International Business

1. International Business 10e Daniels/Radebaugh/Sullivan International Business Chapter Four The Economic Environment 2004 Prentice Hall, Inc

2. Reading chapters • It’s important to do the reading before class • You cannot assume that everything on the tests will be on the slides • Everything on the tests will be • discussed in class • mentioned in the study guide for the test • But you will have to study the text and your notes

3. Studying cases • You are notrequired to memorize any facts from the cases • No facts from the cases will be on the tests unless I specifically tell you • But you are expected to have read the cases and thought aboutthe study question

4. On tests, a question about a case will give you the facts you need • A multiple choice question will provide the basic data • An essay will be ‘open book’ • But if you did not read before class, you are unlikely to absorb enough during class discussion to be ready

5. Cases have two central roles in Business 187 • They illustrate points in the text • They show the complexities of the real world • Cases give you a chance to think about real situations • Let you consider which of the theories in the text you find useful

6. As you read cases, think about … • Which theories in the text are at work? • To what extent does the case provide evidence that I have to go beyond the theory?

8. The first 4 chapters… • Basic ideas about international business • Culture – What it is, why it’s crucial, how to develop the art of dealing with it • The political environment – Nature of the systems that create ‘rules of the game’ • The economic environment – • How do nations produce wealth? • How muchdo they have?

9. Chapter Objectives • Learn criteria for dividing countries into economic categories • Understand key measures like “Gross National Income” • Understand “economic systems” • Discuss economic issues that influence international business • Assess the transition process for former “command economies” • Daewoo case – Economic development

10. Economic issues thatmultinational enterprises must grasp • What is the size, growth potential, and stability of the market? • What type of economic system does the country have? • Is your firm’s industry in the public or private sector of this country? • If public, does the government allow private competition? • How does the government control the nature and extent of private enterprise?

11. Factors of Production • Inputs to the production process • Human resources • Physical resources • Knowledge • Capital • Infrastructure • Factor conditions are most obviously critical for manufacturing, mining, and agriculture

12. Demand Conditions • Market potential • Size of home demand • Growth of home demand • Composition of home demand (nature of buyer needs) • Internationalization of demand Composition? Size? Growth? Internationalization?

13. Classifying countries by income • Gross National Income (GNI)(formerly “Gross National Product” - GNP) • the market value of final goods and services newly produced by domestically owned factors of production. • Gross Domestic Product (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

14. Examples • A Ford manufactured in the U.S. • counts in U.S. GNI (because Ford is a U.S. company) • counts in U.S. GDP (because the work is done in the U.S.) • A Toyota manufactured in the U.S. • does not count in U.S. GNI (because Toyota is not a U.S. company) • does count in U.S. GDP (because the work is done here) 4-9

15. A Ford produced in Mexico… • counts in U.S. GNI • (though the wages paid to Mexicans would be deducted) • But is not part of U.S. GDP

16. Common Classification Per Capita GNI ($ in 2000) World Bank Category Developing Country (India, Vietnam) $755 or less Low Income Developing Country (China, Egypt) $756-2,995 Lower Middle Income Developing Country (Mexico, Saudi Arabia) $2,996-9,265 Upper Middle Income Developed Country (U.S., Canada, France) $9,266 or more High Income Importance of Per Capita GNI

17. GNI can be an inadequate indicator of wealth • Purchasing Power Parity (PPP) is the number of units of a nation’s money required to buy goods and services inside the country that $1 would buy in the U.S. • PPP is a useful measure since it accounts for international differences in price • Example: China has a higher PPP currency value than Japan • $1 worth of yuan buys more in China than $1 worth of yen buys in Japan

19. World regions are growing at radically different rates From Map 4.2

20. Economic Systems • Governments struggle with • who should own businesses • how they should be controlled

21. Economic Freedom • Market Economy: resources are primarily owned and controlled by the private sector, not the public sector • Consumer sovereignty - the right of consumers to decide what to buy • Prices are determined by supply and demand

22. Little economic freedom • Command Economy (Centrally Planned Economy): all dimensions of economic activity, including pricing and production, are determined by a central government plan • Government owns and controls all resources • Prices are determined by government • North Korea, Cuba

23. No economy is purely market or command • Mixed Economy: Some degree of government ownership and control • Economic systems are along a spectrum of freedoms • Today, most command economies are moving towards a market economy

24. Economic Factors International Businesses Must Consider • Inflation • Government Deficits • Nations’ External Debt • Internal Debt • Privatization • Balance of Payments 4-17

25. Reforms and Economic Progress – the Vicious Circle Figure 4.3 - 1

26. Reforms and Economic Progress – the Virtuous Circle (the goal) Figure 4.3 - 2

27. Daewoo – Growth and Problems

28. Chapter Review • 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