Introduction
The objective of this report is to analyze the country-level data across the upper middle-income countries to understand and report on the investment climate in these countries for the proposed expansion of the firm into new markets in these countries. This report takes into account the levels of inflation, consumer prices, level of investments, and education level of the population to analyze the markets that the company would like to move in and to suggest suitable entry strategies to the company. For this report countries that had GNI per capita income between $ 3,856 and $ 11,905 have been classified as upper-middle-income countries and the relevant data has been gathered and analyzed (World Bank, 2009).
Levels of Inflation
During this period of economic recession, global inflation rates have climbed to higher levels making policymakers of all countries face tougher economic challenges. When the global growth rate is slow with an increase in the prices, a strengthening currency would be able to protect the consumers by increasing the buying power of the consumers. Therefore countries with relatively weak currencies by maintaining the growth rate stable would be able to fight inflation effectively. On the other hand countries with stronger currencies like the euro will be having fewer anti-inflationary tools disabling them to protect the economy. Asian economies with their central banks having the mechanisms to counter price pressures and fight inflation would be attractive destinations for investments (Plumberg & Johnson, 2008).
Inflation in the high middle-income countries during the past years has shown the following trend.
Though the inflation level showed a decline in 2005, the subsequent periods have shown an increase in the level which implies that higher middle-income countries having weaker currencies have to maintain the growth rate for fighting against inflation.
Consumer Prices
The consumer price index is the tool used to measure the changes over time in the prices paid by the households for the goods and services they usually purchase for consumption. The scope of the consumer price index includes the prices of all consumer durables like furniture and automobiles, luxury goods, food, clothing, and the amount spent on travel, insurance, and social security contributions in the calculation of the price index. Though the consumer price index provides a strong base for assessing the investment climate of a country, it is to be remembered that it is not possible to monitor the movements of prices in all items consumed by the household (World Bank Statistical Manual, 2009). Therefore, prices of few representative items are considered for arriving at the consumer price index. For assessing the investment climate of upper-middle-income countries the consumer price index is the appropriate measure. However, in the absence of consumption data, the Gross National Income (GNI) per capita can be taken as the basis for assessing the investment climate. World Bank reports GNI for higher middle-income countries as below.
It can be observed from the table that there is a consistent increase in the GNI over the period from which it can be assumed that the purchasing power of the people in these countries has increased over the period which offers a better climate for investment.
Level of Investments
Openness to foreign investment is one of the major criteria to judge the suitability of any country as an investment destination. There are several factors like transparency, enforcement of laws and regulations, the existence of strong legal systems, and economic reforms facilitating better investment opportunities that determine the suitability of a country for investment. In general, the emerging economies whether they belong to the upper-middle-income group or not, are successful in attracting more foreign investment and in establishing their creditworthiness for obtaining private commercial loans (Sanford, 2003, p 9). China is one of the classic examples in this context as the country was the largest receiver of foreign direct investments in the last century (US Department of State, 2008).
The data relating to high-middle-income countries concerning the level of foreign direct investments received by them is shown in the following table.
From the table, it is clear that there has been a constant increase in the investment levels in the case of high middle-income countries signifying the fact that these countries have offered better investment climates for the investors.
Education of Population
The improvement in investment climate has a strong correlation with education. The link between the investment in human capital and growth is strengthened by how the educational services are provided and the skills are allocated within an economy. It is quite normal that increased investment would result in more demand for human capital. Since firms would have more opportunities to adopt newer and improved technologies they would be in a position to raise the social and private return for education. Moreover, there will be a need for more skilled workers as multinational firms tend to use technology transfers and these technologies are to be adopted by the local firms. Multinational firms may also adopt significant changes in organizational structures which also necessitate a higher level of education in the country where the investment is proposed to be made. Even though higher levels of formal education may not be required by the firms for all its activities, lack of availability of workers with some basic education may pose a problem for these firms to promote high value-added manufacturing operations (Smith, 2004, p 138). Therefore the level of education among the population becomes an important factor in deciding on the investment in a particular country.
The table above indicates the level of education among the population in respect of higher middle-income countries. This percentage is almost equal to the 97% population with literacy in respect of Europe and Central Asia.
Markets that the Company can Move into
Considering the classification of the countries done by the World Bank based on income, there are several upper-middle-income countries located in Latin America and the Caribbean region. These countries include Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Mexico, Panama, Peru, Uruguay, and Venezuela. All these countries offer a large scope for expansion of the market of the company. It is important to consider the individual country’s risk in respect of these countries while assessing the market potential. The country risk can be assessed based on various factors including political and economic structure risks. Haner & Ewing, (1985) define country risk as “the prevention of losses from sociopolitical, financial and operating risks, all of which are necessary and sufficient conditions for measuring the risk incurred on the business by operating in a foreign country”. Country risk is an important factor in deciding the expected return on investment and has to be considered in full while any company wants to invest in a foreign country. The analysis of country risk normally covers the potential of the country in respect of its natural and human resources, and the willingness and ability of the government to recognize economic and budgetary problems. The government should also be in a position to take appropriate remedial actions wherever necessary. The country’s risk is enhanced by trends towards the government-imposed price, interest rates, and exchange control measures. The desire of the country to support the international business needs of domestic customers also determines the degree of country risk against the business environment. Country risk covers the possibilities of nationalization or expropriation of assets, government repudiation of external indebtedness, stringent exchange control, and currency depreciation or devaluation. Therefore careful consideration of all the country’s risk factors needs to be taken into account while deciding on the expansion into the Latin American market.
Market Entry Strategies
The market entry strategies should be based on the dominant tendency of increasing the resources commitment gradually over time (Shama, 1995). Three different forms of entry models can be considered for expanding into new markets. They are (i) exports, (ii) forming a joint venture with a local partner, and (iii) acquiring a local firm.
International companies adopt less risky modes such as exporting to retailers or wholesalers as this mode presents the lowest financial risk. This mode also provides valuable feedback on the acceptance of the products of the firm and the effectiveness of its marketing techniques by the foreign market (Schuh & Holzmuller, 2000). When there is improvement in the sales and the local business in the foreign country justifies the investment, the firm may open a representative office or sales office to coordinate the business. The objective of opening a representative office is to gather more information on the new market, to educate the customers and middlemen, and to secure better control over the marketing efforts to sustain the growth in the business. If the business in the overseas market develops according to plan the representative office may be converted into a marketing and sales subsidiary having a reporting responsibility to the head office or parent company in the home country. Besides exporting, a joint venture may also be considered as an entry strategy when circumstances warrant it. However, since sales growth in the upper middle-income countries is largely dependent on the overall economic development of the countries exporting through middlemen would ideally suit the consumer goods business.
Conclusion
A good investment climate fosters productive private investment leading to overall economic growth and poverty alleviation. It also creates employment opportunities for people, apart from providing a sustainable source of tax revenue to the government. However, an economy to become an attractive destination for investment should possess certain basic characteristics in terms of its political and economic stability. Factors such as level of inflation, level of investments, consumer price levels, and education of population are important factors affecting the investment climate. Based on the analysis of relevant data to consider these factors, this report suggests entering the Latin American and Caribbean market through exporting for a possible expansion of the Company’s business in overseas markets.
References
- Haner, F.T. & Ewing, J., 1985. Country Risk Assessment: Theory and Worldwide Practice. New York: Praeger.
- Plumberg, K. & Johnson, S.C., 2008. Global Inflation Climbs to Historic Levels. [Online]
- Sanford, J.E., 2003. Developing Countries: Definitions, Concepts and Comparisons. New York: Nova Publishers.
- Schuh, A. & Holzmuller, h., 2000. Marketing Strategies of Western Consumer Goods Firm in Central and Eastern Europe. [Online]
- Shama, A., 1995. Entry Strategies for U S Firms to the former Soviet Bloc and Eastern Europe. California Management Review, 37(3), pp.90-109.
- Smith, W., 2004. A Better Investment Climate for Everyone. New York: World Bank Publications.
- USDepartmentofState, 2008. 2008 Investment Climate Statement – China.
- WorldBank, 2009. Country Classification. [Online]
- WorldBankStatisticalManual, 2009. Consumer Price Index. [Online]