Chapter 15: Doing Business in Developing countries

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International Trade and Investment

by John Gionea Slides prepared by John Gionea

TOPIC PLAN

• Definition of Developing Countries (DCs) • Import markets in DCs • Trade issues in DCs • Export marketing aspects in DCs • Considerations for Investing in DCs Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

by John Gionea Slides prepared by John Gionea

Definition of Developing Countries

• Alternative names: – Less developed countries (LDCs) – The Third World; – The South • WTO:Statistical emphasis on geographic criteria – Latin America – Africa – Middle East – Asia(incl.Australia) Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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General Features of Developing Countries

• High levels of rural population • Relatively high population growth rates • High proportion of population living in absolute poverty • Not well developed banking/credit facilities Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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General Features of Developing Countries

• Relative lack of financial capital (esp. FX) • Relatively low level of infrastructure (roads, telecommunications,education institutions) • Low marketing facilities (e.g.storage,distribution,) Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

by John Gionea Slides prepared by John Gionea

Government Sector in Developing Countries

• Bigger size government sector than in IC's (Lower tax base) • However, more government regulation than in IC's – Big concern:Control over the national economy.

• More development planning than in IC's e.g.

– Indonesia:"Repellita"(5-year plans) – Malaysia,Taiwan Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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Trade and Development

• Trade as engine of growth • Import substitution versus Export Orientation • Development strategies – Stage 1:Exports of natural resources/ Imports of manufactures – Stage 2:Import substitution – Stage 3:Export-led growth Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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The Import market of Developing Countries by main regions(%); 1999 Total: $US 1,631.5 Billion Fig.15.1

Hong Kong 10% Singapore 7% Sub-Saharan Africa 5% Sth Asia 4% M.East&N.Afric

a 8% L.America&Car ib.

20% E. Asia&Pacific 30% Europe&C.Asia

16% Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

by John Gionea Slides prepared by John Gionea

Merchandise Imports of Low& Middle Income Regional Groupings by source, 1999,% Source E.U

Japan US Other ICs E.Asia& Pacific 11.5

17.2

11.5

4.6

Other High Income Low&Mid.

Income 26.4

27.6

Latin America 18.5

5.6

46.3

1.9

3.7

24.1

M.East& N.Africa

South Asia 45.5

23.1

4.5

13.6

4.5

11.5

11.5

7.7

4.5

27.3

15.4

30.8

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International Trade and Investment

by John Gionea Slides prepared by John Gionea Sub-Saharan.

Africa 39.7

7.9

11.9

0.8

7.9

31.7

Imports of Low& Middle Income Regional Groupings by product, 1999,% Source Total E.Asia& Pacific 100 Latin America 100 M.East& N.Africa

100 South Asia 100 Sub-Saharan.

Africa 100 Food Farm Raw Materials Fuels Ores and Metals Manufact’s 5 3 10 5 9 2 7 2 … … … … 12 4 18 5 74 80 … Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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Changes in Merchandise Imports composition in Low and Middle Income countries,%, 1990, 1999

80 70 60 50 40 30 20 10 0 Food Agricultural RM Fuels Ores & metals Manufactures Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

by John Gionea Slides prepared by John Gionea 1990 1999

Imports of Singapore and Hong Kong, China by Product, 1999, %

Singapore Food Fuels Ores and Metals Hong Kong Food Farm Raw Materials Fuels Ores and Metals Manufactures Manufactures Manufactures Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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Trade Policy Issues

• TARIFFS – Generally higher than in IC's – A lower proportion of tariffs are BOUND – Regional economic groupings(e.g.AFTA, MERCOSUR) discriminate against non members (See impact of AFTA’s intra-regional tariff cuts on next slide) Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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Comparison of 1999 MFN simple tariff rates and average CEPT rate s, in selected AFTA countries 1999, 2003 Country Indonesia Malaysia MFN 1999 10.9 7.1 Philippines 10.0 Singapore 0.0 Thailand Vietnam 21.6 15.1 Intra-AFTA(%) 1999 2003 5.85 3.17 7.00 0.0 9.75 3.78 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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Trade Policy Issues

• Non-tariff Measures

– South Korea : "Pigs is pigs !" – Malaysia : Import licences (Plastics raw materials)

• Barriers to Trade in Services

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International Trade and Investment

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Export Marketing Issues

• Cultural differences – Language – Cultural restrictions on consumption/imports • Price strategies – Differentiated prices (on the low side) – “Price markets” Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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Export Marketing Issues

• Distribution – Longer distribution channels than in IC's • Promotion – Less spending required compared to IC's – However,growing promotion expenditure in Asia and Latin America (See Table 15.9 in the textbook for data on advertising expenditure) Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

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Direct Investment in LDC's

• Asia-the largest beneficiary of inward FDI among LDCs. Hong Kong -top attraction in 2000.

• FDI in the Service sector is growing fast, but manufacturing still takes about 55 % of inward FDI.

• Political stability-key consideration for FDI • Government controls • Government attitude to FDI (The "obsolescing bargain") • Joint venture-preferred form of FDI(?) Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment

by John Gionea Slides prepared by John Gionea