Global Marketing Management Chapter 2 Global Economic Environment Warren J. Keegan

Overview The World Economy – An Overview Economic Systems Stages of Market Development Stages of Economic Development Income and Purchasing Power Parity The Location of Population Marketing and Economic Development Balance of Payments Trade Patterns Summary

Learning Objectives Understand the main differences between economic systems found around the world Learn ways of classifying countries by their market development Understand consumption patterns in different countries Know the main regional economic co-operation agreements

The World Economy - Overview During the last 50 years: Emergence of global markets Integration of world economy Capital movements are driving force Production is “uncoupled” from employment Macroeconomics of individual countries no longer control economic outcomes

Economic Systems Three types of economic systems: Capitalist Socialist Mixed Classification based on dominant method of resource allocation Market allocation Command allocation Mixed system

Economic Systems – Market Allocation Relies upon consumers to allocate resources Role of state Promote competition Ensure consumer protection Predominately market economies: US, Western European Countries, Japan

Economic Systems – Command Allocation State has broad powers to serve public interest Decides which products to make Decides how to make them Elements of marketing mix are not used as strategic variables Countries that relied upon command allocation systems for decades: China, former USSR, India

Economic Systems – Mixed Systems In reality, no pure market or command allocation systems among the world’s economies In OECD countries, the portion taxes ranges from 32% GDP in US to 64% in Sweden

Economic Systems Index of Economic Freedom (Source: Heritage Foundation) Free: Hong Kong, Singapore, New Zealand, , Bahrain, Luxembourg, US, Mostly Free Canada, Chile, El Salvador, Taiwan Mostly Unfree Cambodia. Mexico, Slovak Rep., Slovenia, Swaziland Repressed North Korea, Iraq, Libya, Somalia, Cuba

Stages of Market Development Countries/markets are at different stages of development GNP per capita provides a useful way of grouping countries into 5 categories Categories are a useful basis for: Market segmentation Target marketing

Country Income Segmentation $9,656 High Income (Advanced Countries) -Triad -Others + $3,126 Upper Middle Income (NIC’s) + $786 Lower Middle Income (DC’s) < $768 Lower Income (LDC’s) Basket Cases (BC’s)

Global Income & Population 2001 GNP (billion) GNP/ Capita % GNP Population (Millions) % Pop. World $30,251 $4,931 100 6,134 High $24,280 $24,693 80 983 16 Up-Mid $2,111 $4,476 7 449 Low-Mid $3,150 $1303 10 2,418 39 Low $810 $355 3 2,284 37

Top 10 GNP (in millions) United States $8,259,358 Japan 4,427,104 Germany 2,127,086 France 1,446,515 United Kingdom 1,359,764 China 1,179,345 Italy 1,168,771 Brazil 850,852 Canada 602,158 Spain 544,944

Stages of Market Development – High Income Countries GNP per capita above $9,656 Norway at $38,070, US at $20,953 Post-Industrial Countries Importance of service sector – more than 50% of GNP Ascendancy of knowledge over capital

Stages of Market Development – Upper Middle Income Countries GNP per capita between $3,126 and $9,656 Characteristics Rising wages High rates of literacy Advanced education Experience rapidly, export-driven economic growth Become formidable competitors

Stages of Market Development – Lower Middle Income Countries GNP per capita between $785 and $3,125 Characteristics Early stages of industrialization Expanding consumer markets Major competitive advantage in the production of mature, standardized, labor-intensive products

Stages of Market Development – Low Income Countries Income per capita less than $785 Characteristics Limited industrialization High birth rates Low literacy rates Heavy reliance on foreign aid Political instability Concentration in Africa, south of the Sahara

Stages of Market Development – Basket Cases A country with economic, social & political problems that are so serious they make the country unattractive for investment and operations Low-income, no-growth countries (E.g.. Ethiopia) One-time growing & successful countries that have become divided by political struggles

Stages of Economic Development Stages of market development based on GNP per capita correspond with the stages of economic development Low & lower-middle-income countries = less developed countries (LDCs) Upper- middle-income countries = industrializing countries High-income countries = advanced, industrialized & postindustrial

Income and Purchasing Power (1) Single most important indicator of market potential Purchasing Power Parities Comparison of goods & services that can be bought with local currency in different countries Gross National Product (GNP) Sum of the money values of all final goods & services produced during a year

Income and Purchasing Power (2) Top 10 Nations ranked by GNP/Capita (2000) Luxembourg Japan Norway Denmark Singapore United States Switzerland Hong Kong Kuwait Austria

Income and Purchasing Power (3) Top 10 Nations ranked by GNP/Capita adjusted for Purchasing Power (PPP) Luxembourg Switzerland United States Denmark Singapore Japan Norway Belgium Hong Kong Austria

The Location of Population Country Population GNP/Capita % World (thousands) (thousands) GNP China 1,268,121 930 3.9 India 1,015,287 424 1.4 United States 275,746 29,953 27.3 Indonesia 210,785 1,176 0.7 Brazil 170,661 5,535 2.8

Marketing & Economic Development Does marketing play an important role in the economic development of a country? Is marketing only relevant to conditions that apply in affluent, industrialized countries? The marketing process of focusing an organization’s resources on environmental opportunities is a process of universal relevance

Balance of Payments A record of all economic transactions between residents of a country & the rest of the world Capital Account records Long-term direct investment, Portfolio investment, Other short & long-term capital flows Current Account records Trade in merchandise & service, Private gifts, Public aid transactions between countries

Trade Patterns (1) World merchandise trade has grown faster than world production during the last 50 years Top 5 exporting countries Top 5 importing countries United States United States Germany Germany Japan Japan China United Kingdom France France

Trade Patterns (2) Services Trade The fastest- growing sector of world trade In 1994, U.S. service exports totalled $195 Billion

Summary Economic environment is major determinant of global market potential & opportunity World economies can be categorized into market allocation systems, command allocation systems, & mixed systems For many products, most important indicator of market potential is income