COUNTRY ANALYSIS

COUNTRY ANALYSIS
•Each international market provides unique challenges and opportunities for doing
business. A commonly used framework for examining these factors is the PESTLE
analysis.
•The PESTLE framework includes political, economic, social, technological, legal,
and environmental issues that impact a company, industry, or target location. 
PESTLE ANALYSIS
THE ATLAS OF ECONOMIC
COMPLEXITY
THE ECONOMIC COMPLEXITY
•Economic complexity is expressed in the composition of a country’s
productive output and reflects the structures that emerge to hold and
combine knowledge.
•The complexity of an economy is related to the multiplicity of useful
knowledge embedded in it. For a complex society to exist & to sustain
itself, people who know about design, marketing, finance, technology,
human resource management, operations and trade law must be able to
interact and combine their knowledge to make products.
•Increased economic complexity is necessary for a society to be able to
hold and use a larger amount of productive knowledge, and we can
measure it from the mix of products that countries are able to make.
THE ECONOMIC COMPLEXITY
•Economic complexity, therefore, is related to a country’s level of
prosperity. As such, it is just a correlation of things we care about. The
relationship between income and complexity, however, goes deeper
than this.
•Countries whose economic complexity is greater than what we would
expect, given their level of income, tend to grow faster than those that
are “too rich” for their current level of economic complexity. In this
sense, economic complexity is not just a symptom or an expression of
prosperity.
•In short, economic complexity matters because it helps explain
differences in the level of income of countries, and more important,
because it predicts future economic growth. Economic complexity might
not be simple to accomplish, but the countries that do achieve it, tend
to reap important rewards.
THE ECONOMIC COMPLEXITY
•Thus, Economic complexity is a measure of the knowledge in a society
that gets translated into the products it makes.
•A country is considered ‘complex’ if it exports not only highly complex
products, but also a large number of different products.
•The more complex a country’s economy, the stronger its infrastructure
and the more adaptable it is to market changes.
•A measure of the knowledge in a society as expressed in the products it
makes.
•The economic complexity of a country is calculated based on
the diversity of exports a country produces and their ubiquity, or the
number of the countries able to produce them (and those countries’
complexity).
THE ECONOMIC COMPLEXITY
•Countries that are able to sustain a diverse range of productive know-
how, including sophisticated, unique know-how, are found to be able to
produce a wide diversity of goods, including complex products that few
other countries can make.
•The economic complexity of different types of products in developing
countries (BRICS) comprising of exports & imports can be seen with the
help of following charts.
THE PORTERS DIAMOND
MODEL
THE PORTER’s DIAMOND MODEL
•The American strategy professor Michael Porter developed an
economic diamond model for (small-sized) businesses to help them
understand their competitive position in global markets.
•This Porter Diamond Model, also known as the Porter Diamond theory
of National Advantage or Porters double diamond model, has been
given this name because all factors that are important in global business
competition resemble the points of a diamond.
•Michael Porter assumes that the competitiveness of businesses is
related to the performance of other businesses. Furthermore, other
factors are tied together in the value-added chain in a long distance
relation or a local or regional context.
•The model can be shown with the help of following diagram:
THE PORTER’s DIAMOND MODEL
THE PORTER’s DIAMOND MODEL
•Organisations can use the Porter’s Diamond Model to establish how
they can translate national advantages into international advantages.
•The Porter Diamond Model suggests that the national home base of an
organization plays an important role in the creation of advantages on a
global scale.
•This home base provides basic factors that support an organization,
including government support but they can also hinder it from building
advantages in global competition.
•The determinants that Michael Porter distinguishes are in four parts
with two supporting parts with an important application and they are as
follows:
 1. FACTOR CONDITIONS

•This is the situation in a country relating to production factors like

knowledge and infrastructure. These are relevant factors for
competitiveness in particular industries.
•These factors can be grouped into material resources- human resources
(labour costs, qualifications and commitment) – knowledge resources
and infrastructure.
•But they also include factors like quality of research or liquidity on stock
markets and natural resources like climate, minerals, oil and these could
be reasons for creating an international competitive position.
 2. RELATED AND SUPPORTING INDUSTRIES

•The success of a market also depends on the presence of suppliers and

related industries within a region. Competitive suppliers reinforce
innovation and internationalization.
•Besides suppliers, related organizations are of importance too. If an
organization is successful this could be beneficial for related or
supporting organizations.
•They can benefit from each other’s know – how and encourage each
other by producing complementary products.
 3. HOME DEMAND CONDITIONS

•In this determinant the key question is: What reasons are there for a
successful market? What is the nature of the market and what is the
market size?
•There always exists an interaction between economies of scale,
transportation costs and the size of the home market.
•If a producer can realize sufficient economies of scale, this will offer
advantages to other companies to service the market from a single
location.
•In addition the question can be asked: what impact does this have on
the pace and direction of innovation and product development?
 4. STRATEGY, STRUCTURE AND RIVALRY

•This factor is related to the way in which an organization is organized

and managed, its corporate objectives and the measure of rivalry within
its own organizational culture.
•The Furthermore, it focuses on the conditions in a country that
determine where a company will be established.
•Cultural aspects play an important role in this. Regions, provinces and
countries may differ greatly from one another and factors like
management, working morale and interactions between companies are
shaped differently in different cultures.
•This could provide both advantages and disadvantages for companies in
a certain situation when setting up a company in another country.
 4. STRATEGY, STRUCTURE AND RIVALRY

•According to Michael Porter domestic rivalry and the continuous search

for competitive advantage within a nation can help organizations
achieve advantages on an international scale.
•In addition to the above-mentioned determinants Michael Porter also
mentions factors like Government and chance events that influence
competition between companies.
 5. GOVERNMENT

•Governments can play a powerful role in encouraging the development

of industries and companies both at home and abroad.
•Governments finance and construct infrastructure (roads, airports) and
invest in education and healthcare.
•Moreover, they can encourage companies to use alternative energy or
alternative environmental systems that affect production.
•This can be effected by granting subsidies or other financial incentives.
 6. CHANCE EVENTS

•Michael Porter also indicates that in most markets chance plays an

important role. This provides opportunities for innovative companies
that are not afraid to start up new operations.
•Entrepreneurs usually start their companies in their homeland, without
this having any economic advantages, whereas a similar start abroad
would provide more opportunities.
THE COUNTRY RISK
ANALYSIS
 THE COUNTRY RISK ANALYSIS
•When business transactions occur across international borders, they
bring additional risks compared to those in domestic transactions.
•These additional risks are called country risks which include risks arising
from national differences in socio-political institutions, economic
structures, policies, currencies, and geography.
•The CRA monitors the potential for these risks to decrease the
expected return of a cross-border investment. Analysts have categorized
country risk into following groups:
• Economic risk: this type of risk is the important change in the economic
structure that produces a change in the expected return of an
investment. Risk arises from the negative changes in fundamental
economic policy goals.
• Transfer risk: transfer risk arises from a decision by a foreign
government to restrict capital movements. It is analyzed as a function
of a country’s ability to earn foreign currency. Therefore, it implies that
effort in earning foreign currency increases the possibility of capital
controls.
• Exchange risk: this risk occurs due to an unfavorable movement in the
exchange rate. Exchange risk can be defined as a form of risk that arises
from the change in price of one currency against another. Whenever
investors or companies have assets or business operations across
national borders they face currency risk if their positions are not
hedged.
• Location risk: is type of risk is also referred to as neighborhood risk. It
includes effects caused by problems in a region or in countries with
similar characteristics. Location risk includes effects caused by troubles
in a region, in trading partner of a country, or in countries with similar
perceived characteristics.

• Sovereign risk: this risk is based on a government’s inability to meet its

loan obligations. Sovereign risk is closely linked to transfer risk in which
a government may run out of foreign exchange due to adverse
developments in its balance of payments. It also relates to political risk
in which a government may decide not to honor its commitments for
political reasons. Sovereign risk refers to the risk that a government
may default on its debt obligation.
• Political risk: this is the risk of loss that is caused due to change in
political structure or in the politics of country where the investment is
made. For example, tax laws, expropriation of assets, tariffs, or
restriction in repatriation of profits, war, corruption and bureaucracy
also contribute to the element of political risk.
 COUNTRY RISK CATEGORIES AND MEASUREMENTS
Country risk is, loosely speaking, the risk of a crisis in a country. There
are many risks related to local crises, including:
•Sovereign risk, which is the risk of default of sovereign issuers, such as
Central Banks or government sponsored banks
•A deterioration of the economic conditions
•A deterioration of the value of the bank’s base currency
•The difficulties or prohibition of transferring funds from the country
either due to the legal restrictions imposed locally because the currency
is not convertible any more.
•A market crisis triggering large losses for those holding exposures in the
local markets
• Thus, Country risk is the potentially adverse impact of a country’s
environment on an MNC’s cash flows.
• An MNC conducts country risk analysis when it applies capital
budgeting to determine whether to implement a new project in a
particular country or to continue conducting business in a particular
country.
• Political Risk Characteristics
1. Attitude of consumers in the host country - a tendency of residents
to purchase only locally produced goods.
2. Actions of the host government - A host government might impose
pollution control standards and additional corporate taxes, as well as
withholding taxes and fund transfer restrictions.
3. Blockage of fund transfers - A host government may block fund
transfers, which could force subsidiaries to undertake projects that are
not optimal (just to make use of the funds).
4. Currency inconvertibility - Some governments do not allow the home
currency to be exchanged into other currencies.
5. War – Conflicts with neighboring countries or internal turmoil can
affect the safety of employees hired by an MNC’s subsidiary or by
salespeople who attempt to establish export markets for the MNC.
6. Inefficient bureaucracy - Bureaucracy can delay an MNC’s efforts to
establish a new subsidiary or expand business in a country.
7. Corruption – Corruption can occur at the firm level or with firm-
government interactions. Transparency International has derived a
corruption index for most countries
Financial Risk Characteristics
Economic Growth is influenced by:
•Interest rates: higher interest rates tend to slow growth and reduce
demand for MNC products
•Exchange rates: strong currency may reduce demand for the country’s
exports, increase volume of imports, and reduce production and
national income.
•Inflation: inflation can affect consumers’ purchasing power and their
demand for MNC goods.
 MEASURING COUNTRY RISK

•Macro-assessment of country risk

•It represents an overall risk assessment of a country and considers all
variables that affect country risk except those that are firm-specific.

•Micro-assessment of country risk

•It involves assessment of a country as it relates to the MNC’s type of
business.
 TECHNIQUES TO ASSESS COUNTRY RISK
•Checklist approach: ratings assigned to various factors
•Delphi technique: collection of independent opinions without group
discussion
•Quantitative analysis: use of models such as regression analysis
•Inspection visits: Meetings with government officials, business
executives, and consumers to clarify risk.
•Combination of techniques: many MNCs have no formal method but
use a combination of methods.
 DERIVING A COUNTRY RISK RATING

An overall country risk rating using a checklist approach can be

developed from separate ratings for political and financial risk.

•First, the political factors are assigned values within some range
•Next, these political factors are assigned weights. The assigned values
of the factors times their respective weights can then be summed to
derive a political risk rating.
•The process is then repeated to derive the financial risk rating.
•Once the political and financial ratings have been derived, a country’s
overall country risk rating as it relates to a specific project can be
determined by assigning weights to the political and financial ratings
according to importance.
• Trade protectionism is used by countries when they think their industries
are being damaged by unfair competition from foreign industries. It’s a
defensive measure, and is usually politically motivated. It can often work, in
the short run.
• However, in the long run it usually does the opposite of its intentions. It can
make the country, and the industries it is trying to protect, less competitive
on the global marketplace.
• Protectionism is the economic policy of restraining trade between nations,
through methods such as high tariffs on imported goods, restrictive quotas,
and anti-dumping laws in an attempt to protect domestic industries in a
particular nation from foreign takeover and competition.
• Countries use a variety of ways to protect their trade. One way is to enact
tariffs, which tax imports. This immediately raises the price of the imported
goods, making them less competitive when compared to locally produced
goods.
• Protectionism exists when a government's demands duties or quotas on
imported goods in order to protect domestic industries from international
competition. These government policies limit or inhibits international trade.
• While this action is often implemented with the intent of protecting local
businesses and jobs from foreign competition it can have unintended
consequences such as raising prices of domestic goods. One popular approach to
protectionism is to levy import tariffs; quotas. Another mechanism is to provide
subsidies or tax cuts to local businesses
 ARGUMENTS IN FAVOUR OF PROTECTIONISM
•Newborn industry argument
•Efforts of a developing country to diversify
•Protection of employment
•Source of government revenue
•Strategic arguments
•Means to overcome balance of payments disequilibrium
•Anti – dumping
 ARGUMENTS AGAINST PROTECTIONISM
•Misallocation of resources
•The danger of retaliation and “trade wars”
•The potential for corruption
•Increased costs of production due to lack of competition
•Higher price for domestic consumers
•Increased cost of imported factors of production
•Reduced export competitiveness
• FORMS OF ECONOMIC INTEGRATION
• There are five major types of economic integration which are as follows:
• Preferential Trading Agreements (PTA)
In this type of economic integration a group d countries come together and make
tentative or temporary preferential trading agreements among themselves to
giving preferential treatment to each other's goods.
• Free Trade Area. (F.T.A.)
As per the title a group of countries forming a free trade area bring about a free
trade between them by removing all the trading restrictions. The North Atlantic
Free Trade Agreement (NAFTA) is an example o such a free trade area, and
includes the USA, Canada, and Mexico.
• Customs Union. (C.U.)
A customs Union is a free trade are plus a common policy, of tariffs adopted by the
member countries in dealing with the imports from the nonmember countries of
the world. A burning example of customs union is E. C. European Community.
• Common Market (C.M.)
A common market is a step higher than the customs union. A common market is a
custom union plus free movement of factors of production viz. labor and capital
within the common market area or region.

• Economic Union (E.U.)

The Economic Union is still an advanced stage of economic integration. The
Economic Union is a common market plus harmonization of national economic
policies viz. monetary and fiscal policies.
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