Economic systems and international

business
Economic Systems
An economic system is what allows a country to decide what to produce, how to
produce, and for whom to produce. These systems include natural resources, labor,
capital, management and standards for creating products.
Market Economies
In market economies, i) ownership of private property is encouraged, ii) businesses
are encouraged to produce better products, iii) competition is encouraged because it
can create better quality and lower prices, iv) the Government has little direct
involvement with the business itself, and v) self- sufficiency is not seen as an
economic goal.
Supply and demand control market economies. The law of supply states that
as the price of a product increases, producers will be willing to make more of that
product. The law of demand states that as the price of a product increases consumers
will demand less of that product. Producers must find the equilibrium point which is the
point at which the consumers are willing to pay the asking price and the company still
makes a profit.
Centrally Planned Economies
In centrally planned economies the government controls the ownership of private
property. By having more government control the profit motive is not the main goal of
the business.
There are fewer pure centrally planned economies following the collapse of
communism in the former Soviet Union.
Mixed Economies
A mixed economy includes government involvement and private ownership of
businesses. In some countries, the government owns the transportation and
communication businesses. In socialist mixed economies, most of the main
industries are government controlled, but citizens are free to work in other industries.
Canada has a mixed economy. Because Canada has a large, land mass and a relatively
small population, the Canadian government has to play a major role in our important
industries. Sweden, Italy, and Australia have also adopted mixed economy systems.
Governments privatize state owned enterprises. Privatization may occur when a country
moves from a centrally planned to a market economy, it can also happen in mixed
economies.

As a countries economic system matures, it tends to move towards a market system.

When a centrally planned economy shifts to a market economy, the price of some
products rise, there is more competition, and there may be greater unemployment.
Global Economic Systems
Since no nation can be completely self sufficient, they must trade with others
(interdependence). Economic growth increases economic stability and brings the
nation confidence as well as the ability to invest in the future.
The global economy reflects the total amount of interdependent economic activity around
the globe. In the past, the government would set rules on economic policies, but now the
world is becoming one big market and trade barriers are beginning to slack.
Global economy provides countries with more jobs and a higher standard of living.
Countries use different strategies such as clustering (joining together in their
industries) to get into the new economic order.
Business Cycles
Business cycles are patterned movements in the economy measured by the growth
of production and industries. There are 4 phases*: 1) Depression (slowest
economy), 2) Recovery (improving economy), 3) Prosperity (good economy), and
4) Recession (economy begins to slow) *See pg 288 for full explanations
The World Economic Freedom Index
Businesses must be aware of the economic freedom rating (A measure of prosperity
that relates to economic growth, per capita income, and material wealth, calculated
according to the level of market and trade freedoms a country has)
The Economic Freedom of the World measures the following factors:
-size of government
-international exchange
-Monetary policy and price stability
-economy structure & use of markets
-freedom to use alternative currencies -freedom of exchange in capital &
financial markets
-legal structure and property rights
*See pg 289 for current and past global economic freedom ratings
Canadas Global Entrepreneurs
In 2000, 1 in 16 Canadian adults tried to start a business (In this year Canada was
th
ranked 6 of 21 countries for entrepreneurial activity). In most of Europe, employers
provide good benefits. It makes people not want to risk

entrepreneurial activity. Encouraging new business ventures also requires an environment

with minimal paper work and applications.
Around-the-Clock World Markets
Stock exchanges are discussing the creation of a global market. Ordinary investors will be
able to buy and trade stocks without being restricted by hours and listings of their home
market.
This new market is referred to as the global equity market. Equity is something that has
worth, such as a home or stocks. Ten exchanges in three time zones are considering the set
up:
-Toronto, New York, Mexico, and Sao Paolo, Brazil in the Americas
-Australia, Tokyo, and Hong Kong in the Asia-Pacific region
-Euronext, the combined Paris, Amsterdam, and, Brussels exchange in Europe (one of the
issues to be resolved is that not all stocks are listed on each of these markets).
Even without around-the-clock trading, financial markets and national economies are
interdependent. Uncertainty in any of the world stock exchanges reverberates through other
economies.
Common Currency
The Euro attempts to balance each economy with greater price stability, harmonized
long-term interest rates, more stable national currencies, and a commitment to control
national budget deficits and public debt.
The benefit of the Euro is that it simplifies transactions, reduces exchange risks,
and strengthens European companies trading within and outside the EU.
Some people have suggested a common currency between the USA and Canada; referred to
as dollarization. Some effects would be a closer link between the two economies. Canada
has already adopted the US dollar as a second currency. More and more Canadian
companies have listed themselves in the US stock exchange.
A single currency might ultimately hand Canadas monetary policy to the US. It will take
time to decide if a common currency would provide easier trade and travel.
Impacts of economics system on international business
Introduction
Last four years had seen a rapid, radical change in an international economic condition. The
Global Economic change embodies the upgrading and degrading of any country's living
standard. Global economic changes affect the economic environment which includes level of
employment, inflation, interest rate, taxation and exchange rate. Hence, implementation of
economic policies has a strong direct effect on international business and that's way when the
International economic policies are framed they are framed with reference to international

business. Internationally there are number of problems which had affected the international
economy as well as national economy such as problem in international trade, diseases like bird
flu, environmental condition such as disasters like tsunami in Japan, financial crisis etc. and for
these reasons globally coordinated efforts are required like international public goods whose
rules applies across the globe as a whole M., Ferroni and A., Mody, (2002).
Defining global economy
The term global or international economy refers to the combined world economy with a free and
open transaction of labour, technology, goods and services; it is a picture of an interconnected
international economy with an increased movement of capital. This concept could not be
understood in isolation but parallel to globalization which is an integration of consumption and
production in every market across the world. It is a clear view that globalization not only benefits
the country globally but also do the betterment for the whole global economy. Today the
international economy is considered as an economy with a common or combined market for all
goods and services produced EconomyWatch.com.

Global economy at a glance

In 2010, the world economy in term of GDP was worth $74.007 trillion (PPP method) and
expected to grow $78.092 trillion in 2011. Economic condition with in BRIC (Brazil, Russia,
India and China) have posted 7 to 10 growth rate. These conditions of BRIC countries played a
huge role in making the economic atmosphere for less wealthy nations as in many situations
under developed and developing countries depend on economic wellbeing of developed
countries M., Lanzeni, (2008). The global economic condition is mostly dominated by
technological aspect; particularly computers, telecommunications, robotics, medical equipment
etc. although the huge advancement has taken place in developed nations but this accelerated
development of agricultural and industrial technology both is creating a complicated
environmental problems. The growth rate for industrial production is estimated in 2003 at 3%.
Global economic change
Today the international system is under the huge structural change in term of both economic and
political dimension. The international economy has combined its production and financial system
to an extraordinary degree, which challenges the nation's economic authority and creates demand
for global organizations Pollins, B., (2007). The hasty economic development in various large
emerging-market (LEMs) economies is responsible for such a radical change in the global
economy. However the implications of these expansions for the management and performance of
the global financial and economic system are controversial. On one side economic observers do
predict the shift of economic power globally and on other side, it is claimed that US will stick it
out to be the global superpower and will continue to dominate the international financial system
and economy. According to G., Sachs, (2007) the main perpetrators for such a huge economic
change in the world are BRIC (Brazil, Russia, India and China) countries and it is advisable to
identify and adjust to these emerging global economy and financial changes.

Reasons for global economic change

Across the globe today economies are going through a huge economic modification process. The
big economists has described this process by many different terms such as globalization,
industrialization, structural adjustment, and some time even just economic change. Generally
these changes occur due to the decrement of government involvement or from command to
capitalist economies. It can be said that there are three coinciding mechanisms responsible for
the world-wide economic change or adjustment process.
Shift of Command to capitalism economic environment.
Command economy is the economic system where price, supply and distribution are under
government regulation and only government have an authority to decide about which good and
services have to be produced and in what quantity it is also termed as centrally planned economy
Ericson, R., E., (2005). On the other hand in capitalism type of economic system the capital is
owned by the private owners and government role is very limited in this Swedberg, R., (2011). In
real life case pure command and pure capitalism economy does not exist but a mixed economic
system containing features of both capitalism and command economy is followed although
economies may vary between command and capitalism economy. Today due to the globalisation
the mixed economic system became imbalanced and tilted towards capitalism system of
economy.
STRUCTURE
The sequence of policies designed to decrease the role of government and increase the role of
private sectors.
There are certain policies followed such as privatization in which government assets are sold to
private owners, promoting competitions among private owners, leaving very limited role in
government's hand, reformation of price globalization of the economy, lowering the government
budget and do less government spending which reduce inflation and promote private investment.

Privatization
Polices
Competition limited role of government
Price reformation promoting private investment
Source: author's creation
BENEFITS AND PROBLEMS

There are some benefits and problems involved in the economy shift from command economy to
the capitalism economy. Such as market based economy that is capitalism economy is always
achieves more efficiency compared to command economy and very less resources are wasted but
in negative sense initially there is a period of inflation, unequal economic distribution of income
and unemployment Dave, S., (2007).
Free trade
Economists favour free trade and recently US congress and US president have supported the
view for removing of trade barriers. It is not wrong to say that across the globe countries are
decreasing there trade barriers. And many have even signed multilateral and bilateral agreements
with other countries in neighbour or region.

Benefits and problems of free trade

As the income level of people keep on increasing their living standard also increases and for that
they need and buy more luxury goods. Therefore countries producing luxury goods get richer as
the demand for their produced increase overtime. People also get exposed to more variety of
goods and services which is the biggest benefit of the free trade.
Free trade is the biggest means of competition and competition can be full of risk and
particularly in the situation countries prosperity. Company also try hard to protect them self
against free trade. And in that situation foreign goods can be more expensive as more tax is
imposed. It also dangerous for the local producers as they have to face multinational business
organizations and which ultimately pushes them to exploit the locals Pettinger, T., (2007).
Economic Development
But after all the reasons the biggest reason for the economic change is the overall world's
economic development. It is hard to define this concept but increase in GDP per capita is taken
as the measure by the economists.
There were two main concepts taken as the reasons for economic development they are:
EXPORT ORIENTED INDUSTRIALIZATION:
It is the trade policy of the economy with the aim of speeding the industrialization process in the
country with the help of exporting goods for which the nation had got the competitive advantage.
This opens domestic market to other foreign markets some polices adopted under this are
floating exchange rate, reduced traffic barriers and government supports. Certain countries like
South Korea adopted it a lot Export-Oriented Industrialization.
IMPORT SUBSTITUTION INDUSTRIALIZATION:

It is an important economic development program in which there is a dependence on import in

some nations for development of local business within the very nation. This theory has been
plasticized throughout 20th century by the developing nations by import substitution
industrialization employment opportunities is increased for citizens, innovation increased in the
countries, decrease in dependency on foreign countries and methods used against this change is
import quota and protective tariffs Jim, B., (2003).
Impact of Economic change on international companies
International companies are the most important factor which backing up the globalization. So it
affects the most to the economy and became the biggest part for its change. International
companies do their operation at the cross point of foreign investment and international trade.
They are also known as Multinational Corporation it is that type of firm which organize and
control production in at least two countries Caves, R., E., (1996).
There has been a huge investment in recent years which had boomed the property and stock
market and became a huge push for consistent growth of Europe and North America but beside
these, investments have also brought a great economic development in Middle East, Africa and
Japan.
Impact of economic change on SABIC and how management cop up through the situation
The SABIC enjoys goodwill as it has a strong brand image among Petrochemicals Company in
the Gulf region. It has seen a huge profit in last two years and due to the backup by Saudi
Government SABIC enjoys remarkable credibility and influence. The company have a huge size
and incorporation which makes it reaps good economies of scale. However, some countries like
China and Iran are involved in aggressive petrochemical production, which may jiggle the
pricing policy in future.
Source: SABIC annual report 2009
The year 2009 was one of toughest challenge for the SABIC but all the challenges were well
managed. Going against the environment of global economic disorder, SABIC turned up to a
very praiseworthy performance with the increase in production by 4 % and increase in sales by 5
%. Although there is decrease in the profits due to the jiggling of the price caused by world's
economic slump but remarking the overall condition of the company the performance was strong
throughout the year and it also proved the capacity to perform well out of pressure. This is all
possible because of unique and capable board and members of the company as they given very
powerful strategy on which company followed consistently in recent years. The management of
the company had acquired to build the capability and global presence, and working with the aim
to be the global leader in the field. Company and there management worked hard to improve
their business process and invested a huge capital in the development of plant and distribution
facilities, so as to efficiently exploit the growing demand. Company had also invested on
employees with a view of motivation to their dedication and talent. The acquisition has always
been a key asset for the company so it grows with the steady speed toward the awaited bold 2020
strategy. Company also invested in innovation with the view of providing clean, safer and

sustainable products to the world. The innovation in the company looks beyond of just providing
product but also looking ahead to interact with communities, stake holders and customers as well
as relate themselves to the environment and various other ethical issues. With the new
organization structure they are now capable of meet more of customer's requirement and with
very strong global buying power, improved process and policies made it possible for the
company to further integrate the global functions SABIC annual report, (2009).