Brazil vs. China for Your Business  1. Again, very specifically what is your business? What products/services are you selling? What customers are you targeting? Who are your major competitors or alternative suppliers? (2 slides)  2. What are the ownership (O) advantages you have as a foreign player vs. local competitors/alternative suppliers in Brazil/China? (1 slide) 3. Fill the boxes and bubbles in the diamond model (<5 examples in each box/bubble). (1 slide)  4. Focusing on the country risks (from the ICRG reports), list relevant major uncertainties/changes in economic- and political environments (<3 in each box/bubble) that may most likely affect your components in #3. (1 slide)  5. How do these uncertainties/changes (assuming they do occur in future) affect your components? How do the changes in these components affect your O advantages vs. local competitors/alternative suppliers in Brazil/China? (1 slide)  6. Think about how you collapse these changes in multiple dimensions into a location choice decision. For instance, some boxes/bubbles are becoming better, some worse, what is the overall impact on the final selection, assuming you can only select one? (just think, no worries about the slides/presentations yet).

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

Chance Factor Conditions Demand Conditions  The competition intensity in the respective industry  Country risks: Entry barriers, esp. for foreign investors  Your major competitive advantages vis-à-vis local firms  Ownership advantages comparative tables  Country risks: How to maintain competitive advantages  The motivations of companies and their employees and managers  Country risks: Cultural distance from American, and local content requirements Structure of firms and rivalry

For all teams: economic institutions as supporting institutions and government factors CategorySpecific examplesInformation sources (URL) Strong property rights Easy and low-cost registration of private propertyhttp://goo.gl/tstPk4 Strong legal protection of private propertyhttp://goo.gl/Dgw6t9 (Area 2C) Strong investor protection (e.g., shareholders, creditors, financers, etc.) Strong minority shareholder protectionhttp://goo.gl/GrfoV3 Strong intellectual property rights (IPR) protectionhttp://goo.gl/rxK2Xv Free and fair competition Easy entryhttp://goo.gl/T86FC9 Easy existhttp://goo.gl/cg0imV Low government consumptionhttp://goo.gl/Dgw6t9 (Area 1A) Low % of government enterprises/investmentshttp://goo.gl/Dgw6t9 (Area 1C) Low corporate tax ratehttps://goo.gl/vUtVzE Low other taxes & feeshttp://goo.gl/Skh4OA No informal competitionhttp://goo.gl/pWca0R For financial industry in particular: (Area 3D) Freedom to own a foreign banking accounthttp://goo.gl/Dgw6t9 (Area 4Di) No restrictions on foreign ownership/investmenthttp://goo.gl/Dgw6t9 (Area 4Dii) No government control of capitalhttp://goo.gl/Bz9ulH Low bank concentration % High foreign to local bank % Low transaction cost Easy access to credit informationhttp://goo.gl/w9U4V2 Strong auditing/reporting standardshttp://goo.gl/rxK2Xv Low trading barriershttp://goo.gl/IPnW9Z Free trade agreementshttps://goo.gl/8uPqXd Bilateral investment treatieshttp://goo.gl/cuNZWp Strong contract enforcement High corporate ethicshttp://goo.gl/rxK2Xv Strong and efficient legal enforcement of contractshttp://goo.gl/02H36g Core Tech as O Advantage Market competition Factor/Demand Conditions

Economic institutions (from lecture 5) CategorySpecific examplesChinaBrazil Strong property rights Easy and low-cost registration of private property BJ: 4 steps; 9 days; 3.1% of value; 14.5 out of 30 in land administration SP: 14 steps; 25.5 days; 3.5% of value; 14 out of 30 in land administration Strong legal protection of private property5 out of 10 (10 best)6.8 out of 10(10 best) Strong investor protection Strong minority shareholder protection Strong intellectual property rights (IPR) protection3.95 out of 7 (7 best)3.25 out of 7 (7 best) Free and fair competition Easy entry BJ: 11 steps; 33 days; 0.8% of income; 0 paid-in min cap RJ: 11 steps; 54 days; 4% of income; 0 paid-in min cap Easy exist Low government consumption3.7 out of 10(10 best)4.1 out of 10(10 best) Low % of government enterprises/investments2 out of 10 (10 best)10 out of 10 (10 best) Low corporate tax rate11%25% Low other taxes & fees57%44% No informal competition 69.1% against informal competitors; 94.9% startups are informal, lasting for 0.1 year; 49.1% firms think informal competition is a constraint 57.7% against informal competitors; 95.8% startups are informal, lasting for 0.1 year; 7.4% firms think informal competition is a constraint For financial industry in particular: Freedom to own a foreign banking account No restrictions on foreign ownership/investment No government control of capital Low bank concentration % High foreign to local bank % Low transaction cost Easy access to credit informationDepth 6; Coverage: 89.5% by public; 0 by privateDepth 7; Coverage: 55% by public; 79% by private Strong auditing/reporting standards Low trading barriers Free trade agreements Bilateral investment treaties Strong contract enforcement High corporate ethics3.98 out of 7 (7 best)2.44 out of 7 (7 best) Strong and efficient legal enforcement of contracts SH: 406 days; 15.1% of value; judicial quality 14.5 out of 18 SP: 731 days; 20.7% of value; judicial quality 14 out of 18

Local content requirement ChinaBrazil Check local hiring/sourcing laws to see if certain % of labor or materials should be domestically hired/sourced? If so, is quality lower or cost higher? If local hiring is necessary, cultural differences between US and the local employees will affect factor conditions Selected questions from WVS 1.Work is important in life? 2.Most people can be trusted? 3.Open to diversity? 1.Open to different race as neighbor? 2.Open to foreign worker as neighbor? 3.Open to foreign language speaker as neighbor? 4.Trust a foreign national? 5.Trust someone you meet for the first time? 6.See self as a global citizen? 4.Respect for authority? 5.Pro-competition? 6.Belief in hard work brings a good life?

Others for your own business  Policies and laws regarding your business/products  Look for potential changes in these factors/institutions from, e.g., PRG country reports  Now, before the next question “making a final selection”, ask yourself carefully what your goal is for your business?  Fast return on investment and capital exist?  Market share for local clients?  Consistent returns for long-term stay?

Translating all analyses into a decision Rule of Thumb  For instance, if the goal is the highest return on investment measured as net present value (NPV), a typical measure for foreign direct investment. So translate all your analyses into these four factors (Ct, C0, r, and t).

Take home assignment  Last 6 points (Quizzes 13,14)  Keep revising your last report with my comments/suggestions  Add any economic institutions/local content requirement/cultural barriers that you haven’t included but are essential to your business  Present the final list of the country risk factors (categorized by diamond model components) and translate them into the calculation of your decision Rule of Thumb, see an example here C0CttrNPV Risk1Increase C0 due to higher cost of entry Decrease Ct due to a tougher market to compete for new customers Decrease t due to a slowing down economy and thus an earlier date to reach market saturation, after when no more customers Increase r since higher overall uncertainty causes investors to ask for more premium over the risk-free rate Overall, NPV decreases. Risk 2 Risk 3 Risk 4 Risk 5