Global Marketing Management, 4e
Chapter 2
Global Economic
Environment
Chapter 2
Copyright (c) 2007 John Wiley & Sons, Inc.
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Chapter Overview
1. Intertwined World Economy
2. Country Competitiveness
3. Evolution of Cooperative Global Trade Agreements
4. U.S. Position in Foreign Direct Investment and
Trade
5. Information Technology and the Changing Nature of
Competition
6. Regional Economic Arrangements
7. Multinational Corporations
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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 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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1. Intertwined World Economy
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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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1. Intertwined World Economy
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1. Intertwined World Economy
 The weekly volume of international trade in
currencies exceeds the annual value of the trade
in goods and services.
 All nations with even partially convertible
currencies are exposed to the fluctuations in the
currency markets.
 A rise in the value of the local currencies make
exports more expensive; a rising currency value
also deters foreign investment in a country and
may encourage outflow of investment.
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1. Intertwined World Economy
 Examples of severe currency fluctuations are the
1995 Mexican meltdown, and the Asian financial
crisis (1997-1999).
 Unfortunately, the influence of these short-term
money flows are nowadays far more powerful
regarding exchange rates than an investment by a
Japanese or German automaker.
 Recent examples of financial crisis occurred in
Argentina and Brazil (2002).
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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 24).
 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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2. Country Competitiveness
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2. Country Competitiveness
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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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4. Evolution of Cooperative Global Trade
Agreements

ITO (International Trade Organization):
– ITO was established after World War II.
 GATT (General Agreements on Tariffs & Trade):
– After 1950, GATT succeeded ITO.
– The main operating principle of GATT was the
concept of most favored nations (MFN).
– GATT was successful in lowering trade
barriers.
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4. Evolution of Cooperative Global Trade
Agreements

WTO (World Trade Organization Trade):
–
–
–
The eighth and last round of GATT talks – called the
“Uruguay Round” (1986-1994) established an
international body called the WTO which took effect on
January 1, 1995.
As of February 16, 2005, WTO had 148 member
countries.
WTO has statutory powers to adjudicate trade
disputes among nations and has its own secretariat.
– WTO is the new legal and institutional
foundation for a multilateral trading system.
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4. Evolution of Cooperative Global Trade
Agreements


WTO’s ninth round---called the “Doha
Development Agenda” (Doha Round) was
launched in Doha, Qatar in November 2001 (see
Exhibit 2-5). Interim deal in December 2005 to
end farm export subsidies by 2013 prevented
collapse of the latest round of the talks.
The Doha Round of 2001 facilitated the way for
China and Taiwan to get full membership in the
WTO.
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4. Evolution of Cooperative Global
Trade Agreements
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4. Evolution of Cooperative Global Trade
Agreements
 Although WTO is a global institutional proponent of
free trade, it is not without critics.
 The WTO dispute settlement mechanism is faster,
more automatic, and less susceptible to blockages
than the old GATT system.
 The WTO Work Program on Electronic Commerce
is in the process of defining the trade-related
aspects of electronic commerce that would fall
under the parameters of WTO mandates.
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5. Information Technology and the
Changing Nature of Competition
 Information technology and the changing nature of
competition have created many challenges for the
firms.
 Over the Internet, any piece of electronically
represented intellectual property can be copied.
 The Trade Related Aspects of Intellectual Property
Rights (TRIPS) Agreement was concluded as part
of the GATT Uruguay Round. Update to accord
ensuring patent protection does not block
developing countries’ access to affordable
medicines is the top of the agenda.
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5. Information Technology and the
Changing Nature of Competition
 Proliferation of E-Commerce and Regulations:
Countries’ regulators have not kept pace with the
rapid proliferation of international e-commerce and
Internet-related activities.
 In many countries, rules and regulations are vague
regarding e-commerce transactions.
 The United Nations Commission on International
Trade Law (UNCITRAL) has formed a Working
Group on Electronic Commerce to reexamine
these treaties.
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6. Regional Economic
Arrangements
 An evolving trend in international economic
activity is the formation of multinational trading
blocs.
 There are over 120 regional free trade areas
worldwide.
 Market groups take many forms, depending on
the degree of cooperation and inter-relationships,
which lead to different levels of integration
among the participating countries.
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6. Regional Economic Arrangements
 Types of Regional Economic Arrangements:
– Free Trade Areas: Formal agreement among
two or more countries to reduce or eliminate
customs duties and nontariff barriers.
Examples: NAFTA, MERCOSUR, CAFTA-DR &
FTAA (proposed and currently stalled)
– Customs Union: Addition of common external
tariffs to the provisions of free trade
agreements. Example: ASEAN.
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6. Regional Economic Arrangements
– Common Market: Eliminates all tariffs and other barriers,
adopts a common set of external tariffs on nonmembers, and
remove all restrictions on the flow of capital and labor among
member nations. Example: European Union.
– Monetary Union: Represents the fourth level of integration with
a single currency among politically independent countries.
Example: EU and the euro.
– Political Union: Highest level of integration resulting in a
political union. Sometimes, countries come together in a loose
political union for historical reasons, as in the case of the
British Commonwealth which exists as a forum for discussion
and common historical ties.
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7. Multinational Corporations
 The U.S. government defines a multinational
corporations (MNC) for statistical purposes
as a company that owns or controls 10
percent or more of the voting securities, or
the equivalent, of at least one foreign
business enterprise.
 At present, there are 70,000 MNCs with
690,000 affiliates in foreign countries.
 MNCs’ total sales exceed $19 trillion.
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7. Multinational Corporations
 One third of multinational companies’ trade is
accounted for by intra-firm activities.
 Two-thirds of of world trade in goods and services
is controlled by multinational companies.
 Of the 100 largest economies in the world, 51 are
corporations.
 The sovereignty of nations will perhaps continue to
weaken due to multinationals and the increasing
integration of economies.
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7. Multinational Corporations
 In 1970, of the 7,000 multinationals identified by
the United Nations, more than half were from two
countries: the United States and Britain.
 By 1995, less than half of the 36,000
multinationals identified by the United Nations
came from four countries: the United States,
Japan, Germany, and Switzerland.
 The nation-state, while considerably weaker than
its nineteenth century counterpart, is likely to
remain alive and well.
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7. Multinational Corporations
 Currently, factors such as currency movements,
capital surpluses, faster growth rates, and falling
trade and investment barriers have all helped
multinationals from other countries join the crossborder fray.
 It is not unusual for a startup firm to become global
at its inception. Those firms are known as “born
global.”
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