GLOBAL

MARKETING
MANAGEMENT Chapter 2 PowerPoint
Sixth Edition Economic Environment
MASAAKI KOTABKE | KRISTIAAN HELSEN

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 1

 Chapter Overview

1. Intertwined World Economy

2. Country Competitiveness
3. Evolution of Cooperative Global Trade Agreements
4. U.S. Position in Foreign Direct Investment and Trade
5. Information Technology and the Changing Nature
of Competition
6. Regional Economic Arrangements
7. Multinational Corporations

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 Introduction

 In 2008, the annual global merchandise trade amounted

to $16.8 trillion.
 From 1997 to 2007, world GDP grew more than 30
percent.
 In the same period, total world exports of merchandise
increased by more than 60 percent.
 The World Bank (at the time of this writing) predicted
that the global GDP growth would slow down to 2.5
percent in 2012 and 3.1 percent in 2013.

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 Exhibit 2-1: Growth in the Volume of World
Merchandise Trade and GDP, 2001-11

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 Introduction

According to the World Trade Organization (WTO), the top

five merchandise exporting countries in 2012 were:

China ($1,904 billion),

European Union ($1,791 billion)
United States ($1,497 billion)
Germany ($1,408 billion)
Japan ($788 billion)

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 Introduction

• Collectively, the top five export nations accounted for

35% of global trade in 2012.

• The Triad Regions (North America, Western Europe, and

Japan) of the world collectively produced nearly 60
percent of world GDP in 2007, down from 78 percent in
2004.

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 Introduction

• The net result of these factors?

– Increased interdependence of countries/economies
– Increased competitiveness
– Need for firms to keep a constant watch on the
international economic environment.

• Consumers and companies in the U.S. and Japan are able

to find domestic sources for their needs because of their
diversified and extremely large economies.

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 1. Intertwined World Economy

• Despite the increasingly intertwined world economy, the

United States is still relatively more insulated from the
global economy than other nations. In 2011, the U.S.
economy was about $15.1 trillion and about 15 percent
of what Americans consumed was imported in the
United States.

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 Exhibit 2-2: Top 10 Exporters and Importers in
World Merchandise Trade, 2012

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 1. Intertwined World Economy

• The larger the country’s domestic economy, the less

dependent it tends to be on exports and imports relative
to its GDP.
• Intertwining of economies by the process of
specialization due to international trade leads to job
creation in both the exporting and importing country.
• Foreign direct investment (FDI) involves investment in
manufacturing and service facilities in a foreign country.

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 1. Intertwined World Economy

• As firms invest in manufacturing and distribution facilities

outside their home countries to expand into new
markets around the world, they have added to the stock
of foreign direct investment.
• The increase in foreign direct investment has also been
promoted by the efforts of many national governments
to woo multinationals.
• Portfolio investment or indirect investment refers to
investments in foreign countries that are withdrawable at
short notice, such as investments in foreign stocks and
bonds.

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 Exhibit 2-3: Foreign Direct Investment Inflows,
1980 - 2011

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 1. Intertwined World Economy

• The weekly volume of international trade in currencies

exceeds the annual value of the trade in goods and
services.
• All nations with even partially convertible currencies are
exposed to the fluctuations in the currency markets.
• A rise in the value of the local currencies make exports
more expensive; a rising currency value also deters
foreign investment in a country and may encourage
outflow of investment.

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 1. Intertwined World Economy

• Examples of severe currency fluctuations are the 1995

Mexican meltdown, and the Asian financial crisis (1997-
1999).
• Unfortunately, the influence of these short-term money
flows are nowadays far more powerful regarding
exchange rates than an investment by a Japanese or
German automaker.
• Recent examples of financial crisis occurred in Argentina
and Brazil (2002).

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 2. Country Competitiveness

• Country competitiveness refers to the productiveness of

a country, which is represented by its firms’ domestic and
international productive capacity.
• Country competitiveness is not fixed.
• The role of human skill resources has become
increasingly important as a primary determinant of
industry and country competitiveness.

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 2. Country Competitiveness

• In 2008-9, one Asian Tiger (Singapore at #5) was among

the world’s top 10 economies. Others were the U.S.,
Switzerland, Denmark, Sweden, Finland, Germany,
Netherlands, Japan and Canada (see Exhibit 2-4).
• Taiwan, another Asian Tiger, dropped from #5 to #17
between 2005 and 2008.
• The U.S. and Switzerland have been the most innovative
in the last three decades
• Other OECD countries (especially Japan) have been
increasingly catching up.

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 Exhibit 2-4: Global Competitiveness Ranking

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 Exhibit 2-5: Change in Country Innovativeness:
A Key to a Country’s Long-Term Competitiveness

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 3. Emerging Economies

• Over the next two decades, the big emerging markets

(BEMs) will hold the greatest potential for U.S. exports
• Largest BEMs: Chinese economic area (including China,
Hong Kong region, and Taiwan), India, C.I.S. (Russia,
Central Asia, and the Caucasus states), South Korea,
Mexico, Brazil, and Argentina
• B.R.I.C.- Brazil, Russia, India, China
• Each BEM offers opportunities and challenges for local
policy makers, businesses and the international business
and economic community

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 Exhibit 2-6: Leading Emerging Economies in 2008

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 4. Evolution of Cooperative
Global Trade Agreements
• GATT (General Agreements on Tariffs & Trade):
– After 1950, GATT succeeded ITO.
– The main operating principle of GATT was the concept of
most favored nations (MFN).
– GATT was successful in lowering trade barriers.

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 4. Evolution of Cooperative
Global Trade Agreements
• WTO (World Trade Organization):
– The eighth and last round of GATT talks – called the
Uruguay Round (1986-1994) established an international
body called the WTO which took effect on January 1,
1995.
– As of July 2008, WTO had 153 member countries.
– WTO has statutory powers to adjudicate trade disputes
among nations and has its own secretariat.
– WTO is the new legal and institutional foundation for a
multilateral trading system.

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 4. Evolution of Cooperative
Global Trade Agreements
• WTO’s ninth round---called the “Doha Development
Agenda” (Doha Round) was launched in Doha, Qatar in
November 2001 (see Exhibit 2-7). Interim deal in
December 2005 to end farm export subsidies by 2013
prevented collapse of the latest round of the talks.
• The Doha Round of 2001 facilitated the way for China
and Taiwan to get full membership in the WTO.

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 Exhibit 2-7: Agenda for the Doha Round

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 4. Evolution of Cooperative
Global Trade Agreements
• Although WTO is a global institutional proponent of free
trade, it is not without critics.
• The WTO dispute settlement mechanism is faster, more
automatic, and less susceptible to blockages than the old
GATT system.
• The WTO Work Program on Electronic Commerce is in
the process of defining the trade-related aspects of
electronic commerce that would fall under the
parameters of WTO mandates.

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 5. Information Technology and the Changing
Nature of Competition
• Information technology and the changing nature of
competition have created many challenges for the firms.
• Over the Internet, any piece of electronically represented
intellectual property can be copied.
• The Trade Related Aspects of Intellectual Property
Rights (TRIPS) Agreement was concluded as part of the
GATT Uruguay Round. Update to accord ensuring patent
protection does not block developing countries’ access to
affordable medicines is the top of the agenda.

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 5. Information Technology and the Changing
Nature of Competition
• Proliferation of E-Commerce and Regulations: Countries’
regulators have not kept pace with the rapid proliferation
of international e-commerce and Internet-related
activities.
• In many countries, rules and regulations are vague
regarding e-commerce transactions.
• The United Nations Commission on International Trade
Law (UNCITRAL) has formed a Working Group on
Electronic Commerce to reexamine these treaties.

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 6. Regional Economic Arrangements

• An evolving trend in international economic activity is

the formation of multinational trading blocs.
• There are over 120 regional free trade areas worldwide.
• Market groups take many forms, depending on the
degree of cooperation and inter-relationships, which lead
to different levels of integration among the participating
countries.

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 6. Regional Economic Arrangements

• Types of Regional Economic Arrangements:

– Free Trade Areas: Formal agreement among two or more
countries to reduce or eliminate customs duties and
nontariff barriers. Examples: NAFTA, MERCOSUR, CAFTA-
DR & FTAA (proposed and currently stalled)
– Customs Union: Addition of common external tariffs to the
provisions of free trade agreements. Example: ASEAN.

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 6. Regional Economic Arrangements

– Common Market: Eliminates all tariffs and other barriers,

adopts a common set of external tariffs on nonmembers,
and remove all restrictions on the flow of capital and labor
among member nations. Example: European Union.
– Monetary Union: Represents the fourth level of integration
with a single currency among politically independent
countries. Example: EU and the euro.
– Political Union: Highest level of integration resulting in a
political union. Sometimes, countries come together in a
loose political union for historical reasons, as in the case of
the British Commonwealth which exists as a forum for
discussion and common historical ties.

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 7. Multinational Corporations

• The U.S. government defines a multinational

corporations (MNC) for statistical purposes as a company
that owns or controls 10 percent or more of the voting
securities, or the equivalent, of at least one foreign
business enterprise.
• At present, there are 78,000 MNCs with 780,000
affiliates in foreign countries.
• The outward FDI stock reached $21.2 trillion in 2011—a
little more than a tenfold increase since 1990 ($2 trillion).

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 7. Multinational Corporations

• In 1970, of the 7,000 multinationals identified by the

United Nations, more than half were from two countries:
the United States and Britain.
• By 1995, less than half of the 36,000 multinationals
identified by the United Nations came from four
countries: the United States, Japan, Germany, and
Switzerland.
• The nation-state, while considerably weaker than its
nineteenth century counterpart, is likely to remain alive
and well.

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 Exhibit 2-8: Selected Indicators of
Foreign Direct Investment and International
Production , 1990-2011

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 7. Multinational Corporations

• Currently, factors such as currency movements, capital

surpluses, faster growth rates, and falling trade and
investment barriers have all helped multinationals from
other countries join the cross-border fray.
• It is not unusual for a start-up firm to become global at
its inception. Those firms are known as “born global.”

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