Chapter 2- Global Economic Environment

Foreign Exchange Market

Consists of buyer's and seller's market where currencies are traded for spot and future delivery on a continuous basis.

Consider Institutions when Zeroing in on Economic Systems

Country characterized by transparency, standards, absence of corruption? Standards ignored and court system compromised?

Managing Economic Exposure

Economic exposure introduced by currency fluctuations is an issue for companies. 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.

Centrally Planned Capitalism

Economic system in which command resource allocation is used extensively in an environment of private resource ownership .Example: Swedish government controls 2/3s of all spending; a hybrid of CPS and capitalism (Market Socialism) Swedish government plans move towards privatization.

Mistaken Assumptions about LDCs # 3

Entering developing markets is fruitless because goods there are too cheap to make a profit.

Consider Markets when Zeroing in on Economic Systems

Entrepreneurial high risk/high reward? Socialized market? Government dominated price and wage controls?

G-20, Group of Twenty

Established in 1999. Finance Ministers and central bank governors of 19 countries and the EU.

Hedging

Establishing an offsetting currency position. Involves balancing the risk of loss in one currency with a corresponding gain in another currency.

Forward Market

For future delivery

Spot market

For immediate delivery

Overview of International Finance

Foreign exchange makes it possible to do business across the boundary of a national currency which involves financial risks, decisions, and activities. Currency of various countries are traded for both immediate (spot) and future (forward) delivery Currency risk adds turbulence to global commerce

Consider Trade and capital flows when Zeroing in on Economic Systems

Free trade, part of trading bloc? Currency board or exchange controls?

Zeroing in on Economic Systems

Globalization has made it harder to pigeonhole economies within the four-cell matrix.

G-8, the Group of Eight

Goal of global economic stability and prosperity US, Japan, Germany, France, Britain, Canada, Italy, Russia.

GNI

Gross National Income

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

LLDCs

Least Developed Countries

LDCs

Less Developed Countries

Newly Industrializing Economies (NIEs)

Lower-middle and upper income economies with the highest sustained rates of economic growth Greater industrial output that developing economies Exports of manufactured and refined products N-11 a new country grouping identified by Goldman Sachs. NIEs include Egypt, Indonesia, the Philippines, (lower-middle income) Mexico, and Turkey (upper-middle income).

Consider Type of Government when Zeroing in on Economic Systems

Monarchy, dictatorship, tyrant? One-party system? Dominated by another state? Democracy? Terrorist?

MDCs

Most or More Developed Countries

NIEs

Newly Industrialized Economies

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 moving towards some market allocation and private ownership.

Mistaken Assumptions about LDCs # 4

People in BOP (bottom of the pyramid) countries cannot use technology.

New Market Realities 2

Production has become uncoupled from employment.

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.

Balance of Payments

Record of all economic transactions between the residents of a country and the rest of the world

Economic Exposure

Refers to the impact of currency fluctuations on the present value of the company's financial performance. It occurs when sales are in a foreign currency. For example, Nestlé generates 98% of sales outside home country, Euro zone companies GlaxoSmithKline, Daimler AG, BP, for example, generate 1/3 of sales in the U.S.

Centrally Planned Capitalism

Resource Allocation: Command Resource Ownership: Private

Centrally Planned Socialism

Resource Allocation: Command Resource Ownership: State

Market Capitalism

Resource Allocation: Market Resource Ownership: Private

Market Socialism

Resource Allocation: Market Resource Ownership: State

Forward Contracts

Set the price of the exchange rate at some point in the future to eliminate some risk

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

Product Saturation Levels

The % of potential buyers or households who own a product. Examples: India: 20% of people have telephones Autos: 1 per 43,000 Chinese, 21 per 100 Poles, 49 per EU adults, 8 per 1,000 Indians, 200 out of 1,000 in Russia, 565 out of 1,000 in Germany Computers: 1 PC per 6,000 Chinese; 11 PCs per 100 Poles; 34 PCs per 100 EU citizen

OECD, the Organization for Economic Cooperation and Development

34 nations. Post-WW II European origin Canada, U.S. (1961), Japan (1964) Promotes economic growth and social well-being Focuses on world trade, global issues, labor market deregulation Anti-bribery conventions

Correlation of Economic Freedom

A high correlation exists between the degree of economic freedom and the extent to which a nation's mixed economy is market oriented.

Gross Domestic Product (GDP)

A measure of the nation's economic activity calculated by consumer spending, investment spending, government purchases, and net exports.

Devaluation

A result from government action or an economic crisis reducing the nation's currency against other currencies.

Mistaken Assumptions about LDCs # 1

The poor have no money.

Mistaken Assumptions about LDCs # 2

The poor will not "waste" money on non-essential goods.

Call Option

The right, not obligation, to buy the foreign currency.

New Market Realities 4

The struggle between capitalism and socialism began in 1917 is over. Capitalism has won.

GDP per Capita

The sum total of all that is produced in a country divided by the number of people in a country

New Market Realities 3

The world economy, not individual countries, is the dominating factor.

Leading Exporters

China, Germany, US, Japan, Netherlands

Consider when Zeroing in on Economic Systems

Type of economy: advanced industrial state, emerging or transition economy, or developing nation?

The Triad

U.S., Western Europe, and Japan Represents 75% of world income Expanded Triad includes all of North America and the Pacific Rim and most of Eastern Europe Global companies should be equally strong in each part

Leading Importers

US, China, Germany, France, Japan

Gross National Income (GNI)

Used by the World Bank as a base to determine stages of economic development.

trade deficit

negative current account

Consider Services when Zeroing in on Economic Systems

provided by the state or state funded: Pensions, health care, education.

Capital account

record of all long-term direct investment, portfolio investment and capital flows

Current account

record of all recurring trade in merchandise and services, and humanitarian aid

Big Mac

A country's currency can be overvalued if the Big mac price is lower than the US Price Conversely, a country's currency would be undervalued if the Big mac price is lower than the US price.

BEM

Big Emerging Market

Risk rating in the world

CRT 1 (Low Risk) to a CRT5 (High Risk) Opportunities are in the 3s and 4s.

New Market Realities 1

Capital movements have replaced trade as the driving force of the world economy ( transfer of money, people, product)

Economic System Type 2

Centrally Planned Capitalism

Economic System Type 4

Centrally Planned Socialism

Marketing Opportunities in LDCs

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

New Market Realities 5

E-Commerce diminishes the importance of national barriers and forces companies to re-evaluate business models

Low Income Countries

GNI per capita of $1,025 or less Limited industrialization High percentage of population in farming High birth rate, short life expectancy Low literacy rates Heavy reliance on foreign aid Political instability and unrest Concentrated in Sub-Saharan Africa

Lower-Middle-Income Countries

GNI per capita: $1,026 to $4,035 (LDCs) Rapidly expanding consumer markets Cheap labor Mature, standardized, labor-intensive industries like footwear, textiles and toys 50 bottom-ranked countries are LDCs—least developed countries India is the only BRIC nation

High-Income Countries

GNI per capita: $12,476 or more (MDCs) Also known as advanced, developed, industrialized, or postindustrial countries Sustained economic growth through disciplined innovation Service sector is more than 50% of GNI Households have high ownership levels of basic products 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

Upper-Middle-Income Countries

GNP per capita: $4,036 to $12,475 (NIEs) 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 The BEMs of the world! The NICs (NIEs) BRICS: Brazil, China, Russia, South Africa Other countries: Malaysia, Chile, Venezuela, Mexico

GATT

General Agreement on Tariffs and Trade

Put Option

Gives the buyer the right to sell a specified number of foreign currency units at a fixed price

Mistaken Assumptions about LDCs # 5

Global companies doing business in BOP countries will be seen as exploiting the poor.

BEM Countries

Identified 10 years ago, were countries in Central Europe, Latin America, and Asia that were to have rapid economic growth: China, India, Indonesia, South Korea, Brazil, Mexico, Argentina, South Africa, Poland and Turkey.

Today's World Economy Overview

In the early 20th century economic integration was at 10%; today it is 50%. EU and NAFTA are very integrated. Global competitors have displaced or absorbed local ones.

Economic System Type 1

Market Capitalism

Economic System Type 3

Market Socialism

Market Socialism

Market allocation policies are permitted within and overall environment of state ownership.

BRICS

Today the focus is on BRICS. Brazil, Russia, India, China, South Africa Substantiality, high populations.

Consider The commanding heights when Zeroing in on Economic Systems

Transportation, communications & energy sectors. State, private, or mixed ownership?

trade surplus

positive current account