabia exports oil, Ghana exports
cocoa, and Brazil exports coffee
But, why does Switzerland export chemicals,
pharmaceuticals, watches, and jewelry? Why does Japan
export automobiles, consumer electronics, and machine
tools?

Global Strategic Management: Philippe Lasserre

The Pattern of
International Trade
Ricardos theory of comparative advantage suggests that
existing trade patterns are related to differences in labor
productivity
Heckscher and Ohlins theory explains trade through the
interplay between the proportions in which the factors of
production are available in different countries and the
proportions in which they are need for producing particular
goods
Ray Vernon suggested that trade patterns could be explained
by looking at a products life cycle

Global Strategic Management: Philippe Lasserre

The Pattern of
International Trade
Paul Krugman developed new trade theory which suggests that
the world market can only support a limited number of firms
in some industries, and so trade will skew toward those
countries that have firms that were able to capture first mover
advantages
Michael Porter focused on the importance of country factors to
explain a nations dominance in the production and export of
certain products

Global Strategic Management: Philippe Lasserre

Trade Theory
and Government Policy
While the theories all suggest that trade is beneficial, they lack
agreement in their recommendations for government policy
Mercantilism makes a case for government involvement in
promoting exports and limiting imports
Smith, Ricardo, and Heckscher-Ohlin promote unrestricted
free trade
New trade theory and Porter justify limited and selective
government intervention to support the development of
certain export-oriented industries

Global Strategic Management: Philippe Lasserre

Mercantilism
Mercantilism (mid-16th century) asserted that it is in a
countrys best interest to maintain a trade surplus, to export
more than it imports
it advocated government intervention to achieve a surplus
in the balance of trade
it viewed trade as a zero-sum game (one in which a gain by
one country results in a loss by another)
Mercantilism is problematic and not economically valid, yet
many political views today have the goal of boosting exports
while limiting imports by seeking only selective liberalization
of trade

Global Strategic Management: Philippe Lasserre

Absolute Advantage
In 1776, Adam Smith attacked the mercantilist assumption that
trade is a zero-sum game and argued that countries differ in
their ability to produce goods efficiently, and that a country
has an absolute advantage in the production of a product when
it is more efficient than any other country in producing it
According to Smith, countries should specialize in the
production of goods for which they have an absolute
advantage and then trade these goods for the goods produced
by other countries

Global Strategic Management: Philippe Lasserre

Absolute Advantage
Assume that two countries, Ghana and South Korea, both have
200 units of resources that could either be used to produce rice
or cocoa
In Ghana, it takes 10 units of resources to produce one ton
of cocoa and 20 units of resources to produce one ton of
rice
So, Ghana could produce 20 tons of cocoa and no rice, 10
tons of rice and no cocoa, or some combination of rice and
cocoa between the two extremes

Global Strategic Management: Philippe Lasserre

Absolute Advantage
In South Korea it takes 40 units of resources to produce
one ton of cocoa and 10 resources to produce one ton of
rice
So, South Korea could produce 5 tons of cocoa and no rice,
20 tons of rice and no cocoa, or some combination in
between

Ghana has an absolute advantage in the production of

cocoa
South Korea has an absolute advantage in the
production of rice
Global Strategic Management: Philippe Lasserre

Absolute Advantage
Without trade
Ghana would produce 10 tons of cocoa and 5 tons of rice
South Korea would produce 10 tons of rice and 2.5 tons of
cocoa
If each country specializes in the product in which it has an
absolute advantage and trades for the other product
Ghana would produce 20 tons of cocoa
South Korea would produce 20 tons of rice

Global Strategic Management: Philippe Lasserre

Absolute Advantage
Suppose
Ghana could trade 6 tons of cocoa to South Korea for 6
tons of rice
After trade
Ghana would have 14 tons of cocoa left, and 6 tons of rice
South Korea would have 14 tons of rice left and 6 tons of
cocoa
Both countries gained from trade

Global Strategic Management: Philippe Lasserre

Absolute Advantage
The Theory of Absolute Advantage

Global Strategic Management: Philippe Lasserre

Absolute Advantage
Absolute Advantage and the Gains from Trade

Global Strategic Management: Philippe Lasserre

Comparative Advantage
In 1817, David Ricardo explored what might happen when one
country has an absolute advantage in the production of all
goods
According to Ricardos theory of comparative advantage, it
makes sense for a country to specialize in the production of
those goods that it produces most efficiently and to buy the
goods that it produces less efficiently from other countries,
even if this means buying goods from other countries that it
could produce more efficiently itself

Global Strategic Management: Philippe Lasserre

Comparative Advantage
Assume
Ghana is more efficient in the production of both
cocoa and rice
In Ghana, it takes 10 resources to produce one tone
of cocoa, and 13 1/3 resources to produce one ton
of rice
So, Ghana could produce 20 tons of cocoa and no
rice, 15 tons of rice and no cocoa, or some
combination of the two

Global Strategic Management: Philippe Lasserre

Comparative Advantage
In South Korea, it takes 40 resources to produce
one ton of cocoa and 20 resources to produce one
ton of rice
So, South Korea could produce 5 tons of cocoa and
no rice, 10 tons of rice and no cocoa, or some
combination of the two
If each country specializes in the production of the
good in which it has a comparative advantage and
trades for the other, both countries will gain

Global Strategic Management: Philippe Lasserre

Comparative Advantage
With trade
Ghana could export 4 tons of cocoa to South Korea
in exchange for 4 tons of rice
Ghana will still have 11 tons of cocoa, and 4
additional tons of rice
South Korea still has 6 tons of rice and 4 tons of
cocoa

Global Strategic Management: Philippe Lasserre

Comparative Advantage
The Theory of Comparative Advantage

Global Strategic Management: Philippe Lasserre

Classroom Performance
Which theory did not suggest that there could be gains
from specialization and trade?
a) Mercantilism
b) Absolute advantage
c) Comparative advantage

Global Strategic Management: Philippe Lasserre

The Gains from Trade

The theory of comparative advantage argues that
trade is a positive sum gain in which all gain
Potential world production is greater with
unrestricted free trade than it is with restricted
trade
The theory of comparative advantage provides a
strong rationale for encouraging free trade

Global Strategic Management: Philippe Lasserre

Qualifications and Assumptions

The simple example of comparative advantage assumes
only two countries and two goods
zero transportation costs
similar prices and values
resources are mobile between goods within countries, but
not across countries
constant returns to scale
fixed stocks of resources
no effects on income distribution within countries

Global Strategic Management: Philippe Lasserre

The Product Life Cycle Theory

The product life-cycle theory - as products mature
both the location of sales and the optimal production
location will change affecting the flow and direction
of trade
proposed by Ray Vernon in the mid-1960s

Globalization and integration of the world economy

has made this theory less valid today
the theory is ethnocentric
production today is dispersed globally
products today are introduced in multiple markets
simultaneously
Global Strategic Management: Philippe Lasserre

New Trade Theory

New trade theory suggests that the ability of firms to
gain economies of scale (unit cost reductions
associated with a large scale of output) can have
important implications for international trade
Countries may specialize in the production and
export of particular products because in certain
industries, the world market can only support a
limited number of firms
new trade theory emerged in the 1980s

Global Strategic Management: Philippe Lasserre

The Implications Of
New Trade Theory For Nations?
Nations may benefit from trade even when they do
not differ in resource endowments or technology
a country may dominate in the export of a good simply
because it was lucky enough to have one or more firms
among the first to produce that good

Governments should consider strategic trade policies

that nurture and protect firms and industries where
first mover advantages and economies of scale are
important

Global Strategic Management: Philippe Lasserre

An Overview of Trade Theory

Free Trade occurs when a government does not attempt to
influence, through quotas or duties, what its citizens can
buy from another country or what they can produce and
sell to another country.

The Benefits of Trade allow a country to specialize in the

manufacture and export of products that can be produced
most efficiently in that country.
The Pattern of International Trade displays patterns that
are easy to understand (Saudi Arabia/oil or Mexico/labor
intensive goods). Others are not so easy to understand
(Japan and cars).
McGraw Hill Companies, Inc.,2000

Global Strategic Management: Philippe Lasserre

4-5

Country attractiveness is
Market Prospects Competitive Context
Risk of operating = level of attractiveness
Return on Investment = risk-adjusted
weighted cost of capital
Logic of decision:
1.Equal to or higher than the cost of capital
2.Acceptable risk of operating, for
shareholders and employees.
Global Strategic Management: Philippe Lasserre

Why is a country attractive?

There are two broad categories that contributes

to country attractiveness :
1. Market and industry opportunities
2. Country risks
Relative to the type of industry

Global Strategic Management: Philippe Lasserre

High

High
Attractiveness

High Risk
High Return

Market and
Competitive
Opportunities
Low
Attractiveness

Low Risk
Low Return

Low
High

Risks

Global Strategic Management: Philippe Lasserre

Low

MARKET
How important is the
demand in this country?
Growth?
Size
Customers quality?

RESOURCES
Is the country a
critical
source of:
Skilled

Personnel
Raw materials?
Components?
Labour
Technological
innovation?
Learning

COUNTRY MARKET and

INDUSTRY OPPORTUNITIES

INCENTIVES
Taxes

Quality of Infrastructure
and supporting services
Location

COMPETITION
Intensity of
rivalry
Entry barriers
Bargaining
power
Of suppliers and
customers
Is the business
Profitable short
term ?
Profitable long
term ?

Subsidies
Infrastructures
Government contracts
Does a presence in this country
Increase competitiveness ?

Global Strategic Management: Philippe Lasserre

GDP per Capita and Household Appliances Markets

1000
Hong Kong

Consumers Expenditures
On Household Appliances
($/cap 1998)
Argentina

Germany
Japan Norway
UK

Switzerland
NZ France
Denmark
USA
Spain
Poland
Portugal Greece
Singapore
Brazil
Korea
Chile Taiwan
Sweden
Thailand Mexico
Czech
Saud
Bulgaria
Hungary
i
Venezuela
Malaysia
Russia
South Africa
China
Indonesia
Colombia

100

10

Vietnam

Romania
Philippines
Morocco

100

10,000
1,000
GDP/ Cap (US$ 1998 log Scale)

100,000

Global Strategic Management: Philippe Lasserre

Household Goods and Service

Per capita Expenditures

Household Goods and Service

Total Expenditures
70,000

400
60,000

350

50,000
Brazil

Million US$ 1998

US$ 1998/Cap

300
250
200
150

40,000
30,000
20,000

100
50

China

Russia

China
India

10,000
0

Global Strategic Management: Philippe Lasserre

Russia
Brazil
India

MIDDLE CLASS EFFECT 1

Distribution

Very Poor

Poor

Middle Class

Rich

Global Strategic Management: Philippe Lasserre

Distribution
%

Increase in GDP/Cap
+ 20%

Threshold
Increase in Middle Class
+ 66%

Average GDP/Cap
Very Poor

Poor

Middle Class

Rich

Global Strategic Management: Philippe Lasserre

Middle Class Effect in China 1990-95

158%

VCR

68%

Washers
Refrigerators

79%
143%

Televisions

605%

Telephones
36%

GNP/cap

0% 100% 200% 300% 400% 500% 600% 700%

Source: World Bank and EIU

Global Strategic Management: Philippe Lasserre

High End:

Top End
Lower High End
Higher Low End
Low End

Generic Segmentation
Top End
Higher Low End
Middle Class
Lower End

Developing World Segmentation

Huge low-end commodity market
Rising middle class but still relatively
small
Tiny highly wealthy segment

Differentiated products
Functionalities and Performances
Less Price Sensitive
Low End:
Undifferentiated products
Mass production and distribution
Price Sensitive

Top End
Lower Top End
Higher End
Lower High End
Higher Low End
Lower End
Industrialized Countries Segmentation
Diverse Segmentation
Middle Class Markets dominate

Global Strategic Management: Philippe Lasserre

Countries Life Cycle

Average Growth Rate 1970-1999

12 %
10%
China
8%
6%

Malaysia

Taiwan

Singapore

Korea

Hong Kong

Indonesia Thailand

SrLanka
Pak Brazil
Mexico

India

4% Nigeria
Bengl Phil
3.65% World Average
2%

Ireland

Israel

USA
France

Spain

Italy

UK

Japan

Germany

Switzerland

1110 $
0

5000

15000

25000

35000

45000

GDP/ Cap US$ 1999 (Circles are proportional to GDP)

Global Strategic Management: Philippe Lasserre

Characteristics of Demand According to Countries Life Cycle

Demand
Characteristics

Developing
Countries

Emerging
Countries

Newly
Industrialized
Economics

Industrialized
Countries

Low

High

High

Low

Small

Small to High

Small to High

High

Segmentation

Dominant
subsistence
sector
Large low
end
segment

Fast growing
middle class
Large low end
segment

Established
middle class
Increased
diversity of
segments

Established
middle class
Diverse and
sophisticated
segmentation

Customer
Value Curve

Price
Availability

Price
Distribution
Emerging
Advertising

Product
functionality
Performances
Services

Product
functionality
Performances
Services

Distribution

Push
logistics

Push logistics
Beginning of
pull

Pull
Beginning of
mass retailing

Diversity
Mass retail
important

Competition

Regulated

Beginning of
de-regulation
New entrants

Deregulated
Active
Diverse

Deregulated
Active
Diverse

Growth
Size

Global Strategic Management: Philippe Lasserre

Industry Analysis: Michael Porters 5 Forces

New Entrants
High capital investments
Short product life cycles
R & D costs
Proprietary products
Industry standards
Bargaining Power of
Suppliers
Scarce supplies
Proprietary supplies
Concentrated suppliers
Threat of forward
integration

Economies of scale
Large distribution channels
needed
Some closed markets
Fear of rataliation

Intensity of
Competitive Rivalry
Overcapacity.
Cyclical sales.
High corporate stakes
Undifferentiated products
High exit barriers

Government
Price controls
Regulatory constraints
Taxation
Global
Source: Porter:1980 (Adapted)

Bargaining Power of
Buyers
Some backward
integration
Low switching costs
Buyers are
concentrated
High percentage
price/total purchase

Substitutes
Alternative value proposition
Coming from different technologies
Strategic Management: Philippe Lasserre

Hourly Compensation in Manufacturing (US$)

GERMANY
SWITZERLAND
BELGIUM
NORWAY
DENMARK
AUSTRIA
SWEDEN
FINLAND
JAPAN
NETHERLANDS
UNITED STATES
FRANCE
ITALY
UNITED KINGDOM
CANADA
AUSTRALIA
IRELAND
SPAIN
ISRAEL
NEW ZEALAND
GREECE
SINGAPORE
BRAZIL
ARGENTINA
CHINA,P.R.:HONG KONG
SOUTH AFRICA
PORTUGAL
TAIWAN PROV.OF CHINA
KOREA
CHILE
VENEZUELA
COLOMBIA
MALAYSIA
CHINA,P.R.: MAINLAND
TURKEY
PHILIPPINES
CZECH REPUBLIC
MEXICO
HUNGARY
THAILAND
RUSSIA
POLAND
INDIA
INDONESIA

10

15

20

25

Global Strategic Management: Philippe Lasserre

30

Cost of Labor and Technological Skills

Index of
Technological Skills*
13

Average FDI/Cap= 7000$

Average FDI/Cap= 6200$

Singapore

12

Finland

Israel

USA

Taiwan

11

Ireland
10

Hungary

Australia
Canada
UK

Korea

Sweden
Austria
Belgium
Denmark
Netherlands

New Zealand

CzechTurkey
9 IndiaRussiaMalaysia
Chile
China
Hong Kong
Egypt
8
Greece
Poland
South Africa
Thailand
Indonesia
Portugal Argentina
Brazil
Mexico
7
Phil Columbia
Vietnam
Venezuela

Switzerland
Germany

Japan

France

Spain

Norway
Italy

Average FDI/Cap= 840$

Average FDI/Cap= 2000$

6
0

10

12

14

16

18

20

22

24

26

28

30

Hourly Compensation in Manufacturing (US$1998) (Indices of Technological Sophistication plus Math and Science Education
Source: The Global Competitiveness Report, 2000)

Global Strategic Management: Philippe Lasserre

The quality of the infrastructure is among the best in the world

Finland
Singapore
Germany
Switzerland
Denmark
France
Hong Kong
USA
Austria
Canada
Australia
Netherland
Sweden
Japan
Belgium
Malaysia
New Zealand
Norway
South Africa
UK
Spain
Israel
Taiwan
P ortugal
Korea
Egypt
Turkey
Czech
Thailand
Italy
Greece
Ireland
Mexico
Argentina
Hungary
Chile
Indonesia
Brazil
China
P oland
Russia
Venezuela
Bulgaria
Ukraine
India
P hilippines
Columbia
Vietnam

Strongly disagree

Strongly agree
Source: World Economic Forum: Global Competitiveness Report, 2000

Global Strategic Management: Philippe Lasserre

Michael Porters Country Diamond

Context for Firm
Strategy and Rivalry
A local context that
encourages appropriate
forms of investments and
sustained upgrading.
Vigorous competition

Factors (Input)
Conditions
Factors inputs quality and cost:
Natural resources
Human Resources
Capital
Physical Infrastructure
Administrative Infrastructure
Information Infrastructure
Scientific and Technological
infrastructure

Related and Supporting

Industries
A critical mass of capable
local suppliers.
Presence of clusters

Demand
Conditions
Sophisticated and
demanding customers
Customers needs that
anticipate those
elsewhere
Unusual demand in
specialized segments
that can be served
globally

Source : Porter, 1998

Global Strategic Management: Philippe Lasserre

1 of 2

Major Types of Incentives for Foreign Investments

Type of Incentive

Nature of the Incentive

Fiscal Incentive
Tax Reduction

Tax holiday for a certain period

Ability to write-off losses against profits after the end of the
tax holiday period.
Reduced tax rate
Accelerated depreciation
Reduction in Social Security contributions
Special deductions of taxable incomes based on certain
types of activities (social, R&D)
Exemption of property taxes or other special taxes
Reduction of taxes base on local content or employment
levels
Income tax exemption or reduction for expatriate personnel

Import and Export

Exemption of import duties and value added taxes for raw

material, capital equipments and parts.
Exemption of export duties
Tax credits on domentic sales based on export
performances

Global Strategic Management: Philippe Lasserre

2 of 2

Major Types of Incentives for Foreign Investments

Type of Incentive

Nature of the Incentive

Financial Incentives

Subsidies of all kinds

Sweet loans
Guaranteed loans
Export credits
Equity participation
Risks insurance (Exports, Exchange rates)

Competitive
Incentives

Protection against imports

Capacity regulation
Monopolistic position
Preferential purchases

Operational Incentives Preferential rates, rents, lands, power, telecommunication,

etc
Assistance for market studies
Utilixation of public services or government agencies for
companies operations
Detachment of personnel

Global Strategic Management: Philippe Lasserre

POLITICAL RISKS
SHAREHOLDERS'S EXPOSURE
Assets destruction (war, riots..)
Assets spoliation (expropriation)
Assets inflexibility (transfer, freeze)

COUNTRY

ECONOMIC
RISKS

EMPLOYEESS EXPOSURE
Kidnapping
Gangsterism
Harassment

COMPETITIVE
RISKS

RISK

Economic growth
Variability
Inflation
Costs of inputs
Exchange rates

OPERATIONAL EXPOSURE
Market disruption
Labour unrest
Racketing
Supplies shortage

BUSINESS LOGICS
Corruption
Cartels
Networks

ANALYSIS

OPERATIONAL RISKS
REGULATIONS
Nationalistic preferences
Constraints on local capital, local content,
local employment
Taxes

INFRASTRUCTURE
Power, Telecommunication,
Transport
Suppliers

Global Strategic Management: Philippe Lasserre

Country Risk Analysis and Assessments

Methods:

Issues

Lessons

Grand Tour
Banks
Consultants
Trade Commissions
Ratings
Intelligence building

Availability of data
Reliability of data
Biais
Cultures
Dont

rely on one single source

Dont delegate the interpretation to third parties
Invest in intelligence
Look at operational issues
Global Strategic Management: Philippe Lasserre

Shareholders Risks*
High

3
2.5
2

Risk
Level

1.5
1
0.5

Low

* Armed Conflicts, Social Unrest, and Expropriation

Am
er
ic
a

La
tin

As
ia

ro
pe
Eu

Ea
s

te
rn

Eu
ro
pe

G
7

W
or
ld

E
M

d
an

a
c
i
r
Af

Source: EIU, Global Outlook, 200

Global Strategic Management: Philippe Lasserre

Variability of Economic Growth

Yearly Growth Rate %
16
14

Brazil (Average growth 4.25%/yr, STD 4.52; Coefficient of Variation:1.06)

12

India (Average growth 4.90%/yr, STD 2.69; Coefficient of Variation:0.55)

10
8

India

6
Brazil

4
2
0
-2
-4

Global Strategic Management: Philippe Lasserre

20
00

19
98

19
96

19
94

19
92

19
90

19
88

19
86

19
84

19
82

19
80

19
78

19
76

19
74

19
72

19
70

-6

China-India Comparison
POLITICAL
RISK
Index

POLITICAL
Risks

China

China

ECONOMIC
Risks
India

India
REMITTANCE AND OPERATIONAL RISK
REPATRIATION
Index
Index

BERI Assessment

COMPETITIVE
Risks

OPERATIONAL
Risks

EIU Assessment

Sources: EIU, Gloabl Outlook, 2000,;BERI: Business Risks Services, 20

Global Strategic Management: Philippe Lasserre

Cluster Characteristics in Asia Pacific

Global Strategic Management: Philippe Lasserre