Chapter 4: Economic Environments Facing Business

Case: Emerging Economies: Comeback or Collapse?

Summary of Events

• Global Economic Shift: By 2050, major economies will predominantly be in greater Asia (China, India, Japan, Indonesia, Russia).

• Emerging Economies Growth: Emerging economies are transitioning from the periphery to the center of the global economy, with significant growth in Asian neighbors and parts of Africa.

• Economic Center of Gravity: The center of global economic activity is shifting eastward, moving approximately 140 km/year from the West to Asia.

• Emerging Economies' Output: In 1980, emerging economies accounted for 36% of global production; by 2019, this rose to 59%.

• Institutional Changes: The G-7 has expanded to the G-20, with emerging economies gaining influence in global governance.

• Historical Context: Emerging economies historically dominated global output until the Industrial Revolution shifted power to the West.

• China's Re-emergence: China has reclaimed its status as the largest producer of goods, surpassing the U.S. in 2009.

Main Themes

• Economic Power Shift: The transition of economic power from developed to emerging economies.

• Globalization and Connectivity: Initiatives like China's One Belt One Road (OBOR) enhance global trade and connectivity.

• Diverse Economic Models: Emerging economies are adopting state capitalism and authoritarianism, contrasting with Western free-market ideologies.

• Historical Cycles: The cyclical nature of economic dominance, with emerging economies aiming to restore their historical roles.

Motifs

• Resilience and Adaptation: Emerging economies are adapting to global challenges and opportunities, despite facing demographic and institutional hurdles.

• Innovation and Infrastructure: Investments in infrastructure and technology are pivotal for growth in emerging markets.

• New Economic Analytics: Traditional Western economic models may not apply to emerging economies, necessitating new frameworks for analysis and management.

Conclusion

The rise of emerging economies signals a significant transformation in the global economic landscape, presenting both opportunities and challenges for stakeholders worldwide.

International Economic Analysis

• Managers study an economic environment to interpret its development, assess its performance, and estimate its potential

• A principle of globalization is the broadening network of relationships among people, companies, countries, and institutions. The same principle applies to the emergence and evolution of economies

• World Bank identifies 217 discrete economic environments

• Few, if any, MNEs can fund and run operations in all 217 economic environments

  • Target markets with greatest return and least risk

  • Improve success by assessing:

    • Development

    • performance

    • potential

  • ^^ shaped by economic conditions

• Every economy is interconnected

Who’s Who in the Global Business Environment

• Developed economies generally have high income levels, advanced technologies, sophisticated infrastructure, high living standards, but slowing growth

• Developing economies generally have low incomes, limited industrialization, basic infrastructure, challenging living standards, and chronic civil difficulties

• Base of the Pyramid is the largest, but poorest, socioeconomic group in the world

• Emerging economies exhibit improving productivity, rising income, and growing prosperity, particularly relative to slower growing developing economies

• Business activity powered by growing globalization

• Expansion in both → countries prospering

• Uneven national performance → manager economic analysis

• Differences in economies:

  • demography

  • geography

  • resource endowment

  • national output

  • wages

  • productivity

  • trade activity

• ^^shape the ease of doing business

• Comprehensive indicators of development:

  • standard of living

  • per capita income

  • civil stability

  • education, medical care

  • social services

• developed countries:

  • political freedom

  • democratic governance

  • rule of law

  • free markets

  • offshoring to developing economies

• Developing countries:

  • Pockets of great wealth

  • extreme poverty

  • Workers lack formal education/practical training and few career options

  • pervasive underemployment compounds high employment

  • Rural areas and ag work

  • strong communities

  • self-sufficiency

• 35 or so economies are qualified as emerging; 60% of the world’s pop

Economic Freedom

• Economic freedom holds that one has the right to work, produce, consume, save, and invest in the way that one prefers

• Economic freedom measures the absence of government constrain on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty

• Economic Freedom Index: Estimates economic freedom in 180 countries. Measures the degree that a nation accepts that basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society.

  • Dimensions:

    • Rule of Law

    • Limited Government

    • Regulatory Efficiency

    • Open Markets

  • Classifications and Scores:

    • 80-100 Free

    • 70-79.9 Most Free

    • 60-69.9 Moderately Free

    • 50-59.9 Mostly Unfree

    • 0-49.9 Repressed

• Direct relationship with economic freedom and growth (higher productivity, greater prosperity, and less poverty)

• Richer countries typically regulate business activities less. Poorer countries regulate them more

• Despite the benefits of economic freedom, only 6/180 rank as a “free” economy

Managers watch key events to gauge the contest between economic freedom and state control - how the govt:

• regulates the economy

• protects property rights

• sets fiscal and monetary policies

• promotes transparent decision making

Case: Looking to The Future: State Capitalism: Detour or Destination?

Summary of Events

• Philosophical Contest: The text contrasts two economic ideologies: Adam Smith's free markets and Karl Marx's state power.

• State Capitalism Defined: An economic system where the state influences production without direct control, promoting national champions and managing trade.

• Pragmatic Approach: State capitalism relies on technocrats rather than ideological revolutionaries, focusing on economic stability and growth.

• Ownership Dynamics: Governments own or influence major companies, as seen in China, Brazil, and Russia, consolidating authority through economic means.

• Economic Nationalism: The state encourages local consumption and develops specific sectors to enhance competitiveness.

• Global Trends: Many countries are at a crossroads, with state capitalism gaining traction, particularly in the wake of China's economic success and the COVID-19 pandemic.

Main Themes

• Economic Freedom vs. State Control: The ongoing debate about the effectiveness of free markets versus state-managed economies.

• Pragmatism in Governance: A shift from ideological governance to practical management for economic stability.

• Role of the State: The state's dual role as an economic influencer and a stabilizer of social order.

Motifs

• National Champions: The concept of state-owned enterprises as tools for national economic strategy.

• Economic Nationalism: Promotion of local industries and consumption as a means of fostering economic growth.

• Global Emulation: The trend of countries adopting state capitalism models, inspired by China's success, to achieve economic development.

Types of Economic Systems

• An economic system organizes the production, distribution, and consumption of goods and services

• Market economy (CAPITALISM): capitalism and its advocacy of the private ownership of the factors of production

  • endorses the ideals of economic freedom, doctrine of capitalism, and the principle of the invisible hand

• In the command economy, the visible hand of the state supersedes the invisible had of the market

• Command economy (COMMUNISM): an economic system in which the political authorities make major decisions regarding the production and distribution of goods and services

• Mixed economy (SOCIALISM): combines elements of the market and command economic system. both govt and private enterprise influence production, consumption, investment, and savings

Assessing Economic Development, Performance, and Potential

• Gross National Income (GNI): the broadest measure of economic performance

• Gross Domestic Product (GDP): total market value of goods and services produced by workers and capital within a nation’s borders

  • provides the truest measure of a nation’s economic activity

• Gross National Product (GNP): total value of all final goods and services produced within a nation in a particular year

• Managers improve the usefulness of economic indicators by adjusting for the

  • growth rate of the economy

  • the nation’s population

  • local cost of living

• Purchasing power parity controls for differences in the relative cost of living between countries

• Green economics advocates assessing economic performance in terms of the effect of current choices on long-term sustainability

• Sustainability and stability perspectives hold that the objective of economic activity is to create an environment for people to enjoy long, healthy, and happy lives

• Green economics argues that fully measuring growth, progress, and prosperity calls for assessing the consequences of economic choice on sustainability and stability

  Point Growth: Positive and Productive

  Importance of Growth

  • Necessity: Growth is essential for actualizing the productive potential of individuals, communities, and countries.

  • Benefits:

    • Morally stabilizes society

    • Liberates individuals from poverty

    • Reduces violent conflict

    • Raises living standards

    • Funds safety nets and government support

    • Inspires material improvements and job creation

  Key Benefits of Growth

  1. Poverty Reduction

  • Growth is the primary means to alleviate poverty.

  • Extreme poverty decreased from 43% (1.94 billion) in 1981 to 10% (800 million) today.

  2. Civil Stability

  • Growth fosters social attitudes and strengthens political institutions.

  • Rising incomes promote tolerance, benevolence, and social mobility.

  3. Business Dividend

  • Stimulates employment and investment.

  • Improves productivity and asset valuations.

  • Public confidence in business success enhances economic resilience.

  4. Fiscal Dividend

  • Thriving economies boost tax revenues for government spending.

  • Supports social projects and aids during transitions (e.g., unemployment, disasters).

  5. Peace Dividend

  • Growth creates opportunities, leading to peaceful behavior.

  • Middle-class individuals are more open-minded and supportive of democracy.

  6. Environmental Benefits

  • Encourages innovation and efficient resource allocation.

  • Growth leads to lower energy consumption per unit of GDP.

  7. Quest to Excel

  • Growth incentivizes initiative and creativity.

  • Drives progress in various fields, from social trends to alternative energy.

  8. Life Expectancy

  • Growth has significantly increased life expectancy (from 47 years in 1900 to 78 years in 2020).

  • Improved productivity and healthcare contribute to a better quality of life.

  Conclusion

  • While growth has associated costs, the benefits far outweigh them.

  • The absence of growth leads to societal decay; thus, continuous growth is vital for progress and prosperity.

  Counterpoint Growth: Positive and Productive?

  Overview

  • Premise: Growth is believed to support life and foster values like morality, transparency, tolerance, mobility, equality, justice, and liberty.

  • Concern: Ignoring the costs of growth threatens civil society, humanity's stability, and planetary sustainability.

  Key Arguments Against Growth

  1. Growth Privileges Few

  • Myth: "A rising tide lifts all boats."

  • Reality: Benefits of growth are unevenly distributed, leading to extreme inequalities in wealth and power.

  • Outcome: While global growth has occurred, many struggle, and a small elite thrive.

  2. Growth Is Misleading

  • Promises vs. Reality:

    • Rewards the financially strong, punishes the weak.

    • Creates free time but demands mobility, disrupting community ties.

    • Offers new products but traps consumers in cycles of disappointment.

  • Result: Growth oversells benefits, leading to "spiritual despair" and a consumerist identity.

  3. Growth Threatens Life

  • Environmental Impact: Growth leads to pollution, climate change, and resource depletion.

  • Economic Measurement: Metrics like GDP ignore external costs, labeling them as "externalities."

  • Consequence: Society pays the price through environmental degradation and social alienation.

  4. Growth Diminishes Individuality

  • Massification: Growth demands mass production and consumption, sacrificing individuality and local uniqueness.

  • Cultural Loss: Results in a loss of craftsmanship, intimacy, and character, replacing material poverty with moral poverty.

  5. Current Growth Is Unsustainable

  • Resource Consumption: Humanity consumes 30% more than nature can regenerate.

  • Future Projections: By 2050, humanity may need 3-5 planets' worth of resources.

  • Warning: Unsustainable practices cannot continue without significant innovation.

  Call to Action: Change the Game

  • Current Situation: Epic poverty, ecosystem decline, and consumer alienation signal a critical juncture.

  • Choices:

    • Remain ignorant of growth's costs, seduced by apparent gains.

    • Confront the issue, applying sustainability standards to reset the economy.

  • Goal: Ensure growth meets present needs without compromising future generations' ability to meet theirs.

Elements of Economic Analysis

• Balance of Payments (BOP)

• Deflation

• Foreign Direct Investment

• Income Distribution

• Inflation

• Misery Index

• Poverty

• Public Debt

• Unemployment

Integrating Economic Analysis

• An economy’s productivity (especially efficiency) in converting inputs into useful outputs is a key determinant of its competitiveness

• Economic freedom has a direct relationship with a country’s relative competitiveness and innovation performance

Case: Economic Environments of the West: Problems, Puzzles, and the Fourth Industrial Revolution

Overview

• Emerging Economies: Countries like China, India, Brazil, and Indonesia show entrepreneurial spirit and innovation.

• Developed Economies: Nations such as Canada, Germany, Italy, and the U.S. face unique challenges despite being significant players in the global economy (40% of global GDP).

Economic Trends

• Declining Share of GDP: Developed economies' share of global GDP decreased from 57% in 2000 to projected 37% by 2025.

• Slow Growth Post-2008:

  • EU: -2% growth

  • U.S.: 34% growth

  • China: 139% growth

  • India: 96% growth

Persistent Issues

• Unemployment & Wage Stagnation:

  • Wage growth stagnated post-2004; many households in developed economies saw flat or declining incomes.

  • Real median net wealth declined significantly since the financial crisis.

• Income Inequality:

  • Disparities between average and median net worth highlight growing inequality.

• Low Interest Rates:

  • Central banks implemented historically low and negative interest rates, leading to unusual market conditions.

Policy Challenges

• State Intervention: Increased government involvement raises questions about economic freedom.

• Political Consequences: Economic issues contribute to political instability and the rise of nationalism and populism.

• COVID-19 Impact: The pandemic exacerbated economic problems, leading to a global recession.

Future Considerations

• Revitalizing Growth: Questions arise about the effectiveness of aggressive fiscal and monetary policies.

• Long-term Stagnation: Concerns about the sustainability of current economic strategies and the potential need for new measures.

Fourth Industrial Revolution

• Technological Transformation:

  • Convergence of physical and digital worlds introduces new production and consumption paradigms.

  • Innovations like AI, robotics, and 3D printing are reshaping industries.

• Job Displacement:

  • Significant job losses expected due to automation, but new job creation is also anticipated.

  • Lifelong learning and skill adaptation become essential for workforce resilience.