Global Marketing Chapter 2 & 3 The Global Economic Environment Global Marketing Chapter 2 & 3

The World Economy— An Overview In the early 20th century economic integration was at 10%; today it is 50% Integration is particularly striking in the two regions EU and NAFTA. Global competitors have displaced or absorbed local ones Fifty years ago, the auto industry was very different. European automakers like Renault, Citroen, Peugeot, Morris, Volvo and others produced vehicles radically different from those of American makers like Chevrolet, Ford or Plymouth or Japanese autos made by Toyota or Nissan. Today, manufacturers make autos for for home markets but are increasing global companies with global products.

The World Economy— An Overview The new realities: Capital movements have replaced trade as the driving force of the world economy. Production has become uncoupled from employment. Gross domestic product (GDP) , a measure of a nation’s economic activity, is calculated by adding consumer spending (C), investment spending, (I), government purchases, (G), and net exports (NX): C+I+G+NX = GDP The world economy, not individual countries, is the dominating factor. The first change is the increased volume of capital movements. The dollar value of world trade in merchandise is running at roughly $11 trillion per year. However, the London foreign exchange market turns over $450 billion each working day; overall, foreign exchange transactions are running at approximately $1.5 trillion per day worldwide—far surpassing the dollar volume of world trade in goods and services. The second change is the relationship between manufacturing and productivity. Manufacturing is not in decline but employment in manufacturing is declining due to gains in productivity. In 1971, 26% of U.S. workers were employed in manufacturing; 13% in 2001. Manufacturing share of GDP declined from 19.25 in 1989 to 16.1% in 1999. The third change is the emergence of the world economy as the dominant economic unit. The real secret of economic success of Japan and Germany is that business leaders and policy makers focus on their countries’ competitive positions in world markets. This change has brought two questions to the fore: How does the global economy work, and who is in charge? Unfortunately, the answers to these questions are not clear cut.

The World Economy— An Overview The new realities, continued: 75-year struggle between capitalism and socialism has almost ended E-Commerce diminishes the importance of national barriers and forces companies to re-evaluate business models The fourth change is the end of the Cold War. The demise of communism as an economic and political system can be explained in a straightforward manner: Communism is not an effective economic system. The overwhelmingly superior performance of the world’s market economies has given leaders in socialist countries little choice but to renounce their ideology and introduce democratic reform. The fifth change relates to e-commerce. The PC and the internet have, in some ways, diminished the importance of national boundaries. 2/3s of American households have PCs. There are 600 million computers used worldwide. Finally, the personal computer revolution and the advent of the Internet era have in some ways diminished the importance of national boundaries. In the so-called Information Age, barriers of time and place have been subverted by a transnational cyber-world that functions “24/7.” amazon.com, eBay, Google, MySpace and YouTube are examples of companies in this arena.

Economic System Criteria used to categorize economic system 1- Type of economy: Industrial state, emerging economy, transition economy, developing nation. 2- Type of government: Monarchy, dictatorship, or a tyrant, autocratic one-party system, democracy with a multi-party system, dominated by other state, unstable or terrorist nation. 3- Trade and capital flows 4- The commanding height 5- Services provided by the state and funded through taxes. 6- Institutions 7- Markets

Economic Systems Resource Allocation Resource Ownership Market Command Private Resource Ownership State Centrally Planned Capitalism Market Capitalism Market Socialism Centrally Planned Socialism

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 U.S “wild free for all”. Japan as Japan Inc. Market capitalism is practiced around the world, most notably in Western Europe and North America. All market-oriented economies do not function in an identical manner. The U.S. is characterized by its competitive “free-for-all” and decentralized initiative. Japan is sometimes called “Japan, Inc.” because it has a tightly run, highly regulated economic system that is also market oriented.

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 economic freedom Marxism is a vanquished economic system. For decades China, the Former Soviet Union, and India used this economic system. All of these countries now have economic reforms that have some degree of market allocation and private ownership.

Centrally Planned Capitalism & Market socialism CPC 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 permits market allocation policies within an overall environment of state ownership (e.g., China gives freedom to businesses/individuals to operate in a market system). In Sweden, where 2/3s of all expenditures are controlled by the government, resource allocation is more “command” oriented that “market” oriented. Sweden’s “welfare state” has a hybrid system that has elements of both centrally planned socialism and capitalism. Swedish gov’t ownership: TeliaSonera, telecom, 45%; SAS airline, 21%; Vin & Spirit alcohol was 100% government owned until it was sold to France’s Pernod Ricard in 2008. China’s Guangdong Province operates within a market system. China’s private sector accounts for 75% of total national output. Cuba and North Korea are the last countries to use command allocation approach.

GATT General Agreement on Tariffs and Trade Treaty among nations to promote trade among members established in 1947 Handled trade disputes Lacked enforcement power Replaced by World Trade Organization in 1995

The World Trade Organization Forum for trade-related negotiations among 150 members Based in Geneva Serves as dispute mediator through DSB Has enforcement power and can impose sanctions The website for the WTO is www.wto.org The Dispute Settlement Body of neutral staff members mediates unfair trade barriers and other issues. For 60 days, parties are expected to negotiate in good faith. After that, the DSB will appoint a three member panel of trade experts to hear the case behind closed doors. The panel must rule in nine months. The losing party has the right to turn to a seven-member appellate body. If, after due process, a country’s policies are found to violate WTO rules, it is expected to change those policies. If it does not, trade sanctions may be imposed. Trade ministers meet annually to work on improving world trade. The Doha Round began in 2001, collapsed in 2005 and has not been restarted as of Sept. 2007. 11

Preferential Trade Agreements Many countries seek to lower barriers to trade within their regions PTAs give partners special treatment and may discriminate against others Over 150 PTAs have been notified to the WTO It is customary to notify the WTO when countries enter into PTAs. Strictly speaking, few fully conform to WTO requirements; none, however, has been disallowed. 12

Free Trade Area Two or more countries agree to abolish tariffs and other barriers to trade amongst themselves Countries continue independent trade policies with countries outside agreement Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another Sometimes duties may be eliminated on the day of the agreement or phased out over time. Chile and Canada established a FTA in 1997. A Caterpillar tractor made in Canada could be shipped to Chile duty free. A U.S. made tractor could not be shipped through Canada to Chile because the Made in the USA label would subject it to about $13,000 in duties. Little wonder that the U.S. negotiated its own agreement with Chile that came into effect in 2003. Other FTAs: European Economic Union—the EU plus Norway, Liechtenstein, and Iceland The Group of Three (G3)—Colombia, Mexico, and Venezuela The Closer Economic Partnership Agreement—China and Hong Kong NAFTA Protest in Ottawa 13

Customs Union Evolution of Free Trade Area Includes the elimination of internal barriers to trade (as in FTA) AND establishes common external barriers to trade Examples: The EU and Turkey, the Andean Community, Mercosur, CARICOM, Central American Integration System (SICA) The EU’s and Turkey’s agreement eliminated tariffs averaging 14% that added $1.5 billion/year to the cost of European goods imported into Turkey. 14

Common Market Includes the elimination of internal barriers to trade (as in free trade area) AND establishes common external barriers to trade (as in customs union) AND allows for the free movement of factors of production, such as labor, capital, and information Current Central and South American customs unions may evolve into common markets. 15

Economic Union Includes the elimination of internal barriers to trade (as in free trade area) AND establishes common external barriers to trade (as in customs union) AND allows for the free movement of factors of production, such as labor, capital, and information (as in common market) AND coordinates and harmonizes economic and social policy within the union In the European Union, countries must harmonize their licensing standards so that professionals such as doctors or lawyers qualified in one country may work in another. Harmonization is an important concept to be stressed. 16

Economic Union Full evolution of economic union European Union Flag Full evolution of economic union creation of unified central bank use of single currency common policies on issues such as agriculture, social policy, transport, competition, mergers, taxation requires extensive political unity would lead to a central government in time The EU has not ratified the European Constitution. It was approved by 16 countries but derailed after voters in France and the Netherlands vetoed it. 17

North America—NAFTA Canada, United States, Mexico NAFTA established free trade area All three nations pledge to promote economic growth through tariff reductions and expanded trade and investment No common external tariffs Restrictions on labor and other movements remain The U.S. is home to more global industry leaders than any other nation and dominates in the computer, software, aerospace, entertainment, medical equipment, and jet engine industries. The agreement does leave the door open for discretionary protectionism. California avocado growers won government protection for a $250 million market. Mexican avocado growers can only ship during the winter and only to the northeast U.S. and are subject to a $30 million quota. Mexico imposed tariffs on chicken leg quarters and on red and golden apples. The U.S. and Canada formed the Canada-U.S. Free Trade Area in 1989. The $400 billion of goods traded each year is the biggest trading relationship between any two countries. In 1994, the U.S., Canada, and Mexico began trading under NAFTA. The NAFTA represents a combined population of roughly 430 million and a total GNI of almost $14 trillion. U.S.-Mexico Border Crossing 18

NAFTA Income and Population

What are the most important trading arrangements in Latin America? Important trading arrangements include: Central American Integration System (SICA) Andean Community The Common Market of the South (Mercosur) The Caribbean Community and Common Market (CARICOM).

Asia-Pacific: The Association of Southeast Asian Nations (ASEAN) The Association of Southeast Asian Nations (ASEAN) was established in 1967 as an organization for economic, political, social, and cultural cooperation among its member countries. 21

The European Union (EU) Initially began with the 1958 Treaty of Rome Objective is to harmonize national laws and regulations so that goods, services, people, and money could flow freely across national boundaries 1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the Euro)

European Union 27 countries 491 million people Combined GNI of $14.7 trillion Euro currency, 1999 Harmonization of laws and regulations

Marketing Issues in EU Marketing mix issues must be addressed in Europe's single market (e.g., content and other product standards that varied among nations must be harmonized). Harmonization means that content and other product standards that varied among nations have been brought into alignment. Direct comparability of prices in the euro zone forces companies to review pricing policies; the marketing challenge is to develop strategies to take advantage of a large, wealthy market. The enlargement of the EU will further impact marketing strategies and harmonized laws; food safety laws in the EU are different form those in Central European countries.

Marketing Issues in EU (Cont’d) Because they are in transition, the markets of Central and Eastern Europe present interesting opportunities and challenges. Global companies view the region as an important new source of growth, and the first country to penetrate a country market often emerges as an industry leader.

The Middle East Afghanistan, Bahrain, Cyprus, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, Yemen Primarily Arab, some Persian and Jews 95% Muslim, 5% Christian and Jewish 34.7 million people, 24 million in Saudi Arabia 25% of world’s oil in Saudi Arabia Strong impact of world economic crisis on Dubai Countries fall into all categories of economic freedom as discussed in Chapter 2. The price of oil drives business. Bahrain, Iraq, Iran, Kuwait, Oman, Qatar, and Saudi Arabia hold significant world oil reserves. Saudi Arabia, with 22 million people and 25% of the world’s oil, is the most important market in the region. Connection is a key word in conducting business in the Middle East. Forming relationships, establishing trust, and respect are key. Arab businesspeople do business in person, not over the phone or through correspondence. Women are not usually part of a business or social scene for traditional Arabs. 26

Gulf Cooperation Council Established in 1981 by 6 countries with 45% of world’s oil These countries are attempting to diversify industries

Marketing Issues in Middle East Connection is a key word in conducting business in the Middle East; developing relationships with key business and government figures are likely to cut through red tape. Bargaining is culturally ingrained, and business people should be prepared for haggling; establishing personal trust, mutual trust, and respect are essential. Decisions are not made by correspondence or telephone. The Arab businessperson does business with the individual, not the company. Women are not part of the business or entertainment scene for traditional Muslim Arabs.

Africa 54 nations over three distinct areas Republic of South Africa North Africa Black Africa or sub-Saharan Africa With 1.3 percent of the world's wealth and 11.5 percent of its population, Africa is a developing region with an average per capita income of less than $600. The Arabs living in North Africa are differentiated politically and economically. The six northern nations are richer and more developed, and several—notably Libya, Algeria, and Egypt— benefit from large oil resources. 11.7 million sq. miles, or 3 ½ times the size of the U.S. 1.3% of world’s wealth 11.5% of world’s population Average per capita income of less than $600 Arabs of northern Africa are politically and economically differentiated from the rest of the continent. Libya, Algeria, and Egypt benefit from oil resources. 29

For what does the acronym “Mena” stand? The Middle East and North Africa are viewed as a regional entity “Mena”; the economies of non-oil, “emerging Mena” (Jordan, Lebanon, Morocco, Tunisia) have performed best.

Regional agreements (Africa) Economic Community of West African States (ECOWAS). East African Cooperation. South African Development Community (SADC).