chapter 2kotabe & helsen's global marketing management, second edition 1 global economic...

Chapter 2 Kotabe & Helsen's Global Marketing Management, Second Edition

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Global Economic EnvironmentGlobal Economic Environment

Dr. Wenyu DouDr. Wenyu Dou


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Key issues in the ChapterKey issues in the Chapter

1. Evolution of Cooperative Global Trade 1. Evolution of Cooperative Global Trade AgreementsAgreements

2. Regional Economic Arrangements2. Regional Economic Arrangements

3. Multinational Corporations3. Multinational Corporations


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Evolution of Cooperative Global Trade Evolution of Cooperative Global Trade AgreementsAgreements

ITO (International Trade Organization):ITO (International Trade Organization):

– ITO was established after World War II.ITO was established after World War II. GATT (General Agreements on Tariffs & Trade):GATT (General Agreements on Tariffs & Trade):

– After 1950, GATT succeeded ITO.After 1950, GATT succeeded ITO.

– The main operating principle of GATT was the The main operating principle of GATT was the concept of most favored nations (MFN)/extend tariff concept of most favored nations (MFN)/extend tariff reduction to all member statesreduction to all member states

– GATT was successful in lowering trade barriers GATT was successful in lowering trade barriers (developed countries’ average tariff on manufacture (developed countries’ average tariff on manufacture red goods dropped from 40% in 1948 to 4% in 1994)red goods dropped from 40% in 1948 to 4% in 1994)


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3. Evolution of Cooperative Global 3. Evolution of Cooperative Global Trade Agreements (contd.)Trade Agreements (contd.)

WTO (World Trade Organization Trade):WTO (World Trade Organization Trade):– The eighth and last round of GATT talks – The eighth and last round of GATT talks –

called the “Uruguay Round” (1986-1994) called the “Uruguay Round” (1986-1994) established an international body called the established an international body called the WTO which took effect on January 1, 1995.WTO which took effect on January 1, 1995.

– In 1999, the WTO had 135 members.In 1999, the WTO had 135 members.– WTO has statutory powers to adjudicate trade WTO has statutory powers to adjudicate trade

disputes among nations and has its own disputes among nations and has its own secretariat.secretariat.

– WTO is the new legal and institutional WTO is the new legal and institutional foundation for a multilateral trading system.foundation for a multilateral trading system.


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Evolution of Cooperative Global Trade Evolution of Cooperative Global Trade Agreements (contd.)Agreements (contd.)

WTO includes trade in services and trade-related WTO includes trade in services and trade-related aspects of intellectual property.aspects of intellectual property.

Although WTO is a global institutional Although WTO is a global institutional proponent of free trade, it is not without critics.proponent of free trade, it is not without critics.

The WTO Work Program on Electronic The WTO Work Program on Electronic Commerce is in the process of defining the Commerce is in the process of defining the trade-related aspects of electronic commerce that trade-related aspects of electronic commerce that would fall under the parameters of WTO would fall under the parameters of WTO mandates.mandates.


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Regional Economic ArrangementsRegional Economic Arrangements An evolving trend in international economic An evolving trend in international economic

activity is the formation of multinational trading activity is the formation of multinational trading blocs.blocs.

Market groups take many forms, depending on the Market groups take many forms, depending on the degree of cooperation and inter-relationships, degree of cooperation and inter-relationships, which lead to different levels of integration among which lead to different levels of integration among the participating countries. the participating countries.

Types of Regional Economic ArrangementsTypes of Regional Economic Arrangements: : – Free Trade AreasFree Trade Areas: Formal agreement among two : Formal agreement among two

or more countries to reduce or eliminate customs or more countries to reduce or eliminate customs duties and nontariff barriers/no common external duties and nontariff barriers/no common external tariff, problem?tariff, problem?


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Regional Economic ArrangementsRegional Economic Arrangements

– Customs UnionCustoms Union: Addition of common external : Addition of common external tariffs to the provisions of free trade tariffs to the provisions of free trade agreements.agreements.

– Common MarketCommon Market: Elimination of all tariffs and : Elimination of all tariffs and other barriers, adopts a common set of external other barriers, adopts a common set of external tariffs on nonmembers, and removal of all tariffs on nonmembers, and removal of all restrictions on the flow of capital and labor restrictions on the flow of capital and labor among member nations.among member nations.

– Monetary UnionMonetary Union: Represents the fourth level of : Represents the fourth level of integration with a single currency among integration with a single currency among politically independent countries. politically independent countries.


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Regional Economic Arrangements Regional Economic Arrangements (contd.)(contd.)

– Political UnionPolitical Union: Highest level of integration : Highest level of integration resulting into a political union. Sometimes, resulting into a political union. Sometimes, countries come together in a loose political countries come together in a loose political union for historical reasons, as in the case of union for historical reasons, as in the case of British Commonwealth which exists as a forum British Commonwealth which exists as a forum for discussion and common historical ties.for discussion and common historical ties.


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ExamplesExamples

Free trade area: North American Free Trade Free trade area: North American Free Trade AgreementAgreement

Customs union: ASEAN (Association of Customs union: ASEAN (Association of Southeast Asian Nations)Southeast Asian Nations)

Common market: MERCOSUR (Southern Common market: MERCOSUR (Southern Cone Free Trade Area) by 2005, Cone Free Trade Area) by 2005,

Monetary union: European UnionMonetary union: European Union


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Comparison of Regional Trade GroupingsComparison of Regional Trade Groupings (Albaum et al, 2001) (Albaum et al, 2001)

FTAFTA Cus. U.Cus. U. Co. M.Co. M. Eco. U.Eco. U. Pol. U.Pol. U.

Removal of internal Removal of internal tarifftariff

XX XX XX XX XX

Common External Common External TariffsTariffs

XX XX XX XX

Free flow of capital Free flow of capital and laborand labor

XX XX XX

Harmonization of Harmonization of economic policyeconomic policy

XX XX

Political integrationPolitical integration xx


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Multinational CorporationsMultinational Corporations

The U.S. government defines the multinational The U.S. government defines the multinational corporations (MNCs) for statistical purposes as a corporations (MNCs) for statistical purposes as a company that owns or controls 10 percent or more company that owns or controls 10 percent or more of the voting securities, or the equivalent, of at of the voting securities, or the equivalent, of at least one foreign business enterprise.least one foreign business enterprise.

At present, there are 40,000 MNCs with 250,000 At present, there are 40,000 MNCs with 250,000 affiliates in foreign countries.affiliates in foreign countries.

One third of multinational companies’ trade is One third of multinational companies’ trade is accounted for by intra-firm activities.accounted for by intra-firm activities.


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Multinational Corporations (contd.)Multinational Corporations (contd.)

Two-thirds of of world trade in goods and services Two-thirds of of world trade in goods and services is controlled by multinational companies.is controlled by multinational companies.

The hundred largest multinationals alone account The hundred largest multinationals alone account for more than $2 trillion in sales around the world for more than $2 trillion in sales around the world and employ six million people.and employ six million people.

The sovereignty of nations will perhaps continue The sovereignty of nations will perhaps continue to weaken due to multinationals and the increasing to weaken due to multinationals and the increasing integration of economies.integration of economies.


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In 1970, of the 7,000 multinationals identified by In 1970, of the 7,000 multinationals identified by the United Nations, more than half were from two the United Nations, more than half were from two countries: the United States and Britain.countries: the United States and Britain.

By 1995, less than half of the 36,000 By 1995, less than half of the 36,000 multinationals identified by the United Nations multinationals identified by the United Nations came from four countries: the United States, came from four countries: the United States, Japan, Germany, and Switzerland.Japan, Germany, and Switzerland.

The nation-state, while considerably weaker than The nation-state, while considerably weaker than its nineteenth century counterpart, is likely to its nineteenth century counterpart, is likely to remain alive and well.remain alive and well.


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Currently, factors such as movements, Currently, factors such as movements, capital surpluses, faster growth rates, and capital surpluses, faster growth rates, and falling trade and investment barriers have falling trade and investment barriers have all helped multinationals from other all helped multinationals from other countries join the cross-border fray/What countries join the cross-border fray/What happened to Relistar Bank in St. Cloud?happened to Relistar Bank in St. Cloud?


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Group ExerciseGroup Exercise

P61, question 4P61, question 4 P61, question 3P61, question 3

chapter 2kotabe & helsen's global marketing management, second edition 1 global economic...

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