International Business Chapter Four The Economic Environment International Business 10e Daniels/Radebaugh/Sullivan 2004 Prentice Hall, Inc

Reading chapters It’s important to do the reading before class It’s important to do the reading before class You cannot assume that everything on the tests will be on the slides You cannot assume that everything on the tests will be on the slides Everything on the tests will be Everything on the tests will be discussed in classdiscussed in class mentioned in the study guide for the testmentioned in the study guide for the test But you will have to study the text and your notes But you will have to study the text and your notes

2004 Prentice Hall, Inc Studying cases You are not required to memorize any facts from the cases You are not required to memorize any facts from the cases No facts from the cases will be on the tests unless I specifically tell youNo facts from the cases will be on the tests unless I specifically tell you But you are expected to have read the cases and thought about the study question But you are expected to have read the cases and thought about the study question

2004 Prentice Hall, Inc On tests, a question about a case will give you the facts you need A multiple choice question will provide the basic data A multiple choice question will provide the basic data An essay will be ‘open book’ An essay will be ‘open book’ But if you did not read before class, you are unlikely to absorb enough during class discussion to be ready But if you did not read before class, you are unlikely to absorb enough during class discussion to be ready

2004 Prentice Hall, Inc Cases have two central roles in Business 187 They illustrate points in the text They illustrate points in the text They show the complexities of the real world They show the complexities of the real world Cases give you a chance to think about real situationsCases give you a chance to think about real situations Let you consider which of the theories in the text you find usefulLet you consider which of the theories in the text you find useful

2004 Prentice Hall, Inc As you read cases, think about … Which theories in the text are at work? Which theories in the text are at work? To what extent does the case provide evidence that I have to go beyond the theory? To what extent does the case provide evidence that I have to go beyond the theory?

2004 Prentice Hall, Inc

The first 4 chapters… I. Basic ideas about international business II. Culture – What it is, why it’s crucial, how to develop the art of dealing with it III. The political environment – Nature of the systems that create ‘rules of the game’ IV. The economic environment –  How do nations produce wealth?  How much do they have?

2004 Prentice Hall, Inc Chapter Objectives Learn criteria for dividing countries into economic categories Learn criteria for dividing countries into economic categories Understand key measures like “Gross National Income”Understand key measures like “Gross National Income” Understand “economic systems”Understand “economic systems” Discuss economic issues that influence international business Discuss economic issues that influence international business Assess the transition process for former “command economies” Assess the transition process for former “command economies” Daewoo case – Economic developmentDaewoo case – Economic development

2004 Prentice Hall, Inc Economic issues that multinational enterprises must grasp What is the size, growth potential, and stability of the market? What is the size, growth potential, and stability of the market? What type of economic system does the country have? What type of economic system does the country have? Is your firm’s industry in the public or private sector of this country? Is your firm’s industry in the public or private sector of this country? If public, does the government allow private competition?If public, does the government allow private competition? How does the government control the nature and extent of private enterprise? How does the government control the nature and extent of private enterprise?

2004 Prentice Hall, Inc Factors of Production Inputs to the production process Inputs to the production process Human resourcesHuman resources Physical resourcesPhysical resources KnowledgeKnowledge CapitalCapital InfrastructureInfrastructure Factor conditions are most obviously critical for manufacturing, mining, and agriculture Factor conditions are most obviously critical for manufacturing, mining, and agriculture

2004 Prentice Hall, Inc Demand Conditions Market potential Market potential Size of home demandSize of home demand Growth of home demandGrowth of home demand Composition of home demand (nature of buyer needs)Composition of home demand (nature of buyer needs) Internationalization of demandInternationalization of demand Composition? Size? Growth? Internationalization?

2004 Prentice Hall, Inc Classifying countries by income Gross National Income (GNI) (formerly “Gross National Product” - GNP) Gross National Income (GNI) (formerly “Gross National Product” - GNP) the market value of final goods and services newly produced by domestically owned factors of production.the market value of final goods and services newly produced by domestically owned factors of production. Gross Domestic Product (GDP) Gross Domestic Product (GDP) the value of production that takes place within a nation’s borders, without regard to whether the production is done by domestic or foreign factors of productionthe value of production that takes place within a nation’s borders, without regard to whether the production is done by domestic or foreign factors of production

2004 Prentice Hall, Inc Examples A Ford manufactured in the U.S. A Ford manufactured in the U.S. counts in U.S. GNI (because Ford is a U.S. company)counts in U.S. GNI (because Ford is a U.S. company) counts in U.S. GDP (because the work is done in the U.S.)counts in U.S. GDP (because the work is done in the U.S.) A Toyota manufactured in the U.S. A Toyota manufactured in the U.S. does not count in U.S. GNI (because Toyota is not a U.S. company)does not count in U.S. GNI (because Toyota is not a U.S. company) does count in U.S. GDP (because the work is done here)does count in U.S. GDP (because the work is done here) 4-9

2004 Prentice Hall, Inc A Ford produced in Mexico… A Ford produced in Mexico… counts in U.S. GNIcounts in U.S. GNI (though the wages paid to Mexicans would be deducted) (though the wages paid to Mexicans would be deducted) But is not part of U.S. GDPBut is not part of U.S. GDP

2004 Prentice Hall, Inc Importance of Per Capita GNI Low Income $755 or less Developing Country (India, Vietnam) High Income $9,266 or more Developed Country (U.S., Canada, France) Upper Middle Income $2,996-9,265 Developing Country (Mexico, Saudi Arabia) Lower Middle Income $756-2,995 Developing Country (China, Egypt) World Bank Category Per Capita GNI ($ in 2000) Common Classification

2004 Prentice Hall, Inc GNI can be an inadequate indicator of wealth Purchasing Power Parity (PPP) is the number of units of a nation’s money required to buy goods and services inside the country that $1 would buy in the U.S. Purchasing Power Parity (PPP) is the number of units of a nation’s money required to buy goods and services inside the country that $1 would buy in the U.S. PPP is a useful measure since it accounts for international differences in price PPP is a useful measure since it accounts for international differences in price Example: China has a higher PPP currency value than JapanExample: China has a higher PPP currency value than Japan $1 worth of yuan buys more in China than $1 worth of yen buys in Japan $1 worth of yuan buys more in China than $1 worth of yen buys in Japan

2004 Prentice Hall, Inc

World regions are growing at radically different rates From Map 4.2

2004 Prentice Hall, Inc Economic Systems Governments struggle with Governments struggle with who should own businesseswho should own businesses how they should be controlledhow they should be controlled

2004 Prentice Hall, Inc Economic Freedom Market Economy: resources are primarily owned and controlled by the private sector, not the public sector Market Economy: resources are primarily owned and controlled by the private sector, not the public sector Consumer sovereignty - the right of consumers to decide what to buyConsumer sovereignty - the right of consumers to decide what to buy Prices are determined by supply and demandPrices are determined by supply and demand

2004 Prentice Hall, Inc Little economic freedom Little economic freedom Command Economy (Centrally Planned Economy): all dimensions of economic activity, including pricing and production, are determined by a central government plan Command Economy (Centrally Planned Economy): all dimensions of economic activity, including pricing and production, are determined by a central government plan Government owns and controls all resourcesGovernment owns and controls all resources Prices are determined by governmentPrices are determined by government North Korea, Cuba North Korea, Cuba

2004 Prentice Hall, Inc No economy is purely market or command Mixed Economy: Some degree of government ownership and control Mixed Economy: Some degree of government ownership and control Economic systems are along a spectrum of freedomsEconomic systems are along a spectrum of freedoms Today, most command economies are moving towards a market economyToday, most command economies are moving towards a market economy

2004 Prentice Hall, Inc Economic Factors International Businesses Must Consider Inflation Inflation Government Deficits Government Deficits Nations’ External Debt Nations’ External Debt Internal Debt Internal Debt Privatization Privatization Balance of Payments Balance of Payments 4-17

2004 Prentice Hall, Inc Reforms and Economic Progress – the Vicious Circle Figure

2004 Prentice Hall, Inc Reforms and Economic Progress – the Virtuous Circle (the goal) Figure

2004 Prentice Hall, Inc Daewoo – Growth and Problems

2004 Prentice Hall, Inc Chapter Review Learn differences among the world’s major economic systems Learn differences among the world’s major economic systems Learn criteria for dividing countries into economic categories Learn criteria for dividing countries into economic categories Discuss economic issues that influence international business Discuss economic issues that influence international business Assess the transition process for market economies Assess the transition process for market economies

2004 Prentice Hall, Inc