The Global Economic Environment Global Marketing Chapter 2

The Global Economic Environment Global Marketing Chapter 2 & 3 1

The World Economy— An Overview • In the early 20 th century economic integration was at 10%; today it is 50% • Integration is particularly striking in the two regions EU and NAFTA. • Global competitors have displaced or absorbed local ones 2 -2 © 2011 Pearson Education, Inc. publishing as Prentice Hall

The World Economy— An Overview • The new realities: – Capital movements have replaced trade as the driving force of the world economy. – Production has become uncoupled from employment. Gross domestic product (GDP) , a measure of a nation’s economic activity, is calculated by adding consumer spending (C), investment spending, (I), government purchases, (G), and net exports (NX): C+I+G+NX = GDP – The world economy, not individual countries, is the dominating factor. 2 -3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

The World Economy— An Overview The new realities, continued: • 75 -year struggle between capitalism and socialism has almost ended • E-Commerce diminishes the importance of national barriers and forces companies to re-evaluate business models 2 -4 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Economic System • Criteria used to categorize economic system 1 - Type of economy: Industrial state, emerging economy, transition economy, developing nation. 2 - Type of government: Monarchy, dictatorship, or a tyrant, autocratic one-party system, democracy with a multi-party system, dominated by other state, unstable or terrorist nation. 3 - Trade and capital flows 4 - The commanding height 5 - Services provided by the state and funded through taxes. 6 - Institutions 7 - Markets © 2011 Pearson Education, Inc. publishing as Prentice Hall

Economic Systems Resource Allocation Market Private Resource Ownership State Command Market Capitalism Centrally Planned Capitalism Market Socialism Centrally Planned Socialism 2 -6 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Market Capitalism • Individuals and firms allocate resources • Production resources are privately owned • Driven by consumers • Government’s role is to promote competition among firms and ensure consumer protection • U. S “wild free for all”. Japan as Japan Inc. 2 -7 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Centrally Planned Socialism • Opposite of market capitalism • State holds broad powers to serve the public interest; decides what goods and services are produced and in what quantities • Consumers can spend only what is available • Government owns entire industries and controls distribution • Demand typically exceeds supply • Little reliance on product differentiation, advertising, pricing strategy • China, India, and the former USSR now 2 -8 moving towards some economic freedom © 2011 Pearson Education, Inc. publishing as Prentice Hall

Centrally Planned Capitalism & Market socialism CPC Economic system in which command resource allocation is used extensively in an environment of private resource ownership - Example: Swedish government controls 2/3 s of all spending; a hybrid of CPS and capitalism Market socialism permits market allocation policies within an overall environment of state ownership (e. g. , China gives freedom to businesses/individuals to operate in a market system). 2 -9 © 2011 Pearson Education, Inc. publishing as Prentice Hall

GATT • General Agreement on Tariffs and Trade – Treaty among nations to promote trade among members established in 1947 • Handled trade disputes • Lacked enforcement power • Replaced by World Trade Organization in 1995 © 2011 Pearson Education, Inc. publishing as Prentice Hall

The World Trade Organization • Forum for traderelated negotiations among 150 members – Based in Geneva – Serves as dispute mediator through DSB – Has enforcement power and can impose sanctions © 2011 Pearson Education, Inc. publishing as Prentice Hall

Preferential Trade Agreements • Many countries seek to lower barriers to trade within their regions • PTAs give partners special treatment and may discriminate against others • Over 150 PTAs have been notified to the WTO © 2011 Pearson Education, Inc. publishing as Prentice Hall

Free Trade Area • Two or more countries agree to abolish tariffs and other barriers to trade amongst themselves • Countries continue independent trade policies with countries outside agreement • Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another NAFTA Protest in Ottawa © 2011 Pearson Education, Inc. publishing as Prentice Hall

Customs Union • Evolution of Free Trade Area • Includes the elimination of internal barriers to trade (as in FTA) • AND establishes common external barriers to trade • Examples: The EU and Turkey, the Andean Community, Mercosur, CARICOM, Central American Integration System (SICA) © 2011 Pearson Education, Inc. publishing as Prentice Hall

Common Market • Includes the elimination of internal barriers to trade (as in free trade area) • AND establishes common external barriers to trade (as in customs union) • AND allows for the free movement of factors of production, such as labor, capital, and information © 2011 Pearson Education, Inc. publishing as Prentice Hall

Economic Union • Includes the elimination of internal barriers to trade (as in free trade area) • AND establishes common external barriers to trade (as in customs union) • AND allows for the free movement of factors of production, such as labor, capital, and information (as in common market) • AND coordinates and harmonizes economic and social policy within the union © 2011 Pearson Education, Inc. publishing as Prentice Hall

Economic Union European Union Flag • Full evolution of economic union – creation of unified central bank – use of single currency – common policies on issues such as agriculture, social policy, transport, competition, mergers, taxation – requires extensive political unity – would lead to a central government in time © 2011 Pearson Education, Inc. publishing as Prentice Hall

North America—NAFTA • Canada, United States, Mexico • NAFTA established free trade area –All three nations pledge to promote economic growth through tariff reductions and expanded trade and investment –No common external tariffs –Restrictions on labor and other movements remain © 2011 Pearson Education, Inc. publishing as Prentice Hall U. S. -Mexico Border Crossing

NAFTA Income and Population © 2011 Pearson Education, Inc. publishing as Prentice Hall

What are the most important trading arrangements in Latin America? Important trading arrangements include: • Central American Integration System (SICA) • Andean Community • The Common Market of the South (Mercosur) • The Caribbean Community and Common Market (CARICOM). © 2011 Pearson Education, Inc. publishing as Prentice Hall

Asia-Pacific: The Association of Southeast Asian Nations (ASEAN) • The Association of Southeast Asian Nations (ASEAN) was established in 1967 as an organization for economic, political, social, and cultural cooperation among its member countries. © 2011 Pearson Education, Inc. publishing as Prentice Hall

The European Union (EU) • Initially began with the 1958 Treaty of Rome • Objective is to harmonize national laws and regulations so that goods, services, people, and money could flow freely across national boundaries • 1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the Euro) © 2011 Pearson Education, Inc. publishing as Prentice Hall

European Union • 27 countries • 491 million people • Combined GNI of $14. 7 trillion • Euro currency, 1999 • Harmonization of laws and regulations © 2011 Pearson Education, Inc. publishing as Prentice Hall

Marketing Issues in EU • Marketing mix issues must be addressed in Europe's single market (e. g. , content and other product standards that varied among nations must be harmonized). Harmonization means that content and other product standards that varied among nations have been brought into alignment. • Direct comparability of prices in the euro zone forces companies to review pricing policies; the marketing challenge is to develop strategies to take advantage of a large, wealthy market. • The enlargement of the EU will further impact marketing strategies and harmonized laws; food safety laws in the EU are different form those in Central European countries. © 2011 Pearson Education, Inc. publishing as Prentice Hall

Marketing Issues in EU (Cont’d) • Because they are in transition, the markets of Central and Eastern Europe present interesting opportunities and challenges. • Global companies view the region as an important new source of growth, and the first country to penetrate a country market often emerges as an industry leader. © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Middle East • Afghanistan, Bahrain, Cyprus, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, Yemen – Primarily Arab, some Persian and Jews – 95% Muslim, 5% Christian and Jewish – 34. 7 million people, 24 million in Saudi Arabia – 25% of world’s oil in Saudi Arabia – Strong impact of world economic crisis on Dubai © 2011 Pearson Education, Inc. publishing as Prentice Hall

Gulf Cooperation Council • Established in 1981 by 6 countries with 45% of world’s oil • These countries are attempting to diversify industries © 2011 Pearson Education, Inc. publishing as Prentice Hall

Marketing Issues in Middle East • Connection is a key word in conducting business in the Middle East; developing relationships with key business and government figures are likely to cut through red tape. • Bargaining is culturally ingrained, and business people should be prepared for haggling; establishing personal trust, mutual trust, and respect are essential. • Decisions are not made by correspondence or telephone. The Arab businessperson does business with the individual, not the company. • Women are not part of the business or entertainment scene for traditional Muslim Arabs. © 2011 Pearson Education, Inc. publishing as Prentice Hall

Africa • 54 nations over three distinct areas – Republic of South Africa – North Africa – Black Africa or sub-Saharan Africa • With 1. 3 percent of the world's wealth and 11. 5 percent of its population, Africa is a developing region with an average per capita income of less than $600. • The Arabs living in North Africa are differentiated politically and economically. • The six northern nations are richer and more developed, and several—notably Libya, Algeria, and Egypt— benefit from large oil resources. © 2011 Pearson Education, Inc. publishing as Prentice Hall

For what does the acronym “Mena” stand? • The Middle East and North Africa are viewed as a regional entity “Mena”; the economies of non-oil, “emerging Mena” (Jordan, Lebanon, Morocco, Tunisia) have performed best. © 2011 Pearson Education, Inc. publishing as Prentice Hall

Regional agreements (Africa) – Economic Community of West African States (ECOWAS). – East African Cooperation. – South African Development Community (SADC). © 2011 Pearson Education, Inc. publishing as Prentice Hall