International Business

1
International Business

• Chapter Four
• The Economic Environment

2
Chapter Objectives

• To appreciate the importance of the economic
  analysis of foreign markets
• To identify the major dimensions of international
  economic analysis
• To compare and contrast the economic indicators
  of countries
• To profile the characteristics of the types of
  economic systems
• To discuss the idea of economic freedom
• To profile the idea, drivers, and constraints of
  economic transition

3
Introduction

• All countries differ in terms of
• -levels of economic development
• -economic performance
• -economic potential
• A firms managers must understand the economic
  environments of those countries in which it
  operates, as well as those of countries in which
  it does not, in order to predict how trends and
  events the world over will likely affect firm
  performance.

4
Key Economic Forces

• The general economic framework of a country
• Its degree of economic stability
• The existence and role of capital markets
• The presence of factor endowments
• Market size
• The existence of economic infrastructure

5
Factor Conditions

• Factor conditions a nations inputs into the
  production process, such as human, physical,
  knowledge, and capital resources and
  infrastructure
• Not only is it difficult to specify a
  definitive set of economic indicators
  that precisely assess the performance and
  potential of a nations economy, but it is also
  difficult to understand the systematic
  relationship of one variable to another.

6
Fig. 4.1. Physical and Societal Influences on
International Business
7
Gross National Income

• Gross national income (GNI) the market value of
  all final goods and services produced by a
  countrys domestically-owned firms in a given
  year
• ECONOMIES RANKED BY 2003 GNI US
  MILLIONS
• 1. United States 11,012,597 9. Spain
  700,475
• 2. Japan 4,360,824 10. Mexico
  637,159
• 3. Germany 2,085,464 11. South Korea
  576,426
• 4. United Kingdom 1,680,069 12. India
  570,760
• 5. France 1,521,613 13. Brazil
  479,515
• 6. China 1,416,751 14. Australia
  436,470
• 7. Italy 1,243,168 15. The Netherlands
  425,556
• 8. Canada 773,943 16. Russian Fed.
  374,810
• Source World Bank Development Indicators 2003

8
Map 4.2 The Worlds Wealth Measured in Per
Capita GNI
9
Purchasing Power Parity

• Purchasing power parity the number of units of
  a countrys currency required to buy the same
  amount of goods and services in the domestic
  market that one unit of income would buy in
  another country.
• Purchasing power parity PPP is estimated by
  calculating the value of a universal basket of
  goods that can be purchased with one unit of a
  countrys currency.

10
Map 4.3 The Worlds Wealth Measured in Terms of
Purchasing Power Parity
11
The Human Development Index

• Is designed to capture long-term progress rather
  than short-term changes
• Measures longevity, knowledge (adult literacy
  rates), and standards of living
• Combines indicators of real purchasing power,
  education, and health
• The human development index provides a more
  comprehensive measure that incorporates both
  economic and social variables.

12
Map 4.4 The Human Development Index
13
Second-order Indicators of Economic Development
and Potential

• Inflation
• Unemployment rate
• Debt
• Internal
• external
• Income distribution
• Poverty rate
• Balance of payments
• The Consumer Price Index (CIP) measures the
  average change in consumer prices over time in a
  fixed market basket of goods and services the
  misery index represents the sum of a countrys
  inflation and unemployment rates.

14
The Balance of Payments

• reports the total of all money flowing into a
  country less all money flowing out of that
  country to any other country during a given
  period of time
• records a countrys international transactions
  amongst companies, governments, and/or
  individuals during a given period of time
• The Balance of Payments BOP is officially
  known as the Statement of International
  Transactions.

15
The Balance of Payments Key Components

• Current Account
• Value of merchandise exports and imports
• Value of services exports and imports
• Value of income receipts and payments
• Net value of unilateral transfers
• Capital Account
• Value of capital inflows and outflows
• Value of financial inflows and outflows
• Net change in official reserve assets

16
Surpluses and Deficits

• A trade surplus indicates that the value of
  exports exceeds the value of imports.
• A trade deficit indicates that the value of
  imports exceeds the value of exports.
• Trends in balance of payments data can reveal
  important strategic implications with respect to
  a countrys economic environ- ment and potential
  economic policies.

17
Economic System Defined

• Economic system the set of structures and
  processes that guides the allocation of scarce
  resources and shapes the conduct of business
  activities in a nation
• Spectrum of Economic Systems
• Centrally-planned Free-market
• N. Korea China Brazil Japan
  USA
• Cuba Russia India Germany
  Canada
• Vietnam S. Korea France UK
  

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Types of Economic Systems

• Market Economy a free-market (capitalistic)
  economy built upon the private ownership and
  control of the factors of production
• Command Economy a centrally-planned economy
  built upon government ownership and control of
  the factors of production
• Mixed Economy an economy in which economic
  decisions are largely market-driven and ownership
  is largely private, but significant government
  intervention is still evident

19
Fig. 4.3 Relationships between the Control of
Economic Activity and the Ownership of Production
Factors
20
The Economic Freedom Index

• approximates the extent to which a government
  intervenes in the areas of free choice, free
  enterprise, and market-driven prices for reasons
  that go beyond basic national needs
• classifies countries as
• -free
• -mostly free
• -mostly unfree
• -repressed

21
The Economic Freedom IndexDetermining Factors

• Trade policy
• The fiscal burden of the government
• The extent and nature of government intervention
• Monetary policy
• Capital flows and investment
• Banking and financial activities
• Wage and price levels
• Property rights
• Other government regulation
• Informal market activities

22
Map 4.5 Countries Ranked According to Economic
Freedom
23
Map 4.6 GDP Per Capita Growth Rate
24
Economic Transition

• The shift from a command or mixed economy to
• a freer market economy largely depends on a
  governments ability to
• -dismantle features such as central planning
• -create features such as consumer sovereignty.
• The success of the transition process depends
• upon the governments ability to liberalize
• economic activity, to reform business practices,
• and to establish legal and institutional
  frameworks.

25
Policies That Shape the Economic Transition
Process

• Privatization the sale and/or legal transfer of
  government-owned resources to private individuals
  and/or entities
• Deregulation the relaxation or removal of
  restrictions on the free operation of markets
  and business practices
• Property rights the protection of real
  (tangible) and intellectual (intangible) property
  
• continued

26

• Fiscal and monetary reform the reliance upon
  market-oriented instruments to achieve
  macroeconomic stabilization, the setting of
  strict budgetary limits, and the use of
  market-based policies to manage the money supply
• Antitrust legislation laws designed to
  maintain and promote market competition, i.e.,
  to prohibit the anticompetitive behavior of
  monopolies

27
Fig. 4.4 Reforms and Economic Progress
28
Implications/Conclusions

• The benefits of doing business in a given country
  are directly influenced by the size of the
  market, the wealth of consumers, and the
  openness, the stability, and the growth potential
  of the economy.
• continued

29

• The power of economic analysis is a function of
  identifying the best possible indicators and then
  understanding how they work both in isolation and
  interactively.
• The type of economic system is a strong predictor
  of a nations present economic performance and
  its future economic prospects.