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):
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2 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

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90.0%
EVOLUTION OF URBAN HOUSEHOLDS INCOME IN CHINA
80.0%

70.0% 2005
60.0%

50.0%

40.0%

30.0%

20.0%
300 M
2015
10.0% 160 M
67 M
0.0% 58 M

RMB 0 50000 100000 150000 200000 250000

POORS LOWER MASS

UPPER GLOBAL
MIDDLE AFFLUENTS
MIDDLE AFFLUENTS
CLASS
CLASS

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

Middle Class in India: McKinsey Survey2007

60%

50%

2005
40% 2015

2025
30%

20%

10%
Thousand Rupiah
Per Household
1US$=45.7Rp)
0%
0 100 200 300 400 500 600 700 800 900 1000

“Global”
“Aspirers” Low Middle Class Middle Class
(90000-200000Rp) “Seekers” ( 200000-500000 Rp) “Strivers” (500000-1000000Rp) Above 1000000Rp
Deprived (2000-4400US$) (4400-11000Us$) (11000-21000US$) >21000US$
Below 90000Rp
<2000US$

Source: McKinsey Research Institute: Tracking the Growth of Indian Middle ClassMcKinsey
Quarterly 2007 n°3

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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.

Higher Margin
High End Lower volume

:
•Differentiated products/ services Large
•Functionalities and Performances Corporations
•Less Price sensitive
Elites
Cosmopolites •More Loyalty

Lower Margin
Middle Class
Higher volume
Low End
Medium Sized Firms

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

The majority ofSMEs

Consumers Segments Business-to-Business Segments

4 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.

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Table 6.5
Major Types of Incentives for Foreign Investments

Type of Incentive Nature of the Incentive

Fiscal Incentives:
• Tax Reduction
• Import and Export
Financial Incentives
Competitive Incentives
Operational incentives
Source: UNCTAD, 1996
• 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

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 Emerging Resource Rich

Giants Developing*
Population L H M/H
GDP L M L
GDP/Cap H L L
Infrastructure H L L
Skills H L L
Labour Costs M L L
Risks L M H
Natural

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

The following countries would qualify for being:

Hub in Africa: Dubai

Emerging Giant in Latin America: Brazil
Resource Rich in Eastern Europe: Russia, Ukraine

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