1. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 1 Global Marketing Management Masaaki Kotabe & Kristiaan Helsen Second Edition John Wiley & Sons, Inc., 2001

2. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 2 Chapter 2 Global Economic Environment

3. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 3 Chapter Overview 1. Intertwined World Economy 2. Country Competitiveness 3. Evolution of Cooperative Global Trade Agreements 4. U.S. Position in Foreign Direct Investment and Trade 5. Information Technology and the Changing Nature of Competition

4. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 4 Chapter Overview (contd.) 6. Regional Economic Arrangements 7. Multinational Corporations

5. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 5 In 1998, the annual global trade in goods and services reached $11 billion. In 1998, the annual global trade in goods and services reached $11 billion. Since 1950, global trade has expanded seventeenfold. Since 1950, global trade has expanded seventeenfold. According to Standard & Poor’s DRI, world exports of goods and services will reach $11.4 trillion by 2005 (28% of world GDP). According to Standard & Poor’s DRI, world exports of goods and services will reach $11.4 trillion by 2005 (28% of world GDP). Net Result of globalization: increased interdependence, increased competitiveness and more internationalization. Net Result of globalization: increased interdependence, increased competitiveness and more internationalization. Introduction

6. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 6 1. Intertwined World Economy Despite the increasingly intertwined world economy, the United States is still relatively more insulated from the global economy than other nations. Despite the increasingly intertwined world economy, the United States is still relatively more insulated from the global economy than other nations. Over the next two decades, the big emerging markets (BEMs) will hold the greatest potential for U.S. exports. Over the next two decades, the big emerging markets (BEMs) will hold the greatest potential for U.S. exports. The larger the country’s domestic economy, the less dependent it tends to be on exports and imports relative to its GDP. The larger the country’s domestic economy, the less dependent it tends to be on exports and imports relative to its GDP.

7. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 7 1. Intertwined World Economy (contd.) Intertwining of economies by the process of specialization due to international trade leads to job creation in both the exporting and importing country. Intertwining of economies by the process of specialization due to international trade leads to job creation in both the exporting and importing country. Foreign direct investment (FDI) involves investment in manufacturing and service facilities in a foreign country. Foreign direct investment (FDI) involves investment in manufacturing and service facilities in a foreign country. Portfolio investment or indirect investment refers to investments in foreign countries that are withdrawable at short notice, such as investments in foreign stocks and bonds. Portfolio investment or indirect investment refers to investments in foreign countries that are withdrawable at short notice, such as investments in foreign stocks and bonds.

8. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 8 1. Intertwined World Economy (contd.) The weekly volume of international trade in currencies exceeds the annual value of the trade in goods and services. The weekly volume of international trade in currencies exceeds the annual value of the trade in goods and services. All nations with even partially convertible currencies are exposed to the fluctuations in the currency markets. All nations with even partially convertible currencies are exposed to the fluctuations in the currency markets.

9. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 9 2. Country Competitiveness Country competitiveness refers to the productiveness of a country, which is represented by its firms’ domestic and international productive capacity. Country competitiveness refers to the productiveness of a country, which is represented by its firms’ domestic and international productive capacity. Country competitiveness is not a fixed thing. Country competitiveness is not a fixed thing. The role of human skill resources has become increasingly important as a primary determinant of industry and country competitiveness. The role of human skill resources has become increasingly important as a primary determinant of industry and country competitiveness.

10. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 10 2. Country Competitiveness (contd.) The Institute of Industrial Policy Studies’ 1999 country competitiveness report placed Asian Tigers (Singapore, Taiwan, Korea, and Hong Kong) and Indonesia, Thailand, and Malaysia among the world’s top ten economies (along with Japan, the United States, and Australia) in terms of human resources (see Exhibit 2-3). The Institute of Industrial Policy Studies’ 1999 country competitiveness report placed Asian Tigers (Singapore, Taiwan, Korea, and Hong Kong) and Indonesia, Thailand, and Malaysia among the world’s top ten economies (along with Japan, the United States, and Australia) in terms of human resources (see Exhibit 2-3). Although the United States and Switzerland have been the most innovative in the last three decades, other OECD countries have been catching up. Although the United States and Switzerland have been the most innovative in the last three decades, other OECD countries have been catching up.

11. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 11 3. Evolution of Cooperative Global Trade Agreements ITO (International Trade Organization): ITO (International Trade Organization): –ITO was established after World War II. GATT (General Agreements on Tariffs & Trade): GATT (General Agreements on Tariffs & Trade): –After 1950, GATT succeeded ITO. –The main operating principle of GATT was the concept of most favored nations (MFN). –GATT was successful in lowering trade barriers.

12. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 12 3. Evolution of Cooperative Global Trade Agreements (contd.) WTO (World Trade Organization Trade): WTO (World Trade Organization Trade): –The eighth and last round of GATT talks – called the “Uruguay Round” (1986-1994) established an international body called the WTO which took effect on January 1, 1995. –In 1999, the WTO had 135 members. –WTO has statutory powers to adjudicate trade disputes among nations and has its own secretariat. –WTO is the new legal and institutional foundation for a multilateral trading system.

13. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 13 3. Evolution of Cooperative Global Trade Agreements (contd.) Although WTO is a global institutional proponent of free trade, it is not without critics. Although WTO is a global institutional proponent of free trade, it is not without critics. The WTO Work Program on Electronic Commerce is in the process of defining the trade-related aspects of electronic commerce that would fall under the parameters of WTO mandates. The WTO Work Program on Electronic Commerce is in the process of defining the trade-related aspects of electronic commerce that would fall under the parameters of WTO mandates.

14. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 14 4. U.S. Position in Foreign Direct Investment and Trade The United States has been a significant overseas investor since 1945. The United States has been a significant overseas investor since 1945. The first wave of major investment was part of the Marshall Plan in the 1950s. The first wave of major investment was part of the Marshall Plan in the 1950s. Most U.S. investment abroad has been concentrated in Europe. Most U.S. investment abroad has been concentrated in Europe. In 1998, U.S. firms invested $118 billion overseas. In 1998, U.S. firms invested $118 billion overseas. Firms based in Britain and the Netherlands have been the largest investors in the United States. Firms based in Britain and the Netherlands have been the largest investors in the United States.

15. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 15 4. U.S. Position in Foreign Direct Investment and Trade (contd.) In the last decade, Japanese firms have increased their direct investment position rapidly and now are the second largest investor in the United States. In the last decade, Japanese firms have increased their direct investment position rapidly and now are the second largest investor in the United States. Regarding the balance of payments (BOP), the United States has run a persistent deficit on the current account since the first oil shock in 1973. Regarding the balance of payments (BOP), the United States has run a persistent deficit on the current account since the first oil shock in 1973. There is increasing concern that the conventional measures of the deficit may not accurately reflect a country’s transactions with the rest of the world. There is increasing concern that the conventional measures of the deficit may not accurately reflect a country’s transactions with the rest of the world.

16. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 16 5. Information Technology and The Changing Nature of Competition Information technology and the changing nature of competition have created many challenges for the firms. Information technology and the changing nature of competition have created many challenges for the firms. Over the Internet, any piece of electronically represented intellectual property can be copied. Over the Internet, any piece of electronically represented intellectual property can be copied. The Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement was concluded as part of the GATT Uruguay Round. The Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement was concluded as part of the GATT Uruguay Round. Countries’ regulators have not kept pace with the rapid proliferation of international e-commerce and Internet-related activities. Countries’ regulators have not kept pace with the rapid proliferation of international e-commerce and Internet-related activities.

17. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 17 6. Regional Economic Arrangements An evolving trend in international economic activity is the formation of multinational trading blocs. An evolving trend in international economic activity is the formation of multinational trading blocs. Market groups take many forms, depending on the degree of cooperation and inter-relationships, which lead to different levels of integration among the participating countries. Market groups take many forms, depending on the degree of cooperation and inter-relationships, which lead to different levels of integration among the participating countries. Types of Regional Economic Arrangements: Types of Regional Economic Arrangements: –Free Trade Areas: Formal agreement among two or more countries to reduce or eliminate customs duties and nontariff barriers.

18. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 18 6. Regional Economic Arrangements (contd.) –Customs Union: Addition of common external tariffs to the provisions of free trade agreements. –Common Market: Elimination of all tariffs and other barriers, adopts a common set of external tariffs on nonmembers, and removal of all restrictions on the flow of capital and labor among member nations. –Monetary Union: Represents the fourth level of integration with a single currency among politically independent countries.

19. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 19 6. Regional Economic Arrangements (contd.) –Political Union: Highest level of integration resulting into a political union. Sometimes, countries come together in a loose political union for historical reasons, as in the case of British Commonwealth which exists as a forum for discussion and common historical ties.

20. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 20 7. Multinational Corporations The U.S. government defines the multinational corporations (MNCs) for statistical purposes as a company that owns or controls 10 percent or more of the voting securities, or the equivalent, of at least one foreign business enterprise. The U.S. government defines the multinational corporations (MNCs) for statistical purposes as a company that owns or controls 10 percent or more of the voting securities, or the equivalent, of at least one foreign business enterprise. At present, there are 40,000 MNCs with 250,000 affiliates in foreign countries. At present, there are 40,000 MNCs with 250,000 affiliates in foreign countries. One third of multinational companies’ trade is accounted for by intra-firm activities. One third of multinational companies’ trade is accounted for by intra-firm activities.

21. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 21 7. Multinational Corporations (contd.) Two-thirds of of world trade in goods and services is controlled by multinational companies. Two-thirds of of world trade in goods and services is controlled by multinational companies. The UNCTAD report indicates that the hundred largest multinationals alone account for more than $2 trillion in sales around the world and employ six million people. The UNCTAD report indicates that the hundred largest multinationals alone account for more than $2 trillion in sales around the world and employ six million people. The sovereignty of nations will perhaps continue to weaken due to multinationals and the increasing integration of economies. The sovereignty of nations will perhaps continue to weaken due to multinationals and the increasing integration of economies.

22. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 22 7. Multinational Corporations (contd.) In 1970, of the 7,000 multinationals identified by the United Nations, more than half were from two countries: the United States and Britain. In 1970, of the 7,000 multinationals identified by the United Nations, more than half were from two countries: the United States and Britain. By 1995, less than half of the 36,000 multinationals identified by the United Nations came from four countries: the United States, Japan, Germany, and Switzerland. By 1995, less than half of the 36,000 multinationals identified by the United Nations came from four countries: the United States, Japan, Germany, and Switzerland. The nation-state, while considerably weaker than its nineteenth century counterpart, is likely to remain alive and well. The nation-state, while considerably weaker than its nineteenth century counterpart, is likely to remain alive and well.

23. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 23 7. Multinational Corporations (contd.) Currently, factors such as movements, capital surpluses, faster growth rates, and falling trade and investment barriers have all helped multinationals from other countries join the cross-border fray. Currently, factors such as movements, capital surpluses, faster growth rates, and falling trade and investment barriers have all helped multinationals from other countries join the cross-border fray.

24. Chapter 2Kotabe & Helsen's Global Marketing Management, Second Edition 24 Copyright © John Wiley & Sons, Inc., 2001