Global Strategic Global Strategic ManagementManagement

Country AttractivenessCountry Attractiveness

Hadi Satyagraha, Ph.D.Hadi Satyagraha, Ph.D.

Country AttractivenessCountry Attractiveness

A function ofA function of : :• Market prospectsMarket prospects• Competitive contextCompetitive context• Operating risksOperating risks

Two fundamental questionsTwo fundamental questions::• Is business likely to generate a return Is business likely to generate a return

equal or higher than the cost of capital?equal or higher than the cost of capital?• Are the risks acceptable to the Are the risks acceptable to the

shareholders and employees?shareholders and employees?

Risks and OpportunitiesRisks and Opportunities

Risks

Opportunities

Low

Low

High

High

High Risks

High RiskHigh Return

HighlyAttractive

Low RiskLow Return

Low Attractiveness

Market OpportunitiesMarket Opportunities

CountryAttractiveness

Market:. Size. Growth. Customer quality

Resources:. Critical source of:

. Personnel

. Raw materials

. Components

. Labor. . Technology

. Learning. Quality of infrastructure:. Location

Incentives:. Taxes. Subsidies. Infrastructure. Government contracts

Competition:. Intensity of rivalry. Entry barriers. Bargaining power of buyers and suppliers

Market OpportunitiesMarket Opportunities

EconomicEconomic SociologicalSociological DemographicaDemographicall

InstitutionalInstitutional

GDPGDP UrbanizationUrbanization PopulationPopulation GovernmentGovernment

spendingspending

GDP/capitaGDP/capita DistributionDistribution PopulationPopulation

GrowthGrowthInfrastructure;Infrastructure;

. POWER. POWER

. TELECOM. TELECOM

Disposable Disposable incomeincome

Age distributionAge distribution

Income Income distributiondistribution

Export/ImportExport/Import

Savings rateSavings rate

Investment rateInvestment rate

Quality of DemandQuality of Demand

Segmentation of population based on Segmentation of population based on income per capita:income per capita:• Top endTop end• Middle classMiddle class• Higher low endHigher low end• Lower endLower end

Industry StructureIndustry Structure

Rivalry

New Entrants

Suppliers Buyers

Substitutes

Resource EndowmentResource Endowment

Natural resources:Natural resources:• MineralsMinerals• ForestryForestry• MarineMarine

Human Resources:Human Resources:• Quality (Indonesia: low)Quality (Indonesia: low)• Cost (Indonesia: low)Cost (Indonesia: low)

Infrastructure:Infrastructure:• Communications and logisticsCommunications and logistics• Support industriesSupport industries

Porter’s Diamond FrameworkPorter’s Diamond Framework

Context

Related &SupportingIndustries

DemandConditions

FactorsConditions

Government IncentivesGovernment Incentives

Tax Tax

ReductionReductionImportImport

ExportExportFinancialFinancial

IncentivesIncentivesCompetitivCompetitive Incentivee Incentive

OperationaOperational Incentivel Incentive

Tax holidayTax holiday Import/Import/export export dutiesduties

ExportExport

CreditCreditProtectionProtection

Against impAgainst impSpecialSpecial

ratesrates

Reduced Reduced raterate

Tax creditsTax credits GuaranteedGuaranteed

LoansLoansCapacityCapacity

RegulationRegulationPublic Public resourcesresources

AcceleratedAccelerated

DepreciationDepreciationEquity Equity

ParticipationParticipationMonopolisticMonopolistic

PositionPositionMarketMarket

studiesstudies

PropertyProperty

TaxesTaxesRisk Risk

insuranceinsurance

Country Risk AnalysisCountry Risk Analysis

CountryRisks

Political Risks:. Shareholder exposure. Employee exposure. Operational exposure

Economic Risks:. Growth. Inflation. Exchange rates

Operational Risks:. Infrastructure. regulations

Competitive Risks:. Infrastructure. regulations

Country Risk:Country Risk:China and IndiaChina and India

ChinaIndia

Political Risks

Competitive Risks

Operational Risks

Economic Risks

Globalization FactorsGlobalization Factors Economic integration:Economic integration:

• TradeTrade• FDIFDI

Personal contacts:Personal contacts:• TelephoneTelephone• TravelTravel• RemittancesRemittances

Technological connectivity:Technological connectivity:• Internet usersInternet users• Internet hostsInternet hosts• Secure serversSecure servers

Political engagement:Political engagement:• International organizationsInternational organizations• UN PeacekeepingUN Peacekeeping• TreatisesTreatises• Government transfersGovernment transfers

Globalization IndexGlobalization Index

EconEcon PersPers TechTech PolPol

1.1. SingaporeSingapore v v v v2.2. SwitzerlandSwitzerland v v v v v v3.3. United StatesUnited States v v4.4. IrelandIreland v v vv v v5.5. DenmarkDenmark v v vv v v v v6.6. CanadaCanada vv v v v v7.7. NetherlandsNetherlands v v v v8.8. AustraliaAustralia v v9.9. AustriaAustria vv v v10.10. SwedenSweden v v v v

Top 25 FDI Confidence IndexTop 25 FDI Confidence Index20042004 20052005 20042004 20052005

ChinaChina 11 1 1 CanadaCanada 16 16 2121

United StatesUnited States 2 2 33 BrazilBrazil 17 17 77

IndiaIndia 3 3 22 SingaporeSingapore 18 18 18 18

United KingdomUnited Kingdom 4 4 4 4 HungaryHungary 19 19 1111

GermanyGermany 5 5 99 ThailandThailand 20 20 20 20

FranceFrance 6 6 1414 South KoreaSouth Korea 21 21 2323

AustraliaAustralia 7 7 88 MexicoMexico 22 22 1616

Hong KongHong Kong 8 8 1010 IndonesiaIndonesia 23 23 Out Out

ItalyItaly 9 9 1919 NetherlandsNetherlands 2424 Out Out

JapanJapan 10 10 1515 TaiwanTaiwan 2525 Out Out

RussiaRussia 11 11 66 TurkeyTurkey 2929 13 13

PolandPoland 12 12 55 Dubai/UAEDubai/UAE 22 22

SpainSpain 13 13 1717 CentralCentral AsiaAsia 27 27 2424

Czech RepublicCzech Republic 14 14 1212 RomaniaRomania 4242 25 25

MalaysiaMalaysia 15 15 OutOut

5 Most Important Drivers5 Most Important Drivers

Lower R&D costsLower R&D costs Quality labor forceQuality labor force IP protectionIP protection Quality of university and research centersQuality of university and research centers Regulatory environmentRegulatory environment

ConclusionConclusion China, India, and Eastern European China, India, and Eastern European

reached new heights in terms of country reached new heights in terms of country attractivenessattractiveness

Drivers of FDI in these regions are:Drivers of FDI in these regions are:• Low costLow cost• Higher quality labor forceHigher quality labor force• More reliable property rights regimesMore reliable property rights regimes• Educational and IT infrastructuresEducational and IT infrastructures

Business models:Business models:• Joint venture: R&D and knowledge-relatedJoint venture: R&D and knowledge-related• Third party outsourcing: IT, call centers, and Third party outsourcing: IT, call centers, and

distribution & logisticsdistribution & logistics

Global Strategic Global Strategic ManagementManagement

Location Attractiveness IndexLocation Attractiveness Index

20042004

A.T. KearneyA.T. Kearney

IntroductionIntroduction

Potential location for offshore Potential location for offshore servicesservices

Diversify risks and tap into Diversify risks and tap into global global talenttalent

Viability of countries based on:Viability of countries based on:• Financial structureFinancial structure• People skills and availabilityPeople skills and availability• Business environmentBusiness environment

Attractiveness Index 2004Attractiveness Index 2004

FinancialFinancial Business EnvBusiness EnvPeoplePeople

IndiaIndia 3.72 3.72 1.31 1.31 2.09 2.09 ChinaChina 3.32 .93 1.36 3.32 .93 1.36 Malaysia 3.09 1.77 .73Malaysia 3.09 1.77 .73 Singapore 1.47 2.63 1.36Singapore 1.47 2.63 1.36 Philippines 3.59 .92 .94Philippines 3.59 .92 .94 Thailand 3.44 1.19 .57Thailand 3.44 1.19 .57 Vietnam 3.65 .70 .35 Vietnam 3.65 .70 .35

Evaluations by Category (p5)Evaluations by Category (p5)

CategoryCategory Sub-categorySub-category MetricsMetricsFinancial StructureFinancial Structure Compensation Compensation

costscosts

Infrastructure costsInfrastructure costs

Tax and regulatory Tax and regulatory costs costs

Average wageAverage wage

Utilities costsUtilities costs

Costs of corruptionCosts of corruption

People skills and People skills and availabilityavailability

Experience and Experience and skillsskills

Lbor availabilityLbor availability

Business Business EnvironmentEnvironment

Economic and Economic and politicalpolitical

InfrastructureInfrastructure

Cultural Cultural adaptabilityadaptability

Security of IPSecurity of IP

People Skills and Availability (p6)People Skills and Availability (p6)

IndiaIndia ChinaChina SingaporeSingapore PhilippinesPhilippines MalaysiaMalaysia ThailandThailand VietnamVietnam

Business Environment (p10)Business Environment (p10)

SingaporeSingapore MalaysiaMalaysia IndiaIndia ThailandThailand ChinaChina PhilippinesPhilippines VietnamVietnam

Financial Structure (p13)Financial Structure (p13)

IndiaIndia VietnamVietnam PhilippinesPhilippines ThailandThailand ChinaChina MalaysiaMalaysia SingaporeSingapore

Global Strategic Global Strategic ManagementManagement

FDI Confidence IndexFDI Confidence Index

20042004

A.T. KearneyA.T. Kearney

SummarySummary

Surveys of CEOs, CFOs of 1000 Surveys of CEOs, CFOs of 1000 largest firms (70% of global FDI)largest firms (70% of global FDI)

On 65 countries receiving more than On 65 countries receiving more than 90% of global FDI flows90% of global FDI flows

Tracking impact of political, Tracking impact of political, economic and regulatory changes, economic and regulatory changes, and preferences of leading and preferences of leading companiescompanies

FDI Confidence Index (p3)FDI Confidence Index (p3)

ChinaChina 2.032.03 IndiaIndia 1.401.40 Hong KongHong Kong .99 .99 JapanJapan .97 .97 MalaysiaMalaysia .92 .92 SingaporeSingapore .91 .91 ThailandThailand .87 .87 Indonesia .80Indonesia .80

China versus India (p4)China versus India (p4) China AdvantageChina Advantage::

• Market sizeMarket size• Market growthMarket growth• Access to export marketAccess to export market• Government incentivesGovernment incentives• Production costsProduction costs• InfrastructureInfrastructure• StabilityStability• Quality of loifeQuality of loife• Tax regimeTax regime• Competitor presenceCompetitor presence• Consumer Consumer

sophisticationsophistication

India AdvantageIndia Advantage::• Highly educated Highly educated

workforceworkforce• Management talentManagement talent• Rule of lawRule of law• TransparencyTransparency• Cultural barriersCultural barriers• Regulatory environmentRegulatory environment• Availability of MA Availability of MA

targetstargets

Global Developments (p7)Global Developments (p7)

Recovery of US economyRecovery of US economy Dollar volatilityDollar volatility Overheating of China’s economyOverheating of China’s economy Trade initiativesTrade initiatives Government regulationsGovernment regulations Corporate governance issuesCorporate governance issues TerrorismTerrorism Rising interest ratesRising interest rates

Reasons for Not Off-shoring (p10)Reasons for Not Off-shoring (p10)

Higher labor skills Higher labor skills Better infrastructureBetter infrastructure Proximity to consumersProximity to consumers Maintain organizational controlMaintain organizational control Less risksLess risks Safeguard IPSafeguard IP Cultural affinityCultural affinity

Most critical risks (p12)Most critical risks (p12)

Government regulationsGovernment regulations Country financial risksCountry financial risks Currency/interest rates volatilityCurrency/interest rates volatility Political/social disturbancesPolitical/social disturbances Corporate governance issuesCorporate governance issues Absence of rule of lawAbsence of rule of law Theft of IPTheft of IP Terrorist attacksTerrorist attacks

High Risk CountriesHigh Risk Countries

BrazilBrazil 35%35% ChinaChina 23%23% MexicoMexico 21%21% India India 17%17% PolandPoland 8%8%

Greatest Risks in ChinaGreatest Risks in China

Legal/regulatory environmentLegal/regulatory environment CorruptionCorruption IP rightsIP rights Foreign exchange controlForeign exchange control Political reformPolitical reform Cultural adaptabilityCultural adaptability Protectionist policyProtectionist policy Unreliable local partnersUnreliable local partners

Greatest Risks in IndiaGreatest Risks in India

BureaucracyBureaucracy Political stabilityPolitical stability Maintaining cost advantageMaintaining cost advantage Physical infrastructurePhysical infrastructure Geopolitical risks: PakistanGeopolitical risks: Pakistan Trader barriersTrader barriers TransparencyTransparency PovertyPoverty

Greatest Risks in IndonesiaGreatest Risks in Indonesia

BureaucracyBureaucracy Poor infrastructurePoor infrastructure Shaky financial systemsShaky financial systems Fragile political situationFragile political situation Rampant corruptionRampant corruption Terrorist attacksTerrorist attacks Separatist violenceSeparatist violence