Introduction to Global Marketing

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The Global EconomicEnvironment

Chapter 2

Global Marketing

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Keegan andGreen, Chapter 2

Changes in the World Economy

•Emergence of global markets

•Integration of world economy

•Increased volume of capital movements

•End of the Cold War

•Diminishing importance of nationalboundaries due to technologicaladvancements

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Keegan andGreen, Chapter 2

Economic Systems

•Market capitalism

•Centrally planned socialism

•Centrally planned capitalism

•Market socialism

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Keegan andGreen, Chapter 2

Figure 2-1: Economic Systems

Market Command

Market

Capitalism

Centrally

Planned

Capitalism

Market

Socialism

Centrally

Planned

Socialism

Private

Resource

Ownership

State

Resource Allocation

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Keegan andGreen, Chapter 2

Market Capitalism

•Economic system in which individuals andfirms allocate resources:

–Production resources are privately owned

–Consumers decide what goods are desired andfirms determine what and how much to produce

–Role of state is to promote competition andprotect consumers

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Keegan andGreen, Chapter 2

Centrally Planned Socialism

•Opposite of market capitalism

•State holds broad powers to serve the publicinterest; decides what goods and services areproduced and in what quantities

•Consumers can spend on what is available

•Government owns entire industries

•Demand typically exceeds supply

•Little reliance on product differentiation,advertising, pricing strategy

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Keegan andGreen, Chapter 2

Centrally Planned Capitalism

•Economic system in which commandresource allocation is used extensively inan environment of private resourceownership

•Examples:

–Sweden

–Japan

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Keegan andGreen, Chapter 2

Market Socialism

•Economic system in which marketallocation policies are permitted within anoverall environment of state ownership

•Examples:

–China

–India

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Keegan andGreen, Chapter 2

Degrees of Economic FreedomTable 2-1

•Rankings of economic freedom among countries

–Ranges from “free” to “repressed”

•Variables considered include such things as:

–Trade policy

–Taxation policy

–Banking policy

–Wage and price controls

–Property rights

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Keegan andGreen, Chapter 2

Degrees of Economic FreedomSelections from Table 2-1

•Free

–Hong Kong

–Singapore

–Ireland

–New Zealand

–United States

–United Kingdom

–Netherlands

–Australia

–Switzerland

•Repressed

–Bosnia

–Vietnam

–Laos

–Iran

–Cuba

–Iraq

–Libya

–North Korea

–Congo

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Keegan andGreen, Chapter 2

Stages of Market Development

•High income countries

•Upper-middle income countries

•Lower-middle income countries

•Low income countries

•Categories developed by The World Bank

•Stages based on GNP

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Keegan andGreen, Chapter 2

BEMs: Big Emerging Markets

•China

•India

•Indonesia

•South Korea

•Brazil

•Mexico

•Argentina

•South Africa

•Poland

•Turkey

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Keegan andGreen, Chapter 2

Low Income Countries

•GNP per capita of $785 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

•Of these, only China and India are BEMs

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Keegan andGreen, Chapter 2

Lower Middle Income Countries

•GNP per capita between $786 and $3,125

•Sometimes called less-developed countries(LDCs)

•Characteristics

–Early stages of industrialization

–Cheap labor markets

–Factories supply items such as clothing, tires,building materials, and packaged foods

•3 BEMs: Poland, Turkey, Indonesia

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Keegan andGreen, Chapter 2

Upper Middle Income Countries

•GNP per capita between $3,126 to $9,655

•Characteristics

–Rapidly industrializing

–Rising wages

–High rates of literacy and advanced education

–Lower wage costs than advanced countries

•Sometimes called newly industrializing economies(NIEs)

•3 BEMs: Argentina, Brazil, Mexico, South Africa

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Keegan andGreen, Chapter 2

High Income Countries

•GNP per capita above $9,656

•Sometimes referred to as post-industrialcountries

•Characteristics

–Importance of service sector, informationprocessing and exchange, and intellectualtechnology

–Knowledge as key strategic resource

–Orientation toward the future

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Keegan andGreen, Chapter 2

G-7 Countries

•Leaders from these high income countrieswork to establish prosperity and ensuremonetary stability

–United States

–Japan

–Germany

–France

–Britain

–Canada

–Italy

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Keegan andGreen, Chapter 2

OECD: Organization for EconomicCooperation and Development

•29 nations each with market-allocationeconomic systems

•Mission: to enable its members to achievethe highest sustainable economic growthand improve the economic and social well-being of their populations

•www.oecd.org

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Keegan andGreen, Chapter 2

The Triad

•Dominant economic centers of the world

–Japan

–Western Europe

–United States

•Expanded Triad

–Pacific Region

–North America

–European Union

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Keegan andGreen, Chapter 2

Balance of Payments

•Record of all economic transactions between theresidents of a country and the rest of the world

–Current account – record of all recurring tradein merchandise and services, private gifts, andpublic aid between countries

•trade deficit

•trade surplus

–Capital account – record of all long-term directinvestment, portfolio investment, and capitalflows

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Keegan andGreen, Chapter 2

Leading Exporters and ImportersTable 2-6

•Exporters

–United States

–Germany

–Japan

–China

–France

–United Kingdom

–Canada

–Italy

•Importers

–United States

–Germany

–United Kingdom

–France

–Japan

–Netherlands

–Canada

–Italy

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The Global Trade Environment

Chapter 3

Global Marketing

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Keegan andGreen, Chapter 2

GATT

•General Agreement on Tariffs and Trade

–treaty among nations to promote trade amongmembers

•handled trade disputes

•lacked enforcement power

•replaced by World Trade Organization in1995

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Keegan andGreen, Chapter 2

World Trade Organization

•Provides forum for trade-relatednegotiations among 141 members

–based in Geneva

–serves as dispute mediators

–empowered with ability to enforce rulings

•Countries found in violation of WTO rulesare expected to change policies or else facesanctions

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Keegan andGreen, Chapter 2

Preferential Trade Agreements

•Many countries seek to lower barriers totrade within their regions

–Free Trade Areas

–Customs Unions

–Common Market

–Economic Unions

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Keegan andGreen, Chapter 2

Free Trade Area

•Two or more countries agree to abolish allinternal barriers to trade amongstthemselves

•Countries continue independent tradepolicies with countries outside agreement

•NAFTA

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Keegan andGreen, Chapter 2

Customs Union

•Evolution of Free Trade Area

•Includes the elimination of internal barriersto trade (as in FTA) AND

•Establishes common external barriers totrade

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Keegan andGreen, Chapter 2

Common Market

•Includes the elimination of internal barriersto trade (as in free trade area) AND

•Establishes common external barriers totrade (as in customs union) AND

•Allows for the free movement of factors ofproduction, such as labor, capital, andinformation

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Keegan andGreen, Chapter 2

Economic Unions

•Includes the elimination of internal barriers totrade (as in free trade area) AND

•Establishes common external barriers to trade (asin customs union) AND

•Allows for the free movement of factors ofproduction, such as labor, capital, and information(as in common market) AND

•Coordinates and harmonizes economic and socialpolicy within the union

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Keegan andGreen, Chapter 2

Economic Unions (cont.)

•Full evolution of economic union

–creation of unified central bank

–use of single currency

–common policies on issues ranging fromagriculture to taxation

–requires extensive political unity

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Keegan andGreen, Chapter 2

Major Regions

•North America

•Latin America

•Asia-Pacific

•Western, Central, and Eastern Europe

•Middle East

•Africa

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Keegan andGreen, Chapter 2

North America

•Canada, United States, Mexico

•NAFTA established free trade area

–all three nations pledge to promote economic growththrough tariff reductions and expanded trade andinvestment

–no common external tariffs

–restrictions on labor and other movements remain

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Keegan andGreen, Chapter 2

Latin America

•Caribbean, Central, and South America

•4 preferential trade agreements in place

–Central American Integration System

–Andean Community

–Common Market of the South

–Caribbean Community and Common Market

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Keegan andGreen, Chapter 2

Central American Integration System

•El Salvador, Honduras, Guatemala,Nicaragua, Costa Rica, Panama

•All member countries conform to acommon external tariff (CET) of 5 to 20%for most goods

•Common rules of origin were adopted toencourage freer movement of goods

•Integration remains a struggle

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Keegan andGreen, Chapter 2

Andean Community

•Bolivia, Colombia, Ecuador, Peru, Venezuela

•Customs union

–Agreement abolished foreign exchange,financial and fiscal incentives, and exportsubsidies

–Common external tariffs were established

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Keegan andGreen, Chapter 2

Common Market of the South (Mercosur)

•Argentina, Brazil, Paraguay, Uruguay

•Customs union, seeks to become common market

–internal tariffs eliminated

–common external tariffs up to 20% established

–in time, factors of production will move freely throughmember countries

•Chile and Bolivia -

–associate members

–participation in free trade area but not customs union

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Keegan andGreen, Chapter 2

Caribbean Community andCommon Market (CARICOM)

•Antigua, Barbuda, Bahamas, Barbados, Belize,Dominica, Grenada, Guyana, Haiti, Jamaica,Montserrat, St. Kitts, St. Lucia, St. Vincent,the Grenadines, Trinidad, Tobago

•Replaced Caribbean Free Trade Association

•Agreed to establish economic union withcommon currency in 1998

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Keegan andGreen, Chapter 2

Asia-Pacific

•Includes 23 countries and 56% of worldpopulation

–Japan

–Newly industrializing economies

–Association of Southeast Asian Nations

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Keegan andGreen, Chapter 2

Japan

•Generates 14% of world’s GNP

•Key factors

–population density

–geographic isolation

•Recent economic struggles despite status ashigh income country

•Strong culture requires flexibility andcommitment from global marketers

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Keegan andGreen, Chapter 2

Newly Industrializing Economies(NIEs)

•Strong economic growth in recent decades

–foreign investment

–export-driven industrial development

•Sometimes called the 4 Tigers of Asia

–South Korea

–Taiwan

–Singapore

–Hong Kong

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Keegan andGreen, Chapter 2

Association of Southeast Asian Nations(ASEAN)

•Brunei, Indonesia, Malaysia, Philippines,Singapore, Thailand, Vietnam, Cambodia,Laos, Burma

•Goal to implement a free trade area by 2003

–Tariffs of 20+% will be reduced to 0 - 5%

•Singapore represents great success amongASEAN nations

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Keegan andGreen, Chapter 2

Europe

•European Union

•European Free Trade Area

•European Economic Area

•The Lome Convention

•Central European Free Trade Association(CEFTA)

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Keegan andGreen, Chapter 2

European Union

•Initially began with the 1958 Treaty ofRome

•Objective to harmonize national laws andregulations so that goods, services, peopleand money could flow freely across nationalboundaries

•1991 Maastricht Treaty set stage fortransition to an economic union with acentral bank and single currency (the Euro)

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Keegan andGreen, Chapter 2

Current EU Members

•Austria

•Belgium

•Denmark

•Finland

•France

•Germany

•Greece

•Ireland

•Expected to joinby 2002

–CzechRepublic

–Hungary

–Poland

–Estonia

–Slovenia

•Italy

•Luxembourg*

•Netherlands

•Portugal

•Spain

•Sweden

•UnitedKingdom*

*Countries have chosen not to adopt the Euro

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Keegan andGreen, Chapter 2

European Free Trade Area and theEuropean Economic Area

•Austria, Finland, Sweden, Norway, Iceland,Liechtenstein, Switzerland

•Free trade area

•Members (excluding Switzerland) chose toestablish European Economic Area (EEA)

–Non-EU members of the EEA are expected toadopt EU guidelines

•Norway, Iceland, Liechtenstein, and Switzerlandmaintain free trade agreements with othercountries as well

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Keegan andGreen, Chapter 2

The Lome Convention

•An accord between EU and 71 countries inAfrica, Caribbean, and the Pacific

•Promotes trade and provides poor countrieswith financial assistance from a EuropeanDevelopment Fund

•Currently working to establish a successoragreement

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Keegan andGreen, Chapter 2

Central European Free TradeAssociation (CEFTA)

•Hungary, Poland, Czechoslovakia

•Allows for cooperation in many areasincluding:

–infrastructure and telecommunications

–sub-regional projects

–inter-enterprise cooperation

–tourism and retail trade

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Keegan andGreen, Chapter 2

The Middle East

•Afghanistan, Cyprus, Bahrain, Egypt, Iran, Iraq,Israel, Jordan, Kuwait, Lebanon, Oman, Qatar,Saudi Arabia, Syria, the United Arab Emirates,Yemen

–Primarily Arab, some Persian and Jews

–95% Muslim

•3 key regional organizations

–Gulf Cooperation Council

–Arab Maghreb Union

–Arab Cooperation Council

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Keegan andGreen, Chapter 2

Africa

•53 nations over three distinct areas

–Republic of South Africa

–North Africa

–Black Africa

•Regional agreements

–Economic Community of West African States

–East African Cooperation

–South African Development Community

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Keegan andGreen, Chapter 2

Economic Community ofWest African States (ECOWAS)

•Benin, Burkina Faso, Cape Verde, TheGambia, Ghana, Guinea, Guinea-Bissau,Ivory Coast, Liberia, Mali, Mauritania,Niger, Nigeria, Senegal, Sierra Leone, Togo

•Free trade area with unified monetary zone

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Keegan andGreen, Chapter 2

East African Cooperation

•Kenya, Uganda, Tanzania

•Free trade area with possibility of expansionto a customs union

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Keegan andGreen, Chapter 2

South African DevelopmentCommunity (SADC)

•Angola, Botswana, Congo, Lesotho,Malawi, Mauritius, Mozambique, Namibia,South Africa, Seychelles, Swaziland,Tanzania, Zambia, Zimbabwe

•Mechanism to promote trade, cooperation,and economic integration by black-ruledstates

•Ultimately seeks to form customs union