International Marketing Chapter 2: Global Economic Environment
Major Changes in the World Economy: Over the past 100 years, the global economy has experienced significant transformations, including industrialization, globalization, technological advancements, and shifts in economic power from Western countries to emerging markets.
Types of Economic Systems: Economic systems vary globally, with capitalism, socialism, and mixed economies being the primary types. Capitalism emphasizes private ownership and market-driven economies, socialism focuses on state ownership and planned economies, and mixed economies incorporate elements of both.
Economic Development Categories: The World Bank classifies countries based on economic development into low-income, middle-income, and high-income categories. Key emerging markets include countries transitioning from low to middle income, such as India and Brazil.
Balance of Payments: This statistic is crucial for understanding a country's economic transactions with the rest of the world, including trade balance, capital flows, and foreign exchange reserves. It reflects the economic health and stability of major economies.
Leaders in Trade and Currency Exchange: The world's leading countries in merchandise and services trade include the United States, China, and Germany. Currency exchange rates significantly affect a company's ability to operate and compete internationally, influencing costs, pricing, and profitability.
CASE 2-1
India's Population Growth: In 2023, India became the world's most populous country, surpassing China. This demographic shift presents significant market potential for global marketers.
Economic Aspirations: Prime Minister Narendra Modi aims for India to become a high-income country by 2047, leveraging demographics, democracy, and diversity as key pillars.
Manufacturing and Job Creation: Since 2014, Modi has focused on attracting foreign manufacturing to India, which currently contributes 17% to the economy. The goal is to create millions of new jobs, particularly in manufacturing.
Income Levels and Poverty: India's per capita income is $2,410, classifying it as a lower-middle-income country. A significant portion of the population lives at or below the poverty line, defined as $2.15 per day.
Sachet Economy: Due to affordability and space constraints, consumer goods are often sold in small, single-use packages. This approach caters to the economic realities and living conditions of many Indian households.
Middle Class Growth: India has over 430 million middle-class consumers with annual incomes between $6,700 and $40,000. The middle class is expected to expand as the population grows to an estimated 1.7 billion by 2064.
Economic Reforms and FDI: Modi's government is committed to economic reforms to match population growth, with a focus on attracting foreign direct investment to create jobs and sustain economic growth.
Global Market Dynamics: The economic environment is dynamic and integrated, with countries like India offering both challenges and opportunities for global marketers. The BRICS nations, including India, are particularly noteworthy for their market potential and competitive companies.
2.1 The World Economy—Overview of Major Changes
Emergence of Global Markets: Since World War II, global markets have emerged, with global competitors displacing local ones. Economic integration has increased from 10% to 50%, notably in the EU and USMCA, although protectionism and nationalism may slow further integration.
Capital Movements: Capital movements have surpassed trade as the driving force of the world economy. Currency trading is the largest market, with foreign exchange transactions exceeding the dollar volume of global trade.
Productivity and Employment: Productivity has increased while manufacturing employment has declined. In the U.S., manufacturing's share of GDP fell from 19.2% in 1989 to 12% in 2021. Similar trends are seen in other industrial economies, with disruptive technologies like AI and additive manufacturing impacting employment.
Dominance of the Global Economy: The global economy has become the dominant economic unit, with successful countries focusing on world markets. The end of the Cold War marked the decline of communism, as market economies proved more effective.
Impact of Technology: The internet and personal computers have diminished national boundaries, creating a transnational cyberworld. Companies like Alibaba and Amazon are examples of businesses thriving in this connected environment.
2.2 Economic Systems
Market Capitalism: Characterized by private ownership of resources and market-based allocation. Individuals and businesses make decisions based on supply and demand, with minimal government intervention.
Centrally Planned Socialism: Resources are owned by the state, and allocation is determined by a central authority. The government makes all economic decisions, aiming to distribute resources equitably.
Centrally Planned Capitalism: Combines state ownership with market-based allocation. The government owns resources but allows market mechanisms to guide economic activity.
Market Socialism: Features state ownership of resources with market-based allocation. The government owns resources but permits market forces to influence production and distribution decisions.
Continuum of Economic Systems: Economic systems can be viewed on a spectrum based on two dimensions: the method of resource allocation (market vs. command) and the form of resource ownership (private vs. state).
Market Capitalism
Market Capitalism: An economic system where individuals and firms allocate resources, and production resources are privately owned. Consumers decide on desired goods, while firms determine production quantities.
Role of the State: In market capitalism, the state promotes competition among firms and ensures consumer protection.
Global Practice: Market capitalism is widely practiced, especially in North America and the European Union.
Western Market Systems:
Anglo-Saxon Model: Characterized by private ownership, free enterprise, minimal social safety net, and flexible employment policies. Practiced in the United States, Canada, and Great Britain.
Social Market Economy Model: Features private ownership with involvement of social partners like employer groups, unions, and banks. Involves inflexible employment policies. Found in Germany, France, and Italy.
Nordic Model: Combines state and private ownership, high taxes, market regulation, and a generous social safety net. Practiced in Sweden and Norway.
Diversity in Market Economies: Not all market-oriented economies function identically. The United States is known for its competitive and decentralized approach, while Japan is characterized by a tightly regulated system referred to as "Japan Inc."
Centrally Planned Socialism
Centrally Planned Socialism: In this economic system, the state exercises extensive control over the economy, making decisions about production and distribution. The government owns industries and enterprises, and there is minimal use of marketing strategies like product differentiation and advertising.
Demand vs. Supply: Typically, demand exceeds supply in centrally planned socialism, leading to limited consumer choice and government-controlled distribution to prevent exploitation by intermediaries.
Economic Globalization: Historically, countries with centrally planned economies have not participated in economic globalization. However, there is a shift towards market economies, as seen in China.
Shift to Market Capitalism: The effectiveness of market capitalism in providing goods and services has led many formerly socialist countries to adopt market-based reforms. This shift marks a significant ideological change from the socialist principles developed by Marx and Lenin.
Economic Reforms in Major Countries: China, the former Soviet Union, and India have moved towards market resource allocation and private ownership, reflecting a global trend towards economic reform and modernization.
Democracy and Economic Growth: There is a noted correlation between democracy and economic growth, with large economies achieving high per-capita income typically being democracies. China's attempt to become a wealthy autocracy is unprecedented.
Centrally Planned Capitalism and Market Socialism
Economic Systems: Most countries practice a mix of command and market resource allocation, along with private and state resource ownership. Pure forms of market capitalism and centrally planned socialism are rare.
Centrally Planned Capitalism: This system uses command resource allocation extensively within an environment of private resource ownership.
Market Socialism: Involves market-allocation policies within a framework of state ownership.
Sweden's Economic System: Sweden exemplifies a hybrid system combining elements of centrally planned socialism and capitalism. The government controls a significant portion of expenditures and has substantial holdings in key business sectors.
Privatization in Sweden: Sweden is reducing state ownership in businesses, such as the sale of Vin & Spirit to Pernod Ricard and reducing its stake in Nordea Bank.
China's Economic System: China represents state-directed socialism but allows significant market freedom, especially in regions like Guangdong Province. The private sector contributes to 60% of national output, although state enterprises receive most bank financing.
Economic Systems of the Global Age
Market Reforms and Global Investments: Market reforms and emerging capitalism are creating opportunities for global companies to invest in various regions. Coca-Cola's return to India in 1994 exemplifies this trend, facilitated by laws allowing 100% foreign ownership.
Command Allocation Approach: Cuba remains one of the few countries adhering to a command allocation approach, contrasting with the global shift towards capitalism and privatization.
Economic Freedom Rankings: The Heritage Foundation ranks countries based on economic freedom, considering factors like trade policy, taxation, and property rights. Singapore and Switzerland are top-ranked, while Cuba, Venezuela, and North Korea are at the bottom.
Cuba's Changing Market: Diplomatic relations between the U.S. and Cuba were renewed in 2014, leading to potential market opportunities. However, trade normalization requires the U.S. Congress to repeal the embargo.
Correlation Between Economic Freedom and Market Orientation: There is a high correlation between economic freedom and market orientation in mixed economies. However, the criteria for ranking economic freedom are debated, as seen in Singapore's authoritarian capitalism, which limits personal freedoms despite economic prosperity.
Singapore's Authoritarian Capitalism: Singapore's economic model provides for citizens but restricts freedoms like free speech and press. This model shows similarities to command-style systems despite being ranked as economically free.
2.3 Stages of Market Development
World Bank Classification System: The World Bank categorizes countries into four groups based on per capita gross national income (GNI): high-income, upper-middle-income, lower-middle-income, and low-income countries. This classification aids in global market segmentation and target marketing.
High-Income Countries: These countries, often members of the OECD, have a high per capita GNI and contribute significantly to the world GDP. They are characterized by advanced economies and stable markets.
Upper-Middle-Income Countries: These countries have a moderate per capita GNI and are experiencing growth. They represent significant opportunities for market expansion.
Lower-Middle-Income Countries: With a lower per capita GNI, these countries are in the process of development and offer potential for investment and growth.
Low-Income Countries: These countries have the lowest per capita GNI and face challenges in economic development but may offer long-term opportunities for growth.
Emerging Markets: Countries like China, India, Brazil, and Russia are considered big emerging markets (BEMs) due to their rapid economic growth and potential for significant global trade impact.
BRICS Nations: Brazil, Russia, India, China, and South Africa are key players in global trade. Despite challenges such as human rights and environmental issues, they are expected to continue influencing global markets.
Economic Disparities: As BRICS countries develop, they face increasing income disparities, which may lead to domestic pressures and affect their global trade relationships.
Low-Income Countries
Low-Income Countries and LDCs: Low-income countries have a GDP per capita of $1,135 or less. The UN designates 45 countries with a GDP per capita of less than $1,018 as least-developed countries (LDCs), eligible for special international support measures like financial aid and preferential trade treatment.
Characteristics of Low-Income Countries: These countries often have limited industrialization, high agricultural engagement, high birth rates, low literacy, reliance on foreign aid, political instability, and are mostly located in Africa south of the Sahara.
Economic Challenges and Opportunities: Many low-income countries face severe economic, social, and political issues, limiting investment opportunities. Some, like Burundi, have stagnant economies, while others, like Rwanda, have shown significant economic growth through strategic investments and initiatives like Vision 2050.
Rwanda's Economic Growth: Rwanda's per-capita GNI doubled from 2006 to 2016, driven by investments in infrastructure like a new convention center and airport. However, government-linked businesses dominate some sectors, raising concerns about economic control.
Ethiopia's Economic Development and Challenges: Ethiopia experienced double-digit economic growth from 2005 to 2020, supported by foreign investment and industrial parks. However, the 2020 conflict with the TPLF and subsequent global events have severely impacted its economy.
Technological Advancements: Access to broadband internet and education is a regional goal. Companies like Kenya-based BRCK are innovating with products like a surge-resistant internet router, targeting both African and international markets.
Lower-Middle-Income Countries
Lower-middle-income countries have a GNI per capita between $1,136 and $4,465, with rapidly expanding consumer markets. Vietnam, with a GNI per capita of $4,163, exemplifies this growth by leveraging its low-cost labor force to serve global markets, especially as companies seek alternatives to China for supply chains.
Competitive advantages in these countries include mature, standardized, labor-intensive industries like footwear, textiles, and toys. Vietnam is a significant player in Nike's global manufacturing network.
India's economic transformation began in the 1990s, driven by reforms such as reducing tariffs, easing foreign investment restrictions, and liberalizing the rupee. This led to the emergence of world-class companies like Infosys and Tata, and attracted global companies like Apple and Coca-Cola.
Uzbekistan, part of the "Stans," presents a risk-reward trade-off due to its low income and economic hardship. Despite a risky business environment, it offers consumer market opportunities, as seen with GM's past involvement and Google's recent collaboration with local programmers.
Kazakhstan, an upper-middle-income country, is diverse with 130 ethnic groups. Grupo Bimbo has capitalized on local market conditions by partnering with Food Town, coinciding with political changes under President Kassym-Jomart Tokayev.
Upper-Middle-Income Countries
Upper-middle-income countries have a GNI per capita ranging from $4,466 to $13,845. These countries experience a significant shift from agriculture to industrial sectors, leading to increased urbanization.
Industrialization and Education: Countries like Chile, Malaysia, Mexico, and Venezuela are rapidly industrializing with high literacy rates and strong education systems. Wages are rising but remain lower than in high-income countries.
Economic Growth: Innovative local companies in these countries contribute to rapid, export-driven economic growth.
BRICS Nations: Brazil, China, and South Africa are examples of upper-middle-income countries. Brazil, with a GNI per capita of $8,917 in 2022, is notable for its large economy, population, and natural resources.
Brazil's Economic Development: Government policies in Brazil led to steady GNI growth from 2003 to 2013, elevating millions to the middle class. However, recent scandals have negatively impacted the economy.
Technological Advancements and Contrasts: Brazil showcases contrasts typical of its development stage, with advanced logistics and inventory management systems alongside traditional methods like horse-drawn carts.
Outsourcing Sector: Brazil's strength in computers supports a rapidly growing outsourcing sector.
Global Importance: Brazil's cultural and economic ties position it as a significant player on the world trade scene, as highlighted by former French President Jacques Chirac.
EMERGING MARKETS BRIEFING BOOK
Xinjiang's Historical and Cultural Context: Xinjiang, a province in Western China, was historically part of the Silk Road. It has a diverse population, including Uighurs and Han Chinese, with distinct languages and cultures.
Human Rights Concerns: There are significant human rights concerns in Xinjiang, particularly regarding the treatment of Uighurs. Reports suggest that thousands have been detained in reeducation camps, which the UN has suggested could be crimes against humanity.
Economic Importance: Xinjiang is rich in resources, such as polysilicon for solar panels and cotton, which are crucial to global supply chains. Allegations of forced labor in these industries have led to international scrutiny and legislative responses like the Uighur Forced Labor Prevention Act in the U.S.
Tourism and Rebranding Efforts: The Chinese government is promoting tourism in Xinjiang and investing in infrastructure to improve its image. This includes using social media influencers to portray a positive narrative and developing sustainable energy projects.
China's Economic Strategy: China is shifting from an export-driven economy to one focused on internal consumption and advanced industries, as seen in initiatives like the Belt and Road Initiative and Made in China 2025.
Global Economic Relations: China remains a major destination for foreign investment, but political tensions and human rights issues have led some companies to diversify their supply chains to other countries.
BRICS and Global Influence: China, as part of the BRICS group, is working with other member countries to counterbalance U.S. influence. Recent expansions of BRICS include new member countries, reflecting strategic geopolitical shifts.
Marketing Opportunities in Low-Income Countries
Long-term Market Opportunities in Low-Income Countries: Companies can nurture market opportunities in low-income countries by adapting to local needs. Nike's success in China exemplifies this, as it became the top sportswear brand by understanding the market potential.
Misconceptions about the Bottom of the Pyramid (BOP): There are misconceptions that low-income countries are not viable markets. However, these regions can evolve into attractive markets with the right marketing strategies that focus on local needs and incomes.
Role of Marketing in Economic Development: Marketing is crucial in both affluent and low-income countries. It helps identify and satisfy consumer needs, which is essential for economic development. Marketing can also facilitate government support by addressing local needs.
Sustainable Energy and Economic Opportunities: Focusing on sustainable energy at the BOP can lead to significant commercial opportunities. Entrepreneurs like José Andrés and Wes Meier are addressing energy and water needs, respectively, in low-income regions.
Internet Access and Economic Development: Increasing broadband access in low- and lower-middle-income countries is vital for education and healthcare. The World Bank's SDG 9 emphasizes innovation and infrastructure, advocating for public/private partnerships to improve internet access.
Environmental Conservation and Economic Development: Companies can contribute to economic development by preserving natural resources while creating economic opportunities. Examples include Daimler AG and Hermès International, which use sustainable materials and practices to appeal to environmentally conscious consumers.
ENTREPRENEURIAL LEADERSHIP, CREATIVE THINKING, AND THE GLOBAL STARTUP
José Andrés is an entrepreneur who founded World Central Kitchen (WCK) to address food insecurity globally, inspired by his experiences in the Spanish navy and his work in Washington, D.C.
WCK's mission is to "change the world through the power of food," providing meals and training to individuals in need, especially during catastrophes like earthquakes and pandemics.
WCK's innovative approach includes using local recipes and ingredients to create comfort food, and advocating for safer cooking methods, such as transitioning from charcoal to propane stoves in Haiti.
The interconnected restaurant community plays a crucial role in WCK's success, leveraging connections to farmers and distribution channels to efficiently provide meals.
WCK has provided tens of millions of meals to people in need, gaining attention from figures like Ron Howard, who directed a documentary about the organization.
Despite challenges and tragedies, such as the loss of volunteers in conflict zones, WCK continues its humanitarian mission, emphasizing the importance of relieving suffering and supporting communities in crisis.
High-Income Countries
High-Income Countries: Defined by a GNI per capita of $13,846 or higher, these countries, except for some oil-rich nations, have achieved their status through sustained economic growth. They are often referred to as postindustrial societies, a term coined by Daniel Bell, emphasizing the importance of theoretical knowledge and the service sector over traditional industrial outputs.
Postindustrial Society Characteristics: In these societies, the service sector dominates, and knowledge becomes the key strategic resource. Intellectual technology surpasses machine technology, and professionals play a more significant role than engineers and semiskilled workers. There is a focus on future orientation and interpersonal relationships.
Economic and Market Dynamics: High ownership levels of basic products lead companies to innovate and create new markets, as seen in the e-commerce and communication sectors with companies like Expedia and Match Group.
Group of Seven (G-7): Comprising the US, Japan, Germany, France, UK, Canada, and Italy, this group collaborates to ensure global economic stability. They address issues like the Partnership for Global Infrastructure and Investment to support economic growth in lower-income countries.
Demographic Challenges: Countries like Japan and Italy face declining populations, impacting economic stability. Japan's aging population increases dependency ratios, while Italy's low fertility rate and high debt burden pose economic challenges.
OECD and Global Cooperation: The Organisation for Economic Co-operation and Development (OECD) promotes sustainable economic growth among its 38 member nations. It addresses global issues like bribery through conventions and fosters economic reform and policy discussions among members.
G-20 and Global Influence: Established in 1999, the G-20 includes finance ministers and central bank governors from 19 countries and the EU, addressing global economic issues. The 2023 summit in New Delhi focused on themes of unity and future collaboration.
Marketing Implications of the Stages of Development
Product Saturation Levels: These levels indicate the percentage of potential buyers or households that own a particular product. They are crucial for marketers to evaluate market opportunities.
Elevator Market Example: In China, there is about 0.5 elevator per 1,000 people, compared to 6 elevators per 1,000 people in mature markets like Europe. This indicates significant growth potential in China.
Automobile Ownership: In India, only 8% of households own cars, compared to 75% in Germany. This low saturation level in India presents a lucrative opportunity for global automakers, with India projected to become the third-largest automobile market by 2025.
Champagne Market Dynamics: After the Brexit vote, the British pound's devaluation led to higher prices for French Champagne in the UK, prompting consumers to choose alternatives like English sparkling wines or Italian prosecco. This shift highlights the importance of understanding product saturation and market dynamics, as seen in the low Champagne consumption in the U.S. (0.07 bottle per person) compared to France (2 bottles per person).
2.4 Balance of Payments
Balance of Payments: This is a comprehensive record of all economic transactions between a country's residents and the rest of the world, divided into the current and capital accounts.
Current Account: Includes merchandise trade, services trade, and certain financial transfers like humanitarian aid. A negative balance indicates a trade deficit, while a positive balance indicates a trade surplus.
Capital Account: Records long-term direct investment, portfolio investment, and other capital flows. Outflows are indicated by minus signs, such as the $3.2 trillion outflow for U.S. merchandise imports in 2022.
Overall Balance: The balance of payments is always in balance, though subsets like the trade balance on goods can show imbalances.
U.S. Deficits: The U.S. regularly posts deficits in both the current account and trade balance in goods, influenced by factors like high trade volume with China and military costs.
Services Trade Surplus: Despite overall deficits, the U.S. maintains a services trade surplus with many countries.
China's Trade Surplus: China has significant foreign reserves and offsets its trade surpluses with capital outflows, while the U.S. offsets its trade deficit with capital inflows.
Foreign Ownership: Foreign investors own substantial U.S. assets, including $1.2 trillion in U.S. treasury bonds by China.
Trade Policy Focus: Former U.S. President Trump's trade policy focused on reducing the trade deficit with China, which exceeded $300 billion in 2016.
2.5 Trade in Merchandise and Services
World Trade Growth: Since World War II, world merchandise trade has grown faster than world production, largely due to the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). In 2022, the dollar value of world merchandise trade reached $25 trillion.
Leading Exporters and Importers: Germany and China are significant players in global trade. Germany was the top exporter until China surpassed it in 2009. Germany's exports, primarily machinery and transport equipment, have historically contributed significantly to its GDP and employment. However, recent challenges include competition from Chinese electric vehicles and energy import reliance.
China's Export Growth: China's export growth surged after joining the WTO in 2001, despite external pressures to increase the yuan's value. Although China's economic growth has slowed from its peak in 2007, it remains a major export force.
Trade in Services: The fastest-growing sector in world trade is services, including education, streaming, and business services. The global market for business services is nearly $700 billion. The U.S. is the leading services trader, with a significant services surplus that helps offset its merchandise trade deficit.
Intellectual Property Concerns: Intellectual property violations, particularly by China, significantly impact countries exporting service products like software and entertainment. The U.S. economy loses between $225 billion and $600 billion annually due to these violations.
U.S. Trade Balance: In 2022, U.S. services exports totaled over $900 billion, contributing to a services surplus of $231 billion. This surplus partially offsets the U.S. merchandise trade deficit, which was $1.2 trillion in 2022. The overall trade deficit remains a contentious political issue, with differing views on its economic implications.
Overview of International Finance
Foreign Exchange and Business Risks: Conducting business internationally involves foreign exchange risks due to currency fluctuations, unlike domestic business where transactions occur in a single currency.
Foreign Exchange Market: This market includes spot and forward markets where currencies are traded based on supply and demand. Central banks, global trade participants, and currency speculators are key players.
Devaluation: A reduction in a currency's value can result from government actions or economic crises, impacting the economy significantly, as seen in Russia's 1998 crisis and recovery.
Quantitative Easing: The European Central Bank's quantitative easing increased the euro supply, leading to its devaluation, affecting U.S. businesses and tourists.
Currency Appreciation and Mercantilism: A country's currency appreciates when it exports more than it imports, unless controlled by government policies like mercantilism, which China has been criticized for.
Impact of Stronger Currency: A stronger Chinese yuan could rebalance the global economy, increase domestic purchasing power, and reduce inflation, benefiting global companies operating in China.
Exchange Rate Fluctuations: Currency value changes affect financial risks in international contracts, as shown in Table 2-8, impacting payments depending on the specified currency.
Big Mac Index: This index compares the price of a Big Mac globally to assess currency valuation. If the converted price is lower than the U.S. price, the currency is undervalued, as demonstrated with the yuan.
Economic Exposure
Economic exposure refers to the impact of currency fluctuations on a company's financial performance, particularly when transactions involve foreign currencies.
Companies like Diageo face economic exposure when exchange rates change between the time of export sales and account settlement.
Nestlé is significantly affected by economic exposure, as 98% of its sales occur outside Switzerland.
European companies such as GlaxoSmithKline, Daimler AG, BP, Sanofi-Aventis, Royal Dutch Shell, and AstraZeneca face economic exposure due to their substantial sales in the U.S. market, where the dollar's volatility relative to the euro is a concern.
GE has less economic exposure compared to these European companies, as 45% of its revenues are from the U.S. market and only 20% from Europe.
A company's ability to use price as a strategic tool to maintain profit margins in response to currency fluctuations depends on the price elasticity of demand.
If demand is less price-sensitive, companies have more flexibility in adjusting prices to counteract exchange rate changes.
An example of price elasticity is Porsche's experience in the late 1980s, where raising prices in response to a weak dollar led to a significant drop in U.S. sales, indicating elastic demand for luxury cars.
Managing Exchange Rate Exposure
Exchange Rate Forecasting Challenges: Accurately predicting exchange rate movements is difficult, leading companies to develop strategies to manage cash flows and mitigate exchange rate risks.
Hedging Exchange Rate Exposure: Companies establish offsetting currency positions to balance losses and gains across different currencies. This is common among global companies like Porsche, which uses currency hedging to protect earnings from foreign exchange fluctuations.
Hedging Strategies: If a foreign currency is expected to weaken, companies can hedge to prevent transaction losses. Conversely, if a foreign currency is expected to strengthen, companies might not hedge to benefit from potential gains.
External Hedging Tools: These include forward contracts and currency options. Forward contracts allow companies to lock in a fixed exchange rate for future transactions, protecting against exchange rate fluctuations.
Internal Hedging Methods: These involve price adjustment clauses and intracorporate borrowing or lending in foreign currencies.
Forward Market Usage: Companies use the forward market when currency exposure is known in advance, such as with firm contracts for sales.
Foreign Currency Options: Options are suitable when future foreign currency cash flows are uncertain. A put option allows selling foreign currency at a fixed price, providing flexibility if a company wins a bid for a foreign project.
Currency Payment Demands: Companies can avoid economic exposure by demanding payment in a specific currency, though this shifts the currency risk to customers.
Invoicing Strategies: Companies often invoice exports in strong currencies and imports in weak currencies, but this can affect competitiveness in the global market.
Summary
Economic Environment and Global Market Potential: The economic environment significantly influences global market potential and opportunities. Capital movements are a key driving force in the global economy, and capitalism has largely replaced communism.
Types of Economies: Economies are categorized based on resource allocation and ownership into market capitalism, centrally planned capitalism, centrally planned socialism, and market socialism. Many countries have transitioned towards market capitalism, but disparities in economic freedom remain.
Stages of Economic Development: Countries are classified by economic development stages: low income, lower-middle income, upper-middle income, and high income. GDP and GNI are common measures of economic development. Least-developed countries (LDCs) are the lowest in the low-income category, while newly industrializing economies (NIEs) are upper-middle-income countries with high growth rates.
Notable Economic Groups: The BRICS group includes India, Brazil, China, South Africa, and Russia, representing various income levels. High-income nations like the G-7, G-8, G-20, and OECD promote democratic ideals and free market policies globally.
Global Income Distribution: Most of the world's income is concentrated in Japan, Greater China, the United States, and Western Europe. Companies with global aspirations typically operate in these regions.
Balance of Payments: A country's balance of payments records its economic transactions with the world, indicating trade surpluses or deficits. The U.S. had a merchandise trade deficit but a services trade surplus in 2022, while China had an overall trade surplus.
Foreign Exchange and Currency Dynamics: Foreign exchange facilitates cross-border transactions. Currency values can be affected by central bank actions or international speculators, impacting national economies and companies. Strong economies or high demand for goods can lead to currency appreciation. Firms manage exchange rate exposure through hedging.
Discussion Questions
BRICS Nations: Brazil, Russia, India, China, and South Africa are highlighted due to their significant roles in global economic development. Each nation is at different stages of economic development, with new members Egypt, Ethiopia, Iran, and the United Arab Emirates also considered.
Index of Economic Freedom: This index ranks countries based on economic policies and can guide global marketers in identifying market opportunities. The rankings differ from other indices like the IMD Global Competitiveness Ranking due to varying criteria considered, such as regulatory efficiency and market openness.
Economic Rankings: The United States and Sweden have different rankings in the Index of Economic Freedom and the IMD Global Competitiveness Ranking due to differing criteria. The Index of Economic Freedom focuses on aspects like government size and regulatory efficiency, while the IMD ranking considers factors like infrastructure and business efficiency.
Income Category Trends: Over the past 30 years, the definition of "low-income" countries has evolved, with the threshold increasing from $501 in 1996 to $1,135 currently. This trend reflects changes in global economic conditions and inflation.
U.S. Trade Deficit: Despite the merchandise trade deficit exceeding $1 trillion in 2022, the overall trade picture includes services and investments, which can offset the deficit and indicate a more balanced economic situation.
CASE 2-1 (Continued)
Policy Changes and Foreign Investment: Prime Minister Modi's policy changes in 2015 aimed to increase foreign investment by easing local-content rules for foreign retailers. This allowed companies like Apple to open stores in India, despite initial challenges with local-sourcing requirements.
Apple's Expansion in India: Apple began assembling iPhones in India to diversify its supply chain away from China. By 2023, Apple successfully opened its first stores in Mumbai and New Delhi.
Amazon's Strategy in India: Amazon competes with local e-commerce companies by customizing its approach, accepting cash payments, and using a marketplace model due to regulatory restrictions.
Liberalization of Other Sectors: Foreign investors can now fully own Indian airlines and defense projects, with companies like Boeing forming partnerships with Indian firms.
Digital India Initiative: Modi's "Digital India" plan aims to expand high-speed internet access, boosting e-commerce and app-based services in local languages.
Demonetization: In 2016, Modi's government demonetized the Rs500 and Rs1000 notes to combat "black money," which impacted cash transactions and benefited fintech startups like Paytm.
International Relations and Investments: Modi strengthened alliances with countries such as France and the U.S., resulting in significant investments in infrastructure and defense technology.
India's Global Position: India hosted the G20 summit in 2023, leveraging its global presence to enhance its image as a leader on the world stage.
Market Capitalism: An economic system where individuals and firms allocate resources, and production is driven by consumer demand. Prices are determined by supply and demand in a free market. An example is the United States.
Centrally Planned Capitalism: A system where the government plans and directs economic activity, but private ownership is maintained. The government may control certain sectors or industries. An example is Sweden, where the government influences economic activities through regulations and policies.
Centrally Planned Socialism: An economic system where the government owns and controls all means of production and distribution. The government makes all decisions regarding the economy, including what to produce, how to produce, and for whom to produce. An example is North Korea.
Market Socialism: A system that combines elements of socialism and capitalism, where the government owns the means of production but allows market forces to determine some aspects of production and consumption. An example is China, which has state-owned enterprises but also allows for private business and market-driven practices.