Market Potential Indicator

Market Potential Indicator

Purpose of Indicator

As the name states, it is a measure of the market potential of a country using several dimensions, ratings, indexes and percentages. Currently, emerging economies comprise more than half of the world's population, account for a large share of world output and have very high growth rates, which mean an enormous market potential. With global marketing becoming more important, companies and marketers are attempting to determine which international markets they would like to penetrate and the appropriate marketing strategy.

Using the market potential indicator countries are distinguished by the recent progress they have made in economic liberalization using eight dimensions. Each dimension is given a weight to contribute to the overall market potential index.

Construction of the index

The market potential index was first constructed using only seven dimensions and was given the following weights: Market Size (4/20), Market Growth Rate (3/20), Market Intensity (3/20), Market Consumption Capacity (2/20), Commercial Infrastructure (2/20), Economic Freedom (2/20), Market Receptivity (4/20).

Market Size

In developing their business plans, companies of all sizes face the challenge of determining the size of their markets. The relevant market equals the company's sales if it were to capture 100% of its specific niche of the market. This index represents the total population.

Market Growth Rate

Another important dimension, the market growth rate is a combination of market factors used to predict the likely level of sales. It is usually expressed as a percentage per annum, at which a market is increasing in size.

Market Intensity

This index takes into consideration the gross national income per capita and private consumption as a percentage of GDP.

Market Consumption Capacity

Ranks the size of the middle class available in consumption/income.

Commercial Infrastructure

Infrastructure is important for any emerging market. Transportation, communication and retail outlets are very important for a business to function in any market.

Economic Freedom

This is basically a measurement of the degree of economic freedom. This index scores nations on 10 broad factors of economic freedom: business freedom, trade freedom, monetary freedom, freedom from government, fiscal freedom, property rights, investment freedom, financial freedom, freedom from corruption and labour freedom.

Market Receptivity

Average annual growth rate of imports and per capita imports from the United States.

By the year 1998 the country risk dimension was added to the market potential indicator and was given a weight of 4/50 whilst changing the weights for all the other dimensions as well.

Country Risk

It reflects the ability and willingness of a country to service its financial obligations. Country risk may be prompted by a number of country-specific factors or events. There are three major components of country risk, namely economic, financial and political risk.

As can be seen in the able above Asian countries dominate the table with 11 countries out of which four of them are at the top of the table.

Focus on emerging market - China:

China's ranking in the index has been fairly stable over the past decade (Appendix A,B,C), with steady improvement except for a spike during the period from 1998 - 2000 due to the Asian financial crisis, which made China risky country to invest in.

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