International Business Environments & Operations Daniels ● Radebaugh ● Sullivan International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan Copyright © 2015 Pearson Education, Inc.

The Economic Environments Facing Businesses Chapter 4 The Economic Environments Facing Businesses Chapter 4: The Economic Environments Facing Business Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objectives Communicate the importance of economic analysis Discuss the idea of economic freedom Profile the characteristics of the types of economic systems Introduce the notion of state capitalism Profile leading indicators of economic development, performance, and potential The learning objectives for this chapter are To communicate the importance of economic analysis To discuss the idea of economic freedom To profile the characteristics of the types of economic systems To introduce the notion of state capitalism To profile indicators of economic development, performance, and potential Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Introduction Managers assess a country’s economic environment knowing Countries differ in different ways Economic and political changes alter market circumstances It is important to understand connections, change, and consequences The challenges of the comeback Choices of citizens, policymakers, and institutions Managers study economic environments to estimate how market trends and government policy influence the performance of their companies. A country’s economic policies are a leading indicator of a government’s goals and its planned use of economic tools and market reforms. Managers should study a country’s economic environment to assess its development, explain its performance, and estimate its potential. Managers do this knowing countries differ in different ways, economic and political changes alter market circumstances, that it’s critical to make connections between events and predict the consequences of changes, the challenges of the comeback, and choices of citizens, policymakers, and institutions. Copyright © 2015 Pearson Education, Inc.

International Economic Analysis A universal assessment of economic environments is difficult because of: System Complexity Identifying proper indicators is difficult Market Dynamism New economic circumstances Market Interdependence Markets influence each other Data Overload Complicates decision-making Determining which countries warrant investment is not easy. It’s very difficult to assess the potential of a country because any type of assessment relies on behavioral assumptions as well as more scientific principles. There are some 208 discrete economic environments in the world today. Managers need to narrow them down and identify exactly which countries offer the greatest potential return for the least risk. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Economic Freedom Economic freedom – people have the right to work, produce, consume, save, and invest the way they prefer measured across business freedom, monetary freedom, fiscal freedom, investment freedom, freedom from corruption, property rights, trade freedom, government size, financial freedom, and labor freedom So, it’s important for managers to monitor a range of economic issues, but perhaps most important is an assessment of economic freedom, or what a manager has the freedom to do. Economic freedom reflects the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty. In some countries these freedoms are taken for granted, while in others they are rare. Economic freedom advanced in 2011. As you might expect, it tends to be higher in Western countries and lower in Eastern countries. Copyright © 2015 Pearson Education, Inc.

Economic Freedom Economic Freedom by Region, with Population This Figure shows economic freedom by region. Notice that most people in the world live in countries with lower degrees of economic freedom. Copyright © 2015 Pearson Education, Inc.

Global Distribution of Economic Freedom Copyright © 2015 Pearson Education, Inc.

Economic Freedom: Value and Trend Economic freedom affects: Growth rates, Productivity, Income levels, Inflation, Employment, Life expectancy, Literacy, Political openness, Environmental sustainability The trend toward increased economic freedom is no longer certain The legitimacy of free markets has been questioned The benefits of more state control Why is economic freedom important? Countries with economic freedom typically have higher per capita income, standards of living, and social stability as compared to less free countries. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Standard of Living Copyright © 2015 Pearson Education, Inc.

Types of Economic Systems An economic system refers to the mechanism that deals with the production, distribution, and consumption of goods and services Types Market Economy: a free-market (capitalistic) economy built upon the private ownership and control of the factors of production Command Economy: a centrally-planned economy built upon government ownership and control of the factors of production Mixed Economy: an economy in which economic decisions are largely market-driven and ownership is largely private, but significant government intervention is still evident Managers can explore a country’s economic system to understand how the host government regulates the economy, protects property rights, sets fiscal and monetary policies, and enforces antitrust regulation. There are three main types of economic systems: market, command, and mixed economies. Copyright © 2015 Pearson Education, Inc.

Evaluating Market, Mixed and Command Economy Criteria Market Mixed Command Degree of economic freedom Ownership of means of production Role of price in the system Role of government Trade and investment policy Fiscal and monetary policy

Types of Economic Systems This Figure shows the different types of economic systems. Copyright © 2015 Pearson Education, Inc.

Economic Development, Performance, and Potential Broad classes of countries include developing countries largest number of countries low per capita income emerging economies fast growing, relatively prosperous BRICS – Brazil, Russia, India, China and South Africa developed countries high per capita income and standard of living like the U.S., Japan, France, Australia Managers need to assess a country’s level of economic development, performance, and potential. Countries can be classified as developing countries, emerging economies, and developed countries. Copyright © 2015 Pearson Education, Inc.

The Rise of the Emerging Nations Emerging Nations are the center of most economic discussions today Who are these nations? What is their impact in a globalized world? Impact of Emerging Markets See my presentation under Teaching Aids BRICS and plus nations

Measures of Economic Performance Gross national income (GNI) the broadest measure of economic activity for a country Gross national product (GNP) the total value of all final goods and services produced within a nation in a particular year Gross domestic product (GDP) the total market value of goods and services produced by workers and capital within a nation’s borders One way managers can assess markets is by looking at gross national income or GNI which measures the value of all production in the domestic economy together with the income the country receives from other countries, less similar payments it has made to other countries. Managers can also look at gross national product or GNP. Conceptually, world GNI and world GNP are the same. Gross domestic product or GDP allows managers to assess countries in which the output of multinationals represents a significant share of activity. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Improving Analysis GNI data should be adjusted for the growth rate of the economy the number of people in a country the local cost of living It’s important to be careful when using GNI data because it can be misleading. To improve the usefulness of GNI managers should adjust for the growth rate of the economy, the number of people in a country, and the local cost of living. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. GNI Data Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. A Divided World Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. GNI per Capita, 2011 Copyright © 2015 Pearson Education, Inc.

GNI Per Capita, 2011, Adjusted for Purchasing Parity Copyright © 2015 Pearson Education, Inc.

National Performance and Potential: Broader Concepts GNI data should be adjusted for the growth rate of the economy the number of people in a country the local cost of living Green economics: gauge economic performance in terms of the effect of current choices on long-term sustainability Sustainable development: meet the needs of the present without compromising the ability of future generations to meet their own needs Happynomics: importance of emotional prosperity in addition to financial prosperity In addition to looking at GNI, GNP, and GDP, managers also need to consider sustainability and stability. Green economics allows managers to consider the social and ecological costs of their decisions. The goal should be to create an enabling environment for people to enjoy long, healthy, and happy lives. There is growing criticism of traditional GNI figures as a measure of performance. Research shows that people in rich countries are not significantly happier than people in poor countries. Happynomics focuses on the importance of emotional happiness as a measure of a country’s performance and potential. Copyright © 2015 Pearson Education, Inc.

Purchasing Power Parity PPP is the number of units of a country’s currency required to buy the same amounts of goods and services in the domestic market that $1 would buy in the United States. The relative price index makes the difference. Example: The price of tomato in USA and India is $2.00 and $0.20 respectively. If an Indian earns $3000 per year, how much an American will have to earn to buy the same amount of tomato? As we evaluate an economy, the purchasing power parity should also be taken into consideration

Copyright © 2015 Pearson Education, Inc. Economic Analysis Managers should also consider Inflation Unemployment Debt Income distribution Poverty Balance of payments Managers can also study other features of an economy including inflation, unemployment, debt, income distribution, poverty, and its balance of payments. Copyright © 2015 Pearson Education, Inc.

The Balance of Payments Reports the total of all money flowing into a country less all money flowing out of that country to any other country during a given period of time Records a country’s international transactions amongst companies, governments, and/or individuals Concept of trade surplus and trade deficit

Chapter 4: Discussion Questions Define “economic freedom” and explain its implication in an economy. What are the three types of economic systems? What criteria can we use to evaluate them? Explain. Discuss the impact of “emerging nations” in a globalized world. Explain how we can evaluate an economy using traditional and nontraditional(broader) measures of economic performance. Explain the Balance of Payments account of a country with its four subheads. Why is it important to in international business manager? 27

Copyright © 2015 Pearson Education, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2015 Pearson Education, Inc.