Unit 2 Tools for country Selection

Tools for International Business

Kunal Upadhyay

Out Line of UnitOut Line of Unit Tools for country SelectionTools for country Selection Market Potential IndexMarket Potential Index Global Competitive IndexGlobal Competitive Index Global Political Risk IndexGlobal Political Risk Index International Product Life CycleInternational Product Life Cycle International Monetary System International Monetary System

Fixed and Floating Exchange Fixed and Floating Exchange FDI Confidence IndexFDI Confidence Index Modes of Payment in International TradeModes of Payment in International Trade

Advance PaymentAdvance Payment Recoverable & Non recoverable Letter of credit Consignment Recoverable & Non recoverable Letter of credit Consignment

SalesSales Open AccountOpen Account

Tools for country Selection

International expansion of a firms activities requires identifying business opportunities across the borders, evaluating them and selecting one or a few countries for the firm’s operations.

Firms that are expanding internationally need to carry out research on business opportunities, evaluate different countries and select the potential locations

Trade Analysis & Analog Methods

Market size = Production + Import -

Export

Opportunity-Risk Analysis

Choose variables both for opportunities Market size, growth, future potential, tax rates,

cost Risk factors like

Political, commercial, economic, operational

Products-Country Matrix Strategy

Under this approach, previous trade statistics are analyzed to identify the major markets and major product

It was observed in mid-nineties India prepared such matrix. 15 countries and 15 commodities accounted for around 75-80% on India’s Exports.

Market Focus Strategies

Technique is based market potential, generally on a regional basis is determined and major group that need to be focused are identified. Textile industries:- ready-made garments, carpets, and

handicrafts Engineering product and computer products

CIS countries was launched on 1st April,2003 Programe was based on integrated countries of CIS

regions and Focus on major product group, technology and services.

Growth-Share Matrix

A strategic planning tool based on the philosophy that a product’s market growth rate and market share are important in determining marketing strategy.

Country Attractiveness- Company Strength Matrix

Strategy is based on business attractiveness of countries and competitive strength of the company.

Country attractiveness are Market size, consumer buying, governance structure,

economic & Political Stability Competitive strength are

Market share, 4p, image, position, technology

Cont..

Primary Market These countries offer the highest marketing opportunities

and call for a high level of business commitments. Secondary Market

These countries, perceived political and economic risks are too high to make long term binding business commitments.

Tertiary market These countries with high perceived risk, allocation of

firms' resource is minimal.

Market Potential IndexMarket Potential Index

The MPI measures the likelihood of adults or households in a specified area to exhibit certain consumer behavior as compared to their country’s national average income.

Cont..

The index is represent a value of 100 as the overall demand for the country.

A value of more than 100 represents a high demand and a value of less than 100 represents a low demand.

For example, an index of 120 implies that demand in the trade area is likely to be 20% higher than the national average; an index of 85% implies demand is 15% lower than the national average.

Cont..

Global marketing is becoming more and more important along the years with the increasing trend in internationalization.

Having too many choices, marketers face the challenge of determining which international markets to enter, and the appropriate marketing strategies for those countries.

Cont..

Those emerging economies comprise more than half of the world’s population, account for a large share of world output, and have very high growth rates; all indicators of market potential.

Indexing studies help companies to compare the emerging markets with each other on several dimensions.

Practices of MPI

Identify The potential country

Invest money more effectively

Develop successful advertising and marketing plan

Decide which expansions are most profitable

Measures of Market PotentialMeasures of Market Potential

Market Size Growth rate Market Intensity Market consumption capacity Commercial infrastructure Economic freedom

Global Competitive Index (GCI)

Global Competitive Index (GCI)

Since,1979 the world economic forum’s annual Global competitiveness Reports have examined many factors enabling national economies to achieve sustained economic growth and long-term prosperity.

The goal has been to provide benchmarking tools for business leaders & policymakers to identify obstacles to improve competitiveness

Cont.. The World Economic Forum provides a complete

overview of factors that are critical to driving productivity and competitiveness and groups in 12 pillars

Cont..

• Basic Requirement

Key for factor driven economies

• Efficiency Enhancer

Key for efficiency

driven economies

• Innovation & sophistication factors

Key for innovation

driven economies

• Institutions• Infrastructure• Macroeconomic stability• Health and primary

education

• Business sophistication• Innovation

• Higher education & training• Goods markets efficiency• Labor markets efficiency• Financial markets

sophistication• Technological readiness• Market Size

Global Political Risk IndexGlobal Political Risk Index

The GPRI is an index of country stability ratings for 24 emerging market countries.

Its unique methodology measures a country’s ability to absorb political shocks.

The GPRI evaluates political, social, economic, and security factors, using a combination of quantitative and qualitative data that is collected on the ground and also through open source methods.

Cont..

Ratings are expressed on a scale of 0 to 100.

Clear and short analysis accompanies the index to illustrate what events impacted each country’s stability rating, and make forecasts for the coming month.

What does GPRI measure?

The GPRI measures stability and is defined as the capacity of a country to withstand internal and external shocks or cries.

GPRI measures in 24 emerging market countries. The GPRI is calculated on a monthly basis. Monthly

analysis places everyday occurrences into a larger context of comparative state stability.

Measures of GPRI

Efficient state institutions Government effectiveness (High degree of political

institutionalization) High degree of political legality among the population. Sound economic performance and policies Absence of significant anti-state opposition Rare instance of political violence Low level of social, ethnic or religious tensions

Countries currently covered on the GPRI

The 24 countries include Algeria, Argentina, Brazil, Bulgaria, China, Colombia, Egypt, Hungary, India, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Poland, Russia, Saudi Arabia, South Africa, South Korea, Thailand, Turkey, Ukraine and Venezuela.

Selection of counties for the index is based upon economic relevance for the international markets in equities, debt, or Foreign Direct Investment.

International Product Life-Cycle Theory

The level of innovation and technology, resources, size of market and competitive structure influence trace pattern.

IPLC recognizable stages that influence demand structure, production, marketing strategy and international competition.

Introduction Stage

Companies spends more on R&D activities and need speedy recovery through price

Price of new product is relatively higher, targeting high income countries

A firm targets domestic market or high income countries

Demand Structure

Production Market Strategy

InternationalCompetition

Demand Not understand

Consumers ready pay premium price

• Rapidly change

• Requires skill labour

• Sales mostly to home country

• Some exported to high-income countries

• A few domestic competitors

Growth Stage The demand in the international markets exhibits an

increasing trend and the innovating firms get opportunities for exports.

Its increased international market competition in target market.

A firm establish its production locations in other developed countries

Demand Structure

Production Market Strategy InternationalCompetition

Price Competition begins

Product standard emerging

• Mass Production • Increased exports to high-income countries

• Competitors in other countries begin production for their domestic market

Maturity Stage

Firms know how of the innovative process become widely known,

A firm begins to establish its operations in middle & low income countries with competitive advantage of price

Demand Structure

Production Market Strategy InternationalCompetition

Competitions based on price and product differentiation

• Long runs with stable techniques

• Capital intensive

• Innovator firms protect foreign market from local competition

• Firm target market from high income countries to innovating countries

Decline Stage

At decline stage market strategy shifts to price and cost competitiveness.

Firm emphasis on most cost-effective location rather than on producing themselves.

Demand Structure

Production Market Strategy InternationalCompetition

Mostly price competition

• Long runs with stable techniques.

• Lowest cost of production needed by capital intensive

• Innovator company may begin production in developing countries

• Firm target market from innovating countries to high income countries

International Monetary System International Monetary System

Money includes anything that is generally accepted in exchange as payment for goods and services.

The key function of money is to act as a medium of exchange, it also serves as a store of value, unit of account, and standard of deferred payment.

The development of currencies in various parts of the world involved great innovations.

Cont..

International monetary systems refers to a set of rules, regulations, policies, practices, instruments, institutions and mechanisms that determine exchange rates between currencies.

Evolution of monetary systems is explained to help readers in developing a conceptual understanding of current monetary arrangements.

Gold Standard

Gold has been used as a medium of exchange primarily due to its rare availability and desirable properties

From 1876 to 1913 were generally said by gold standard. each country backed up its currency with gold, and currencies were convertible into gold at specified rates.

Fixed exchange ratesFixed exchange rates

In July 1944, representatives of 44 allied nations agreed to fixed rate monetary system and setting up of International Monetary Fund in a conference held in Bretton Woods, New Hampshire.

Each member country promised to maintain fixed or attached exchange rate for its currency vis-à-vis gold or the US dollar.

Floating Exchange Rate System

By March 1973, the fixed exchange rate system was unrestricted and the world officially moved to a system of floating exchange rates.

Under the freely floating exchange rate system, currently prices are determined by market demand and supply conditions without the intervention of government.

Foreign Direct Investment Confidence Index

examines overarching trends and ranks countries on how changes in their political, economic, and regulatory systems are likely to affect foreign direct investment (FDI) inflows in the coming years

As in the past, this year's index provides valuable insight into how business leaders regard the medium-term economic.

The index provides a unique look at the present and future prospects for international investment flows.

Methods of International TradeMethods of International Trade To succeed in today’s global marketplace and win sales against

International trade presents a spectrum of risk, which causes uncertainty over the timing of payments exporter (seller) and importer (foreign buyer).

For exporters, any sale is a gift until payment is received.

Therefore, exporters want to receive payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer.

Cont..

For importers, any payment is a donation until the goods are received.

Therefore, importers want to receive the goods as soon as possible but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to pay the exporter.

Cont.. PREPAYMENT

With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.

However, requiring payment in advance is the least attractive option for the buyer, because it creates cash- flow problems. 

exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms.

Cont.. LETTERS OF CREDIT

Letters of credit (LCs) are one of the most secure instruments available to international traders

An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents.

An LC also protects the buyer because no payment obligation arises until the goods have been shipped or delivered as promised.

Cont.. OPEN ACCOUNT

An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days.

This option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter.

Because of strong competition in export markets, foreign buyers frequently press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad.