Topic 3 - The Global Economic Environment

THE GLOBAL ECONOMIC ENVIRONMENT

Several factors have contributed to the growth of the international economy post World War II. Principal forces have been the development of Economic blocks.

In the past fifty years the global economic environment has changed rapidly.

• Development of world economy integration
• Standardized products
• Capital movement rather than trade
• World economy in control
• Decisions in Product, Pricing, Communications and Merchandising can stimulate economic development.

A meeting by ESCAP Expert Group Meeting on Trade Facilitation and Electronic Commerce held in Bangkok 30 and 31st July 2003 stated; Globalization has led to astonishing increases in global trade.

• Trade currently represents 30 per cent of world gross domestic product (GDP)
• Expected to grow to 50 per cent of world GDP by 2020.
• Greater participation in international trade is a prerequisite for economic growth and sustainable development in today’s competitive world economy.

Developing countries have contributed to the:

• Fast pace of global growth - growth rate averaged about 6 per cent.
• Benefiting from strong demand for their exports and rising prices for their primary commodities.
• Developing countries are at the mercy of world supply and demand movements, with the resultant fluctuations in prices.
• Depressed world market prices can have a deleterious effect on developing economies.

 Secondly the rapid globalization and focus away from domestic economies has created global competition and in turn, this has pushed up quality.

Generally speaking, unless developing countries can break into non-committal based products they are being further left behind in the global economic stakes.

However positively, whilst developed worlds concentrate on industrial and service products it leaves opportunities for developing countries to export more food based products.

A survey done by McKinsey group have found that the top three trends to affect global business over the next five years are:

• The growing number of consumers in emerging economies
• The shift of economic activity between and within regions
• The greater ease of obtaining information and developing knowledge
• Other noteworthy trends:
• The increasing communication/interaction in business and social realms as a result of technological innovation
• Shifting structures/emerging forms of corporate organization

More social backlash against business.

Interestingly enough, the survey also found that executives perceived the potential impact of those trends to be significantly larger on global business than on their own company’s profitability – perhaps signalling a weakness in their ability to translate global trends into corporate strategy.

Another finding – perhaps predictable considering who was surveyed – is that 85% of the executives describe their business environment as more competitive than it was 5 years ago.

When asked what factors contributes most to the accelerating pace of change in the global business environment today they identified the main reason as:

• Innovation in products
• Services and business models.
• Greater ease of obtaining information
• Developing knowledge and
• Rising consumer awareness and activism.

 

The Global Economic Structures

Managers seeking to operate in a global environment must better understand the structure of the global economy.

Although countries and many regions are unique, there are some basic similarities and differences. The three different elements of a global economy structure are:

• Mature Market Economies and Systems
• Developing Economies
• Other Economies 

Mature Market Economies and System – Based on the private ownership of businesses and allows market forces such as supply and demand to determine business and marketing strategies.

Mature Market Economies include the United States, Japan, the United Kingdom, France, Germany, Sweden, Australia, New Zealand and Canada.

The countries mentioned have several things in common:

• They tend to employ market forces in the allocation of resources
• Private ownership of properties however some variance (France has a high level of government ownership among the market economies)

Market System – Clusters of countries that engage in high levels of trade with each other.

One mature market system is North America Free Trade Agreement (NAFTA). The US, Canada and Mexico are major trading partners with one another.

• More than 70 percent of Mexico’s export go to the US
• More than 65 percent of what Mexico imports comes from the US.
• NAFTA – Various agreements to make trade easier between the three countries

Market System – European Union (Formidable market system- 15 members  countries are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Netherlands, Portugal, Spain, Sweden and UK.

Until recently Europe had two distinct economic areas

• The Eastern European Region consisted of communist countries such as Poland, Czechoslovakia and Romania. (these countries were characterized by government ownership of business and greatly restricted trade)
• The Western European countries – Traditional market economies. Have been working together to promote international trade for decades

The EU aims to integrate the economies, coordinate the social development and bring about the political union of the democratic nations of Europe.

A good example is the formation of their currency EURO introduced in 2002

Market System – Asia-Pacific Region (APAC)

Embraces Japan, Hong Kong, Singapore, South Korea, and Taiwan. Collectively known as the five dragons

The region also includes Malaysia, Indonesia, Thailand, Vietnam, India, Pakistan, Sri Lanka, Australia, New Zealand and Pacific Island states.

China is the emerging power house yet to reveal its full potential in economic terms

Trade among these nations has been on the rise since 1980’s. By 2000 trade volumes have gone above 15 percept.

Developing Economies – These economies are relatively underdeveloped and immature. They are generally characterized by:

• Weak Industry
• Weak Currency
• Relatively poor consumers

Governments in developing countries are actively working to strengthen their economies by opening their doors to foreign investment and promoting international trade.

Other Economies – Some economic system around the world defy classification as either mature markets or developing economies

One major area that falls outside these categories are the oil producing region of the Middle East. The oil-exporting countries present mixed models of resources allocation, property ownership and development of infrastructure. These countries include Iran, Iraq, Kuwait, Saudi Arabia, Libya, Syria and the United Arab emirates.

High oil prices in the 1970s and the 1980s created enormous wealth in these countries. Many of them invested heavily in their infrastructures. Whole new cities were built, airports were constructed and the population were educated. As oil prices have fallen, many of the oil-producing countries have been forced to cut back on some of these activities.

Nevertheless, these countries are still quite wealthy. Per capita incomes in the United Arab Emirates and Qatar, for example are among the highest in the world.

Although the oil-producing nations have great wealth, they provide great challenges to managers. Political instability (as evidenced by the Gulf war in 1991) and tremendous cultural differences, for example, combine to make doing business in some parts of the Middle East very challenging. 

Other countries pose risks of a different sort to business. Politically and ethically motivated violence, for example, still characterizes some countries. Students just need to read and search the news to see political and ethnicity violence to understand why doing business in some of these countries as challenging. 

Law and order problems in some countries is also a challenge to businesses and investors thinking of doing business on a global basis. The recent pirating of oil tankers in the Persian Gulf is one such threats also forcing international business to look at it operations internationally.

The Trend in Global Growth

Most profound change in the world economy in the past 50 years is the emergence of global  markets and global competitors who have steadily replaced local competitors.

Keegan (1995) attributes this to five factors:

• Capital movement rather than trade which is now the driving force in the world economy
• Production continues to grow despite decline in employment
• The linkage between primary products relative to industrial goods have fallen
• The world economy has increasingly more impact on economic outcome
• Contest between capitalism an socialism is over leading to more market orientation of the socialist countries economy.

According to the United Nation Trade and Development Report 2006, the upswing of the world economy after 2002 has been shared by all regions, although expansion in the economies in transition has slowed down somewhat since 2004. Developing countries, including many of the poorest countries, have benefited;

• from continuing strong demand for primary commodities but some of them have
• also had to carry a higher burden of rising costs for imported oil and other raw materials

In particular, rapid growth in China and India has contributed to this outcome:

• Not only because of their (population) statistical weight as large economies
• Also they serve as an engine for trade in manufactures within Asia.

Their rapid growth, combined with their increasingly intense use of energy and metals, has sustained international demand for a wide range of primary commodities. As seen in lecture one there was a myriad of forces that triggered the globalization of industries, companies and individuals.

• Development of economic blocs, and, conversely, by the collapse of others.
• Blocs like the European Union (EU),
• ASEAN,
• North American Free Trade Agreement (NAFTA) with the USA, Canada and Mexico has created market opportunities and challenges.

New countries are trying to join these blocs all the time, because of the economic, social and other advantages they bring. Similarly, the collapse of the old communist blocs have given rise to opportunities for organizations as they strive to get into the new market based economies rising from the ruins. This is certainly the case with the former Soviet bloc.  

Global Communication and Media – Bringing information, services, cultures and brands to all corners of the world.

Example: The demise of English based Barings Bank in 1995 from various transactions between Japan Stock Exchange and Singapore illustrated the interconnectedness of the finance industry.

The devaluation of currencies in the Asian region including Japan against the US dollars had an impact on the Australian and New Zealand economies.

Global Advertising – Consolidated through fewer agencies which design world campaigns and adaptation to local markets. (Moss Kanter 1994).

Example: The massive global advertising, promotion and publicity campaign by Microsoft to launch Windows products simultaneously around the world illustrates the speed of market penetration that can be achieved in multiple markets.

Global Strategy – Means a company competes on the basis of its entire combination of competencies, infrastructure and products in all its markets, rather than on a country-by-country basis. Ability to assess the environmental factors in international marketing.

• Uncontrollable factors – insensitive product & sensitive product (identify differences and similarities)
• Environmental sensitivity – Task of finding differences and similarities – plans have to be designed adapted to circumstances.
• Conceptual framework (national markets vs other nations
• Strategy formulation
• Global environment scanning
• Framework for isolating similarities and differences

• Conceptual framework

• Product/market life cycle

The emphasis on globalization has received major momentum from:

• The information revolution

• The transition from an industrial to an information economy

• The shift in employment to service and information industries

• The Information technology and revolution has contributed to;

• Internationalization of the media

• The rise of a more global consumer with widespread communication between individuals

• Changes in work practices and behavior. The trend now is that a growing number of companies around the world are looking at their business in a global context. For some this means;

• Considering the company’s markets and operations together within an integrated framework

• For others it means standardizing products and marketing programs and rationalizing R&D and production

• Create global economies of scale with tactical product, service and marketing done on a country-by-country basis.

THE GLOBAL FIRM IN A GLOBAL ENVIRONMENT

Global firms has to look at a whole set of strategic decisions to be able to compete and operate successfully in the global environment;

Decisions in Product, Pricing, Communications and Merchandising.

Fixed price systems to market based pricing could lead to the faster achievement of development objectives.

Characteristics of a Global Firm:

• Has a business concept rather than a geographic concept with a focus on how you do business rather than where you do business

• Is decentralized rather than centralized and is willing to do business in any location and does not worry about centralizing activities in a particular location

• Adopt a holistic view of its operation and believes that part of the business should reflect the whole business. The firm has shared values, attitudes and beliefs which are evident wherever it chooses to do business

• Consciously eliminates the isolation that preludes sharing of information and deliberately lowers the boundaries between members of its value chain

• Build trust between members of the organization and the networks in which the elements are embedded so as to speed up communication and decision making.

• Goes out of its way to be good corporate citizen in the countries in which it operates and cater to local tastes without sacrificing the economies of scale.

• Operates as a coordinator amongst members of its network of companies rather than as a controller. These enable the amplification and interpretation of communications and facilitate the sharing of experiences.

• Actively works to remove duplication of facilities and achieve economies of scale be leveraging knowledge. This is reflected in the espousing of outsourcing

• Encourages horizontal communication within the group from one level to another, rather than vertical communication from operating level up to CEO then down to operating level in the other country.

• Understands the world wide economies of the businesses in which it is involved and engages in cross subsidization between areas of activity as required with a focus on long-term financial rewards rather than short-term gains.

• For a growing number of firms it means transforming from domestic or multinational player to a single global entity, operating seamlessly anywhere in the world.

• Example: Nokia has already become a global company.

• Mobile products division operates as a world business

• New products are rolled out worldwide in months rather than years

• Manufacturing plants consolidated into few plants

• Operations standardized (for fast movement)

• Human resource policies are standardized to facilitate personal transfer

Motivations For Globalization:

Understands the world wide economies of the businesses in which it is involved and engages in cross subsidization between areas of activity as required with a focus on long-term financial rewards rather than short-term gains.

For a growing number of firms it means transforming from domestic or multinational player to a single global entity, operating seamlessly anywhere in the world.

THE GLOBAL ECONOMY - ECONOMICS OF INTERNATIONAL TRADE

Balance of Payments - This is the measure of all economic transactions between one nation and another. (Trade carried out by businesses). The balance of payments is made up of: the current account, showing trade in goods and services and the capital account, which shows financial transactions.

The balance of payments account helps marketers select the location of supply for foreign markets and the selection of markets.

The Capital Account may show the nations which have control restrictions and hence be difficult to deal with.

Trade Balances and exchange rates:

When exchange rates are allowed to fluctuate, the currency of a country that tends to run a deficit will tend to decline over time, since there will be less demand for that currency.

This reduced exchange rate will then tend to make exports more attractive in other countries and imports less attractive at home.
 

Measuring a Country wealth - There are two ways to measure the wealth of a country. The nominal per capita Gross Domestic Product (GDP) refers to the value of goods and services produced per person in a country if this value in local currency were to be exchanged into US dollars. The Gross National Product (GNP) includes income made by citizens working abroad, and does not include the income of foreigners working in the country. Today the GDP is the most commonly used in practice.

Government Policies:

This refers to the government measures and regulations which have a bearing on trade;

• Tariffs

• Quotas

• Exchange controls etc.

• Price Indexes

• Fiscal Policy

• Monetary Policies

These can cause formidable barriers to marketers.

Exchange controls - Control of different currency movement between different countries.

Price Indexes – Price Indexes helps to measure the health of the economy by measuring the levels of inflation, disinflations, deflation and stagflation.

Fiscal Policy – Refers to the government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.

Monetary Policies – Is the management of the money supply and interest rates

World Institutions -This refers to institutions that have assisted in developing countries development: Institutions such as:

World Trade Organization (WTO) – Established in 1995 main function has been to resolve trade disputes and developed procedures for handling trade disputes.

United Nations Conference on Trade and Development (UNCTAD) – Furthers the development of emerging nations. It seeks to improve the prices of primary goods exports through commodity agreements. It also established a tariff preferences system favoring developing nations.

Regionalism: - Regionalism is a major and important trade development. 

• NAFTA - North America Free Trade.
• EU - European Union.
• ASEAN – Association of South East Nations.
• APC – Asian Pacific Rim Countries.
• CARICOM – Caribbean Community and Common Market.
• ECOWAS – Economic Community of West African States.
• SADC – South African Development Conference.
• PTA – Preferential Trade Area. 

These blocks are of various form, power, influence and success.  Example:

ASEAN – in a collaboration of industry and agriculture.

PTA – in tariffs.

The EU, North American Union and the Pacific Rim Union will pose the greatest power blocks in the future.

Many developing countries have entered into trading blocs as a reaction against loss of developed country markets or as base to build economic integration and markets

International Financial System:

Global financing operations based on the gold standard gave rise to instability, so Bretton Woods, post-World War II saw the establishment of the International Monetary Fund (IMF) and World Bank (WB)

RESULTS OF GLOBALIZATION

Positives and Negatives:

• Promotes greater cultural homogeneity .

• common demands

• common consumer preferences

• common information

• blending of cultures

• erosion of cultural differences

Change the role of government

Example: As individual nations join the EU, they gave up certain powers of laws that were previously belonged to individual national governments.

Give up of certain individual sovereignty. E.g. EU and common currency EURO, defer to European court of justice.
Governments are redefining their roles at the national level and must strive to provide a counterbalance to the negative effect of globalization.

Government must strive to formulate and implement policies that facilitate economic growth.

Government must work to prevent social instability and political backlash.

Environmental Pollution
Massive environment problems around the world. E.g. Mobil oil spill in the US.

Environmentalist opposing trade agreements especially in developing countries. E.g. PNG with the latest uproar over the recent Environmental Act .

Increasing Gaps between Rich and Poor

This problem is pronounced in many countries with food shortages and income per household.

Further, globalization causes economic problems in one region of the world to be felt throughout the world.

Economic woes in Latin America, Asia and the economies of other emerging markets affect the economies of nations around the world.

The G7 or Group of Seven is an example of economies that does have an impact on other economies. (G7 is an economic group that includes the US, Japan, Germany, France, Great Britain, Canada and Italy.

To be able to operate successfully in the international and global markets, organization have to understand a whole lot of issues such as:

• Global environment

• Cultural environment

• Political and Legal structure of different countries

• Market structure and systems

• Market trends

• Other international factors

SOURCE:

International Business 3^rd Edition. P. Subba Rao
Marketing Management 11th Edition. Phillip Kotler
International Business Environment , Revised Edition. Francis Cherunilam
International Economics (1990) M. Chacholiades