8 Economic and Socioeconomic Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. This chapter covers: The purpose of economic analysis Economic and socio- economic dimensions Consumption patterns and purchasing power Labor costs The significance of foreign debt Birthrate trends and its implications Indicative plans

Chapter Objectives  Understand the purpose of economic analysis  Recognize the economic and socioeconomic dimensions of the economy  Understand the importance of a nation’s consumption patterns and the significance of purchasing power parity  Understand the degree to which labor costs can vary from country to country  Understand the significance for businesspeople of the large foreign debts of some nations  Ascertain the reasons for the worldwide downward trend in birthrates and its implications for businesspeople 8-2

International Economic Analyses  Economic Analysis  When a firm enters overseas markets, economic analyses become more complex  Should provide data on both actual and prospective markets 8-3

International Economic Analysis  Sources for Economic Information  Reports from central or international banks  American chambers of commerce  Commercial officers in U.S. embassies  The United Nations and the World Bank  The International Monetary Fund  The Organization for Economic Cooperation and Development 8-4

Dimensions of the Economy  Important Economic Indicators  Gross National Product  Distribution of income  Private consumption expenditures  Personal ownership of goods  Private investment  Unit labor costs  Exchange rates  Inflation rates  Interest rates 8-5

Dimensions of the Economy Gross Domestic Product (GDP) Or Gross National Income (GNI) The total of all goods and services produced in a country in a given year, including production by foreign firms within a country’s borders 8-6 In order to compare the purchasing power of nations managers need to know among how many people GDP is divided GDP Or GNI/Capita Generally the higher the value, the more advanced the economy.

Dimensions of the Economy  Income Distribution  A measure of how a nation’s income is apportioned among its people  Data gathered by the World Bank  Published yearly in the World Development Indicators  Income is more evenly distributed in richer nations  Income redistribution proceeds very slowly  Income inequality increases in early stages of development but reverses in later stages 8-7

Dimensions of the Economy  Private Consumption  Disposable income  After-tax personal income  Discretionary income  Disposable income less essential purchases  Data available from UN and World Bank 8-8

Dimensions of the Economy  Unit labor costs  Total direct labor costs divided by units produced.  Countries with slower-rising unit labor costs attract management’s attention. 8-9 Reasons for relative changes in labor costs Compensation Productivity Exchange rates International firms must keep a close watch on labor rates around the world

Dimensions of the Economy Example of how large foreign debts affect an international firm If a large part of the foreign exchange a nation earns cannot be used to import components used in local products, then Local industries must manufacture the part or companies that import the part must stop production in the home country

Socioeconomic Dimensions Total Population Most general indicator of potential market size First characteristic of the population that analysts examine Population size, used alone, is not a good indicator of economic strength and market potential 8-11

Socioeconomic Dimensions Total Population and GNP Where GNP increases faster than the population Probably an expanding market. Where population increases faster than GNP Possible market contraction. This situation may suggest a potential area of political unrest may be present. Example is Egypt

Socioeconomic Dimensions Age Distribution Generally, because of high birth and fertility rates Developing countries have more youthful populations than do industrial countries Birthrates are decreasing worldwide Population of developing countries account for over three-quarters of the world’s population 8-13

Population Growth Figure

Forces Reducing Birthrates Government supported family planning programs Improved levels of health, education and status for women More even distribution of income Greater degree of urbanization 8-15

Socioeconomic Dimensions Concern in Developed Nations Declining birthrates are causing concern in the governments of industrialized nations. An increasing number of young Europeans are not marrying. Those who are marrying, do so later and are having fewer children. By the year 2025, the present 9 percent unemployment rate in the EU will be replaced by a shortage of workers. 8-16

Socioeconomic Dimensions Concern in Developed Nations (Japan) By 2025, Japan’s population age 65 and older will make up 26.8 percent of its total population. This proportion compares to 18.5 percent of this age group in the U.S. By the year 2025, Japan will have twice as many old people as it has children. 8-17

Socioeconomic Dimensions Population Density A measure of the number of inhabitants per area unit. Densely populated countries tend to make product distribution and communications simpler. Less costly than less densely populated countries 8-18 Population Distribution A measure of how the inhabitants are distributed over a nation’s area. Changing population distribution Rural-to-urban shift as people move to cities in search of higher wages and more conveniences.

Rural-to-Urban Shift Table

Socioeconomic Dimensions Increase in the number of working women May require marketers to alter the promotional mix. Results in larger family incomes. Results in a greater market for convenience goods. 8-20

United States R&D % of GDP 8-23

Consumption Groups in Hungary 8-24

Georgia State Average Annual Pay 8-25

10 Places With the Lowest Birth Rates Worldwide Average number of children per woman, Source: United Nations, World Population Prospects: The 2002 Revision (medium scenario),