Multilateral economic agreements DRIVING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING Multilateral economic agreements DRIVING FORCES Regional agreements: NAFTA, EU expansion and single currency. WTO (1994) Market needs and wants and IT: There are cultural universals as well as differences. Common elements in human nature provide the opportunity to create and serve global markets. For example, soft drinks companies must recognize that product adaptation is not always necessary and that competitors may be serving global customers. The information revolution that Thomas Friedman calls the democratization of information is one reason for the trend to convergence. CNN and MTV allow people in remote areas to compare their lifestyles to others. Advertising overlapping national boundaries such as in Asia or Europe and the mobility of consumers in these markets has allowed for pan-regional positioning. The Internet is perhaps the strongest force that allows people everywhere to buy and sell. Transportation and communication: Jets allow around the world travel in less than 48 hours. 1970: 75 million international passengers. 2003: 540 million. Airlines sell one another’s seats thanks to modern technology. International phone calls are inexpensive and there are many other ways to communicate including fax, email, video conferencing, wi-fi, and broadband Internet. Transportation costs have fallen. Due to specially designed ships, the cost of shipping autos from Japan to the United States is less than the cost to ship from Detroit to either U.S. coast. Intermodal transportation uses 20- to 40-foot containers that may be transferred from trucks to railroad cars to ships. Product Development Costs: New pharmaceutical cost in 1976 = $ 76 million; today = $400 million and up to 14 years to get a drug approved. Pharmaceutical companies go global to spread the costs. However, only 7 countries account for 75 percent of sales. p. 56

Multilateral Agreements NAFTA The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. In terms of combined GDP of its members, as of 2010, the trade bloc is the largest in the world.

ASEAN- Other Countries The Association of Southeast Asian Nations, commonly abbreviated ASEAN is a geo-political and economic organization of ten countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include the acceleration of economic growth, social progress, cultural development among its members, the protection of the peace and stability of the region, and to provide opportunities for member countries to discuss differences peacefully. ASEAN- Other Countries ASEAN has concluded free trade agreements with PR China, Korea, Japan, Australia, New Zealand and most recently India. The agreement with People's Republic of China created the ASEAN–China Free Trade Area (ACFTA), which went into full effect on January 1, 2010. In addition, ASEAN is currently negotiating a free trade agreement with the European Union.

DRIVING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING Converging market needs & the information revolution

Converging market needs & the information revolution

Information revolution

Transportation & communication improvements DRIVING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING Transportation & communication improvements

Transportation & Communication improvements

DRIVING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING Product development costs

Product development costs Cost of developing a new drug in 1976- $54M Cost of developing a new drug in 2009-$400 Million Such huge investments can be recovered only in global market place. Refer Table 1-10 on Page 58

DRIVING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING Quality DRIVING FORCES Regional agreements: NAFTA, EU expansion and single currency. WTO (1994) Market needs and wants and IT: There are cultural universals as well as differences. Common elements in human nature provide the opportunity to create and serve global markets. For example, soft drinks companies must recognize that product adaptation is not always necessary and that competitors may be serving global customers. The information revolution that Thomas Friedman calls the democratization of information is one reason for the trend to convergence. CNN and MTV allow people in remote areas to compare their lifestyles to others. Advertising overlapping national boundaries such as in Asia or Europe and the mobility of consumers in these markets has allowed for pan-regional positioning. The Internet is perhaps the strongest force that allows people everywhere to buy and sell. Transportation and communication: Jets allow around the world travel in less than 48 hours. 1970: 75 million international passengers. 2003: 540 million. Airlines sell one another’s seats thanks to modern technology. International phone calls are inexpensive and there are many other ways to communicate including fax, email, video conferencing, wi-fi, and broadband Internet. Transportation costs have fallen. Due to specially designed ships, the cost of shipping autos from Japan to the United States is less than the cost to ship from Detroit to either U.S. coast. Intermodal transportation uses 20- to 40-foot containers that may be transferred from trucks to railroad cars to ships. Product Development Costs: New pharmaceutical cost in 1976 = $ 76 million; today = $400 million and up to 14 years to get a drug approved. Pharmaceutical companies go global to spread the costs. However, only 7 countries account for 75 percent of sales. p. 59

Quality Global marketing strategies generate greater opportunities and greater revenue which intern support design and manufacturing quality.

DRIVING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING World economic trends

World Economic Trends

DRIVING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING Leverage

Leverage Global companies possess the unique opportunities to develop leverage. It means the type of advantage that a company enjoys by virtue of the fact that it has experience in more than one country. Experience transfer Scale of Economies Resource Allocation Global strategy

Leverage: Experience Transfers A global company can leverage its experience in any market in the world. It can draw on management practices, strategies, products, advertising appeals, or sales or promotional ideas that have been tested in actual markets and apply them in other comparable markets. For example, Asea Brown Boveri (ABB), a company with 1,300 operating subsidiaries in 140 countries, has considerable experience with a well-tested management model that it transfers across national boundaries. The Zurich-based company knows that a company's headquarters can be run with a lean staff. When ABB acquired a Finnish company, it reduced the headquarters staff from 880 to 25 between 1986 and 1989. Headquarters staff at a German unit was reduced from 1,600 to 100 between 1988 and 1989. After acquiring Combustion Engineering (a U.S. company producing power plant boilers), ABB knew from experience that the headquarters staff of 800 could be drastically reduced, in spite of the fact that Combustion Engineering had a justification for every one of the headquarters staff positions. ABB- 1400 subsidiaries in 140 countries. Very famous for running the operations with the minimum number of staff

Leverage: Scale of Economies The global company can take advantage of its greater manufacturing volume to obtain traditional scale advantages within a single factory. Also, finished products can be produced by combining components manufactured in scale-efficient plants in different countries. The larger scale of the global company also creates opportunities to improve corporate staff competence and quality.

Leverage : Resource Allocation A major strength of the global company is its ability to scan the entire world to identify people, money, and raw materials that will enable it to compete most effectively in world markets. Global companies utilizes the resources where there is the greatest opportunity to serve a need at a profit

RESTRAINING FORCES AFFECTING GLOBAL INTEGRATION & GLOBAL MARKETGING Management myopia & Organizational culture Opposition to globalization Management myopia and organizational culture: Ethnocentric companies will not expand geographically. Managers tend to dictate when they should create strong local teams that they can rely upon for market information. Know-it-all local teams won’t listen to management and all-knowing managers won’t listen to local experts. Successful global companies have learned to integrate global vision and perspective with local market initiative and input. National controls: Every country tries to protect its home industries and services through tariff and non-tariff controls. Thanks to organizations like GATT, WTO, NAFTA, EU, and other economic agreements, tariffs have been largely removed in high-income countries. Non-tariff barriers to trade include “Buy Local” campaigns, food safety rules, and other bureaucratic obstacles. Opposition to Globalization: Globophobia is the term used to describe an attitude of hostility toward trade agreements, global brands, or company policies that appear to result in hardship for some individuals or countries while benefiting others. Opponents to globalization include college or university students, NGOs, and labor unions. Some Americans believe that globalization has sent American jobs—both blue- and white-collar—overseas and also depressed wages at home. In developing countries, many believe that free trade agreements benefit the world’s most advanced countries. An unemployed miner in Bolivia said, “Globalization is just another name for submission and domination. We’ve had to live with that here for 500 years and now we want to be our own masters.” National controls – (to protect local industries) p. 62

Management myopia Management ignores (will not see) the opportunities to peruse global marketing. Global marketing does not work without a strong local team that can provide information about the local market conditions.

Summary Global marketing is the process of focusing resources on global marketing opportunities Goal is to create customer value & competitive advantage by maintaining focus FOUR classifications of management orientation: ethnocentric, polycentric, regiocentric, geocentric Global marketing importance is shaped by a variety of driving & restraining forces

Looking Ahead to Chapter 2 The global economic environment

Introduction This chapter includes An overview of the world economy A survey of economic system types The stages of market development The balance of payments

The World Economy—An Overview In the early twentieth century economic integration was at 10%; today it is 50% EU and NAFTA are very integrated Global competitors have displaced or absorbed local ones Fifty years ago, the auto industry was very different. European automakers such as Renault, Citroen, Peugeot, Morris, Volvo, and others produced vehicles radically different from those of American makers such as Chevrolet, Ford, or Plymouth, or Japanese autos made by Toyota or Nissan. Today, manufacturers make autos for home markets but are increasing global companies with global products.

Centrally planned capitalism Centrally planned socialism Economic Systems Resource Allocation Market Command Private Resource Ownership State Centrally planned capitalism Market capitalism Market socialism Centrally planned socialism

Market Capitalism Individuals and firms allocate resources Production resources are privately owned Driven by consumers Government’s role is to promote competition among firms and ensure consumer protection Eg: United States Market capitalism is practiced most around the world, most notably in Western Europe and North America. All market-oriented economies do not function in an identical manner. The United States is characterized by its competitive “free-for-all” and decentralized initiative. Japan is sometimes called “Japan, Inc.” because it has a tightly run, highly regulated economic system that is also market oriented.

Centrally Planned Socialism Opposite of market capitalism State holds broad powers to serve the public interest; decides what goods and services are produced and in what quantities Government owns entire industries and controls distribution Demand typically exceeds supply Eg: North Korea, Venezuela etc. Marxism is a vanquished economic system. For decades China, the Former Soviet Union, and India used this economic system. All of these countries now have economic reforms that have some degree of market allocation and private ownership.

Centrally Planned Capitalism Economic system in which command resource allocation is used extensively in an environment of private resource ownership Examples Sweden Japan INDUSTRY SECTOR STATE OWNERSHIP Telecom 45% Airline 21% Banking 20% Alcohol 100% In Sweden, where two-thirds of all expenditures are controlled by the government, resource allocation is more “command” oriented than “market” oriented. Sweden’s “welfare state” has a hybrid system that has elements of both centrally planned socialism and capitalism. China’s Guangdong Province operates within a market system. China’s private sector accounts for 75 percent of total national output. Cuba is one of the last countries to use command allocation approach.

13 Stages of Economic Development (p. 80-93) Brazil Russia India China BIG EMERGING MARKETS (BEMs) China India Indonesia South Korea Brazil Mexico Argentina South Africa Poland Turkey B R I C Brazil Russia India China

BRIC Since the four BRIC countries are developing rapidly, by 2050 their combined economies could eclipse the combined economies of the current richest countries of the world. These four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

WORLD’S TOP ECONOMIES

Low-Income Countries GNP per capita of $825 or less Characteristics Limited industrialization High percentage of population involved in farming High birth rates Low literacy rates Heavy reliance on foreign aid Political instability and unrest Concentrated in Sub-Saharan Africa Includes 40 percent of the world’s population. LICs represent limited markets for products with some exceptions. The Bangladesh garment industry shipped $2.4 billion in goods to the United States in 2002. GNP is about $380 and garment workers, mostly women, made about $35 a month. The country received preferential treatment under the Multifiber Arrangement trade agreement that expired in 2004. Some expect this will lead to a shakedown in the garment industry and cause unemployment and social and political unrest. Some low-income countries have such serious economic, social, and political problems that they represent extremely limited opportunities. Burundi, Rwanda, and Haiti are examples. FSU (former Soviet Union) states present a interesting situation: Income is declining and there is economic hardship. These countries present risk/reward trade-offs. Table 2-3 shows that Tajikistan and Belarus are considered “repressed” in terms of economic freedom. India

Source: World bank 2012 Statistics

Lower-Middle-Income Countries GNI per capita: $826 to $3,255 Characteristics Rapidly expanding consumer markets Cheap labor Mature, standardized, labor-intensive industries like textiles and toys India is the only BRIC Country China: No democratic reforms. Trading partners are concerned about human rights and intellectual property protection. State leaders must deal with a large bureaucratic system while reforming state enterprises. GM, Ford, Honda, Volkswagon, Motorola, P&G, Avon, Siemens AG, and McDonald’s are investing there. Brazil: Largest country in South America in terms of its economy, population, and geography. It has the richest natural resources in the hemisphere. Hyperinflation is under control and it has liberalized trade policies. Companies doing business there are Whirlpool, Electrolux, Raytheon, Fiat, and Ford. Brazil is a study in contrasts. Horse-drawn carts are common in some parts. Grocery companies use logistics software to route trucks. Many retailers use sophisticated computer systems to maintain control in a volatile financial environment. Former French president Jacques Chirac said, “Geographically, Brazil is part of America. But it’s European because of its culture and global because of its interests.”

Upper-Middle-Income Countries GNP per capita: $3,256 to $10,065 Characteristics Rapidly industrializing, less agricultural employment Increasing urbanization Rising wages High literacy rates and advanced education Lower wage costs than advanced countries Also called newly industrializing economies (NIEs) Examples: BRCI COUNTRIES ARE BRAZIL, RUSSIA & CHINA In Hungary and other NIEs, many manufacturing companies have received ISO-9000 certification for documenting compliance with quality standards.

High-Income Countries GNI per capita: $10,066 or more Also know as advanced, developed, industrialized, or postindustrial countries Characteristics Sustained economic growth through disciplined innovation Service sector is more than 50% of GNI Product and market opportunities in a postindustrial society are more heavily dependent on new products and innovations than in industrial societies. Ownership levels of basic products are extremely high in most households. When it is difficult to expand market share, companies must bring new products to market or create new markets for products.

High-Income Countries Importance of information processing and exchange Ascendancy of knowledge over capital, intellectual over machine technology, scientists and professionals over engineers and semiskilled workers Future oriented Importance of interpersonal relationships

High Income countries

High Income countries (Contd..)

Marketing Opportunities in LDCs Characterized by a shortage of goods and services Long-term opportunities must be nurtured in these countries Look beyond per capita GNP Consider the LDCs collectively rather than individually Consider first mover advantage Set realistic deadlines

G-8, the Group of Eight Goal of global economic stability and prosperity United States Japan Germany France Britain Canada Italy Russia (1998) As of 2007, the U.S. State Department website with G-8 information is http://usinfo.state.gov/ei/economic_issues/group_of_8.html. G-7 began in 1975 and Russia joined in 1998. The EU is also represented at all meetings. The leader of the host country is the president of the G-8. The group meets every summer. The presidency of the G8, and responsibility for hosting all G-8 meetings, rotates each year, with the order of G-8 rresidencies as follows: 2004 United States 2005 United Kingdom 2006 Russia 2007 Germany 2008 Japan 2009 Italy 2010 Canada 2011 France 2012 United States Photo: Top Row (l-r): Otto Schily (Germany), Brigitte Zypries (Germany), Dominique de Villepin (France), Tom Ridge (United States), John Ashcroft (United States), Rashid Gumarovich Nurgaliev (Russia), Vladimir Vasilyevich Ustinov (Russia), Akio Harada (Japan), Iwao Uruma (Japan). Bottom Row: Dominique Perben (France), Hazel Blears (UK), Roberto Castelli (Italy), Giuseppe Pisanu (Italy), Irwin Cotler (Canada), Paul Kennedy (Canada), Antonio Vitorino (EU). 2007 G-8 leaders in Germany

Assignment-2 Study about the Association of South East Asian Nations (ASEAN) and its marketing issues and opportunities. Submit the assignment in the class and one group shall present the topic in the class.

OECD, the Organization for Economic Cooperation and Development 34 nations Post–World War II European origin Canada, United States (1961), Japan (1964) Promotes economic growth and social well-being Focuses on world trade, global issues, labor market deregulation http://www.oecd.org

THE OECD

The Triad United States, Western Europe, and Japan Represents 75% of world income Expanded triad includes all of North America and the Pacific Rim and most of Eastern Europe Global companies should be equally strong in each part The ascendancy of the global economy has been noted by many observers in recent years. One of the most astute is Kenichi Ohmae, former chairman of McKinsey & Company Japan. His 1985 book Triad Power represented one of the first attempts to develop a coherent conceptualization of the new emerging order. Ohmae argued that successful global companies had to be equally strong in Japan, Western Europe, and the United States. These three regions, which Ohmae collectively called the Triad, represented the dominant economic centers of the world. Today, roughly 75 percent of world income as measured by GNP is located in the Triad. Coca-Cola is a example of a company with a balanced revenue stream. Revenue: 25 percent from Asia; 25 percent from Europe, Eurasia, and Middle East; 40 percent from North America

Balance of Payments Record of all economic transactions between the residents of a country and the rest of the world Current account—record of all recurring trade in merchandise and services, and humanitarian aid Trade deficit—negative current account Trade surplus—positive current account Capital account—record of all long-term direct investment, portfolio investment, and capital flows

International finance: An Overview

Overview of International Finance Foreign exchange makes it possible to do business across the boundary of a national currency Currency of various countries are traded for both immediate (spot) and future (forward) delivery Currency risk adds turbulence to global commerce Foreign exchange is an aspect of global marketing that involves certain financial risks, decisions, and activities that are completely different from those facing a domestic marketer. Those risks can be even higher in developing countries such as Thailand, Malaysia, and South Korea. A country’s central bank can buy or sell currencies in the foreign exchange market and government securities in an effort to influence exchange rates. For example, China bought more than $250 billion in U.S. Treasury bonds between 2001 and 2006. Such purchases help ensure that China’s currency is relatively weak compared to the U.S. dollar. Second, some of the trading in foreign exchange markets is to settle accounts for the global trade in goods and services. For example, Porsche, a German company, must exchange U.S. dollars received in U.S. sales to euros. Third, currency speculators also trade in exchange markets.

Balance of Payments A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

Balance of Payments The BOP is divided into 2 accounts The Current account The Capital account The Current Account: A broad measure that includes merchandise trade and service trade. The Capital Account A record of all long term direct investment, portfolio investment and other short term, long term capital flows Refer Table 2.5 @ Page 93

Balance of Payments-Thailand Bank of Thailand   EC_XT_010 : Balance of Payments (Summary) (Unit : Millions of Baht) Last Updated : 31 May 2011 14:32 Retrieved date : 08 Jun 2011 13:43 2010 2009 2008 2007 1 Exports (f.o.b.) 6,120,927.59 5,155,054.37 5,831,085.78 5,212,208.04 2 (% change) 18.73 -11.59 11.87 7.72 3 Imports (c.i.f.) -5,681,327.14 -4,485,935.34 -5,845,351.76 -4,773,127.13 4 26.64 -23.25 22.46 -0.64 5 Trade balance 439,600.44 669,119.03 -14,265.97 439,080.90 6 Net services income & transfers 23,963.61 85,355.33 81,646.47 100,623.25 7 Current account balance 463,564.05 754,474.37 67,380.49 539,704.16 8 Capital and financial account 503,431.31 -101,685.89 399,828.21 -61,663.39 9 Monetary authorities 82,631.52 50,005.17 1,096.65 -21,482.93 10 Government 103,993.24 19,493.87 -15,461.11 -77,645.54 11 Bank 307,032.24 260,686.92 348,808.59 -46,582.40 12 Others 9,774.29 -431,871.87 65,384.08 84,047.48 13 Net errors & omissions 19,630.25 171,811.71 344,640.05 108,377.76 14 Balance of payments 986,625.62 824,600.18 811,848.77 586,418.54 Source:

Purchasing Power Parity(PPP) Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. The concept is founded on the law of one price, the idea that in absence of transaction costs and official barriers to trade, identical goods will have the same price in different markets when the prices are expressed in terms of one currency.

Purchasing Power Parity(PPP) A country’s currency is overvalued if the Big Mac price (Converted to dollars) is higher than in the US. A country’s currency is undervalued if the converted Big Price is lower than the US price.

Managing Economic Exposure Economic exposure refers to the impact of currency fluctuations on the present value of the company’s future cash flows Two categories of economic exposure Transaction exposure is from sales/purchases Real operating exposure arises when currency fluctuations, together with price changes, alter a company’s future revenues and costs The degree to which exchange rates affect a company’s market value as measured by its stock price is known as economic exposure. Transaction exposure example: Guinness agrees to accept payment for Scotch whiskey at one rate but settles at another rate. Real operating exposure occurs for firms with overseas sourcing or manufacturing operations.

Managing Exchange rate Exposure Hedging Forward & Future Markets Options Call Put

Hedging Hedging exchange rate exposure involves establishing an offsetting currency position such that the loss or gain of one currency position is offset by a corresponding gain or loss in some other currency.

Forwards With a forward contract, the company can lock in a specific fixed exchange rate for a future date and thus immunize itself from the loss ( or gain) caused by the exchange rate fluctuation. In addition to spot prices, 30-, 60- and 180 day forward prices are traded for dozens of world currencies.

Put Options Gives the Holder the right,(not obligation) to sell a specified number of foreign currency units at a fixed price until the options expiration date.

Call Options Gives the holder the right,(not obligation) to buy a specified number of foreign currency units at a fixed price until the options expiration date.

Looking Ahead to Chapter 3 The global trade environment