Global Marketing Contemporary Theory Practice and Cases By

Global Marketing Contemporary Theory, Practice, and Cases By Ilan Alon, Eugene Jaffe, Christiane Prange, and Donata Vianelli © Taylor & Francis 2016

Chapter 2 Assessing the Global Marketing Environment The Global Economy and Technology © Taylor & Francis 2016

Learning Objectives After reading this chapter you should be able to: ▪ Understand the current situation of economic growth and world trade. ▪ Understand how to analyze balance of payment and balance of trade figures. ▪ Learn about different economic systems and stages of economic development. ▪ Realize the potential of emerging global giants. ▪ Conduct a thorough environmental analysis using a variety of tools. ▪ Demonstrate the importance of high technology and environmentalism. ▪ Show marketing strategies adopt an environmental perspective. © Taylor & Francis 2016

A PESTEL Analysis of the Macro-Global Environment Factor Political Possible Factors for Study Local and national government structure, government stability, internal politics that affect business, international relations, terrorist activity. Regional economic growth indicators, exchange rates, trade and trade policy, government intervention in the economy, taxation, consumption, employment/unemployment, inflation, balance of payments. Examples Crisis in the Ukraine, which leads to political instability Social Demographics, lifestyle, education, living standards (health and welfare), immigration/emigration. Technological infrastructure, including market opportunities in the electronics, high-tech markets, development of biotechnology and information technology industries, and clean technology markets. Environmental regulations, global warming, pollution, green marketing, legal systems, business legislation, consumer protection, intellectual property issues. In 2012, the Austrian government changed its national anthem to account for gender issues. The email celebrated its 30 th anniversary in 2014, and it has completely changed the way we communicate with each other. Huge pollution problems and intellectual property protection issues in China that pose a threat to doing business. Economic Environmental / Legal Economic growth of emerging market countries has multiplied in the last decade. © Taylor & Francis 2016

Economic Growth and World Trade • Increased economic liberalization and integration (for example, the European Union, or EU). • Economic liberalization is positive especially for emerging and developing countries. • Liberalization favors unrestricted capital flowing into and out of the country in order to boost growth and efficiencies within the home country. • Investors can provide new opportunities for diversification and profit. • Trends in world trade depicting major exporters and importers of merchandise and services. © Taylor & Francis 2016

Leading Exporter and Importers in World Merchandise Trade Rank Exporters Value Rank Importers 2049 1546 1407 799 656 569 548 529 Share Annual % Change 11. 1 8 8. 4 4 7. 6 -5 4. 3 -3 3. 6 -2 3. 1 -5 3. 0 -1 2. 9 1 1 2 3 4 5 6 7 8 China United States Germany Japan NL France Korea, Republ. Russian Federation 9 10 Italy Hong Kong China 501 493 2. 7 9 10 -4 8 1 2 3 4 5 6 7 8 Value Share Annual % Change 2336 12. 6 3 1818 9. 8 4 1167 6. 3 -7 886 4. 8 4 690 3. 7 2 674 3. 6 -6 591 3. 2 -1 553 3. 0 8 United States China Germany Japan UK France NL Hong Kong China Korea, Republ. 140 India 490 2. 8 2. 6 Year 2012 (billion US$ and percentages) Source: WTO International Trade Statistics, 2013 [www. wto. org/statistics] © Taylor & Francis 2016 -1 5

Leading Exporter and Importers in World Services Rank Exporters Value Share Annual % Change Rank Importers 1 United States 621 14. 3 6 1 United States 411 9. 9 4 2 UK 280 6. 4 -3 2 Germany 293 7. 1 -1 3 4 5 6 7 8 9 Germany France China Japan India Spain NL 257 211 190 142 141 136 131 5. 9 4. 8 4. 4 3. 3 3. 2 3. 1 3. 0 -1 -6 8 0 3 -4 -3 3 4 5 6 7 8 9 China Japan UK France India NL Singapore 280 175 174 172 127 119 118 6. 7 4. 2 4. 1 3. 1 2. 9 2. 8 18 5 0 -9 3 -1 3 10 Hong Kong China 123 2. 8 5 10 Ireland 112 2. 7 -3 Year 2012 (billion US$ and percentages) Source: WTO International Trade Statistics, 2013 [www. wto. org/statistics] Value Share Annual % Change © Taylor & Francis 2016

Balance of Payments and Balance of Trade • The balance of payment (BOP) records for a given period the payments and receipts of the residents of the country in their transactions with residents of other countries. • Although the totals of payments and receipts are necessarily equal, there will be inequalities—excesses of payments or receipts, called deficits or surpluses—in particular kinds of transactions. • The BOP is divided into three main categories: • the current account • the capital account • the financial account. © Taylor & Francis 2016

The Current Account • The current account is used to mark the inflow and outflow of goods (raw materials and manufactured goods) and services (tourism, transportation, engineering, business service fees, royalties from patents, and copyrights) into a country. • When combined, goods and services together make up a country's balance of trade (BOT). The BOT is typically the biggest bulk of a country's balance of payments, as it makes up total imports and exports. • If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. © Taylor & Francis 2016

Comparison between Balance of Trade and Balance of Payment Definition Calculation Favorable or Unfavorable Affected by Meaning of Credit and Debit Balance of Trade difference between export and import of goods and services. BOT = Net Earning on Export – Net payment for imports Balance of Payment flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also financial capital transfer. BOP = BOT + (Net Earning on foreign investment – payment made to foreign investors) + Cash Transfer + Capital Account + or - Balancing Item If export is more than Balance of Payment is favorable if there is a surplus in current import, at that time, BOT will be favorable. If account for paying all past loans in the capital account. import is more than export, at that time, BOT will Balance of Payment will be unfavorable if there is a current be unfavorable. account deficit and the country takes more loans from foreigners, including interests. a) cost of production b) availability of raw materials c) exchange rate d) prices of goods manufactured at home Credit means total export of different goods and services, and debit means total import of goods and services in current account. Source: Adapted from: http: //www. svtuition. org/2011/04/difference-betweenbalance-of-trade-and. html [accessed: 1 July, 2014] a) conditions of foreign lenders b) economic policy of government c) all the factors of BOT Credit means inflow of cash to current and capital account, and debit means total outflow of cash both current and capital account and difference between debit and credit will be net balance of payment. © Taylor & Francis 2016

The Capital Account • The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of: • non-financial assets (for example, a physical asset such as land) • non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds. • The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, etc. © Taylor & Francis 2016

The Financial Account • In the financial account, international monetary flows related to investment in business, real estate, bonds, and stocks are documented. • Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with International Monetary Fund, private assets held abroad, and direct foreign investment. • Assets owned by foreigners, private and official, are also recorded in the financial account. © Taylor & Francis 2016

BOP and BOT • A country can run a trade deficit, but still have a surplus in its balance of payments. • Countries strive to have a positive balance of trade. • A deficit generates a decrease in aggregate income and its associated measures, especially consumption, savings, investment, and tax revenue. • However, for some countries, an increase in economic growth and aggregate income will result in higher domestic consumption expenditures, including the purchase of imports from foreign countries. In this case, the increase in imports, which may widen the trade deficit, is actually a result of a prosperous economy, and the trade deficit should not be labeled “unfavorable. ” © Taylor & Francis 2016

Gross National Happiness • The term “gross national happiness” (GNH) was coined in 1972 • In recent years, a few rich world leaders have pushed efforts to study whether a happiness statistic could prove useful: measuring happiness could be questionable as results may differ according to measurement approaches. • In July 2011, the UN General Assembly passed a resolution inviting member countries to measure the happiness of their people and to use this to help guide their public policies. • Denmark, Norway, Switzerland, The Netherlands, and Sweden are the top countries in the GNH list © Taylor & Francis 2016

Overview of Major Trade Theories Name Absolute Advantages Comparative Advantages Factor Proportion Theory Leontief Paradox and Differences in International Taste Product Lifecycle Theory National Competitive Advantage New Trade Theory Origin Adam Smith Basic Idea Each country should specialize in the production and export of the product that it produces most efficiently, that is, with the fewest labor hours. David Ricardo Even if a country was most efficient in the production of two products, it must be relatively more efficient in the production of one product. It should then specialize in the production and export of that product in exchange for the import of the other product. Eli Heckscher and A country that is relatively labor abundant (capital abundant) should specialize in the Bertil Ohlin production and export of that product which is relatively labor intensive (capital intensive). Wassily Leontief The test of the factor proportion theory, which resulted in the unexpected finding that the United States was actually exporting products that were relatively labor intensive rather than the capital intensive products that a relatively abundant country should, according to theory. Raymond Vernon The country that possesses comparative advantages in the production and export of an industrial product changes over time as the technology of the product’s manufacture matures. Michael Porter International competitive advantage stems from a combination of conditions: demand conditions, related and supporting industries, firm strategies, structures and rivalry. Competitive advantage is also established through geographic “clusters” or concentrations of companies in different parts of the same industry. Paul Krugman Economies of scale, and network effects, can be so significant that they outweigh the more traditional theory of comparative. Source: Adapted from: http: //www. svtuition. org/2011/04/difference-between-balance-oftrade-and. html [accessed: 1 July, 2014] © Taylor & Francis 2016

Four Basic Economic Systems 1. Traditional Economic System 2. Market Economic System 3. Command Economic System 4. Mixed Economic System © Taylor & Francis 2016

Traditional Economic System • A traditional economic system is the most ancient types of economy in the world. Countries that adopt this system typically belong to rural, second- or third-world areas closely tied to an agrarian landscape. • In this system, each new generation retains the economic position of its parents and grandparents. Tradition decides what an individual does for his living. There is a strong social network that governs behavior. • This type of society is rather slow to change and does not take advantage of technological advancements. There is relatively little promotion of intellectual and scientific promotion and typically the provision of goods and services is insufficient. © Taylor & Francis 2016

Market Economic System • A market-based economic system is based on individual or consumer-related consumption. • The state has relatively little influence in determining the rules of this system (separation of the market and the government) apart from promoting competition and ensuring consumer protection. • Complete market economies do not utilize price controls or subsidies, and prefer less regulation of industry and production. • While capitalist countries, such as the U. S. , Japan, and Western Europe, practice a market-based approach, there are still differences among them. • A disadvantage of the market economic system may be that it emphasizes growth and prosperity over social relationships and ethics. © Taylor & Francis 2016

Command Economic System • A command system is characterized by a centrally controlled economy where the government makes all the decisions. The state decides which goods are produced, and consumers can only buy what is available. • Communism is a typical example of such a system: the government owns companies or entire industries, and the market plays little to no role in production decisions. • These economies are less flexible than market economies and react more slowly to changes in consumer purchasing patterns and fluctuations in supply and demand. • An example: North Korea versus South Korea. © Taylor & Francis 2016

Mixed Economic System • A mixed economic system, also called a dual economy, primarily refers to a mixture of market and command economy. • In most mixed economies, state ownership is very low or non-existent except for a few areas, for example, areas which comprise education or transportation. • In general, the mixed economy is characterized by the private ownership of the means of production by profit-seeking enterprises, but unlike a free-market economy, the government would wield indirect macroeconomic influence over the economy through fiscal and monetary policies and interventions that promote social welfare. • There also disadvantages of a mixed economy: • government regulation requirements may cost a company so much that it puts it out of business; • unsuccessful regulations may paralyze features of production; • the government decides the amount of tax on products. © Taylor & Francis 2016

Changing Economic Systems: From Socialism to Capitalism • Fall of communism in Eastern Europe. • Catch-up policies of Eastern countries. • Transition countries in Asia. Parts of the Former Wall in Berlin Source: Authors © Taylor & Francis 2016

Market Development and Global Geographics Income High income Cut-off income $12, 746 or more Country Examples BRIC Countries e. g. South Korea, G-8 Russia countries (Japan, U. S. Germany, France, Britain, Canada, Italy, Russia), Australia, Singapore Upper middle $4, 126 to $12, 745 Latin America & Caribbean Colombia, Mexico, Panama, China, Brazil income 9, 536 Turkey, South Africa Lower middle $1, 046 to $4, 125 income Low income $1, 045 or less Region Euro area 38, 336 Sub-Saharan Africa 1, 615 Indonesia, Philippines, Egypt, Ukraine Afghanistan, Bangladesh, Guinea, Mali, Zimbabwe India Gross National Income Per Capita, 2013. US$ Source: World Bank 2014 [http: //databank. worldbank. org/data/download/GNIPC. pdf; accessed: July, 2014] © Taylor & Francis 2016

High-Tech Products Lead World Trade Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Country USA Japan Germany UK HK China Singapore Canada Mexico Malaysia Korea France Ireland Australia Brazil 2000 29. 9 7. 0 6. 7 6. 6 6. 5 5. 9 5. 2 5. 1 4. 6 4. 3 4. 0 1. 9 1. 4 1. 3 Country China HK USA Singapore Japan Korea Mexico Germany Malaysia France UK Vietnam Canada Poland Indonesia 2013 36. 5 13. 0 9. 6 6. 8 6. 6 6. 1 5. 7 4. 4 3. 3 1. 5 1. 3 1. 1 0. 9 0. 6 Country China HK USA Korea Mexico Singapore Japan Malaysia Germany Vietnam Poland France Indonesia UK India 2030 51. 1 10. 1 6. 6 5. 7 4. 5 4. 0 3. 7 2. 3 1. 8 0. 9 0. 8 High-Tech Exports Globally (adapted from HSBC) Source: http: //blogs. ft. com/beyond-brics/2014/03/18/china-leads-em-surge-in-high-tech-exports/ [accessed 2 July, 2014] © Taylor & Francis 2016

Characteristics of High-Technology Markets • High tech markets are: • highly dynamic • Complex • risky • They are highly competitive, they tend to mature rapidly, they are fast moving and expensive due to technological advances, intense competition, and demanding consumers. • They are production- rather than consumer-oriented (typical of low-tech products). In many cases, consumers cannot visualize future demand for high-tech products. • Supply determines demand for most consumer products rather than the other way around. Therefore, high-tech product developers must anticipate consumer needs even before consumers are aware of them. © Taylor & Francis 2016

How to Reduce the Risk of Market Failure for High-Tech Products • There abundant examples in which high-tech consumer products could not generate sufficient demand. • In order to reduce the risk of market failure, the following steps can be taken: • Determine whether “first-mover” advantage is necessary, or whether it is best to be as sure as possible that there is sufficient interest in the product. • Rethink the value of market research before launching the product. • Target the market carefully, exploiting the innovators and early adopters. 
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Global Countries and Emerging Giant Companies • Both countries and companies can be typed according to the extent to which they are global. The KOF Globalization Index classifies countries according to the three main dimensions: economic, social, and political. • Most of the world’s nations have become increasingly interconnected. Economies have expanded beyond national borders. • Production, finance, marketing, communications, and labor forces have become globalized. More than one-third of the world’s private assets are owned by TNCs (transnational corporations) and one-third of all international trade occurs in intra-TNC transactions. • While global in reach, nearly all of the TNC headquarters are concentrated in industrialized countries. Despite their growing numbers, their resources are highly concentrated; i. e. , the 300 largest corporations account for approximately one-quarter of the world’s productive assets, and they possess significant economic power. • The economic strength or size of several transnational companies equal that of many developed countries. This can be visualized by comparing transnational corporate sales with the GDP of countries: for example, Walmart’s sales are higher than the GDP of many developed countries such as Norway, Denmark, or Austria. © Taylor & Francis 2016

The World’s Top 20 Non-Financial TNCs in 2013 Source: adapted from UNCTAD (2014)—data 2013 © Taylor & Francis 2016

The Green Economy • The green economy is an economy that results in reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment. • The green economy seeks to optimize the synergy among three sets of values (triple P): • social (people) • environmental (planet) • and financial (profit). • Push for a green economy in industries such as energy and utilities, construction, transportation, and manufacturing. Part of the green economy entails the adoption of “clean technologies. ” • Representative clean tech industries include wind power, solar energy, hydropower, and biofuels. Today, South Korea and China are the major investors in clean technology, followed by the United States. © Taylor & Francis 2016

The Green Economy Market Size • Growth rates for the global market for green goods and services is expected to more than double from € 1, 400 billion in 2007 to € 3, 100 billion in 2020. • The fastest-growing sectors will be the new markets in ecotechnologies such as renewable energies, energy efficiency, and clean technologies. • Consumers are increasingly embracing natural and organic products, and often they are as concerned about what is not in Green and Healthy Products © Authors the products they buy, especially food, as much as what is in it. © Taylor & Francis 2016

Consumer Segments in the Green Economy • Two shopper segments offer outsized opportunities for manufacturers and retailers: • True Believers: These shoppers are passionate about staying fit and healthy. They are focused on trying new things and serving as strong role models for their children, and they are strong believers in the benefits of natural/organic products. True Believers enjoy a median income of $65, 000, have an average of 40, attended college, and in some cases, embarked on post-graduate studies. • Enlightened Environmentalists: This segment is passionate about the environment and making good choices to support it. These shoppers are making a real effort to make healthier choices and will go out of their way to shop at stores that carry natural/organic products. Enlightened Environmentalists are older than True Believers, are an average of 63 years old, have attended graduate school and have a median income of $57, 000. • People are realizing that their current behavior in the marketplace has consequences for future generations. • People are interested in what companies are doing to help the environment and how their business operations impact the environment • However, while more and more firms experience the desire of consumers to be environmentally friendly, many firms have not experienced the expected financial gains. © Taylor & Francis 2016

Managerial Guidelines and Policy Implications for Improving the Profitability of Green Products Activities Explanation Overcome apathy, convenience, and price elasticity Emphasize the positive aspects of green consumerism Provide more information Consumers need to be educated about the firm’s green offerings. Also authenticity is very important Distinguish the benefit of product types A company should position the product as more than just green that is the additional benefit should be mentioned. Balance price and quality Green products need to perform at least as good as other products if not better. Determining the price elasticity is paramount. Public policy implications Consumers find it difficult to be green. Therefore, incentives should be given to pursue a green lifestyle. Source: Adapted from Gabler et al. (2013) © Taylor & Francis 2016

Discussion Questions 1. Can a nation have a favorable balance of trade and an unfavorable balance of payments? 2. How do you consider the risks of investing in a low-income country? 3. What are the different challenges in designing your marketing strategy for a high income and a lower middle-income country 4. It is argued that high tech products will dominate trade in the twenty-first century. Does this mean emerging market countries will be left out of this development? 5. Does the Green Economy pose more challenges or more threats to a global marketer? © Taylor & Francis 2016