1. International Business Environments & Operations
Daniels ● Radebaugh ● Sullivan
International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan
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2. The Economic Environments Facing Businesses
Chapter 4
The Economic Environments Facing Businesses
Chapter 4: The Economic Environments Facing Business
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Learning Objectives
Communicate the importance of economic analysis
Discuss the idea of economic freedom
Profile the characteristics of the types of economic systems
Introduce the notion of state capitalism
Profile leading indicators of economic development, performance, and potential
The learning objectives for this chapter are
To communicate the importance of economic analysis
To discuss the idea of economic freedom
To profile the characteristics of the types of economic systems
To introduce the notion of state capitalism
To profile indicators of economic development, performance, and potential
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Introduction
Managers assess a country’s economic environment knowing
Countries differ in different ways
Economic and political changes alter market circumstances
It is important to understand connections, change, and consequences
The challenges of the comeback
Choices of citizens, policymakers, and institutions
Managers study economic environments to estimate how market trends and government policy influence the performance of their companies. A country’s economic policies are a leading indicator of a government’s goals and its planned use of economic tools and market reforms. Managers should study a country’s economic environment to assess its development, explain its performance, and estimate its potential. Managers do this knowing countries differ in different ways, economic and political changes alter market circumstances, that it’s critical to make connections between events and predict the consequences of changes, the challenges of the comeback, and choices of citizens, policymakers, and institutions.
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5. International Economic Analysis
A universal assessment of economic environments is difficult because of:
System Complexity
Identifying proper indicators is difficult
Market Dynamism
New economic circumstances
Market Interdependence
Markets influence each other
Data Overload
Complicates decision-making
Determining which countries warrant investment is not easy. It’s very difficult to assess the potential of a country because any type of assessment relies on behavioral assumptions as well as more scientific principles.
There are some 208 discrete economic environments in the world today. Managers need to narrow them down and identify exactly which countries offer the greatest potential return for the least risk.
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Economic Freedom
Economic freedom – people have the right to work, produce, consume, save, and invest the way they prefer
measured across business freedom, monetary freedom, fiscal freedom, investment freedom, freedom from corruption, property rights, trade freedom, government size, financial freedom, and labor freedom
So, it’s important for managers to monitor a range of economic issues, but perhaps most important is an assessment of economic freedom, or what a manager has the freedom to do. Economic freedom reflects the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty.
In some countries these freedoms are taken for granted, while in others they are rare.
Economic freedom advanced in As you might expect, it tends to be higher in Western countries and lower in Eastern countries.
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7. Economic Freedom Economic Freedom by Region, with Population
This Figure shows economic freedom by region. Notice that most people in the world live in countries with lower degrees of economic freedom.
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8. Global Distribution of Economic Freedom
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9. Economic Freedom: Value and Trend
Economic freedom affects: Growth rates, Productivity, Income levels, Inflation, Employment, Life expectancy, Literacy, Political openness, Environmental sustainability
The trend toward increased economic freedom is no longer certain
The legitimacy of free markets has been questioned
The benefits of more state control
Why is economic freedom important? Countries with economic freedom typically have higher per capita income, standards of living, and social stability as compared to less free countries.
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Standard of Living
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11. Types of Economic Systems
An economic system refers to the mechanism that deals with the production, distribution, and consumption of goods and services
Types
Market Economy: a free-market (capitalistic) economy built upon the private ownership and control of the factors of production
Command Economy: a centrally-planned economy built upon government ownership and control of the factors of production
Mixed Economy: an economy in which economic decisions are largely market-driven and ownership is largely private, but significant government intervention is still evident
Managers can explore a country’s economic system to understand how the host government regulates the economy, protects property rights, sets fiscal and monetary policies, and enforces antitrust regulation.
There are three main types of economic systems: market, command, and mixed economies.
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12. Evaluating Market, Mixed and Command Economy
Criteria
Market
Mixed
Command
Degree of economic freedom
Ownership of means of production
Role of price in the system
Role of government
Trade and investment policy
Fiscal and monetary policy

13. Types of Economic Systems
This Figure shows the different types of economic systems.
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14. Economic Development, Performance, and Potential
Broad classes of countries include
developing countries
largest number of countries
low per capita income
emerging economies
fast growing, relatively prosperous
BRICS – Brazil, Russia, India, China and South Africa
developed countries
high per capita income and standard of living
like the U.S., Japan, France, Australia
Managers need to assess a country’s level of economic development, performance, and potential. Countries can be classified as developing countries, emerging economies, and developed countries.
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15. The Rise of the Emerging Nations
Emerging Nations are the center of most economic discussions today
Who are these nations? What is their impact in a globalized world?
Impact of Emerging Markets
See my presentation under Teaching Aids
BRICS and plus nations

16. Measures of Economic Performance
Gross national income (GNI)
the broadest measure of economic activity for a country
Gross national product (GNP)
the total value of all final goods and services produced within a nation in a particular year
Gross domestic product (GDP)
the total market value of goods and services produced by workers and capital within a nation’s borders
One way managers can assess markets is by looking at gross national income or GNI which measures the value of all production in the domestic economy together with the income the country receives from other countries, less similar payments it has made to other countries.
Managers can also look at gross national product or GNP. Conceptually, world GNI and world GNP are the same.
Gross domestic product or GDP allows managers to assess countries in which the output of multinationals represents a significant share of activity.
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Improving Analysis
GNI data should be adjusted for
the growth rate of the economy
the number of people in a country
the local cost of living
It’s important to be careful when using GNI data because it can be misleading. To improve the usefulness of GNI managers should adjust for the growth rate of the economy, the number of people in a country, and the local cost of living.
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GNI Data
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A Divided World
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GNI per Capita, 2011
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21. GNI Per Capita, 2011, Adjusted for Purchasing Parity
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22. National Performance and Potential: Broader Concepts
GNI data should be adjusted for
the growth rate of the economy
the number of people in a country
the local cost of living
Green economics: gauge economic performance in terms of the effect of current choices on long-term sustainability
Sustainable development: meet the needs of the present without compromising the ability of future generations to meet their own needs
Happynomics: importance of emotional prosperity in addition to financial prosperity
In addition to looking at GNI, GNP, and GDP, managers also need to consider sustainability and stability.
Green economics allows managers to consider the social and ecological costs of their decisions. The goal should be to create an enabling environment for people to enjoy long, healthy, and happy lives.
There is growing criticism of traditional GNI figures as a measure of performance. Research shows that people in rich countries are not significantly happier than people in poor countries. Happynomics focuses on the importance of emotional happiness as a measure of a country’s performance and potential.
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23. Purchasing Power Parity
PPP is the number of units of a country’s currency required to buy the same amounts of goods and services in the domestic market that $1 would buy in the United States.
The relative price index makes the difference. Example: The price of tomato in USA and India is $2.00 and $0.20 respectively. If an Indian earns $3000 per year, how much an American will have to earn to buy the same amount of tomato?
As we evaluate an economy, the purchasing power parity should also be taken into consideration

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Economic Analysis
Managers should also consider
Inflation
Unemployment
Debt
Income distribution
Poverty
Balance of payments
Managers can also study other features of an economy including inflation, unemployment, debt, income distribution, poverty, and its balance of payments.
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25. The Balance of Payments
Reports the total of all money flowing into a country less all money flowing out of that country to any other country during a given period of time
Records a country’s international transactions amongst companies, governments, and/or individuals
Concept of trade surplus and trade deficit

27. Chapter 4: Discussion Questions
Define “economic freedom” and explain its implication in an economy.
What are the three types of economic systems? What criteria can we use to evaluate them? Explain.
Discuss the impact of “emerging nations” in a globalized world.
Explain how we can evaluate an economy using traditional and nontraditional(broader) measures of economic performance.
Explain the Balance of Payments account of a country with its four subheads. Why is it important to in international business manager? 27

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