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CHAPTER 2

THE GLOBAL ECONOMIC ENVIRONMENT

SUMMARY

The economic environment is a major determinant of global market potential andopportunity. In today’s global economy, capital movements are the driving force, production is uncoupled from employment, and capitalism has vanquished communism.Based on patterns of resource allocation and ownership, the worlds economies can becategori!ed as market capitalism ce!trall"#pla!!e$ capitalism ce!trall"#pla!!e$

s%cialism and market s%cialism& The final years of the twentieth century were marked by transitions toward market capitalism in many countries that had been centrallycontrolled. "owever, there still e#ists a great disparity among the nations of the world interms of economic freedom.

$ountries can be categori!ed in terms of their stage of economic development% l%'

i!c%me l%'er mi$$le i!c%me (pper mi$$le i!c%me and )i*) i!c%me& Gr%ss$%mestic pr%$(ct +G,P- a!$ *r%ss !ati%!al i!c%me +GNI- are commonly usedmeasures of economic development. The &' poorest countries in the low(incomecategory are sometimes referred to as least#$e.el%pe$ c%(!tries +L,Cs-& )pper middle(income countries with high growth are often called !e'l" i!$(striali/i!* ec%!%mies

*NIEs+. everal of the world’s economies are notable for their fast growth- the BRIC nations include Bra!il, ussia, India, and $hina. The Gr%(p %0 Se.e! +G1- Gr%(p %0

Ei*)t +G#- and Or*a!i/ati%! 0%r Ec%!%mic C%%perati%! a!$ ,e.el%pme!t

+OEC,- represent efforts by high(income nations to promote democratic ideals and free(market policies throughout the rest of the world. /ost of the worlds income is located inthe Tria$ which is comprised of 0apan, the )nited tates, and 1estern 2urope.

$ompanies with global aspirations generally have operations in all three areas. /arket potential for a product can be evaluated by determining pr%$(ct sat(rati%! le.els inlight of income levels.

3 country’s 3ala!ce %0 pa"me!ts is a record of its economic transactions with the rest ofthe world- this record shows whether a country has a tra$e s(rpl(s *value of e#portse#ceeds value of imports+ or a tra$e $e0icit *value of imports e#ceeds value of e#ports+.Trade figures can be further divided into merc)a!$ise tra$e and ser.ices tra$e

accounts- a country can run a surplus in both accounts, a deficit in both accounts, or acombination of the two. The ).. merchandise trade deficit was 4567 billion in 8''9."owever, the ).. enjoys an annual service trade surplus. :verall, however, the )nitedtates is a debtor- 0apan enjoys an overall trade surplus and serves as a creditor nation.

;oreign e#change provides a means for settling accounts across borders. The dynamicsof international finance can have a significant impact on a nation’s economy as well asthe fortunes of individual companies. $urrencies can be subject to $e.al(ati%! orre.al(ati%! as a result of actions taken by a country’s central banker. $urrency trading by international speculators can also lead to devaluation. 1hen a country’s economy isstrong or when demand for its goods is high, its currency tends to appreciate in value.

< 8'66 =earson 2ducation, Inc. publishing as =rentice "all

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1hen currency values fluctuate, global firms face various types of economic e#posure.;irms can manage e#change rate e#posure by )e$*i!*.

OVERVIE4

ANNOTATE, LECTURE5OUTLINE

THE 4ORL, ECONOMY6 AN OVERVIE4

• 4)at is t)e m%st 0(!$ame!tal c)a!*e i! t)e '%rl$ ec%!%m" si!ce 44II7

The world economy has changed dramatically since 1orld 1ar II. =erhaps the mostfundamental change is the emergence of global markets- responding to new opportunities,global competitors have displaced or absorbed local ones.

The integration of the world economy has increased significantly. 2conomic integration

was 6' percent at the beginning of the 8'th century- today, it is appro#imately &' percent.

• I! ')at areas %0 t)e '%rl$ is *l%3al i!te*rati%! m%st striki!*7

Integration is particularly striking in the two regions of the 2uropean )nion *2)+ and the ?orth 3merican ;ree Trade 3rea. ;or e#ample, the world’s largest automakers have, forthe most part, evolved into global companies.

@uring the past two decades, the world economic environment has become increasinglydynamic- change has been dramatic and far(reaching. To achieve success, e#ecutives andmarketers must take into account the following new realities%

a+ $apital movements have replaced trade as the driving force of the worldeconomy. Alobal capital movements far e#ceed the dollar volume of global trade.

b+ =roductivity has become uncoupledC from employment. The second changeconcerns the relationship between productivity and employment. To illustrate thisrelationship, it is necessary to review some basic macroeconomics. Gr%ss

$%mestic pr%$(ct +G,P- , a measure of a nation’s economic activity, iscalculated by adding consumer spending *$+, investment spending, *I+,government purchases,*A+, and net e#ports *?D+%

$EIEAE?D F A@=

2conomic growth, as measured by A@=, reflects increases in a nation’s productivity.

a+ The world economy dominates the scene- individual country economies play asubordinate role.

b+ The struggle between capitalism and socialism is largely over. The $old 1ar isover- communism is not an effective economic system.


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c+ ;inally, the growth of the personal computer and the advent of the Internet havediminished the importance of national boundaries.

ECONOMIC SYSTEMS

•4)at are t)e 0%(r mai! t"pes %0 *l%3al ec%!%mic s"stems7

Traditionally, there are four main types of economic systems% market capitalism,centrally planned socialism, centrally planned capitalism, and market socialism.

• Up%! ')at is t)is classi0icati%! sc)eme 3ase$7

This classification was based on the dominant method of resource allocation *marketversus command+ and the dominant form of resource ownership *private versus state+*see ;igure 8(6+.

3lternatively, more robust descriptive criteria include the following%

• Type of economy

• Type of government

• Trade and capital flows

• The commanding heights

• ervices provided by the state and funded through ta#es

• /arkets

Market Capitalism

• ,e0i!e 8Market Capitalism&9

Market capitalism is an economic system in which individuals and firms allocateresources, and production resources are privately owned. $onsumers decide what goodsthey desire, and firms decide how much to produce- the state’s role is to promotecompetition *see Table 8 (6+.

/arket capitalism is practiced worldwide, especially in ?orth 3merica and 1estern2urope, but all market(oriented economies do not function in the same manner.

The ).. is distinguished by its competitive wild free(for(allC and decentrali!edinitiative whereas 0apan is a tightly run, highly regulated economic system that is marketoriented.

Ce!trall"#Pla!!e$ S%cialism


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• 4)at is 8Ce!trall"#Pla!!e$ S%cialism97

3t the opposite end of the spectrum is Centrally-planned socialism. Centrally-planned socialism gives the state broad powers to serve the public as it sees fit.

tate planners make top(downC decisions about the goods and services produced and inwhat quantities- consumers spend money on what is available.

Aovernment ownership of industries and individual enterprises is characteristic. @emande#ceeds supply, and there is little reliance on product differentiation, advertising, or promotion. To eliminate e#ploitationC by intermediaries, the government controlsdistribution.

Because of market capitalism’s superiority, many socialist countries have adopted it- theideology developed by /ar# and perpetuated by Genin has been resoundingly refuted.

;or decades, the economies of $hina, the former oviet )nion, and India functionedaccording to the tenets of centrally planned socialism. 3ll three countries are nowengaged in economic reforms characteri!ed, in varying proportions, by increased relianceon market allocation and private ownership.

Ce!trall"#Pla!!e$ Capitalism a!$ Market S%cialism

In reality, market capitalism and centrally(planned socialism do not e#ist in pureC form.$ommand and market resource allocation are practiced simultaneously, as are private and state resource ownership. The role of government in modern market

economies varies widely.

• ,e0i!e 8Ce!trall"#Pla!!e$ Capitalism9 a!$ 8Market S%cialism&9

Ce!trall"#pla!!e$ capitalism is an economic system in which command resourceallocation is used e#tensively in an environment of private resource ownership *e.g.,weden+.

Market s%cialism permits market allocation policies within an overall environment ofstate ownership *e.g., $hina gives freedom to businessesHindividuals to operate in amarket system+.

/arket reforms and nascent capitalism in many parts of the world are creatingopportunities for large(scale investments by global companies. ;or e#ample, $oca($olareturned to India in 677, two decades after being forced out by the government. 3 newlaw allowing 6'' percent foreign ownership of enterprises helped pave the way.


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The "eritage ;oundation, a conservative think tank, classifies economies according to thedegree of economic freedom enjoyed. The variables considered in compiling the rankingsinclude%

• trade policy

• ta#ation policy• government consumption of economic output

• monetary policy

• capital flows

• foreign investment

• banking policy

• wage and price controls

• property rights

• regulations

• the black market

The rankings form a continuum from freeC to repressed.C "ong Jong and ingaporeare ranked first and second in terms of economic freedom- $uba, Gaos, and ?orth Joreaare ranked lowest *see Table 8(>+.

STAGES O: ECONOMIC ,EVELOPMENT

3t any point in time, individual country markets are at different stages of economicdevelopment.

The 1orld Bank has developed a four(category classification system that uses per capita

*r%ss !ati%!al i!c%me +GNI- as a base. 3lthough the income definition for each of thestages is arbitrary, countries within a given category generally have a number ofcharacteristics in common. *Table 8(+.

• 4)at are t)e BRIC c%(!tries7

Today, global attention is focused on opportunities in Bra!il, ussia, India and $hina*collectively known as BI$+. ;or each of the stages of economic development, specialattention is given to the BI$ countries.

L%'#I!c%me C%(!tries

Gow(income countries have a GNI per capita %0 less t)a! ;<=>& The generalcharacteristics shared by countries at this income level are%

• limited industriali!ation and a high percentage of the population engaged in

agriculture and subsistence farming

• high birth rates


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• low literacy rates

• heavy reliance on foreign aid

• political instability and unrest

• concentration in 3frica south of the ahara

3ppro#imately ' percent of the world’s population is included in this group. Typically,these countries provided limited investment opportunities.

"owever, there are e#ceptions- for e#ample, in Bangladesh, where per capita A?= isappro#imately 4&', the garment industry has enjoyed burgeoning e#ports.

The newly independent countries of the former oviet )nion present an interestingsituation% Income is declining, and there is considerable economic hardship. The potentialfor disruption is, therefore, high.

India is the sole low(income county in the BI$ group.

In the 677's India faced high inflation and low foreign e#change reserves. Geadersopened India’s economy to trade and investment and dramatically improved marketopportunities.

L%'er#Mi$$le#I!c%me C%(!tries

• ,e0i!e t)e 8least#$e.el%pe$ c%(!tries9

The )nited ?ations designates fifty countries in the bottom ranks of the low(income

category as least#$e.el%pe$ c%(!tries +L,Cs-.

The term is sometimes used to indicate a contrast with $e.el%pi!* *i.e., upper ranks oflow(income plus lower(middle and upper(middle(income+ c%(!tries and $e.el%pe$ *high(income+ c%(!tries&

• 4)at is t)e i!c%me le.el %0 t)e l%'er#mi$$le#i!c%me c%(!tries7

Gower(middle(income countries are those with a A?I per capita between 47>K and4>,9'&.

$onsumer markets in these countries are e#panding rapidly. $ountries such as $hina andThailand represent an increasing competitive threat as they mobili!e their relativelycheap labor forces to serve target markets in the rest of the world.

The developing countries in the lower(middle(income category have a major competitiveadvantage in mature, standardi!ed, labor(intensive industries such as making toys andte#tiles.


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• 4)ic) %0 t)e BRIC !ati%!s are i! t)e l%'er#mi$$le#i!c%me cate*%r"7

C)i!a a!$ Bra/il are t)e BRIC !ati%!s i! t)e l%'er#mi$$le#i!c%me cate*%r"& $hinarepresents the largest single destination for foreign investment in the developing world.

@espite ongoing market reforms, $hinese society does not have democratic foundations.3lthough $hina has joined the 1orld Trade :rgani!ation, trading partners are stillconcerned about human rights, protection of intellectual property rights, and other issues.

Upper#Mi$$le#I!c%me C%(!tries

• Upper#Mi$$le#I!c%me c%(!tries are als% k!%'! as ')at7

)pper(middle(income countries, als% k!%'! as i!$(striali/i!* %r $e.el%pi!* c%(!tries

are those with A?= per capita ranging from 4>,9'K to 466,&&.

ussia and Bra!il, with per capita A?I of 4&,99' and 4,96', respectively, are the towBI$ nations that currently fall into the upper(middle(income category.

The percentage of population engaged in agriculture has dropped sharply as people moveto the industrial sector and the degree of urbani!ation increases.

• 4)at are NIEs7

)pper(middle(income countries that achieve the highest rates of economic growth aresometimes referred to as !e'l" i!$(striali/i!* ec%!%mies +NIEs-.

Marketi!* Opp%rt(!ities i! L,Cs a!$ ,e.el%pi!* C%(!tries

@espite many problems in G@$s and developing countries, it is possible to nurture long(term market opportunities.

3lthough ?ike sells only a small portion of its output in $hina, it clearly has the future inmind when it refers to $hina as a two(billion(foot market.C

• 4)at are t)e 3asic misc%!cepti%!s a3%(t c%(!tries at t)e ?3%tt%m %0 t)e

p"rami$@ t)at m(st 3e c%rrecte$7

=rahalad and "ammond have identified several assumptions and misconceptions aboutthe bottom of the pyramidC *B:=+ that need to be corrected%

• Mistaken assumption #1: The poor have no money.


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The aggregate buying power of poor communities can be substantial. In ruralBangladesh, for e#ample, villagers spend considerable sums to use village phonesoperated by local entrepreneurs.

• Mistaken assumption #2: The poor are too concerned with fulfilling asic needs

to !waste" money on non-essential goods.

$onsumers who are too poor to purchase a house do buy lu#uryC items such astelevision sets and gas stoves to improve their lives.

• Mistaken assumption #: The goods sold in developing markets are so

ine$pensive that there is no room for a new market entrant to make a profit.

In reality, because the poor often pay higher prices for many goods, there is anopportunity for efficient competitors to reali!e attractive margins by offering quality andlow prices.

• Mistaken assumption #%: &eople in '(& markets cannot use advanced

technology.

esidents of rural areas can and do quickly learn to use cell phones, =$s, and similardevices.

• Mistaken assumption #): *loal companies that target '(& markets will e

critici+ed for e$ploiting the poor.

The informal economies in many poor countries are highly e#ploitative. 3 global

company offering basic goods and services that improve a country’s standard of livingcan earn a reasonable return while benefiting society.

:ne of marketing’s roles in developing countries is to focus resources on the task ofcreating and delivering products that are best suited to local needs and incomes./arketing can be the link that relates resources to opportunity and facilitates needsatisfaction on the consumers terms.

ome believe marketing is relevant only in affluent, industriali!ed countries.

• T)e ar*(me!t6 In less(developed countries the major problem is the allocation of

scarce resources toward obvious production needs. 2fforts should focus on production and how to increase output, not on customer needs and wants.

• T)e c%!.erse ar*(me!t6 The role of marketing L to identify people’s needs and

wants and to focus individual and organi!ational efforts to respond to these needsand wants L is the same in all countries, irrespective of level of economicdevelopment.


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1hen global marketers respond to the needs of rural residents in emerging markets suchas $hina and India, they are also more likely to gain all(important government supportand approval.

;or e#ample, ?estle introduced =ure Gife bottled water in =akistan and the brand has

captured &' percent of the market. $oca($ola recently began to address dietary andhealth needs in low(income countries by developing Mitango, a beverage product that canhelp fight anemia, blindness, and other ailments related to malnutrition.

There is also an opportunity to help developing countries join the Internet economy.

3t the /assachusetts Institute of Technology’s /edia Gab, a project called :ne Gaptop per $hild has the goal of developing a laptop computer that governments in developingcountries can buy for 46''.

Hi*)#I!c%me C%(!tries

• Hi*)#I!c%me c%(!tries are t)%se c%(!tries 'it) a G,P %0 at least )%' m(c)7

These are advanced, developed, industriali!ed, or postindustrial countries, having a percapita A?= of 466,&K or higher. They have reached their present income level throughsustained economic growth.

The phrase postindustrial countriesC describes the )nited tates, weden, 0apan, andother advanced, high(income societies.

:pportunities in a postindustrial society depend on new products and innovations because ownership levels for basic products are high.

:rgani!ations face difficulty in e#panding shares in e#isting markets, but they can createnew markets.

• 4)at c%(!tries make (p t)e ?Gr%(p %0 Se.e!@7

3mong high(income countries, the ).., 0apan, Aermany, ;rance, Britain, $anada, andItaly form the Gr%(p %0 Se.e! *G#1+ to steer the global economy to prosperity andstability.

• 4)at c%(!tr" 'as a$$e$ t% t)e G#1 t% 0%rm t)e G#7

tarting in the mid(677's, ussia began attending the A(9 summit meetings. In 6775,ussia became a full participant, giving rise to the new Gr%(p %0 Ei*)t +G#-.

3nother institution of high(income countries is the Or*a!i/ati%! 0%r Ec%!%mic

C%%perati%! a!$ ,e.el%pme!t *OEC,+. The >' :2$@ nations believe in market(


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allocation economic systems and pluralistic democracy- the organi!ation has beendescribed as an economic think(tankC and a rich(man’s club.C

2vidence of the increasing importance of the BI$ group is the fact that $hina, India,Bra!il, and ussia have all formally announced their intention to join the :2$@.

T)e Tria$

• 4)at t)ree ec%!%mic ce!ters make (p t)e Tria$7

In his book Triad &ower, :hmae argued that successful global companies had to beequally strong in the dominant economic centers of 0apan, 1estern 2urope, and the)nited tates.

These three regions, called the Tria$ represented the dominant centers of the world and

the location of nearly 9& percent of world income, as measured by A?=.

The epa!$e$ Tria$ includes the entire =acific region, $anada and /e#ico- and the boundary in 2urope is moving eastward.

Marketi!* Implicati%!s %0 t)e Sta*es %0 ,e.el%pme!t

The stages of economic development can serve as a guide to marketers in evaluatingpr%$(ct sat(rati%! le.els, the percentage of potential buyers or households whoown a product.

In countries with low per capita income, product saturation levels are low *e.g.,ownership of telephones in India is only about 8' percent of the population+.

In $hina, saturation levels of private motor vehicles and personal computers are very low L only about one car or light truck for every >,''' people, and one =$ for every K,'''.$ompare this to the 2), with a ratio of > =$s per 6'' people.

BALANCE O: PAYMENTS

• 4)at is t)e 3ala!ce %0 pa"me!ts7

The 3ala!ce %0 pa"me!ts is a record of all economic transactions between the residentsof a country and the world. It is divided into the current and capital accounts. *Table 8(&+.

• 4)at is t)e c(rre!t acc%(!t7

The c(rre!t acc%(!t is a measure that includes trade in merchandise and services, pluscertain categories of financial transfers such as humanitarian aid.


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• ,e0i!e a tra$e $e0icit&

• ,e0i!e a tra$e s(rpl(s&

3 country with a negative current account balance has a tra$e $e0icit- that is, the outflow

of money to pay for imports e#ceeds the inflows of money for sales of e#ports

3 country with a positive current account balance has a tra$e s(rpl(s.

• 4)at is t)e capital acc%(!t7

The capital acc%(!t is a record of all long(term direct investment, portfolio investment,and other short( and long(term capital flows.

The minus signs indicate outflows of cash, payment for *for e#ample, Table 8(&, line 8shows an outflow of 46.79 trillion in 8''9, that represents payment for ).. merchandise

imports+.

3 country accumulates reserves when the net of its current and capital accounttransactions shows a surplus- it gives up reserves when the net shows a deficit.

The )nited tates regularly posts a deficit in both the current account and the trade balance of goods.

3 close e#amination of Table 8(& reveals that the )nited tates regularly posts deficts in both the current account and the trade balance in goods.

:verall, the ).. post balance of payments deficits while important trading partners, suchas $hina, have surpluses. *Table 8(K+.

TRA,E IN MERCHAN,ISE AN, SERVICES

Thanks in part to the achievements of A3TT and the 1T:, world merchandise trade hasgrown at a faster rate than world production since the end of 1orld 1ar II.

3ccording to figures compiled by the 1orld Trade :rgani!ation, the dollar value ofworld trade in 8''9 totaled 46>.7 trillion.

In 8''>, Aermany surpassed the )nited tates as the world’s top merchandise e#porter.2#ports generate ' percent of Aermany’s gross domestic product, and 7 million jobs aree#port related.

$hina’s third place in the e#port ranking underscores its role as an e#port powerhouse.*Table 8(9+.


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$hinese e#ports to the )nited tates have surged since $hina joined the 1orld Trade:rgani!ation in 8''6- in fact, policymakers in 1ashington are pressuring Beijing to boost the value of the yuan in an effort to stem the tide of imports.

Table 8(5 provides a different perspective on global trade. The 2uropean )nion is

treated as a single entity with import and e#ports that e#clude intra(regional trade amongthe 8& countries that were 2) members at the end of 8''K. It shows that the 2) is the N6e#porter and importer of world merchandise in 8''K.

The fastest(growing sector of world trade is trade in services. ervices include travel andentertainment- education- business services such as engineering, accounting, and legalservices- and payments of royalties and license fees.

).. services e#ports in 8''9 totaled 4&'' billion. This represents more than one(third oftotal ).. e#ports. The ).. services surplus *service e#ports minus imports+ stood at4667 billion.

OVERVIE4 O: INTERNATIONAL :INANCE

;oreign e#change makes it possible for a company in one country to conduct business inother countries with different currencies.

• 4)at t'% 3asic markets make (p t)e 0%rei*! ec)a!*e market7

The foreign e#change market consists of a buyer’s market and a seller’s market wherecurrencies are traded for both spot and future delivery on a continuous basis.

•

4)at is t)e $i00ere!ce 3et'ee! t)e 8sp%t9 market a!$ t)e 80%r'ar$9 market7

The spot market is for immediate delivery- the market for future delivery is called the forward market.

• 4)% are t)e participa!ts i! t)is market7

6. 3 country’s central bank can buy and sell currencies in the foreign e#changemarket and government securities in an effort to influence e#change rates.

8. ome of the trading in the foreign e#change market takes the form oftransactions needed to settle accounts for the global trade in goods and

services. *;or e#ample, because =orsche is a Aerman company, the dollarsspent on =orsche automobiles by 3merican car buyers must be converted toeuros.+

>. $urrency speculators also participate in the foreign e#change market.

• 4)at is 8$e.al(ati%!97

• 4)at is 8re.al(ati%!97


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,e.al(ati%! can result from government action that mandates a reduction in the value ofthe local currency against other currencies.

The opposite is re.al(ati%!& In 8''&, the $hinese government responded to pressurefrom its trading partners by adopting a policy of re.al(ati%! to strengthen the yuan

against the dollar and other currencies. 3 stronger yuan would make $hina’s e#ports tothe )nited tates more e#pensive while making ).. e#ports to $hina less e#pensive.

P(rc)asi!* P%'er Parit"

Aiven that currencies fluctuate in value, a reasonable question to ask is whether a givencurrency is over( or undervalued compared with another.

• 4)at is t)e ?Bi* Mac I!$e@7

:ne way to answer the question is to compare world prices for a single well(known product% /c@onalds Big /ac hamburger. The so(called Big /ac Inde#C is a Oquick anddirty’ way of determining which of the worlds currencies are too weak or strong.

The underlying assumption is that the price of a Big /ac in any world currency should,after being converted to dollars, equal the price of a Big /ac in the )nited tates.

3 country’s currency would be overvalued if the Big /ac price *converted to 4+ is higherthan the ).. price. $onversely, a country’s currency would be undervalued if theconverted Big /ac price is lower than the ).. price.

2conomists use the concept of p(rc)asi!* p%'er parit" +PPP- when adjusting nationalincome data to improve comparability.

Ec%!%mic Ep%s(re

• 4)at is 8ec%!%mic ep%s(re97

Ec%!%mic ep%s(re reflects the impact of currency fluctuations on a company’sfinancial performance. 2conomic e#posure can occur when a company’s businesstransactions result in sales or purchases denominated in foreign currencies.

Ma!a*i!* Ec)a!*e Rate Ep%s(re

;orecasting e#change rate movements is a major challenge. :ver the years, the search forways of managing cash flows to eliminate or reduce e#change rate risks has resulted inthe development of numerous techniques and financial strategies.


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He$*i!* e#change rate e#posure involves establishing an offsetting currency positionsuch that the loss or gain of one currency position is offset by a corresponding gain orloss in some other currency. External hedging methods for managing both transaction and translation e#posurerequire companies to participate in the foreign currency market. pecific hedging tools

include forward contracts and currency options.

Internal hedging methods include price adjustment clauses and intra(corporate borrowing or lending in foreign currencies.

The 0%r'ar$ market is a mechanism for buying and selling currencies at a preset pricefor future delivery.

In some situations companies are not certain about the future foreign currency cashinflow or outflow. In such an instance, forward contracts are not the appropriate hedgingtool.

3 0%rei*! c(rre!c" %pti%! is best for such situations.

• 4)at is a 8p(t %pti%!79

• 4)at is a 8call %pti%!79

3 p(t %pti%! gives the buyer the right, not the obligation, to sell a specified number offoreign currency units at a fi#ed price, up to the options e#piration date.$onversely, a call %pti%! is the right, but not the obligation, to buy the foreign currency.

,ISCUSSION UESTIONS

6. 2#plain the difference between market capitalism, centrally planned capitalism,centrally planned socialism, and market socialism. Aive an e#ample of a country thatillustrates each type of system.

Market capitalism is an economic system in which individuals and firms allocateresources and production resources are privately owned. $onsumers decide whatgoods they desire and firms determine what and how much to produce- the role ofthe state in market capitalism is to promote competition. /arket capitalism isfound in the )nited tates.

Centrally-planned capitalism is an economic system in which command resourceallocation is utili!ed e#tensively in an environment of private resource ownershipcan be called. $entrally(planned capitalism is found in weden, where two(thirdsof all e#penditures are controlled by the government.

Centrally-planned socialism is an economic system in which the state has broad powers to serve the public interest as it sees fit. tate planners make top(downCdecisions about what goods and services are produced and in what quantities-


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consumers can spend their money on what is available. The government ownsindustries as well as individual enterprises. $entrally(planned socialism wasfound in the former oviet )nion.

Market socialism is an economic system in which market allocation policies are

permitted within an overall environment of state ownership. /arket socialism isfound in $hina where farmers can offer part of their production in a free market.

8. The seven criteria for describing a nation’s economy introduced at the beginning ofthis chapter can be combined in a number of different ways. ;or e#ample, the )nitedtates can be characteri!ed as follows%

• Type of economy% 3dvanced industrial state

• Type of government% @emocracy with a multi(party system

• Trade and capital flows% Incomplete free trade and part of trading bloc

• The commanding heights% /i# of state and private ownership

• ervices provided by the state and funded through ta#es% =ensions and education but not health care

• Institutions% Transparency, standards, corruption is absent, a free press and strong

courts

• /arkets% ;ree market system characteri!ed by high riskHhigh reward

entrepreneurial dynamism

)se the seven criteria found on pp. 8(> to develop a profile of one of the BI$ nations,or any other country that interests you. 1hat implications does this profile have formarketing opportunities in the countryP

tudent answers will vary by country chosen.

>. 1hy are Bra!il, ussia, India, and $hina *BI$+ highlighted in this chapterP Identifythe current stage of economic development for each BI$ nation.

2#perts predict that the BI$ nations will be key players in global trade even astheir track records on human rights, environmental protections and other issuescome under closer scrutiny by their trading partners.

India is in the Gow(Income category. $hina and Bra!il fall within the Gower(/iddle(Income category. ussia is the only BI$ nation to be in the )pper(/iddle(Income category.

. Turn to the Inde# of 2conomic ;reedom *Table 8(>+ and identify where the BI$nations are ranked. 1hat does the result tell you in terms of the relevance of the inde# toglobal marketersP

3ll four BI$ countries fall within the /ostly )nfreeC category. This indicatesthat, while the inde# and what it stands for are certainly important to marketers,


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they are not willing to forego the business opportunities presented by thesecountries.

&. The "eritage ;oundation’s Inde# of 2conomic ;reedom is not the only ranking thatassesses countries in terms of successful economic policies. ;or e#ample, the 1orld

2conomic ;orum *12;- www. weformum.org+ publishes an annual Alobal$ompetitiveness eport- in the 8''K (8''9 report, the )nited tates ranks in si#th placeaccording to the 12;’s metrics. By contrast, weden is in third place. 3ccording to theInde# of 2conomic ;reedom’ rankings the )nited tates and weden are in si#th andtwenty(si#th place, respectively. 1hy are the rankings so differentP 1hat criteria doeseach inde# considerP

The "eritage foundation measures trade policy, ta#ation policy, governmentconsumption of economic output, monetary policy, capital flows and foreigninvestment, banking policy, wage and price controls, property rights, regulations,and the black market. It does take a very conventional and conservative approach

to classifying economies.

:n the other hand, the 1orld 2conomic ;orum, according to their website, states%The orld conomic /orum is an independent, international organi+ation

incorporated as a 0wiss not-for-profit foundation. e are striving towards a

world-class corporate governance system where values are as important a asis

as rules. (ur motto is entrepreneurship in the gloal pulic interest. e elievethat economic progress without social development is not sustainale, while

social development without economic progress is not feasile. (ur vision for the

orld conomic /orum is threefold. 3t aims to e: the foremost organi+ationwhich uilds and energi+es leading gloal communities4 the creative force

shaping gloal, regional and industry strategies4 the catalyst of choice for its

communities when undertaking gloal initiatives to improve the state the world"http%HHwww.weforum.orgHenHaboutH:urQ8':rgani!ationHinde#.htm.

$learly, the 12; assigns a great deal of value to measuring the values and socialdevelopments, and opportunities of a country. This strong belief systeminfluences the 12;’s country ranking L not by what is current possess but what it should be doing.

K. 1hen the first edition of this te#tbook was published in 677K, the 1orld Bank definedlow(income countryC as one with per capita income of less than 4&'6. In 8''>, whenthe third edition of *loal Marketing appeared, low incomeC was defined as 495& orless in per capita income. 3s shown in Table 8( of this chapter, 47>& is the current lowincomeC threshold. The other stages of development have been revised in a similarmanner. "ow do you e#plain the upward trend in the definition of income categoriesduring the past 6& yearsP

The economic systems of countries are constantly developing and changes happenrapidly. The percentage of the world’s A?I for low(income countries is now at a


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http://www.weforum.org/en/about/Our%20Organization/index.htm

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record low of >.8> percent as compared to the lower(middle(income countries,and the upper(middle(income countries. This suggests great gains in income per person and income distribution for those living in the low(income companies. 3scountries in the low(income begin to tackle their economic, social, and political problems, more opportunities present themselves for the people living in those

countries.

9. 3 manufacturer of satellite dishes is assessing the world market potential for his products. "e asks you if he should consider developing countries as potential markets."ow would you advise himP

@eveloping markets should prove attractive on the basis of current low productsaturation levels. "igh rates of growth in many developing countries suggest thatsome segments of the population save enough money to afford e#pensiveelectronics equipment such as a satellite dish. 3 satellite entrepreneur might inviteneighbors to his home and charge them for the privilege of watching

programming that would not otherwise be available. These neighbors might not be able to afford a satellite and related equipment, but they could afford to watchan occasional movie.

5. 3 friend is distressed to learn that 3mericas merchandise trade deficit hit a record495' billion in 8''&. Rou want to cheer your friend up by demonstrating that the trade picture is not as bleak as it sounds. 1hat do you sayP

The overall trade balance reflects merchandise as well as services trade asreported in official balance of payments figures. The ).. typically runs a tradesurplus in services, which serves to offset the merchandise trade deficit.

The )nited tates is a major service trader. 3s shown in ;igure 8(&, ).. servicese#ports in 8''K totaled appro#imately 48 billion. This represented slightly lessthan one(third of total ).. e#ports. The ).. services surplus stood at 45' billion.This surplus partially offset the ).. merchandise trade deficit, which reached arecord 45>5 billion in 8''K.

CASES

Case 2 #6 T)e Gl%3al Ec%!%mic Crisis6 T)e Assi*!me!t

O.er.ie'6 3s ).. consumer spending slowed in 8''9(8''7, e#ports from ingaporeand the =hilippines began to slump. By contrast, Indonesia and /alaysia, weree#periencing strong demand for e#ports of crude oil and natural gas. 0apan, became lessdependent on e#ports to the )nited tates. The ripple effect from the global recessionwas felt especially strongly in $anada. 2urope’s economy was also mired in a recession.3s the economic crisis deepened in the fall of 8''5, world leaders offered a variety of perspectives and proposals.


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6. @oes the global economic crisis signal that the 3merican model of free marketcapitalism is fundamentally flawedP

?ot necessarily flawed, just bruised a little. The 3merican model, capitalism doesnot fully address the different social situations of all of the countries around the

world, which are% those that are centrally planned capitalism, centrally plannedsocialism, and market socialism. 2ach system requires different approaches to prevent and alleviate an economic crisis

8. =olicymakers in 0apan, the world’s second(largest economy must transition theirnation away from a manufacturing(dependent model for growth. 1hat industry sectorsmight emerge as the new drivers of economic growthP

The service sector and environmental manufacturing and service opportunitiesabound for 0apan as it transitions’ from a manufacturer of goods to a producer ofgoods and services. :ne of the fastest(growing sectors of world trade is the trade

of services between high income and low or middle( income countries. 0apanwith its location in 3sia stands to profit from their distribution of services to thatcontinent.

>. @o you think that the economic stimulus programs in the )nited tates, 3sia, andelsewhere are the right approach to pulling the world out of recessionP

The movement of capital, the production of goods, the balance of payment, tradesurpluses, trade deficits, and service trades are all key driving forces surroundinga country’s economy. The ) balance of payment in both its current and capitalaccounts are in the negative range. Therefore, it is unlikely that the ) can furtherinfluence the world’s economy.

Case 2#26 O!e Lapt%p Per C)il$

O.er.ie'6 In 8''&, after 8' years, ?icolas ?egroponte, announced he was leaving to pursue an ambitious vision% bridging the digital divide between developed anddeveloping nations by providing powerful =$s to schoolchildren in impoverished parts ofthe world. ?egroponte named his initiative :ne Gaptop =er $hild.

6. 1hy are /icrosoft, Intel, and other leading for(profit companies interested in low(costcomputers for the developing worldP

;orty percent of the world’s population resides in low(income countries the e#actones that the :G=$ program is targeting. These major companies understand theneed to grow their consumer base in countries that are low income or low(middleincome countries. These companies are betting that the economies of these low(income countries will grow in the future.

8. @o you agree with ?egroponte’s decision to partner with /icrosoftP


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tudent answers will vary depending on whether or not they agree with thedecision. "owever, student answers should include statements regarding therole*s+ international companies play in e#panding the :G=$ program around theworld.

>. 3ssess the thinking behind the give one, get oneC promotion. @o you think this is agood marketing tacticP

The goal of :G=$ was to give laptops to children in low(income countries, not) and $anadian children. The stated goal of the tactic was to increase production via increased sales L but not to their target market. 3t best, this is astop gap measure, designed to accomplish two disparate goals% increase production to lower unit costs and increase e#posure to the program.

Case 2#=6 :r%m C%mm(!ism t% Capitalism6 Viet!am9s Ec%!%mic Tra!s0%rmati%!

O.er.ie'& Mietnam is an underdeveloped country with a great market potential. /anydeveloped countries have invested money in the Mietnam market since the early 677's.3merica became involved in the process of investment later and based normal tradingrelations *?T+ with Mietnam only in mid(677's. ;oreign countries have e#periencedgreat market opportunities at Mietnam due to low labor cost and the availability of humanresources. 3merican companies involved in trade relations with Mietnam face manychallenges in market development.

6. 3ssess the market opportunities in Mietnam for both 3merican consumer(productscompanies and 3merican industrial(products companies. 1hat is the nature of theopportunityP

2ven though the )nited tates were preceded by other countries in establishingmarket relations with Mietnam in early 677's, 3merican companies *such asAillette, 3TST, 2##on/obile, etc+ started to work on the issue after ?Testablishment between Mietnam and 3merica. Mietnam gives a great opportunityfor 3merican industrial(products and consumer(products companies. Theinfrastructure in Mietnam is weak, therefore electric, road(building, and phonecompanies can e#pect to profit greatly from investing in Mietnam markete#pansion. @ue to the cheap labor(cost, the ).. can build *and it actually does+factories that would produce such goods as clothes and computers and e#portthem back to the )nited tates or around the globe. Mietnam is a mostly unfreeCcountry in degrees of economic freedom, but the country’s involvement in 1T:can change the situation and make the state more market(oriented.

8. ?ike and several other well(known 3merican companies are sourcing some of their production in Mietnam, thereby taking advantage of a labor force that is paid theequivalent of 84 per day or less. 3re goods labeled /ade in MietnamC likely to findwidespread acceptance among 3merican consumersP


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The mentioned situation has an equivalent in the already established )..($hinesemarket. /ade in MietnamC goods will find buyers in the ).. and in othercountries. If the products prove themselves to be reliable and trustworthy, while being ine#pensive *and they will be based on low(cost labor force+, these products

should find widespread acceptance among ).. consumers.

>. ome critics have argued that $uba is more deserving of diplomatic and trade relationswith the )nited tates than Mietnam. 1hat are some of the factors behind this argumentP

anked by degree of economic freedom inde#, Mietnam is described as a mostlyunfreeC country while $uba is that of depressedC group. :ne factor behind theargument that $uba is more deserving of diplomatic and trade relations is that of$uban’s location on the world map. $uba is a closer neighbor to the ).. Besidesthis, there is the argument that we fought a war with Mietnam and lost- while wehave never been at war with $uba.

Case 2#26 Is C)i!a9s C(rre!c" T%% Str%!*7

O.er.ie'6 $hina is one of the largest trade partners of the )nited tates. The $hinesegovernment has been attempting to make $hinese goods competitive with those of the)nited tates by revaluing $hinese currency yuan. )nited tates trade representatives protest against the possible revaluation saying that it can lead to changes in $hinese(3merican trade relationship and cause losses for 3merican companies investing to$hinese market.

6. $onsumer goods, including shoes and electronics, represent about 5' percent of )..imports from $hina. 3merican consumers have saved an estimated 4K'' billion over the past 6' years by buying ine#pensive $hinese goods. If the $hinese government revaluesthe yuan by 8' percent or more and 3merican consumers pay higher prices, is this adesirable outcomeP

It’s definitely not a desirable outcome for 3merican consumers and for 3mericaneconomy at all. If prices for these products were to go up, quantity demanded willmost probably go down. $hinese goods such as clothes and shoes have a low(income or medium(income population as a consumer who will not pay higher price if there would be something cheaper. "istorically, $hinese goods are knownfor low price and not the best quality. $hina is the largest big emerging market*B2/+. If the relationship between $hina and the investing countries shouldchange, it could cause a tremendous shift in world trade. If the $hinese currencygoes up, there would be less profitable for other countries *especially the )nitedtates+ to invest. The result might be negative for $hina. )3 can always use/e#ico, while 2urope might use 3sian countries, even though it would be atremendous challenge. The impact on our economy would be significantlynegative.


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8. =rotectionist sentiments in the )nited tates are fueled by the argument that $hina is to blame for the flood of imports, the giant ).. current account deficit, and downward pressure on wages in some industries. @o you agreeP

The )nited tates $ongress tries to use protectionist sentiments against $hina in

blaming it for ).. current account deficit, the flood of imports, and downward pressure on wages in some industries. I don’t believe that $hina can or should be blamed for problems in the 3merican economy. 3merican($hinese relationshipsare beneficial for both sides. $hina provides 3merican market with low(cost products and low(interest rate loans. $hina is one of the greatest trading partnersof the )nited tates. If this relationship were to be restricted, 3merica woulde#perience a great challenge trying to recover. To say it would precipitate aneconomic crisis would not be overreaching. The best thing for the 3merican($hinese relationship is to keep free trade process between two countries open anduntouched.

>. @o you think an aggressive legislative posture with respect to $hina’s currency is the best approach for any trade partner to takeP

?o. 3n aggressive posture does nothing but cause strained relations between thetwo countries. Rou should not try to force your point by threatening them withsanctions, tariffs, or undue restrictions. Gong(term relationships are secured andflourish due to mutual need and benefits. This is where we should beconcentrating.

TEACHING TOOLS AN, EDERCISES

A$$iti%!al Cases6 Alobal 1ine 1ar 8''7% ?ew 1orld versus :ld.C $hristopher 3.Bartlett, 5'0, 76''&.

O(t#O0#Class Rea$i!*6 3ssign the following seminal article on marketing and askstudents to apply the concepts presented to global marketing.

Theodore Gevitt, /arketing /yopia,C 5arvard 'usiness 6eview 5', no. 9H5*0uly(3ugust 8''+, pp. 6>5(67.

I!ter!et Eercise% "ave students go to http://finance.yahoo.com/currency?u. This siteoffers a foreign e#change calculator that allows easy comparison of currencye#change rates. tudents will select a few currencies such as the Thai baht, the$hinese Ruan, the /alaysian ringed, and Indonesian rupee and compare e#changerates.

Acti.it"6 2ither in groups or individually, students should begin preparing their $ultural,and 2conomic 3nalysis and /arketing =lan as noted in $hapter 6.


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:ilm6 "ave students watch the movie 1all treet.C 3lthough not dealing directly withinternational finance, the film gives students insight into various financial dealingsand transactions and the potential outcomes associated.

SUGGESTE, REA,INGSB%%ks

2nghold, $hristopher. 7oing 'usiness in 8sias 'ooming China Triangle. )pper addleiver, ?0% =rentice "all, 677.

;inger, /ichael 0. 3nstitutions and Trade &olicy. ?orthampton, /3% 2dward 2lgar, 8''8.

Aarten, 0effrey 2. The 'ig Ten: The 'ig merging Markets and 5ow They ill Change(ur 9ives. ?ew Rork% BasicBooks, 6779.

Isaak, obert 3. Managing orld conomic Change. )pper addle iver, ?0% =rentice

"all, Inc., 677&.

Jennedy, =aul. The 6ise and /all of *reat &owers. ?ew Rork% andom "ouse, 6759.

/c$ue, arah. /orce to /orce: 'uilding &rofitale -Commerce 0trategies. /ason, :"%Thomson "igher 2ducation, 8''K.

oberts, =aul $., and Jaren Ge ;ollette 3raujo. The Capitalist 6evolution in 9atin

8merica. :#ford% :#ford )niversity =ress, 6779.

hapiro, 3lan $. Multinational /inancial Management , &th ed. )pper addle iver, ?0%=rentice "all, Inc., 677&.

=orter, /ichael 2. The Competitive 8dvantage of ations. ?ew Rork% The ;ree =ress,677'.

Thurow, Gester. 5ead to 5ead: The Coming conomic 'attle 8mong ;apan, urope, and

8merica. ?ew Rork% 1illiam /orrow and $ompany, Inc., 6778.

Articles

$avusgil, . Tamer. /easuring the =otential of 2merging /arkets% 3n Inde#ing3pproach.C 'usiness 5ori+ons ', no. 6 *0anuaryH;ebruary 6779+, pp. 59(76.

$!inkota, /ichael . The 1orld Trade :rgani!ation L =erspectives and =rospects,C ;ournal of 3nternational Marketing >, no. 6 *677&+, pp. 5&(78.

@owlah, $.3.;. The ;uture of the eadymade $lothing Industry in the =ost()ruguayound 1orld.C orld conomy 88, no. 9 *eptember 6777+, pp. 7>>(7&>.


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Aolden, =eggy 3., =atricia /. @oney, @enise /. 0ohnson, and 0erald . mith, The@ynamics of a /arketing :rientation in Transition 2conomies% 3 tudy of ussian;irms,C ;ournal of 3nternational Marketing >, no. 8 *677&+, pp. 87(7.

Jaikati, 0ack A., Aeorge /. ullivan, 0ohn /. Mirgo, T. . $arr, and Jatherine . Mirgo,

The =rice of International Business /orality% Twenty Rears under the ;oreign $orrupt=ractices 3ct,C ;ournal of 'usiness thics 8K, no. > *8'''+, pp. 86>(888.

Jnight, Aary and . Tamer $avusgil. Innovation, :rgani!ational $apabilities and theBorn Alobal ;irm,C ;ournal of 3nternational 'usiness 0tudies >&, no. 8 *8''+, pp. 686(66.

=rowse, /ichael. Is 3merica in @eclinePC 5arvard 'usiness 6eview 9', no. *0ulyH3ugust 6778+, pp. >K(>9.

Ran, ick, To each $hinas $onsumers, 3dapt to *uo <ing, 5arvard 'usiness

6eview 98, no. & *eptemberH:ctober 677+, pp. KK(9.

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