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Global Marketing Management, 4e

Global Marketing Management, 4e. Chapter 2 Global Economic Environment. Chapter Overview. 1. Intertwined World Economy 2. Country Competitiveness 3. Evolution of Cooperative Global Trade Agreements 4. U.S. Position in Foreign Direct Investment and Trade

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Global Marketing Management, 4e

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  1. Global Marketing Management, 4e Chapter 2 Global Economic Environment Copyright (c) 2007 John Wiley & Sons, Inc.

  2. Chapter Overview 1. Intertwined World Economy 2. Country Competitiveness 3. Evolution of Cooperative Global Trade Agreements 4. U.S. Position in Foreign Direct Investment and Trade 5. Information Technology and the Changing Nature of Competition 6. Regional Economic Arrangements 7. Multinational Corporations Copyright (c) 2007 John Wiley & Sons, Inc.

  3. In 2005, the annual global trade in goods and services amounted to $12.5 trillion. Daily international financial flows now exceed $1.9 trillion. From 1990 to 2004, world GDP grew some 40 percent. In the same period, total world exports of merchandise and services increased by almost 120 percent. Introduction Copyright (c) 2007 John Wiley & Sons, Inc.

  4. Introduction • The net result of these factors has been the increased interdependence of countries/economies and increased competitiveness and the concomitant need for firms to keep a constant watch on the international economic environment. • Consumers and companies in the U.S. and Japan tend to be able to find domestic sources for their needs since their economies are diversified and extremely large. Copyright (c) 2007 John Wiley & Sons, Inc.

  5. 1. Intertwined World Economy • Despite the increasingly intertwined world economy, the United States is still relatively more insulated from the global economy than other nations. In 2004, the U.S. economy was about $11.7 trillion and imports about 80% more as it exports. Copyright (c) 2007 John Wiley & Sons, Inc.

  6. 1. Intertwined World Economy Copyright (c) 2007 John Wiley & Sons, Inc.

  7. 1. Intertwined World Economy Copyright (c) 2007 John Wiley & Sons, Inc.

  8. 1. Intertwined World Economy • The larger the country’s domestic economy, the less dependent it tends to be on exports and imports relative to its GDP. • Intertwining of economies by the process of specialization due to international trade leads to job creation in both the exporting and importing country. • Foreign direct investment (FDI) involves investment in manufacturing and service facilities in a foreign country. Copyright (c) 2007 John Wiley & Sons, Inc.

  9. 1. Intertwined World Economy • As firms invest in manufacturing and distribution facilities outside their home countries to expand into new markets around the world, they have added to the stock of foreign direct investment. • The increase in foreign direct investment has also been promoted by the efforts of many national governments to woo multinationals. • Portfolio investment or indirect investment refers to investments in foreign countries that are withdrawable at short notice, such as investments in foreign stocks and bonds. Copyright (c) 2007 John Wiley & Sons, Inc.

  10. 1. Intertwined World Economy Copyright (c) 2007 John Wiley & Sons, Inc.

  11. 1. Intertwined World Economy • The weekly volume of international trade in currencies exceeds the annual value of the trade in goods and services. • All nations with even partially convertible currencies are exposed to the fluctuations in the currency markets. • A rise in the value of the local currencies make exports more expensive; a rising currency value also deters foreign investment in a country and may encourage outflow of investment. Copyright (c) 2007 John Wiley & Sons, Inc.

  12. 1. Intertwined World Economy • Examples of severe currency fluctuations are the 1995 Mexican meltdown, and the Asian financial crisis (1997-1999). • Unfortunately, the influence of these short-term money flows are nowadays far more powerful regarding exchange rates than an investment by a Japanese or German automaker. • Recent examples of financial crisis occurred in Argentina and Brazil (2002). Copyright (c) 2007 John Wiley & Sons, Inc.

  13. 2. Country Competitiveness • Country competitiveness refers to the productiveness of a country, which is represented by its firms’ domestic and international productive capacity. • Country competitiveness is not a fixed thing. • The role of human skill resources has become increasingly important as a primary determinant of industry and country competitiveness Copyright (c) 2007 John Wiley & Sons, Inc.

  14. 2. Country Competitiveness • The World Economic Forum’s Global Competitiveness Report of 2005-6 placed two Asian Tigers (Taiwan and Singapore) among the world’s top 10 economies along with Finland, the United States, Sweden, Denmark, Iceland, Switzerland, Norway, and Australia (see Exhibit 2-4). • Although the United States and Switzerland have been the most innovative in the last three decades, other OECD countries have been increasingly catching up. Copyright (c) 2007 John Wiley & Sons, Inc.

  15. 2. Country Competitiveness Copyright (c) 2007 John Wiley & Sons, Inc.

  16. 2. Country Competitiveness Copyright (c) 2007 John Wiley & Sons, Inc.

  17. 3. Emerging Economies • Over the next two decades, the big emerging markets (BEMs) will hold the greatest potential for U.S. exports • The largest BEMs include the Chinese economic area (including China, Hong Kong region, and Taiwan), India, C.I.S. (Russia, Central Asia, and the Caucasus states), South Korea, Mexico, Brazil, and Argentina • R.I.C.- Russia, India China (with Brazil, it’s sometimes called B.R.I.C.) • Each of these economies has unique economic, market, and industry characteristics, that, in turn present opportunities and challenges for local policy makers, businesses and the the international business and economic community Copyright (c) 2007 John Wiley & Sons, Inc.

  18. 3. Emerging Economies Copyright (c) 2007 John Wiley & Sons, Inc.

  19. 4. Evolution of Cooperative Global Trade Agreements • ITO (International Trade Organization): • ITO was established after World War II. • GATT (General Agreements on Tariffs & Trade): • After 1950, GATT succeeded ITO. • The main operating principle of GATT was the concept of most favored nations (MFN). • GATT was successful in lowering trade barriers. Copyright (c) 2007 John Wiley & Sons, Inc.

  20. 4. Evolution of Cooperative Global Trade Agreements • WTO (World Trade Organization Trade): • The eighth and last round of GATT talks – called the “Uruguay Round” (1986-1994) established an international body called the WTO which took effect on January 1, 1995. • As of February 16, 2005, WTO had 148 member countries. • WTO has statutory powers to adjudicate trade disputes among nations and has its own secretariat. • WTO is the new legal and institutional foundation for a multilateral trading system. Copyright (c) 2007 John Wiley & Sons, Inc.

  21. 4. Evolution of Cooperative Global Trade Agreements • WTO’s ninth round---called the “Doha Development Agenda” (Doha Round) was launched in Doha, Qatar in November 2001 (see Exhibit 2-5). Interim deal in December 2005 to end farm export subsidies by 2013 prevented collapse of the latest round of the talks. • The Doha Round of 2001 facilitated the way for China and Taiwan to get full membership in the WTO. Copyright (c) 2007 John Wiley & Sons, Inc.

  22. 4. Evolution of Cooperative Global Trade Agreements Copyright (c) 2007 John Wiley & Sons, Inc.

  23. 4. Evolution of Cooperative Global Trade Agreements • Although WTO is a global institutional proponent of free trade, it is not without critics. • The WTO dispute settlement mechanism is faster, more automatic, and less susceptible to blockages than the old GATT system. • The WTO Work Program on Electronic Commerce is in the process of defining the trade-related aspects of electronic commerce that would fall under the parameters of WTO mandates. Copyright (c) 2007 John Wiley & Sons, Inc.

  24. 5. Information Technology and the Changing Nature of Competition • Information technology and the changing nature of competition have created many challenges for the firms. • Over the Internet, any piece of electronically represented intellectual property can be copied. • The Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement was concluded as part of the GATT Uruguay Round. Update to accord ensuring patent protection does not block developing countries’ access to affordable medicines is the top of the agenda. Copyright (c) 2007 John Wiley & Sons, Inc.

  25. 5. Information Technology and the Changing Nature of Competition • Proliferation of E-Commerce and Regulations:Countries’ regulators have not kept pace with the rapid proliferation of international e-commerce and Internet-related activities. • In many countries, rules and regulations are vague regarding e-commerce transactions. • The United Nations Commission on International Trade Law (UNCITRAL) has formed a Working Group on Electronic Commerce to reexamine these treaties. Copyright (c) 2007 John Wiley & Sons, Inc.

  26. 6. Regional Economic Arrangements • An evolving trend in international economic activity is the formation of multinational trading blocs. • There are over 120 regional free trade areas worldwide. • Market groups take many forms, depending on the degree of cooperation and inter-relationships, which lead to different levels of integration among the participating countries. Copyright (c) 2007 John Wiley & Sons, Inc.

  27. 6. Regional Economic Arrangements • Types of Regional Economic Arrangements: • Free Trade Areas: Formal agreement among two or more countries to reduce or eliminate customs duties and nontariff barriers. Examples: NAFTA, MERCOSUR, CAFTA-DR & FTAA (proposed and currently stalled) • Customs Union: Addition of common external tariffs to the provisions of free trade agreements. Example: ASEAN. Copyright (c) 2007 John Wiley & Sons, Inc.

  28. 6. Regional Economic Arrangements • Common Market: Eliminates all tariffs and other barriers, adopts a common set of external tariffs on nonmembers, and remove all restrictions on the flow of capital and labor among member nations. Example: European Union. • Monetary Union: Represents the fourth level of integration with a single currency among politically independent countries. Example: EU and the euro. • Political Union: Highest level of integration resulting in a political union. Sometimes, countries come together in a loose political union for historical reasons, as in the case of the British Commonwealth which exists as a forum for discussion and common historical ties. Copyright (c) 2007 John Wiley & Sons, Inc.

  29. 7. Multinational Corporations • The U.S. government defines a multinational corporations (MNC) for statistical purposes as a company that owns or controls 10 percent or more of the voting securities, or the equivalent, of at least one foreign business enterprise. • At present, there are 70,000 MNCs with 690,000 affiliates in foreign countries. • MNCs’ total sales exceed $19 trillion. Copyright (c) 2007 John Wiley & Sons, Inc.

  30. 7. Multinational Corporations • One third of multinational companies’ trade is accounted for by intra-firm activities. • Two-thirds of of world trade in goods and services is controlled by multinational companies. • Of the 100 largest economies in the world, 51 are corporations. • The sovereignty of nations will perhaps continue to weaken due to multinationals and the increasing integration of economies. Copyright (c) 2007 John Wiley & Sons, Inc.

  31. 7. Multinational Corporations • In 1970, of the 7,000 multinationals identified by the United Nations, more than half were from two countries: the United States and Britain. • By 1995, less than half of the 36,000 multinationals identified by the United Nations came from four countries: the United States, Japan, Germany, and Switzerland. • The nation-state, while considerably weaker than its nineteenth century counterpart, is likely to remain alive and well. Copyright (c) 2007 John Wiley & Sons, Inc.

  32. 7. Multinational Corporations • Currently, factors such as currency movements, capital surpluses, faster growth rates, and falling trade and investment barriers have all helped multinationals from other countries join the cross-border fray. • It is not unusual for a startup firm to become global at its inception. Those firms are known as “born global.” Copyright (c) 2007 John Wiley & Sons, Inc.

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