The Frontier Economy Scorecard

How can strategists choose among dozens of potential frontier economies?

We recommend a simple scorecard with six panels to compare them and understand their policies. The top panels gauge the country's suitability as an export platform (productivity, competitiveness, and diversity of exports) and the bottom ones evaluate the attractiveness of the domestic market (size of market, growth, and barriers to entry). From left to right the panels reveal information most suitable to entry in competitive vs. regulatory-rent industries. The scorecard helps piece together the macro-economic strategy each country is following and can be constructed with publicly-available information. We favor looking at 5-10 year trends in macroeconomic indicators when possible and 2-5 year trends in exchange rates, productivity, corruption or doing business indicators, rather than looking at the last year's information. If the investment thesis is right, frontier economies should show clear improvements in attractiveness over time.

Within each of the panels we offer suggested indicators that allows an analyst team to quickly compare different frontier markets. Magician firms will need to pay special attention to productivity and competitiveness, as well as make sure that they are not alone on the country's export platform; understanding relative labor costs and exchange rate dynamics is crucial to know whether the market has any potential as a base for production. Rentiers will need to know whether similar firms have succeeded in exporting in the past by examining the export platform; what the dynamics of cost and exchange rates are that will determine how the top and bottom lines intersect with the global market; and what the barriers to entry are, for how complex the bureaucratic environment might be and how likely an expropriation is. Workhorses will be first interested in the market size and growth to determine whether the domestic market has enough potential, and will also need to understand barriers to entry to ensure they can enter the market in the first place. They will also need to know some of the cost dynamics from the upper panels, but these cost increases will be mitigated in domestic markets with rising purchasing power of potential customers. Finally, firms intending to compete in the powerbroker quadrant will need to understand the barriers to entry first and foremost, with market size and growth important secondary considerations. Some frontier economies are simply too stacked with political interest in the powerbroker quadrant for a foreign firm to compete.

Obviously some of the boxes serve multiple objectives and require a more nuanced investigation on a second pass. For instance, any country suitable to serve as an export platform should have low barriers to entry, at least in special economic zones, but these specialized regulations might not show up in country-wide averages. Similarly, barriers to entry might seem insurmountable but the country could have particular needs, for example in reliable power generation, that would mean a stable investing environment would be available for the firm that played its cards right.

The scorecard, together with the four-market mapping, can help you piece together the direction the country is going and whether your firm can fit into it.