Table of Contents
Boosting the Egyptian Exports:
Towards Developing a Comprehensive System Dynamics Based Tool
for International Market Selection
Ahmed Mounir A.Azim
Head of Project Management Department,
Quality Standard for Information Technology Egypt -- QSIT, Cairo, Egypt
MBA Graduate, Maastricht School of Management, The Netherlands
Ahmed.mounir@ gs4it.com
Khaled Wahba
Assistant Professor, Systems and Biomedical Engineering Department
Faculty of Engineering, Cairo University, Egypt
Academic Advisor, Regional IT Institute, Cairo, Egypt
Tel: +2 02 737 6006, Fax: +2 02 739 1380
Khaled.wahba@niti.org
ABSTRACT
Egyptian economy has faced several challenges along the way for recovery, among
these challenges comes the deficit in the balance of trade, although a lot of efforts
were dedicded to this area but still the gap between exports and imports forcing the
value of Egyptian Pound to go down the hill continuously. Egyptian exports are not
proportional to the efforts exerted to increase it, nor to the potential of the Egyptian
economy. Most of these efforts target the laws and regulations related to export issues,
which is not enough alone, as there is a lack of efforts towards increasing the base of
Egyptian exporters as well as their effectiveness. There is a reluctance to engage in
export business among the major part of the Egyptian producers while the smaller part
engaging in export business lack the up-to-date knowledge and tools needed to
maximize the export benefits, as they just react to spontaneous orders from
intemational markets. The research will try to give a comprehensive advisory guide
for the exporting business and introduce the first steps towards achieving
comprehensive systematic process to be used for selecting the optimum intemational
markets, by integrating intemational business aspects with economic concepts in a
dynamic system thinking approach. Since the main concem of any exporter is the
financial benefits (price, revenues and market share) that he will get from exporting,
though the research output will identify the major factors that affect the financial
results of the product in the intemational market under study and the way each factor
affects these results. The researchers will apply the results of research to rank the most
suitable markets for the Finished Leather Goods (specifically the women leather
shoes), using the screening process. Future research proposed building on this
research; would be to simulate the results developed in the research in form of causal
loop diagram into simulation model in the form of stock and flow to project the
expected financial results in each country resulted from the screening step.
INTRODUCTION
Many people have gained pre-eminence in the world through their trade activities,
among them are Etruscans, Phoenicians, Egyptians, Chinese, Spaniards, and
Portuguese. (Czinkota and Ronkainen, 1996)
Introducing Egyptian products to the intemational markets in form of exports is the
main concem of this research. Changing the export decision from a reaction attitude
to proactive action is very important to grasp the opportunities flashing everywhere in
the globe, relying on a systematic process for decision making to minimize the
associated risks, maximize expected retums and ensure covering all the possible
opportunities.
PROBLEM DEFINITION
A lot of individual and govemmental efforts have been exerted for boosting the
exports, however the results are not proportionally reflecting these efforts, as Egyptian
producers lack the knowledge and tools that gives them courage to take a proactive
actions to open new markets based on rational approaches. The industry of concern in
this research is the finished leather goods as it has poor results in the international
markets and its export figures declined from $11.2 million in 1997 to $1.93 million in
2001.
RESEARCH OBJECTIVE
The Purpose of this research is to find a systematic process for “Intemational Market
Selection” based on the system dynamics/thinking methodology to help the Egyptian
exporters to allocate the most suitable markets for their products. The process will be
developed by relating the PEST factors and internal market conditions of the desired
market as the “independent variables” to the financial results of the required product
to be exported as the “dependent variable”. Also the research will highlight the most
important elements to be investigated in case of export decision has to be taken.
STATE-OF-THE-ART
Globalisation is the starting point for this research, as it tends to be the most emerging
word in nowadays world. Since it is uncontrollable, thus every nation should adapt
itself to the globalisation rules and needs according to its unique characteristics.
There are two approaches for a Nation to deal with globalisation:
Approach 1: The companies as well as Nations take the initiative to allocate other
markets across the boarders to enter and sell its products and services seeking to fulfil
several needs.
Approach 2: The Nation defends itself and its intemal market from invaders of other
countries.
Such strategy is no more valid as no single country can close its borders and prevent
the incoming products and services leaning on its own resources. But for each
individual company, it can choose the suitable approach according to its capabilities,
although the tiniest companies and least experienced entrepreneurs have the potential
to export. Going across the boarders needs a thorough study of where to and how to
select an international market that realizes maximum profits for a certain product.
There are two approaches to define the most suitable intemational market; systematic
and non-systematic approach:
Non-Systematic Approach: These are irrational ways of choosing target markets and
subjected to personal opinions and feelings, furthermore it does not investigate the
whole range of the factors affecting intemational business.
Systematic Approach: This is a rational way of deciding the target market based on
thorough researches and studies, considering all the factors and conditions related to
the desired market.
There are several tools to compare the countries in this approach, some of which are:
1. Grids
It can be used to compare countries on whatever factors are deemed important.
The Grid constitute of several categories depending on the decision makers.
2. Opportunity risk matrix
This matrix is used to plot summary of the data produced by the grid,
furthermore it shows the relative placement of each country in the future.
3. Country attractiveness-C ompany strength matrix
This type of matrices is used to highlight the fit between a company’s specific
product and the country under investigation, as well as the products’ advantages
ona country -by- country bases.
4. Environmental scanning
This is a systematic assessment of external conditions that might affect the
company’s operations. The factors and conditions that should be scanned can be
categorized in four dimensions “PEST” representing the political, economical,
social and technological factors of the country under investigation.
THEORETICAL FRAMEWORK
The study based on the theoretical framework that link the relevant factors
contributing in the dynamics of the exports decision (figure 1).
Economical
Factors
Political a A
Techno
Factors logical
Factors
Target market f
dynamics >| Product
Financial
results
Social
Factors
Desired
Market Conditions
Figure 1: Conceptual Modeling for the study
RESEARCH QUESTIONS
The researchers have developed several questions to be able to tackle the subject in
structural manner.
MAJOR RESEARCH QUESTION
What are the main factors that an exporter should consider when selecting an
international market for his product?
The major research question is considered the main concem of the study, also it is
considered as the (0 Level, very conceptual level or preliminary level) which should
be broken down into dimensions level, this will be clear in the minor research
questions. The study will focus on the main factors affecting the choice of the most
suitable market for exports, represented by the political, economic, social,
technological and intemal market conditions of the country under study (as the
independent variables).
These variables affect the financial results of the product in that country (as the
dependent variable), which is represented in terms of revenues, market share and
profit as the dimensions of the dependent variable. The final answer can be used to
induce a process to be used in ranking of countries and hence facilitate the selection of
the most suitable.
MINOR RESEARCH QUESTIONS
A group of minor questions had to be developed to be able to answer the above
mentioned major question, which includes: How do the Political, Economical, Social,
Technological factors and the Internal market conditions of the Desired market have
an impact on the financial results the product to be exported?
DYNAMIC HYPOTHESES
The main concem of any exporter to a certain country is the financial benefits
(revenues and profits) that he will get from exporting his product, so building on the
Invisible Hand theory of Adam Smith, the supply and demand in the target market
will induce certain price which is the main determinant of the profits and revenues the
exporter is looking for.
The supply, demand and price interactions represent the market dynamics; which is
affected by the political, economical, social and technological factors of the country
under investigation, as those factors interreact and affect the intemal market
conditions. This dynamics is being articulated in form of the causal loop diagram (see
figure 2).
CAUSAL LOOP DIAGRAM (CLD)
Figure 2 shows the cause and effect relationship among the involved variables under
study, that explains the dynamics of the export decision from the researchers’ point of
view.
Traders! expect Ta r
price —
Price
++ s
Market inventory
Markt shares, os
ae ©
ia
bs) B1 A Supplied to the.
exporting market
<T,
oO onlers 2 budget
4 Productio
~~
ime ad
Demand for
» z\ local product
demand
x
. / iN §
Govemment consumption (up
Price of loc
+
expenditure
% ¥ substitutes
:
+ Weosbiste "price of local subs frela|
GDP 4. Income
ee Inflation
Figure 2: Causal Loop Diagram for Export Dynamics
Quotas
Non Tariff Barriers
Causal loop Terms
Term Explanation
Required orders |The demand for the product under consideration in the
market under study
Market The inventory of the product under consideration in the
inventory market under study
Market share The share of the product under consideration in the market
under study
Production The production of the product under consideration in its
home country
Market demand | The total demand for the product (imported and local) in the
market under study
Relative price Price of local substitute/ Price of the product under
consideration
The major dynamic loops that show the relations between the variables:
GDP Effect Loop (reinforcing): The GDP affects the income of the household, so any
increase in the GDP affects their consumption of a certain product according to their
marginal propensity to consume leading to an increase in the demand of that product,
consequently increasing the country’s aggregate demand and its GDP as shown by the
reinforcing loop “R4”.
Supply Loops (B1 -B2 balancing): The supply side of the “Invisible Hand Theory” is
resembled by the production in home country and the market inventory as in loop
“B1”, as the increase in production due to the increase in required orders will lead to
the increase of market inventory consequently the price will decrease. In loop “B2”
the increase in production leads to a reduction in the unit cost, which in tum will lead
to a reduced price.
Market Demand loops (B3- B4 balancing): The demand part in Smith’s theory is
resembled by market demand which can he disaggregated into local part and imported
part, our concem in this research is the demand for our product, represented by the
term "required orders”, so an increase in the required orders will be reflected in the
market demand leading to an increase in the price which will lead to a decrease in the
relative price leading to a decrease in the required order hence the price will go down
as described in loop B3. The effect of substitute appears in Loops B3 & B4 as the
increase in demand will increase the price of substitute which increases the relative
price leading to a decrease in the demand for the substitute hence reduces the total
demand as described in loop B4.
Market growth loops (R1-R2 reinforcing): The market growth in this model is
maintained by the “marketing budget” which to be increased upon the increase in the
revenues leading to an increase in the demand for that product "required orders”,
consequently the sales, market share and more increase in revenues as shown by loops
“Ri and R2”.
FINDINGS
Concerning the process that the researchers is proposing to be used -systematically-
by the Egyptian Exporters for intemational market scanning to select the most suitable
market for exporting their products, the research findings can be summarized as
follows:
Export is a vital issue for Egypt, and should follow professional proactive actions.
Systematic screening approach considers the whole world, which minimizes skipping
any unforeseen opportunity.
Macro economic factors are of major importance in determining the most suitable
market for exporting.
Political risks have minor effect in case of exports, its impact is realized in the form of
government interference in trade by setting quotas for other countries and controlling
imports by increasing or reducing the non tariff barriers, which affects the availability
of the product in the market.
The GDP per capita of the country is an important factor that should be considered in
case of international market selection, as it affects the household income, which
determines the consumption in the country, and thus the aggregate demand is affected
leading to changes in prices accordingly.
GDP growth rate should be considered as well, as it gives an indicator about the
economy, whether it is facing a recession, slowdown or it is flourishing, which
indicates higher opportunities.
The population specification in form of the age - gender structure in the countries
under investigation give an indicator about the pool of customers for the product,
affecting directly the demand for that product.
Technological factors in the countries under investigation are of minor impact, as they
appear in the form of the degree of availability in telecommunication facilities and
means of transportation, which affects the distribution of the product, thus its
availability for the customers in time.
The causal loop diagram developed in figure 4.1 revealed that Adam Smith’s
“Invisible hand theory” have a dynamic concept in its core, as the macroeconomic
factors interact between themselves and the market parties in Smith’s theory.
CONCLUSION
Export is a strategic and essential direction for Egypt, although a lot of efforts are
exerted to boost the exports but the results are not proportional to these efforts, the
government is targeting the laws and procedures, but no real efforts dedicated for
educating the producers or give them the required knowledge to help them overcome
the fear of going across boarders to the right market. Nowadays through the
intemational agreements, protectionism will vanish nevertheless the countries should
find there competitive advantage and to use models and approaches which helps to
catch intemational markets. (Noonan, 1999)
Choosing a suitable market for export is a critical decision especially for a small or
medium size company, though it must be given the proper attention to select the
optimum market from the 230 countries of the globe. The criteria for this selection are
acombination of macro and microeconomic factors.
The criteria include the politic al factors of the countries under investigation, although
it may have a minor effect on the financial results of the concemed product in case of
exports, but in case of other mode of intemational trade it has high impact and may
presume high degree of risk.
The technological factors as well have a minor impact on the financial results of the
product. Social factors represent the customer pool for the product, the customers are
highly affected by the economic factors of the economy they are living in and
consequently they have a big impact on the financial results of the product under
investigation.
The conditions of the market under investigation represent the microeconomic side of
the country, which describe the specific status of the product under investigation and
the market dynamics that is affected by the macroeconomic factors and affecting
directly the financial results of the product. All these factors are combined together
and used in the screening process which allows the exporter to investigate the whole
world and be sure not to skip any opportunity that may flash anywhere in the world.
So, building on the causal loop diagram developed in figure 4.1 that shows how each
factor affect the financial results of the product, the researcher would propose that
these factors used by the screening process comprise a simple, systematic and costless
tool to rank the most suitable markets for exporting a certain product relative to each
other.
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