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Overview The rise of Ireland’s economy in the 1990s and subsequent decline in the first years of the new millennium illustrate globalization’s impact. Companies engage in global marketing to reach new customers and increase sales, profits, and market share. This chapter characterizes the world economic environment, starting with an overview of the world economy, a survey of economic system types, a discussion of stages of market development, and balance of payments. Foreign exchange is discussed in the appendix at the end of the chapter. Objectives • To show that the economic environment determines market potential and opportunity. Capital driving force, production is uncoupled from employment, To categorize the world’s economies as market allocation systems, command systems. To categorize countries in terms of economic development: low income, lower income, and high income. To examine fast growing economies, big emerging markets (BEMs). To identify the Group of Seven (G7) and Organization for Economic Cooperation two initiatives by high-income nations to promote To show that most of the world’s income is located in the Triad—Japan, the United To evaluate market potential for a product by determining product saturation levels To explain a country’s balance of payments, trade surplus and trade deficit. and Development (OECD) as States, and Western Europe. in light of income levels. democratic ideals and free-market policies. movements are the and capitalism has vanquished communism. allocation systems, and mixed allocation middle income, upper middle
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The World Economy: An Overview The most fundamental change is the emergence of global markets; responding to new opportunities, global competitors have displace d or absorbed local ones. The integration of the world economy has increased significantly. Economic integration stood at 10 percent at the beginning of the 20th century; today, it is approximately 50 percent. Integration is particularly striking in two regions, the European Union (EU) and the North American Free Trade Area. The past decade has seen changes in the world economy: The first change is the increased volume of capital movements. Global capital movements exceed the dollar volume of global trade. Capital movements and trade determine currency value. The second change concerns the relationship between productivity and employment. Although employment in manufacturing remains steady or has declined, productivity continues to grow (e.g., in America, fewer farm employees produce more output).The third major change is the emergence of the world economy as the dominant economic unit. The fourth change is the end of the Cold War. Communism is not an effective economic system. A key policy change is to stop managing national economies with a single central plan. Finally, the personal computer revolution and the advent of the Internet era have greatly diminished the importance of national boundaries.
There are four main types of economic systems: market capitalism, centrally-planned socialism, centrally-planned capitalism, and market socialism. Classification is based on resource allocation (market versus command) and resource ownership (private versus state).
The government controls distribution. free speech. and North Korea ranked lowest. centrally-planned socialism. or free assembly). Q: What is a country’s “software”? A: “Software” is comprised of the rule of law—a country’s legal and regulatory systems and the degree to which laws are understood. Latin America. Market capitalism is practiced worldwide. South Africa. The “hardware” is the basic shell around a country’s economy. wage and price controls. monetary policy. Cuba. which provide for global market segmentation and target marketing. Demand exceeds supply. Still. The rankings form a continuum from “free” to “repressed. consumers spend money on what is available. a country needs software. there were three basic types of hardware: free-market capitalism. centrally-planned capitalism..• Market Capitalism allows individuals and firms to allocate resources and own production resources privately. embraced. India. To maximize the hardware and operating system. every country is using the same hardware: free-market capitalism. Laos. State planners make “top-down” decisions about the goods and services produced and quantities. taxation policy. Countries within a category have several common characteristics. Stages of Market Development The World Bank developed a classification based on per capita gross national product (GNP). and made workable. as are private and state resource ownership.g. Brazil. a conservative think-tank. Give an example of a country that illustrates each type of system. Argentina. Because of market capitalism’s superiority. Indonesia. South Korea. They are key to global trade despite poor 2 . and market socialism. Centrally-Planned Capitalism Command and market resource allocation are practiced simultaneously. In the Cold War era.g. Centrally-planned capitalism is an economic system in which command resource allocation is used extensively in an Environment of private resource ownership (e. China’s leaders maintain control over society but seek economic reform). All market-oriented economies do not function in the same manner • Centrally-Planned Socialism gives the state broad powers. The “operating system” is compared to a country’s broad economic policies.. Hong Kong and Singapore ranked first and second in economic freedom. Sweden).. classifies economies of more than 150 countries according to the degree of economic freedom. property rights. BEMs fall into all four stages of economic development. farmers in socialist countries offer part of their production in a free market. Mexico.g.. Government ownership of industries and individual enterprises is characteristic. Market socialism permits market allocation policies within an environment of state ownership (e. and hybrid. .) Discussion Question #1: Explain the differences between market capitalism. regulations. advertising. Singapore has no free press.” with “mostly free” and “mostly unfree” in between. The Heritage Foundation. Open to Discussion: Which Operating System Do You Use? Thomas L. banking policy. known as big emerging markets (BEMs) have experienced rapid economic growth throughout the past decade. and the black market. communism. Now. A high correlation exists between economic freedom and a nation’s level of market orientation. some aspects of “free economies” resemble command-style systems (e. and Asia. especially in North America and Western Europe. Poland. and Turkey. government consumption of economic output. These countries include: China. capital flows and foreign investment. many socialist countries have adopted it (e.g. or promotion. Several countries in Central Europe. Economic variables include: trade policy. and there is little reliance on product differentiation. Friedman compares and contrasts various types of economic systems by drawing an analogy with the elements of a computer system.
communications. China lacks democratic foundations. Brazil uses logistics software. South Africa has a modern infrast ructure and well-developed industry sectors. and heavy reliance on foreign aid iii) Political instability iv)Concentration in Africa south of the Sahara Over one third of the world lives in a low-income country with limited markets. Technology.g. whereby a plant imports materials. telephones.Limited industrialization with most people in Agriculture ii) High birth rates. Three BEMs in the upper-middle-income category are located in Latin America (Argentina. is an industrialized country with a strong economy. India’s well-developed legal and commercial codes and a middle class of approximately 100 million people have attracted many companies.126 to $9. Companies set up a subsidiary. have a per capita GNP from $3. only China and India are BEMs.S. Indonesia plays a key economic role in Southeast Asia. export-driven economic growth. i) Factories supply a growing domestic market.g. Chile. or . Discussion Question #2 : What is a Big Emerging Market (BEM)? Identify the BEMs according to their respective stages of economic development. labor-intensive industries such as toys and textiles. Innovative local companies are formidable competitors and contribute to rapid. Germany is Turkey’s top trading partner. and expanding production is the most pressing need. • Low-Income Countries have a GNP per capita of $785 or less. which has the largest economy in Africa south of the Sahara. Two-thirds of Poland’s trade is conducted with the European Union. despite high inflation. • Upper-Middle-Income Countries. China attracts foreign investment due to its vast size and market potential.. Brazil. BEM government leaders are under pressure as their developing market economies create greater income disparity. Turkey. particularly the computer revolution.655. yet Indonesia’s economy was severely affected by the Asian currency crisis of 1997. The fourth BEM is South Africa. children in the labor force and human rights issues concern trading partners. and other enterprises. Rising wages. standardized. components and equipment duty-free in return for using Mexican labor. high literacy rates. The percentage engaged in agriculture drops as people move to the industrial sector and urbanization increases (e. juxtaposes (put next to) the old and the new (e. yet horse-drawn carts are a common sight). iii) Poland has established a democratic government and privatized banking. and consumer markets are expanding (e. a NATO member. Malaysia. Mexico). advanced education. As the world’s fourth most populous nation. have a per capita GNP between $786 and $3. Of all the countries in the low-income category. Poland. • Marketing Opportunities in LDCs and Developing Countries The central problem in LDCs and developing countries is the shortage of goods and services. Despite market reforms. Indonesia. • Lower-Middle-Income Countries. called less-developed countries (LDCs). Mexico is a key U.ii) The LDCs have a major competitive advantage in mature.g. including finance. Completed products are exported to the U. trading partner due to a shared border and NAFTA. Greater competitive pressures will force firms that lag behind them. as well as: I). and trading partners worry about human rights issues and intellectual property rights.performance on human rights and the environment. Hungary)..S. low literacy rates.. and lower wages characterize these countries. and manufacturers pay duty only on value added in Mexico. Countries with the highest rates of economic growth are called newly industrializing economies (NIEs). Brazil. Market opportunities in emerging countries can be lost through indifference and preemptive foreign to reevaluate their strategies and look for new markets in the developing world. and Turkey).. joint venture. and energy. which it hopes to join by 2003. called industrializing or developing countries. Fast-growing LDCs are initiating business in countri 3 .125 and fall into early stages of industrialization.
Historically. Germany. Canada. inadequate. have a per capita GNP above $9. and the United States—the Triad—the location of 75 percent of world income as measured by GNP. and other advanced. such as industries that have not been privatized and state-owned farms. China. France. When a global crisis looms. where resource allocation is a problem. G-7 representatives coordinate policy. and Eastern Europe. Goskomstat measured the state economy of the Soviet Union. Brazil. which are advanced. Others argue that focusing resources on opportunities is universal. and Russia intend to join but must show progress towards economic reform. • The Triad Ohmae argued that successful global companies had to be equally strong in the dominant economic centers of Japan. What does the result tell you in terms of the relevance of the index to global marketers? • High-Income Countries. One study suggests that companies: look beyond per capita GNP. These countries have reached their present income level mostly through sustained economic growth. Japan.” or the Russian State Statistical Committee. weigh the benefits of being the first to offer a product or service (i. Goskomstat continues to collect data and measure production in the least productive sectors. the ascendancy of knowledge over capital are important. not customer needs and wants. The role of marketing—to identify needs and wants. They argue that for LDCs. 4 . Russian GNP might not be so severely underestimated. but they can create new markets.S. distorted. joined in 1961. India. Indonesia. consider LDCs and developing countries collectively. The service sector. information processing and exchange. or postindustrial countries.. Discussion Question #3: Turn to the Index of Economic Freedom (Table 2-1) and identify where the BEMs are ranked. industrialized. Is marketing relevant to economic development? Some say that marketing is for affluent countries to direct resources. developed. production and increased output are key. Japan. Another institution for high-income countries is the Organization for Economic Cooperation and Development (OECD). South Korea is the only BEM to achieve high-income country status. Organizations face difficulty in expanding shares in existing markets. first-mover advantage). Britain. Opportunities in a postindustrial society depend on new products and innovations because ownership levels for basic products are high.S. the U. Among high-income countries. The phrase “postindustrial countries” describes the United States. Western Europe. at all levels of economic development. and set realistic deadlines for results. high-income societies. Marketing can be the link that relates resources to opportunity and facilitates need satisfaction. If those statistics were balanced by equivalent numbers from the private sector. Innovation is derived from the codification of theoretical knowledge rather than from “random” invention. Open to Discussion: How Big is the Russian Economy? Economic information and statistics coming from Russia are inaccurate. Sweden. and biased. Canada and Italy form the Group of Seven (G-7) to steer the global economy to prosperity and stability. The main source of economic statistics is an agency called “Goskomstat.competition.e. The expanded Triad includes the entire Pacific region.656. and respond to them—is equal in all countries. Mexico..OECD members review economic and social policies that affect world trade. The 29 OECD nations believe in market-allocation economic systems and pluralistic democracy. The U.
and public aid transactions between countries. merchandise imports. The capital account is a record of all long-term direct investment. Discussion Question #5: A friend is distressed to learn that America’s merchandise trade deficit hit a record $248 billion in 1998. households who own a product. it gives up reserves when the net shows a deficit. that is. the percentage of potential buyers or in India is limited to 1 percent of the population). the outflow of money to pay for imports exceeds the inflows of money for sales of exports. Japan offsets its trade surplus with an outflow of capital. while the Japanese own more U. because unsophisticated marketers may be reluctant to enter a market depicted by such bleak numbers. ownership of telephones A country accumulates reserves when the net of its current and capital account transactions shows a surplus. and government securities. The estimated amount of underreported production is 45 percent..S. • Marketing Implications of the Stages of Development The stages of economic development guide marketers in evaluating product saturation levels. product saturation levels are low (e.S. Foreign direct investment has grown five times faster than world trade and 10 times faster than GNP.g. merchandise trade deficit with Japan in 2000 reached $81 billion. consumers and businesses own more Japanese products. and. and other short. In countries with low per capita income.S. payment for U. The current account is a record of all recurring trade in merchandise and services.and long-term capital flows. You want to cheer your friend up by demonstrating that the trade picture is not as bleak as it sounds. Discussion Question #4: A manufacturer of satellite dishes is assessing the world market potential for his products. One consequence is slowed growth. The U. real estate. He asks you if he should consider developing countries as potential markets. A country with a negative current account balance has a trade deficit. private gifts. while the United States offsets its trade deficit with an inflow of capital. How would you advise him? Balance of Payments The balance of payments is a record of all economic transactions between the residents of a country and the world. The United States posts balance of payment deficits while Japan has surpluses. U. It is divided into the current and capital accounts. World merchandise trade has grown faster than world production. The minus signs signify outflows of cash. portfolio investment. A country with a positive current account balance has a trade surplus.Q: What is the impact of the skewed numbers? A: The faulty numbers create a ripple effect worldwide. 5 . What do you say? Trade Patterns Import and export growth has outpaced the rate of GNP increase.S.
Trade growth outside industrialized countries has been accelerating. services surplus—services exports minus imports—stood at $80 billion.S. protect intellectual property or patents (e. China). Industrialized nations increased world trade by trading more among themselves. China’s fourth place in the export rankings underscores its role as an export powerhouse. royalties. two-thirds of world exports were generated by industrialized countries and one third by developing countries.The Triad countries account for two-thirds of world exports and imports. • Merchandise Trade In 1999.S. The United States is a major service trader. business and legal services. The top 20 exporting and importing countries of the world are determined by the International Monetary Fund. 6 . market. Low. more than one quarter of total U. merchandise trade deficit. Services exports in 2000 totaled $95 billion.S. and license fees. U.g.9 trillion.A major issue between the high and lower income countries is trade in services. Exports to the United States will surge when China joins the World Trade Organization. and even uppermiddle-income countries do not enforce copyrights. and less with the rest of the world. Mexico’s trade surplus with the U. Mexico’s export growth reflects the impact of NAFTA.S. lower. This surplus partially offset the U.middle. the dollar value of world trade exceeded $5. exports. Countries that export computer software. results from American firms assembling products in Mexican factories for the U. music. education.. and video entertainment lose income. • Services Trade The fastest-growing sector of world trade is in services—travel and entertainment.S. In 1997. which reached a record $450 billion in 2000.