Read Chapter 12, 13, and 14 of textbook.Please read attached instructions.One of the shortcomings of the MPI presented at the website of
MSU-CIBER is that it is not product specific. A company might for
instance want to identify the potential of markets across the world in
regards to their product. Your textbook gives an example of such a case
and how the MPI can be constructed. In the following example, a more
general example is given with explicit steps on how to construct such an
index and its advantages/disadvantages in assessing markets for firm
entry. Your assignment is to replicate the MPI 2009 worksheet for any
other year in the period 2004-2008. For this particular research
task, your report should be a Word or PDF document that has the final
MPI table (e.g., Step 4 table in the excel file below). Make sure that
you sort the final MPI table by Overall Ranking. You may find it easier
to report the top 10 countries in your first page along with a short
paragraph describing your findings and copy/paste the full table in the
following pages of your document. Step 1: The
first step in constructing such an index is to select the variables
that measure the various markets’ potential and the sample of countries
that you want to include. In regards to the sample of countries,
the more countries we include in the analysis the more representative
the sample is and the more options to choose from. Therefore, a sample
with more countries is preferred even if we want to focus on emerging
markets since we can always isolate the emerging markets after the
analysis is performed. In regards to variables that measure the
various markets’ potential, it sometimes is product-specific (e.g., a
pharmaceutical company might want to include some different measures in
the calculation of MPI than a retail company) but most of the measures
will be the same, especially the institutional measures (economic and
political freedom, country risk rating). In this example, we have
selected the following variables for the year 2009:
Urban population (1000s) -20091Electricity production (million kwh) – 20091
Market Growth Rate
Growth rate of primary energy use (%) – between years 2005-20091Real GDP growth rate (Annual %) – 20091
GDP per capita using PPP (current US Dollars) – 20091Urban population (% of total) – 20091
Commercial Infrastructure / Access to Consumer
Main Telephone lines – 20091Cellular mobile subscribers (per 100 people) – 20091Paved road density (km per million people) – 20091Secure Internet servers (per million people) – 20091
Trade as a percentage of GDP (%) – 20091Per capita imports from US (US Dollars per capita) – 20092
Free Market Structure
Economic Freedom Index – 20093Political Freedom Index – 20094
Country risk rating – March 20115
1 Source: World Bank, World Development Indicators 2 Source: U.S. Census Bureau Foreign Trade Division, Country Trade Data – 2009 3 Source: Heritage Foundation, The Index of Economic Freedom – 2009 4 Source: Freedom House, Survey of Freedom in the World – 2009 5 Source: Euromoney, Country Risk Survey – March 2011 (earlier data were not freely available) Step 2: After
the collection of the data, each measure needs to be standardized in
order to be comparable with the rest of the measures. A common formula
is called the Z score and is calculated in the following way: Alt version Where X denotes a particular measure (e.g., urban population) and its values represent the value for each country in the sample. Step 3: After
each measure has been standardized, we find the average of all
standardized measures within each dimension for each country. That is,
for dimension Market Size, its first value will be the average of the
standardized urban population and standardized electricity production
for country A. Therefore, after this step we have a column of data for
each of the seven dimensions of the MPI index. Step 4: The resulting scores need to be converted to a scale of 1-100 and for this we use the following formula: Alt version Where Yijs is the scaled final value of country j for the dimension i (i=1,.., 7 ); Yij is the average score of country j on dimension i; mini and maxi are the minimum and maximum values for dimension i,
respectively. Finally, we find the weighted average of all dimensions
using the weights presented in the previous table (based on input from
managers). Now if all the above sounds really confusing, the
following Excel file demonstrates the steps in the construction of the
Market Potential Index. In the worksheet “Raw Data” you will find the
data that are used in the construction of the MPI for the years 2004 to
2009. In the worksheet “MPI 2009” the steps required for the
construction of the MPI are demonstrated (see formulas in the first row
cells of each table). Excel file What are some potential advantages and disadvantages of the index? Advantages
It’s construction is straightforward and it requires only freely available data.It provides an initial screening for attractiveness
of the foreign market and can be easily modified to account for
product-specific factors using different variables from the World
Development Indicators or other sources. Disadvantages
Looking at the 2009 MPI, Luxembourg is in the third
position owing to ratings in all dimensions of the index apart from
Market Size. However, market size is an important determinant in
assessing entry. Therefore, while the overall index helps us to split
good vs. bad choices, we also need to look at the individual components
of the index.It cannot predict potential future economic or
financial distress of the foreign market, especially if it is calculated
for a particular year. For instance, Ireland is in the 21st place but
it recently received a bailout from IMF. Therefore, for more complete
picture several years of observation are needed but more importantly
measures that more accurately capture deterioration of the economy and
financial situation of each country are needed. We will cover these in
more detail in later chapters. What if we don’t have any input from managers to calculate Weights? If
we don’t have any information about appropriate weights to use in the
calculation of MPI, then we can follow the textbook’s paradigm and find
the average MPI. In other words, in step 4 of the above example, instead
of weighted average we calculate the ordinary average.
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