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Answers for CHAPTER 6

1 Take two countries of your choice and compare their country risk profile? Please find below a table of country risk from the Global Insight web site (www.globalinsight.com):

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre

What is the middle class effect? The middle class effect describes the statistical phenomenon existing in emerging countries showing that middle class population grows faster than the growth of the economy. The middle class effect is due to the skewed nature of the income distribution in emerging countries. It fosters the demand for branded consumer goods. The following chart shows the dramatic evolution and forecast of the middle class population in China and India

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre


90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

EVOLUTION OF URBAN HOUSEHOLDS INCOME IN CHINA

2005

300 M 160 M
67 M
0 50000 POORS LOWER MIDDLE CLASS

2015
58 M
100000 UPPER MIDDLE CLASS 150000 MASS AFFLUENTS 200000 GLOBAL AFFLUENTS 250000

RMB

Source: Farrell Diana , Ulrich Gersh and Elizabeth Stepehenson, The Value of Chinas Emerging Middle Class, The McKinsey Quarterly, 2006 Special Edition, Pp. 60-69

Middle Class in India: McKinsey Survey2007


60% 50% 40% 30% 20% 10% 0% 0 100 200 300 400 500 600 700 800 900
Thousand Rupiah Per Household 1US$=45.7Rp)

2005

2015 2025

1000
Global Above 1000000Rp >21000US$

Deprived Below 90000Rp <2000US$

Aspirers (90000-200000Rp) (2000-4400US$)

Low Middle Class Seekers ( 200000-500000 Rp) (4400-11000Us$)

Middle Class Strivers (500000-1000000Rp) (11000-21000US$)

Source: McKinsey Research Institute: Tracking the Growth of Indian Middle ClassMcKinsey Quarterly 2007 n3

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre 3 What determines the quality of demand? The quality of demand describes the nature of the consumer segmentation as well as the customer value curve. A country where the main bulk of the demand for a certain type of product or service would be concentrated in one large segment of low value added products where customers would only be driven by the price, would show a low quality of demand. Low quality demand segments would see low customer loyalty. Quality of demand is essentially driven by purchasing power and the absence or presence of an important educated and sophisticated middle class. The following graph shows the typical segments that exist in a large variety of industry and the quality associated with those.

High End

Higher Margin Lower volume

Elites Cosmopolites

: Differentiated products/ services Functionalities and Performances Less Price sensitive More Loyalty

Large Corporations

Middle Class

Low End
Low End: Standardized Products/ servics Mass Production and distribution Price sensitive

Lower Margin Higher volume Medium Sized Firms

Low Income Groups

The majority ofSMEs

Consumers Segments

Business-to-Business Segments

What are the tools of governments to promote foreign investments? Below is a reproduction of table 6.5 that gives a description of the various incentives used by governments to attract foreign investments.

GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre


Table 6.5 Major Types of Incentives for Foreign Investments Type of Incentive Fiscal Incentives: Tax Reduction Source: UNCTAD, 1996 Nature of the Incentive 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 and D) Exemption of property taxes or others special taxes Reduction of taxes base on local content or employment levels Income tax exemption or reduction for expatriate personnel Exemption of import duties and value added taxes for raw material, capital equipments and parts Exemption of export duties Tax credits on domestic sales based on export performances Subsidies of all kinds Sweet loans Guaranteed loans Export credits Equity participation Risks insurance (Exports, Exchange rates) Protection against imports Capacity regulation Monopolistic position Preferential purchases Preferential rates rents, lands, power telecommunication, etc. Assistance for market studies Utilization of public services or government agencies for companies operations Detachment of personnel

Import and Export

Financial Incentives

Competitive Incentives

Operational incentives

5.

Can you give examples of a Hub in Africa, an Emerging Giant in Latin America, a resource rich country in Eastern Europe? The book gives the following characteristics of those types of country:
Hubs Population GDP GDP/Cap Infrastructure Skills Labour Costs Risks Natural L L H H H M L Emerging Giants H M L L L L M Resource Rich Developing* M/H L L L L L H

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GLOBAL STRATEGIC MANAGEMENT 2d Edition 2007 Philippe Lasserre


Resources L (L= Low, M=Medium, H= High) M H

The following countries would qualify for being: Hub in Africa: Emerging Giant in Latin America: Resource Rich in Eastern Europe: Dubai Brazil Russia, Ukraine

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