IDENTIFYING THE NEXT GENERATION OF
CANADIAN PRIORITY MARKETS
Preliminary Analysis
Presented to: Foreign Affairs, Trade and Development Canada
The Conference Board of Canada—October 2012
Prepared by:
Danielle Goldfarb
Associate Director,
The Global Commerce Centre
Identifying the Next Generation of Canadian Priority Markets
Table of Contents
Contents
Introduction ..................................................................................................................... 3
Selecting Priority Markets ................................................................................................ 5
Measuring Potential ..................................................................................................... 5
Index 1: Country Growth Potential Index .................................................................. 5
Index 2: Canadian Business Potential Index ............................................................ 6
Excluding the Usual Suspects .................................................................................. 6
Our Underlying Factors Compared With Others ....................................................... 7
Creating the Next Generation List ................................................................................... 8
Minimum Size Criteria .................................................................................................. 8
Finding the “Sweet Spot” ........................................................................................ 11
Policy and Risk Dimensions .......................................................................................... 17
Conclusions .................................................................................................................. 19
Appendix: Additional Details on Method ........................................................................ 20
Index 1: Country Growth Potential Index ................................................................ 20
Index 2: Canadian Business Potential Index .......................................................... 23
Alternate Index Constructions ................................................................................ 24
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Introduction
The global operating environment has changed. The rise of global value chains, high
growth markets, digitized information, foreign direct investment, and the Canadian dollar
represent some of the changes Canadian companies face. Canadian companies are
adapting, many of them fundamentally shifting what they trade and with whom.
In this context, which markets are likely to represent the greatest potential for Canadian
companies? Trade with the U.S. has been stagnant over the past decade, and many
developed economies are growing slowly compared with rapid growth in developing
economies. The obvious candidates representing the greatest business potential are the
large, developing economies, mainly Brazil, China, and India. These have already been
the focus of so much attention in recent years and are likely to continue to be the most
important growth markets based on their economic and demographic sizes. But
opportunities exist beyond these countries.
Goldman Sachs (GS) and the Economist Intelligence Unit (EIU), among others, have
developed lists of “next” countries that likely represent the most economic potential.
These lists go beyond the countries that provided traditional sources of growth (such as
the U.S. and U.K.), and beyond the BRIC economies of Brazil, Russia, India, and China
(that Goldman Sachs highlighted a decade ago). Several of Canada’s peer country
governments have also developed lists of “next” priority countries for their global
commerce efforts. Table 1 highlights and compares these lists.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Table 1
Identifying Promising Markets: Comparing Priority Lists
"CIVETS"
(Economist
High growth
Intelligence Unit, "L6" plus China,
economies of
"Next Tier"
2010)
India (Australia)*
focus (U.K.)
(U.S.)
Representing
greatest
Australian
business growth Representing best
With highest
With highest
potential,
trade and
With high GDP growth potential,
sustained
including
investment growth To prioritize for
and growth
beyond the
growth potential
establishing
opportunities for
U.S. export
potential
BRICs
and sizeable
local presence U.K. businesses
promotion
"BRIC"
(Goldman
Sachs, 2003)
Purpose of
exercise is to
identify markets…
"Next 11"
(Goldman
Sachs, 2005)
Country (listed
from highest to
lowest GDP)
China
Brazil
Russia
India
Mexico
Republic of Korea
Indonesia
Turkey
Saudi Arabia
Iran
Argentina
South Africa
Colombia
Nigeria
Egypt
Philippines
Pakistan
Vietnam
Bangladesh
Chile
Peru
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Focus on ASEAN
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Focus on North Africa
Focus on ASEAN
x
Focus on ASEAN
x
x
x
x
x
*Australia also lists Sub-Saharan Africa as a region of focus, in addition to the L6.
Sources: The Conference Board of Canada; International Monetary Fund; Goldman Sachs 2001, Building
Better Global Economic BRICs; Goldman Sachs 2005, How Solid Are the BRICs?; Economist Intelligence
Unit 2010, World Economy: Beyond BRICS; Austrade Corporate Plan 2009–2010; Report to the President
on the U.S. National Export Initiative 2010; U.K. White Paper on Trade and Investment for Growth 2011.
To our knowledge, no one has yet done such an analysis through a Canadian lens. This
report—commissioned by Foreign Affairs, Trade and Development Canada—attempts to
address this gap and to inform the Government of Canada’s “refreshed” global
commerce strategy. We create a method to identify a fresh list of “next generation”
countries. Our method is based on available economic data that proxy both Canadian
business potential (two-way trade and two-way investment) and country growth
potential.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Based on this analysis, we identify preliminary “next generation” countries that go
beyond the “usual suspects.” We define the usual suspects as our traditional trade and
investment partners, as well as the large, developing economies of Brazil, China, and
India that are already on the “radar screen.”
Selecting Priority Markets
Our selection of priority markets is based primarily on economic data, similar to the
Goldman Sachs approach. A country risk analysis, for example, is outside the scope of
this analysis. We do, however, return to a few policy indicators once we have identified
priority countries.
Our goal is to select countries that will be important for Canada’s future economic
prosperity and likely represent the most Canadian business potential. We therefore use
an approach that accounts for both a country’s specific potential with respect to Canada
and its growth potential and size. A forthcoming Conference Board Global Commerce
Centre report shows that the key driver of Canada’s future trade will be real GDP growth
in partner countries,1 bolstering this focus on growth potential for determining future
commercial opportunities.
In developing our method, we reviewed what other organizations and countries have
done, and we considered alternative indexes and indicators, as well as alternative
weighting schemes and their pros and cons. Selecting indicators and deciding how to
organize and weight them requires trade-offs. No method, including our own, is perfect,
but we consider it to be a sound data-based tool to provide a preliminary analysis of
“next generation” priority countries for Canada.
We give a brief description and explanation of our method here, and provide additional
detail in Appendix A.
Measuring Potential
We created two indexes. We call one the “country growth potential index” and the other
“the Canadian business potential index.”
Index 1: Country Growth Potential Index
We chose indicators and summary indicators that would best capture economic
potential, based on existing evidence of what drives growth. This index contains four
equal-weighted elements for each country:
1
Beckman, Kip. Forthcoming. What Might Canada’s Future Exports Look Like? The Conference Board of
Canada.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
1. Goldman Sachs Global Environment Scores 2011 Index (to proxy for future
growth)
2. Past five years of real GDP growth (to proxy for future growth and to balance
Goldman Sachs measures, which may not capture all elements driving
growth)
3. Share of global GDP (to give larger economies more weight)
4. Share of global inward and outward investment (to proxy business confidence
in these countries, and outward investment orientation)
Index 2: Canadian Business Potential Index
We assume that countries that already deal with Canada have higher future potential.
This index contains two equal-weighted elements for each country, on the basis that all
of these elements are meaningful aspects of Canadian global commercial activity:
1. Trade—equal weight to exports and imports (services are not included due to
significant data limitations)
2. Investment—equal weight to each of foreign direct investment in Canada and
Canadian direct investment abroad
There is not much commercial activity with most of the countries beyond our traditional
commercial partners. But we include this element as it seems reasonable to assume that
countries that have at least some activity with Canada now are more likely to represent
greater future Canadian business opportunities than are countries with which there are
almost no existing Canadian relationships.
Excluding the Usual Suspects
Since we have been tasked with providing a fresh, next generation list, we exclude from
our indexes the “usual suspects.” We standardize our index values relative to the
remaining countries, after we have excluded these “usual suspects.” The remaining
index scores therefore represent the scores relative to the non-“usual suspects.” This
allows us to focus on a fresh, next generation list of high growth potential economies.
We define the usual suspects as the advanced economies and Brazil, India, and China.
Advanced economies are also generally well known to Canadian businesses, the public,
and policy-makers, Canada has strong historical ties with these economies, and
Canada’s government has been dealing with these countries in multiple fora for many
years. More specifically, we exclude the United States, the countries of Western Europe
(Austria, Belgium, Denmark, France, Finland, Germany, Greece, Iceland, Ireland, Italy,
Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United
Kingdom), Japan, Australia, and New Zealand.
The large, developing economies of Brazil, India, and China represent key long-term
opportunities for Canada but are already on the business and policy “radar screen.” We
therefore exclude them. We did not exclude Russia (the fourth country in the BRIC) as it
is a bit different from the other BRIC economies—with smaller population and GDP and
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
more volatile growth. It is also not on the Canadian business and policy radar screen,
having weak commercial linkages with Canada.
To create the indexes, we standardize the data in each index component from 0 to 100.
We then weight according to the descriptions above, and arrive at two index values, one
for country potential and one for Canadian business potential.
Our Underlying Factors Compared With Others
Other countries and organizations have developed “next” priority country rankings, and
theirs use similar underlying factors to ours. Table 2 shows factors we included in our
selection of priority markets for Canada, compared with factors that others have used.
Table 2
Identifying Promising Markets: Different Approaches
Factors included in assessment of priority markets
Size
Gross Domestic Product
Population
Growth environment and potential
Past or expected GDP growth
Macroeconomic stability (e.g., inflation, government deficit and external debt)
Political conditions
Macroeconomic conditions (e.g., trade openness and investment rates)
Technology
Human capital (e.g., education and life expectancy)
Microeconomic environment (e.g., cost to start a business, urban population,
patents, R&D)
Market diversity
Financial system soundness
Foreign direct investment
Economic relationship with partner country
Trade
Investment
Country market penetration, room for expansion
Purpose of exercise is to identify markets…
"Next Gen" (this
analysis)
"Next 11"
(Goldman
Sachs, 2005)
"CIVETS"
(Economist
Intelligence
Unit, 2010)
"Next Tier"
(U.S.)
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Representing high
growth potential
and greatest
Canadian
business
potential,
including two-way
trade and two-way
investment
(beyond the
BRICs)
With highest
growth
potential
(beyond the
BRICs)
With highest
sustained
growth potential
and sizeable
To prioritize for
(beyond the
US export
BRICs)
promotion
Sources: The Conference Board of Canada; Goldman Sachs 2005, How Solid Are the BRICs; Economist
Intelligence Unit 2010, World Economy: Beyond BRICS; Report to the President on the U.S. National Export
Initiative 2010.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Creating the Next Generation List
Minimum Size Criteria
Our assumption is that countries need to have a minimum size to represent significant
enough potential for Canada. This assumption of the importance of both GDP and
population is in line with the other “priority lists” we reviewed.2 So, after excluding the
usual suspects and constructing the indexes, we screen the 154 countries in our sample
for a minimum economic and demographic size (GDP greater than $100 billion, and
population 10 million or higher). We do this even though GDP is already included in our
“country growth potential index,” since in that index it is only given partial (one-quarter)
weight, and since we feel a minimum GDP is a key criterion on which to determine
priorities.
Countries that did not meet our minimum criteria included the Caribbean countries,
Singapore and Hong Kong, some Eastern European countries (such as the Slovak
Republic, Croatia, Bulgaria, and the Baltic countries), the Gulf states, many of the former
Soviet republics, many African countries, smaller Latin American countries (such as
Panama and Uruguay), and many island countries.
Table 3A shows those 31 countries that meet this minimum set of criteria, listed in order
of country growth potential. Table 3B shows the same countries, listed in order of
Canadian business potential.
2
For example, Goldman Sachs (2005, How Solid Are the BRICs?) notes that “Without a substantial
population, even a successful growth story is unlikely to have a global impact. Hong Kong will never be a
global power nor Luxembourg, despite the very high levels of income and living standards that they have
achieved.”
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Table 3A
Countries Meeting Minimum Criteria, in Order of Country Potential
Rank
(country
growth
potential)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Country
GDP (2011,
US$billions)
Population
(2011,
millions)
Country
growth
potential
index (0-100,
higher is
better)
1850
1116
1155
846
578
448
514
482
279
778
346
248
328
123
215
408
236
178
467
174
140
190
191
115
316
213
165
101
211
113
239
142
49
114
241
28
41
38
76
29
74
64
17
46
89
11
51
79
17
23
30
10
21
36
33
30
96
46
20
175
167
160
54
45
37
34
32
31
31
31
30
29
28
27
27
27
26
26
26
25
25
23
23
22
22
22
21
21
20
19
17
17
16
Russia
Republic of Korea
Mexico
Indonesia
Saudi Arabia
Argentina
Poland
Iran
Malaysia
Turkey
Thailand
Chile
Colombia
Vietnam
Czech Republic
South Africa
Egypt
Kazakhstan
Taiwan
Peru
Hungary
Romania
Algeria
Iraq
Venezuela
Philippines
Ukraine
Angola
Pakistan
Bangladesh
Nigeria
Sources: The Conference Board of Canada; World Bank.
© The Conference Board of Canada, 2012.
Canadian
business
potential
index (0-100,
higher is
better)
9
53
60
15
7
9
4
1
7
9
8
31
8
3
2
13
5
12
12
22
26
1
7
4
5
4
1
3
3
4
3
Identifying the Next Generation of Canadian Priority Markets
Table 3B
Countries Meeting Minimum Criteria, in Order of Canadian Business Potential
Rank
(Canadian
business
potential)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
31
27
28
29
30
Country
Mexico
Republic of Korea
Chile
Hungary
Peru
Indonesia
South Africa
Kazakhstan
Taiwan
Argentina
Turkey
Russia
Thailand
Colombia
Saudi Arabia
Malaysia
Algeria
Venezuela
Egypt
Bangladesh
Philippines
Poland
Iraq
Nigeria
Pakistan
Angola
Vietnam
Czech Republic
Romania
Iran
Ukraine
Country
growth
Population
GDP (2011,
potential
(2011,
US $billions)
index (0-100,
millions)
higher is
better)
1155
1116
248
140
174
846
408
178
467
448
778
1850
346
328
578
279
191
316
236
113
213
514
115
239
211
101
123
215
190
482
165
Sources: The Conference Board of Canada; World Bank.
© The Conference Board of Canada, 2012.
114
49
17
10
30
241
51
17
23
41
74
142
64
46
28
29
36
30
79
167
96
38
33
160
175
20
89
11
21
76
46
37
45
27
23
23
34
26
25
25
31
29
54
28
27
32
30
22
21
26
17
21
31
22
16
17
19
27
26
22
31
20
Canadian
business
potential index
(0-100, higher
is better)
60
53
31
26
22
15
13
12
12
9
9
9
8
8
7
7
7
5
5
4
4
4
4
3
3
3
3
2
1
1
1
Identifying the Next Generation of Canadian Priority Markets
(If we were to halve the minimum population and GDP required—for a minimum GDP of
$50 billion and population five million and above—additional countries that would make
the cut-off are: Azerbaijan, Belarus, Bulgaria, Hong Kong, Israel, Singapore, Slovak
Republic, and the United Arab Emirates.)
Finding the “Sweet Spot”
We plot the short list that made our minimum size cut-off of $100 billion in GDP and 10
million or greater in population on Chart 1. We plot country growth potential on the
vertical axis and Canadian business potential on the horizontal axis. To identify priorities
among the non-usual suspects, we focus on which part of the scatterplot these countries
fall into, rather than their index values.
The top right section represents countries with both high country potential and high
Canadian potential. This is the “sweet spot” of countries that have the potential to
become more important for Canada over the medium to longer term. What is
immediately obvious is that South Korea (the Republic of Korea) and Mexico are clearly
in the “sweet spot,” ranking high on both Canadian business potential and country
growth potential. South Korea has a large economy, a strong “growth environment,” and
Canada exports and receives a large amount of investment from Korea, relative to the
non-usual suspects. Similarly, Canada’s trade links with its NAFTA partner Mexico are
relatively large when not compared with the U.S., and Mexico’s economy is a relatively
large economy (though has relatively low recent growth and only a modest “growth
environment score”).
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Chart 1
Countries Meeting Size Criteria
Source: The Conference Board of Canada.
The top left corner is also interesting. Russia is clearly an outlier here, with high growth
potential due to its large economy and relatively rapid growth (though low “growth
environment score,” and as we’ll see later, a poor rating on the World Bank’s ease of
doing business measure). Russia has a very limited commercial relationship with
Canada, and thus places very low on the Canadian business potential index.
Beyond Mexico, South Korea, and Russia, there are a number of candidates that appear
clustered together. To better be able to determine priorities amongst these remaining
countries, Chart 2 excludes these top three countries. We are then able to zero in on the
remaining countries that have met our minimum size criteria. In order to determine
priorities, we use a thick black line to define four sections.
The bottom left section shows countries with low potential on both indexes. Countries in
this section include Algeria, Angola, Bangladesh, Iraq, Nigeria, Pakistan, the Philippines,
Romania, Ukraine, and Venezuela. We drop these countries from consideration. (Note
that many of the countries that would place in this section have already been eliminated
due to our minimum size criteria cut-offs.)
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Chart 2
Countries Meeting Size Criteria
Excluding Mexico, South Korea, and Russia
Source: The Conference Board of Canada.
The top right section in Chart 2, by contrast, represents countries with both high country
potential and high Canadian potential. In addition to Mexico and South Korea, we
consider this the “sweet spot” of countries that have the potential to become more
important for Canada over the medium to longer term. Note that Indonesia ranks so
highly because of its recent rapid growth and large size, rather than its more modest
Goldman Sachs “growth environment” rank.
The top left section—which is where Russia placed in Chart 1—may also be promising.
If a country has high growth potential but little Canadian involvement, it may still be
worthwhile to consider this group. Canadian businesses may not have explored the full
potential of rapidly growing countries like Colombia and Vietnam, for example.
Governments may decide to prioritize a country that has huge growth potential but of
which Canadian companies have not fully taken advantage.
As Chart 2 shows, no countries place in the bottom right section of high Canadian
engagement but low growth potential.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Chart 3 zeroes in on the countries in the “sweet spot,” with bubble size representing the
size of their economy. It shows that Indonesia stands out in terms of its growth potential
due to its large economy and rapid recent growth (though this is tempered by its low
“growth environment” scores). Chile, Peru, and Hungary stand out in terms of Canadian
involvement, but have smaller economies (Hungary’s GDP just barely placed it above
our minimum size criteria). South Africa and Taiwan have relatively large economies.
Taiwan also has a strong “growth environment” score though modest recent growth
compared with rapidly growing Kazakhstan.
Chart 3
“Sweet Spot”
Excluding Mexico and South Korea
(bubble size represents GDP)
Source: The Conference Board of Canada.
Chart 4 zooms in on the countries in the top left hand corner of Chart 2 that have at least
a value of 3 on the Canadian business potential index (this excludes the Czech Republic
and Iran, which have values lower than 3). These countries have relatively high growth
potential. But they have little Canadian involvement, and possibly represent unexplored
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Canadian potential. (Note that charts 3 and 4 are on different scales and are therefore
not directly comparable.)
Chart 4
High Growth Potential
Excluding Russia
(bubble size represents GDP)
Source: The Conference Board of Canada.
Many of these countries are clustered together, with various trade-offs between country
potential, Canadian potential, and GDP. Colombia, Egypt, and Vietnam have all had
over 20 per cent annual average growth over the past five years and so rank relatively
high on growth potential, despite their modest economic sizes. Argentina has had
similarly rapid growth, but also has a much larger GDP, placing it relatively higher in
terms of growth potential (though it ranks as a very difficult place to do business by the
World Bank’s ease of doing business measure, as Table 5 will show below).
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
To summarize, Table 4 lists those countries that either hit the sweet spot or are above
the cut-off line for high growth potential and have at least a value of 3 on the Canadian
business potential index. Countries are listed in alphabetical order, and we show their
economic and demographic size, as well as their index scores.
Table 4
Countries in the Sweet Spot or With Growth Potential
Country
Sweet spot
Chile
Hungary
Indonesia
Kazakhstan
Mexico
Peru
Republic of Korea
South Africa
Taiwan
Growth potential
Argentina
Colombia
Egypt
Malaysia
Poland
Russia
Saudi Arabia
Thailand
Turkey
GDP (2011,
US$billions)
Canadian
Country growth
Population
business
potential index (0(2011,
potential index
100, higher is
millions)
(0-100, higher
better)
is better)
248
140
846
178
1155
174
1116
408
467
17
10
241
17
114
30
49
51
23
27
31
23
34
25
37
23
45
26
25
26
15
12
60
22
53
13
12
448
328
236
279
514
1850
578
346
778
41
46
79
29
38
142
28
64
74
31
27
26
30
31
54
32
28
29
9
8
5
7
4
9
7
8
9
Sources: The Conference Board of Canada, World Bank.
Of note in this list are the large economies of Korea and Russia, the Latin American
countries of Mexico, Chile, Peru, Argentina, and Colombia, the Southeast Asian
countries of Indonesia, Malaysia, Thailand, and Vietnam, the Eastern European
countries of Turkey, Hungary, and Poland. Others include Saudi Arabia, South Africa,
Kazakhstan, Taiwan, and Egypt. As will be discussed in the next section, each country
has its pros and cons, and needs to be considered in a broader context to determine if it
should truly be a Canadian priority country.
This country list is not out of line with the findings from other organizations (as Table 1
showed, and as Table 5 will show below). The countries in the overall list are also largely
consistent with variations of our own method.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Some may wonder which countries might have made the list if we had lower size
requirements. If we cut our minimum GDP and population sizes in half (to $50 billion and
five million respectively), the “sweet spot” would additionally include Hong Kong and
Singapore. And the “growth potential” section of the table would additionally include
Israel and the United Arab Emirates.
This list necessarily excludes many countries with potential for Canada, simply because
they could not all be priorities. We had to include those that indicated the most potential
according to our indexes, which are based on economic data. This does not mean
excluded countries do not represent future potential for Canada.
Policy and Risk Dimensions
This list should be viewed as a preliminary one, based on readily available economic
indicators. Each of the countries in the list needs to be explored further. In particular, to
determine Canadian priority countries, candidate countries should be put through other
filters and other factors should be considered. Such factors include the compatibility of
Canada’s and the country’s industrial structure, political and other risks,3 human rights
records and policies, and whether a country is “like-minded” with Canada regarding
trade and investment policies.
It may also be important to consider how “policy accessible” a particular country is—i.e.,
to what degree Canada’s government can have a meaningful impact on changing
another country’s policy affecting Canadian businesses, or to what degree Canadian
trade commissioners on the ground can help Canadian businesses access markets.
Policy accessibility is less straightforward to assess than economic potential.
Also, it may be important to consider any dramatic policy changes that are not reflected
in existing economic data. For example, Burma’s government has made major political
and economic reforms in 2011–2012, and Canada has adjusted its policy towards the
country in response. Any resulting greater commercial potential with that country would
not yet be reflected in economic data.
It may also be important to consider whether to approach or address countries with a
regional approach. For example, Malaysia, Thailand, Indonesia, and Vietnam are part of
ASEAN—a regional trading bloc—and so may be better addressed via a regional
approach.
A full exploration of these factors is outside the scope of this study. But to get a brief
sense of the range of policy and risk filters that may also need to be considered, we add
3
Political stability is included in one component of the Goldman Sachs index that forms part of one of our
indexes, but it is a very small component of the overall index.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
a few indicators to the country list in Table 4. Table 5 shows these countries on a few
“policy” measures, as well as compared to priority country lists by other organizations
and other countries.
Table 5
Countries in the Sweet Spot or With Growth Potential: “Policy” Measures and
Comparators
"Policy" measures
Country
Sweet spot
Chile
Hungary
Indonesia
Kazakhstan
Mexico
Peru
Republic of Korea
South Africa
Taiwan
Growth potential
Argentina
Colombia
Egypt
Malaysia
Poland
Russia
Saudi Arabia
Thailand
Turkey
Vietnam
Comparators
Ease of doing
Simple average
business (rank
applied MFN
out of 183
tariff (%)
countries)
39
51
129
47
53
41
8
35
25
6
5
7
9
9
5
12
8
6
113
42
110
18
62
120
12
17
71
98
13
13
17
8
5
10
5
10
10
10
FTA or FIPA with Canada
(Ongoing negotiations in
brackets, exploratory
discussions in double
brackets)
FTA
FIPA, (FTA with EU)
(FIPA)
(FIPA)
FTA
FTA, FIPA
(FTA)
BRIC/Next-11
(Goldman
Priority country for U.S.,
Sachs) or
U.K., Australia
CIVETS (EIU)
Aus
N-11, CIVETS U.S., U.K. (ASEAN focus)
N-11
N-11
CIVETS
Aus, U.K.
Aus
U.K.
U.S., U.K.
FIPA, ((FTA with MERCOSUR))
Aus
FTA
CIVETS
Aus, U.S.
FIPA
N-11, CIVETS U.K. (North Africa focus)
U.K. (ASEAN focus)
FIPA, (FTA with EU)
FIPA
BRIC
U.S.
FIPA, ((FTA))
U.K. (ASEAN focus)
((FTA))
N-11, CIVETS U.S.
(FIPA)
N-11, CIVETS U.S., U.K. (ASEAN focus)
Sources: The Conference Board of Canada; World Trade Organization; World Bank; Department of Foreign
Affairs and International Trade; Goldman Sachs; Economist Intelligence Unit; country trade policy plans.
For example, Indonesia is in the “sweet spot” but, as Table 5 shows, it ranks 129/183 on
the World Bank’s ease of doing business measure (the higher the number, the harder it
is to do business). Similarly, Argentina also ranks as a difficult place to do business.
Egypt has high growth potential and is ranked as a Next-11 country by Goldman Sachs
but also ranks poorly on ease of doing business, has a very high average tariff rate, and
is considered a failed state (ranked number 31 of 177 on the Foreign Policy Failed
States Index, where higher rank is worse—note that this index is not shown above).
In short, each potential next generation market has different non-economic
circumstances. Because this is only a preliminary analysis we do not do a complete
assessment of the policy and risk dimensions. What we do provide is a starting point for
policy-makers to consider possible priority economic potential markets, which they can
then put through relevant political and other filters.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Conclusions
To be sure, Canada’s traditional trade partners—including the U.S., much of Western
Europe, and other advanced economies—plus Brazil, India, and China will continue to
represent the most significant long-term potential for Canadian businesses. Canada’s
refreshed global commerce strategy should necessarily focus on these usual suspects,
but also consider the next generation of countries that could represent potential for
Canadian businesses.
This preliminary analysis finds a fresh list of additional, “next generation” economies that
might represent economic potential for Canada going forward, despite being relatively
modestly engaged with Canada at present. We define potential in the broad sense of all
types of commercial opportunities, including exports and imports of both goods and
services, and two-way investments, as well as a country’s growth potential.
Canada’s government should examine each potential market relative to country risk,
complementary industrial structures, and “policy accessibility,” as well as other filters.
Moreover, economic and political circumstances change, and a next generation list
should evolve over time in response to changed circumstances and new information.
This report was produced by The Conference Board of Canada’s Global
Commerce Centre. The Conference Board of Canada is the foremost
independent, not-for-profit applied research organization in Canada. The Board
has a long history of developing data-based methods for establishing rankings
and priorities.
The Global Commerce Centre has an active research program on trade,
investment, and trade policies. The Centre has produced over 50 evidencebased reports. This report was written by Danielle Goldfarb, with input,
underlying data analysis, and guidance from Doris Chu, Brenda Lafleur, Paul
Darby, and Glen Hodgson.
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Appendix: Additional Details on Method
We created two indexes. One we call the “country growth potential index” and the other
“the Canadian business potential index.” We “bucket” indicators in these two separate
indexes,4 rather than add them together. We do this so the trade-offs between the
indexes will be transparent, and also so as to not over- or under-weight either factor. In
other words, a country should, in theory, have both growth potential and Canadian
business potential in order to be considered for our priority list. We show results on an
XY scatterplot, with each index on an axis, thus effectively giving each equal visual
weight.
Within each index, we selected indicators that are readily available, available for a large
number of countries, and available for the most current time periods. We dropped those
countries from the analysis for which no data were available for three or four of our
chosen indicators. We also exclude Barbados from the analysis as $53 billion of
Canada’s direct investment abroad in 2011 is recorded as going to Barbados. Barbados
is a low tax conduit for this investment rather than its final destination. Leaving Barbados
in would result in Canadian direct investment values being standardized relative to this
highly misleading Barbados investment value (since the value of $53 billion is the
highest in our non-usual suspects sample). Barbados will later be excluded from the
analysis in any case, based on not meeting our minimum size criteria.
Once we drop advanced economies, Brazil, India, and China, countries without sufficient
data, and Barbados, we are left with 153 countries in our sample from which to draw our
“next generation” list.
In constructing the indexes, we tried to include enough indicators or summary indicators
to a) capture the most significant aspects of economic potential and b) ensure that any
one underlying indicator would not overpower the results, particularly in the event that
the data represented a short-term blip rather than a long-term trend. Where we felt it was
necessary, we added more indicators to make our results more robust. We tried various
weightings, as well as adding and deleting additional indicators to see whether they
would affect the results.
Index 1: Country Growth Potential Index
We chose indicators and summary indicators that would best capture economic
potential, based on existing evidence of what drives growth. This index contains four
equal-weighted elements for each country:

Goldman Sachs Global Environment Scores (GES) 2011 Index5
4
This “bucket” approach is used frequently in constructing indexes. See, for example, Goldman Sachs, Our
2011 GES, and The Conference Board of Canada, How Canada Performs 2009.
5
Source: Goldman Sachs – —“Our 2011 GES: A Sharper Signal for Growth.” .
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets



Past five years of GDP growth
Share of global GDP
Share of global inward and outward foreign direct investment
We chose to include the Goldman Sachs GES measure as it is a broad-based, databased measure that tries to capture the conditions for growth in any country. This index
includes a range of economic, political, and social variables that have been strongly and
robustly related to subsequent GDP growth outcomes across both countries and time.
Specifically, the index includes 18 indicators grouped into six broad categories:




Macroeconomic stability
o Inflation (percentage change in rate)—high inflation can increase
uncertainty
o Government deficit (percentage of GDP)—high deficits can hurt economic
stability
o External debt (percentage of GDP)—large foreign borrowing raises the
risk of external crises and tends to push up real interest rates
Macroeconomic conditions
o Investment rate (gross fixed capital formation, as a percentage of GDP)—
higher investment in productive activities and resources encourages
capital accumulation and future productivity growth
o Openness (trade balance as a percentage of GDP, adjusted for
population and surface area)—more open economies may grow faster for
several reasons, including technology and knowledge diffusion,
exploitation of comparative advantage, exposure to competition, and
increasing economies of scale
Technology
o Mobile cellular subscriptions (per 100 people)—mobile phone penetration
is a proxy for information and communication technology (ICT) adoption,
which encourages productivity growth
o Personal computers (per 100 people)—personal computer penetration is
another dimension of ICT diffusion
o Internet users (per 100 people)—Internet penetration is another
dimension of ICT diffusion
o Secure Internet servers (per 1 million people)—the number of secure
Internet servers is another dimension of ICT diffusion
Human capital
o Life expectancy (number of years)—poor health conditions, as proxied by
low life expectancy, can hinder productivity and educational attainment,
thereby depressing growth rates as well
o Schooling (net secondary school enrolment)—higher levels of educational
attainment encourage productivity growth and technological adoption
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets


Political conditions
o Political stability (index score from the World Bank’s Worldwide
Governance Indicators)—unstable political regimes result in higher
uncertainty, which tends to deter investment and hinder growth
o Corruption (index score from the World Bank’s Worldwide Governance
Indicators)—greater corruption tends to distort incentives and divert
human and physical resources from their most productive uses
o Rule of law (index score from the World Bank’s Worldwide Governance
Indicators)—well-defined property rights and well-functioning institutions
are prerequisites for sustained, productive investment and growth
Microeconomic environment:
o Cost to start a business (percentage of income per capita)—excessive
business-entry regulations can hinder competition, strangle
entrepreneurship, encourage rent-seeking, and promote informality, all of
which delay the entry and growth of firms
o Urban population (percentage of total population)—a higher share of
people living in cities reflects a rebalancing from agriculture towards more
productive service and manufacturing industries; also, the concentration
of people can boost productivity via economies of scale and network
externalities
o Patent applications (per 1 million people)—a higher number of patent
applications is indicative of incentives for innovation, along with the
institutional capacity to provide protection for new ideas
o Expenditures on research and development (percentage of GDP)—R&D
activity enables technological progress and, thus, productivity growth
Each component is standardized from 0 to 10, and then aggregated into category
scores. Goldman Sachs assigns equal weight to each category to arrive at a “growth
environment score” for each country.
While the GES index may capture many of the factors underlying an economy’s ability to
grow, it might miss some important countries (China, for example, ranks 65th in the 2011
ranking). So we think it meaningful to add a measure of expected growth. Rather than
relying too heavily on one forecaster’s opinion, we chose to use past GDP growth rates
as a proxy for future growth. We also tried including growth in population and per capita
GDP but found this led to less meaningful results.
Our third element in this index was the economy’s size as a share of the world. This was
intended to rank larger economies higher in terms of their potential.
To add further information to the index, we added in a final element of investment as a
vote of confidence by other countries, and as a way of proxying a country’s global
competitiveness and outward orientation. Our measure was composed of half-weight
world outward foreign direct investment stock as a share of the world, and half-weight
inward foreign direct investment stock as a share of the world. We found that adding this
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
investment element had the effect of lowering the ranking of countries like Argentina,
Iran, Iraq, Nigeria, and Venezuela.
We considered alternative weightings within this index, but decided on an equal weight
scheme for simplicity’s sake and in order to not arbitrarily under- or over-weight any
particular element.
Index 2: Canadian Business Potential Index
We chose those indicators that seem likely to best capture future business potential
based on existing evidence of what drives trade and investment. We define business
potential broadly, in the sense of both exports and imports, ideally of both goods and
services, and two-way investment. We assume that countries that already deal with
Canada have higher future potential. This index contains two equal-weighted elements
for each country:
1. Trade—equal weight to exports and imports
2. Investment—equal weight to each of inward FDI and Canadian direct investment
abroad
Our method gives equal weight within the Canadian business potential index to each of
the trade and investment sub-indexes. This implicitly assumes that recent trade and
investment activities are equally important metrics of future Canadian trade and
investment potential, which may or may not be true. But it seems a reasonable
assumption if we are trying to evaluate country potential with respect to a wide array of
commercial activities.
Within each of trade and investment, we also give each sub-component equal weight. In
effect, we use a “global value chain” approach that considers both exports and imports
and both inward and outward foreign direct investment valuable aspects of Canadian
commercial activity.
Within the trade component, we use a three-year average to smooth out the impact of
annual swings in Canadian trade performance. We tried to include services data, but
there were simply so little services data available for the majority of the countries in the
sample (only available for 30 of 180 countries) that we excluded them. Goods trade data
should at least be a partial proxy for where services trade may go, so these could
partially cover such a gap.
We note that the trade and investment data are imperfect. For a fuller discussion of the
gaps in such data, see the Conference Board’s Global Commerce Centre series on
“Missing Trade” and “Value-added Trade.”
(It might be useful to include in such an index an element that captures Canada’s
industrial structure and areas of comparative advantage relative to the target country,
but this is outside the scope of this preliminary analysis.)
© The Conference Board of Canada, 2012.
Identifying the Next Generation of Canadian Priority Markets
Alternate Index Constructions
To ensure that our final method would be meaningful, we considered alternate
constructions for our index. When our method produced an unusual set of countries and
rankings, or was wildly out of line with peer results, we reviewed the method and
dropped or added indicators. Our final method is one in which slight variations in method
yielded a similar list of countries. Variations in method did result in countries moving
between the sweet spot and the high growth potential sections of the list.
We found that our resulting list is not out of line with those chosen by other countries and
organizations, with a few differences that might be expected due to different
geographies, and political and other priorities. That said, this is one method of evaluating
potential, and alternative methods could yield different results.
© The Conference Board of Canada, 2012.