International Business Chapter Four The Economic Environment International Business 10e Daniels/Radebaugh/Sullivan 2004 Prentice Hall, Inc4-1

International BusinessInternational Business

Chapter FourChapter Four

The Economic EnvironmentThe Economic Environment

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Danie

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2004 Prentice Hall, Inc 4-1

2004 Prentice Hall, Inc

Chapter ObjectivesChapter Objectives

Learn differences among the worldLearn differences among the world’’s s major economic systemsmajor economic systems

Learn criteria for dividing countries Learn criteria for dividing countries into economic categoriesinto economic categories

Discuss economic issues that Discuss economic issues that influence international businessinfluence international business

Assess the transition process for Assess the transition process for market economiesmarket economies

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IntroductionIntroduction Managers need to understand economic

environments to predict trends that might affect their company’s performance.

A country’s economic policies are a leading indicator of the government’s goals and its planned use of economic tools and market reforms.

The subject of economic development is important to citizens, managers, policymakers, and institutions,


Economic Issues for International Economic Issues for International BusinessesBusinesses

What type of economic system does the What type of economic system does the country have?country have?

What is the size, growth potential, and What is the size, growth potential, and stability of the market?stability of the market?

Is the companyIs the company’’s industry in that countrys industry in that country’’s s public or private sector?public or private sector?• If public, does the government allow private If public, does the government allow private

competition?competition?• If private, is it moving towards public If private, is it moving towards public

ownership?ownership?

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Economic Issues for International Economic Issues for International Businesses, contBusinesses, cont

Does the government view foreign capital Does the government view foreign capital as competition with or in partnership with as competition with or in partnership with public or local private enterprises?public or local private enterprises?

How does the government control the How does the government control the nature and extent of private enterprise?nature and extent of private enterprise?

How much of a contribution is the private How much of a contribution is the private sector expected to make in assisting the sector expected to make in assisting the government formulate overall economic government formulate overall economic objectives?objectives?

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Key Economic ForcesKey Economic Forces General economic frameworkGeneral economic framework Economic size and stabilityEconomic size and stability Existence and influence of capital marketsExistence and influence of capital markets Factor endowmentsFactor endowments IndicatorsIndicators

• GrowthGrowth• InflationInflation• SurplusesSurpluses• DeficitsDeficits

Market SizeMarket Size Availability of economic infrastructureAvailability of economic infrastructure

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Factor ConditionsFactor Conditions

Inputs to the production processInputs to the production process• Human resourcesHuman resources• Physical resourcesPhysical resources• KnowledgeKnowledge• CapitalCapital• InfrastructureInfrastructure

Factor conditions are especially Factor conditions are especially critical for the production of goodscritical for the production of goods

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Demand ConditionsDemand Conditions

Market potentialMarket potential• Composition of home demand (nature of buyer Composition of home demand (nature of buyer

needs)needs)• Size of home demandSize of home demand• Growth of home demandGrowth of home demand• Internationalization of demandInternationalization of demand

Demand conditions areDemand conditions are especially critical forespecially critical for market-seeking market-seeking investments investments

Composition?Size?

Growth?Internationalization?

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Gross National IncomeGross National Income Tool to measure one country against Tool to measure one country against

anotheranother• Size Size • DemandDemand

Gross National Income (formerly the Gross Gross National Income (formerly the Gross National Product)National Product)

GNI is the market value of final goods GNI is the market value of final goods and services newly produced by and services newly produced by domestically owned factors of domestically owned factors of production.production.

Countries with high populations and Countries with high populations and high per capita GNI are most desirable high per capita GNI are most desirable in terms of market potentialin terms of market potential

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Gross Domestic ProductGross Domestic Product

GDP: GDP: the value of production that the value of production that takes place within a nationtakes place within a nation’’s borders, s borders, without regard to whether the without regard to whether the production is done by domestic or production is done by domestic or foreign factors of productionforeign factors of production

Example -Example -• Both a Ford and a Toyota manufactured in the Both a Ford and a Toyota manufactured in the

United States counts towards US GDP.United States counts towards US GDP.• A Ford produced in Mexico would not.A Ford produced in Mexico would not.

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Importance of Per Capita GNIImportance of Per Capita GNI

Low IncomeLow Income755 or less (in 755 or less (in 2000)2000)

Developing/Emerging Developing/Emerging CountryCountry

High IncomeHigh Income9,266 or more9,266 or moreDeveloped/Industrial Developed/Industrial CountryCountry

Upper Middle Upper Middle IncomeIncome

2,996-9,2652,996-9,265Developing/Emerging Developing/Emerging CountryCountry

Middle IncomeMiddle Income756-9,265756-9,265Developing/Emerging Developing/Emerging CountryCountry

Lower Middle Lower Middle IncomeIncome

756-2,995756-2,995Developing/Emerging Developing/Emerging CountryCountry

World Bank World Bank CategoryCategory

Per Capita GNI Per Capita GNI ($)($)

Common NameCommon Name

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Purchasing Power ParityPurchasing Power Parity

PPP is the number of units of a countryPPP is the number of units of a country’’s s currency required to buy the same currency required to buy the same amounts of goods and services in the amounts of goods and services in the domestic market that $1 would buy in the domestic market that $1 would buy in the United StatesUnited States

PPP is a useful measure since it accounts PPP is a useful measure since it accounts for international differences in pricefor international differences in price• Example: China has a higher PPP than JapanExample: China has a higher PPP than Japan

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Countries Classified by RegionCountries Classified by Region

From Map 4.2

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Human DevelopmentHuman Development

A country’s degree of human development human development , in terms of both economic and social factors, us studied in order to estimate its current and future economic activity.

Complementing economic indicators by also analyzing the overall quality of life in a country.

The Human Resource IndexThe Human Resource Index: Longevity: life expectancy at birth. Knowledge: adult literacy rate and primary, secondary and tertiary gross enrollment ratio. Standard of Living: GNI per capita measured expressed in PPP.

Features of an EconomyFeatures of an Economy

1.1. Inflation:Inflation: the pervasive and sustained increase in the aggregate level of prices as measured by a cost of living index.

Results when aggregate demand grows faster than aggregate supply (too many people trying to buy too few goods; prices increase faster than incomes)

High inflation leads to:- setting higher interest rates- Installing wage and price controls- Imposing protectionist trade policies and currency

controls.

The Consumer Price Index (CPI) measures the average change in consumer prices over time in a fixed market basket of goods and services.

2. Unemployment: represents the number of workers who want to work but do not have jobs.

The unemployment rate is:The number of unemployed workers /

The total civilian labor force (all those wiling and able to work for pay)

The Misery IndexThe Misery Index: the sum of a country’s inflation and unemployment rates.

3. DebtDebt: the sum total of a government’s financial obligations.

The state’s borrowing from its citizens, from foreign organizations, from foreign governments, and from international institutions.

Internal Debt: is the portion of the government debt that is denominated in the country’s own currency and is held by domestic residents.

External Debt: is the portion of the government debt that is denominated in foreign currencies and is owed to foreign creditors.


Heavily Indebted Poor Countries (HIPCs)Heavily Indebted Poor Countries (HIPCs)

Poor countries with large debts that are the target of Poor countries with large debts that are the target of initiatives to alleviate the severe external debt initiatives to alleviate the severe external debt burdens of less developed countries, as a means of burdens of less developed countries, as a means of assisting their development.assisting their development.

4. 4. Income DistributionIncome Distribution: describes what share of a country’s income goes to various segments of the population (each segment’s share of GNI per capita).

5. PovertyPoverty: the state of having little or no money, few or no material possessions, and little or no resources with which to enjoy a reasonable standard of living.


PovertyPoverty

Globally, the world is: 78% poor (ppp per capita less than $3479); 11% middle income; 11% rich (ppp per capita more than $8000)

6. The Balance of Payments: Officially known as the Statement of International Transactions, and records a country’s international transactions among companies, governments, and/or individuals.

Reports the total of all money flowing into a country minus all money flowing out of that country to others, during a given period.


The two primary accounts under the Balance of Payments:

a. The Current Account: tracks all trade in goods and services, as well as income from assets abroad.

b. The Capital Account: tracks transactions in real or financial assets between countries, as well as loans given to foreigners and loans received by citizens.


Countries Classified by Economic Countries Classified by Economic SystemSystem

Figure 4.24-13


Types of Economic SystemsTypes of Economic Systems An Economic SystemAn Economic System is the set of structures is the set of structures

and processes that guides the allocation of scarce and processes that guides the allocation of scarce resources (ownership of resources), and shapes the resources (ownership of resources), and shapes the conduct (degree of control) of business activities in conduct (degree of control) of business activities in a nation.a nation.

Market EconomyMarket Economy: : resources are primarily owned resources are primarily owned and controlled by the private sector, not the public and controlled by the private sector, not the public sector. sector. • Consumer sovereignty is the right of consumers Consumer sovereignty is the right of consumers

to decide what to buyto decide what to buy• Prices are determined by supply and demandPrices are determined by supply and demand

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Free-market (capitalistic) economiesFree-market (capitalistic) economiesare built upon:are built upon:

The private ownership and control of the factors of The private ownership and control of the factors of production.production.

Freedom of market entry and exit.Freedom of market entry and exit. Determination of prices according to the laws of Determination of prices according to the laws of

supply and demand.supply and demand.

The Laissez-Faire Principle

• Non-intervention by government in a country’s economic activity.

• Results in effective and efficient allocation of resources


Economic Freedom, conEconomic Freedom, con’’tt

Command Economy (Centrally Planned Command Economy (Centrally Planned Economy): all dimensions of economic Economy): all dimensions of economic activity, including pricing and production activity, including pricing and production decisions, are determined by a central decisions, are determined by a central government plangovernment plan• Government owns and controls all Government owns and controls all

resourcesresources• Prices are determined by governmentPrices are determined by government

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Economic Freedom, conEconomic Freedom, con’’tt Mixed Economy: Some degree of government Mixed Economy: Some degree of government

ownership and controlownership and control Economic decisions are largely market-driven and Economic decisions are largely market-driven and

ownership is largely private.ownership is largely private. Government intervenes in in many economic Government intervenes in in many economic

decisions.decisions. No economy is purely market or commandNo economy is purely market or command Economic systems are along a spectrum of Economic systems are along a spectrum of

freedomsfreedoms Most command economies are moving towards a Most command economies are moving towards a

market economymarket economy

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The Means of TransitionThe Means of Transition

Central Planning Systems v.

Consumer Sovereignty

The success of the transition process depends on: - Government’s ability to liberalize economic activity. Reform business practices. Establish appropriate legal and institutional

frameworks.


1. Privatization: : the sale and/or legal transfer of government-owned resources to private individuals.

Benefits: - Reduces government debt. Increases market efficiency. Private enterprises must compete in open for

materials, labor, and capital; thus, they succeed or fail on their own merits.

2. Deregulation: the relaxation or removal of restrictions on the free operation of markets and business.


Benefits: Allows businesses to be more productive and, thus,

make investments in the innovations and activities that can lead to economic growth.

3. Property Rights: The protection of tangible and intangible property rights permits individuals to enjoy the benefits of their accomplishments.

4. Fiscal and Monetary Reform: Adopting market-oriented instruments such as interest rates and taxation policies, in order to achieve stability, reduce unemployment and inflation, which will attract investments needed for growth.


Economic Factors International Economic Factors International Businesses Must AddressBusinesses Must Address

InflationInflation SurplusesSurpluses DeficitsDeficits Balance of PaymentsBalance of Payments External DebtExternal Debt Internal DebtInternal Debt PrivatizationPrivatization

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Reforms and Economic ProgressReforms and Economic Progress

Figure 4.3 4-18


Physical & Societal InfluencesPhysical & Societal Influences

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Chapter ReviewChapter Review

Learn differences among the worldLearn differences among the world’’s s major economic systemsmajor economic systems

Learn criteria for dividing countries Learn criteria for dividing countries into economic categoriesinto economic categories

Discuss economic issues that Discuss economic issues that influence international businessinfluence international business

Assess the transition process for Assess the transition process for market economiesmarket economies

4-20

Documents

International Business Chapter Four The Economic Environment International Business 10e Daniels/Radebaugh/Sullivan 2004 Prentice Hall, Inc4-1