3.0 THE ECONOMY AND BUSINESS

1. 3.0 THE ECONOMY AND BUSINESS Levels and models of the environment Measuring economies Shifts in global economic power Types of capitalist system Changing nature of capitalism

2. 3.1 LEVELS OF THE ENVIRONMENT • Immediate, local level e.g. local government planning permission, local labour markets, local competition • National level e.g.economic and education policies, laws and regulations, bank interest rates • International level e.g. Impact of globalization, World Trade Organization regulations, currency exchange

3. 3.2 WAYS OF LOOKING AT THE ENVIRONMENT • PEST • PESTEL • LoNGPEST • SWOT All the above are ways of assessing the environment from the perspective of an individual firm or an industrial sector.

4. 3.3 PEST, PESTEL AND LoNGPEST PEST • Political environment (P) • Economic environment (E) • Socio-cultural environment (S) • Technological environment (T) PESTEL PEST plus • Ethical environment (E) • Legal environment (L) LoNGPEST PEST plus • Local (Lo) • National (N) • Global (G)

5. 3.4 SWOT ANALYSIS • Strengths of the organization in the face of prevailing environmental conditions and likely change. • Weaknesses of the organization in the face of prevailing environmental conditions and likely change. • Opportunities presented by the prevailing environmental conditions and likely change. • Threats presented by the prevailing environmental conditions and likely change.

6. 3.5 ECONOMY AND BUSINESS – AN OVERVIEW

7. 3.6 MEASURING ECONOMIES • Gross domestic product (GDP) Total value of all goods and services in a given year including exports less imports. • GDP per capita As above divided by the number of population. • Gross National Product (GNP) Total value of all goods and services in a given year plus income from residents overseas minus income at home by non-residents. • Gross National Income (GNI) GDP plus or minus income received from or paid to other countries e.g. Interest on loans. • Purchasing power parity (PPP) Measure of the relative cost of living in different countries and an indicator of poverty.

8. 3.7 SHIFT IN GLOBAL ECONOMIC POWER • Growth and influence of Japan • BRICS • Continuing dominance or changing status of the USA?

9. 3.8 GROWTH AND INFLUENCE OF JAPAN • Economic growth 1950-90 • Export market growth 1970-90 • Japan as an economic role model • Japanization of the west – FDI plus adoption

10. 3.9 JAPAN ECONOMIC INDICATORS I

11. 3.10 JAPAN ECONOMIC INDICATORS II

12. 3.11 JAPAN ECONOMIC INDICATORS III Japan as world leader 1990s in the following goods and services Automobiles Forklift trucks Trucks Robotics Car audio Home audio Satellite communications Fax machines (99% world production + export) VCR (99% world production + export) Musical instruments Sewing machines Cameras (80% world production + export) Video games Soy sauce SOURCE: M.E.PORTER et al (2000), CAN JAPAN COMPETE?, LONDON: MACMILLAN

13. 3.12 EXPLANATIONS FOR JAPAN’S ECONOMIC GROWTH • Low wages, long hours • Investment in process technologies • Protected home market • Networked economy • Supportive state • Supportive banking system • HR policies – tenure, reward, flexibility, culture, Tus • Cultural values – duty, loyalty, collectivism • Influential in terms of management strategy But speculation and scandals contributing to recession in through the 1990s and beyond. As a result growth was halted for a while and Japan fell back in world rankings.

14. 3.13 THE BRICS PHENOMENON I BRICs originally referred to 4 countries • Brazil • Russia • China • India These countries were identified in a 2003 report by Goldman Sachs, where it was predicted that the combined economic growth of BRICs countries would outstrip the combined value of the G6 (France, Germany, Italy, Japan, UK and USA) by 2040. Since the report was published South Africa became a member of the BRICS in 2011. Source: Goldman Sachs Global Economics Paper 9: Wilson and Purushothaman (2003).

15. 3.14 THE BRICS PHENOMENONII

16. 3.15 THE BRICS PHENOMENONIII Despite predictions of growth people will still be poorer on average than those in G6 countries. The predicted GDP per capita of the BRICs economies against the G6 in 2050 expressed in $US.

17. 3.16 THE BRICS PHENOMENON IV

18. 3.17 THE BRICS PHENOMENON V

19. 3.18 THE BRICS IN PERSPECTIVE Updated Goldman Sachs (2009) • BRICS doing better after banking crisis than G6. • Long-term trend upheld. As big as G7 by 2032. Even faster acceleration for China with parity with USA by 2027. • China, India and Brazil doing better than Russia. PWC World in 2050 (2011) • GDP as PPP – E7 will overtake G7 by 2020. China will overtake USA by 2020. • GDP as MER – roughly supports Goldman Sachs. China overtakes USA by 2035. • New multinationals from E7 will increase in influence. • Growing middle classes in E7 will accelerate growth of consumer markets.

20. 3.19 BRICS ISSUES • Official links at government level in 2006. • Why South Africa? Small economically yet powerful in Africa, a target continent for other BRICS. • Form part of G20 but also Indonesia, Mexico, Argentina • What do the BRICS have in common? - dissatisfaction with the old global order - want more input in world affairs - interest in Middle East, Africa and developing countries - GDP growth and trade e.g. energy trade between Russia and China, China is Brazil’s main market. • BUT - is growth sustainable in the long term? - no sign of BRICS as a political power; China is a contender but as part of liberal global; order or as an alternative. - no collective vision e.g. on climate change, Syria etc. - significant variations politically, economically and socially.

21. 3.20 THE EMERGENCE OF CHINA • Liberalization since 1970s but under state control. • World’s fastest growing economy since 1980. • In 2009 contributed 18% of total world economic growth. USA contributed 14%. • World’s largest exporter of manufactured goods. • World’s largest producer of steel, cars, computers, TV sets and fish and meat products. • World’s second largest importer. • Global expansion. Chinese companies buy IBM PC division, Motorola, Smithfield Foods.

22. 3.21 CHINA –ECONOMIC GROWTH II

23. 3.22 CHINA – ECONOMIC GROWTH III

24. 3.23 TYPES OF FIRM IN CHINA I • State-owned enterprises (SOEs). Assets owned and managers appointed by the state. Include energy and banking sectors. Local authorities own and control collective enterprises (COEs). • Private companies. Shareholder owned limited liability companies. Range from large to small business start-ups. • Foreign-owned enterprises (FOEs). Where 25% or more of assets are owned by a foreign investor. Ownership in some areas is limited to 50%. Chinese partner can be SOE or private company.

25. 3.24 TYPES OF FIRM IN CHINA II

26. 3.25 REASONS FOR GROWTH OF THE CHINESE ECONOMY • Globalization –trade and FDI. • WTO membership boosted trade. • Privatization and growth of the stock market. • Government strategies to encourage inward FDI and then encourage move to higher value-added products and outward FDI. • Human capital development. Increased access to education at all levels. Investment in universities. Students from foreign universities returning home.

27. 3.26 CHINA - PROBLEMS AND ISSUES • Dominance of foreign firms especially in higher value-added sectors. • One of the lowest rates of domestic consumption in Asia (around 35% of GDP). • Economic transformation has product a widening economic gap and increased inequalities, that are now wider than the USA. Potential for unrest. • Low ranking in PPP. China ranked 76th. India ranked 120th. • Poor productivity in SOEs. Typical labour problems of a transitional economy. • Banking dominated by state banks. No foreign banks and lack of integration with the global economy. • Rising inflation. • Still viewed by investors as difficult and complex bureaucracy. • Pollution.

28. 3.27 CHINA AND INDIA – SIMILARITIES The two countries are similar in many ways: • Both emerged in their current form in the late 1940s. • Both have a large population + large supply of cheap labour. • Both have experienced highly controlled economies. • 2x economic growth of other countries with China as the world’s fastest growing economy since 1980.

29. 3.28 CHINA AND INDIA – DIFFERENCES • China focus on manufacturing. More exports and FDI • India focus on services especially IT Economic structure China India Agriculture 13% 18% Industry 48 27 Services 40 55 (World Bank, World Development Indicators, April 2007)

30. 3.29 PPP CHINA AND INDIA

31. 3.30 DOMINANCE OF THE USA I

32. 3.31 DOMINANCE OF THE USA II • USA drives the global economy. • Influence of USA foreign policy – USA has 50% of global defence spending is a key factor in that influence. • World leader economically. US contributes: 25% of manufacturing 34% of services 15% of agriculture • Influence via multinationals since 1920s - Value of overseas production 2.5x value of exports.

33. 3.32 DOMINANCE OF THE USA III But there are signs of decline. • China will be a larger economy by the latest 2040 but probably much sooner. • Decline in FDI – 50% of world in 1960, 21% in 2005. • Severe criticisms of foreign policy from other countries. • US brands overtaken by foreign competition in cars, electronics and pharmaceuticals.

34. 3.33 EXAMPLE OF USA DECLINE I

35. 3.34 EXAMPLE OF USA DECLINE II

36. 3.35 A CHANGING POLITICAL ECONOMY • Liberalization • Privatization • Shift to Anglo-Saxon capitalism?

37. 3.36 TYPOLOGY OF CAPITALIST SYSTEMS • ANGLO-SAXON • SOCIAL MARKET • ASIAN • TRANSITIONAL

38. 3.37 ANGLO-SAXON CAPITALISM • Competitive markets, little state intervention • Importance of individualism • Importance of private property • Shareholders the most important stakeholders • Role of institutional shareholders • Mergers and takeovers, often hostile • Managers rewarded for maintaining profits and share price • Short-termism • Trade unions tolerated and restricted by law • Use of labour market flexibility to respond to change • In a recession, costs cut to maintain profits

39. 3.38 SOCIAL MARKET CAPITALISM • Competitive market regulated by the state • Mix of private and state ownership • Well-funded, comprehensive social welfare system • Markets and firms regulated by law and state bureaucracy • Many stakeholders recognized including employees • Co-ordinated wage bargaining • Importance of responsibility to society • Stable share market with takeovers limited • National champions protected by the state • Close relationship between firms and banks • Reinvestment has priority over share dividend • Considerable employee involvement

40. 3.39 ASIAN CAPITALISM • Belief in free market with state intervention where necessary • Importance of Confucian values • Large corporations collaborating with the state • State is bureaucratic but assists business • Weak social welfare - individual responsibility • Importance of savings • Firm and associates viewed as a family • Strong corporate cultures • Stable stock market • Collaboration between competing firms • Long-term strategies • Weak trade unions (except S. Korea) • Attempts to save jobs and suppliers in a recession

41. 3.40 KEY DIFFERENCES

42. 3.41 SHIFT TO ANGLO-SAXONISM I Success of Germany and Japan in 70s and 80s was followed by decline in 1990s with re-emergence of USA. Noted shift towards Anglo-Saxon approaches in both Germany and Japan. • Globalization of German and Japanese firms and capital. • Prioritization of shareholder interest. • Move from ‘blockholders’ to more diversified pattern of shareholding. • Reduced involvement of banks in decision-making. • Focus by banks on ROI rather than long-term investment. • Less job protection – jobs cuts in recession. • Adoption of ‘US practices’ – performance related pay, increased job mobility, appraisals.

43. 3.42 SHIFT TO ANGLO-SAXONISM II Evidence suggest shift in kind and modification of some practices rather than total acceptance. In Germany and Japan there is still evidence of: • Greater involvement of banks plus their financial commitment. • Greater cooperation rather than self-interested individualism. • Greater employee involvement in decision-making. • Greater commitment of employees and strong corporate culture (especially Japan). • More complex legal framework (especially Germany).

44. 3.43 TRANSITIONAL ECONOMIES • In a process of change from state control to a market economy involving processes of: - Liberalization of markets, wages and prices - Stabilization to control wage and price inflation - Internationalization for trade and inward investment - Privatization • New issues – competition, unemployment • Which model to follow?

45. 3.44 ISSUES RELATING TO MODELS OF CAPITALISM • Favoured ideal models have appeared at different times – Japan, Germany, USA. • Are models linked to cultural differences? • Do some models lead to better economic performance than others? • Not all firms in a country conform to national models. • Is there one best way or a choice? This is an important question for transitional economies and developing economies.

46. 3.45 IMPACT OF BUSINESS ON THE ECONOMY • Production of goods, service and provision of employment. • Contribution to income, capital assets and economic growth. • Contribute to the economy via overseas investment especially FDI.

47. 3.46 IMPACT OF THE ECONOMY ON BUSINESS • Structural changes - deindustrialization, growth of services, impact on level and type of employment. • Supply and price of raw materials. • Levels and changing nature of international competition and the influence of globalization. • Influence of multinational firms. • Increase in international/global activity.