Transcript The Economic Environment

Chapter 3
The Economic
Environment
To become familiar with concepts and tools used by economists for
comparing national economies.
To identify the differences between divergent economic systems,
including their market openness, social perspectives and the role of the
state in economic life.
To assess the prospects and opportunities of the world’s developing and
transitional economies.
To gain an overview of regional integration in the
global economy.
To highlight the challenges faced by the least
developed economies.
To compare national economies using the tools of
macroeconomics.
To examine key aspects of national economies,
including growth, employment, inflation and balance of
payments.
To identify differences in national economic systems,
spanning developed, developing and transition
economies, pointing out implications for business
strategy.
To assess the extent and depth of
regional integration.
To highlight the prospects and
challenges faced by the leastdeveloped countries
Comparing countries:
size and income
GNI and GDP per capita allow comparisons
between countries.
Gross national income (GNI) – total income from
all final products produced within a country,
including that arising from foreign investments
of its residents.
Gross domestic product (GDP) – value of total
economic activity within a country.
Purchasing power parity (PPP)
makes adjustments for differing
costs of living among countries.
GDP of selected countries
Source: IMF (2006) IMF Economic Outlook database, www.imf.org
Economic development
Definition: processes of change in economic activities
and organizations, on which the country’s wealth and
prosperity depend.
Types of economic activity:
1. Primary – agriculture, mining and fishing
2. Secondary – manufacturing and industrial production
3. Tertiary – services
Economic development usually progresses
through these three stages, although in resourcerich countries, wealth is mainly generated by
exploiting their resources (often through FDI).
Selected high-, middle- and low-income countries
Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan).
Selected developed, transition, developing
and least-developed countries
Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)
Economic growth
Definition: percentage growth in GDP or GNI from
year to year.
High growth rates are typically enjoyed by
industrializing countries and those rich in natural
resources, both of which attract FDI.
Growth tends to slow as GDP per capita rises.
Slowing growth in developed countries has led
MNEs to seek new markets in the emerging
economies.
Governments seek sustainable growth, but global
economic factors constrain governments’ influence.
Economic growth in selected countries
Source: The Economist Economic Indicators (2007), www.economist.com/indicators
Comparing countries:
inflation and employment
• Inflation can be measured using the consumer price
index (CPI) for each country.
– Inflation has become a global (as well as national)
phenomenon.
• Improving labour productivity can lead to raising
economic growth.
• Country differences in employment policies and
costs of labour are influential in stimulating (or
discouraging) business activity.
• Unemployment is linked to weak economic growth,
and can have social, as well as economic,
implications.
CPI inflation
Sources: Financial Times, 8, 30 November 2004; 30 November 2005; 24 May 2006
Annual growth in GDP per hour worked
Source: OECD (2008) Databases at Source OECD, oecd.org
Productivity and growth
Figure 3.6:
Unemployment in selected countries, 2006
Source: UNDP (2007) Human
Development Report 2007–2008
(Basingstoke: Palgrave Macmillan)
Balance of payments
• Definition: total credit and debit transactions
between a country’s residents and those of other
countries.
• Current account balance – A country may have a
surplus (meaning that it exports more than it
imports), or a deficit.
– A country’s balance of payments reflects the
competitiveness of its exporters and the demand
of its consumers for imports.
– Trade imbalances have become a global issue –
the US has a huge trade deficit, while China has a
trade surplus.
Current
account
balances (as
percentage
of GDP)
Source: The Economist
Economic Indicators (2007),
www.economist.com/indicat
ors
Inequality
Income inequality is measured by the Gini
coefficient and by calculating the proportion of
income earned by each quintile (20%) of the
population.
Accumulation of wealth in a few hands is
associated with liberal market economic systems
of advanced economies, but the concentration of
land and wealth in the developing world is also
responsible for inequality.
Inequality, especially combined with high levels of
poverty, can lead to social tensions and political
instability.
Inequality measurements for selected countries
Note on Gini coefficient: 0 = perfect equality, Source: UNDP (2006) Human Development Report 2006
(Basingstoke: Palgrave Macmillan)
100 = perfect inequality
Public finances
• Governments are responsible for the country’s
‘coffers’, taking in and spending huge sums of
money.
• The national budget balance and national debt
represent the state of government finances.
• Budget deficits have become a fact of life in many
countries.
• Both direct and indirect taxes are raised by
governments.
– Levels of taxation are important considerations
for firms contemplating FDI in a country; the flat
tax favoured by new EU member states has
helped to attract FDI.
Budget deficits in selected countries (as percentage of GDP)
Source: The Economist Economic
Indicators (2007),
www.economist.com/indicators
Top rates of
corporation
tax
Source: Financial
Times, 3 October
2005
Diverse economic systems
• Planned economy – supply, demand and prices
controlled by the state.
• Liberal market economy – principles of capitalism:
– Maximum freedom to carry on enterprises
– Protection of private property
– Minimum government intervention.
• Social market economy – market tempered by state
role, especially in social protection and welfare.
• Asian economic systems – alliance capitalism:
market economies based on links between
government and business.
Differing models
of capitalism
Transition economies
• Economies of Central and Eastern Europe – making
transition from communism to capitalist market
models.
– Central European states, including new EU
members, have been recognized as market
economies.
– Countries of South-East Europe and nations of the
former Soviet Union are making the transition to
market economies, including privatizations; the
legacy of the strong state remains in the latter
nations.
• China’s market reforms – growing influence of market
forces in the economy, but continuing dominance of
communist party political rule and state-controlled
enterprises.
FDI flows to selected countries in Central and Eastern Europe
Source: UN (2007) World Investment Report
2007 (Geneva: UN)
Regional integration
• Regional ties among countries can be between
governments, businesses and individuals – both
formal and informal.
• Regional economic integration …
– Has been facilitated by falling trade barriers,
enshrined in regional trade agreements.
– Is most developed in the EU, and especially in the
eurozone. However, divergence in national
economic systems continues.
• The ‘Triad’ theory of trade focuses on three major
regions: North America, Europe and Japan (although
the 3rd bloc should be broadened to Asia).
The least-developed economies
The world’s poorest countries, mainly dependent on
fragile agriculture and vulnerable to effects of
climate change (such as desertification and
flooding).
Mainly in sub-Saharan Africa, but also Asia (such as
Bangladesh).
The challenges:
◊ Poverty alleviation
◊ Building social cohesion
◊ Establishing stable government
◊ Promoting economic development
Conclusions
National economies diverge in their size, the nature
of their economic activities, and their economic
systems.
A growing number of countries are experiencing
economic growth and development, creating
opportunities for international business.
Despite growing economic integration globally
– Diverse national economic systems persist
– Regional integration is growing.
The least-developed countries are attracting
international business, but poverty and weak
governance persist.
3.1: Heineken (page 99)
1. What changes are taking place in global
drinking habits?
The greatest growth is in emerging markets,
such as China and Russia. Drinkers in North
America and Western Europe are shifting
away from beer towards wine and spirits. As
consumers’ lifestyles become more affluent,
they tend to move up to more premium
products, including low-alcohol beers.
3.1: Heineken (page 99)
2. Looking at the quotation in the first
paragraph, in what ways have changes in
Heineken’s management made it more
‘Anglo-Saxon’?
Heineken is a private company, just over 50% owned by the
Heineken family. This type of company is traditionally conservative
and inward-looking, recruiting managers from within and
maintaining a closely-knit culture based on cultural homogeneity.
The ‘Anglo-Saxon’ model is more individualist, relying less on
consensual decision-making. The new executive committee and
regional executives are now able to take decisions more quickly,
based on market trends which are rapidly unfolding. This is
especially true of decisions on mergers and acquisitions. After this
case study was written, Inbev acquired Anheuser-Busch of America,
bringing further consolidation in the global brewing industry.
3.1: Heineken (page 99)
3. To what extent are the changes at Heineken giving
it a competitive edge on its larger rivals?
The new approach at Heineken has led it to
emphasize innovation. It has launched a lowalcohol beer as an extension of its flagship
Heineken brand. It has been at the forefront of
innovation in packaging and the use of aluminium.
New slim aluminium bottles are designed for
nightclubs and bars. At the same time, it pursues
cost savings relentlessly, unafraid to close
breweries if necessary. Both innovation and cost
savings enhance its competitiveness, which it
needs to compete against larger rivals.
3.1: Heineken (page 99)
4. Why does the future look sparkling for the global
brewing companies in emerging markets?
Beer consumption is still rising in emerging
markets. Heineken has a 14% share in the Russian
market and has bought a number of Russian
breweries. As numbers of middle-class consumers
grow, these markets have potential for growth. The
more affluent consumers in these (as well as
mature markets) are turning more to speciality
beers. Beer has had an image problem in the past
in the mature markets, but this is less true in
emerging markets, where new lifestyles and beer
consumption are both rising.