Ch02 The Global Economic Environment

CHAPTER 2 THE GLOBAL ECONOMIC ENVIRONMENT SUMMARY The economic environment is a major determinant of global market potential and opportunity. In today’s global economy, capital movements are the driving force, production is uncoupled from employment, and capitalism has vanquished communism. Based on patterns of resource allocation and ownership, the world's economies can be categorized as market capitalism, centrally-planned capitalism, centrally-planned socialism, and market socialism. The final years of the twentieth century were marked by transitions toward market capitalism in many countries that had been centrally controlled. However, there still exists a great disparity among the nations of the world in terms of economic freedom. Countries can be categorized in terms of their stage of economic development: low income, lower middle income, upper middle income, and high income. Gross domestic product (GDP) and gross national income (GNI) are commonly used measures of economic development. The 50 poorest countries in the low-income category are sometimes referred to as least-developed countries (LDCs). Upper middle-income countries with high growth are often called newly industrializing economies (NIEs). Several of the world’s economies are notable for their fast growth; the BRIC nations include Brazil, Russia, India, and China. The Group of Seven (G7), Group of Eight (G-8), and Organization for Economic Cooperation and Development (OECD) represent efforts by high-income nations to promote democratic ideals and free-market policies throughout the rest of the world. Most of the world's income is located in the Triad, which is comprised of Japan, the United States, and Western Europe. Companies with global aspirations generally have operations in all three areas. Market potential for a product can be evaluated by determining product saturation levels in light of income levels. A country’s balance of payments is a record of its economic transactions with the rest of the world; this record shows whether a country has a trade surplus (value of exports exceeds value of imports) or a trade deficit (value of imports exceeds value of exports). Trade figures can be further divided into merchandise trade and services trade accounts; a country can run a surplus in both accounts, a deficit in both accounts, or a combination of the two. The U.S. merchandise trade deficit was $819 billion in 2007. However, the U.S. enjoys an annual service trade surplus. Overall, however, the United States is a debtor; Japan enjoys an overall trade surplus and serves as a creditor nation. Foreign exchange provides a means for settling accounts across borders. The dynamics of international finance can have a significant impact on a nation’s economy as well as the fortunes of individual companies. Currencies can be subject to devaluation or revaluation as a result of actions taken by a country’s central banker. Currency trading by international speculators can also lead to devaluation. When a country’s economy is strong or when demand for its goods is high, its currency tends to appreciate in value. When currency values fluctuate, global firms face various types of economic exposure. Firms can manage exchange rate exposure by hedging. OVERVIEW ANNOTATED LECTURE/OUTLINE THE WORLD ECONOMY: AN OVERVIEW What is the most fundamental change in the world economy since WWII? The world economy has changed dramatically since World War II. Perhaps the most fundamental change is the emergence of global markets; responding to new opportunities, global competitors have displaced or absorbed local ones. The integration of the world economy has increased significantly. Economic integration was 10 percent at the beginning of the 20th century; today, it is approximately 50 percent. In what areas of the world is global integration most striking? Integration is particularly striking in the two regions of the European Union (EU) and the North American Free Trade Area. For example, the world’s largest automakers have, for the most part, evolved into global companies. During the past two decades, the world economic environment has become increasingly dynamic; change has been dramatic and far-reaching. To achieve success, executives and marketers must take into account the following new realities: Capital movements have replaced trade as the driving force of the world economy. Global capital movements far exceed the dollar volume of global trade. Productivity has become “uncoupled” from employment. The second change concerns the relationship between productivity and employment. To illustrate this relationship, it is necessary to review some basic macroeconomics. Gross domestic product (GDP) , a measure of a nation’s economic activity, is calculated by adding consumer spending (C), investment spending, (I), government purchases,(G), and net exports (NX): C+I+G+NX = GDP Economic growth, as measured by GDP, reflects increases in a nation’s productivity. The world economy dominates the scene; individual country economies play a subordinate role. The struggle between capitalism and socialism is largely over. The Cold War is over; communism is not an effective economic system. Finally, the growth of the personal computer and the advent of the Internet have diminished the importance of national boundaries. ECONOMIC SYSTEMS What are the four main types of global economic systems? Traditionally, there are four main types of economic systems: market capitalism, centrally planned socialism, centrally planned capitalism, and market socialism. Upon what is this classification scheme based? This classification was based on the dominant method of resource allocation (market versus command) and the dominant form of resource ownership (private versus state) (see Figure 2-1). Alternatively, more robust descriptive criteria include the following: Type of economy Type of government Trade and capital flows The commanding heights Services provided by the state and funded through taxes Markets Market Capitalism Define ‘Market Capitalism.’ Market capitalism is an economic system in which individuals and firms allocate resources, and production resources are privately owned. Consumers decide what goods they desire, and firms decide how much to produce; the state’s role is to promote competition (see Table 2 -1). Market capitalism is practiced worldwide, especially in North America and Western Europe, but all market-oriented economies do not function in the same manner. The U.S. is distinguished by its competitive “wild free-for-all” and decentralized initiative whereas Japan is a tightly run, highly regulated economic system that is market oriented. Centrally-Planned Socialism What is ‘Centrally-Planned Socialism’? At the opposite end of the spectrum is Centrally-planned socialism. Centrally-planned socialism gives the state broad powers to serve the public as it sees fit. State planners make “top-down” decisions about the goods and services produced and in what quantities; consumers spend money on what is available. Government ownership of industries and individual enterprises is characteristic. Demand exceeds supply, and there is little reliance on product differentiation, advertising, or promotion. To eliminate “exploitation” by intermediaries, the government controls distribution. Because of market capitalism’s superiority, many socialist countries have adopted it; the ideology developed by Marx and perpetuated by Lenin has been resoundingly refuted. For decades, the economies of China, the former Soviet Union, and India functioned according to the tenets of centrally planned socialism. All three countries are now engaged in economic reforms characterized, in varying proportions, by increased reliance on market allocation and private ownership. Centrally-Planned Capitalism and Market Socialism In reality, market capitalism and centrally-planned socialism do not exist in “pure” form. Command and market resource allocation are practiced simultaneously, as are private and state resource ownership. The role of government in modern market economies varies widely. Define ‘Centrally-Planned Capitalism’ and ‘Market Socialism.’ Centrally-planned capitalism is an economic system in which command resource allocation is used extensively in an environment of private resource ownership (e.g., Sweden). Market socialism permits market allocation policies within an overall environment of state ownership (e.g., China gives freedom to businesses/individuals to operate in a market system). Market reforms and nascent capitalism in many parts of the world are creating opportunities for large-scale investments by global companies. For example, Coca-Cola returned to India in 1994, two decades after being forced out by the government. A new law allowing 100 percent foreign ownership of enterprises helped pave the way. The Heritage Foundation, a conservative think tank, classifies economies according to the degree of economic freedom enjoyed. The variables considered in compiling the rankings include: trade policy taxation policy government consumption of economic output monetary policy capital flows foreign investment banking policy wage and price controls property rights regulations the black market The rankings form a continuum from “free” to “repressed.” Hong Kong and Singapore are ranked first and second in terms of economic freedom; Cuba, Laos, and North Korea are ranked lowest (see Table 2-3). STAGES OF ECONOMIC DEVELOPMENT At any point in time, individual country markets are at different stages of economic development. The World Bank has developed a four-category classification system that uses per capita gross national income (GNI) as a base. Although the income definition for each of the stages is arbitrary, countries within a given category generally have a number of characteristics in common. (Table 2-4). What are the BRIC countries? Today, global attention is focused on opportunities in Brazil, Russia, India and China (collectively known as BRIC). For each of the stages of economic development, special attention is given to the BRIC countries. Low-Income Countries Low-income countries have a GNI per capita of less than $936. The general characteristics shared by countries at this income level are: limited industrialization and a high percentage of the population engaged in agriculture and subsistence farming high birth rates low literacy rates heavy reliance on foreign aid political instability and unrest concentration in Africa south of the Sahara Approximately 40 percent of the world’s population is included in this group. Typically, these countries provided limited investment opportunities. However, there are exceptions; for example, in Bangladesh, where per capita GNP is approximately $450, the garment industry has enjoyed burgeoning exports. The newly independent countries of the former Soviet Union present an interesting situation: Income is declining, and there is considerable economic hardship. The potential for disruption is, therefore, high. India is the sole low-income county in the BRIC group. In the 1990s India faced high inflation and low foreign exchange reserves. Leaders opened India’s economy to trade and investment and dramatically improved market opportunities. Lower-Middle-Income Countries Define the ‘least-developed countries’ The United Nations designates fifty countries in the bottom ranks of the low-income category as least-developed countries (LDCs). The term is sometimes used to indicate a contrast with developing (i.e., upper ranks of low-income plus lower-middle and upper-middle-income) countries and developed (high-income) countries. What is the income level of the lower-middle-income countries? Lower-middle-income countries are those with a GNI per capita between $936 and $3,705. Consumer markets in these countries are expanding rapidly. Countries such as China and Thailand represent an increasing competitive threat as they mobilize their relatively cheap labor forces to serve target markets in the rest of the world. The developing countries in the lower-middle-income category have a major competitive advantage in mature, standardized, labor-intensive industries such as making toys and textiles. Which of the BRIC nations are in the lower-middle-income category? China and Brazil are the BRIC nations in the lower-middle-income category. China represents the largest single destination for foreign investment in the developing world. Despite ongoing market reforms, Chinese society does not have democratic foundations. Although China has joined the World Trade Organization, trading partners are still concerned about human rights, protection of intellectual property rights, and other issues. Upper-Middle-Income Countries Upper-Middle-Income countries are also known as what? Upper-middle-income countries, also known as industrializing or developing countries are those with GNP per capita ranging from $3,706 to $11,455. Russia and Brazil, with per capita GNI of $5,770 and $4,710, respectively, are the tow BRIC nations that currently fall into the upper-middle-income category. The percentage of population engaged in agriculture has dropped sharply as people move to the industrial sector and the degree of urbanization increases. What are NIEs? Upper-middle-income countries that achieve the highest rates of economic growth are sometimes referred to as newly industrializing economies (NIEs). Marketing Opportunities in LDCs and Developing Countries Despite many problems in LDCs and developing countries, it is possible to nurture long-term market opportunities. Although Nike sells only a small portion of its output in China, it clearly has the future in mind when it refers to China as a “two-billion-foot market.” What are the basic misconceptions about countries at the “bottom of the pyramid” that must be corrected? Prahalad and Hammond have identified several assumptions and misconceptions about the “bottom of the pyramid” (BOP) that need to be corrected: Mistaken assumption #1: The poor have no money. The aggregate buying power of poor communities can be substantial. In rural Bangladesh, for example, villagers spend considerable sums to use village phones operated by local entrepreneurs. Mistaken assumption #2: The poor are too concerned with fulfilling basic needs to “waste” money on non-essential goods. Consumers who are too poor to purchase a house do buy “luxury” items such as television sets and gas stoves to improve their lives. Mistaken assumption #3: The goods sold in developing markets are so inexpensive that there is no room for a new market entrant to make a profit. In reality, because the poor often pay higher prices for many goods, there is an opportunity for efficient competitors to realize attractive margins by offering quality and low prices. Mistaken assumption #4: People in BOP markets cannot use advanced technology. Residents of rural areas can and do quickly learn to use cell phones, PCs, and similar devices. Mistaken assumption #5: Global companies that target BOP markets will be criticized for exploiting the poor. The informal economies in many poor countries are highly exploitative. A global company offering basic goods and services that improve a country’s standard of living can earn a reasonable return while benefiting society. One of marketing’s roles in developing countries is to focus resources on the task of creating and delivering products that are best suited to local needs and incomes. Marketing can be the link that relates resources to opportunity and facilitates need satisfaction on the consumer's terms. Some believe marketing is relevant only in affluent, industrialized countries. The argument: In less-developed countries the major problem is the allocation of scarce resources toward obvious production needs. Efforts should focus on production and how to increase output, not on customer needs and wants. The converse argument: The role of marketing – to identify people’s needs and wants and to focus individual and organizational efforts to respond to these needs and wants – is the same in all countries, irrespective of level of economic development. When global marketers respond to the needs of rural residents in emerging markets such as China and India, they are also more likely to gain all-important government support and approval. For example, Nestle introduced Pure Life bottled water in Pakistan and the brand has captured 50 percent of the market. Coca-Cola recently began to address dietary and health needs in low-income countries by developing Vitango, a beverage product that can help fight anemia, blindness, and other ailments related to malnutrition. There is also an opportunity to help developing countries join the Internet economy. At the Massachusetts Institute of Technology’s Media Lab, a project called One Laptop per Child has the goal of developing a laptop computer that governments in developing countries can buy for $100. High-Income Countries High-Income countries are those countries with a GDP of at least how much? These are advanced, developed, industrialized, or postindustrial countries, having a per capita GNP of $11,456 or higher. They have reached their present income level through sustained economic growth. The phrase “postindustrial countries” describes the United States, Sweden, Japan, and other advanced, high-income societies. Opportunities in a postindustrial society depend on new products and innovations because ownership levels for basic products are high. Organizations face difficulty in expanding shares in existing markets, but they can create new markets. What countries make up the “Group of Seven”? Among high-income countries, the U.S., Japan, Germany, France, Britain, Canada, and Italy form the Group of Seven (G-7) to steer the global economy to prosperity and stability. What country was added to the G-7 to form the G-8? Starting in the mid-1990s, Russia began attending the G-7 summit meetings. In 1998, Russia became a full participant, giving rise to the new Group of Eight (G-8). Another institution of high-income countries is the Organization for Economic Cooperation and Development (OECD). The 30 OECD nations believe in market-allocation economic systems and pluralistic democracy; the organization has been described as an “economic think-tank” and a “rich-man’s club.” Evidence of the increasing importance of the BRIC group is the fact that China, India, Brazil, and Russia have all formally announced their intention to join the OECD. The Triad What three economic centers make up the Triad? In his book Triad Power, Ohmae argued that successful global companies had to be equally strong in the dominant economic centers of Japan, Western Europe, and the United States. These three regions, called the Triad, represented the dominant centers of the world and the location of nearly 75 percent of world income, as measured by GNP. The expanded Triad includes the entire Pacific region, Canada and Mexico; and the boundary in Europe is moving eastward. Marketing Implications of the Stages of Development The stages of economic development can serve as a guide to marketers in evaluating product saturation levels, the percentage of potential buyers or households who own a product. In countries with low per capita income, product saturation levels are low (e.g., ownership of telephones in India is only about 20 percent of the population). In China, saturation levels of private motor vehicles and personal computers are very low – only about one car or light truck for every 43,000 people, and one PC for every 6,000. Compare this to the EU, with a ratio of 34 PCs per 100 people. BALANCE OF PAYMENTS What is the balance of payments? The balance of payments is a record of all economic transactions between the residents of a country and the world. It is divided into the current and capital accounts. (Table 2-5). What is the current account? The current account is a measure that includes trade in merchandise and services, plus certain categories of financial transfers such as humanitarian aid. Define a trade deficit. Define a trade surplus. A country with a negative current account balance has a trade deficit; that is, the outflow of money to pay for imports exceeds the inflows of money for sales of exports A country with a positive current account balance has a trade surplus. What is the capital account? The capital account is a record of all long-term direct investment, portfolio investment, and other short- and long-term capital flows. The minus signs indicate outflows of cash, payment for (for example, Table 2-5, line 2 shows an outflow of $1.97 trillion in 2007, that represents payment for U.S. merchandise imports). A country accumulates reserves when the net of its current and capital account transactions shows a surplus; it gives up reserves when the net shows a deficit. The United States regularly posts a deficit in both the current account and the trade balance of goods. A close examination of Table 2-5 reveals that the United States regularly posts deficts in both the current account and the trade balance in goods. Overall, the U.S. post balance of payments deficits while important trading partners, such as China, have surpluses. (Table 2-6). TRADE IN MERCHANDISE AND SERVICES Thanks in part to the achievements of GATT and the WTO, world merchandise trade has grown at a faster rate than world production since the end of World War II. According to figures compiled by the World Trade Organization, the dollar value of world trade in 2007 totaled $13.9 trillion. In 2003, Germany surpassed the United States as the world’s top merchandise exporter. Exports generate 40 percent of Germany’s gross domestic product, and 9 million jobs are export related. China’s third place in the export ranking underscores its role as an export powerhouse.(Table 2-7). Chinese exports to the United States have surged since China joined the World Trade Organization in 2001; in fact, policymakers in Washington are pressuring Beijing to boost the value of the yuan in an effort to stem the tide of imports. Table 2-8 provides a different perspective on global trade. The European Union is treated as a single entity with import and exports that exclude intra-regional trade among the 25 countries that were EU members at the end of 2006. It shows that the EU is the #1 exporter and importer of world merchandise in 2006. The fastest-growing sector of world trade is trade in services. Services include travel and entertainment; education; business services such as engineering, accounting, and legal services; and payments of royalties and license fees. U.S. services exports in 2007 totaled $500 billion. This represents more than one-third of total U.S. exports. The U.S. services surplus (service exports minus imports) stood at $119 billion. OVERVIEW OF INTERNATIONAL FINANCE Foreign exchange makes it possible for a company in one country to conduct business in other countries with different currencies. What two basic markets make up the foreign exchange market? The foreign exchange market consists of a buyer’s market and a seller’s market where currencies are traded for both spot and future delivery on a continuous basis. What is the difference between the ‘spot’ market and the ‘forward’ market? The spot market is for immediate delivery; the market for future delivery is called the forward market. Who are the participants in this market? A country’s central bank can buy and sell currencies in the foreign exchange market and government securities in an effort to influence exchange rates. Some of the trading in the foreign exchange market takes the form of transactions needed to settle accounts for the global trade in goods and services. (For example, because Porsche is a German company, the dollars spent on Porsche automobiles by American car buyers must be converted to euros.) Currency speculators also participate in the foreign exchange market. What is ‘devaluation’? What is ‘revaluation’? Devaluation can result from government action that mandates a reduction in the value of the local currency against other currencies. The opposite is revaluation. In 2005, the Chinese government responded to pressure from its trading partners by adopting a policy of revaluation to strengthen the yuan against the dollar and other currencies. A stronger yuan would make China’s exports to the United States more expensive while making U.S. exports to China less expensive. Purchasing Power Parity Given that currencies fluctuate in value, a reasonable question to ask is whether a given currency is over- or undervalued compared with another. What is the “Big Mac Index”? One way to answer the question is to compare world prices for a single well-known product: McDonald's Big Mac hamburger. The so-called “Big Mac Index” is a ‘quick and dirty’ way of determining which of the world's currencies are too weak or strong. The underlying assumption is that the price of a Big Mac in any world currency should, after being converted to dollars, equal the price of a Big Mac in the United States. A country’s currency would be overvalued if the Big Mac price (converted to $) is higher than the U.S. price. Conversely, a country’s currency would be undervalued if the converted Big Mac price is lower than the U.S. price. Economists use the concept of purchasing power parity (PPP) when adjusting national income data to improve comparability. Economic Exposure What is ‘economic exposure’? Economic exposure reflects the impact of currency fluctuations on a company’s financial performance. Economic exposure can occur when a company’s business transactions result in sales or purchases denominated in foreign currencies. Managing Exchange Rate Exposure Forecasting exchange rate movements is a major challenge. Over the years, the search for ways of managing cash flows to eliminate or reduce exchange rate risks has resulted in the development of numerous techniques and financial strategies. Hedging exchange rate exposure involves establishing an offsetting currency position such that the loss or gain of one currency position is offset by a corresponding gain or loss in some other currency. External hedging methods for managing both transaction and translation exposure require companies to participate in the foreign currency market. Specific hedging tools include forward contracts and currency options. Internal hedging methods include price adjustment clauses and intra-corporate borrowing or lending in foreign currencies. The forward market is a mechanism for buying and selling currencies at a preset price for future delivery. In some situations companies are not certain about the future foreign currency cash inflow or outflow. In such an instance, forward contracts are not the appropriate hedging tool. A foreign currency option is best for such situations. What is a ‘put option?’ What is a ‘call option?’ A put option gives the buyer the right, not the obligation, to sell a specified number of foreign currency units at a fixed price, up to the option's expiration date. Conversely, a call option is the right, but not the obligation, to buy the foreign currency. DISCUSSION QUESTIONS 1. Explain the difference between market capitalism, centrally planned capitalism, centrally planned socialism, and market socialism. Give an example of a country that illustrates each type of system. Market capitalism is an economic system in which individuals and firms allocate resources and production resources are privately owned. Consumers decide what goods they desire and firms determine what and how much to produce; the role of the state in market capitalism is to promote competition. Market capitalism is found in the United States. Centrally-planned capitalism is an economic system in which command resource allocation is utilized extensively in an environment of private resource ownership can be called. Centrally-planned capitalism is found in Sweden, where two-thirds of all expenditures are controlled by the government. Centrally-planned socialism is an economic system in which the state has broad powers to serve the public interest as it sees fit. State planners make “top-down” decisions about what goods and services are produced and in what quantities; consumers can spend their money on what is available. The government owns industries as well as individual enterprises. Centrally-planned socialism was found in the former Soviet Union. Market socialism is an economic system in which market allocation policies are permitted within an overall environment of state ownership. Market socialism is found in China where farmers can offer part of their production in a free market. 2. The seven criteria for describing a nation’s economy introduced at the beginning of this chapter can be combined in a number of different ways. For example, the United States can be characterized as follows: Type of economy: Advanced industrial state Type of government: Democracy with a multi-party system Trade and capital flows: Incomplete free trade and part of trading bloc The commanding heights: Mix of state and private ownership Services provided by the state and funded through taxes: Pensions and education but not health care Institutions: Transparency, standards, corruption is absent, a free press and strong courts Markets: Free market system characterized by high risk/high reward entrepreneurial dynamism Use the seven criteria found on pp. 42-43 to develop a profile of one of the BRIC nations, or any other country that interests you. What implications does this profile have for marketing opportunities in the country? Student answers will vary by country chosen. 3. Why are Brazil, Russia, India, and China (BRIC) highlighted in this chapter? Identify the current stage of economic development for each BRIC nation. Experts predict that the BRIC nations will be key players in global trade even as their track records on human rights, environmental protections and other issues come under closer scrutiny by their trading partners. India is in the Low-Income category. China and Brazil fall within the Lower-Middle-Income category. Russia is the only BRIC nation to be in the Upper-Middle-Income category. 4. Turn to the Index of Economic Freedom (Table 2-3) and identify where the BRIC nations are ranked. What does the result tell you in terms of the relevance of the index to global marketers? All four BRIC countries fall within the “Mostly Unfree” category. This indicates that, while the index and what it stands for are certainly important to marketers, they are not willing to forego the business opportunities presented by these countries. 5. The Heritage Foundation’s Index of Economic Freedom is not the only ranking that assesses countries in terms of successful economic policies. For example, the World Economic Forum (WEF; www. weformum.org) publishes an annual Global Competitiveness Report; in the 2006 -2007 report, the United States ranks in sixth place according to the WEF’s metrics. By contrast, Sweden is in third place. According to the Index of Economic Freedom’ rankings the United States and Sweden are in sixth and twenty-sixth place, respectively. Why are the rankings so different? What criteria does each index consider? The Heritage foundation measures trade policy, taxation policy, government consumption of economic output, monetary policy, capital flows and foreign investment, banking policy, wage and price controls, property rights, regulations, and the black market. It does take a very conventional and conservative approach to classifying economies. On the other hand, the World Economic Forum, according to their website, states: “The World Economic Forum is an independent, international organization incorporated as a Swiss not-for-profit foundation. We are striving towards a world-class corporate governance system where values are as important a basis as rules. Our motto is ‘entrepreneurship in the global public interest’. We believe that economic progress without social development is not sustainable, while social development without economic progress is not feasible. Our vision for the World Economic Forum is threefold. It aims to be: the foremost organization which builds and energizes leading global communities; the creative force shaping global, regional and industry strategies; the catalyst of choice for its communities when undertaking global initiatives to improve the state the world” http://www.weforum.org/en/about/Our%20Organization/index.htm. Clearly, the WEF assigns a great deal of value to measuring the values and social developments, and opportunities of a country. This strong belief system influences the WEF’s country ranking – not by what is current possess but what it should be doing. 6. When the first edition of this textbook was published in 1996, the World Bank defined “low-income country” as one with per capita income of less than $501. In 2003, when the third edition of Global Marketing appeared, “low income” was defined as $785 or less in per capita income. As shown in Table 2-4 of this chapter, $935 is the current “low income” threshold. The other stages of development have been revised in a similar manner. How do you explain the upward trend in the definition of income categories during the past 15 years? The economic systems of countries are constantly developing and changes happen rapidly. The percentage of the world’s GNI for low-income countries is now at a record low of 3.23 percent as compared to the lower-middle-income countries, and the upper-middle-income countries. This suggests great gains in income per person and income distribution for those living in the low-income companies. As countries in the low-income begin to tackle their economic, social, and political problems, more opportunities present themselves for the people living in those countries. 7. A manufacturer of satellite dishes is assessing the world market potential for his products. He asks you if he should consider developing countries as potential markets. How would you advise him? Developing markets should prove attractive on the basis of current low product saturation levels. High rates of growth in many developing countries suggest that some segments of the population save enough money to afford expensive electronics equipment such as a satellite dish. A satellite entrepreneur might invite neighbors to his home and charge them for the privilege of watching programming that would not otherwise be available. These neighbors might not be able to afford a satellite and related equipment, but they could afford to watch an occasional movie. 8. A friend is distressed to learn that America's merchandise trade deficit hit a record $780 billion in 2005. You want to cheer your friend up by demonstrating that the trade picture is not as bleak as it sounds. What do you say? The overall trade balance reflects merchandise as well as services trade as reported in official balance of payments figures. The U.S. typically runs a trade surplus in services, which serves to offset the merchandise trade deficit. The United States is a major service trader. As shown in Figure 2-5, U.S. services exports in 2006 totaled approximately $424 billion. This represented slightly less than one-third of total U.S. exports. The U.S. services surplus stood at $80 billion. This surplus partially offset the U.S. merchandise trade deficit, which reached a record $838 billion in 2006. CASES Case 2 -1: The Global Economic Crisis: The Assignment Overview: As U.S. consumer spending slowed in 2007-2009, exports from Singapore and the Philippines began to slump. By contrast, Indonesia and Malaysia, were experiencing strong demand for exports of crude oil and natural gas. Japan, became less dependent on exports to the United States. The ripple effect from the global recession was felt especially strongly in Canada. Europe’s economy was also mired in a recession. As the economic crisis deepened in the fall of 2008, world leaders offered a variety of perspectives and proposals. 1. Does the global economic crisis signal that the American model of free market capitalism is fundamentally flawed? Not necessarily flawed, just bruised a little. The American model, capitalism does not fully address the different social situations of all of the countries around the world, which are: those that are centrally planned capitalism, centrally planned socialism, and market socialism. Each system requires different approaches to prevent and alleviate an economic crisis 2. Policymakers in Japan, the world’s second-largest economy must transition their nation away from a manufacturing-dependent model for growth. What industry sectors might emerge as the new drivers of economic growth? The service sector and environmental manufacturing and service opportunities abound for Japan as it transitions’ from a manufacturer of goods to a producer of goods and services. One of the fastest-growing sectors of world trade is the trade of services between high income and low or middle- income countries. Japan with its location in Asia stands to profit from their distribution of services to that continent. 3. Do you think that the economic stimulus programs in the United States, Asia, and elsewhere are the right approach to pulling the world out of recession? The movement of capital, the production of goods, the balance of payment, trade surpluses, trade deficits, and service trades are all key driving forces surrounding a country’s economy. The US balance of payment in both its current and capital accounts are in the negative range. Therefore, it is unlikely that the US can further influence the world’s economy. Case 2-2: One Laptop Per Child Overview: In 2005, after 20 years, Nicolas Negroponte, announced he was leaving to pursue an ambitious vision: bridging the digital divide between developed and developing nations by providing powerful PCs to schoolchildren in impoverished parts of the world. Negroponte named his initiative One Laptop Per Child. 1. Why are Microsoft, Intel, and other leading for-profit companies interested in low-cost computers for the developing world? Forty percent of the world’s population resides in low-income countries the exact ones that the OLPC program is targeting. These major companies understand the need to grow their consumer base in countries that are low income or low-middle income countries. These companies are betting that the economies of these low-income countries will grow in the future. 2. Do you agree with Negroponte’s decision to partner with Microsoft? Student answers will vary depending on whether or not they agree with the decision. However, student answers should include statements regarding the role(s) international companies play in expanding the OLPC program around the world. 3. Assess the thinking behind the “give one, get one” promotion. Do you think this is a good marketing tactic? The goal of OLPC was to give laptops to children in low-income countries, not US and Canadian children. The stated goal of the tactic was to increase production via increased sales – but not to their target market. At best, this is a stop gap measure, designed to accomplish two disparate goals: increase production to lower unit costs and increase exposure to the program. Case 2-3: From Communism to Capitalism: Vietnam’s Economic Transformation Overview. Vietnam is an underdeveloped country with a great market potential. Many developed countries have invested money in the Vietnam market since the early 1990s. America became involved in the process of investment later and based normal trading relations (NTR) with Vietnam only in mid-1990s. Foreign countries have experienced great market opportunities at Vietnam due to low labor cost and the availability of human resources. American companies involved in trade relations with Vietnam face many challenges in market development. 1. Assess the market opportunities in Vietnam for both American consumer-products companies and American industrial-products companies. What is the nature of the opportunity? Even though the United States were preceded by other countries in establishing market relations with Vietnam in early 1990s, American companies (such as Gillette, AT&T, ExxonMobile, etc) started to work on the issue after NTR establishment between Vietnam and America. Vietnam gives a great opportunity for American industrial-products and consumer-products companies. The infrastructure in Vietnam is weak, therefore electric, road-building, and phone companies can expect to profit greatly from investing in Vietnam market expansion. Due to the cheap labor-cost, the U.S. can build (and it actually does) factories that would produce such goods as clothes and computers and export them back to the United States or around the globe. Vietnam is a “mostly unfree” country in degrees of economic freedom, but the country’s involvement in WTO can change the situation and make the state more market-oriented. 2. Nike and several other well-known American companies are sourcing some of their production in Vietnam, thereby taking advantage of a labor force that is paid the equivalent of 2$ per day or less. Are goods labeled “Made in Vietnam” likely to find widespread acceptance among American consumers? The mentioned situation has an equivalent in the already established U.S.-Chinese market. “Made in Vietnam” goods will find buyers in the U.S. and in other countries. If the products prove themselves to be reliable and trustworthy, while being inexpensive (and they will be based on low-cost labor force), these products should find widespread acceptance among U.S. consumers. 3. Some critics have argued that Cuba is more deserving of diplomatic and trade relations with the United States than Vietnam. What are some of the factors behind this argument? Ranked by degree of economic freedom index, Vietnam is described as a “mostly unfree” country while Cuba is that of “depressed” group. One factor behind the argument that Cuba is more deserving of diplomatic and trade relations is that of Cuban’s location on the world map. Cuba is a closer neighbor to the U.S. Besides this, there is the argument that we fought a war with Vietnam and lost; while we have never been at war with Cuba. Case 2-2: Is China’s Currency Too Strong? Overview: China is one of the largest trade partners of the United States. The Chinese government has been attempting to make Chinese goods competitive with those of the United States by revaluing Chinese currency yuan. United States trade representatives protest against the possible revaluation saying that it can lead to changes in Chinese-American trade relationship and cause losses for American companies investing to Chinese market. 1. Consumer goods, including shoes and electronics, represent about 80 percent of U.S. imports from China. American consumers have saved an estimated $600 billion over the past 10 years by buying inexpensive Chinese goods. If the Chinese government revalues the yuan by 20 percent or more and American consumers pay higher prices, is this a desirable outcome? It’s definitely not a desirable outcome for American consumers and for American economy at all. If prices for these products were to go up, quantity demanded will most probably go down. Chinese goods such as clothes and shoes have a low-income or medium-income population as a consumer who will not pay higher price if there would be something cheaper. Historically, Chinese goods are known for low price and not the best quality. China is the largest big emerging market (BEM). If the relationship between China and the investing countries should change, it could cause a tremendous shift in world trade. If the Chinese currency goes up, there would be less profitable for other countries (especially the United States) to invest. The result might be negative for China. USA can always use Mexico, while Europe might use Asian countries, even though it would be a tremendous challenge. The impact on our economy would be significantly negative. 2. Protectionist sentiments in the United States are fueled by the argument that China is to blame for the flood of imports, the giant U.S. current account deficit, and downward pressure on wages in some industries. Do you agree? The United States Congress tries to use protectionist sentiments against China in blaming it for U.S. current account deficit, the flood of imports, and downward pressure on wages in some industries. I don’t believe that China can or should be blamed for problems in the American economy. American-Chinese relationships are beneficial for both sides. China provides American market with low-cost products and low-interest rate loans. China is one of the greatest trading partners of the United States. If this relationship were to be restricted, America would experience a great challenge trying to recover. To say it would precipitate an economic crisis would not be overreaching. The best thing for the American-Chinese relationship is to keep free trade process between two countries open and untouched. 3. Do you think an aggressive legislative posture with respect to China’s currency is the best approach for any trade partner to take? No. An aggressive posture does nothing but cause strained relations between the two countries. You should not try to force your point by threatening them with sanctions, tariffs, or undue restrictions. Long-term relationships are secured and flourish due to mutual need and benefits. This is where we should be concentrating. TEACHING TOOLS AND EXERCISES Additional Cases: “Global Wine War 2009: New World versus Old.” Christopher A. Bartlett, HBS, 910405. Out-Of-Class Reading: Assign the following seminal article on marketing and ask students to apply the concepts presented to global marketing. Theodore Levitt, “Marketing Myopia,” Harvard Business Review 80, no. 7/8 (July-August 2004), pp. 138-149. Internet Exercise: Have students go to http://finance.yahoo.com/currency?u. This site offers a foreign exchange calculator that allows easy comparison of currency exchange rates. Students will select a few currencies such as the Thai baht, the Chinese Yuan, the Malaysian ringed, and Indonesian rupee and compare exchange rates. Activity: Either in groups or individually, students should begin preparing their Cultural, and Economic Analysis and Marketing Plan as noted in Chapter 1. Film: Have students watch the movie “Wall Street.” Although not dealing directly with international finance, the film gives students insight into various financial dealings and transactions and the potential outcomes associated. SUGGESTED READINGS Books Enghold, Christopher. Doing Business in Asia’s Booming China Triangle. Upper Saddle River, NJ: Prentice Hall, 1994. Finger, Michael J. Institutions and Trade Policy. Northampton, MA: Edward Elgar, 2002. Garten, Jeffrey E. The Big Ten: The Big Emerging Markets and How They Will Change Our Lives. New York: BasicBooks, 1997. Isaak, Robert A. Managing World Economic Change. Upper Saddle River, NJ: Prentice Hall, Inc., 1995. Kennedy, Paul. The Rise and Fall of Great Powers. New York: Random House, 1987. McCue, Sarah. Force to Force: Building Profitable E-Commerce Strategies. Mason, OH: Thomson Higher Education, 2006. Roberts, Paul C., and Karen Le Follette Araujo. The Capitalist Revolution in Latin America. Oxford: Oxford University Press, 1997. Shapiro, Alan C. Multinational Financial Management, 5th ed. Upper Saddle River, NJ: Prentice Hall, Inc., 1995. Porter, Michael E. The Competitive Advantage of Nations. New York: The Free Press, 1990. Thurow, Lester. Head to Head: The Coming Economic Battle Among Japan, Europe, and America. New York: William Morrow and Company, Inc., 1992. Articles Cavusgil, S. Tamer. “Measuring the Potential of Emerging Markets: An Indexing Approach.” Business Horizons 40, no. 1 (January/February 1997), pp. 87-91. Czinkota, Michael R. “The World Trade Organization – Perspectives and Prospects,” Journal of International Marketing 3, no. 1 (1995), pp. 85-92. Dowlah, C.A.F. “The Future of the Readymade Clothing Industry in the Post-Uruguay Round World.” World Economy 22, no. 7 (September 1999), pp. 933-953. Golden, Peggy A., Patricia M. Doney, Denise M. Johnson, and Jerald R. Smith, “The Dynamics of a Marketing Orientation in Transition Economies: A Study of Russian Firms,” Journal of International Marketing 3, no. 2 (1995), pp. 29-49. Kaikati, Jack G., George M. Sullivan, John M. Virgo, T. R. Carr, and Katherine S. Virgo, “The Price of International Business Morality: Twenty Years under the Foreign Corrupt Practices Act,” Journal of Business Ethics 26, no. 3 (2000), pp. 213-222. Knight, Gary and S. Tamer Cavusgil. “Innovation, Organizational Capabilities and the Born Global Firm,” Journal of International Business Studies 35, no. 2 (2004), pp. 121-141. Prowse, Michael. “Is America in Decline?” Harvard Business Review 70, no. 4 (July/August 1992), pp. 36-37. Yan, Rick, "To Reach China's Consumers, Adapt to Guo Qing," Harvard Business Review 72, no. 5 (September/October 1994), pp. 66-74.