The Dynamic Environment of International Trade Chapter 2

BALANCE OF PAYMENTS When countries trade there are financial transactions among businesses or consumers of different nations Money constantly flows into and out of a country The system of accounts that records a nation’s international financial transactions is called its balance of payments (BP) It records all financial transactions between a country’s firms, and residents, and the rest of the world usually over a year The BP is maintained on a double-entry bookkeeping system

Balance of Payments The BP is the difference between receipts and payments Receipts merchandise export sales. money spent by foreign tourists. transportation. payments of dividends and interest from FDI abroad. new foreign investments in the U.S. Payments costs of goods imported. spending by U.S. tourists overseas. new overseas investments. cost of foreign military and economic aid. 2-3

THE WORLD ECONOMY The macro dimensions of the environment are economic, social and cultural, political, legal and technological. Each is important. But perhaps the single most important characteristics of the global market is the economic dimension. Without money, many things are impossible for the marketer. Luxury products, for example, cannot be sold to low-income consumers. Hypermarkets for food, furniture, or durables require a large base of consumers with the ability to make purchase of goods and the ability to drive away with those purchases.

THE WORLD ECONOMY The likelihood of business success is much greater when plans and strategies are based on the new reality of the changed world economy; Capital movements rather than trade have become the driving force of the world economy. Production has become “uncoupled” from employment. Manufacturing is not in decline but employment in manufacturing is declining due to gains in productivity. The emergence of the world economy as the dominant economic unit. Germany & Japan “observes” the world and then the world watches them. The growth of commerce via the Internet diminishes the importance of national barriers.

ECONOMIC SYSTEMS Three types of economic systems: Capitalist Socialist Mixed Classification based on dominant method of resource allocation Market allocation Command allocation or central plan allocation Mixed system

STAGES OF MARKET DEVELOPMENT Countries/markets are at different stages of development GNP per capita provides a useful way of grouping countries into 4 categories (categories developed by The World Bank, Stages based on GNP) High income countries Upper-middle income countries Lower-middle income countries Low income countries Categories are a useful basis for: Market segmentation Target marketing

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 These countries represent limited markets for all products and are not significant locations doe competitive threats. There are exceptions like Bangladesh, where a growing garments industry has enjoyed growing exports.

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 A growing threat - since they mobilize their relatively cheap but highly motivated labor to serve target markets in the world. Indonesia

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 Countries in this stage of development frequently become formidable competitors and experience rapid economic growth. 3 BEMs: Argentina, Brazil, Mexico, South Africa Today, the focus is on BRIC, Brazil, Russia, India, and China.

BRIC BRIC is a grouping acronym that refers to the countries of Brazil, Russia, India and China, which are all deemed to be at a similar stage of newly advanced economic development. It is typically rendered as "the BRICs" or or alternatively as the "Big Four". 2010 – BRICS – South Africa “These countries encompass over 25% of the world's land coverage and 40% of the world's population and hold a combined GDP (PPP) of 18.486 trillion dollars. On almost every scale, they would be the largest entity on the global stage. These four countries are among the biggest and fastest growing emerging markets “- Jim O'Neill, global economist at Goldman Sachs

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

G-8, THE GROUP OF EIGHT G-7 began in 1975 and Russia joined in 1998. The EU is also represented at all meetings. Goal of global economic stability and prosperity U.S. Japan Germany France Britain Canada Italy Russia (1998) As of 2007, the U.S. State Department website with G-8 information is http://usinfo.state.gov/ei/economic_issues/group_of_8.html G-7 began in 1975 and Russia joined in 1998. The EU is also represented at all meetings. The leader of the host country is the president of the G-8. The group meets every summer. The Presidency of the G8, and responsibility of hosting all G8 meetings, rotates each year, with the order of G8 Presidencies as follows: 2004 United States 2005 United Kingdom 2006 Russia 2007 Germany 2008 Japan 2009 Italy 2010 Canada 2011 France 2012 United States 2009 G-8 Leaders in Italy

THE TRIAD The ascendancy of the global economy has been noted by many observers in recent years. One of the most astute is Kenichi Ohmae, former chairman of McKinsey & Company Japan.. His 1985 book Triad Power represented one of the first attempts to develop a coherent conceptualization of the new emerging order. Ohmae argued that successful global companies had to be equally strong in Japan, Western Europe, and the United States. These three regions, which Ohmae collectively called the Triad, represented the dominant economic centers of the world. Today, roughly 75 percent of world income as measured by GNP is located in the Triad. Coca-Cola is a example of a company with a balanced revenue stream. Revenue: 1/4 from Asia; 25% from Europe, Eurasia and Middle East; 40% from North America. The ascendancy of the global economy has been noted by many observers in recent years. One of the most astute is Kenichi Ohmae, former chairman of McKinsey & Company Japan. His 1985 book Triad Power represented one of the first attempts to develop a coherent conceptualization of the new emerging order. Ohmae argued that successful global companies had to be equally strong in Japan, Western Europe, and the United States. These three regions, which Ohmae collectively called the Triad, represented the dominant economic centers of the world. Today, roughly 75 percent of world income as measured by GNP is located in the Triad. Coca-Cola is a example of a company with a balanced revenue stream. Revenue: 1/4 from Asia; 25% from Europe, Eurasia and Middle East; 40% from North America.

MISTAKEN ASSUMPTIONS ABOUT LDCS The poor have no money. The poor will not “waste” money on non-essential goods. Entering developing markets is fruitless because goods there are too cheap to make a profit. People in BOP (bottom of the pyramid) countries cannot use technology. Global companies doing business in BOP countries will be seen as exploiting the poor. In the aggregate, the buying power of poor communities can be substantial. In rural Bangladesh, villagers spend considerable sums to use village phones operated by local entrepreneurs. Poor consumers buy TVs and gas stoves to improve their lives. Poor people often pay higher prices. There is an opportunity for efficient competitors to realize attractive margins by offering quality and low prices. Rural residents can and do learn to use cell phones, PCs, and other devices. Informal economies in many poor countries are highly exploitive. A global company can improve a country’s standard of living while earning a reasonable ROI.