Quiz #5 1. Why did Mengniu, Yolo, Dongxiang, and Evergrande accept equity ratchets, but not XCMG and Taizinai (under local government trusteeship)?  [A] Chinese capital market was predominantly controlled by state-owned banks  [B] Private enterprises in China were more active in seeking domestic funding  [C] State-owned enterprises in China were more struggling in getting banking loans in China  [D] Private enterprises in China have better information disclosure than state-owned enterprises 2. Why didn’t PE investors sue Taizinai but Gansu Shiheng?  [A] Gansu Shiheng was a small private player, whereas its plaintiff is partially a dominant Chinese central state-owned enterprise  [B] Taizinai was a private enterprise  [C] Gansu Shiheng was a major state-owned enterprise  [D] Taizinai was local, whereas Gansu Shiheng was owned by a Hong Kong-based shareholder 3. Why did the Supreme Court only enforce the equity ratchet between shareholders but not firms?  [A] Shareholders’ bids should not be on the cost of uninformed creditors, many of which are state-owned.  [B] Equity ratchet was initially designed as an agreement between shareholders, not firms.  [C] Equity ratchet is protecting shareholders against the investee firm.  [D] Shareholders are the ultimate property rights owner of firms.  Please send your answers to my graduate assistant Matthew Ashman and cc me by 8pm.

The process: A Summary

Tonight  1. Identifying the most relevant environmental factors  2. Circle time  3. Teamwork on the final project  5. Quiz 6

What have we learned so far?  Firm-specific competitive advantages  Star with the ownership (O) advantages at home  Market-oriented institutions  Fit O advantages in a new institutional contexts  Some concrete measures of market-oriented economic/financial/legal institutions  Now, which of these foreign institutional contexts are most relevant to our business? In other words, there are so many differences between US and a new country (China/Brazil), which differences do we need to include in our country risk analysis?

Institutions Matter, but What and How? DR. VICTOR Z. CHEN UNC CHARLOTTE

What have we learned so far?  What do we care most when entering a new market?  Survival under competition  External forces in the location that shape the degree and characteristics of local competition

The diamond model: Porter’s explanation of determinants of national competitiveness From Mike Porter’s The competitive advantage of nations. Chance Factor Conditions Demand Conditions Structure of firms and rivalry CSAs in certain industries/products

The diamond model: Porter’s explanation of determinants of national competitiveness Chance Factor Conditions Demand Conditions Structure of firms and rivalry  Human resources  Quality, skills, and cost  Physical resources  Land, water, mineral deposits, timber, hydro power sources, and fishing grounds  Knowledge resources  Scientific, technical, and market knowledge  Capital resources  Amount, type, and cost of financial resources  Infrastructures  Transportation, communications, health-care, etc.

The diamond model: Porter’s explanation of determinants of national competitiveness Chance Factor Conditions Demand Conditions Structure of firms and rivalry  Composition of the home demand  Various niches, buyer sophistication  The size and growth of the home demand  Internationalization of domestic demand

The diamond model: Porter’s explanation of determinants of national competitiveness Chance Factor Conditions Demand Conditions Structure of firms and rivalry  Competitive downstream industries through efficient, early, or rapid access to cost-effective inputs;  Competitive related industries that can coordinate and share activities in the value chain  Competing products/services  Complementary products/services

The diamond model: Porter’s explanation of determinants of national competitiveness Chance Factor Conditions Demand Conditions Structure of firms and rivalry  The ways in which firms are managed and choose to compete  The motivations of companies and their employees and managers  The competition intensity in the respective industry

The diamond model: Porter’s explanation of determinants of national competitiveness Chance Factor Conditions Demand Conditions Structure of firms and rivalry  Chance events are occurrences that are outside of control of a firm  New inventions  Political decisions by foreign governments  Wars  Significant shifts in world financial markets or exchange rates  Discontinuities in input costs such as oil shocks  Surges in world or regional demand  Major technological breakthroughs

The diamond model: Porter’s explanation of determinants of national competitiveness Chance Factor Conditions Demand Conditions Structure of firms and rivalry  Government influences  Subsidies  Education policies  The regulation or deregulation of capital markets  The establishment of local product standards and regulations  The procurement of goods and services  Tax laws  Antitrust regulation

Chance Factor Conditions Demand Conditions Structure of firms and rivalry CSAs: Cluster-specific advantages CSAs in certain industries/products Clustering: Interconnection and Concentration of All These Factors

Chance Factor Conditions Demand Conditions Structure of firms and rivalry Country A CSAs in certain industries/products Clustering: Interconnection and Concentration of All These Factors

Chance Factor Conditions Demand Conditions Structure of firms and rivalry Country B CSAs in certain industries/products Clustering: Interconnection and Concentration of All These Factors

CSA analysis is threefold  Step 1: Locate your (subnational) cluster not just a country  Step 2: Diamond Model  Draw the current structure/characteristics of CSAs in one cluster vis-à-vis its alternative (e.g., Sao Paulo in Brazil vis-à-vis Beijing in China) for your selected business/industry/product/service.  Compare each pair of diamond components between the two countries, and note which cluster is stronger in which pair, including very specific measures in each component.  Step 3: Arrows  Project the ongoing patterns of each component in each cluster (i.e., green vs. red arrows)  Compare each pair of diamond components between the two clusters based on the after-change status.  We will discuss this in more detail in the last section using your selected business.

An example: CSAs for American ICT multinationals such as Google.

Chance Factor Conditions Demand Conditions Structure of firms and rivalry CSA for ICT industries/products Factor conditions: Plenty of high-quality computer sciences and engineering graduates Abundant VC capital network Chance events: PC revolution WWW revolution Supporting industries and institutions: HR intermediaries: e.g., Smart Valley Inc. High-standard universities: e.g., Stanford Information sharing networks: e.g., Enterprise Network; Software Industry Coalition. Collective lobbyists for deregulation and low tax: e.g., Regulatory Forum; Council on Tax and Fiscal Policy Structure of firms and rivalry: Information sharing across IT researchers is common Risk-taking and entrepreneurship is a local culture embedded in the wild west California style Demand conditions: Relatively richer consumers Sophisticated buyers located in the founding district of ICT industries Government: Public R&D funding: e.g., SBIR, DARPA, etc. Public VCs: e.g., CalPERS Tax exempt for selected VC activities. An example: CSAs for American ICT multinationals such as Google. Silicon Valley

Single- to Double/Multi- Diamond  More often than not, the most relevant diamond components do not all locate within the same cluster, but more spread in different locations, sometimes across borders.

Discussion: The rise of the Great Lakes area as a cluster of auto industry: An application of diamond model  Question 1: In this situation, how do you expand the diamond model to capture Canada?  Question 2: What are the locational advantages for this cluster in the US? (list 1 example for each box/bubble of the diamond model)  Question 3: What are the locational disadvantages for this cluster in the US assuming the absence of Canada in the model? (list 1 example for each box/bubble of the diamond model)  Question 4: How do Canadian locational advantages contribute to this cluster? (list 1 example for each box/bubble of the diamond model)  Question 5: Can you organize all the above discussions into the model you created for Question 1?

Geography

Population advantages State Median income United States49,27646,32642,22834,07630,12623,618 Illinois50,72848,39846,17138,07131,88424,870 Indiana46,13942,43740,37933,38527,08922,675 Michigan46,27645,93345,04736,42632,11724,242 Minnesota52,32154,21552,68137,93329,47923,856 New York49,78147,17642,11433,02831,79423,639 Ohio45,88644,20341,78534,94129,79025,174 Pennsylvania48,31446,30043,49934,52430,36722,877 Wisconsin50,35144,65045,34640,95531,13323,246

Cluster Advantages (assuming the absence of Canada in the model) Chance Factor Conditions Demand Conditions Structure of firms and rivalry CSAs in certain industries/products Natural Gas Pipeline Safety Act 1968 Natural Gas Wellhead Decontrol Act of 1989 Energy Policy Act 1992

Cluster Disadvantages (assuming the absence of Canada in the model) Chance Factor Conditions Demand Conditions Structure of firms and rivalry CSAs in certain industries/products GDP US$15 trillion 3 billion bbl per year just for running vehicles, not including production etc. Hunger & uncertainty

An example: North Am auto industry (cont’d): Oil reserves in Canada; Oil pipelines between Canada and US; Auto industry in the US. GDP US$15 trillion 3 billion bbl per year just for running vehicles, not including production etc. Production vs. Consumption ml. bbl/day: US: 19 vs. 9.7 (-9.3) Canada: 3.9 vs. 2.2 (+1.7) GDP US$1.7 trillion

An example: North Am auto industry Canadian railways and ports of entry/exist serving the US markets LA-Long Beach Asia’s pacific ports Up to 58 hours closer 5 days

An example: North Am auto industry (cont’d) Free-trade agreement FTA since Jan 1988 NAFTA since Jan 1994

The double diamond: Regional integration of multiple countries e.g., petroleum and minerals; Prince Rupert and Vancouver in British Columbia as ports of entry CN and CP railways as inter-state transportation e.g., the largest vehicle market with high purchasing power e.g., a decent market with high purchasing power CA auto parts suppliers (e.g., Magna International) e.g., abundant labor force; petroleum refinery; domestic pipelines Pacific gateway initiative Keep the border open; energy policies (NA)FTA since 1988 China WTO 2001 US auto parts suppliers Two potential chance events: Trans-Pacific Partnership Trans-Atlantic Partnership

Contact Victor Z. Chen Belk College of Business UNC Charlotte +1 (704)