Transcript Lecture 2

Chapter 2
The Global Business Environment
Outline
 Key variables in the global economic environment
Population
Economic Development:
GDP, GNP, Competitiveness, etc
Trade
Natural Resources
Foreign Investment
Environment
Introduction
☆Effective international management starts
with a knowledge of key variables in the
global economic environment.
 the size and growth rates of country markets; populations;
 trade volumes, compositions, and growth rates;
 natural resource bases and labor costs; and financial positions
☆An overall knowledge of the wheres, whats,
whys, and hows of the countries and regions
of the world can be used as an initial way to
identify the threats and opportunities that
might arise in international operations.
Ⅰ. Population
World Population Milestones
8 Billion (2024)
According to the most recent United Nations estimates, the human population
of the world is expected to reach 8 billion people in the spring of 2024.
7 Billion (2011)
According to the United Nations, world population reached 7 Billion on
October 31, 2011.
6 Billion (1999)
According to the United Nations, the 6 billion figure was reached on October
12, 1999 (celebrated as the Day of 6 Billion).
Previous Milestones
5 Billion: 1987 4 Billion: 1974 3 Billion: 1960
2 Billion: 1927 1 Billion: 1804
Population in the world is currently
growing at a rate of around
1.14% per year.
The average population change is
currently estimated at around
80 million per year.
Source: worldometers.info
Source: worldometers.info
Source: Internetworldstats.com
Implications
 The population trends have enormous implications
for global employment.
 High population growth rates have implications for
the types of products that are and will be in demand.
 Substantial variability exists among countries with
respect to the concentration of the population within
the country.
 International migration has a major impact on overall
trade and balance of payments.
In China, Cargill finds a sweet spot
☆US agribusiness giant Cargill Inc is looking to further expand its
presence in China as the country's demand for diversified food products
continues to be on the upswing.
☆China, India and Brazil have become fast growing markets for
international agricultural product marketers and producers from the US
and Europe.
☆According to the National Bureau of Statistics, in recent years the
average person in China has been consuming 5% more meat, 10% more
milk, and 8% more cooking oil than five years ago.
☆"At Cargill, we believe that to meet the growing global food needs, one
of the key essentials is an open global market. China's entrance into the
WTO was a critical step that ensured China could use the global food
system efficiently to fill in the gaps in its overall supply."
China: a major market for books in English
 European and American publishers might be having a hard
time in their own markets but at least they have respite in China.
 China is now the world's biggest book publishing market by
volume with 7.7 billion books published last year, up 7.5% on
the previous year, according to the General Administration of
Press and Publication.
 According to the British Council, China is producing 20 million
new English speakers every year, more than the population of
many countries. As a result, sales of books in English are
soaring: 14,708 book titles, mostly in English, were imported by
China last year, up 7.2% on the previous year.
Ⅱ. Economic Development
▲Indexes:
 GNP /GDP: the first rough measure of
market size to capture the volume of
goods and services produced and
consumed in a country.
 Growth rate of GNP: signal of the speed at
which markets are growing
 GDP /GNP per capita: an indication of the
income levels, which can indicate the
types of products in demand and wage
levels
List of continents by GDP (nominal) 2013
Source: IMF（2013）
List of countries by GDP (nominal) 2013
Source: IMF（2013）
Countries by 2013 GDP (nominal) per capital
Source: en.wikipedia.org
China GDP Trends and Real GDP Growth Rate
Source:“China GDP trends ” ( http://www.starmass.com/)
Major problems of the indexes
 Indigenous people in subculture economics(SCEs) do not
participate in the official economy (e.g. producers of
handicrafts, cultural products and handmade clothing).
 Illegal goods and service not appearing in GNP statistics
— “Underground Economy”
 The prices for the same product may not be the same among
different countries when expressed in a common currency. (e.g.
Starbucks charges as much as 50% more on some of its products sold in
China than in the U.S., U.K. and India. The margin in China and the Pacific
region is as high as 32%, compared with 21.1% in the U.S. and 1.9% in
Europe, the Middle East and Africa.)
Method: Purchasing power parity(PPP)
If PPP is applied to relatively expensive high-income countries,
it usually leads to a fall in reported GNP per capita.
List of countries by GDP
per capita (nominal)2013
List of countries by GDP
per capita (PPP) 2013
Source: IMF(2013)
OECD comparative price levels
Purchasing power parity (PPP) is an economic theory and a technique used
to determine the relative value of currencies, estimating the amount of
adjustment needed on the exchange rate between countries in order for the
exchange to be equivalent to (or on par with) each currency's purchasing
power.
Prive level (USA=100)
 All the indexes mentioned above are indications of
the past performance of the economy:
market size, income distribution, and wage rates.
 As with many areas of business management and
strategy, some indications of future performance
are useful:
World Competitiveness Report
(ranks countries based on hundreds of factors that are
thought to contribute to future growth)
The Global Competitiveness Index 2014–2015
rankings and 2013–2014 comparison
Source: The Global Competitiveness Report 2014–2015
The Global Competitiveness Index of China
Source: The Global Competitiveness Report 2014–2015
Investors' top 10 regional preferences
Global cities index
Source:2014 Global Cities Index and Emerging Cities Outlook
Ⅲ. Trade, Natural Resources, and Foreign
Investment
1. Trade
An analysis of the trade volumes, growth
rates, composition, and destinations and
sources can provide useful insights into
emerging sources of supply, shifting
comparative and competitive advantage,
and new markets.
The trends in the trade of manufactured goods
 The volume of trade is rising dramatically
 The number of source countries is rising as well
 The composition of the trade of many countries
has changed
◆These trends have been driven by the spread of product and
process technology, the fall of transportation costs relative to
production costs, and the reduction of tariff and nontariff barriers
to trade.
Leading exporters and importers
in world merchandise trade(excluding intra-EU (27) trade） 2012
(Billion dollars and percentage)
Source: WTO 2013 International Trade Statistics
Leading exporters and importers
in world commercial services, 2012
（Billion dollars and
percentage）
Source: WTO 2013 International Trade Statistics
The structure of China’s international trade (percent)
Source: China Custom Statistics, various year
China's changes on trade strategy
 China introduced its trade reform policy at the end of the 1970s
when China ranked 32nd among nations in global trade, due to
China's "Import Substitution" strategy.
 For several decades, China has built its economic strategy on
four pillars: exports, foreign direct investment, fixed-asset
investment and domestic consumption.
 China's fast trade development is attributed to its
implementation of a strategy and policy featuring "active
absorption of foreign direct investments and encouragement of
foreign trade development" for the sake of coping with global
economic integration and international industrial relocation.
2. Natural resources
 The relative value of unprocessed natural
resources in international trade had declined.
 A combination of technology transfer and
relatively low labor and land costs has lead to
the export of fresh and processed agricultural
and fishery products.
3. FDI
 Foreign direct investment (FDI) influences not
only the flow of capital but also the flows of
product and process technology and trade
patterns and volumes.
FDI Confidence Index (2014)
Source: “The 2014 Foreign Direct Investment Confidence Report” by A.T. Kearney
FDI of China
 For the first time since 2003, China has surpassed the United States as the
world’s largest recipient of global foreign direct investment (FDI). During the
first six months of the year, FDI flows to China totaled $59 billion, a slight
decline from $61 billion in the first half of 2011. Meanwhile, FDI flowing to
the U.S. reached $57.4 billion, a decline of 39.2 percent from a year earlier.
Overcoming liability of foreignness
 As more Chinese companies clamor to go global,
the country has vaulted to become the world's third
largest overseas investor in 2012, a significant jump
from the sixth spot in 2011.
 Since 2000, China has pursued an active "going
global" policy to support the internationalization of its
firms, and it has flanked these national policies with
an active program.
 Chinese MNEs have become important outward
investors but they all need to be accepted in a nondiscriminatory manner as increasingly important
players in the world FDI market.
Building up in the West
• Europe is experiencing the start of a structural surge in
outbound direct investment in advanced economies by Chinese
firms.
 Tencent, a China-based leading provider for
comprehensive Internet service, announced
Thursday it has set up a joint venture with
Indonesia largest media company PT Global
Mediacom in a bid to further explore the country
vast Internet service potential.
 In 2010, Geely, a Chinese automaker based in
East China's Zhejiang province, bought a 100percent share of the Sweden-based Volvo.
Volvo's sales volume is expected to hit 800,000
units by 2015.
Ⅳ. The Environment
 For the multinational enterprise and its managers, there is an
awareness of the impact of economic development on the
environement.
 Water creation (and disposal), water supply and use, air
quality, overfishing and overlogging, acid rain, and so forth
variously affect business.
 E.g. in the Phillippines some Japanese companies have
complained that new environmental standards for new
investments are more stringent than they are in Japan.
 The number of constituencies that multinational firms are
potentially answerable to has increased dramatically with the
heightened awareness of our interconnectedness.