Global Marketing

The Global Economic Environment

Chapter 2
The World Economy—An Overview
 In the early 20th century economic integration was at
10%; today it is 50%
 EU and ＵＳＭＣＡ（ NAFTA ） are very integrated
 Global competitors have displaced or absorbed local ones

What if global
trade ended?

2
WHY Global economic integrate?

Taiwan 3 months  14hours USA

ancient now
3
The World Economy— 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
 E-Commerce diminishes the importance of national barriers
and forces companies to re-evaluate business models

What’s the difference?

4
5
 Which system is better?
MNE Local firm

Capitalism Socialism

Private State-owned
firm firm
6
 4 main economic systems
Resource Allocation
Market Command

Private I. Market III. Centrally

Capitalism Planned Capitalism
Resource
Ownership
State II. Market IV. Centrally
Socialism Planned Socialism

7
 I. 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

8
 I. Market Capitalism
Pros
Absence of bureaucracy and red
tape
Freedom to Innovate
Customers Drive Choices
Cons
Limited Product Ranges
Dangers of Profit Motive(sacrifice
worker safety, environmental
standards and ethical behavior
to achieve those profits)
Market Failures(Depression)
2-9
10
 IV. 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

11
IV. Centrally Planned Socialism
Pros Cons
Ensures equal distribution of Lack of competition and
wealth associated efficiency
Reduces inequality and social
Lack of freedom
division in the society

Low level of unemployment Lack of innovation

Allocation of resources to
Lack of incentive for hard work
maximize social welfare

Eliminate monopolies Increased chance of corruption

2-12
 There is no pure market capitalism
and centrally planned socialism

III. II. Market

Centrally Socialism
Planned
Capitalism

Swedish government controls 2/3s of all spending; a

hybrid of CPS and capitalism. Moving towards 13
privatization.
 Economic Freedom
 Rankings of economic freedom among countries
 “free” “mostly free” “mostly unfree” “repressed”
 Variables considered include such things as:
 Trade policy
 Taxation policy
 Capital flows and foreign investment
 Banking policy
 Wage and price controls
 Property rights
 Black market

14
 How about
2023 rankings?

• Where does Taiwan rank?

• Where does your country
rank? ________________
• Does your country’s ranking
go up or go down?
• WHY?
15
Not ranked: Afghanistan, Iraq, Kosovo, Libya, Liechtenstein, Somalia, Sudan, Syria
What else does a MNE need to
consider?
Type of Type of Trade and
economy Government capital flows
• advanced • Monarchy, • Free trade, part of
industrial state, dictatorship, trading bloc?
emerging or tyrant? • Currency board or
transition • One-party exchange
economy, or system? controls?
developing • Dominated by
nation? another state?
• Democracy?
• Terrorist?

16
What else does a MNE need to consider?
Services
The
provided by
commanding Institutions
the state or
heights
state funded
• Transportation, • Pensions, health • Country
communications & care, education characterized by
energy sectors. transparency,
• State, private, or standards,
mixed ownership? absence of
corruption?
• Standards ignored
and court system
compromised?
17
 Stages of Market Development
 The World Bank has defined four categories of development
using Gross National Income (GNI) as a base
For the current 2024 fiscal year
Low-Income Countries
• $1,135 or less
Lower-Middle-Income Countries
• $1,136~$4,465
Upper-Middle-Income Countries • $4,466~$13,845
High-Income Countries • $13,846 or more

GNI = GDP + (inward remittances by businesses and individuals – outward remittance by

the foreigners residing in the country.)
Gross domestic product(GDP) = C + I + G + NX
C=consumer spending, I= investment spending, G= government purchases, NX = net
exports 18
19
 Low-Income Countries
 GNI per capita of $1,135 or less
 Characteristics
 Limited industrialization
 High percentage of population in farming
 High birth rates
 Low literacy rates
 Heavy reliance on foreign aid
 Political instability and unrest
 Concentrated in south of the Saharan Africa 20
 Lower-Middle-Income Countries
GNI per capita: $1,136 to $4, 465
 Characteristics
o Rapidly expanding consumer markets
o Cheap labor
o Mature, standardized, labor-intensive
industries like footwear, textiles and toys
 50 bottom-ranked countries are LDCs—
least developed countries

21
Upper-Middle-Income Countries
GNI per capita: $4,466 to $13,845
 Characteristics:
 Rapidly industrializing, less agricultural employment
 Increasing urbanization
 Rising wages
 High literacy rates and advanced education
 Lower wage costs than advanced countries

 Also called industrializing or developing economies

 BRICS: Brazil, Russia, China, South Africa 22
Newly Industrializing Economies (NIEs)
 Lower-middle & upper income economies with
the highest sustained rates of economic growth
o Greater industrial output than developing
economies
o Exports of manufactured and refined products
o Next-11 (N11) a new country grouping identified by
Goldman Sachs
 NIEs include Egypt, Indonesia, the Philippines, (lower-
middle income) Mexico, and Turkey (upper-middle
income)
23
 Mistaken Assumptions about LDCs
1. The poor have no money.
2. The poor will not “waste” money on non-essential goods.
3. Entering developing markets is fruitless because goods
there are too cheap to make a profit.
4. People in BOP (bottom of the pyramid) countries cannot
use technology.
5. Global companies doing business in BOP countries will
be seen as exploiting the poor.

24
 High-Income Countries
 GNI per capita: $13,846 or more
 Also known as advanced, developed, industrialized,
or postindustrial countries
 Characteristics:
 Sustained economic growth through disciplined
innovation
 Households have high ownership levels of basic
products

25
 High-Income Countries
 Characteristics, continued:
 Importance of information processing
and exchange
 Ascendancy of knowledge over capital,
intellectual over machine technology,
scientists and professionals over
engineers and semiskilled workers
 Future oriented
 Importance of interpersonal
relationships 26
 G-7, the Group of Seven
 World’s 7 largest
developed economics
which dominate global
trade and the
international financial
system.
Russia joined in 1998 changing the
group to the G-8 but its membership was
suspended in 2014 after it annexed the
Crimean peninsula.
 G-20, Group of Twenty
 Established in 1999
 Finance Ministers and central bank governors of 19
countries and the EU
 Russia remains a member, unlike in the G-7
 VS

https://www.youtube.com/watch?v=0uVfrmw8xc0
2-29
OECD, the Organization for Economic
Cooperation and Development
 34 nations
 Post-WW II European origin
 Promotes economic growth and social well-being
 Focuses on world trade, global issues, labor market
deregulation
 Anti-bribery conventions
 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, and humanitarian aid
o trade deficit— imports exceed its exports
o trade surplus— exports exceed its imports
 Capital account – record of all long-term direct
investment, portfolio investment, and capital flows

31
Top Exporters & Importers in World
Merchandise Trade, 2015 (US$ Billions)
Leading 2015 Leading Importers 2015
Exporters
1. China $2,274 1. United States $ 2,308
2. United States 1,504 2. China 1,681
3. Germany 1,329 3. Germany 1,050
4. Japan 624 4. Japan 648
5. Netherlands 567 5. United Kingdom 625

32
 Class activity
Grouping for mid-term project with 6 -7 people

Read Case 2-1 and answer the following questions.

1. Social activists and political opponents in India have voiced

objection to Modi’s economic liberalization initiatives. What do
you think is the nature of some of these objections?
2. Assess Modi’s two main economic reforms – namely,
demonetization and tax reform. Can it help to intake more
foreign investment?
38
 Class activity
Case 2-1 Google Excel

39
Case 2-1
India’s Economy at the Crossroad:
Can Prime Minister Narendra Modi
Deliver Acche Din?

Textbook, 10th Edition,

Page 62, 63, 89, 90

40
 Learning Objectives
1. Identify and briefly explain major changes in the world economy
over the last 100 years
2. Compare and contrast types of economic systems that are found in
the different regions of the world
3. Explain the stages of economic development used by the World
Bank and identify the key emerging country markets at each stage
of development
4. Discuss the significance balance of payments for the world’s major
economies
5. Identify the countries that are leading exporters
6. Briefly explain how exchange rates impact a company’s
opportunities in different parts around the world

44
Questions?
 Global Marketing
The Global Trade Environment
Chapter 3
Barriers to global trade -- Tariffs
a tax placed on a good that is traded internationally

47 47
47
 3 types of imported tariffs
AD VALOREM COMPOUND
SPECIFIC TARIFF
TARIFF TARIFF

• A percentage of • A specific dollar • Both an ad

the market value amount per unit valorem
of the imported of weight or component and
good. other standard a specific
measure. component.

48 48
48
 Why do
governments
impose
tariffs?

49
49
 Barriers to global trade –
Nontariff barrier (NTB)
any government Quotas
regulation, policy, or
procedure other than a
tariff that has the effect Nontariff
of impeding international barrier
trade. (NTB)
Numerical
Other non-
Export
tariff barrier
Controls

50 50
50
 Nontariff barrier- Quotas
• A numerical limit on the quantity of a good that may be
imported into a country during some time period (a year)
 Traditionally been used to protect politically powerful industries
 But after the Uruguay Round of WTO meeting, many countries have
replaced quotas tariff rate quotas
• Tariff rate quota (TRQ):
 imposes a low tariff rate on a limited amount of imports of a specific
good
 Above that threshold, a TRQ imposes a prohibitively high tariff rate on
the good

51 51
51
 Nontariff barrier-
Numerical Export Controls
• Quantitative barriers to trade in the form of numerical limits on
the amount of a good it will export
• A Voluntary Export Restraint (VER)
 A promise by a country to limit its exports of a good to another
country to a prespecified amount of percentage of the affected
market
 Used to resolve or avoid trade conflicts with an otherwise friendly
trade partner
• Embargo:
 An absolute ban on the exporting (and/or importing) of goods to a
particular destination
 Export controls to punish a country’s political enemies 52 52
52
 Other Non-tariff Barriers
More difficult to eliminate than tariffs and quotas. Often embedded in
bureaucratic procedures & are not quickly changeable.

Product and Testing Standard

• A requirement that foreign goods meet a country’s product
standards or testing standards before the goods can be offered for
sale in that country
• US’s FDA; Brazil: new pharmaceutical products must undergo clinical
testing in Brazil

Restricted Access to Distribution Networks

• Restricting foreign suppliers’ access to the normal channels of
distribution.
• Thailand: foreign banks are limited to a single branch and are
53 53
forbidden from utilizing off-site ATM machines 53
 Other Non-tariff Barriers
Public-sector Procurement Policies
Public-sector Procurement Policies

• Give preferential treatment to domestic firms

• US: requires that any iron, steel, and manufactured goods purchased using funds
provided by the act to build or repair a public building or public work must be
produced in the US.
• Important to state-owned enterprises (SOEs)

Local-purchase Requirement
• Requiring foreign firms to purchase goods or services from local suppliers
• Indonesia: encourages pharmaceutical companies to manufacture locally if they
wish their drugs to be approved for sale
• China: requires that all travel agents use China’s state-owned reservation service
when booking flights for Chinese tourists
54 54
54
 Other Non-tariff Barriers
Regulatory Controls
• Conducting health and safety inspections, enforcing environmental regulations,
requiring firms to obtain licenses before beginning operations or constructing
new plants, and changing taxes and fees for public services
• Taiwan’s National Health Insurance Bureau’s reimbursement schedule for
pharmaceuticals and medical devices favors domestically made products over
foreign-produced onesies

Investment Controls
• Controls on foreign investments and ownership, E.g. broadcasting, utilities, air
transportation, defense contracting and financial services
• Often make it difficult for foreign firms to develop an effective presence in such
markets
• Philippines restricts foreign ownership in advertising to 30% and
telecommunication to 40%
55 55
55
Types of Barriers to International Trade

2-56
How to reduce the restriction of
international trade?

2-57
Global trade is mainly operated
by two forces:

Global Trade Mechanisms Regional Trading Alliances

• European Union (EU)
• World Trade Organization (WTO)
• North American Free Trade
• International Monetary Fund (IMF)
Agreement (NAFTA)
• World Bank Group • Association of Southeast Asian
• Organization for Economic Cooperation Nations (ASEAN)
and Development (OECD) 58
 Global Trade Mechanisms
(GATT & WTO)

• International Trade
Organization (ITO). GATT • World Trade
• Never came into
• General Agreement Organization
being • Adopted GATT’s
on Tariffs and Trade
(GATT), 1947 mission
• Took over ITA’s • 153 members+
mission: Promote
ITO Trade
WTO
59 59
59
 https://www.youtube
.com/watch?v=rdX3x
PSywgU

Promote International Trade,

Handled trade disputes
Lacked enforcement power;
nicknamed the General
Agreement to Talk and Talk
Disputes lasted for years
ensure that trade flows as
smoothly, predictably and
freely as possible
Reduce Trade Barriers, deals
with the global rules of trade
between nations

Resolve Trade Disputes, has

Replaced by World Trade enforcement power and can
Organization in 1995 impose sanctions
60 60
60
WTO Structure
create subsidiary negotiating bodies to
handle individual negotiating subjects.
Map of Disputes btw WTO members

 Click for more info 

World Trade Organization

63 63
 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 300 PTAs have been
notified to the WTO
Hierarchy of PTAs
Four Forms of Regional Economic Integration

CET = Common External Tariffs

 Free Trade Area (FTA)
 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

Protesters opposed a
trade agreement in
Vienna, 2016

Anti-TPP protest,
Tokyo, 2012
 North America—USMCA(NAFTA)
 NAFTA established free trade
area from 1994, 2021 USMCA
 Canada, United States, Mexico
 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

U.S.-Mexico Border Crossing

NAFTA Income
& population
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)
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
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
 European Union Flag

Economic Union
Full evolution of economic union
o creation of unified central bank
o use of single currency
o common policies on issues such as
agriculture, social policy, transport,
competition, mergers, taxation
o requires extensive political unity
o would lead to a central government in
time
Forms of Regional Economic
Integration
U.S. Goods Exports & IMPORTS In 2016
(Figure 3-2)
Latin America: SICA, Andean
Community, Mercosur, CARICOM
 Includes the Caribbean,
Central, and South America
 History of no growth, inflation,
debt, and protectionism has
given way to free markets,
open economies, and
deregulation
 Some concern for further
growth with the rise of left-
leaning politicians
SICA Central American Integration System
Sistema de la Integración Centroamericana
 El Salvador, Honduras,
Guatemala, Nicaragua,
Costa Rica, and Panama
 Moving towards a common
market
 Common External Tariff of
0 to 15%
 Retains tariffs on goods
also produced in
importing country
DR-CAFTA
 SICA members El Salvador, Honduras,
Guatemala, Nicaragua, Costa Rica joined the
Dominican Republic and the United States in a
FTA
 80% of US goods and 50%+ of agricultural
goods are duty free
 Paperwork is reduced
 Reduced risks mean more direct foreign
investment
Andean Community
Comunidad Andina de Naciones
 Bolivia, Colombia, Ecuador,
Peru
 50th anniversary in 2019
 Customs Union
 Abolished foreign exchange,
financial and fiscal incentives,
and export subsidies
 Established common external
tariffs
 MERCOSUR
Common Market of the South
 Argentina, Brazil, Paraguay, Uruguay,
Venezuela
 Customs union, seeks to become
common market
o Internal tariffs eliminated
o Established common external tariffs
up to 20%
o In time, factors of production will
move freely through member
countries
o EU is the #1 trading partner
 Chile, Ecuador, Peru, Bolivia
o Associate members
o Participate in free trade area but not
CARICOM
Caribbean Community and Common Market
 CARICOM
• Founded in 1973 by 15
members
• 17 million population
• Stagnant for 20 years
• Customs Union in 1991 • Caribbean Basin Trade Partnership
• Rejected the idea of an Act exempts textile and apparel
economic union in 1998 exports to the U.S. market access
as a single currency from duties and tariffs. Caribbean
would not be especially Basin Initiative of 20 nations includes
beneficial. CARICOM.
ASEAN
The Association of
Southeast Asian
Nations
ASEAN
The Association of Southeast Asian Nations
 Established in 1967
 Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand, Vietnam
 Top trading partners U.S., Japan, EU, China
 Geographically close; historically divided
 “ASEAN plus six” (Japan, China, Korea, Australia, New
Zealand, India) working towards an economic
community
 China/ASEAN FTA established in 2010 removes 90% of
tariffs on traded goods
 Singapore
 World’s 2nd largest container
port
 2nd highest standard of
living in the region behind
Japan
 5.4 million people
 95% literacy rate
 Over 3,000 companies Singapore, an important trade hub in Asia, is
becoming a cultural destination.
 Crime is nearly nonexistent
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

Lithuania joined the euro zone  1991 Maastricht Treaty set

On January 1, 2015. stage for transition to an
economic union with a
central bank and single
currency (the Euro)
European Union
 28 countries
 450 million people
 $15 trillion GNI
 Euro currency, 1999
 Harmonization of laws
and regulations
 Price transparency
 No customs at national
borders
European
Union (EU)
 The Middle East
 Afghanistan, Bahrain, Cyprus, 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, 5% Christian and Jewish
 Wide variation in Economic Freedom
rankings (Bahrain is 18th, UAE is 25th, Saudi
Aribia is 77th)
 Oil prices drive commerce
 25% of world’s oil in Saudi Arabia
 Arab Spring 2011
 Gulf Cooperation Council key regional
organization
 GCC
The Gulf Cooperation Council

• Established in 1981 by 6
countries with 45% of world’s
oil, only 18% of output
• These countries are attempting
to diversify industries
 Africa
 54 nations over three distinct areas
 Republic of South Africa
 North Africa
 Black Africa or sub-Saharan Africa

 Arabs in the north differ politically and economically from the rest of
the continent.
 MENA: Middle East and North Africa
 Viewed as a regional entity

 Regional agreements
 Economic Community of West African States (ECOWAS)
 East African Cooperation
 South African Development Community (SADC)
 Click for more info 
 Click for more info 
 Click for more info 
Forms of Economic Integration

2-95
 Degree of economic integration
Surrender of sovereignty, in exchange for economic benefits

1. No tariffs between products

Free Trade ＵＳＭＣＡ
2. Give up tariff autonomy of Member States
Area （ NAFTA ）
3. Past protected tariff industries are affected

Custom 1+2+3
EU-Turkey
Union 4. Tariff agreement on non-member States
1+2+3+4 South America
Comment
5. Capital, manpower can move freely between comment
Market market
members
1+2+3+4+5 The
Economic
6. Coordination of economic policies (fiscal, European
Union
currency) among members Union
1+2+3+4+5+6
Political
7. Common foreign affairs, justice and internal
Union
affairs policy 96
 Why is a trade union needed?
1. Expanding the scale of the market: economies of scale,
attracting foreign investment
2. Effective use of resources: the more efficient use of
resources across countries
3. Trade effects: trade diversion effect, trade creation
4. Industrial rationalization: to change the existing
industrial structure, more efficient ways of production 。
5. Increase competition: Intensified competition in cross-
border markets

97
Impact of Economic Integration on
Firms
PROS CONS

Open Markets of Threaten Less- Efficient

Member Countries Firms
Lower Production and Harms Specific Sectors
Distribution Costs in the Economy
Improve International Favors Powerful Special
Competitiveness Interest Groups
98 98
98
 Learning Objectives
1. Explain the role of the WTO in facilitating global trade relations
among nations.
2. Compare and contrast the four main categories of preferential trade
agreements.
3. Explain the trade relationship dynamics among signatories of NAFTA.
4. Identify the four main preferential trade agreements in Latin
American and the key members of each.
5. Identify the main preferential trade agreements Asia-Pacific region.
6. Describe the various forms of economic integration in Europe.
7. Describe the activities of the regional organizations in the Middle
East.
8. Identify the issues for global marketers wishing to expand in Africa
Questions?
Thank you for your attention.
See you next week!