Implementing Aid for Trade in Latin America and the Caribbean. (Compilation Case Studies Draft Version)

Implementing Aid for Trade in Latin America and the Caribbean (Compilation Case Studies Draft Version)

Implementing Aid for Trade in Latin America and the Caribbean (Compilation Case Studies Draft Version) Documents prepared for the Second Regional Review on Aid for Trade Montego, Bay, Jamaica May 7 and 8, 2009

Table of Contents Caribbean - Aid for Trade 2009 Creating a Tool for Assessing Aid for Trade in the Context of Services Exports: Approaching the Market from an Investor s Perspective A Case Study of Investment in Medical Tourism in the Caribbean Honduras Aid for Trade 2009 Applying a Value Chain Approach to Aid for Trade A Case Study of Textiles and Apparel in Honduras Notas para la elaboración de una estrategia de inserción internacional Mesoamerica - Aid for Trade 2009 Mesoamerican Integration Corridor and Aid for Trade Peru - Aid for Trade 2009 Applying a Value Chain Approach to Aid for Trade A Case Study of Perishable Agricultural Products. SPS Technical Assistance Priorities. Propuesta de estrategia y plan de acción: implementación del acuerdo de promoción comercial con los EE.UU. en el área de propiedad intelectual.

Caribbean - Aid for Trade 2009 3

Creating a Tool for Assessing Aid for Trade in the Context of Services Exports: Approaching the Market from an Investor s Perspective A Case Study of Investment in Medical Tourism in the Caribbean The views and opinions expressed in this publication are those of the authors and do not necessarily reflect the official position of the Inter-American Development Bank. Research work prepared for the Inter-American Development Bank by Grant Aldonas, Alberto Trejos, and Phillip Swagel. 4

I. Introduction As the World Bank s A Time to Choose Caribbean Development in the 21 st Century makes clear, the countries of the Caribbean confront a unique set of development challenges in a rapidly changing global economy. 1 Given their small market size, they cannot offer potential investors, whether foreign or domestic, the scale that would attract investment in manufacturing and services based on domestic markets alone. 2 The Caribbean s exposure to natural disasters and the resulting economic volatility also make it difficult to sustain investment based on local markets alone. 3 At the same time, the Caribbean faces two other challenges that raise the bar still higher. The countries of the region have seen rising competition at home and in traditional export markets as a result of the erosion of tariff preferences. 4 At the same time, the region as a whole has experienced declining productivity. 5 Responding to these challenges will require a coherent development strategy designed to lift productivity and increase the region s relative attraction as a destination for investment. That will require action on multiple fronts, from education to regulatory reform. But, the most important step the Caribbean can take is embracing global markets in ways that take maximum advantage of what the Caribbean already has to offer strong institutions, solid human capital, and a profoundly beautiful natural environment. 6 1 World Bank, A Time to Choose Caribbean Development in the 21 st Century (2005) xiv ( A Time to Choose ). The Bank s study of the development challenges facing the Caribbean represents the most thorough-going evaluation of what confronts the countries of the region as a result of an accelerating globalization of production of goods, services and ideas. 2 Id. 3 Id. 4 Id. at xxiv. Significantly, while there is little doubt that trade preferences have eroded, there is less consensus on whether that is, in fact, harmful to the Caribbean s long-term economic gains. The erosion of preferences will necessarily require adjustment, but it is also true that the preferences never delivered the results their proponents expected. Id. at 76. The existence of the preferences appears to have affected the composition of Caribbean exports, rather than significantly augmenting their volume. Id. The gains from preferences were, moreover, bound to be limited to the extent that they encouraged investment in areas that were increasingly inconsistent with the changing nature of the Caribbean s comparative advantage in a rapidly shifting global economy. Id. What that underscores and not just for the Caribbean is the simple truth that the gains from trade flow as much from imports as exports because it is the import liberalization that frees capital and resources to engage in activities that are more consistent with the Caribbean s comparative advantage. 5 Id. at xiv. 6 The Caribbean s experience in attracting foreign direct investment ( FDI ) to date underscores that openness is a key determinant of FDI one that offsets the disadvantages of limited domestic market[s]. Id. at 49. 1

For the Caribbean, succeeding in the global economy means attracting investment in industries that can use the Caribbean as a base from which to serve global markets. Given the constraints imposed by geography, those industries are likely to lie in the services sector. 7 The Caribbean has already had considerable success in attracting service industries, particularly in tourism and financial services that serve customers on a global basis. Indeed, investment in both sectors has meant that the Caribbean has, for some years, attracted a disproportionate share of global foreign direct investment relative to the size of the Caribbean markets. 8 Both areas, however, have faced their own unique difficulties of late. 9 Indeed, the Bank suggests that conventional tourism, which has driven much of the growth in the service sector to this point, may soon decline as a major driver of future economic growth. 10 Thus, the challenge lies in diversifying the Caribbean s services export base. 11 Diversifying the Caribbean s exports would yield a number of benefits. There is ample evidence that diversifying exports offers significant benefits in terms of both growth and development. 12 The effects are particularly pronounced in the case of diversifying into a broader range of services exports which offers some unique benefits by expanding exports 7 The World Bank s report makes a point of emphasizing the extent to which the engine of growth in the Caribbean has shifted from agriculture to services a sector which involves higher value-added activities and the potential to take greater advantage of the Caribbean s relatively strong investment in education and the development of human capital. Id. at 7. 8 Id. at xxii. 9 A 2004 study done for the U.S. Agency for International Development by Deloitte Touche Tomatsu highlighted the dual structure of the financial services industry in the Caribbean with a high number of local institutions serving the local community and a smaller number of closely held private banks or branches of foreign institutions serving an offshore market made up of top-tier global companies and other international clients. U.S. Agency for International Development ( AID ), Caribbean Financial Sector Assessment (2004). By contrast, the local market was characterized by state-controlled banks, particularly among the members of the Organization of Eastern Caribbean States, which, unsurprisingly, were deemed to be the weakest [and] least commercially orientated. Id. The report concluded that this duality presents a unique challenge in addressing the question of how to catalyze sector development in the region (i.e., attract investment in the financial services sector to expand the ranges of services provided to global markets, while serving local markets more efficiently). Id. 10 Id. 11 The World Bank highlights the need for diversification, underscoring the beneficial impact such diversification would have on productivity, which has fallen. Id. at 25. Productivity rises as economic activity diversifies, thereby freeing factors of production to pursue activities that exploit their highest comparative advantage. In this instance, diversification implies the need to attract investment away from those traditional areas like mineral extraction, agriculture and travel tourism where the high levels of investment have tended to exhaust the available economies of scale and the returns to the local economy. The Bank points toward needed improvements in the region s investment climate in order to compete for scarce investment dollars. Id. 12 According to a recent World Bank publication, export diversification may improve growth through several channels. P. Brenton, R. Newfarmer, W. Shaw, and P. Walkenhorst, Breaking into New Markets: Overview in R. Newfarmer, W. Shaw, and P. Walkenhorst (eds.), Breaking into World Markets, World Bank (2009) 6 ( Breaking into World Markets ). At a minimum, diversification reduces the cumulative investment in traditional products, which alleviates the exhaustion of economies of scale and a resulting decline in export earnings from sales abroad of traditional goods. Id. Diversification also reduces a developing country s exposure to adverse shifts in its terms of trade by stabilizing export earnings. Id. Lastly, diversification encourages potential knowledge spillovers regarding markets, foreign demand, new business processes, etc., that raise the quality of local manufacturing and services with a concomitant gain in terms of competitiveness on global markets. Id. 2

to existing markets; expanding the range of services offered (and the potential positive network externalities that might flow from the interaction between similar services); and by lowering input and transaction costs that yield gains in merchandise exports as well as services. 13 In effect, diversifying the range of services exports can create a virtuous circle in which successful investments in new industries or markets foster local supply chains that serve the businesses the investment creates. Attracting investment by globally-engaged firms to those sectors creates spillovers into the rest of the business sector by introducing world class business practices and offering Caribbean producers a window into global demand for services in a variety of sectors. By raising the local producer s game, attracting investment by such globally-engaged firms strengthens the investment environment and leads to further investment, rising productivity, and stronger growth. With those benefits in mind, the challenge of diversifying the Caribbean s services exports raises two practical questions from a policy perspective. The first is what steps Caribbean governments might take to improve their ability to attract the investment that would help the region seize the opportunities that the accelerating integration of global markets creates. The second is how best to prioritize among those policy options. For donors and financial institutions like the Inter-American Development Bank ( IDB ), the Caribbean s unique development challenges raise a similar issue. As will be discussed in greater detail below, approaches to aid for trade that are geared toward improving a country s ability not simply to export, but to also participate successfully as a key link in a broader global value chain that serves world markets, do not adequately address the Caribbean s circumstances. Aid for trade in a Caribbean context, however, is not as simple as identifying the choke point in customs clearance and providing assistance to overcome that obstacle. 14 What is needed is a similarly market-oriented framework for analysis that directly addresses the challenge the Caribbean faces in attracting new investment to diversify its services export base. 13 Id. 14 The recent declines in the Caribbean s share of global FDI highlight the challenge the Caribbean will face in its efforts to diversify its services export base. Id. at xxii. The current global downturn, driven by a drying up of credit and investors losing their appetite for risk will compound that picture further. 3

The broad objective of the following case study is to begin building a tool that Caribbean governments, aid donors and lenders like the Inter-American Development Bank could use in developing aid for trade projects relevant to services-oriented economies in the Caribbean. At its core, the approach involves the application of standard tools of investment analysis as a means of illuminating the challenges that Caribbean governments will face in attracting investment in industries engaged in services exports, as well as the way in which donors and the IDB could support that effort. In that sense, the analysis below involves an attempt to develop a practical construct for implementing the insights developed by Ricardo Hausmann and Dani Rodrik in their recent article, Economic Development as Self-Discovery. 15 There, the authors conceive of diversification as a process of self-discovery, one in which developing countries learn what they are good at producing by discovering new products or services that they did not previously produce through a process of experimentation one that typically involves the import of new technologies. 16 The intuitive appeal of this approach is that it points out the limits of the all too frequent one-size-fits-all approaches to development that have driven academic thinking on the subject, as well as the approach of donors and development banks. By its nature, develop involves a heterogeneous process. As Hausmann and Rodrik point out, existing patterns of specialization are the consequence of historical accidents and serendipitous choices by entrepreneurs. 17 The increasing integration of global markets and the changes that globalization has wrought in the organization of industrial production underscore the importance of that insight. To the extent that globalization allows the organization of production on a global basis largely without reference to resource endowments, it increases the importance of understanding what drives the serendipitous choices of entrepreneurs for understanding what drives development. Nonetheless, as the authors point out, 15 R. Hausmann and D. Rodrik, Economic Development as Self-Discovery (2003). 16 Id. 17 Id. 4

[n]either economic theory nor management science is of much help in helping entrepreneurs (or the state) choose appropriate investments among the full range of modern-sector activities, of which there could be tens of thousands, once one moves beyond broad categories such as labor-intensive products or natural-resource based products. Yet making the right investment decisions is key to future growth, as it determines the pattern of specialization. 18 For example, while the traditional tools of trade theory help explain overall production patterns across countries based on factor endowments, those tools do not offer much insight at a more disaggregated level. 19 Those tools allow us to explain ex post the structure of individual markets and the extent to which factor endowments played a role in that structure. They do not allow us to explain ex ante where comparative advantage might lie or what steps policymakers might take to encourage entrepreneurs to redefine their country s comparative advantage in a way that materially contributes to development and a rising standard of living. The authors highlight the experience of Latin America in the 1990s to make their point. The authors note that, despite the shift toward more open economies, per capita income declined and economic growth was lower than during the 1980s. 20 Significantly, Hausmann and Rodrik do not assert, on the basis of Latin America s experience, that greater openness to trade and investment is not important to a country s development. 21 What they do, in fact, say is that the reforms of the 1980s and 1990s... paid scant attention to the 18 Id. at 4. 19 Id. at 19-20. 20 Id. at 2. 21 The work of Hausmann and Rodrik in this area has frequently been misread by critics of trade and investment liberalization. The authors key policy recommendation... is that laissez-faire leads to underprovision of innovation and governments need to play a dual role in fostering industrial growth and transformation. Id. at 32. Unfortunately, the tendency has been for opponents of openness to conflate laissez-faire operation of markets with trade and investment liberalization. That is both wrong as a matter of empirical fact, since no economy in the region operates under any condition approximating the laissez-faire markets Hausmann and Rodrik assumed to construct their model. But, more importantly, the opponents of further trade and investment liberalization tend to ignore that implications of what Hausmann and Rodrik actually suggested, which was the need for governments to encourage entrepreneurship and investment in new activities ex ante, but push out unproductive firms and sectors ex post. It is this latter half of their prescription that is most important for the ongoing debate in the Caribbean over trade and investment liberalization, particularly after the implementation of the Economic Partnership Agreement with the European Union. In the absence of the competition created by trade and investment liberalization, there is no effective means of pushing out unproductive firms and sectors ex post. In other words, rather than being at odds with Hausmann and Rodrik s model, trade and investment liberalization would appear to be almost a necessary condition of the approach they suggest. 5

problem of spurring investment in non-traditional activities, particularly when the potential returns from risk-taking entrepreneurship can be easily appropriated by later market entrants. The following memorandum explores how governments in the region, donors and the IDB might fill that gap. It does so by adopting the perspective of an entrepreneur examining a potential investment in a growing segment of the market for medical tourism as a basis for assessing how best to spur investment in non-traditional activities and where aid for trade might contribute to that effort and create a stronger platform for services exports from the Caribbean. II. Developing the Analytical Framework The reason for adopting the investor s perspective as a means of building a practical tool from Hausmann s and Rodrik s insights that would aid Caribbean policymakers in setting policy priorities might best be understood in contrast to a methodology we have developed in other contexts for aid for trade purposes in the context of agricultural and industrial goods exports. That methodology focused on the steps in the value chain linking local production in Peru and Honduras with global markets. We employed the value chain analysis to estimate the effect of barriers, both domestic and foreign, on the local exporters ability to reach important export markets by estimating the time and distance they added at different stages of the value chain. The value chain approach to connecting people to markets was predicated on changes in the global economy that have reshaped the structure of trade and the organization of production. 22 The methodology recognized that globalization has softened the boundaries of multinational enterprises, which now serve as the hub of a network and mobilize the capital, talent and ideas needed to organize the network and produce a good or service on a globally- 22 Less and less trade involves an arm s length transaction between independent buyers and sellers in different countries. B. Dymond and M. Hart, Navigating New Trade Routes: The Rise of Value Chains, and the Challenge for Trade Policy in C.D. Howe Institute Commentary, No. 259 (March, 2008) ( Rise of Value Chains ) 13; see also Ferreira and Trejos, On the Output Effects of Barriers to Trade, International Economic Review 47, 2006. The lack of solid statistics on the impact of global supply chains on trade complicates the process further. Instead, much of world trade is driven by and takes place within the companies operating on a global basis or within the network of suppliers, distributors, joint venture partners, agents and representatives that they use to produce goods and services for global markets. Rise of Value Chains at 13. More and more, firms are links in a chain, and their ability to add value and to fit effectively within that chain is what determines their success and their survival. 6

efficient basis. The value chain that these global networks of suppliers represent has become the new basis for competition among firms in world markets. 23 From the perspective of connecting firms and individuals in the hemisphere to global markets, the rise of value chains as a method of organizing production poses new challenges. Exporting in this context means less in the way of arm s length sales to independent buyers in particular geographic markets, as challenging as that is. Instead, the challenge of connecting firms in the region to markets depends heavily on their ability to compete effectively as a component of a larger network of suppliers that deliver finished goods and services to consumers on a global basis. What that suggests for policymakers in the region is a need to reduce the hurdles, whether physical or institutional, that inhibit the ability of local firms to participate effectively in global value chains that will increasingly dominate world trade. Such hurdles add time and cost to locally produced goods factors that play a critical role in sourcing decisions by global buyers. Adopting this approach to building development from the bottom up, however, implies the need for a common yardstick that would measure the impact of both internal and external barriers to trade and their effect on the competitiveness of local producers. With a common metric, policymakers, aid donors and lenders like the IDB could identify those barriers that would, if removed, provide the greatest return on investment in terms of improving local firms access to global markets. The logic of this value chain approach would apply with equal force to existing Caribbean enterprises and their prospects in a globalized marketplace. 24 If, however, the 23 Race for the World at 187 (pointing out that, [a]s geographic barriers between markets disappear and new global value chains start to form, competition for the most attractive partners or counterparties intensifies, creating a new basis of global competition); see also Rise of Value Chains at 13. Indeed, successful management of a global value chain has become a defining source of value generation for the globally-engaged firm. Id. By the same token, the lack thereof becomes a critical liability. 24 Clearly, a manufacturer in the Dominican Republic of plastic pots used for gardening will benefit from the ability to sell its wares to Wal-Mart, which will take the manufacturer s products not only to the U.S. market, where the Dominican Republic has ease of access due the Caribbean Basin Initiative and the more recent free trade agreement it signed with the United States, but to every other foreign market that Wal-Mart serves as well. From a policy perspective, lowering the cost of backbone services, such as energy, transportation and telecommunications, helps significantly in supporting the manufacturer s efforts to tap global markets through its connection to Wal-Mart. So, too, does the existence of a policy framework that enhances the benefit to Wal-Mart from sourcing in the Dominican Republic. In that context, using a value chain analysis to examine where policy choices by the Dominican government might reduce the cost of exporting (and increase the sustainability of the links to Wal-Mart) makes a great deal of sense. 7

challenge that the Caribbean faces is one of diversifying its existing exports, particularly exports by its service industries, rather than improving the efficient delivery of services that the Caribbean already exports, a different tool is needed. Diversifying the Caribbean s services exports implies the need to attract investment in new service industries ones in which the Caribbean countries can make more effective use of their significant investments in human capital and generate a higher overall rate of return for their economies. That argues for examining what drives the serendipitous decisions of entrepreneurs to invest, as Hausmann and Rodrik suggest, and how those decisions might be shaped by the policy choices of Caribbean governments. Examining the entrepreneur s decision to invest, in turn, suggests the possibility of drawing on other tools commonly used by global businesses in this case, investment analysis to inform both Caribbean policymakers and the IDB s judgment with respect to the use of aid for trade assistance to augment Caribbean export of services. Adopting the perspective of the private investor would highlight where the existing business environment raises the cost of local operations in the particular service sector, which, in turn, lowers the return on the investment and complicates the decision to invest. Equally important, because of the dependence of service industries and services exports on the local institutional infrastructure an investment analysis could help illuminate those policy changes that would offer the greatest return in terms of their impact on investment decisions. Here, the fact that the Caribbean s future lies in diversifying the region s export of services is actually helpful. As Aditya Mattoo of the World Bank has pointed out, the determinants of comparative advantage in the service industries are far more amenable to policy choices that rest in the hands of the Caribbean governments. 25 The amenability of services exports to supportive policy choices flows from several important differences between the export of goods and services in terms of the infrastructure on which they depend. Services industries differ from mining, textiles and apparel or the 25 A. Mattoo, Exporting Services in Breaking into World Markets 161-182 ( Mattoo ) ( Preliminary evidence suggests that the determinants of comparative advantage in services include endowments (especially of human capital), infrastructure (especially relating to telecommunications), and institutions (especially regulatory and contract enforcing). While these determinants are given today, their future evolution can be influenced by current policy choices. ). 8

production and sale of agricultural goods in terms of the infrastructure on which they depend and the institutional hurdles faced, both domestically and abroad. Contrasting the production of a good like ore in a mining operation and the production of services like airline reservation systems helps illustrate the point. In considering an investment in a mining project, the investor will recognize the need for significant capital investment, including, often times, the associated physical infrastructure needed to bring the minerals to market, such as roads, pipelines, power stations and electrical grids. Indeed, governments frequently insist on the private entity s development of the infrastructure needed as part of the bargain for access to the mineral rights. For an investor considering locating a call center for airline reservations, that is less the case. Investors in service industries tend to rely more heavily on the existing publiclyprovided infrastructure, whether it involves power, telecommunications or transportation. The nature of the transportation that is relevant to services is different as well, relying more heavily on air transport and telecommunications than ports, roads or rail. What that means from the investor s perspective is that they tend to take the business environment and the publicly-provided infrastructure largely as a given in their investment analysis. That means that they incorporate many of the cost factors over which government policy has a control into their initial decision to invest. 26 By the same token, that also means that government policy choices can affect the investor s decision in important ways. In sum, what this suggests for the Caribbean, given its relative dependence on services exports, is that it may have more to gain from a diversification strategy than might be the case for other countries, and the payoffs from diversification may be greater as well. It also suggests that government policy choices by Caribbean governments and aid for trade assistance that helps with their implementation can play a significant role in reinforcing the Caribbean s efforts to diversify its services export base. 26 This is not to say that the distinction between goods and service industries is complete or that an investor considering producing agricultural or industrial goods would not take some of the same costs into account. Rather, it reflects a greater tendency simply to evaluate the business climate as is and make a go-no go decision, rather than negotiating with the government over significant improvements in public infrastructure. 9

The following discussion builds on that insight to develop a framework for evaluating the Caribbean business environment by using the standard tools of investment analysis employed by potential investors in assessing where to locate their business. Like the value chain methodology mentioned above, the purpose of the investment analysis is to help identify those barriers, the removal of which would maximize the attraction of investing in the Caribbean. III. Approaching the Market from an Investor s Perspective The basic tool that global investors use to assess the viability of investment projects is a calculation of their expected return on investment ( ROI ). ROI captures all of the costs associated with the investment and evaluates them against the expected rate of return from the project. The ultimate goal of the ROI calculation is to create a common measure that allows a comparison of various capital projects competing for scarce capital. The ROI calculation, however, like any calculation of this sort, depends on the underlying assumptions. The tool entrepreneurs commonly use to outline the assumptions that undergird their calculation of ROI is their business plan. Creating a business plan forces the entrepreneur to demonstrate an understanding of the target market, the potential competition, and the other factors that will shape the potential success of the investment. As such, it represents an essential step in any proposed investment, whether it is designed to attract venture capital to a new enterprise or to convince finance officials in a larger corporation to allocate capital to a particular project. With that in mind, we examine what elements of an entrepreneur s business plan might prove equally helpful to policymakers in the region hoping to attract new investment in service industries in the Caribbean capable of exporting to global markets. The following discussion is built around the main elements of a business plan commonly used by entrepreneurs to attract investors to a particular project. After a brief explanation of each element, we discuss its potential relevance to policymakers in assessing where they might reduce barriers to investment and how aid for trade might help in overcoming the institutional and physical infrastructure needed to encourage such investment in exportoriented services industries. 10

The basic question we ask is what could the investor s perspective, as reflected in each step in the process of planning an investment, tell us about the investment environment in the Caribbean and how it might be shaped by the policy choices of Caribbean governments? General Market Analysis The general market analysis on which the entrepreneur s business plan is based includes a number of different steps. It includes a description of the industry and any broad economic trends (e.g., demographics; income, etc.) affecting the target market. It also details the number of potential customers in the primary market and how their needs are (or are not) being met. That will include an analysis of the number of annual purchases of similar services consumers make in the targeted market segment in order to establish some sense of the overall demand for the services the new investment would offer. The market analysis would also include information on the historic and projected growth rate of the industry serving the target market and any factors shaping the life cycle of the business because of the impact that may have on ease of entry. This part of the analysis attempts to identify those distinguishing characteristics of the market that differentiate the project in question from other investment alternatives a prospective investor might have. The market analysis generally includes a description of the geographic dispersion of competitors in the market (i.e., a description of existing investments globally, as well as information regarding specialization within those existing investments) as a means of exploring the competition any new investment would face at the outset. As a part of this step, the analysis would identify any sectors or sub-specialties within the target market that are currently under-served, where new investment would be likely to garner a higher rate of return. Any sound market analysis would also discuss current pricing and gross margin targets in the primary market and any relevant subsectors. Mapping the existing competition is critical for a number of reasons, not the least of which is that each different geographic market will differ in terms of the major decisionmakers that will influence consumer choice (e.g., government programs; regulatory agencies; other market participants). The same will hold true of the description of major customer 11

groups (e.g., diverging demographics that might make investment in care for the elderly less relevant). From the perspective of Caribbean governments, aid donors and the IDB, the relevance of this step in the investor s analysis is what it implies in terms of an assessment of the business environment in the Caribbean and a comparison of that business environment with other countries competing for similar investment projects globally. It will highlight where the Caribbean has real strengths in terms of attracting investment in a particular sector, as well as the distance it has yet to cover in order to compete with other countries for such projects. The list of strengths and weakness, in effect, becomes a target list of challenges that Caribbean policymakers, aid donors and the IDB must address in order to diversify the Caribbean s export base (i.e., aid the Caribbean in accessing new trade opportunities). Some are intuitively obvious, such as the importance of a strong privacy law to a company hoping to outsource medical transcription services. 27 Others are less apparent, including the relative importance of the personal ties between doctors and institutions in consumer markets that can provide a means of branding the Caribbean as a provider of high quality medical care. At the same time, the implicit assessment of the business environment encourages policymakers to question why such investment has yet to take place despite seemingly favorable conditions. In other words, where Caribbean leaders see investment moving towards other regions, the market analysis will help illustrate why and what could be done to ensure that the Caribbean improves its attraction as a destination for such investment. Target Market Information A solid business plan will normally reach well beyond the general market conditions discussed above. The plan will go on to identify a particular market segment the proposed investment would target. The information the plan provides on the target market should, with considerable specificity, estimate the size of the particular market segment the investment will target. It 27 Mattoo at 166. 12

will describe the purchasing cycle of potential customers in the target market and identify key decision-makers (i.e., individuals with authority over the final decision to buy). The plan will also assess existing pricing strategies in the market, reflect any trends or potential changes in consumer behavior that may affect the primary target market, and identify constraints on market access imposed by law, whether in the form of regulatory requirements or existing patents, trademarks, etc. 28 Just as important, the plan will assess existing information barriers that might limit the ability to reach potential customers in the target market and suggest ways in which those barriers can be overcome. That analysis will often include any market tests that might help in assessing the size and characteristics of demand in the target market and identify other resources for information relevant to assessing consumer demand in the target market (e.g., directories; trade association publications; government documents, etc.). That said, the real core of the target market analysis involves an evaluation of potential competition. It must identify all key competitors for each service offered with an estimate of the market share they currently hold, together with any indirect or secondary competitors which may have an impact on business success. It should also analyze how long it might take before other competitors enter into the market (i.e., examine the window of opportunity for the proposed investment). The analysis of the competition should, in addition, benchmark potential competitors strengths (e.g., ability to satisfy customer needs; consumer awareness of competitors qualities, etc., and assess any potential weaknesses, e.g., inability to satisfy customer needs; lack of market penetration; limits on access to capital and the constraint that may impose on expanding market share or entering the market, etc.). The analysis of the competition should also identify the lead times needed and potential evolutions in the market that may take place while construction or other steps in the process of creating the proposed business are under way (e.g., time needed to set up the type of business envisioned; any potential changes in technology that might affect investment; competition for skilled personnel essential to the investment s success). 28 The information on the targeted sector will generally highlight relevant characteristics of secondary markets, on both the supply and demand side of the proposed business, and examine how shifts in those markets might alter prospects in the primary market targeted for investment. 13

What that analysis would highlight for Caribbean policymakers are those market niches that are, as yet, unfilled i.e., those where an investment in the Caribbean would face less competition at the outset and would, therefore, have a larger window of opportunity within which to succeed commercially and financially. This step in the analysis, however, will also help illuminate areas in which improvements in institutional or physical infrastructure might help the Caribbean widen the areas of potential investment in export-oriented service industries. Structuring the Investment The business plan would normally summarize the intended business structure as a means of illuminating the steps and costs associated with starting a business of the type under consideration in the target market. This analysis reaches well beyond the simple question of how to incorporate or form a partnership. It would discuss the advantages, if any, associated with these alternative business forms in the target market and also identify key personnel, both in the management team and for the production of the good or delivery of the service in question. Identifying the key personnel helps determine the skills and qualifications needed, as well as compensation requirements that affect the cost structure of the resulting enterprise. It also helps illuminate the potential role that members of the management team or board of directors might play in branding the business and/or help in creating linkages with other enterprises that might help in introducing the new business to potential customers or other key decision-makers affecting purchasing decisions in the target market. From the perspective of Caribbean policymakers, aid donors and the IDB, the relevance of defining the structure of the company and its key personnel is twofold. First, the choice of structure is largely dependent on the dictates of local law and any complications that local law might introduce for limiting liability to that of the capital invested in the enterprise (i.e., the relative degree of protection local law offers to potential investors that ensures their risk is limited to the amount invested, rather than allowing legal claims to be lodged against them in their personal capacity and against their broader holdings). In that sense, it involves an implicit assessment of the local business environment. 14

Second, identifying key personnel needed to make the investment work will help outline what the specific Caribbean country involved must do to ensure that it has a human capital base adequate to support the investment or can attract outside talent to supplement local resources. This includes both the local education system and the ability to attract the talent unavailable in the local market, as needed. Service or Product Line The next step in the process involves defining precisely what the new business will sell and how that good or service matches a market niche that is not currently well-served or for which the new investment has inherent advantages. This step in the analysis should include details regarding suppliers, the availability of related products or services and their costs, information regarding the life cycle of the specific good or service offered, and any developments that could affect that life cycle in the future. The description of the specific service or product line should also identify any relevant intellectual property needed to provide service. It should describe any relevant or needed research and development activities as well. Again, from the perspective of Caribbean policymakers, aid donors and the IDB, this step in the analysis would illuminate the strengths and weakness of the specific country hoping to attract the investment relative to the specific service to be offered. It also helps identify needed support in the form of adequate protection of intellectual property and investments in research and development facilities that would support investments in targeted industries. Marketing and Sales Strategies Having defined the specific good or service that the business will offer, the analysis should develop the specific strategy that the business will adopt to penetrate the market. In particular, the analysis should address the issues of whether the company should buy or build, in terms of its facilities. This step is particularly important in certain businesses in which the proposed investment involves an expansion or extension of an existing business to a new market or a new set of potential customers. 15

The analysis should identify the important channels of distribution for the good or service the business will produce and sell. That should include a communication strategy for reaching customers (e.g., advertising, public relations, personal selling, and printed materials such as brochures, catalogs, flyers, etc.). Lastly, the marketing and sales analysis should outline the new company s growth strategy. That includes identifying specific decision points at which additional capital may be needed to match the market penetration the business achieves if it reaches its goals. From the perspective of Caribbean policymakers, aid donors and the IDB, these steps in the analysis would help illuminate the external barriers that the country s services exports would face. Those could involve qualification requirements for both the Caribbean firm resulting from the investment and for its key personnel. It could also involve commercial barriers, such as the need to link with facilities in export markets as a means of branding the Caribbean business or making inroads with consumers in targeted export markets. Financials and the Funding Request All of the elements outlined above form the assumptions underlying the basic ROI calculation. The ROI calculation, in turn, helps define what it will take to succeed in attracting the capital needed to launch the business. The analysis involves more than a single calculation. It generally involves a description of different funding strategies. It could, for example, contrast a buy strategy that would involve the acquisition of an existing facility with a build strategy that would involve the construction of a new facility. It might also include an assessment of the cost of investing in a partnership formed with an existing local provider of similar services versus a Greenfield investment by the primary investor itself. For each of those scenarios, the financial analysis would estimate current and future funding requirements, including a specific time frame that different tranches would cover; the structure of financing (e.g., equity versus debt); and working capital requirements. The analysis would normally include historical data on existing businesses of a similar type to the extent available. It might examine what the investors could use as potential collateral to 16

attract other debt investment as needed. As a part of that step, the financial analysis would incorporate the cost of capital equipment and supplies needed to get the business up and running. The analysis would necessarily include estimates of prospective earnings that usually take the form of forecasted income statements, balance sheets, cash flow statements, capital expenditure budgets, monthly or quarterly projections for the first year of operation; and quarterly and/or yearly projections for years 2 through 5 of the new company s life. This step in the financial analysis is where questions of local income tax treatment become important due to their impact on the expected income after taxes the project would generate. From the investor s perspective, the acid test is whether the financial analysis suggests that the potential investment can generate a rate of return sufficient to make the project competitive against other potential capital investments. But, that calculation is just as important from the perspective of Caribbean policymakers, aid donors and the IDB because of what it implies about the need to lower the operating costs of the proposed investment or similar investments in order to attract the capital needed to diversify the Caribbean s services exports. Indeed, the ROI calculation will help highlight those areas in which the Caribbean countries must make their own investments in order to create the conditions capable of attracting investment in services industries commensurate with their existing and future human resources. At this stage, based on the public information available, it is possible to take the first two steps toward completing that analysis with respect to potential investments in medical tourism in the Caribbean the general market analysis and the more focused analysis of the target market. Further work would need to be done with both governments and private sector providers of a variety of goods and services to build out the rest of the analysis, particularly the actual calculation of a return on investment that would offer more specific guidance as to where the Caribbean might act to lower the costs of production and create a market more conducive to the serendipitous decisions of entrepreneurs looking at particular markets, like medical tourism. 17

IV. A Case Study of Proposed Investment in Medical Tourism in the Caribbean While not all of the standard elements of a business plan are relevant to the challenges facing Caribbean policymakers, aid donors, and the IDB, applying the basic concepts outlined above to a specific case can yield important insights into what would drive investment in the Caribbean. In the case of aid for trade initiatives, the analysis can help illuminate where assistance would prove helpful in overcoming the challenges the Caribbean faces in attracting the capital needed to diversify its services exports. What follows is a stylized version of a business plan and investment analysis that is contoured to the needs of the policymaking community. In this case we have chosen, for reasons discussed below, to focus on a potential investment in an elder care facility in the Caribbean to illustrate how the analysis might work and what it might suggest to policymakers, donors, and the IDB in terms of aid for trade. The specific investment we use to drive the analysis here involves the development of a facility that combines aspects of a retirement community with a high-quality medical facility specializing in the care of the elderly. The facility would be designed to serve an aging population with relatively high disposable income in industrialized countries confronting rising health care costs. As reflected in the discussion below, there are multiple reasons for that choice. But, the most important of those factors from a business perspective is that the medical tourism market for elder care is, as yet, relatively untapped. Medical tourism is already a growing industry. Indeed, travel for medical services or other health-related reasons has long been a factor in modern life. Wealthy individuals often sought the best available care, regardless of the distance travelled. Specialized clinics, such as the Mayo and Cleveland Clinics, offered a variety of services to an increasingly international clientele. Heart hospitals associated with major research universities in the United States drew increasing attention for their accomplishments. What has changed, however, is the increasing availability of the highest quality health care in many emerging markets. That has been driven by the growth in the number of highly 18