Download Chapter 2 The Global Economic Environment

The Global
Economic
Environment
Global Marketing
Chapter 2
1
The World Economy—
An Overview
• In the early 20th
century economic
integration was at
10%; today it is 50%
• Ford Fiesta – Ford’s
first global car
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The World Economy—
An Overview
• The new realities:
– Capital movements have replaced trade as the
driving force of the world economy
• 2007 world trade: $16.9 trillion
• Annual Forex transactions volume: $ 450 trillion
– Productivity has become uncoupled from
employment
GDP continues to grow even if employment in
manufacturing falls
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The World Economy—
An Overview
The new realities, continued:
• The world economy, not individual countries, is the
dominating factor
• Greece and Spain debt crisis and the EU
• 75-year struggle between capitalism and socialism
has almost ended
– Fall of USSR (key holdouts: Cuba, North Korea, Venezuela)
• E-Commerce diminishes the importance of national
barriers and forces companies to re-evaluate
business models (1 billion Internet users world wide)
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The World Economy: The
Global Competitiveness Index
• http://www.weforum.org/en/initiatives/gcp/Global%20Competiti
veness%20Report/index.htm
– (check the document for individual country profiles)
• World Economic Forum – 12 Pillars of Competitiveness:
Quality of Institutions
Labor market efficiency
Quality of Infrastructure
Financial market sophistication
Macroeconomic stability
Technological Readiness
Health and Primary
Education
Market Size
Higher education and
training
Business sophistication
Goods market efficiency
Innovation
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Weighted Average Index
Basic requirements – Key for FACTOR-DRIVEN ECONOMIES
• Institutions
• Infrastructure
• Macroeconomic stability
• Health and primary education
Efficiency enhancers – Key for EFFICIENCY-DRIVEN ECONOMIES
• Higher education and training
• Goods market efficiency
• Labor market efficiency
• Financial market sophistication
• Technological readiness
• Market size
Innovation and sophistication factors – Key for INNOVATION-DRIVEN
ECONOMIES
• Business sophistication
• Innovation
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Weighted Average Index
Weights of the three main sub-indexes at each
stage of development
Sub-Index
Factor-driven
stage (%)
Efficiencydriven stage
(%)
Innovationdriven stage
(%)
Basic
Requirements
60
40
20
Efficiency
Enhancers
35
50
50
Innovation
factors
5
10
30
Countries allocated to each stage on the basis of per capita GDP and
share of export of mineral goods in total exports
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GCI – 2009-2010
Top 10 GCI countries
GCI
Bottom 10 GCI countries
GCI
Switzerland
5.6
Paraguay
3.35
USA
5.59
Nepal
3.34
Singapore
5.55
Timor
3.26
Sweden
5.51
Mauritania
3.25
Denmark
5.46
Burkina Faso
3.23
Finland
5.43
Mozambique
3.22
Germany
5.37
Mali
3.22
Japan
5.37
Chad
2.87
Canada
5.33
Zimbabwe
2.77
Netherlands
5.32
Burundi
2.58
Note: GCI can range from 1 - 7
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2-8
Traditional Economic Systems
Resource Allocation
Market
Private
Resource
Ownership
State
Command
Market
Capitalism
Centrally
Planned
Capitalism
Market
Socialism
Centrally
Planned
Socialism
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Market Capitalism
•
•
•
•
Individuals and firms allocate resources
Production resources are privately owned
Driven by consumers
Government’s role is to promote competition
among firms and ensure consumer protection
• The “free” end of the spectrum – traditionally
the US – now seeking to increase govt.
control over some activities
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Centrally Planned Socialism
• The ‘repressed’ end of the spectrum
• State holds broad powers to serve the public interest;
decides what goods and services are produced and in
what quantities
• Consumers can spend only what is available
• Government owns entire industries and controls
distribution
• Demand typically exceeds supply
• Little reliance on product differentiation, advertising,
pricing strategy
• Traditionally China, and the former USSR now
moving towards some economic freedom
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Centrally Planned Capitalism and
Market Socialism
• In-between systems
• CPC – Basically capitalist economies
with greater state control on spending
– Swedish government controls 2/3s of all
spending; Japan
• MS – Basically socialist economies
allowing for market allocation
– India
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Western Market Systems
Type of System
Anglo-Saxon
Key Characteristics
Private ownership
free enterprise
Countries
US, Canada,
Great Britain
Minimal social safety net
Social Market
Private ownership
France, Germany,
Economy Model
Inflexible employment
Italy
policies, “social partners”
Nordic Model
Mix of state and private
Sweden, Norway
ownership, large safety net
High taxes
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Economic Freedom – Heritage
Foundation, Washington DC
• Rankings of economic freedom among countries
– “free” “mostly free” “mostly unfree” “repressed”
• Variables considered include such things as:
– Trade policy (free…restrictive)
– Taxation policy (high taxes…low taxes)
– Capital flows and foreign investment (freely
allowed…restricted)
– Banking policy (extensive central bank controls)
– Wage and price controls (govt. controls…market
determination)
– Property rights (private ownership…state ownership)
– Black market (size)
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Economic Freedom—
2010 Rankings
• http://www.heritage.org/ind
ex/Ranking.aspx
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Stages of Market Development
• The World Bank has defined four categories
of development using Gross National Income
(GNI) as a base
• BEMs, identified 10 years ago, were
countries in Central Europe, Latin America,
and Asia that were to have rapid economic
growth
• Today, the focus is on BRIC: Brazil, Russia,
India, and China
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Low-Income Countries
• GNI per capita of $935 or less
• Characteristics
Indian tailor
–
–
–
–
–
–
–
–
–
Limited industrialization
High percentage of population in farming
High birth rates
Low literacy rates
Heavy reliance on foreign aid
Political instability and unrest
Concentrated in Sub-Saharan Africa
40% of the world’s population
India is the only BRIC country
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Lower-Middle-Income
Countries
• GNI per capita: $936 to $3,705
• Characteristics
– Rapidly expanding consumer markets
– Cheap labor
– Mature, standardized, labor-intensive
industries like textiles and toys
– China, Indonesia, Thailand
• BRIC nation is China
2-18
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Upper-Middle-Income
Countries
• GNP per capita: $3,706 to $11,455
• Characteristics:
–
–
–
–
–
Rapidly industrializing, less agricultural employment
Increasing urbanization
Rising wages
High literacy rates and advanced education
Lower wage costs than advanced countries
• Also called newly industrializing economies (NIEs)
• Examples: Brazil, Russia, Malaysia, Chile,
Venezuela, Hungary
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Marketing Opportunities in
LDCs
• Characterized by a shortage of goods and
services
• Long-term opportunities must be nurtured in
these countries
– Look beyond per capita GNP
– Consider the LDCs collectively rather than
individually
– Consider first mover advantage
– Set realistic deadlines
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Mistaken Assumptions about
LDCs
1. The poor have no money.
2. The poor will not “waste” money on nonessential goods.
3. Entering developing markets is fruitless
because goods there are too cheap to make
a profit.
4. People in BOP (bottom of the pyramid)
countries cannot use technology.
5. Global companies doing business in BOP
countries will be seen as exploiting the
poor.
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High-Income Countries
• GNI per capita: $11,456 or more
• Also known as advanced, developed,
industrialized, or postindustrial
countries
• Characteristics:
– Sustained economic growth through
disciplined innovation
– Service sector is more than 50% of
GNI
Tokyo
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High-Income Countries
• Characteristics, continued:
– Importance of information processing and
exchange
– Ascendancy of knowledge over capital,
intellectual over machine technology,
scientists and professionals over engineers
and semiskilled workers
– Future oriented
– Importance of interpersonal relationships
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G-8, the Group of Eight
• Goal of global economic stability and
prosperity
–
–
–
–
–
–
–
–
U.S.
Japan
Germany
France
Britain
Canada
Italy
Russia (1998)
2009 G-8 Leaders in Italy
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OECD, the Organization for Economic
Cooperation and Development
•
•
•
•
30 nations
Post-WW II European origin
Canada, U.S. (1961), Japan (1964)
Promotes economic growth and social
well-being
• Focuses on world trade, global issues,
labor market deregulation
– Anti-bribery conventions
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The Triad
• U.S., Western Europe, and Japan
• Represents 75% of world income
• Expanded Triad includes all of North
America and the Pacific Rim and most
of Eastern Europe
• Global companies should be equally
strong in each part
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Product Saturation Levels
• The % of potential buyers or
households who own a product
• India: 20% of people have telephones
• Autos: 1 per 43,000 Chinese; 21 per
100 Poles; 8 per 1,000 Indians
• Computers: 1 PC per 6,000 Chinese; 11
PCs per Poles; 34 PCs per EU citizen
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Balance of Payments
• Record of all economic transactions between
the residents of a country and the rest of the
world
– Current account–record of all recurring trade in
merchandise and services, and humanitarian aid
• trade deficit—negative current account
• trade surplus—positive current account
– Capital account–record of all long-term direct
investment, portfolio investment, and capital flows
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Balance of Payments
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Top Exporters in 2004
___In US$ billions____
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Germany
U.S.
China
Japan
France
Netherlands
Italy
Great Britain
Canada
Belgium
912
819
593
566
449
358
349
347
317
307
_____% of Total____
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
EU
U.S.
China
Japan
Canada
S. Korea
Mexico
Russia
Taiwan
Malaysia
18.1
12.3
8.9
8.5
4.8
3.8
2.8
2.8
2.7
1.9
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Top Importers in 2004
___In US$ billions___
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
U.S.
1,526
Germany
717
China
561
France
466
Great Britain
464
Japan
455
Italy
351
Netherlands
319
Belgium
286
Canada
280
_____% of Total____
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
U.S.
EU
China
Japan
Canada
South Korea
Mexico
Taiwan
Switzerland
Australia
21.8
18.3
8.0
6.9
4.0
3.2
3.0
2.4
1.6
1.6
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Overview of
International Finance
• Foreign exchange makes it possible to
do business across the boundary of a
national currency
• Currency of various countries are traded
for both immediate (spot) and future
(forward) delivery
• Currency risk adds turbulence to global
commerce
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Foreign Exchange
Market Dynamics
•
Supply and Demand interaction
–
–
–
Country sells more goods/services than it buys
There is a greater demand for the currency
The currency will appreciate in value
Exchange Risks and Gains in Foreign Transactions
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Purchasing Power Parity (PPP)
The 2008 Big Mac Index
• Is a certain currency over/under-valued
compared to another?
• Assumption is that the Big Mac in any country
should equal the price of the Big Mac in the
U.S. after being converted to a dollar price 2-34
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Managing Economic Exposure
• Economic exposure refers to the impact of
currency fluctuations on the present value of the
company’s future cash flows
• Two categories of economic exposure:
– Transaction exposure is from sales/purchases
– Real operating exposure arises when currency
fluctuations, together with price changes, alter a
company’s future revenues and costs
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Managing Economic Exposure
• Numerous techniques and strategies
have been developed to reduce
exchange rate risk
– Hedging involves balancing the risk of
loss in one currency with a corresponding
gain in another currency
– Forward Contracts set the price of the
exchange rate at some point in the future
to eliminate some risk
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