It is a multidisciplinary concept at the crossroads of development economics, financial economics, comparative law and political science: it aims at tracking and contrasting the relative appeal of different territories and jurisdictions competing for “scarce” investment inflows, by scoring them quantitatively and qualitatively across ad hoc series of variables such as GDP growth, tax rates, capital repatriation.
There are multiple factors determining host country attractiveness in the eyes of large foreign direct institutional investors, notably pension funds and sovereign wealth funds. Research conducted by the World Pensions Council (WPC) suggests that perceived legal/political stability over time and medium-term economic growth dynamics constitute the two main determinants
Some development economists believe that a sizeable part of Western Europe has now fallen behind the most dynamic amongst Asia’s emerging nations, notably because the latter adopted policies more propitious to long-term investments: “Successful countries such as Singapore, Indonesia and South Korea still remember the harsh adjustment mechanisms imposed abruptly upon them by the IMF and World Bank during the 1997-1998 ‘Asian Crisis’ […] What they have achieved in the past 10 years is all the more remarkable: they have quietly abandoned the “Washington consensus” [the dominant Neoclassical perspective] by investing massively in infrastructure projects. This pragmatic approach proved to be very successful.”
Guide to analyze country’s attractiveness Unit One
Two broad implications for IB
Political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business
The political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site
1. A country attractiveness assessment is based on two dimensions Market and industry opportunities
Country risks (many organizations publish country assessment results based on various economic/political/social factors)
Country attractiveness analysis
Market opportunities assessment measures the potential demand in the country for a firm’s products or services based on:
Market size Growth
Quality of demand.
Industry opportunities assessment determines profitability potential of a company’s presence in a country given the following factors:
Quality of industry competitive structure (Porter’s five-force Industry Analysis Framework)
Resource availability (Porter’s diamond framework)
Framework for country market and industry attractiveness assessment MARKET - How important is the demand in this country? + Growth? + Size? + Customer quality
Skilled personnel? Raw materials?
Quality of infrastructure supporting services Location
Country attractiveness analysis Political risks
Political risks are probable disruptions owing to internal or external events or regulations resulting from political action of governments or societal crisis and unrest.
Economic risks expose business performance to the extent that the economic business drivers can vary and therefore put profitability at stake.
Competitive risks are related to non-economic distortion of the competitive context owing to cartels and networks as well as corrupt practices. The competitive battlefield is not even and investors who base their competitive advantage on product quality and economics are at disadvantage.
Operational risks are those that directly affect the bottom line, either because government regulations and bureaucracies add costly taxation or constraints to foreign investors or because the infrastructure is not reliable.
8. Framework for country risk analysis
Political risks operational risks competitive risks economic risks
Assets destruction (war, riots)
Assets spoliation (expropriation)
Assets immobility (transfer, freeze ) Operational Exposure
Market disruption Labor unrest
Employees Exposure Kidnapping
Gangsterism Harassment Variability Inflation
Cost of inputs Exchange rates Business logics Corruption
Infrastructure - Power, Telecommunication, Transport - Supplier Country Risk Analysis
o Nationalistic preferences
Constraints on local capital, local content, local employment