• 19 Mar 2007
  • Research & Ideas

Handicapping the Best Countries for Business

 
 
India? South Africa? Russia? Which are the best countries for a firm to invest in? In a new book, Professor Richard Vietor looks at the economic, political, and structural strengths and weaknesses of ten countries and tells readers how to analyze the development of these areas in the future. Read our Q&A and book excerpt. Key concepts include:
  • Governments create the overall environment for successful competition in the global economy. Bad government can only lead to less competitive businesses.
  • To be competitive, countries need to offer businesses sound fiscal and monetary policies, secure property rights, high savings and investment, an absence of corruption, and exports that are competitive in enough areas to eventually balance imports.
  • Business people must understand where markets and countries are headed by analyzing the present and then extending current performance trends forward three to five years.
  • Although each has issues, Singapore, China, and India are currently the best bets for FDI and, pending political stability, so is Russia.
 
 
by Sean Silverthorne

If you are an executive of a multinational looking for geographies in which to expand your markets, operations, and investments, is China more attractive than India? South Africa better than Mexico? Does Russia have more promise than the United States? The answer you devise can be crucial to your company's future.

The good news is that in today's hypercompetitive global economy, certain countries offer distinctive advantages to help your business but you need to choose wisely. Understanding the competitive dynamics of the world's top ten countries is the basis of a new book from Harvard Business School professor Richard H. K. Vietor, How Countries Compete: Strategy, Structure, and Government in the Global Economy.

Vietor undertakes a country-by-country examination of the unique social, cultural, political, and historical forces driving Japan, Singapore, China, India, Mexico, South Africa, Saudi Arabia, Russia, Europe (especially Italy), and the United States. He also helps readers plot their own trajectories and see where countries may be headed in the near future. We asked Vietor to discuss his research and its implications for global business leaders.

Sean Silverthorne: Why should government strategy matter to business people? It seems many executives, particularly Americans, believe government is incompetent.

Richard Vietor: Business people care in several ways—macroeconomic, microeconomic, and foreign investment.

An American business person cares if we're running a large deficit that drives up interest rates. She cares if we have a huge current account deficit and import everything from elsewhere. Her own business might erode to the point of failure. Finally, the American cares because our economic performance affects exchange rates. This directly affects the price competitiveness of her exports and the costs of her imported inputs.

In a microeconomic sense, the business person also cares about tariffs (which affect trade), industrial policies, tax policies (on business directly, but also policies that affect income distribution—and thus consumption), and labor policies.

As to foreign direct investment, any American business person contemplating an investment elsewhere must take into consideration all of the policies mentioned above, as well as for the foreign country into which the investment is to be made—plus risk: risk of inflation, of regulatory changes, of political instability, of corruption, etc.

Q: If you were to boil down the key ingredients needed by a country to create successful economic growth, what would they be?

A: Key ingredients (also described in my book's conclusion) include sound fiscal and monetary policies, secure property rights, high savings and investment, an absence of corruption, and exports that are competitive in enough areas to eventually balance imports.

Q: In addition to understanding a country's current situation, you note that business must also analyze where a country is heading—its trajectory. Why is this important and what are the keys to analyzing and understanding a country's near-term direction?

A: Any business person is interested only in the future—in where markets and countries are heading. The only way to understand the near-term future is to understand the present and then extend current performance trends forward—perhaps three to five years.

The USA must deal with these issues now if we're going to maintain our competitive advantage.

Thus, for example, the U.S. has a huge current account deficit. No matter what happens to presidents, parties, or policies, this situation will continue for the next few years—maybe larger, maybe smaller (barring some catastrophe). Thus, net foreign debt will rise. Thus, the dollar will weaken. Thus, there will be upward pressure on real interest rates … thus, thus, thus. These are then things that a business person can learn about the future, from the present.

Q: One of the payoffs in your book for global strategists is an analysis of the top ten countries in terms of economic development and potential trajectories. Obviously each situation is different, but which countries would you say are best positioned to take advantage of a global economy? The ones most at risk?

A: Singapore, China, and India are clearly doing the best and, pending political stability, Russia.

Mexico, Saudi Arabia, and South Africa all have significant competitive problems, and Italy, Japan, and the USA have issues of maturity, either labor and structural problems (Italy), demographic and entrepreneurial problems (Japan), or excessive consumption and debt problems (USA).

Q: One of the surprises I had in reading the book was your bullishness on Russia. Why the optimism?

A: I am bullish on Russia because I think Putin is effective in rebuilding the Russian State. And, he has immense resource wealth to finance his efforts.

I don't know if he'll succeed politically, but if he does not abandon human rights and constrains political power, then Russia could be a very good place to invest.

Q: Several countries you analyze, including South Africa and Mexico, seem at crucial junctures in their development. They could quickly advance to becoming economic powerhouses or slip behind in their competitiveness.

A: Yes. Those countries (Mexico and South Africa), as well as Malaysia, Brazil, Chile, Argentina, and Turkey are, I believe, "stuck in the middle," as Professor Michael Porter terms it. That is, China and India are taking all the businesses (manufacturing and services) on the low end (as their GDPs/capita and wages are lower) while they really don't compete yet with Singapore, Korea, Taiwan, Japan, USA, Europe, etc., at the high end. Thus, they need to develop strategic niches that work for them with lower inflation, lower corruption, better income distribution, more education, higher savings, and higher investment.

Q: Most of our readers either live or do business in the United States. How would you handicap this country in terms of the future, both in terms of growth and competitiveness against other countries?

A: The USA is by far the strongest economy in the world, not just in size, but in its capacity to do research, to be productive, and for entrepreneurship. However, our country has big problems in foreign policy, in fiscal deficits and, most of all, in cumulative current account deficits (and debt). We need to deal with these issues now if we're going to maintain our competitive advantage.

Q: Thinking back to Michael Porter's The Competitive Advantage of Nations and work by Ted Levitt on global marketing, the challenges and rewards of doing business globally have been a particularly fertile area of research for HBS faculty. In just the last month we've seen books from Rawi Abdelal on international finance and from Lou Wells on protecting foreign investment. What do you think your research and this book does to advance thinking in this area?

A: All three of us are interested in cross-border business, and in globalization. Rawi focused on global capital flows, and Lou on foreign investment. I am trying to show that governments create the overall environments for successful competition in the global economy. Bad government can only lead to less competitive businesses.

Q: What are you working on now?

A: I am doing case development and heading our biggest required course, BGIE or Business, Government, and the International Economy. My next research project, however, will probably focus on the recent history of U.S. macroeconomic management—perhaps from FDR to GWB! But not yet.