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Introduction

The Global
This chapter includes:
Economic
• An overview of the world economy
Environment
• A survey of economic system types
• The stages of market development
• The balance of payments
Global Marketing
Chapter 2
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The World Economy— The World Economy—

An Overview An Overview
• In the early 20th • The new realities:
century economic – Capital movements have replaced trade as
integration was at the driving force of the world economy
10%; today it is 50%
– Production has become uncoupled from
• EU and NAFTA are employment
very integrated
– The world economy, not individual
• Global competitors countries, is the dominating factor
have displaced or
absorbed local ones
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The World Economy— Economic Systems

An Overview
The new realities, continued:
Resource Allocation
• 75-year struggle between capitalism Market Command
and socialism has almost ended
Private Centrally
• E-Commerce diminishes the importance Market
Capitalism Planned
of national barriers and forces Resource Capitalism

companies to re-evaluate business Ownership Market Centrally

models State Socialism Planned
Socialism

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Market Capitalism Western Market Systems

Type of System Key Characteristics Countries
• Individuals and firms allocate resources Anglo-Saxon Private ownership US, Canada,
• Production resources are privately Britain
free enterprise Great

owned Minimal social safety net

• Driven by consumers Social Market Private ownership France, Germany,

• Government’s role is to promote Economy Model Inflexible employment Italy

competition among firms and ensure policies, “social partners”

consumer protection
Nordic Model Mix of state and private Sweden, Norway

2-7 ownership, large safety net 2-8

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High taxes

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Centrally Planned Socialism Centrally Planned Capitalism

• Opposite of market capitalism
• State holds broad powers to serve the public • Economic system in which command
interest; decides what goods and services are
produced and in what quantities
resource allocation is used extensively
• Consumers can spend only what is available
in an environment of private resource
• Government owns entire industries and ownership
controls distribution • Example:
• Demand typically exceeds supply – Swedish government controls 2/3s of all
• Little reliance on product differentiation, spending; a hybrid of CPS and capitalism
advertising, pricing strategy
• China, India, and the former USSR now
moving towards some economic freedom
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Economic Freedom—
Economic Freedom
2009 Rankings
• Rankings of economic freedom among countries Free Repressed
– “free” “mostly free” “mostly unfree” “repressed” 1. Hong Kong 169. Turkmenistan
• Variables considered include such things as: 2. Singapore 170. São Tomé & Príncipe
171. Libya
– Trade policy 3. Australia
172. Comoros
– Taxation policy 4. Ireland
173. Dem. Rep. Congo
5. New Zealand
– Capital flows and foreign investment 174. Venezuela
6. U.S. 175. Eritrea
– Banking policy
7. Canada 176. Burma
– Wage and price controls
8. Denmark 177. Cuba
– Property rights 9. Switzerland 178. Zimbabwe
– Black market 10. U.K. 179. North Korea
2-11 Not ranked: Afghanistan, Iraq, Liechtenstein, Sudan 2-12
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Stages of Market Development
• The World Bank has defined four categories
of development using Gross National Income
(GNI) as a base
• BEMs, identified 10 years ago, were
countries in Central Europe, Latin America,
and Asia that were to have rapid economic
growth
• Today, the focus is on BRIC: Brazil, Russia,
India, and China
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Lower-Middle-Income
Countries
• GNI per capita: $936 to $3,705
• Characteristics
– Rapidly expanding consumer markets
– Cheap labor
– Mature, standardized, labor-intensive
industries like textiles and toys
• BRIC nation is China
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Low-Income Countries
• GNP per capita of $936 or less
• Characteristics
– Limited industrialization
– High percentage of population in farming
– High birth rates
– Low literacy rates
– Heavy reliance on foreign aid
– Political instability and unrest
– Concentrated in Sub-Saharan Africa
Indian tailor
– India is the only BRIC country
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Upper-Middle-Income
Countries
• GNP per capita: $3,706 to $11,455
• Characteristics:
– Rapidly industrializing, less agricultural employment
– Increasing urbanization
– Rising wages
– High literacy rates and advanced education
– Lower wage costs than advanced countries
• Also called newly industrializing economies (NIEs)
• Examples: Brazil, Russia, Malaysia, Chile,
Venezuela, Hungary
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Marketing Opportunities in Mistaken Assumptions about

LDCs LDCs
1. The poor have no money.
• Characterized by a shortage of goods and
2. The poor will not “waste” money on non-
services essential goods.
• Long-term opportunities must be nurtured in 3. Entering developing markets is fruitless
these countries because goods there are too cheap to make
– Look beyond per capita GNP
a profit.
4. People in BOP (bottom of the pyramid)
– Consider the LDCs collectively rather than
countries cannot use technology.
individually
5. Global companies doing business in BOP
– Consider first mover advantage countries will be seen as exploiting the
– Set realistic deadlines poor.
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High-Income Countries High-Income Countries

• GNI per capita: $11,456 or more
• Also known as advanced, developed,
industrialized, or postindustrial
countries
• Characteristics:
– Sustained economic growth through
disciplined innovation
– Service sector is more than 50% of
GNI
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• Characteristics, continued:
– Importance of information processing and
exchange
– Ascendancy of knowledge over capital,
intellectual over machine technology,
scientists and professionals over engineers
and semiskilled workers
– Future oriented
– Importance of interpersonal relationships
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OECD, the Organization for Economic

G-8, the Group of Eight Cooperation and Development

• Goal of global economic stability and • 30 nations

prosperity
• Post-WW II European origin
– U.S.
– Japan • Canada, U.S. (1961), Japan (1964)
– Germany • Promotes economic growth and social
– France well-being
– Britain
– Canada
• Focuses on world trade, global issues,
– Italy labor market deregulation
– Russia (1998) – Anti-bribery conventions
2009 G-8 Leaders in Italy
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The Triad Product Saturation Levels

• U.S., Western Europe, and Japan • The % of potential buyers or

• Represents 75% of world income households who own a product
• Expanded Triad includes all of North • India: 20% of people have telephones
America and the Pacific Rim and most • Autos: 1 per 43,000 Chinese; 21 per
of Eastern Europe 100 Poles; 8 per 1,000 Indians
• Global companies should be equally • Computers: 1 PC per 6,000 Chinese; 11
strong in each part PCs per Poles; 34 PCs per EU citizen

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Balance of Payments Balance of Payments

• Record of all economic transactions between

the residents of a country and the rest of the
world
– Current account–record of all recurring trade in
merchandise and services, and humanitarian aid
• trade deficit—negative current account
• trade surplus—positive current account
– Capital account–record of all long-term direct
investment, portfolio investment, and capital flows

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Top Exporters in 2004 Top Importers in 2004

___In US$ billions____ _____% of Total____ ___In US$ billions___ _____% of Total____
1. Germany 912 1. EU 18.1 1. U.S. 1,526 1. U.S. 21.8
2. U.S. 819 2. U.S. 12.3 2. Germany 717 2. EU 18.3
3. China 593 3. China 8.9 3. China 561 3. China 8.0
4. Japan 566 4. Japan 8.5 4. France 466 4. Japan 6.9
5. France 449 5. Canada 4.8 5. Great Britain 464 5. Canada 4.0
6. Netherlands 358 6. S. Korea 3.8 6. Japan 455 6. South Korea 3.2
7. Italy 349 7. Mexico 2.8 7. Italy 351 7. Mexico 3.0
8. Great Britain 347 8. Russia 2.8 8. Netherlands 319 8. Taiwan 2.4
9. Canada 317 9. Taiwan 2.7 9. Belgium 286 9. Switzerland 1.6
10. Belgium 307 10. Malaysia 1.9 10. Canada 280 10. Australia 1.6
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Overview of
International Finance
• Foreign exchange makes it possible to
do business across the boundary of a
national currency
• Currency of various countries are traded
for both immediate (spot) and future
(forward) delivery
• Currency risk adds turbulence to global
commerce
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Purchasing Power Parity (PPP)
The 2008 Big Mac Index
• Is a certain currency over/under-valued
compared to another?
• Assumption is that the Big Mac in any country
should equal the price of the Big Mac in the
U.S. after being converted to a dollar price 2-31
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Foreign Exchange
Market Dynamics
• Supply and Demand interaction
– Country sells more goods/services than it buys
– There is a greater demand for the currency
– The currency will appreciate in value
Exchange Risks and Gains in Foreign Transactions
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Managing Economic Exposure
• Economic exposure refers to the impact of
currency fluctuations on the present value of the
company’s future cash flows
• Two categories of economic exposure:
– Transaction exposure is from sales/purchases
– Real operating exposure arises when currency
fluctuations, together with price changes, alter a
company’s future revenues and costs
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Managing Economic Exposure Looking Ahead to Chapter 3

• Numerous techniques and strategies • The Global Trade Environment

have been developed to reduce
exchange rate risk
– Hedging involves balancing the risk of
loss in one currency with a corresponding
gain in another currency
– Forward Contracts set the price of the
exchange rate at some point in the future
to eliminate some risk

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