Within the past decade, there have been several remarkable changes in the world economy that hold important implications for business The likelihood of business success is much greater when plans and strategies are based on the new reality of the changed world economy: Capital movements rather than trade have become the driving force of the world economy Production has become ³uncoupled´ from employment The world economy dominates the scene. The macroeconomics of individual countries no longer control economic outcomes
The growth of commerce via the Internet diminishes the importance of national barriers. The first change is the increased volume of capital movements The dollar value of world trade is greater than ever before Trade in goods and services is running at roughly $ 4 trillion per year, but the London Eurodollar market turns over $ 400 billion each working day That totals $ 100 trillion per year ± 25 times the dollar value of world trade In addition, foreign exchange transactions are running at approximately $ 1 trillion per day worldwide, which is $ 250 trillion per year ± 40 times the volume of world trade in goods and services
There is an inescapable conclusion in these data: Global capital movements far exceed the volume of global merchandise and services trade This explains the bizarre combination of U.S trade deficits and a continually rising dollar during the first half of the 1980s Previously, when a country ran a deficit on its trade accounts, its currency would depreciate in value Today, it is capital movements and trade that 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
The pattern is especially clear in American agriculture, where fewer farm employees produce more output In the United States, manufacturing holds a steady 23 to 24 percent of gross national product (GNP) This is true of all the other major industrial economies as well Manufacturing is not in decline ± it is employment in manufacturing that is in decline Countries such as the United Kingdom, which have tried to maintain blue-collar employment in manufacturing, have lost both production and jobs for their efforts The third major change is the emergence of the world economy as the dominant economic unit
Company executives and national leaders who recognize this have the greatest chance of success Those who do not recognize this fact will suffer decline and bankruptcy (in business) or overthrow (in politics) The real secret of the economic success of Germany and Japan is the fact that business leaders and policy makers focus on the world economy and world markets; a top priority for government and business in both Japan and Germany has been their competitive position in the world In contrast, many other countries, including the
United States, have focused on domestic objectives and priorities to the exclusion of their global competitive position In the 1990s the greatest economic change was the end of the Cold War The success of the capitalist market system had caused the overthrow of communism as an economic and political system The overwhelmingly superior performance of the world¶s market economies has led socialist countries to renounce their ideology A key policy change in such countries has been the abandonment of futile attempts to manage national economies with a single central plan.
There are three types of economic systems: capitalist, socialist, and mixed This classification is based on the dominant method of resources allocation: Market allocation, Command or central allocation, and mixed allocation, respectively.
A market allocation system is one that relies on consumers to allocate resources Consumers ³write´ the economic plan by deciding what will be produced by whom The market system is an economic democracy ± citizens have the right to vote with their pocketbooks for the goods of their choice The role of the state in a market economy is to promote competition and ensure consumer protection The United States, most Western European countries, and Japan ± the triad countries that account for three quarters of gross world product
- are examples of predominantly market economies The clear superiority of the market allocation system in delivering the goods and services that people need and want has led to its adoption in many formerly socialist countries.
In a command allocation system, the state has broad powers to serve the public interest These include deciding which products to make and how to make them Consumers are free to spend their money on what is available, but decisions about what is produced and, therefore, what is available are made by state planners Because demand exceeds supply, the elements of the marketing mix are not used as strategic variables There is little reliance on product differentiation, advertising, and promotion; distribution is handled
by the government to cut out ³exploitation´ by intermediaries Three of the most populous countries in the world ± China, the former USSR, and India ± relied on command allocation systems for decades All three countries are now engaged in economic reforms directed at shifting to market allocation systems The prediction made by India¶s Jawaharlal Nehru nearly a half century ago regarding the imminent demise of capitalism has been refuted Market reforms and nascent capitalism in many parts of the world are creating opportunities for large-scale investments by global companies
Indeed, Coca-Cola returned to India I 1994, two decades after being forced out by the government A new law allowing 100 percent foreign ownership of enterprises helped pave the way By contrast, Cuba stands as one of the last bastions of the command allocation approach.
There are, in reality, no pure market or command allocation systems among the world¶s economies All market systems have a command sector, and all command systems have a market sector; in other words, they are ³mixed´ In a market economy, the command allocation sector is the proportion of gross domestic product (GDP) that is taxed and spent by government For the 24 member countries of the Organization for Economic Cooperation and Development (OECD), this proportion ranges from 32 percent of GDP in the United States to 64% in Sweden
In Sweden, therefore, where 64% of all expenditures are controlled by government, the economic system is more ³command´ than ³market´ The reverse is true in the United States Similarly, farmers in most socialist countries were traditionally permitted to offer part of their production in a free market China has given considerable freedom to businesses and individuals in the Guangdong province to operate within a market system Still, China¶s private sector constitutes only 1 to 2 percent of national output.
Stages of Market Development
Global country markets are at different stages of development GNP per capita provides a very useful way of grouping these countries Using GNP as a base, we have divided global markets into four categories Although the income definition for each of the stages is arbitrary, countries in each of the four categories have similar characteristics Thus, the stages provide a useful basis for global market segmentation and target marketing
The categories are shown in table For complete information about the economic status of each country and predictions for 2010 and 2020.
Low-income countries, also known as preindustrial countries, are those with incomes of less than $ 786 per capita They constitute 37% of the world population but less than 3% of world GNP The following characteristics are shared by countries at this income level: 1. Limited industrialization and a high percentage of the population engaged in agriculture and subsistence farming 2. High birthrates
3. Low literacy rates 4. Heavy reliance on foreign aid 5. Political instability and unrest 6. Concentration in Africa, south of the Sahara In general, these countries represent limited markets for all products and are not significant locations for competitive threats Still, there are exceptions; for example, in Bangladesh, where GNP per capita is $ 366, a growing garment industry has enjoyed burgeoning exports.
Lower-middle-income countries (also known as less developed countries or LDCs) are those with a GNP per capita of more then $ 786 and less than $ 3,125 These countries constitute 39% of the world population but only 11% of world GNP These countries are at the early stages of industrialization Factories supply a growing domestic market with such items as clothing, batteries, tires, building materials, and packaged foods The countries are also locations for the production
of standardized or mature products such as clothing for export markets Consumer markets in these countries are expanding LDCs represent an increasingly competitive threat as they mobilize their relatively cheap ± and often highly motivated ± labor to serve target markets in the rest of the world LDCs have a major competitive advantage in mature, standardized, labor-intensive products such as athletic shoes Indonesia, the largest country in Southeast Asia, is a good example of an LDC on the move: Despite political problems GNP per capita has risen from $ 250 in 1985 to $ 1,176 in 2000 Several factories there produce athletic shoes under contract for Nike
Income group by per capita GNP High-income Countries (GNP per Capita > $ 9,656) Upper-Middle-Income Countries (GNP per Capita > $ 3,126 but < $ 9,655 Lower-Middle-Income Countries (GNP per Capita > $ 785 but < $ 3,125) Low-Income Countries (GNP per Capita < $ 785)
2000 GNP 2000 GNP % of ($ millions) per Capita ($) World GNP 24,259 2,031 24,722 4,503 81 7
2000 Population (million) 981 451
(Table) Stages of Market Development