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3.0 THE ECONOMY AND BUSINESS
 Levels and models of the environment
 Measuring economies
 Shifts in global economic power
 Types of capitalist system
 Changing nature of capitalism
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.1
LEVELS OF THE ENVIRONMENT
 Immediate, local level
e.g. local government planning permission, local
labour markets, local competition
 National level
e.g. economic and education policies, laws and
regulations, bank interest rates
 International level
e.g. Impact of globalization, World Trade Organization
regulations, currency exchange
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.2 WAYS OF LOOKING AT THE
ENVIRONMENT
 PEST
 PESTEL
 LoNGPEST
 SWOT
All the above are ways of assessing the
environment from the perspective of an individual
firm or an industrial sector.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.3
PEST, PESTEL AND LoNGPEST
PEST
 Political environment (P)
 Economic environment (E)
 Socio-cultural environment (S)
 Technological environment (T)
PESTEL
PEST plus
 Ethical environment (E)
 Legal environment (L)
LoNGPEST
PEST plus
 Local (Lo)
 National (N)
 Global (G)
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.4 SWOT ANALYSIS
• Strengths of the organization in the face of prevailing
environmental conditions and likely change.
• Weaknesses of the organization in the face of prevailing
environmental conditions and likely change.
• Opportunities presented by the prevailing environmental
conditions and likely change.
• Threats presented by the prevailing environmental
conditions and likely change.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.5
ECONOMY AND BUSINESS – AN OVERVIEW
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.6
MEASURING ECONOMIES
 Gross domestic product (GDP)
Total value of all goods and services in a given year
including exports less imports.
 GDP per capita
As above divided by the number of population.
 Gross National Product (GNP)
Total value of all goods and services in a given year plus
income from residents overseas minus income at home
by non-residents.
 Gross National Income (GNI)
GDP plus or minus income received from or paid to other
countries e.g. Interest on loans.
 Purchasing power parity (PPP)
Measure of the relative cost of living in different countries
and an indicator of poverty.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.7 SHIFT IN GLOBAL ECONOMIC POWER
 Growth and influence of Japan
 BRICS
 Continuing dominance or changing status of
the USA?
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.8 GROWTH AND INFLUENCE OF JAPAN
 Economic growth 1950-90
 Export market growth 1970-90
 Japan as an economic role model
 Japanization of the west – FDI plus adoption
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.9 JAPAN ECONOMIC INDICATORS I
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9781408095218 © 2015 Cengage Learning EMEA Ltd
3.10 JAPAN ECONOMIC INDICATORS II
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.11 JAPAN ECONOMIC INDICATORS III
Japan as world leader 1990s in the following goods and services
Automobiles
Forklift trucks
Trucks
Robotics
Car audio
Home audio
Satellite communications
Fax machines (99% world production + export)
VCR (99% world production + export)
Musical instruments
Sewing machines
Cameras (80% world production + export)
Video games
Soy sauce
SOURCE: M.E.PORTER et al (2000), CAN JAPAN COMPETE?, LONDON: MACMILLAN
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.12 EXPLANATIONS FOR JAPAN’S ECONOMIC
GROWTH
 Low wages, long hours
 Investment in process technologies
 Protected home market
 Networked economy
 Supportive state
 Supportive banking system
 HR policies – tenure, reward, flexibility, culture, Tus
 Cultural values – duty, loyalty, collectivism
 Influential in terms of management strategy
But speculation and scandals contributing to recession in
through the 1990s and beyond. As a result growth was
halted for a while and Japan fell back in world rankings.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.13 THE BRICS PHENOMENON I
BRICs originally referred to 4 countries
 Brazil
 Russia
 China
 India
These countries were identified in a 2003 report by
Goldman Sachs, where it was predicted that the combined
economic growth of BRICs countries would outstrip the
combined value of the G6 (France, Germany, Italy, Japan,
UK and USA) by 2040.
Since the report was published South Africa became a
member of the BRICS in 2011.
Source: Goldman Sachs Global Economics Paper 9: Wilson
and Purushothaman (2003).
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.14 THE BRICS PHENOMENON II
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.15 THE BRICS PHENOMENON III
Despite predictions of growth people will still be poorer on average than
those in G6 countries.
The predicted GDP per capita of the BRICs economies against the G6 in
2050 expressed in $US.
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.16 THE BRICS PHENOMENON IV
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3.17 THE BRICS PHENOMENON V
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9781408095218 © 2015 Cengage Learning EMEA Ltd
3.18 THE BRICS IN PERSPECTIVE
Updated Goldman Sachs (2009)
• BRICS doing better after banking crisis than G6.
• Long-term trend upheld. As big as G7 by 2032. Even
faster acceleration for China with parity with USA by
2027.
• China, India and Brazil doing better than Russia.
PWC World in 2050 (2011)
• GDP as PPP – E7 will overtake G7 by 2020. China will
overtake USA by 2020.
• GDP as MER – roughly supports Goldman Sachs. China
overtakes USA by 2035.
• New multinationals from E7 will increase in influence.
• Growing middle classes in E7 will accelerate growth of
consumer markets.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.19 BRICS ISSUES
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Official links at government level in 2006.
Why South Africa? Small economically yet powerful in Africa,
a target continent for other BRICS.
Form part of G20 but also Indonesia, Mexico, Argentina
What do the BRICS have in common?
- dissatisfaction with the old global order
- want more input in world affairs
- interest in Middle East, Africa and developing countries
- GDP growth and trade e.g. energy trade between Russia and
China, China is Brazil’s main market.
BUT
- is growth sustainable in the long term?
- no sign of BRICS as a political power; China is a contender
but as part of liberal global; order or as an alternative.
- no collective vision e.g. on climate change, Syria etc.
- significant variations politically, economically and socially.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.20 THE EMERGENCE OF CHINA
• Liberalization since 1970s but under state control.
• World’s fastest growing economy since 1980.
• In 2009 contributed 18% of total world economic
growth. USA contributed 14%.
• World’s largest exporter of manufactured goods.
• World’s largest producer of steel, cars, computers, TV
sets and fish and meat products.
• World’s second largest importer.
• Global expansion. Chinese companies buy IBM PC
division, Motorola, Smithfield Foods.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.21 CHINA –ECONOMIC GROWTH II
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.22 CHINA – ECONOMIC GROWTH III
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.23 TYPES OF FIRM IN CHINA I
• State-owned enterprises (SOEs). Assets owned and
managers appointed by the state. Include energy and
banking sectors. Local authorities own and control
collective enterprises (COEs).
• Private companies. Shareholder owned limited liability
companies. Range from large to small business startups.
• Foreign-owned enterprises (FOEs). Where 25% or more
of assets are owned by a foreign investor. Ownership in
some areas is limited to 50%. Chinese partner can be
SOE or private company.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.24 TYPES OF FIRM IN CHINA II
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.25 REASONS FOR GROWTH OF THE CHINESE
ECONOMY
• Globalization –trade and FDI.
• WTO membership boosted trade.
• Privatization and growth of the stock market.
• Government strategies to encourage inward FDI and
then encourage move to higher value-added products
and outward FDI.
• Human capital development. Increased access to
education at all levels. Investment in universities.
Students from foreign universities returning home.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.26 CHINA - PROBLEMS AND ISSUES
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Dominance of foreign firms especially in higher value-added
sectors.
One of the lowest rates of domestic consumption in Asia
(around 35% of GDP).
Economic transformation has product a widening economic
gap and increased inequalities, that are now wider than the
USA. Potential for unrest.
Low ranking in PPP. China ranked 76th. India ranked 120th.
Poor productivity in SOEs. Typical labour problems of a
transitional economy.
Banking dominated by state banks. No foreign banks and lack
of integration with the global economy.
Rising inflation.
Still viewed by investors as difficult and complex
bureaucracy.
Pollution.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.27 CHINA AND INDIA – SIMILARITIES
The two countries are similar in many ways:
• Both emerged in their current form in the late
1940s.
• Both have a large population + large supply of
cheap labour.
• Both have experienced highly controlled
economies.
• 2x economic growth of other countries with
China as the world’s fastest growing economy
since 1980.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.28 CHINA AND INDIA – DIFFERENCES
 China focus on manufacturing. More exports and FDI
 India focus on services especially IT
Economic structure
China
India
Agriculture
13%
18%
Industry
48
27
Services
40
55
(World Bank, World Development Indicators, April 2007)
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.29 PPP CHINA AND INDIA
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3.30 DOMINANCE OF THE USA I
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.31 DOMINANCE OF THE USA II
 USA drives the global economy.
 Influence of USA foreign policy – USA has 50% of
global defence spending is a key factor in that influence.
 World leader economically. US contributes:
25% of manufacturing
34% of services
15% of agriculture
 Influence via multinationals since 1920s - Value of
overseas production 2.5x value of exports.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.32 DOMINANCE OF THE USA III
But there are signs of decline.
 China will be a larger economy by the latest
2040 but probably much sooner.
 Decline in FDI – 50% of world in 1960,
21% in 2005.
 Severe criticisms of foreign policy from
other countries.
 US brands overtaken by foreign competition
in cars, electronics and pharmaceuticals.
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.33 EXAMPLE OF USA DECLINE I
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3.34 EXAMPLE OF USA DECLINE II
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3.35 A CHANGING POLITICAL ECONOMY
 Liberalization
 Privatization
 Shift to Anglo-Saxon capitalism?
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.36 TYPOLOGY OF CAPITALIST SYSTEMS
 ANGLO-SAXON
 SOCIAL MARKET
 ASIAN
 TRANSITIONAL
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.37 ANGLO-SAXON CAPITALISM
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Competitive markets, little state intervention
Importance of individualism
Importance of private property
Shareholders the most important stakeholders
Role of institutional shareholders
Mergers and takeovers, often hostile
Managers rewarded for maintaining profits and share
price
Short-termism
Trade unions tolerated and restricted by law
Use of labour market flexibility to respond to change
In a recession, costs cut to maintain profits
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.38 SOCIAL MARKET CAPITALISM
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Competitive market regulated by the state
Mix of private and state ownership
Well-funded, comprehensive social welfare system
Markets and firms regulated by law and state
bureaucracy
Many stakeholders recognized including employees
Co-ordinated wage bargaining
Importance of responsibility to society
Stable share market with takeovers limited
National champions protected by the state
Close relationship between firms and banks
Reinvestment has priority over share dividend
Considerable employee involvement
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.39 ASIAN CAPITALISM
 Belief in free market with state intervention where
necessary
 Importance of Confucian values
 Large corporations collaborating with the state
 State is bureaucratic but assists business
 Weak social welfare - individual responsibility
 Importance of savings
 Firm and associates viewed as a family
 Strong corporate cultures
 Stable stock market
 Collaboration between competing firms
 Long-term strategies
 Weak trade unions (except S. Korea)
 Attempts to save jobs and suppliers in a recession
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.40 KEY DIFFERENCES
GERMANY/JAPAN
Coordinated market
economy (CME)

UK/USA
Liberal market economy
(LME)
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Stable stock market
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Stable labour market
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Employee involvement
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Top-down decisions
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Competitive capitalism
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ROI rules
Cooperation between
competing firms
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‘Patient capitalism’
Volatile stock market
Labour mobility and
flexibility
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.41 SHIFT TO ANGLO-SAXONISM I
Success of Germany and Japan in 70s and 80s was
followed by decline in 1990s with re-emergence of USA.
Noted shift towards Anglo-Saxon approaches in both
Germany and Japan.
 Globalization of German and Japanese firms and capital.
 Prioritization of shareholder interest.
 Move from ‘blockholders’ to more diversified pattern of
shareholding.
 Reduced involvement of banks in decision-making.
 Focus by banks on ROI rather than long-term
investment.
 Less job protection – jobs cuts in recession.
 Adoption of ‘US practices’ – performance related pay,
increased job mobility, appraisals.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.42 SHIFT TO ANGLO-SAXONISM II
Evidence suggest shift in kind and modification of some
practices rather than total acceptance. In Germany and
Japan there is still evidence of:
 Greater involvement of banks plus their financial
commitment.
 Greater cooperation rather than self-interested
individualism.
 Greater employee involvement in decision-making.
 Greater commitment of employees and strong corporate
culture (especially Japan).
 More complex legal framework (especially Germany).
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.43 TRANSITIONAL ECONOMIES
 In a process of change from state control to a market
economy involving processes of:
- Liberalization of markets, wages and prices
- Stabilization to control wage and price inflation
- Internationalization for trade and inward investment
- Privatization
 New issues – competition, unemployment
 Which model to follow?
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by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.44 ISSUES RELATING TO MODELS OF
CAPITALISM
 Favoured ideal models have appeared at different
times – Japan, Germany, USA.
 Are models linked to cultural differences?
 Do some models lead to better economic
performance than others?
 Not all firms in a country conform to national
models.
 Is there one best way or a choice? This is an
important question for transitional economies and
developing economies.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.45 IMPACT OF BUSINESS ON THE ECONOMY
 Production of goods, service and provision of
employment.
 Contribution to income, capital assets and economic
growth.
 Contribute to the economy via overseas investment
especially FDI.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd
3.46 IMPACT OF THE ECONOMY ON BUSINESS
 Structural changes - deindustrialization, growth of
services, impact on level and type of employment.
 Supply and price of raw materials.
 Levels and changing nature of international
competition and the influence of globalization.
 Influence of multinational firms.
 Increase in international/global activity.
For use with Business in Context 6e
by David Needle
9781408095218 © 2015 Cengage Learning EMEA Ltd