Transcript International Business

Chapter Four
The Economic Environment
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International Business 10e Daniels/Radebaugh/Sullivan
International Business
Chapter Objectives
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Learn differences among the world’s
major economic systems
Learn criteria for dividing countries
into economic categories
Discuss economic issues that
influence international business
Assess the transition process for
market economies
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Introduction
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Managers need to understand economic
environments to predict trends that might
affect their company’s performance.
A country’s economic policies are a leading
indicator of the government’s goals and its
planned use of economic tools and market
reforms.
The subject of economic development is
important to citizens, managers, policymakers,
and institutions,
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Economic Issues for International
Businesses
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What type of economic system does the
country have?
What is the size, growth potential, and
stability of the market?
Is the company’s industry in that
country’s public or private sector?
• If public, does the government allow private
competition?
• If private, is it moving towards public
ownership?
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Economic Issues for International
Businesses, cont
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Does the government view foreign capital
as competition with or in partnership with
public or local private enterprises?
How does the government control the
nature and extent of private enterprise?
How much of a contribution is the private
sector expected to make in assisting the
government formulate overall economic
objectives?
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Key Economic Forces
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General economic framework
Economic size and stability
Existence and influence of capital markets
Factor endowments
Indicators
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Growth
Inflation
Surpluses
Deficits
Market Size
Availability of economic infrastructure
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Factor Conditions
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Inputs to the production process
• Human resources
• Physical resources
• Knowledge
• Capital
• Infrastructure
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Factor conditions are especially
critical for the production of goods
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Demand Conditions
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Market potential
• Composition of home demand (nature of buyer
needs)
Composition?
• Size of home demand
Size?
• Growth of home demand
Growth?
• Internationalization of demand
Internationalization?
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Demand conditions are
especially critical for
market-seeking
investments
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Gross National Income
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Tool to measure one country against
another
• Size
• Demand
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Gross National Income (formerly the
Gross National Product)
GNI is the market value of final goods and
services newly produced by domestically owned
factors of production.
Countries with high populations and high per
capita GNI are most desirable in terms of market
potential
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Gross Domestic Product
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GDP: the value of production that
takes place within a nation’s borders,
without regard to whether the
production is done by domestic or
foreign factors of production
Example • Both a Ford and a Toyota manufactured in the
United States counts towards US GDP.
• A Ford produced in Mexico would not.
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Importance of Per Capita GNI
Common Name
Per Capita GNI
($)
World Bank
Category
Developing/Emerging
Country
755 or less (in
2000)
Low Income
Developing/Emerging
Country
756-2,995
Lower Middle
Income
Developing/Emerging
Country
756-9,265
Middle Income
Developing/Emerging
Country
2,996-9,265
Upper Middle
Income
Developed/Industrial
Country
9,266 or more
High Income
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Purchasing Power Parity
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PPP is the number of units of a country’s
currency required to buy the same
amounts of goods and services in the
domestic market that $1 would buy in the
United States
PPP is a useful measure since it accounts
for international differences in price
• Example: China has a higher PPP than Japan
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Countries Classified by Region
From Map 4.2
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Human Development
A country’s degree of human development , in
terms of both economic and social factors, us studied
in order to estimate its current and future economic
activity.
Complementing economic indicators by also analyzing
the overall quality of life in a country.
The Human Resource Index:
 Longevity: life expectancy at birth.
 Knowledge: adult literacy rate and primary,
secondary and tertiary gross enrollment ratio.
 Standard of Living: GNI per capita measured
expressed in PPP.
Features of an Economy
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Inflation: the pervasive and sustained increase
in the aggregate level of prices as measured by a
cost of living index.
Results when aggregate demand grows faster
than aggregate supply (too many people trying to
buy too few goods; prices increase faster than
incomes)
High inflation leads to:
setting higher interest rates
Installing wage and price controls
Imposing protectionist trade policies and currency
controls.
The Consumer Price Index (CPI) measures the
average change in consumer prices over time in a
fixed market basket of goods and services.
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2. Unemployment: represents the number of workers
who want to work but do not have jobs.
The unemployment rate is:
The number of unemployed workers /
The total civilian labor force (all those wiling and able
to work for pay)
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The Misery Index: the sum of a country’s inflation
and unemployment rates.
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3. Debt: the sum total of a government’s financial
obligations.
The state’s borrowing from its citizens, from foreign
organizations, from foreign governments, and from
international institutions.
Internal Debt: is the portion of the government
debt that is denominated in the country’s own
currency and is held by domestic residents.
External Debt: is the portion of the government
debt that is denominated in foreign currencies and is
owed to foreign creditors.
Heavily Indebted Poor Countries (HIPCs)
Poor countries with large debts that are the target of
initiatives to alleviate the severe external debt
burdens of less developed countries, as a means of
assisting their development.
4. Income Distribution: describes what share of a
country’s income goes to various segments of the
population (each segment’s share of GNI per
capita).
5. Poverty: the state of having little or no money,
few or no material possessions, and little or no
resources with which to enjoy a reasonable
standard of living.
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Poverty
Globally, the world is:
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78% poor (ppp per capita less than $3479);
11% middle income;
11% rich (ppp per capita more than $8000)
6. The Balance of Payments:
Officially known as the Statement of International
Transactions, and records a country’s international
transactions among companies, governments,
and/or individuals.
Reports the total of all money flowing into a country
minus all money flowing out of that country to
others, during a given period.
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The two primary accounts under the Balance of
Payments:
a. The Current Account: tracks all trade in goods
and services, as well as income from assets
abroad.
b. The Capital Account: tracks transactions in real
or financial assets between countries, as well as
loans given to foreigners and loans received by
citizens.
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Countries Classified by Economic
System
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Figure 4.2
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Types of Economic Systems
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An Economic System is the set of structures
and processes that guides the allocation of scarce
resources (ownership of resources), and shapes the
conduct (degree of control) of business activities in
a nation.
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Market Economy: resources are primarily owned
and controlled by the private sector, not the public
sector.
• Consumer sovereignty is the right of consumers
to decide what to buy
• Prices are determined by supply and demand
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Free-market (capitalistic) economies
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are built upon:
The private ownership and control of the factors of
production.
Freedom of market entry and exit.
Determination of prices according to the laws of
supply and demand.
The Laissez-Faire Principle
• Non-intervention by government in a country’s
economic activity.
• Results in effective and efficient allocation of
resources
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Economic Freedom, con’t
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Command Economy (Centrally Planned
Economy): all dimensions of economic
activity, including pricing and production
decisions, are determined by a central
government plan
• Government owns and controls all
resources
• Prices are determined by government
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Economic Freedom, con’t
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Mixed Economy: Some degree of government
ownership and control
Economic decisions are largely market-driven and
ownership is largely private.
Government intervenes in in many economic
decisions.
No economy is purely market or command
Economic systems are along a spectrum of
freedoms
Most command economies are moving towards a
market economy
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The Means of Transition
Central Planning Systems
v.
Consumer Sovereignty
The success of the transition process depends on:  Government’s ability to liberalize economic activity.
 Reform business practices.
 Establish appropriate legal and institutional
frameworks.
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Privatization: the sale and/or legal transfer of
government-owned resources to private
individuals.
Benefits: 
Reduces government debt.
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Increases market efficiency.
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Private enterprises must compete in open for
materials, labor, and capital; thus, they succeed
or fail on their own merits.
2. Deregulation: the relaxation or removal of
restrictions on the free operation of markets and
business.
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Benefits:
 Allows businesses to be more productive and, thus,
make investments in the innovations and activities
that can lead to economic growth.
3. Property Rights: The protection of tangible and
intangible property rights permits individuals to
enjoy the benefits of their accomplishments.
4. Fiscal and Monetary Reform: Adopting marketoriented instruments such as interest rates and
taxation policies, in order to achieve stability,
reduce unemployment and inflation, which will
attract investments needed for growth.
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Economic Factors International
Businesses Must Address
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Inflation
Surpluses
Deficits
Balance of Payments
External Debt
Internal Debt
Privatization
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Reforms and Economic Progress
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Figure 4.3
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Physical & Societal Influences
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Chapter Review
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Learn differences among the world’s
major economic systems
Learn criteria for dividing countries
into economic categories
Discuss economic issues that
influence international business
Assess the transition process for
market economies
2004 Prentice Hall, Inc
4-20