350 global marketing...lorna valdes 4 350 global market 2 (1b) the world economy— an overview •...

350 Global Marketing

Lorna Valdes GlobalMarket 2 (1b)1

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350 Global Market 2 (1b)

Global MarketingABS MKT 350

Introduction to Global Marketing & the Global Economic Environment

Session 1 part 2

Prof. Lorna Valdes

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Introduction

This chapter includes:• An overview of the world economy

• A survey of economic system types

• The stages of market development

• The balance of payments

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The World Economy—An Overview

• In the early 20th century economic integration was at 10%; today it is 50%

• EU and NAFTA are very integrated

• Global competitors have displaced or absorbed local ones

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• The new realities:– Capital movements have replaced trade as

the driving force of the world economy

– Production has become uncoupled from employment

– The world economy, not individual countries, is the dominating factor

KS1

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The new realities, continued:

• 75-year struggle between capitalism and socialism has almost ended

• E-Commerce diminishes the importance of national barriers and forces companies to re-evaluate business models

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Economic Systems

Resource Allocation

Market Command

Private

Resource

Ownership

State

Market

Capitalism

Market

Socialism

Centrally

Planned

Capitalism

Centrally

Planned

Socialism

KS1 In the notes, second paragraph: "the figure was 26 percent"To what does figure refer?

Also, in the next sentence: "40-year period"Given the dates that are mentioned, there is only about a 22 year span. Please review.Kate Stephenson, 05/04/2012



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Market Capitalism

• Individuals and firms allocate resources

• Production resources are privately owned

• Driven by consumers

• Government’s role is to promote competition among firms and ensure consumer protection

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Western Market Systems

Type of System Key Characteristics Countries

Anglo-Saxon Private ownership US, Canada,

Minimal social safety net Great Britain

Social Market Private ownership France, Germany,

Economy Model Inflexible employment Italy

policies, “social partners”

Nordic Model Mix of state and private Sweden, Norway

ownership, large safety net

High taxes

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Centrally Planned Socialism• Opposite of market capitalism• State holds broad powers to serve the public interest;

decides what goods and services are produced and in what quantities

• Consumers can spend only what is available• Government owns entire industries and controls

distribution• Demand typically exceeds supply• Little reliance on product differentiation, advertising,

pricing strategy• China, India, and the former USSR now moving

towards some market allocation and private ownership

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Centrally Planned Capitalism

• Economic system in which command resource allocation is used extensively in an environment of private resource ownership

• Example:– Swedish government controls 2/3s of all spending; a hybrid of CPS

and capitalism

– Swedish government plans move towards privatization

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What is economic freedom?

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state.

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Economic Freedom

• Rankings of economic freedom among countries– “free” “mostly free” “mostly unfree” “repressed”

• Variables considered include such things as:– Trade policy– Taxation policy– Capital flows and foreign investment– Banking policy– Wage and price controls– Property rights– Black market



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Economic Freedom—2011 Rankings

Free1. Hong Kong

2. Singapore

3. Australia

4. New Zealand

5. Switzerland

6. Canada

7. Ireland

8. Denmark

9. United States

10. Bahrain

Repressed169. Turkmenistan170. Timor-Leste171. Iran172. Dem. Rep. Congo173. Libya174. Burma175. Venezuela176. Eritrea177. Cuba178. Zimbabwe179. North Korea

Not ranked: Afghanistan, Iraq, Liechtenstein, Sudan Lorna Valdes

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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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Low-Income Countries

• GNP per capita of $996 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– Uzbekistan and Turmenistan

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Lower-Middle-Income Countries

• GNI per capita: $996 to $3,945

• Characteristics– Rapidly expanding consumer markets

– Cheap labor

– Mature, standardized, labor-intensive industries like footwear, textiles and toys

• BRIC nations are India, China

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Upper-Middle-Income Countries

• Also called newly industrializing economies (NIEs)• Examples: Brazil, Russia, Malaysia, Chile, Venezuela,

Hungary, Mexico

GNP per capita: $3,946 to $12,195Characteristics:

Rapidly industrializing, less agricultural employmentIncreasing urbanizationRising wagesHigh literacy rates and advanced educationLower wage costs than advanced countries

Chilean copper mine

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Marketing Opportunities in LDCs

• Characterized by a shortage of goods and services

• Long-term opportunities must be nurtured in these countries– Look beyond per capita GNP

– Consider the LDCs collectively rather than individually

– Consider first mover advantage

– Set realistic deadlines



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Mistaken Assumptions about LDCs

1. The poor have no money.2. The poor will not “waste” money on non-

essential goods.3. Entering developing markets is fruitless because

goods there are too cheap to make a profit.4. People in BOP (bottom of the pyramid)

countries cannot use technology.5. Global companies doing business in BOP

countries will be seen as exploiting the poor.

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High-Income Countries

• GNI per capita: $12,196 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

– Households have high ownership levels of basic products

TokyoTokyoTokyoTokyo

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High-Income Countries

• 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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G-8, the Group of Eight

• Goal of global economic stability and prosperity– U.S.– Japan– Germany– France– Britain– Canada– Italy– Russia (1998)

2011 G-8 Leaders in Deauville, France

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OECD, the Organization for Economic

Cooperation and Development

• 30 nations• Post-WW II European origin• Canada, U.S. (1961), Japan (1964)• Promotes economic growth and social well-being• Focuses on world trade, global issues, labor market

deregulation– Anti-bribery conventions

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The Triad

• U.S., Western Europe, and Japan

• Represents 75% of world income

• Expanded Triad includes all of North America and the Pacific Rim and most of Eastern Europe

• Global companies should be equally strong in each part



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350 Global Market 2 (1b)Lorna Valdes

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Product Saturation Levels

• The % of potential buyers or households who own a product

• India: 20% of people have telephones

• Autos: 1 per 43,000 Chinese; 21 per 100 Poles; 8 per 1,000 Indians

• Computers: 1 PC per 6,000 Chinese; 11 PCs per 100 Poles; 34 PCs per 100 EU citizen

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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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Balance of Payments

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Top Exporters and Importers in 2009

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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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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 TransactionsLorna Valdes

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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

• Numerous techniques and strategies 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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Gross Domestic Product

Gross Domestic Product The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living.

GDP per capita is the share of individual members of the population to the annual GDP. Mathematically it is calculated by dividing real or nominal GDP by the number of population per year.

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GDP vs GNI

• Gross Domestic Product is the value produced within a country’s borders, whereas the Gross national Income is the value produced by all the citizens.

• GDP is said to be the measure of a country’s overall economic output. The GNI is the total value that is produced within a country, which comprises of the Gross Domestic Product along with the income obtained from other countries (dividends, interests).

• Gross Domestic Product helps to show the strength of a country’s local income. On the other hand, Gross National Income helps to show the economic strength of the citizens of a country.

• GNI is based on location, and GDP is based on ownership.

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GDP per Capita (PPP US $) 2009

1 Qatar 179,000

2 Liechtenstein 141,100

3 Luxembourg 82,600

4 Bermuda 69,900 5 Singapore 62,100

6 Jersey 57,000

7 Norway 54,600 8 Brunei 51,600

9 U.A.E. 49,600

10 Kuwait 48,900 11 United States 47,200



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GDP Per Capita Adjusted by Purchasing Power Parity

The GDP dollar estimates given on this page are derived from purchasing power parity (PPP) calculations. Using a PPP basis

is arguably more useful when comparing generalized differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates

which may distort the real differences in income.

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350 Global Market 2 (1b)2-38

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

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350 Global Market 2 (1b)Lorna Valdes

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Global Economic Considerations

Key Economic Variables• Gross Domestic product

• Unemployment rates

• Interest rates & inflation

• Consumer sentiment

• Budget Deficits

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350 Global Market 2 (1b)The Price Inflation Process


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Employment and Consumer Confidence


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COUNTRY RISK ANALYSIS

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Political Risk

• Risk of change in political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably

• When perceived political risk is high, a country will have a difficult time attracting foreign direct investment

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Source: Aon Global Corporate Marketing

and Communications

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Corruption

Who gives……. and Who Takes….



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Corruption

Political Corruption• is the use of legislated powers by government officials for illegitimate

private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption.

• Neither are illegal acts by private persons or corporations not directly involved with the government. An illegal act by an officeholder constitutes political corruption only if the act is directly related to their official duties.

• All forms of government are susceptible to political corruption.

• Forms of corruption vary, but include bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement.

• While corruption may facilitate criminal enterprise such as drug trafficking, money laundering, and trafficking, it is not restricted to these activities.

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Corruption

World map of the 2011 Corruption Perceptions Index by Transparency International, which measures "the degree to which corruption is perceived to exist among public officials and politicians". High numbers (green) indicate less perception of corruption, whereas lower numbers (red) indicate higher perception of corruption.

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Corruption

Who gives……. The Rational of CorruptionThe 2008 Bribe Payers Survey allows us to evaluate the informed views of foreign bribery by companies from the 22 countries even further, by exploring the frequency of different types of foreign bribery.

The three types of bribery assessed included:

• bribery of high-ranking politicians or political parties

• bribery of low-level public officials to ’speed things up’

• the use of personal or familiar relationships to win public contracts.

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Corruption

Who gives…….The Rational of Corruption

Transparency International Bribe Payers Survey 2008.

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Political Risk - Corruption• In west Africa truck

drivers are held up by “official” checkpoints and must pay bribes to pass through.

• In Mali, a driver pays over $25 in bribes at some 4/6 checkpoints every 100km.

• Customs officers are the most successful when it comes to supplementing their income, followed by the police.

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Discussion Questions

• Is it realistic to prohibit all forms of corruption in international trade?

• What possible future political risks do you see in Europe?



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Sources of Eco-Politico Data

• CIA World FactBook - www.cia.gov/index.html

IMF data & Stats - The World Bank site

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