The Economic Environment Chapter 3 The Economic Environment

The Global Economy - 1986

The Global Economy - 2015

Market Characteristics Population Population figures can be classified to show specific characteristics of their respective markets. Age distribution and life expectancy correlate heavily with the level of development of the market. A household describes all the persons, both related and unrelated, who occupy a housing unit. The degree of urbanization dictates the nature of the marketing task the company faces, in terms of distribution, market potential (buying potential) and buying habits.

Exhibit 2.3 - World Economic Pyramid

Market Characteristics Income Income-distribution can be classified as very low, low, medium, high, very high income families. Per capita GDP is often used as a primary indicator for evaluating purchasing power. Purchasing power parities (PPP) show how many units of currency are needed in one country to buy the amount of goods and services that one unit of currency will buy in another country.

Income Wise Distribution of World

Market Characteristics Income Income figures are useful in the initial screening of markets; The lack of income in a market may prevent the marketing of a standardized product but, at the same time, provide an opportunity for an adjusted product.

Market Characteristics Consumption patterns Engel’s laws - As a family’s income increases, the percentage spent on food will decrease, the percentage spent on housing and household operations will be roughly constant, and the amount saved or spent on other purchases will increase. Product saturation or diffusion provides information on the percentage of households in a market that own a particular product.

Market Characteristics Consumption patterns Inflation affects the buying ability of both industrial customers and consumers, and also introduces uncertainty into both the marketer’s planning process and consumers’ buying habits.

Market Characteristics Infrastructure Transportation networks by land, rail, waterway, or air are essential for distribution. Communication systems for marketing include telephones, computers, broadcast media, print media, internet, and wireless technology. The more extensive the firm’s international involvement, the more it can rely on its already existing support network of banks, advertising agencies, and distributors to assess new markets.

Impact of the Economic Environment on Social Development Factors impeding economic growth: Infrastructure limits Labor shortages Demand for greater political freedom & Political instability Environmental destruction Urbanization Spread of drug addiction

Impact of the Economic Environment on Social Development Physical Quality of Life Index (PQLI) Is a composite measure of the level of welfare in a country. Is average of life expectancy, infant mortality, and adult literacy rates.

Impact of the Economic Environment on Social Development Emotional well-being may be determined by: Quality of social relationships Enjoyment at work Job stability Overall conditions of the country

Exhibit 2.9 - Forms of Economic Integration in Regional Markets

Levels of Economic Integration Free trade area Customs union Common market Economic union European integration North American integration Other economic alliances

Levels of Economic Integration Free trade area Eliminates tariff and quota barriers among member countries. Each country is free to set its own tariff and quota barriers against nonmember countries. Is sometimes formed only for certain classes of goods or services. Examples: ASEAN – Australia – New Zealand Free Trade Area, Gulf Cooperation Council, G-3 Free Trade Agreement (between Colombia, Mexico, and Venezuela), Dozens of FTAs in China.

Levels of Economic Integration Customs union Eliminates tariff and quota barriers among member countries. Establishes a common trade policy with respect to nonmembers, which takes the form of a common external tariff, whereby imports from nonmembers are subject to the same tariff when sold to any member country. Examples: The Afghan Pakistan Transit and Trade Agreement (APTTA)

Levels of Economic Integration Common market area Covers the exchange of goods and services, prohibits duties in exports and imports between members, and adopts a common external tariff with respect to nonmembers. Factors of production are mobile among members. Abolishes restrictions on immigration and cross-border investment. Members must cooperate closely in monetary, fiscal, and employment policies. In short, it is a free trade area with relatively free movement of capital and of services. Example: Mercosur (Latin America)

Levels of Economic Integration Economic union Requires integration of economic policies in addition to the free movement of goods, services, and factors of production across borders. Harmonizes taxation, government spending, and monetary policies. Establishes a common currency for members. Examples: EU, African Union

Levels of Economic Integration European integration European integration is the process of industrial, political, legal, economic, social and cultural integration of states wholly or partially in Europe. European integration has primarily come about through the European Union and its policies. Results in economic growth; sources of growth being: Elimination of transaction costs. Economies of scale attained as production becomes concentrated. More intense competition from European companies. Operations from one country can be freely expanded to other countries.

Levels of Economic Integration North American integration Between Canada, US and Mexico. Is for purely economic reasons. There are no constituencies for political integration. The ratification of the North American Free Trade Agreement (NAFTA) created the world’s largest free market, with 450 million consumers and a total output of $17 trillion.

Levels of Economic Integration North American integration Distinctive features of NAFTA are the two-side agreements to correct perceived abuses in labor and the environment in Mexico. Introduction of maquiladoras (special economic zones), a manufacturing operation in Mexico, where factories import certain material and equipment on a duty-free and tariff-free basis for assembly, processing, or manufacturing and then export the assembled, processed and/or manufactured products.

Regional Economic Integration Other economic alliances Integration in Latin America Integration in Asia Integration in Africa and the Middle East

Exhibit 2.11 - Major Regional Trade Agreements

Exhibit 2.11 - Major Regional Trade Agreements

Regional Economic Integration Economic integration and the international marketer Regional economic integration creates opportunities and potential problems for the international marketer. Decisions regarding integrating markets must be assessed from four different perspectives: Effects of change Strategic planning Reorganization Lobbying

Emerging Markets Emerging markets - A country making an effort to change and improve its economy with the goal of raising its performance to that of the world’s most advanced nations. Strategies adopted by marketers to thrive in emerging markets: Adjust entry strategy Manage affordability Invest in distribution Build strong brands

Developing Markets Five elements of success required for an international marketer to take advantage of and thrive in developing markets. Research Creating buying power Tailoring local solutions Improving access Shaping aspirations

An Example

Risks for Doing Business