The Economic Environment

Reading List

• John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, Reid W. Click (2022). INTERNATIONAL
BUSINESS Environments & Operations, 17th EDITION, Pearson, Chapter 4
• Czinkota, M. R., Ronkainen, I. A., & Moffett, M.H. (2011). International business. 8 th Edition, John
Wiley, Chapters 2-3
 International Economic Analysis
Figure 1 Economic Factors Affecting International Trade and Business
Operations
Who’s Who in the Global Business
Environment

• Types of economics
• Developed economy
• Developing economy
• Emerging economy
In absolute terms, business activity, largely powered by growing globalization,
has increased significantly. Uneven national performance requires that
managers track economies, evaluating event san d trends to spot opportunities
and preempt risks. Interpreting the complexity, dynamism, and
interdependencies spanning 217 countries, is challenging. Complicating
analyses is that despite extensive overlaps, fundamentally, no two economies
are identical. In ITBO, the single most comprehensive indicator is the
development level of a county. The IMF, UN, and World Bank use a
framework that classifies a nation as a developed economy, developing
economy, or emerging economy.

A developed economy has a robust economic environment marked by wide-

ranging activities, efficient capital movement, stable institutions, extensive
infrastructure, international trade and investments, advanced technologies, and
higher economic freedom. A dominant trend in developed economies for the
past generation has been offshoring manufacturing to higher productivity
factories in lower-cost emerging and developing economies.
Generally, a developing economy has an uneven economic environment that
is marked by narrow market activities, inefficient capital movement,
resistance to foreign ownership, trade restrictions, imperfect competition,
unstable institutions, limited infrastructure, sketchy technologies, and lower
economic freedom. The Base of the Pyramid is the largest, but poorest,
socioeconomic group in the world.

Emerging economies exhibit improving productivity, rising income, and

growing prosperity, particularly relative to slower growing developing
economies.
 Emerging Economies
Map 1 Emerging Economies of the World

Source: MSCI Emerging Markets Index. Retrieved January 22, 2020, from
https://www.msci.com/market-classification
Economic Freedom

• What is economic freedom?

• Measuring economic freedom
• The value of economic freedom
• The prevalence of economic freedom
• Economic freedom by type of economic environment
• The paradox of promise versus prevalence
• The scale and scope of the differences between developed, developing, and
emerging economies challenge analysis. A key idea, namely economic
freedom, provides a useful perspective. This idea of economic freedom is a
robust perspective to assess the principles and practices of an economy.
Economic freedom is the “absolute right of property ownership, fully realized
freedoms of movement for labor, capital, and goods, and an absolute absence of
coercion or constraint of economic liberty beyond the extent necessary for
citizens to protect and maintain liberty itself.”
• Economic freedom is about diffusing economic decision making from the state
throughout the economy and, in doing so, empowering ordinary people with
more opportunities and more choices. For businesses, economic freedom
supports confidence in the legitimacy of property rights, liberty to use the
factors of production, flexibility to organize goods and services, and protection
from undue political interference. Economic freedom creates opportunities and
boosts productivity, functioning as the critical link between ambition and action.
Successful entrepreneurs map paths that others follow to build better lives.
Economic freedom does not signify the absence of government. Ultimately,
freedom requires protection.
• The Economic Freedom Index estimates economic freedom in a particular
nation. In principle, this index measures the degree that a nation accepts
Adam Smith’s thesis that “basic institutions that protect the liberty of
individuals to pursue their own economic interests result in greater
prosperity for the larger society
Dimensions of the Economic Freedom Index (1 of 2)
Table 1 Dimensions of the Economic Freedom Index
Dimensions of the Economic Freedom Index (2 of
2)

Table 2 Economic Freedom: Classification and Characteristics

 Chart on Economic Freedom and
Standard of Living
Figure 2 Economic Freedom and the Standard of Living

Sources: Terry Miller, Anthony B. Kim, James M. Roberts, and Patrick Tyrrel, 2020 Index of Economic
Freedom (Washington: The Heritage Foundation, 2020),
http://www.heritage.org/index and International Monetary Fund, World Economic Outlook Databasehttp
s://bit.ly/3eWOIHl (accessed July, 20, 2020).
Map of Economic Freedom (1 of 2)
Map 2 The Distribution of Economic Freedom

Source: Terry Miller, Anthony B. Kim, James M. Roberts, and Patrick Tyrrel, 2020 Index of
Economic Freedom (Washington, DC: The Heritage Foundation and Dow Jones & Co., Inc.,
2020).
Map of Economic Freedom (2 of 2)
Table 3 Average Freedom Scores by Type of Economic
Environment (in %)
Types of Economic Systems
Figure 3 Types of Economic Systems
Wherever they go, managers question how the host government might regulate the market, authorize property
rights, implement fiscal and monetary policies, and interpret the standards of economic freedom. Evaluating
the particular type of economic system in a country enhances analysis.

The market economy is an economic system whereby individuals, rather than the government, make most
decisions is a market economy. It is anchored in the doctrine of capitalism and its thesis that private
ownership confers inalienable property rights that legitimize the profits earned by one’s initiative, investment,
and risk. Optimal resource allocation follows from consumers exercising their freedom of choice and
producers responding accordingly.

In theory, communism champions state ownership of resources and control of economic activity. Nominally a
political ideology, communism calls for an egalitarian, classless, and ultimately stateless society based on the
government’s command of the economy (the instrumentality of attaining the Marxian mandate, “From each
according to his ability, to each according to his need”). Implementing this system requires the state adopt a
command economy in which it owns and controls the factors of production.

Most economies, broadly labeled mixed economies, fall between the market and command types. A mixed
economy is a system in which economic decisions are principally market driven and ownership is largely
private, but the government intervenes, from a little to a lot, in valuing assets, allocating resources, regulating
activities, and organizing markets. Put simply, the state reasons that it is the government’s responsibility to
make strategic decisions about strategic industries.
Assessing Economic Development,
Performance, and Potential (1 of 3)

• Ways to measure an economy

• Monetary
• GNI (Gross National Income)
• GDP (Gross Domestic Product)
• GNP (Gross National Product)
Assessing Economic Development,
Performance, and Potential (2 of 3)
• Improving economic analytics
• Rate of economic growth
• Population size
• Purchasing Power Parity
• The shadow economy
Assessing Economic Development,
Performance, and Potential (3 of 3)
Table 3 The 10 Largest Economies, GDP Adjusted for Purchasing Power Parity

Rank Country Population GDP by PPP Percent of World Economic

(millions) (US$ trillions) Economy Freedom Score

1 China 1,341 29.47 21.62 58.4

2 United States 322 22.32 16.38 76.8

3 India 1,267 12.36 9.07 62.2

4 Japan 127 5.89 4.32 72.1

5 Germany 83 4.59 3.37 73.5

6 Russia 142 4.52 3.32 58.9

7 Indonesia 252 4 2.93 65.8

8 Brazil 203 3.6 2.64 51.9

9 United
Kingdom 63 3.24 2.38 78.9

10 France 64 3.16 2.32 63.8

Blank Blank

World 7,556,278 $135.24 68.34

Sources: International Monetary Fund 2019 and the 2019 Index of Economic Freedom.
Sustainability in Economies
• Green Economics
• Sustainability
• Net National Product (NNP)
• Genuine Progress Indicators (GPI)
• Human Development Index (HDI)
Stability in Economies
• Happynomics
• Your Better Life Index (YBLI)
• Gross National Wellness (GNW)
• Gross National Happiness (GNH)
• Happy Planet Index (HPI)
 Elements of Economic Analysis (1 of 2)
Table 4 Key Components of Economic Analysis
Dimension Specification Implication

Balance of Summary of an economy’s trade and financial Indicates if a country has sufficient savings to pay for
Payments (BOP) transactions, as conducted by individuals, its imports as well as if it produces enough income to
businesses, and government agencies, with the finance growth.
rest of the world.

Deflation General decline in prices, often caused by a Slows economic growth; anticipating lower prices,
reduction in the supply of money or credit or consumers defer purchases, thereby risking a
declining aggregate demand. deflationary spiral. Increases the real value of debt.

Foreign Direct Controlling ownership in a business enterprise in Promotes development, job expansion,
Investment one country by an entity based in another industrialization, and exports. Transfers skills and
country. technologies.

Income The distribution of income among a nation’s Equality stabilizes society and opens opportunities;
Distribution population; estimated by the GINI coefficient. 74 inequality promotes debt, stress, and risks.
 Elements of Economic Analysis (2 of 2)
Table 4 Key Components of Economic Analysis
Dimension Specification
Misery Index The sum of a country’s inflation and unemployment
rates. The higher the sum, the greater the economic
misery.
Poverty Multidimensional condition whereby a person or
community lacks the essentials for a minimum
standard of well-being and life.
Public Debt The total of a state’s financial obligations; measures
what the government borrows from its citizens,
foreign organizations, foreign governments, and
international institutions.
Unemployment The share of out-of-work citizens actively seeking
employment for pay relative to the total civilian
labor force.
Implication
Higher misery discourages spending and
investment in the face of growing austerity.
Persistent poverty destabilizes performance and
constrains potential. Creates stress points that
challenge civil society.
Decreasing debt opens growth opportunities.
Growing debt signals increasing austerity, rising
taxes, and, if uncontrolled, debt crises that impose
political, economic, and social costs.
People gainfully employed testify to the
competency of policymakers to sustain a
productive economy. Persistent unemployment
indicates government ineptitude.
Integrating Economic Analysis

• Other elements of economic analysis to consider

• Global Competitiveness Index (GCI)
• World Competitiveness Index (WCI)
• Global Innovation Index (GII)
• The Best Countries Index (BCI)
• The Where-To-Be-Born Index (WTBBI)
 Economic Freedom, Innovation, and
Competitiveness (1 of 2)
Table 5 Integrating Economic Freedom, Innovation, and Competitiveness
Nation Economic Type of Global World Global Best Where-To-
Freedom Economy Competitiveness Competitiveness Innovation Countries Be-Born
Score Index, Rank Index, Rank Index, Rank Index, Rank Index Rank

Singapore 89.4 Developed 1 1 8 15 6

Switzerland 81 Developed 5 3 1 1 1
Australia 80.9 Developed 16 18 22 7 2
Canada 77.1 Developed 14 8 17 3 9
United 76.2 Developed 2 10 3 8 17
States
Sweden 75.2 Developed 8 6 2 6 4
Malaysia 74 Emerging 27 27 35 38 36
Germany 73.5 Developed 7 17 9 4 16
South Korea 72.3 Developed 13 23 11 22 19

Japan 72.1 Developed 6 34 15 2 25

Poland 67.8 Emerging 37 39 39 33 33

 Economic Freedom, Innovation, and
Competitiveness (2 of 2)
Nation Economic Type of Global World Global Best Where-To-
Freedom Economy Competitiveness Competitiveness Innovation Countries Be-Born
Score Index, Rank Index, Rank Index, Rank Index, Rank Index Rank

Colombia 67.3 Emerging 57 54 63 66 42

Indonesia 65.8 Emerging 50 40 85 43 71

Mexico 64.7 Emerging 48 53 56 35 39

Philippines 63.8 Emerging 64 45 54 50 63

Saudi Arabia 60.7 Developing 36 24 68 32 38

Russia 58.9 Emerging 43 50 46 24 72

China 58.4 Emerging 28 20 14 16 49

South Africa 58.3 Emerging 60 59 63 * 53

India 55.2 Emerging 68 43 52 27 66

Brazil 51.9 Emerging 71 56 66 28 37