The Global Economic Environment

Overview The rise of Irelands economy in the 1990s and subsequent decline in the first years of the new millennium illustrate globalizations impact. Companies engage in global marketing to reach new customers and increase sales, profits, and market share. This chapter characterizes the world economic environment, starting with an overview of the world economy, a survey of economic system types, a discussion of stages of market development, and balance of payments. Foreign exchange is discussed in the appendix at the end of the chapter. Objectives To show that the economic environment determines market potential and opportunity. Capital driving force, production is uncoupled from employment, To categorize the worlds economies as market allocation systems, command systems. To categorize countries in terms of economic development: low income, lower income, and high income. To examine fast growing economies, big emerging markets (BEMs). To identify the Group of Seven (G7) and Organization for Economic Cooperation two initiatives by high-income nations to promote To show that most of the worlds income is located in the TriadJapan, the United To evaluate market potential for a product by determining product saturation levels To explain a countrys balance of payments, trade surplus and trade deficit. and Development (OECD) as States, and Western Europe. in light of income levels. democratic ideals and free-market policies. movements are the and capitalism has vanquished communism. allocation systems, and mixed allocation middle income, upper middle

The World Economy: An Overview The most fundamental change is the emergence of global markets; responding to new opportunities, global competitors have displace d or absorbed local ones. The integration of the world economy has increased significantly. Economic integration stood at 10 percent at the beginning of the 20th century; today, it is approximately 50 percent. Integration is particularly striking in two regions, the European Union (EU) and the North American Free Trade Area. The past decade has seen changes in the world economy: The first change is the increased volume of capital movements. Global capital movements exceed the dollar volume of global trade. Capital movements and trade determine currency value. The second change concerns the relationship between productivity and employment. Although employment in manufacturing remains steady or has declined, productivity continues to grow (e.g., in America, fewer farm employees produce more output).The third major change is the emergence of the world economy as the dominant economic unit. The fourth change is the end of the Cold War. Communism is not an effective economic system. A key policy change is to stop managing national economies with a single central plan. Finally, the personal computer revolution and the advent of the Internet era have greatly diminished the importance of national boundaries.

Economic Systems
There are four main types of economic systems: market capitalism, centrally-planned socialism, centrally-planned capitalism, and market socialism. Classification is based on resource allocation (market versus command) and resource ownership (private versus state).

Market Capitalism allows individuals and firms to allocate resources and own production resources privately. Market capitalism is practiced worldwide, especially in North America and Western Europe. All market-oriented economies do not function in the same manner

Centrally-Planned Socialism gives the state broad powers. State planners make top-down decisions about the goods and services produced and quantities; consumers spend money on what is available. Government ownership of industries and individual enterprises is characteristic. Demand exceeds supply, and there is little reliance on product differentiation, advertising, or promotion; The government controls distribution. Because of market capitalisms superiority, many socialist countries have adopted it (e.g., Chinas leaders maintain control over society but seek economic reform). . Centrally-Planned Capitalism Command and market resource allocation are practiced simultaneously, as are private and state resource ownership. Centrally-planned capitalism is an economic system in which command resource allocation is used extensively in an Environment of private resource ownership (e.g., Sweden). Market socialism permits market allocation policies within an environment of state ownership (e.g., farmers in socialist countries offer part of their production in a free market.) Discussion Question #1: Explain the differences between market capitalism, centrally-planned capitalism, centrally-planned socialism, and market socialism. Give an example of a country that illustrates each type of system. Open to Discussion: Which Operating System Do You Use? Thomas L. Friedman compares and contrasts various types of economic systems by drawing an analogy with the elements of a computer system. The hardware is the basic shell around a countrys economy. In the Cold War era, there were three basic types of hardware: free-market capitalism, communism, and hybrid. The operating system is compared to a countrys broad economic policies. Now, every country is using the same hardware: free-market capitalism. To maximize the hardware and operating system, a country needs software. Q: What is a countrys software? A: Software is comprised of the rule of lawa countrys legal and regulatory systems and the degree to which laws are understood, embraced, and made workable.

The Heritage Foundation, a conservative think-tank, classifies economies of more

than 150 countries according to the degree of

economic freedom. Economic variables include: trade policy, taxation policy, government consumption of economic output, monetary policy, capital flows and foreign investment, banking policy, wage and price controls, property rights, regulations, and the black market. The rankings form a continuum from free to repressed, with mostly free and mostly unfree in between. Hong Kong and Singapore ranked first and second in economic freedom; Cuba, Laos, and North Korea ranked lowest. A high correlation exists between economic freedom and a nations level of market orientation. Still, some aspects of free economies resemble command-style systems (e.g., Singapore has no free press, free speech, or free assembly).

Stages of Market Development

The World Bank developed a classification based on per capita gross national product (GNP). Countries within a category have several common characteristics, which provide for global market segmentation and target marketing. Several countries in Central Europe, Latin America, and Asia, known as big emerging markets (BEMs) have experienced rapid economic growth throughout the past decade. These countries include: China, India, Indonesia, South Korea, Brazil, Mexico, Argentina, South Africa, Poland, and Turkey. BEMs fall into all four stages of economic development. They are key to global trade despite poor

performance on human rights and the environment. BEM government leaders are under pressure as their developing market economies create greater income disparity. Discussion Question #2 : What is a Big Emerging Market (BEM)? Identify the BEMs according to their respective stages of economic development.

Low-Income Countries have a GNP per capita of $785 or less, as well as: I)- Limited industrialization with most people in Agriculture ii) High birth rates, low literacy rates, and heavy reliance on foreign aid iii) Political instability iv)Concentration in Africa south of the Sahara Over one third of the world lives in a low-income country with limited markets. Of all the countries in the low-income

category, only China and India are BEMs. China attracts foreign investment due to its vast size and market potential. Despite market reforms, China lacks democratic foundations, and trading partners worry about human rights issues and intellectual property rights. Indias well-developed legal and commercial codes and a middle class of approximately 100 million people have attracted many companies.

Lower-Middle-Income Countries, called less-developed countries (LDCs), have a per capita GNP between $786 and $3,125 and fall into early stages of industrialization.

i) Factories supply a growing domestic market, and consumer markets are expanding (e.g., Poland, Indonesia, and Turkey).ii) The LDCs have a major competitive advantage in mature, standardized, labor-intensive industries such as toys and textiles. iii) Poland has established a democratic government and privatized banking, telephones, and other enterprises. Two-thirds of Polands trade is conducted with the European Union, which it hopes to join by 2003. Turkey, a NATO member, is an industrialized country with a strong economy, despite high inflation. Germany is Turkeys top trading partner; children in the labor force and human rights issues concern trading partners. As the worlds fourth most populous nation, Indonesia plays a key economic role in Southeast Asia, yet Indonesias economy was severely affected by the Asian currency crisis of 1997.

Upper-Middle-Income Countries, called industrializing or developing countries, have a per capita GNP from $3,126 to

$9,655. The percentage engaged in agriculture drops as people move to the industrial sector and urbanization increases (e.g., Malaysia, Brazil, Chile, Hungary). Rising wages, high literacy rates, advanced education, and lower wages characterize these countries.

Innovative local companies are formidable competitors and contribute to rapid, export-driven economic growth.
Countries with the highest rates of economic growth are called newly industrializing economies (NIEs). Technology, particularly the computer revolution, juxtaposes (put next to) the old and the new (e.g., Brazil uses logistics software, yet horse-drawn carts are a common sight). Three BEMs in the upper-middle-income category are located in Latin America (Argentina, Brazil, Mexico). Mexico is a key U.S. trading partner due to a shared border and NAFTA. Companies set up a subsidiary, joint venture, or , whereby a plant imports materials, components and equipment duty-free in return for using Mexican labor. Completed products are exported to the U.S., and manufacturers pay duty only on value added in Mexico. The fourth BEM is South Africa, which has the largest economy in Africa south of the Sahara. South Africa has a modern infrast ructure and well-developed industry sectors, including finance, communications, and energy.

Marketing Opportunities in LDCs and Developing Countries The central problem in LDCs and developing countries is the shortage of goods and services, and expanding production is the most pressing need. Greater competitive pressures will force firms that lag behind them. Market opportunities in emerging countries can be lost through indifference and preemptive foreign

to reevaluate their strategies and look for new markets in the developing world. Fast-growing LDCs are initiating business in countri

competition. One study suggests that companies: look beyond per capita GNP; consider LDCs and developing countries collectively; weigh the benefits of being the first to offer a product or service (i.e., first-mover advantage); and set realistic deadlines for results. Marketing can be the link that relates resources to opportunity and facilitates need satisfaction. Is marketing relevant to economic development? Some say that marketing is for affluent countries to direct resources. They argue that for LDCs, where resource allocation is a problem, production and increased output are key, not customer needs and wants. Others argue that focusing resources on opportunities is universal. The role of marketingto identify needs and wants, and respond to themis equal in all countries, at all levels of economic development. Discussion Question #3: Turn to the Index of Economic Freedom (Table 2-1) and identify where the BEMs are ranked. What does the result tell you in terms of the relevance of the index to global marketers?

High-Income Countries, which are advanced, developed, industrialized, or postindustrial countries, have a per capita GNP above $9,656. These countries have reached their present income level mostly through sustained economic growth.

The phrase postindustrial countries describes the United States, Sweden, Japan, and other advanced, high-income societies. Innovation is derived from the codification of theoretical knowledge rather than from random invention. The service sector, information processing and exchange, the ascendancy of knowledge over capital are important.

Opportunities in a postindustrial society depend on new products and innovations because ownership levels for basic products are high. Organizations face difficulty in expanding shares in existing markets, but they can
create new markets. South Korea is the only BEM to achieve high-income country status. Among high-income countries, the U.S., Japan, Germany, France, Britain, Canada and Italy form the Group of Seven (G-7) to steer the global economy to prosperity and stability. When a global crisis looms, G-7 representatives coordinate policy. Another institution for high-income countries is the Organization for Economic Cooperation and Development (OECD). The 29 OECD nations believe in market-allocation economic systems and pluralistic democracy. The U.S. joined in 1961. China, India, Indonesia, Brazil, and Russia intend to join but must show progress towards economic reform.OECD members review economic and social policies that affect world trade.

The Triad Ohmae argued that successful global companies had to be equally strong in the dominant economic centers of Japan, Western Europe, and the United Statesthe Triadthe location of 75 percent of world income as measured by GNP.

The expanded Triad includes the entire Pacific region, Canada, Mexico, and Eastern Europe. Open to Discussion: How Big is the Russian Economy? Economic information and statistics coming from Russia are inaccurate, inadequate, distorted, and biased. The main source of economic statistics is an agency called Goskomstat, or the Russian State Statistical Committee. Historically, Goskomstat measured the state economy of the Soviet Union. Goskomstat continues to collect data and measure production in the least productive sectors, such as industries that have not been privatized and state-owned farms. If those statistics were balanced by equivalent numbers from the private sector, Russian GNP might not be so severely underestimated.

Q: What is the impact of the skewed numbers? A: The faulty numbers create a ripple effect worldwide. The estimated amount of underreported production is 45 percent. One consequence is slowed growth, because unsophisticated marketers may be reluctant to enter a market depicted by such bleak numbers.

Marketing Implications of the Stages of Development

The stages of economic development guide marketers in evaluating product saturation levels, the percentage of potential buyers or in India is limited to 1 percent of the population). Discussion Question #4: A manufacturer of satellite dishes is assessing the world market potential for his products. He asks you if he should consider developing countries as potential markets. How would you advise him? Balance of Payments The balance of payments is a record of all economic transactions between the residents of a country and the world. It is divided into the current and capital accounts. The current account is a record of all recurring trade in merchandise and services, private gifts, and public aid transactions between countries. A country with a negative current account balance has a trade deficit; that is, the outflow of money to pay for imports exceeds the inflows of money for sales of exports. A country with a positive current account balance has a trade surplus. The capital account is a record of all long-term direct investment, portfolio investment, and other short- and long-term capital flows. The minus signs signify outflows of cash, payment for U.S. merchandise imports.

households who own a product. In countries with low per capita income, product saturation levels are low (e.g., ownership of telephones

A country accumulates reserves when the net of its current and capital account transactions shows a surplus; it gives up reserves when the net shows a deficit. The United States posts balance of payment deficits while Japan has surpluses. The U.S. merchandise trade deficit with Japan in 2000 reached $81 billion. Japan offsets its trade
surplus with an outflow of capital, while the United States offsets its trade deficit with an inflow of capital. U.S. consumers and businesses own more Japanese products, while the Japanese own more U.S. and, real estate, and government securities. Discussion Question #5: A friend is distressed to learn that Americas merchandise trade deficit hit a record $248 billion in 1998. You want to cheer your friend up by demonstrating that the trade picture is not as bleak as it sounds. What do you say? Trade Patterns Import and export growth has outpaced the rate of GNP increase. World merchandise trade has grown faster than world production. Foreign direct investment has grown five times faster than world trade and 10 times faster than GNP.

The Triad countries account for two-thirds of world exports and imports. Industrialized nations increased world trade by trading more among themselves, and less with the rest of the world. Merchandise Trade In 1999, the dollar value of world trade exceeded $5.9 trillion. Trade growth outside industrialized countries has been accelerating. In 1997, two-thirds of world exports were generated by industrialized countries and one third by developing countries. The top 20 exporting and importing countries of the world are determined by the International Monetary Fund. Chinas fourth place in the export rankings underscores its role as an export powerhouse. Exports to the United States will surge when China joins the World Trade Organization. Mexicos export growth reflects the impact of NAFTA. Mexicos trade surplus with the U.S. results from American firms assembling products in Mexican factories for the U.S. market. Services Trade The fastest-growing sector of world trade is in servicestravel and entertainment; education, business and legal services, royalties, and license fees.A major issue between the high and lower income countries is trade in services. Low, lower- middle, and even uppermiddle-income countries do not enforce copyrights, protect intellectual property or patents (e.g., China). Countries that export computer software, music, and video entertainment lose income. The United States is a major service trader. Services exports in 2000 totaled $95 billion, more than one quarter of total U.S. exports. U.S. services surplusservices exports minus importsstood at $80 billion. This surplus partially offset the U.S. merchandise trade deficit, which reached a record $450 billion in 2000.