1. International Business
Chapter Four
The Economic Environment

2. Chapter Objectives
To appreciate the importance of the economic analysis of foreign markets
To identify the major dimensions of international economic analysis
To compare and contrast the economic indicators of countries
To profile the characteristics of the types of economic systems
To discuss the idea of economic freedom
To profile the idea, drivers, and constraints of economic transition

3. Introduction All countries differ in terms of: -economic performance
-levels of economic development
-economic performance
-economic potential
A firm’s managers must understand the economic environments of those countries in which it operates, as well as those of countries in which it does not, in order to predict how trends and events the world over will likely affect firm performance.

4. Key Economic Forces The general economic framework of a country
Its degree of economic stability
The existence and role of capital markets
The presence of factor endowments
Market size
The existence of economic infrastructure

5. Factor Conditions
Factor conditions: a nation’s inputs into the production process, such as human, physical, knowledge, and capital resources and infrastructure
Not only is it difficult to specify a definitive set of economic indicators that precisely assess the performance and potential of a nation’s economy, but it is also difficult to understand the systematic relationship of one variable to another.

6. Fig. 4.1. Physical and Societal Influences on International Business

7. Gross National Income
Gross national income (GNI): the market value of all final goods and services produced by a country’s domestically-owned firms in a given year
ECONOMIES RANKED BY 2003 GNI [$US MILLIONS]
1. United States 11,012, Spain ,475
2. Japan 4,360, Mexico ,159
3. Germany 2,085, South Korea ,426
4. United Kingdom 1,680, India ,760
5. France 1,521, Brazil ,515
6. China ,416, Australia ,470
7. Italy ,243, The Netherlands 425,556
8. Canada , Russian Fed ,810
Source: World Bank Development Indicators 2003

8. Map 4.2: The World’s Wealth Measured in Per Capita GNI

9. Purchasing Power Parity
Purchasing power parity: the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market that one unit of income would buy in another country.
Purchasing power parity [PPP] is estimated by calculating the value of a universal “basket of goods” that can be purchased with one unit of a country’s currency.

10. Map 4.3: The World’s Wealth Measured in Terms of Purchasing Power Parity

11. The Human Development Index
Is designed to capture long-term progress rather than short-term changes
Measures longevity, knowledge (adult literacy rates), and standards of living
Combines indicators of real purchasing power, education, and health
The human development index provides a more comprehensive measure that incorporates both economic and social variables.

12. Map 4.4: The Human Development Index

13. Second-order Indicators of Economic Development and Potential
Inflation
Unemployment rate
Debt
Internal
external
Income distribution
Poverty rate
Balance of payments
The Consumer Price Index (CIP) measures the average change in consumer prices over time in a fixed market basket of goods and services; the misery index represents the sum of a country’s inflation and unemployment rates.

14. 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 during a given period of time
The Balance of Payments [BOP] is officially known as the Statement of International Transactions.

15. The Balance of Payments: Key Components
Current Account
Value of merchandise exports and imports
Value of services exports and imports
Value of income receipts and payments
Net value of unilateral transfers
Capital Account
Value of capital inflows and outflows
Value of financial inflows and outflows
Net change in official reserve assets

16. Surpluses and Deficits
A trade surplus indicates that the value of exports exceeds the value of imports.
A trade deficit indicates that the value of imports exceeds the value of exports.
Trends in balance of payments data can reveal important strategic implications with respect to a country’s economic environ- ment and potential economic policies.

17. Economic System Defined
Economic system: the set of structures and processes that guides the allocation of scarce resources and shapes the conduct of business activities in a nation
Spectrum of Economic Systems
Centrally-planned Free-market
N. Korea China Brazil Japan USA
Cuba Russia India Germany Canada
Vietnam S. Korea France UK

18. Types of Economic Systems
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

19. Fig. 4.3: Relationships between the Control of Economic Activity and the Ownership of Production Factors

20. The Economic Freedom Index
approximates the extent to which a government intervenes in the areas of free choice, free enterprise, and market-driven prices for reasons that go beyond basic national needs
classifies countries as:
-free
-mostly free
-mostly unfree
-repressed

21. The Economic Freedom Index: Determining Factors
Trade policy
The fiscal burden of the government
The extent and nature of government intervention
Monetary policy
Capital flows and investment
Banking and financial activities
Wage and price levels
Property rights
Other government regulation
Informal market activities

22. Map 4.5: Countries Ranked According to Economic Freedom

23. Map 4.6: GDP Per Capita Growth Rate

24. Economic Transition The shift from a command or mixed economy to
a freer market economy largely depends on a government’s ability to:
-dismantle features such as central planning
-create features such as consumer sovereignty.
The success of the transition process depends
upon the government’s ability to liberalize
economic activity, to reform business practices,
and to establish legal and institutional frameworks.

25. Policies That Shape the Economic Transition Process
Privatization: the sale and/or legal transfer of government-owned resources to private individuals and/or entities
Deregulation: the relaxation or removal of restrictions on the free operation of markets and business practices
Property rights: the protection of real (tangible) and intellectual (intangible) property
[continued]

26. Fiscal and monetary reform: the reliance upon market-oriented instruments to achieve macroeconomic stabilization, the setting of strict budgetary limits, and the use of market-based policies to manage the money supply
Antitrust legislation: laws designed to maintain and promote market competition, i.e., to prohibit the anticompetitive behavior of monopolies

27. Fig. 4.4: Reforms and Economic Progress

28. Implications/Conclusions
The benefits of doing business in a given country are directly influenced by the size of the market, the wealth of consumers, and the openness, the stability, and the growth potential of the economy.
[continued]

29. The power of economic analysis is a function of identifying the best possible indicators and then understanding how they work both in isolation and interactively.
The type of economic system is a strong predictor of a nation’s present economic performance and its future economic prospects.