The Global Economic

Environment

Kuliah ke Dua

© 2005 Prentice Hall 2-1

 Introduction to Chapter
Market definition – People or organizations
with needs and wants; both have the
willingness and ability to buy or sell
The global economic environment plays a
large role in the development of new
markets for organizations

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 Introduction

In 2005, the annual global trade in goods and

services amounted to $12.5 trillion.
Daily international financial flows now exceed $1.9
trillion.
From 1990 to 2004, world GDP grew some 40
percent.
In the same period, total world exports of
merchandise and services increased by almost 120
percent.

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 Introduction

The net result of these factors has been the

increased interdependence of countries/economies
and increased competitiveness and the concomitant
(together) need for firms to keep a constant watch
on the international economic environment.
Consumers and companies in the U.S. and Japan
tend to be able to find domestic sources for their
needs since their economies are diversified and
extremely large.

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 1. Intertwined World Economy

Despite the increasingly intertwined world

economy, the United States is still relatively more
insulated from the global economy than other
nations. In 2004, the U.S. economy was about
$11.7 trillion and imports about 80% more as it
exports.

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 1. Intertwined World Economy

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© 2005 Prentice Hall
 1. Intertwined World Economy

The larger the country’s domestic economy, the

less dependent it tends to be on exports and
imports relative to its GDP.
Intertwining of economies by the process of
specialization due to international trade leads to
job creation in both the exporting and importing
country.
Foreign direct investment (FDI) involves
investment in manufacturing and service facilities
in a foreign country.

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 1. Intertwined World Economy

As firms invest in manufacturing and distribution

facilities outside their home countries to expand
into new markets around the world, they have
added to the stock of foreign direct investment.
The increase in foreign direct investment has also
been promoted by the efforts of many national
governments to woo multinationals.
Portfolio investment or indirect investment refers
to investments in foreign countries that are
withdrawable at short notice, such as investments
in foreign stocks and bonds.

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 2. Country Competitiveness

Country competitiveness refers to the

productiveness of a country, which is represented
by its firms’ domestic and international productive
capacity.
Country competitiveness is not a fixed thing.
The role of human skill resources has become
increasingly important as a primary determinant of
industry and country competitiveness

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 2. Country Competitiveness

The World Economic Forum’s Global

Competitiveness Report of 2005-6 placed two Asian
Tigers (Taiwan and Singapore) among the world’s
top 10 economies along with Finland, the United
States, Sweden, Denmark, Iceland, Switzerland,
Norway, and Australia (see Exhibit 2-4).
Although the United States and Switzerland have
been the most innovative in the last three decades,
other OECD countries have been increasingly
catching up.

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Copyright (c) 2007 John
© 2005 Prentice Hall Chapter 2 Wiley & Sons, Inc.
 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
– The world economy, not individual countries, is
the dominating factor

© 2005 Prentice Hall 2-11

 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

© 2005 Prentice Hall 2-12

 Economic Systems
4 main types of economic systems
– Market Capitalism
– Centrally planned socialism
– Centrally planned capitalism
– Market socialism

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 Economic Systems
Resource Allocation

Market Command

Private Centrally
Market Planned
Capitalism Capitalism
Resource
Ownership
Centrally
Market Planned
State Socialism Socialism

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 Market Capitalism
Individuals and firms allocate resources
Production resources are privately owned
Driven by consumers
Government should promote competition
among firms and ensure consumer
protection

Return

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 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 on what is available
Government owns entire industries
Demand typically exceeds supply
Little reliance on product differentiation,
advertising, pricing strategy
Return

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 Centrally-Planned Capitalism
Economic system in which command
resource allocation is used extensively in an
environment of private resource ownership
Examples:
– Sweden
– Japan

Return
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 Market Socialism
Economic system in which market
allocation policies are permitted within an
overall environment of state ownership
Examples:
– China
– India

Return
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 Economic Freedom
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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 Economic Freedom
Free Repressed
– Hong Kong – Bosnia
– Singapore – Vietnam
– Ireland – Laos
– New Zealand – Iran
– United States – Cuba
– United Kingdom – Iraq
– Netherlands – Libya
– Australia – North Korea
– Switzerland – Congo

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 Balance of Payments
Record of all economic transactions
between the residents of a country and the
rest of the world
– Current account – record of all recurring trade
in merchandise and services, private gifts, and
public aid between countries
• trade deficit
• trade surplus
– Capital account – record of all long-term direct
investment, portfolio investment, and capital
flows

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 Balance of Payments

© 2005 Prentice Hall 2-22

 Overview of International Finance
Foreign exchange makes it possible to do
business across the boundary of a national
currency
Currency of various countries are traded for
both immediate (spot) and future (forward)
delivery
Increases the risk to organizations that are
involved in global marketing

© 2005 Prentice Hall 2-23

 Managed Dirty Float?
Definitions
– Float refers to the system of fluctuating
exchange rates
– Managed refers to the specific use of fiscal and
monetary policy by governments to influence
exchange rates
• Devaluation is a reduction in the value of the local
currency against other currencies

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 Managed Dirty Float?
Definitions
– Dirty refers to the fact that central banks, as
well as currency traders, buy and sell currency
to influence exchange rates

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 Foreign Exchange Market Dynamics

Supply and Demand interaction

– Country sells more goods/services than it buys
– There is a greater demand for the currency
– The currency will appreciate in value

© 2005 Prentice Hall 2-26

 Managing Economic Exposure
Economic exposure refers to the impact of
currency fluctuations on the present value
of the company’s future cash flows
– Transaction exposure is from sales/purchases
– Real operating exposure arises when currency
fluctuations, together with price changes, alter a
company’s future revenues and costs

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 Managing Economic Exposure
Numerous techniques and strategies have
been developed to reduce exchange rate risk
– Hedging involves balancing the risk of loss in
one currency with a corresponding gain in
another currency
– Forward Contracts set the price of the exchange
rate at some point in the future to eliminate
some risk

© 2005 Prentice Hall 2-28

 Stages of Market Development
World Bank has defined four categories of
development
– High-income countries
– Upper-middle income countries
– Lower-middle income countries
– Low-income countries
Based upon Gross National Product (GNP)

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 Stages of Market Development

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 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
Return

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 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

Return
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 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

Return

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 High-Income Countries
GNP per capita above $9,656
Sometimes referred to as post-industrial countries
Characteristics
– Importance of service sector, information processing
and exchange, and intellectual technology
– Knowledge as key strategic resource
– Orientation toward the future

Return
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 Big Emerging Markets
China
India
Indonesia
South Korea
Brazil
Mexico
Argentina
South Africa
Poland
Turkey

© 2005 Prentice Hall 2-35

3. Emerging Economies
Over the next two decades, the big emerging markets (BEMs)
will hold the greatest potential for U.S. exports
The largest BEMs include the Chinese economic area
(including China, Hong Kong region, and Taiwan), India,
C.I.S. (Russia, Central Asia, and the Caucasus states), South
Korea, Mexico, Brazil, and Argentina
R.I.C.- Russia, India China (with Brazil, it’s sometimes called
B.R.I.C.)
Each of these economies has unique economic, market, and
industry characteristics, that, in turn present opportunities and
challenges for local policy makers, businesses and the the
international business and economic community

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 3. Emerging Economies

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 Marketing Opportunities in LDCs (less
development countries)
Characterized by a shortage of goods and
services
Long-term opportunities must be nurtured
in these countries
– Look beyond per capita GNP
– Consider the LDCs collectively rather than
individually
– Consider first mover advantage
– Set realistic Deadlines

© 2005 Prentice Hall 2-38

 Influencing the World Economy
Group of Seven (G-7)
Organization for Economic Cooperation
and Development
The Triad

© 2005 Prentice Hall 2-39

 Group of Seven (G-7)
Leaders from these high income countries work to
establish prosperity and ensure monetary stability
– United States
– Japan
– Germany
– France
– Britain
– Canada
– Italy

Return

© 2005 Prentice Hall 2-40

 Organization for Economic
Cooperation and Development

30 nations each with market-allocation

economic systems
Mission: to enable its members to achieve
the highest sustainable economic growth
and improve the economic and social well-
being of their populations
www.oecd.org
Return

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 The Triad
Dominant economic centers of the world
– Japan
– Western Europe
– United States
Expanded Triad
– Pacific Region
– North America
– European Union

Return
© 2005 Prentice Hall 2-42
 Diskusi kasus ekonomi eropa
Inggris mengurangi belanja publik untuk
mengurangi defisit
Pengetatan anggaran
Membayar pinjaman yg jatuh tempo
Penghematan meningkatkan pengangguran
Dana talangan untuk spanyol
Pengangguran naik 30 juta orang

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 Integrasi perbankan eropa
Spanyol minta dana talangan
Demonstrasi meningkat
Irlandia, yunani, spanyol, portugal
Penganggur spanyol naik jadi 4,7 juta
Wisatawan menurun

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