International Business

Module II - Tools for International Business

Parul Institute of Business Administration

Parul University, Vadodara
Topic covers

 Tools for Country Selection: Market Potential Index, Global

Competitive Index , FDI Confidence Index, Global Political Risk
Index (Only Concepts)
 International Product Life Cycle
 International Monetary System: Fixed Exchange Rate,
Floating Exchange Rate
 Modes of Payment in International Trade: Advance
Payment, Recoverable and Non Recoverable Letter of credit,
Consignment Sales, Open Account
Market Potential Index

 MPI is a composite index that measures the potential of a

country as a market for a product or service.
 The Market Potential Index (MPI) is an index that uses the
segment composition of a geography to estimate customer
potential based on the segment penetration rates of a chosen
product, service or lifestyle.
 It is based on eight indicators that reflect the size, growth,
intensity, consumption capacity, commercial infrastructure,
economic freedom, market receptivity, and country risk of each
country.
Uses of MPI

 To compare and prioritize different countries as potential markets

 To identify the countries with the highest potential, as well as the
countries with the lowest potential.
 To analyze the strengths and weaknesses of each country.
 Countries have a large and growing market size, which countries have a
high consumption capacity and market receptivity, and which countries
have a low country risk and economic freedom.
 Help you tailor your marketing mix and entry strategy to each country.
 Components considered in the Market
Potential Index
Market Size The total size of the target market, usually measured by population or GDP, which indicates the
potential customer base.

Market Growth The rate at which the market is expanding, which reflects future opportunities for growth.
Rate
Market Intensity The level of consumer demand and purchasing power in the market.

Market The ability of consumers in the market to purchase and consume products or services.
Consumption
Capacity
Commercial The quality of transportation, communication, and distribution networks, which impacts the ease
Infrastructure of doing business.

Economic Freedom The level of economic openness and freedom from government intervention, which affects
business regulations and opportunities.

Market Receptivity The openness of consumers to new products and innovations.

Country Risk The overall risk associated with investing or operating in a particular country, including political,
economic, and financial risks.

Market The level of integration with global markets and access to international trade.
Connectedness
 Global Competitive Index

 The Global Competitiveness Index (GCI) is an annual ranking of countries'

economies based on their ability to create and sustain high levels of economic
prosperity. The GCI is published by the World Economic Forum (WEF).
 It assesses the competitiveness of countries and economies based on a wide
range of factors that influence their productivity, prosperity, and overall
economic growth.
 The index aims to provide a comprehensive understanding of a country's
competitiveness and identify areas for improvement to foster sustainable
economic development.
 The Global Competitiveness Index considers multiple pillars, each representing
a distinct aspect of competitiveness. As of the last update in September 2021,
the GCI was based on 12 pillars, which are subject to occasional updates and
revisions by the WEF.
 Pillars

Institutions Infrastructure ICT Adoption Macroeconomic

• Assesses the quality of a • Evaluates the quality and • Focuses on the adoption and Stability
country's public and private extent of a country's integration of information and • Considers factors like
institutions, including the infrastructure, including communication technologies inflation, government debt,
legal and regulatory transportation, (ICT) across the economy and fiscal health, and exchange
environment, property rights, communication, energy, and society rate stability to evaluate a
and corruption levels technological readiness country's macroeconomic
stability

Health Skills Product Market Labor Market

• Assesses the health of a • Examines the education and • Evaluates the efficiency and • Assesses the efficiency and
nation's workforce, life skills level of the workforce, competitiveness of product flexibility of the labor market,
expectancy, and access to including the quality of markets, including market including hiring and firing
healthcare. education and the ability to concentration, trade practices, wage setting, and
meet the demands of a openness, and buyer labor-employer relations
competitive economy. sophistication

Financial System Market Size Business Dynamism Innovation Capability

• Examines the soundness and • Considers the domestic and • Assesses the level of business • Evaluates a country's capacity
efficiency of the financial international market size, competition, for innovation, research and
system, including the which affects economies of entrepreneurship, and agility development (R&D) spending,
availability of credit, depth of scale and opportunities for in responding to market and the protection of
capital markets, and access to businesses. conditions intellectual property rights.
financial services
 World Competitiveness Index

 Recently, the annual World Competitiveness Index was released by the Institute for
Management Development (IMD).
 IMD is a Swiss foundation, based in Switzerland, dedicated to the development of
international business executives at each stage of their careers
 India has witnessed the sharpest rise among the Asian economies, with a six-
position jump from 43rd to 37th rank on the, largely due to gains in economic
performance.
 The IMD World Competitiveness Yearbook (WCY), first published in 1989, is a
comprehensive annual report and worldwide reference point on the
competitiveness of countries.
 It analyzes and ranks countries according to how they manage their competencies
to achieve long-term value creation.
 Factors: Economic performance, Government efficiency, Business efficiency &
Infrastructure
 Top Global Performers

 Europe: Denmark has moved to the top of

the 63-nation list from the third position
last year, while Switzerland slipped from
the top ranking to the second position
and Singapore regained the third spot from
fifth.
 Asia: The top-performing Asian economies
are Singapore (3 th ), Hong Kong (5 th ),
Taiwan (7 th ), China (17 th ) and Australia
(19 th ).
 Others: Both Russia and Ukraine were not
assessed in this year’s edition due to the
limited reliability of data collected.
Reasons for India’s Good Performance

 Major improvements in the context of retrospective taxes in 2021

 Re-regulation of a number of sectors, including drones, space and geo-
spatial mapping.
 Significant improvement in the competitiveness of the Indian economy
 India as a driving force in the global movement to fight climate
change and India’s pledge of net-zero by 2070 at the COP26
summit also sits in harmony with its strength in environment-related
technologies in the ranking.
FDI Confidence Index

 Foreign Direct Investment (FDI) Confidence Index is an annual report

published by Kearney, a leading global management consulting firm.
 The Kearney FDI Index is a survey of global business executives ranking the
markets on the basis of their attractiveness for investments in the coming
years.
 The first-ever report from the firm was released in 1998. This index is created
with the use of data sourced from a proprietary survey of executives working
in top corporations of the world.
 FDI Confidence Index is essentially an analysis of how a given country's FDI is
affected by the economic, regulatory, and political changes in the next three
years.
 The FDICI is calculated on a scale of 0 to 3, with 0 representing poor
confidence and 3 representing high confidence.
 Overview
• To gauge investor sentiment and expectations concerning FDI
Purpose
flows over the next few years.
• The index is compiled through surveys and interviews with
Methodology senior executives and decision-makers from leading
multinational companies around the world.
• Considers a range of factors that influence investment
decisions, such as political stability, economic outlook, market
Factors Considered
potential, regulatory environment, infrastructure, human
capital, and the overall business climate of each country.

Ranking • Typically ranks countries or regions based on their scores.

• Not only provides a ranking but also offers valuable insights
Trends and
into the changing patterns and trends in global investment
Insights
flows.
• widely used by governments, businesses, and analysts to
Usefulness make informed decisions regarding investment strategies,
international expansion plans, and policy formulation.
 Global Political Risk Index
 The Political Risk Index analyses patterns in the world's most
vulnerable countries to support clients in their management of
political risk and bring attention to new trends in global politics.
 The index is a composite measure of a country’s government,
society, security and economy. While the score indicates stability or
instability for the year.
 The GPRI is scored on a scale of 0 to 100, with 0 representing the
lowest risk and 100 representing the highest risk. The index is
divided into four categories:
 Government: This category assesses the stability of the
government, the rule of law, and the effectiveness of the
bureaucracy.
 Society: This category assesses the level of social unrest, the
degree of ethnic and religious tensions, and the strength of civil
society.
 Security: This category assesses the level of crime, the threat of
terrorism, and the stability of the military.
 Economy: This category assesses the health of the economy,
the level of corruption, and the government's ability to manage
its finances.
 https://
willistowerswatson.turtl.co/story/political-risk-index-winter-2022-2023
-gated/page/28
 International Product Life Cycle

 The international product life cycle is a theoretical model describing how an industry
evolves over time and across national borders. This theory also charts the development
of a company’s marketing program when competing on both domestic and foreign fronts.
 Developed by economist Raymond Vernon in the 1960s, this theory seeks to explain how
products and industries transition from being produced and sold primarily in the home
country to becoming internationalized and manufactured and sold in other countries.
 International product life cycle concepts combine economic principles, such as market
development and economies of scale, with product life cycle marketing and other
standard business models.
 The IPLC theory is based on the following assumptions:
 The cost of production decreases as the product is produced in larger quantities.
 The demand for a product is initially high in developed countries, where consumers have more
disposable income.
 As the product matures, demand grows in developing countries, where consumers have lower
incomes but are becoming more affluent.
IPLC Stages

 The IPLC theory posits that products go through five stages as they are
introduced to new markets:
 Introduction: This is the stage when a new product is first introduced to the
market. The product is typically expensive and has a limited market.
 Growth: This is the stage when the product starts to become more popular
and the market expands. Prices start to come down and competition
increases.
 Maturity: This is the stage when the product reaches its peak of popularity
and the market is saturated. Prices are relatively stable and competition is
intense.
 Decline: This is the stage when the product starts to lose popularity and the
market begins to shrink. Prices may come down further, but competition
remains intense.
 Market Strategies
 In the introduction stage, the product is new to the market and there is little competition.
Marketers need to focus on creating awareness of the product and generating demand. They
may use strategies such as advertising, public relations, and sampling.
 In the growth stage, the product is becoming more popular and the market is expanding.
Marketers need to focus on increasing sales and maintaining market share. They may use
strategies such as pricing promotions, distribution expansion, and product differentiation.
 In the maturity stage, the product has reached its peak of popularity and the market is
saturated. Marketers need to focus on defending market share and preventing decline. They
may use strategies such as product repositioning, value-added services, and brand extensions.
 In the decline stage, the product is losing popularity and the market is shrinking. Marketers
need to focus on minimizing losses and exiting the market gracefully. They may use strategies
such as product deletion, price discounts, and clearance sales.
 The IPLC can also help marketers to understand the different marketing strategies that are used
in different countries. For example, in developed countries, marketers may focus on product
differentiation and brand building. In developing countries, marketers may focus on price
promotions and distribution expansion.
International Monetary System

 The international monetary

system is a set of
conventions and rules that
support cross-border
investments, trades, and
the reallocation of capital
between different
countries. These rules
define how exchange rates,
macroeconomic
management, and balance
of payments are addressed
between nations.
Key Takeaways

 International Monetary System refers to the framework in the

world of foreign exchange through which capital movements and
trade of goods and services are facilitated.
 It has evolved from using gold as a means of exchange in the
1880s to implementing the floating exchange rates since the
convention in Jamaica in 1971.
 Its systems ensure sufficient liquidity to aid the temporary
Balance of Payments (BOP) deficits.
 It also allows member countries to practice independent fiscal
and monetary policies according to the state of their respective
economies.
Key Components

Exchange Rate Regimes

International Institutions
Bilateral and Multilateral Agreements
Reserve Currencies
Currency Convertibility
Capital Flows and Financial Integration
Currency Crises and Financial Stability
Global Economic Coordination
Fixed and Floating Exchange Rates

 Fixed and floating exchange rates are two contrasting systems that
countries use to determine the value of their currency in relation to
other currencies. These systems have different implications for
exchange rate stability, monetary policy, and economic interactions with
other countries
Fixed Floating
• Fixed exchange rate system is • Floating exchange rate system
referred to as the exchange is the exchange system where
system where the exchange the exchange rate is
rate is fixed by the government dependent upon the supply
or any monetary authority. It is and demand of money in the
not determined by the market market.
forces. • In a flexible exchange rate
system, the value of the
currency is allowed to fluctuate
freely as per the changes in
the demand and supply of the
foreign exchange.
Key Features of Fixed Exchange Rates

Reduced
Central Bank Currency
Exchange
Intervention Reserves
Rate Risk

Loss of
Vulnerability
Monetary
to External
Independenc
Shocks
e
Key Features of Floating Exchange
Rates

Monetary
Market Exchange Automatic
Independenc
Forces Rate Risk Adjustment
e

Less
Reduced
Market Certainty in
Need for
Speculation International
Reserves
Trade
 Modes of Payment in International
Trade
Cash in Advance (Prepayment)

Open Account

Documentary Collections

Letters of Credit (L/C)

Cash Against Documents (CAD)

Documentary Credits with Deferred Payment

Consignment

Countertrade

Foreign Exchange Risk Management

Thank You