Chapter 3 The Economic Environment To become familiar

Chapter 3 The Economic Environment To become familiar with concepts and tools used by economists for comparing national economies. To identify the differences between divergent economic systems, including their market openness, social perspectives and the role of the state in economic life. To assess the prospects and opportunities of the world’s developing and transitional economies. To gain an overview of regional integration in the global economy. To highlight the challenges faced by the least developed economies.

To compare national economies using the tools of macroeconomics. To examine key aspects of national economies, including growth, employment, inflation and balance of payments. To identify differences in national economic systems, spanning developed, developing and transition economies, pointing out implications for business strategy. To assess the extent and depth of regional integration. To highlight the prospects and challenges faced by the least-developed countries

Comparing countries: size and income GNI and GDP per capita allow comparisons between countries. Gross national income (GNI) – total income from all final products produced within a country, including that arising from foreign investments of its residents. Gross domestic product (GDP) – value of total economic activity within a country. Purchasing power parity (PPP) makes adjustments for differing costs of living among countries.

GDP of selected countries Source: IMF (2006) IMF Economic Outlook database, www. imf. org

Economic development Definition: processes of change in economic activities and organizations, on which the country’s wealth and prosperity depend. Types of economic activity: 1. Primary – agriculture, mining and fishing 2. Secondary – manufacturing and industrial production 3. Tertiary – services Economic development usually progresses through these three stages, although in resourcerich countries, wealth is mainly generated by exploiting their resources (often through FDI).

Selected high-, middle- and low-income countries Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan).

Selected developed, transition, developing and least-developed countries Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)

Economic growth Definition: percentage growth in GDP or GNI from year to year. High growth rates are typically enjoyed by industrializing countries and those rich in natural resources, both of which attract FDI. Growth tends to slow as GDP per capita rises. Slowing growth in developed countries has led MNEs to seek new markets in the emerging economies. Governments seek sustainable growth, but global economic factors constrain governments’ influence.

Economic growth in selected countries Source: The Economist Economic Indicators (2007), www. economist. com/indicators

Comparing countries: inflation and employment • Inflation can be measured using the consumer price index (CPI) for each country. – Inflation has become a global (as well as national) phenomenon. • Improving labour productivity can lead to raising economic growth. • Country differences in employment policies and costs of labour are influential in stimulating (or discouraging) business activity. • Unemployment is linked to weak economic growth, and can have social, as well as economic, implications.

CPI inflation Sources: Financial Times, 8, 30 November 2004; 30 November 2005; 24 May 2006

Annual growth in GDP per hour worked Source: OECD (2008) Databases at Source OECD, oecd. org

Productivity and growth

Figure 3. 6: Unemployment in selected countries, 2006 Source: UNDP (2007) Human Development Report 2007– 2008 (Basingstoke: Palgrave Macmillan)

Balance of payments • Definition: total credit and debit transactions between a country’s residents and those of other countries. • Current account balance – A country may have a surplus (meaning that it exports more than it imports), or a deficit. – A country’s balance of payments reflects the competitiveness of its exporters and the demand of its consumers for imports. – Trade imbalances have become a global issue – the US has a huge trade deficit, while China has a trade surplus.

Current account balances (as percentage of GDP) Source: The Economist Economic Indicators (2007), www. economist. com/indicat ors

Inequality Income inequality is measured by the Gini coefficient and by calculating the proportion of income earned by each quintile (20%) of the population. Accumulation of wealth in a few hands is associated with liberal market economic systems of advanced economies, but the concentration of land wealth in the developing world is also responsible for inequality. Inequality, especially combined with high levels of poverty, can lead to social tensions and political instability.

Inequality measurements for selected countries Note on Gini coefficient: 0 = perfect equality, Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan) 100 = perfect inequality

Public finances • Governments are responsible for the country’s ‘coffers’, taking in and spending huge sums of money. • The national budget balance and national debt represent the state of government finances. • Budget deficits have become a fact of life in many countries. • Both direct and indirect taxes are raised by governments. – Levels of taxation are important considerations for firms contemplating FDI in a country; the flat tax favoured by new EU member states has helped to attract FDI.

Budget deficits in selected countries (as percentage of GDP) Source: The Economist Economic Indicators (2007), www. economist. com/indicators

Top rates of corporation tax Source: Financial Times, 3 October 2005

Diverse economic systems • Planned economy – supply, demand prices controlled by the state. • Liberal market economy – principles of capitalism: – Maximum freedom to carry on enterprises – Protection of private property – Minimum government intervention. • Social market economy – market tempered by state role, especially in social protection and welfare. • Asian economic systems – alliance capitalism: market economies based on links between government and business.

Differing models of capitalism

Transition economies • Economies of Central and Eastern Europe – making transition from communism to capitalist market models. – Central European states, including new EU members, have been recognized as market economies. – Countries of South-East Europe and nations of the former Soviet Union are making the transition to market economies, including privatizations; the legacy of the strong state remains in the latter nations. • China’s market reforms – growing influence of market forces in the economy, but continuing dominance of communist party political rule and state-controlled enterprises.

FDI flows to selected countries in Central and Eastern Europe Source: UN (2007) World Investment Report 2007 (Geneva: UN)

Regional integration • Regional ties among countries can be between governments, businesses and individuals – both formal and informal. • Regional economic integration … – Has been facilitated by falling trade barriers, enshrined in regional trade agreements. – Is most developed in the EU, and especially in the eurozone. However, divergence in national economic systems continues. • The ‘Triad’ theory of trade focuses on three major regions: North America, Europe and Japan (although the 3 rd bloc should be broadened to Asia).

The least-developed economies The world’s poorest countries, mainly dependent on fragile agriculture and vulnerable to effects of climate change (such as desertification and flooding). Mainly in sub-Saharan Africa, but also Asia (such as Bangladesh). The challenges: ◊ Poverty alleviation ◊ Building social cohesion ◊ Establishing stable government ◊ Promoting economic development

Conclusions National economies diverge in their size, the nature of their economic activities, and their economic systems. A growing number of countries are experiencing economic growth and development, creating opportunities for international business. Despite growing economic integration globally – Diverse national economic systems persist – Regional integration is growing. The least-developed countries are attracting international business, but poverty and weak governance persist.

3. 1: Heineken (page 99) 1. What changes are taking place in global drinking habits? The greatest growth is in emerging markets, such as China and Russia. Drinkers in North America and Western Europe are shifting away from beer towards wine and spirits. As consumers’ lifestyles become more affluent, they tend to move up to more premium products, including low-alcohol beers.

3. 1: Heineken (page 99) 2. Looking at the quotation in the first paragraph, in what ways have changes in Heineken’s management made it more ‘Anglo-Saxon’? Heineken is a private company, just over 50% owned by the Heineken family. This type of company is traditionally conservative and inward-looking, recruiting managers from within and maintaining a closely-knit culture based on cultural homogeneity. The ‘Anglo. Saxon’ model is more individualist, relying less on consensual decision-making. The new executive committee and regional executives are now able to take decisions more quickly, based on market trends which are rapidly unfolding. This is especially true of decisions on mergers and acquisitions. After this case study was written, Inbev acquired Anheuser-Busch of America, bringing further consolidation in the global brewing industry.

3. 1: Heineken (page 99) 3. To what extent are the changes at Heineken giving it a competitive edge on its larger rivals? The new approach at Heineken has led it to emphasize innovation. It has launched a lowalcohol beer as an extension of its flagship Heineken brand. It has been at the forefront of innovation in packaging and the use of aluminium. New slim aluminium bottles are designed for nightclubs and bars. At the same time, it pursues cost savings relentlessly, unafraid to close breweries if necessary. Both innovation and cost savings enhance its competitiveness, which it needs to compete against larger rivals.

3. 1: Heineken (page 99) 4. Why does the future look sparkling for the global brewing companies in emerging markets? Beer consumption is still rising in emerging markets. Heineken has a 14% share in the Russian market and has bought a number of Russian breweries. As numbers of middle-class consumers grow, these markets have potential for growth. The more affluent consumers in these (as well as mature markets) are turning more to speciality beers. Beer has had an image problem in the past in the mature markets, but this is less true in emerging markets, where new lifestyles and beer consumption are both rising.