Global Marketing Management A European Perspective Economic Environment Warren J. Keegan Bodo B. Schlegelmilch

Overview The World Economy – An Overview Economic Systems Stages of Market Development Income and Purchasing Power Parity Regionalisation of Markets Summary

Learning Objectives Understanding the main differences between economic systems found around the world Learning ways of classifying countries by their market development Understanding consumption patterns in different countries Knowing the main regional economic co-operation agreements

The World Economy - Overview World Economy has changed profoundly during the last 50 years Emergence of global markets Integration of world economy Capital movements are driving force of world economy Production is “uncoupled” from employment Macroeconomics of individual countries no longer control economic outcomes

Economic Systems Three types of economic systems Capitalist Socialist Mixed Classification based on dominant method of resource allocation Market allocation Command or central plan allocation Mixed allocation

Economic Systems – Market Allocation Relies upon consumers to allocate resources: “Economic Democracy” Role of state Promote competition Ensure customer protection Examples of predominately market economies Western European Countries, United States, Japan

Economic Systems – Command Allocation State has broad powers to serve public interest Decides which products to make Decides how to make them Elements of marketing mix are not used as strategic variables Examples of countries that relied upon command allocation systems for decades China, former USSR, India

Economic Systems – Mixed Systems There are in reality no pure market or command allocation systems among the world’s economies Variables to determine degree of economic freedom Trade policy Taxation policy Government consumption of economic output Monetary policy Capital flows Foreign investment Banking policy Wage and price controls Property rights Etc.

Economic Systems Index of Economic Freedom (Source: Heritage Foundation) Free: E.g., Hong Kong, Singapore, US, Japan, UK, Taiwan, Bahrain Mostly Free E.g., Canada, Germany, Austria, Estonia, France, Sweden, Hungary Mostly Unfree E.g., Turkey, Mexico, Israel, Malta, Russia, Bulgaria, Philippines Repressed E.g., North Korea, Haiti, Moldova, Angola, Cuba

Stages of Market Development Global country markets are at different stages of development GNP per capita provides a useful way of grouping countries into 5 categories Categories are a useful basis for Global segmentation Target marketing

Stages of Market Development – High Income Countries GNP per capita above € 7,960 (E.g., Japan, Sweden) “Post-Industrial Countries” Ascendancy Of knowledge over capital as key strategic resource Of intellectual technology over machine technology Of scientists and professionals over engineers and semiskilled workers Orientation toward the future Importance of interpersonal relationships

Stages of Market Development – Upper Middle Income Countries GNP per capita between € 2,575 and € 7,960 (E.g., Malaysia) Characteristics Rising wages High rates of literacy Advanced education Upper middle income countries Experience rapidly, export-driven economic growth Become formidable competitors

Stages of Market Development – Lower Middle Income Countries GNP per capita between € 650 and € 2,575 (E.g., Indonesia) Characteristics Early stages of industrialization Expanding consumer markets Major competitive advantage in the production of mature, standardized, labour-intensive products

Stages of Market Development – Low Income Countries GNP per capita less than € 650 (E.g., Bangladesh) Characteristics Limited industrialization High birth rates Low literacy rates Heavy reliance on foreign aid Political instability

Income and Purchasing Power (1) Single most important indicator of market potential Purchasing Power Parities Comparison of goods and services that can be bought with local currency in different countries Gross National Product (GNP) Sum of the money values of all final goods and services produced during a year

Income and Purchasing Power (2) Top 10 Nations ranked by GNP/Capita (1997) Luxembourg Switzerland Japan Norway Denmark Singapore Germany Austria United States Belgium

Income and Purchasing Power (3) Top 10 Nations ranked by GNP/Capita adjusted for Purchasing Power (PPP) Luxembourg United States Switzerland Kuwait Hong Kong Singapore Japan Norway Belgium Canada

The Location of Population About 74% of world income is concentrated in the Triad (North America, Japan, Western Europe) Country Population GNP/Capita % World (thousands) (thousands) GNP China 1,231,000 613 3.2 India 965,000 309 1.3 United States 267,000 23,530 26.7 Indonesia 199,000 246 0.8 Brazil 164,000 3,046 2.1

Marketing And Economic Development Does marketing play an important role in the economic development of a country? Is marketing only relevant to conditions that apply in affluent, industrialized countries? The marketing process of focusing an organization’s resources on environmental opportunities is a process of universal relevance

Balance of Payments A record of all economic transactions between residents of a country and the rest of the world Capital Account records Long-term direct investment, Portfolio investment, Other short- and long-term capital flows Current Account records Trade in merchandise and service, Private gifts, Public aid transactions between countries

Regionalisation of Markets (1) Many different forms of economic co-operation between countries Free trade areas Customs unions World Trade Organisation (WTO) Acts as mediator in global trade disputes Ensures that trade flows are as smooth, predictable and as free as possible Common markets Economic unions

Regionalisation of Markets (2) European Union (EU) 15 European member countries Market of 379 million people North American Free Trade Agreement (NAFTA) United States, Canada, Mexico Market of 381 million people Association of Southeast Asian Countries (ASEAN) 10 member countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam)

Summary Economic environment is major determinant of global market potential and opportunity World economies can be categorized into market allocation systems, command allocation systems, and mixed systems For many products, most important indicator of market potential is income There is a strong interest among nations in forming economic co-operations