TOPIC 3

ECONOMIC ENVIRONMENT

plays a vital role in shaping international business and trade.

It refers to the overall economic conditions, such as income levels, inflation, exchange rates, and market stability,that influence how businesses operate across borders.

STABLE ECONOMY

encourages investment, trade, and growth

UNSTABLE ECONOMY

create risks for companies entering global markets.

FACTOR CONDITIONS

Human Resources, Physical Resources, Knowledge Resources, Capital Resources, Infrastructure

Production Factors

They are crucial for the investments made for production purposes.

PHYSICAL RESOURCES

weather, existence of waterways, availability of mineral and agricultural products.

KNOWLEDGE RESOURCES

research and development

CAPITAL RESOURCES

availability of debt and equity capital

INFRASTRUCTURE

roads, port facilities, energy, and communications

DEMAND CONDITIONS

or market potential

Quality and quantity of demand, and internationalization of basic demand. They are crucial for market-seeking investments.

QUALITY OF DEMAND

composition of local demand

QUANTITY OF DEMAND

size and growth of local demand.

LOCATION SPECIFIC ADVANTAGES

Incorporate the combination of factor and demand conditions, plus other relevant qualities.

GROSS NATIONAL INCOME

Previously referred to as Gross National Product (GNP)

Size of national demand is indicated by GNT.

The broadest measure value of final goods and services newly produced by domestically owned factors of production

GROSS DOMESTIC PRODUCT

It represents the value of production that takes place within a nation’s borders, without regard to whether the production is carried out by domestic or foreign factors of production.

PER CAPITA GNI

Computed by dividing GNI by a country’s population.

Nominal Exchange Rates (unadjusted market rates) and Purchasing Power Parity (PPP)

NOMINAL EXCHANGE RATES

unadjusted market rates

Do not reflect international differences in prices.

PURCHASING POWER PARITY

Used as an indicator of the number of units of a country’s currency required to buy the same amounts of goods and services in its domestic market.

WORLD BANK

Refers to low and middle-income nations as developing countries, which are also known as emerging countries. (a term also used to describe the capital markets in such countries)

OWNERSHIP

refers to the ownership of resources engaged in economic activity.

CONTROL

refers to the allocation and control of resources engaged in economic activity.

MARKET ECONOMY

is one in which resources are primarily owned and controlled by the private sector.

CONSUMER SOVEREIGNTY

the right to choose what to buy

COMMAND ECONOMY

often referred to as a centrally planned economy.

It is one in which all dimensions of economic activity, including pricing and production decisions, are determined by central government planning authorities.

MIXED ECONOMY

describes an economic system characterized by a mixture of market and command economies, including a combination of public and private ownership.

MARKET SOCIALISM

characterized by the state ownership of significant resources, but the allocation of those resources comes from the market price mechanism, and the prices are determined by the laws of supply and demand.

MACROECONOMIC FACTORS

can have a major impact on both the profitability and the operating strategy of MNEs.

ECONOMIC GROWTH

Bound to be variable by region, even in the high-income countries

INFLATION

Represents the percentage increase in the change in prices from one period to the next, usually a year.

It occurs because aggregate demand is growing faster than aggregate supply. It affects interest rates, exchange rates, the cost of living and the general confidence in a countr’s political and economic systems.

CONSUMER PRICE INDEX

measures the cost of a fixed basket of goods and services and compared the price from one period to the next.

SURPLUSES AND DEFICITS

Internal and external deficits, Surpluses, Internal Deficit, and External Deficit

INTERNAL AND EXTERNAL DEFICITS

are important indicators of a country’s economic strength and stability.

SURPLUSES

rarely a problem.

INTERNAL DEFICIT

indicates that a government’s expenditures exceed its revenues

EXTERNAL DEFICIT

indicates that a country’s cash outflows (payments) exceed its inflows (receipts).

TRANSITION

the liberalization of economic activity, the reallocation of resources to their most efficient use, macroeconomic stabilization, the privatization of state-owned assets, budgetary constraints, and the development of an institution and legal framework to protect property and individual rights.

THE PROCESS OF TRANSITION

It can provide significant opportunities for MNEs as markets are opened and foreign direct investment opportunities expand.

THE FUTURE OF TRANSITION

Major challenges: continued macro stability, economic growth, improvement in institutional and structural areas and the solution of social issues such as poverty, child welfare and HIV/AIDS, The challenges to the transition economies will virtually be the same as those of other developing economies.

ETHICAL DILEMMAS AND SOCIAL RESPONSIBILITY

Concerns the obligation of high-income countries to assist developing nations.