D270 Final Garcia

Overall Economic System

Key questions managers want to know

country type/development level

economic system type

tole of the government

economic impacts on our industry

economic impact on our firm

macroeconomic factors

Size of the economy

rate of economic growth

degree of stability

population size

per capita income

unemployment

inflation

System Complexity

Many countries

Between 188-214 economies and each one functions uniquely

Market Dynamism

Constant Change

External and internal conditions are constantly changing

Yesterday’s explanations may not hold today

market Interdependence

No country is isolated. Actions in one market affects others

Data Overload

There is a flood of data today and there are differing levels of quality. This may create analysis paralysis

The problem of global economic diversity

214 separate, discrete economies

developed economies had high income, industries, economic freedom

Developing economies have low incomes, limited competition, uneven economics

Emerging economies/economies in transition: economies moving from developing towards developed

What are the different types of economic systems?

Command, mixed, and market

Command system

low economic freedom

government owns most or all resources

advocates centralized, large scales, capital intensive production

applies the visible hand of the state

communism

Mixed System

Government and private ownership of economic resources mixed in varying proportion

Optimizing economic efficiency

promoting egalitarianism and self interest

Socialism

Market System

Mostly private (individual or business) ownership of resources

Advocates decentralized entrepreneurial innovation

applies the invisible hand, laisse faire, property rights, and individualism

Capitalism

High economic freedom

Meaning of economic freedom

ease of doing business

3 components of rule of law

property rights

government integrity

judicial effectiveness

3 components of limited government

Fiscal Health

government spending

tax burden

3 components of regulatory efficiency

labor freedom

business freedom

monetary freedom

3 components of openn markets

trade freedom: Openness of the economy

investment freedom: absence of investment restrictions

financial freedom: Independence an individual or company has that protects them from the government

80-100 economic freedom score

free

70-79.9 economic freedom score

mostly free

60-69.9 economic freedom score

moderately free

50-59.9 economic freedom score

Mostly Unfree

0-49.9 economic freedom score

repressed

Why are repressed countries have a higher average GDP per capita than mostly free countries?

Some countries are rich in certain resources which increases their GDP

Key Economic Measures

GNI, GDP

Rate of economic growth

degree of stability

population size

purchasing power parity

balance of payments

sustainability and happynomics

Human development index

many countries in many conditions

3 components are education levels, health, and per capita income

Gross National Income

Formerly known as Gross National Product

market value of final goods and services produced by domestically owned factors of production at home and abroad

Gross Domestic Product

The market value of production that takes place within a nations borders, without regard to whether the production is created by domestic or foreign enterprises

Purchasing power parity

The price of goods and services vary from country to country due to among other things, difference in cost of lands, labor, capital, productivity rate, government regulations

Commonalities of Big Emerging Markets

Large territory

Big populations

Significant economic policy strides (Liberalization)

Massive infrastructure needs

aspirations of technological leadership

market growth spillovers within their region

significant political influences in the world

What is so important with China in emerging economies at a glance?

China is now 1st or 2nd largest trading partner for 78 countries

Why perform a country analysis?

To decide the most suitable countries in which to expand

to choose an order of expansion over time

to identify which products or services would be most suitable

to decide on the most effective entry modes in a particular country

to identify opportunities and risks of operating in a particular country

Government Intervention Tools

Tariffs

Subsides

tied aid and loans

import quotas

voluntary export restraints

embargoes

domestic content laws/buy local legislation

regulatory standards and labels

specific permission requirements

administrative delays

anti-dumping actions and countervailing measures

immigration

Fight Unemployment goal/rationale

Logic: The unemployed are a powerful pressures group. Full employment is a politically positive goal for every governments

Tools: Tariffs, quotas, domestic content laws

Problems: Affects another country’s exports and thus their employment situation

Protect “Infant” Industries Goal/Rationale

Logic: Long-term growth comes from new, innovative industries. New industries are too small to compete with global competitors, so government needs to provide them protection while they become competitive

Tools: Subsidies, FDI regulations, domestic content laws

Problems: Makes foreign products uncompetitive limits foreign ownership, when does an industry reach adulthood?

Maintaining Essential Industries Goal/Rationale

Logic: Defense, Transportation, scarce resources should be under local control. Critical in times of war and during national emergencies

Tools: FDI regulations, Regulatory Standards, Subsidies, Export Bans

Problems: Hurts foreign competitors, affects other countries exports

Maintain Spheres of influence Goal/Rationale

Logic: Politically friendly countries should be rewarded economically. Politically unfriendly countries should not be rewarded or even punished

Tools: Tied aid, subsidies, preferential tariffs/quotas, embargoes

Problems: Affects other countries exports, makes non favored countries less competitive, hurts firms and individuals who are not responsible for governments policies.

Improve Comparative Position Goal/Rationale

Logic: Because some countries subsidize, employ high tariffs/quotas, or manipulate their currency, their firms are more competitive internationally. Therefore the playing field must be made level

Tools: Anti dumping actions, countervailing duties, tariffs

Problems: Difficult to prove dumping versus effective cost containments, leads to prolonged retaliation

Who wins by Protectionism?

Import-competing industries

• more sales, higher prices

Government

• revenues from tariffs

• political appeasement of interest groups

Domestic producers/interest groups

• VERs

Some stakeholders and special interest groups

Who Loses By Protectionism?

Consumers

Foreign Producers

Internal Economy

• efficiency loss (specialization and competition)

• encourages lobbying

Global Economy

• loss of specialization/efficiency

• retaliation practices

Reasons not to influence trade

Expensive

Creates inefficiencies

• domestically and worldwide

Encourages lobbying

encourages retaliation

Damages competitiveness

• Former soviet union, Argentina, Venezuela

Whose has responsibility for creating order int he World Economy?

Multilateral Organizations

• international Monetary fund

• United Nations

• World Bank

• World Trade Organization

• NATO

Companies approach to deal with government influencing trade

Move operations to a lower cost country

• China, India, Vietnam, Mexico

Concentrate on markets that attract less international competition

Adopt internal innovations

• increase efficiency of current operations

• innovate and create superior products

• Target high value market segments and increase branding

Try to get government protection

What determines societal views toward international business

Historical events

perceived impact of globalization

trade and economic policy

national security issues

deteriorating economic situations

environmental, health, and safety issues

a sense of nationalism, ethnocentrism

views toward immigrants and refugees

the targeted influence of the media

Possible positive contributions of MNE’s

Economic growth and development

global market access

transfer of technology and knowledge

economies of scale

• lower costs and prices

Possible criticism and negative impacts of MNE’s

economic dependence

income inequality

environmental impact

loss of sovereignty

cultural homogenization

ethnical concerns

competitive disadvantage for local firms

Balance of payment equation

B=(m-m1)+(x-x1)+(c-c1)

M: import displacement

m1: import stimulus

x: export stimulus

x1: export reduction

c: capital inflow

c1: capital outflow

Balance of Payments

set of accounts that relate to the inflows and outflows

Current Accounts

Value of exports and imports oh physical goods

Receipts and payments for services

Private transfers like money

Official transfers like international aid

Capital Accounts

Long term capital flows

• investing money in foreign firms and returning the money home

Short Term capital

M>m1

positive

FDI results in the substitution of imported products for local production

m1>m

negative

caused by an increase in imports

x>x1

Positive

FDI results in the generation of exports

x1>x

negative

caused by a decline in exports

c>c1

Positive

FDI results in capital inflows to build plants and capacity

c1>c

negative

results in outflows to repatriate profits back to the home country

Home country losses

jobs created abroad at the expense of jobs in the home country

Home country gains

additional jobs created at home by increasing sales abroad

Host country losses

drives up local labor costs

displaces domestic investment

disadvantage local competitors

destroy local entrepreneurship

Host country gains

transfer of capital, technology, and/or managerial expertise

creation of new jobs

Why should firms monitor host countries BOP?

anticipate possible corrective actions by the host country governments

• import restrictions

• export requirements

• local content regulations

• ownership restrictions

• foreign exchange restrictions

develop a firm governments negotiations strategy

to prepare a PR strategy towards stakeholders

Corruption

the abuse of entrusted power for private gain

What aspects of corruption are captured?

Bribery

Degree of officials using public funds for private gain without facing consequences

red tape and excessive bureaucratic burden

Diversion of public funds

Meritocratic vs. nepotism

What is wrong with Bribery and corruption?

Higher levels of corruption lead to lower economic growth and per capital income levels

corruption erodes the authority of the government which condones it

disclosures damage the reputation of the country

costly

Bottom of the Pyramid Approach

Partnering with governments and NGOs to develop products and services for the poorest consumers

Exploitive

Views differences in wages, working conditions and living standards as exploitable opportunities

Transactional

Engages in law abiding, non exploitive commercial interactions

Responsive

Acts in a way that is sensitive and responsive to the needs of all its immediate stakeholders

Transformative

Commits to leading initiatives to bring life enhancing changes to the broader society