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CHAPTER 2 THE GLOBAL ECONOMIC ENVIRONMENT SUMMARY The economic environment is a major determinant of global market potential and

opportunity. In todays global economy, capital movements are the driving force, production is uncoupled from employment, and capitalism has vanquished communism. Based on patterns of resource allocation and ownership, the world s economies can be categori!ed as market capitalism ce!trall"#pla!!e$ capitalism ce!trall"#pla!!e$ s%cialism and market s%cialism& The final years of the twentieth century were marked by transitions toward market capitalism in many countries that had been centrally controlled. "owever, there still e#ists a great disparity among the nations of the world in terms of economic freedom. $ountries can be categori!ed in terms of their stage of economic development% l%' i!c%me l%'er mi$$le i!c%me (pper mi$$le i!c%me and )i*) i!c%me& Gr%ss $%mestic pr%$(ct +G,P- a!$ *r%ss !ati%!al i!c%me +GNI- are commonly used measures of economic development. The &' poorest countries in the low(income category are sometimes referred to as least#$e.el%pe$ c%(!tries +L,Cs-& )pper middle( income countries with high growth are often called !e'l" i!$(striali/i!* ec%!%mies *NIEs+. ,everal of the worlds economies are notable for their fast growth- the BRIC nations include Bra!il, .ussia, India, and $hina. The Gr%(p %0 Se.e! +G1- Gr%(p %0 Ei*)t +G#2- and Or*a!i/ati%! 0%r Ec%!%mic C%%perati%! a!$ ,e.el%pme!t +OEC,- represent efforts by high(income nations to promote democratic ideals and free( market policies throughout the rest of the world. /ost of the world s income is located in the Tria$ which is comprised of 0apan, the )nited ,tates, and 1estern 2urope. $ompanies with global aspirations generally have operations in all three areas. /arket potential for a product can be evaluated by determining pr%$(ct sat(rati%! le.els in light of income levels. 3 countrys 3ala!ce %0 pa"me!ts is a record of its economic transactions with the rest of the world- this record shows whether a country has a tra$e s(rpl(s *value of e#ports e#ceeds value of imports+ or a tra$e $e0icit *value of imports e#ceeds value of e#ports+. Trade figures can be further divided into merc)a!$ise tra$e and ser.ices tra$e accounts- a country can run a surplus in both accounts, a deficit in both accounts, or a combination of the two. The ).,. merchandise trade deficit was 4567 billion in 8''9. "owever, the ).,. enjoys an annual service trade surplus. :verall, however, the )nited ,tates is a debtor- 0apan enjoys an overall trade surplus and serves as a creditor nation. ;oreign e#change provides a means for settling accounts across borders. The dynamics of international finance can have a significant impact on a nations economy as well as the fortunes of individual companies. $urrencies can be subject to $e.al(ati%! or re.al(ati%! as a result of actions taken by a countrys central banker. $urrency trading by international speculators can also lead to devaluation. 1hen a countrys economy is strong or when demand for its goods is high, its currency tends to appreciate in value.
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1hen currency values fluctuate, global firms face various types of economic e#posure. ;irms can manage e#change rate e#posure by )e$*i!*. OVERVIE4 ANNOTATE, LECTURE5OUTLINE THE 4ORL, ECONOMY6 AN OVERVIE4 4)at is t)e m%st 0(!$ame!tal c)a!*e i! t)e '%rl$ ec%!%m" si!ce 44II7

The world economy has changed dramatically since 1orld 1ar II. =erhaps the most fundamental change is the emergence of global markets- responding to new opportunities, global competitors have displaced or absorbed local ones. The integration of the world economy has increased significantly. 2conomic integration was 6' percent at the beginning of the 8'th century- today, it is appro#imately &' percent. I! ')at areas %0 t)e '%rl$ is *l%3al i!te*rati%! m%st striki!*7

Integration is particularly striking in the two regions of the 2uropean )nion *2)+ and the ?orth 3merican ;ree Trade 3rea. ;or e#ample, the worlds largest automakers have, for the most part, evolved into global companies. @uring the past two decades, the world economic environment has become increasingly dynamic- change has been dramatic and far(reaching. To achieve success, e#ecutives and marketers must take into account the following new realities% a+ $apital movements have replaced trade as the driving force of the world economy. Alobal capital movements far e#ceed the dollar volume of global trade. b+ =roductivity has become BuncoupledC from employment. The second change concerns the relationship between productivity and employment. To illustrate this relationship, it is necessary to review some basic macroeconomics. Gr%ss $%mestic pr%$(ct +G,P- , a measure of a nations economic activity, is calculated by adding consumer spending *$+, investment spending, *I+, government purchases,*A+, and net e#ports *?D+% $EIEAE?D F A@= 2conomic growth, as measured by A@=, reflects increases in a nations productivity. a+ The world economy dominates the scene- individual country economies play a subordinate role. b+ The struggle between capitalism and socialism is largely over. The $old 1ar is over- communism is not an effective economic system.

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c+ ;inally, the growth of the personal computer and the advent of the Internet have diminished the importance of national boundaries. ECONOMIC SYSTEMS 4)at are t)e 0%(r mai! t"pes %0 *l%3al ec%!%mic s"stems7

Traditionally, there are four main types of economic systems% market capitalism, centrally planned socialism, centrally planned capitalism, and market socialism. Up%! ')at is t)is classi0icati%! sc)eme 3ase$7

This classification was based on the dominant method of resource allocation *market versus command+ and the dominant form of resource ownership *private versus state+ *see ;igure 8(6+. 3lternatively, more robust descriptive criteria include the following% Type of economy Type of government Trade and capital flows The commanding heights ,ervices provided by the state and funded through ta#es /arkets

Market Capitalism ,e0i!e 8Market Capitalism&9

Market capitalism is an economic system in which individuals and firms allocate resources, and production resources are privately owned. $onsumers decide what goods they desire, and firms decide how much to produce- the states role is to promote competition *see Table 8 (6+. /arket capitalism is practiced worldwide, especially in ?orth 3merica and 1estern 2urope, but all market(oriented economies do not function in the same manner. The ).,. is distinguished by its competitive Bwild free(for(allC and decentrali!ed initiative whereas 0apan is a tightly run, highly regulated economic system that is market oriented. Ce!trall"#Pla!!e$ S%cialism

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4)at is 8Ce!trall"#Pla!!e$ S%cialism97

3t the opposite end of the spectrum is Centrally-planned socialism. Centrally-planned socialism gives the state broad powers to serve the public as it sees fit. ,tate planners make Btop(downC decisions about the goods and services produced and in what quantities- consumers spend money on what is available. Aovernment ownership of industries and individual enterprises is characteristic. @emand e#ceeds supply, and there is little reliance on product differentiation, advertising, or promotion. To eliminate Be#ploitationC by intermediaries, the government controls distribution. Because of market capitalisms superiority, many socialist countries have adopted it- the ideology developed by /ar# and perpetuated by Genin has been resoundingly refuted. ;or decades, the economies of $hina, the former ,oviet )nion, and India functioned according to the tenets of centrally planned socialism. 3ll three countries are now engaged in economic reforms characteri!ed, in varying proportions, by increased reliance on market allocation and private ownership. Ce!trall"#Pla!!e$ Capitalism a!$ Market S%cialism In reality, market capitalism and centrally(planned socialism do not e#ist in BpureC form. $ommand and market resource allocation are practiced simultaneously, as are private and state resource ownership. The role of government in modern market economies varies widely. ,e0i!e 8Ce!trall"#Pla!!e$ Capitalism9 a!$ 8Market S%cialism&9

Ce!trall"#pla!!e$ capitalism is an economic system in which command resource allocation is used e#tensively in an environment of private resource ownership *e.g., ,weden+. Market s%cialism permits market allocation policies within an overall environment of state ownership *e.g., $hina gives freedom to businessesHindividuals to operate in a market system+. /arket reforms and nascent capitalism in many parts of the world are creating opportunities for large(scale investments by global companies. ;or e#ample, $oca($ola returned to India in 677I, two decades after being forced out by the government. 3 new law allowing 6'' percent foreign ownership of enterprises helped pave the way.

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The "eritage ;oundation, a conservative think tank, classifies economies according to the degree of economic freedom enjoyed. The variables considered in compiling the rankings include% trade policy ta#ation policy government consumption of economic output monetary policy capital flows foreign investment banking policy wage and price controls property rights regulations the black market

The rankings form a continuum from BfreeC to Brepressed.C "ong Jong and ,ingapore are ranked first and second in terms of economic freedom- $uba, Gaos, and ?orth Jorea are ranked lowest *see Table 8(>+. STAGES O: ECONOMIC ,EVELOPMENT 3t any point in time, individual country markets are at different stages of economic development. The 1orld Bank has developed a four(category classification system that uses per capita *r%ss !ati%!al i!c%me +GNI- as a base. 3lthough the income definition for each of the stages is arbitrary, countries within a given category generally have a number of characteristics in common. *Table 8(I+. 4)at are t)e BRIC c%(!tries7

Today, global attention is focused on opportunities in Bra!il, .ussia, India and $hina *collectively known as B.I$+. ;or each of the stages of economic development, special attention is given to the B.I$ countries. L%'#I!c%me C%(!tries Gow(income countries have a GNI per capita %0 less t)a! ;<=>& The general characteristics shared by countries at this income level are% limited industriali!ation and a high percentage of the population engaged in agriculture and subsistence farming high birth rates
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low literacy rates heavy reliance on foreign aid political instability and unrest concentration in 3frica south of the ,ahara

3ppro#imately I' percent of the worlds population is included in this group. Typically, these countries provided limited investment opportunities. "owever, there are e#ceptions- for e#ample, in Bangladesh, where per capita A?= is appro#imately 4I&', the garment industry has enjoyed burgeoning e#ports. The newly independent countries of the former ,oviet )nion present an interesting situation% Income is declining, and there is considerable economic hardship. The potential for disruption is, therefore, high. India is the sole low(income county in the B.I$ group. In the 677's India faced high inflation and low foreign e#change reserves. Geaders opened Indias economy to trade and investment and dramatically improved market opportunities. L%'er#Mi$$le#I!c%me C%(!tries ,e0i!e t)e 8least#$e.el%pe$ c%(!tries9

The )nited ?ations designates fifty countries in the bottom ranks of the low(income category as least#$e.el%pe$ c%(!tries +L,Cs-. The term is sometimes used to indicate a contrast with $e.el%pi!* *i.e., upper ranks of low(income plus lower(middle and upper(middle(income+ c%(!tries and $e.el%pe$ *high(income+ c%(!tries& 4)at is t)e i!c%me le.el %0 t)e l%'er#mi$$le#i!c%me c%(!tries7

Gower(middle(income countries are those with a A?I per capita between 47>K and 4>,9'&. $onsumer markets in these countries are e#panding rapidly. $ountries such as $hina and Thailand represent an increasing competitive threat as they mobili!e their relatively cheap labor forces to serve target markets in the rest of the world. The developing countries in the lower(middle(income category have a major competitive advantage in mature, standardi!ed, labor(intensive industries such as making toys and te#tiles.
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4)ic) %0 t)e BRIC !ati%!s are i! t)e l%'er#mi$$le#i!c%me cate*%r"7

C)i!a a!$ Bra/il are t)e BRIC !ati%!s i! t)e l%'er#mi$$le#i!c%me cate*%r"& $hina represents the largest single destination for foreign investment in the developing world. @espite ongoing market reforms, $hinese society does not have democratic foundations. 3lthough $hina has joined the 1orld Trade :rgani!ation, trading partners are still concerned about human rights, protection of intellectual property rights, and other issues. Upper#Mi$$le#I!c%me C%(!tries Upper#Mi$$le#I!c%me c%(!tries are als% k!%'! as ')at7

)pper(middle(income countries, als% k!%'! as i!$(striali/i!* %r $e.el%pi!* c%(!tries are those with A?= per capita ranging from 4>,9'K to 466,I&&. .ussia and Bra!il, with per capita A?I of 4&,99' and 4I,96', respectively, are the tow B.I$ nations that currently fall into the upper(middle(income category. The percentage of population engaged in agriculture has dropped sharply as people move to the industrial sector and the degree of urbani!ation increases. 4)at are NIEs7

)pper(middle(income countries that achieve the highest rates of economic growth are sometimes referred to as !e'l" i!$(striali/i!* ec%!%mies +NIEs-. Marketi!* Opp%rt(!ities i! L,Cs a!$ ,e.el%pi!* C%(!tries @espite many problems in G@$s and developing countries, it is possible to nurture long( term market opportunities. 3lthough ?ike sells only a small portion of its output in $hina, it clearly has the future in mind when it refers to $hina as a Btwo(billion(foot market.C 4)at are t)e 3asic misc%!cepti%!s a3%(t c%(!tries at t)e ?3%tt%m %0 t)e p"rami$@ t)at m(st 3e c%rrecte$7

=rahalad and "ammond have identified several assumptions and misconceptions about the Bbottom of the pyramidC *B:=+ that need to be corrected% Mistaken assumption #1: The poor have no money.

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The aggregate buying power of poor communities can be substantial. In rural Bangladesh, for e#ample, villagers spend considerable sums to use village phones operated by local entrepreneurs. Mistaken assumption #2: The poor are too concerned with fulfilling asic needs to !waste" money on non-essential goods.

$onsumers who are too poor to purchase a house do buy Blu#uryC items such as television sets and gas stoves to improve their lives. Mistaken assumption ##: The goods sold in developing markets are so ine$pensive that there is no room for a new market entrant to make a profit.

In reality, because the poor often pay higher prices for many goods, there is an opportunity for efficient competitors to reali!e attractive margins by offering quality and low prices. Mistaken assumption #%: &eople in '(& markets cannot use advanced technology.

.esidents of rural areas can and do quickly learn to use cell phones, =$s, and similar devices. Mistaken assumption #): *lo al companies that target '(& markets will e critici+ed for e$ploiting the poor.

The informal economies in many poor countries are highly e#ploitative. 3 global company offering basic goods and services that improve a countrys standard of living can earn a reasonable return while benefiting society. :ne of marketings roles in developing countries is to focus resources on the task of creating and delivering products that are best suited to local needs and incomes. /arketing can be the link that relates resources to opportunity and facilitates need satisfaction on the consumer s terms. ,ome believe marketing is relevant only in affluent, industriali!ed countries. T)e ar*(me!t6 In less(developed countries the major problem is the allocation of scarce resources toward obvious production needs. 2fforts should focus on production and how to increase output, not on customer needs and wants. T)e c%!.erse ar*(me!t6 The role of marketing L to identify peoples needs and wants and to focus individual and organi!ational efforts to respond to these needs and wants L is the same in all countries, irrespective of level of economic development.

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1hen global marketers respond to the needs of rural residents in emerging markets such as $hina and India, they are also more likely to gain all(important government support and approval. ;or e#ample, ?estle introduced =ure Gife bottled water in =akistan and the brand has captured &' percent of the market. $oca($ola recently began to address dietary and health needs in low(income countries by developing Mitango, a beverage product that can help fight anemia, blindness, and other ailments related to malnutrition. There is also an opportunity to help developing countries join the Internet economy. 3t the /assachusetts Institute of Technologys /edia Gab, a project called :ne Gaptop per $hild has the goal of developing a laptop computer that governments in developing countries can buy for 46''. Hi*)#I!c%me C%(!tries Hi*)#I!c%me c%(!tries are t)%se c%(!tries 'it) a G,P %0 at least )%' m(c)7

These are advanced, developed, industriali!ed, or postindustrial countries, having a per capita A?= of 466,I&K or higher. They have reached their present income level through sustained economic growth. The phrase Bpostindustrial countriesC describes the )nited ,tates, ,weden, 0apan, and other advanced, high(income societies. :pportunities in a postindustrial society depend on new products and innovations because ownership levels for basic products are high. :rgani!ations face difficulty in e#panding shares in e#isting markets, but they can create new markets. 4)at c%(!tries make (p t)e ?Gr%(p %0 Se.e!@7

3mong high(income countries, the ).,., 0apan, Aermany, ;rance, Britain, $anada, and Italy form the Gr%(p %0 Se.e! *G#1+ to steer the global economy to prosperity and stability. 4)at c%(!tr" 'as a$$e$ t% t)e G#1 t% 0%rm t)e G#27

,tarting in the mid(677's, .ussia began attending the A(9 summit meetings. In 6775, .ussia became a full participant, giving rise to the new Gr%(p %0 Ei*)t +G#2-. 3nother institution of high(income countries is the Or*a!i/ati%! 0%r Ec%!%mic C%%perati%! a!$ ,e.el%pme!t *OEC,+. The >' :2$@ nations believe in market(
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allocation economic systems and pluralistic democracy- the organi!ation has been described as an Beconomic think(tankC and a Brich(mans club.C 2vidence of the increasing importance of the B.I$ group is the fact that $hina, India, Bra!il, and .ussia have all formally announced their intention to join the :2$@. T)e Tria$ 4)at t)ree ec%!%mic ce!ters make (p t)e Tria$7

In his book Triad &ower, :hmae argued that successful global companies had to be equally strong in the dominant economic centers of 0apan, 1estern 2urope, and the )nited ,tates. These three regions, called the Tria$ represented the dominant centers of the world and the location of nearly 9& percent of world income, as measured by A?=. The eApa!$e$ Tria$ includes the entire =acific region, $anada and /e#ico- and the boundary in 2urope is moving eastward. Marketi!* Implicati%!s %0 t)e Sta*es %0 ,e.el%pme!t The stages of economic development can serve as a guide to marketers in evaluating pr%$(ct sat(rati%! le.els, the percentage of potential buyers or households who own a product. In countries with low per capita income, product saturation levels are low *e.g., ownership of telephones in India is only about 8' percent of the population+. In $hina, saturation levels of private motor vehicles and personal computers are very low L only about one car or light truck for every I>,''' people, and one =$ for every K,'''. $ompare this to the 2), with a ratio of >I =$s per 6'' people. BALANCE O: PAYMENTS 4)at is t)e 3ala!ce %0 pa"me!ts7

The 3ala!ce %0 pa"me!ts is a record of all economic transactions between the residents of a country and the world. It is divided into the current and capital accounts. *Table 8(&+. 4)at is t)e c(rre!t acc%(!t7

The c(rre!t acc%(!t is a measure that includes trade in merchandise and services, plus certain categories of financial transfers such as humanitarian aid.
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,e0i!e a tra$e $e0icit& ,e0i!e a tra$e s(rpl(s&

3 country with a negative current account balance has a tra$e $e0icit- that is, the outflow of money to pay for imports e#ceeds the inflows of money for sales of e#ports 3 country with a positive current account balance has a tra$e s(rpl(s. 4)at is t)e capital acc%(!t7

The capital acc%(!t is a record of all long(term direct investment, portfolio investment, and other short( and long(term capital flows. The minus signs indicate outflows of cash, payment for *for e#ample, Table 8(&, line 8 shows an outflow of 46.79 trillion in 8''9, that represents payment for ).,. merchandise imports+. 3 country accumulates reserves when the net of its current and capital account transactions shows a surplus- it gives up reserves when the net shows a deficit. The )nited ,tates regularly posts a deficit in both the current account and the trade balance of goods. 3 close e#amination of Table 8(& reveals that the )nited ,tates regularly posts deficts in both the current account and the trade balance in goods. :verall, the ).,. post balance of payments deficits while important trading partners, such as $hina, have surpluses. *Table 8(K+. TRA,E IN MERCHAN,ISE AN, SERVICES Thanks in part to the achievements of A3TT and the 1T:, world merchandise trade has grown at a faster rate than world production since the end of 1orld 1ar II. 3ccording to figures compiled by the 1orld Trade :rgani!ation, the dollar value of world trade in 8''9 totaled 46>.7 trillion. In 8''>, Aermany surpassed the )nited ,tates as the worlds top merchandise e#porter. 2#ports generate I' percent of Aermanys gross domestic product, and 7 million jobs are e#port related. $hinas third place in the e#port ranking underscores its role as an e#port powerhouse. *Table 8(9+.

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$hinese e#ports to the )nited ,tates have surged since $hina joined the 1orld Trade :rgani!ation in 8''6- in fact, policymakers in 1ashington are pressuring Beijing to boost the value of the yuan in an effort to stem the tide of imports. Table 8(5 provides a different perspective on global trade. The 2uropean )nion is treated as a single entity with import and e#ports that e#clude intra(regional trade among the 8& countries that were 2) members at the end of 8''K. It shows that the 2) is the N6 e#porter and importer of world merchandise in 8''K. The fastest(growing sector of world trade is trade in services. ,ervices include travel and entertainment- education- business services such as engineering, accounting, and legal services- and payments of royalties and license fees. ).,. services e#ports in 8''9 totaled 4&'' billion. This represents more than one(third of total ).,. e#ports. The ).,. services surplus *service e#ports minus imports+ stood at 4667 billion. OVERVIE4 O: INTERNATIONAL :INANCE ;oreign e#change makes it possible for a company in one country to conduct business in other countries with different currencies. 4)at t'% 3asic markets make (p t)e 0%rei*! eAc)a!*e market7

The foreign e#change market consists of a buyers market and a sellers market where currencies are traded for both spot and future delivery on a continuous basis. 4)at is t)e $i00ere!ce 3et'ee! t)e 8sp%t9 market a!$ t)e 80%r'ar$9 market7

The spot market is for immediate delivery- the market for future delivery is called the forward market. 4)% are t)e participa!ts i! t)is market7 6. 3 countrys central bank can buy and sell currencies in the foreign e#change market and government securities in an effort to influence e#change rates. 8. ,ome of the trading in the foreign e#change market takes the form of transactions needed to settle accounts for the global trade in goods and services. *;or e#ample, because =orsche is a Aerman company, the dollars spent on =orsche automobiles by 3merican car buyers must be converted to euros.+ >. $urrency speculators also participate in the foreign e#change market. 4)at is 8$e.al(ati%!97 4)at is 8re.al(ati%!97
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,e.al(ati%! can result from government action that mandates a reduction in the value of the local currency against other currencies. The opposite is re.al(ati%!& In 8''&, the $hinese government responded to pressure from its trading partners by adopting a policy of re.al(ati%! to strengthen the yuan against the dollar and other currencies. 3 stronger yuan would make $hinas e#ports to the )nited ,tates more e#pensive while making ).,. e#ports to $hina less e#pensive. P(rc)asi!* P%'er Parit" Aiven that currencies fluctuate in value, a reasonable question to ask is whether a given currency is over( or undervalued compared with another. 4)at is t)e ?Bi* Mac I!$eA@7

:ne way to answer the question is to compare world prices for a single well(known product% /c@onald s Big /ac hamburger. The so(called BBig /ac Inde#C is a Oquick and dirty way of determining which of the world s currencies are too weak or strong. The underlying assumption is that the price of a Big /ac in any world currency should, after being converted to dollars, equal the price of a Big /ac in the )nited ,tates. 3 countrys currency would be overvalued if the Big /ac price *converted to 4+ is higher than the ).,. price. $onversely, a countrys currency would be undervalued if the converted Big /ac price is lower than the ).,. price. 2conomists use the concept of p(rc)asi!* p%'er parit" +PPP- when adjusting national income data to improve comparability. Ec%!%mic EAp%s(re 4)at is 8ec%!%mic eAp%s(re97

Ec%!%mic eAp%s(re reflects the impact of currency fluctuations on a companys financial performance. 2conomic e#posure can occur when a companys business transactions result in sales or purchases denominated in foreign currencies. Ma!a*i!* EAc)a!*e Rate EAp%s(re ;orecasting e#change rate movements is a major challenge. :ver the years, the search for ways of managing cash flows to eliminate or reduce e#change rate risks has resulted in the development of numerous techniques and financial strategies.

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He$*i!* e#change rate e#posure involves establishing an offsetting currency position such that the loss or gain of one currency position is offset by a corresponding gain or loss in some other currency. External hedging methods for managing both transaction and translation e#posure require companies to participate in the foreign currency market. ,pecific hedging tools include forward contracts and currency options. Internal hedging methods include price adjustment clauses and intra(corporate borrowing or lending in foreign currencies. The 0%r'ar$ market is a mechanism for buying and selling currencies at a preset price for future delivery. In some situations companies are not certain about the future foreign currency cash inflow or outflow. In such an instance, forward contracts are not the appropriate hedging tool. 3 0%rei*! c(rre!c" %pti%! is best for such situations. 4)at is a 8p(t %pti%!79 4)at is a 8call %pti%!79

3 p(t %pti%! gives the buyer the right, not the obligation, to sell a specified number of foreign currency units at a fi#ed price, up to the option s e#piration date. $onversely, a call %pti%! is the right, but not the obligation, to buy the foreign currency. ,ISCUSSION BUESTIONS 6. 2#plain the difference between market capitalism, centrally planned capitalism, centrally planned socialism, and market socialism. Aive an e#ample of a country that illustrates each type of system. Market capitalism is an economic system in which individuals and firms allocate resources and production resources are privately owned. $onsumers decide what goods they desire and firms determine what and how much to produce- the role of the state in market capitalism is to promote competition. /arket capitalism is found in the )nited ,tates. Centrally-planned capitalism is an economic system in which command resource allocation is utili!ed e#tensively in an environment of private resource ownership can be called. $entrally(planned capitalism is found in ,weden, where two(thirds of all e#penditures are controlled by the government. Centrally-planned socialism is an economic system in which the state has broad powers to serve the public interest as it sees fit. ,tate planners make Btop(downC decisions about what goods and services are produced and in what quantitiesII < 8'66 =earson 2ducation, Inc. publishing as =rentice "all

consumers can spend their money on what is available. The government owns industries as well as individual enterprises. $entrally(planned socialism was found in the former ,oviet )nion. Market socialism is an economic system in which market allocation policies are permitted within an overall environment of state ownership. /arket socialism is found in $hina where farmers can offer part of their production in a free market. 8. The seven criteria for describing a nations economy introduced at the beginning of this chapter can be combined in a number of different ways. ;or e#ample, the )nited ,tates can be characteri!ed as follows% Type of economy% 3dvanced industrial state Type of government% @emocracy with a multi(party system Trade and capital flows% Incomplete free trade and part of trading bloc The commanding heights% /i# of state and private ownership ,ervices provided by the state and funded through ta#es% =ensions and education but not health care Institutions% Transparency, standards, corruption is absent, a free press and strong courts /arkets% ;ree market system characteri!ed by high riskHhigh reward entrepreneurial dynamism

)se the seven criteria found on pp. I8(I> to develop a profile of one of the B.I$ nations, or any other country that interests you. 1hat implications does this profile have for marketing opportunities in the countryP ,tudent answers will vary by country chosen. >. 1hy are Bra!il, .ussia, India, and $hina *B.I$+ highlighted in this chapterP Identify the current stage of economic development for each B.I$ nation. 2#perts predict that the B.I$ nations will be key players in global trade even as their track records on human rights, environmental protections and other issues come under closer scrutiny by their trading partners. India is in the Gow(Income category. $hina and Bra!il fall within the Gower( /iddle(Income category. .ussia is the only B.I$ nation to be in the )pper( /iddle(Income category. I. Turn to the Inde# of 2conomic ;reedom *Table 8(>+ and identify where the B.I$ nations are ranked. 1hat does the result tell you in terms of the relevance of the inde# to global marketersP 3ll four B.I$ countries fall within the B/ostly )nfreeC category. This indicates that, while the inde# and what it stands for are certainly important to marketers,
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they are not willing to forego the business opportunities presented by these countries. &. The "eritage ;oundations Inde# of 2conomic ;reedom is not the only ranking that assesses countries in terms of successful economic policies. ;or e#ample, the 1orld 2conomic ;orum *12;- www. weformum.org+ publishes an annual Alobal $ompetitiveness .eport- in the 8''K (8''9 report, the )nited ,tates ranks in si#th place according to the 12;s metrics. By contrast, ,weden is in third place. 3ccording to the Inde# of 2conomic ;reedom rankings the )nited ,tates and ,weden are in si#th and twenty(si#th place, respectively. 1hy are the rankings so differentP 1hat criteria does each inde# considerP The "eritage foundation measures trade policy, ta#ation policy, government consumption of economic output, monetary policy, capital flows and foreign investment, banking policy, wage and price controls, property rights, regulations, and the black market. It does take a very conventional and conservative approach to classifying economies. :n the other hand, the 1orld 2conomic ;orum, according to their website, states% BThe -orld .conomic /orum is an independent, international organi+ation incorporated as a 0wiss not-for-profit foundation. -e are striving towards a world-class corporate governance system where values are as important a asis as rules. (ur motto is 1entrepreneurship in the glo al pu lic interest2. -e elieve that economic progress without social development is not sustaina le, while social development without economic progress is not feasi le. (ur vision for the -orld .conomic /orum is threefold. 3t aims to e: the foremost organi+ation which uilds and energi+es leading glo al communities4 the creative force shaping glo al, regional and industry strategies4 the catalyst of choice for its communities when undertaking glo al initiatives to improve the state the world" http%HHwww.weforum.orgHenHaboutH:urQ8':rgani!ationHinde#.htm. $learly, the 12; assigns a great deal of value to measuring the values and social developments, and opportunities of a country. This strong belief system influences the 12;s country ranking L not by what is current possess but what it should be doing. K. 1hen the first edition of this te#tbook was published in 677K, the 1orld Bank defined Blow(income countryC as one with per capita income of less than 4&'6. In 8''>, when the third edition of *lo al Marketing appeared, Blow incomeC was defined as 495& or less in per capita income. 3s shown in Table 8(I of this chapter, 47>& is the current Blow incomeC threshold. The other stages of development have been revised in a similar manner. "ow do you e#plain the upward trend in the definition of income categories during the past 6& yearsP The economic systems of countries are constantly developing and changes happen rapidly. The percentage of the worlds A?I for low(income countries is now at a
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record low of >.8> percent as compared to the lower(middle(income countries, and the upper(middle(income countries. This suggests great gains in income per person and income distribution for those living in the low(income companies. 3s countries in the low(income begin to tackle their economic, social, and political problems, more opportunities present themselves for the people living in those countries. 9. 3 manufacturer of satellite dishes is assessing the world market potential for his products. "e asks you if he should consider developing countries as potential markets. "ow would you advise himP @eveloping markets should prove attractive on the basis of current low product saturation levels. "igh rates of growth in many developing countries suggest that some segments of the population save enough money to afford e#pensive electronics equipment such as a satellite dish. 3 satellite entrepreneur might invite neighbors to his home and charge them for the privilege of watching programming that would not otherwise be available. These neighbors might not be able to afford a satellite and related equipment, but they could afford to watch an occasional movie. 5. 3 friend is distressed to learn that 3merica s merchandise trade deficit hit a record 495' billion in 8''&. Rou want to cheer your friend up by demonstrating that the trade picture is not as bleak as it sounds. 1hat do you sayP The overall trade balance reflects merchandise as well as services trade as reported in official balance of payments figures. The ).,. typically runs a trade surplus in services, which serves to offset the merchandise trade deficit. The )nited ,tates is a major service trader. 3s shown in ;igure 8(&, ).,. services e#ports in 8''K totaled appro#imately 4I8I billion. This represented slightly less than one(third of total ).,. e#ports. The ).,. services surplus stood at 45' billion. This surplus partially offset the ).,. merchandise trade deficit, which reached a record 45>5 billion in 8''K. CASES Case 2 #C6 T)e Gl%3al Ec%!%mic Crisis6 T)e Assi*!me!t O.er.ie'6 3s ).,. consumer spending slowed in 8''9(8''7, e#ports from ,ingapore and the =hilippines began to slump. By contrast, Indonesia and /alaysia, were e#periencing strong demand for e#ports of crude oil and natural gas. 0apan, became less dependent on e#ports to the )nited ,tates. The ripple effect from the global recession was felt especially strongly in $anada. 2uropes economy was also mired in a recession. 3s the economic crisis deepened in the fall of 8''5, world leaders offered a variety of perspectives and proposals.

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6. @oes the global economic crisis signal that the 3merican model of free market capitalism is fundamentally flawedP ?ot necessarily flawed, just bruised a little. The 3merican model, capitalism does not fully address the different social situations of all of the countries around the world, which are% those that are centrally planned capitalism, centrally planned socialism, and market socialism. 2ach system requires different approaches to prevent and alleviate an economic crisis 8. =olicymakers in 0apan, the worlds second(largest economy must transition their nation away from a manufacturing(dependent model for growth. 1hat industry sectors might emerge as the new drivers of economic growthP The service sector and environmental manufacturing and service opportunities abound for 0apan as it transitions from a manufacturer of goods to a producer of goods and services. :ne of the fastest(growing sectors of world trade is the trade of services between high income and low or middle( income countries. 0apan with its location in 3sia stands to profit from their distribution of services to that continent. >. @o you think that the economic stimulus programs in the )nited ,tates, 3sia, and elsewhere are the right approach to pulling the world out of recessionP The movement of capital, the production of goods, the balance of payment, trade surpluses, trade deficits, and service trades are all key driving forces surrounding a countrys economy. The ), balance of payment in both its current and capital accounts are in the negative range. Therefore, it is unlikely that the ), can further influence the worlds economy. Case 2#26 O!e Lapt%p Per C)il$ O.er.ie'6 In 8''&, after 8' years, ?icolas ?egroponte, announced he was leaving to pursue an ambitious vision% bridging the digital divide between developed and developing nations by providing powerful =$s to schoolchildren in impoverished parts of the world. ?egroponte named his initiative :ne Gaptop =er $hild. 6. 1hy are /icrosoft, Intel, and other leading for(profit companies interested in low(cost computers for the developing worldP ;orty percent of the worlds population resides in low(income countries the e#act ones that the :G=$ program is targeting. These major companies understand the need to grow their consumer base in countries that are low income or low(middle income countries. These companies are betting that the economies of these low( income countries will grow in the future. 8. @o you agree with ?egropontes decision to partner with /icrosoftP
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,tudent answers will vary depending on whether or not they agree with the decision. "owever, student answers should include statements regarding the role*s+ international companies play in e#panding the :G=$ program around the world. >. 3ssess the thinking behind the Bgive one, get oneC promotion. @o you think this is a good marketing tacticP The goal of :G=$ was to give laptops to children in low(income countries, not ), and $anadian children. The stated goal of the tactic was to increase production via increased sales L but not to their target market. 3t best, this is a stop gap measure, designed to accomplish two disparate goals% increase production to lower unit costs and increase e#posure to the program. Case 2#=6 :r%m C%mm(!ism t% Capitalism6 Viet!am9s Ec%!%mic Tra!s0%rmati%! O.er.ie'& Mietnam is an underdeveloped country with a great market potential. /any developed countries have invested money in the Mietnam market since the early 677's. 3merica became involved in the process of investment later and based normal trading relations *?T.+ with Mietnam only in mid(677's. ;oreign countries have e#perienced great market opportunities at Mietnam due to low labor cost and the availability of human resources. 3merican companies involved in trade relations with Mietnam face many challenges in market development. 6. 3ssess the market opportunities in Mietnam for both 3merican consumer(products companies and 3merican industrial(products companies. 1hat is the nature of the opportunityP 2ven though the )nited ,tates were preceded by other countries in establishing market relations with Mietnam in early 677's, 3merican companies *such as Aillette, 3TST, 2##on/obile, etc+ started to work on the issue after ?T. establishment between Mietnam and 3merica. Mietnam gives a great opportunity for 3merican industrial(products and consumer(products companies. The infrastructure in Mietnam is weak, therefore electric, road(building, and phone companies can e#pect to profit greatly from investing in Mietnam market e#pansion. @ue to the cheap labor(cost, the ).,. can build *and it actually does+ factories that would produce such goods as clothes and computers and e#port them back to the )nited ,tates or around the globe. Mietnam is a Bmostly unfreeC country in degrees of economic freedom, but the countrys involvement in 1T: can change the situation and make the state more market(oriented. 8. ?ike and several other well(known 3merican companies are sourcing some of their production in Mietnam, thereby taking advantage of a labor force that is paid the equivalent of 84 per day or less. 3re goods labeled B/ade in MietnamC likely to find widespread acceptance among 3merican consumersP
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The mentioned situation has an equivalent in the already established ).,.($hinese market. B/ade in MietnamC goods will find buyers in the ).,. and in other countries. If the products prove themselves to be reliable and trustworthy, while being ine#pensive *and they will be based on low(cost labor force+, these products should find widespread acceptance among ).,. consumers. >. ,ome critics have argued that $uba is more deserving of diplomatic and trade relations with the )nited ,tates than Mietnam. 1hat are some of the factors behind this argumentP .anked by degree of economic freedom inde#, Mietnam is described as a Bmostly unfreeC country while $uba is that of BdepressedC group. :ne factor behind the argument that $uba is more deserving of diplomatic and trade relations is that of $ubans location on the world map. $uba is a closer neighbor to the ).,. Besides this, there is the argument that we fought a war with Mietnam and lost- while we have never been at war with $uba. Case 2#26 Is C)i!a9s C(rre!c" T%% Str%!*7 O.er.ie'6 $hina is one of the largest trade partners of the )nited ,tates. The $hinese government has been attempting to make $hinese goods competitive with those of the )nited ,tates by revaluing $hinese currency yuan. )nited ,tates trade representatives protest against the possible revaluation saying that it can lead to changes in $hinese( 3merican trade relationship and cause losses for 3merican companies investing to $hinese market. 6. $onsumer goods, including shoes and electronics, represent about 5' percent of ).,. imports from $hina. 3merican consumers have saved an estimated 4K'' billion over the past 6' years by buying ine#pensive $hinese goods. If the $hinese government revalues the yuan by 8' percent or more and 3merican consumers pay higher prices, is this a desirable outcomeP Its definitely not a desirable outcome for 3merican consumers and for 3merican economy at all. If prices for these products were to go up, quantity demanded will most probably go down. $hinese goods such as clothes and shoes have a low( income or medium(income population as a consumer who will not pay higher price if there would be something cheaper. "istorically, $hinese goods are known for low price and not the best quality. $hina is the largest big emerging market *B2/+. If the relationship between $hina and the investing countries should change, it could cause a tremendous shift in world trade. If the $hinese currency goes up, there would be less profitable for other countries *especially the )nited ,tates+ to invest. The result might be negative for $hina. ),3 can always use /e#ico, while 2urope might use 3sian countries, even though it would be a tremendous challenge. The impact on our economy would be significantly negative.

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8. =rotectionist sentiments in the )nited ,tates are fueled by the argument that $hina is to blame for the flood of imports, the giant ).,. current account deficit, and downward pressure on wages in some industries. @o you agreeP The )nited ,tates $ongress tries to use protectionist sentiments against $hina in blaming it for ).,. current account deficit, the flood of imports, and downward pressure on wages in some industries. I dont believe that $hina can or should be blamed for problems in the 3merican economy. 3merican($hinese relationships are beneficial for both sides. $hina provides 3merican market with low(cost products and low(interest rate loans. $hina is one of the greatest trading partners of the )nited ,tates. If this relationship were to be restricted, 3merica would e#perience a great challenge trying to recover. To say it would precipitate an economic crisis would not be overreaching. The best thing for the 3merican( $hinese relationship is to keep free trade process between two countries open and untouched. >. @o you think an aggressive legislative posture with respect to $hinas currency is the best approach for any trade partner to takeP ?o. 3n aggressive posture does nothing but cause strained relations between the two countries. Rou should not try to force your point by threatening them with sanctions, tariffs, or undue restrictions. Gong(term relationships are secured and flourish due to mutual need and benefits. This is where we should be concentrating. TEACHING TOOLS AN, EDERCISES A$$iti%!al Cases6 BAlobal 1ine 1ar 8''7% ?ew 1orld versus :ld.C $hristopher 3. Bartlett, 5'0, 76'I'&. O(t#O0#Class Rea$i!*6 3ssign the following seminal article on marketing and ask students to apply the concepts presented to global marketing. Theodore Gevitt, B/arketing /yopia,C 5arvard 'usiness 6eview 5', no. 9H5 *0uly(3ugust 8''I+, pp. 6>5(6I7. I!ter!et EAercise% "ave students go to http://finance.yahoo.com/currency?u. This site offers a foreign e#change calculator that allows easy comparison of currency e#change rates. ,tudents will select a few currencies such as the Thai baht, the $hinese Ruan, the /alaysian ringed, and Indonesian rupee and compare e#change rates. Acti.it"6 2ither in groups or individually, students should begin preparing their $ultural, and 2conomic 3nalysis and /arketing =lan as noted in $hapter 6.

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:ilm6 "ave students watch the movie B1all ,treet.C 3lthough not dealing directly with international finance, the film gives students insight into various financial dealings and transactions and the potential outcomes associated. SUGGESTE, REA,INGS B%%ks 2nghold, $hristopher. 7oing 'usiness in 8sia2s 'ooming China Triangle. )pper ,addle .iver, ?0% =rentice "all, 677I. ;inger, /ichael 0. 3nstitutions and Trade &olicy. ?orthampton, /3% 2dward 2lgar, 8''8. Aarten, 0effrey 2. The 'ig Ten: The 'ig .merging Markets and 5ow They -ill Change (ur 9ives. ?ew Rork% BasicBooks, 6779. Isaak, .obert 3. Managing -orld .conomic Change. )pper ,addle .iver, ?0% =rentice "all, Inc., 677&. Jennedy, =aul. The 6ise and /all of *reat &owers. ?ew Rork% .andom "ouse, 6759. /c$ue, ,arah. /orce to /orce: 'uilding &rofita le .-Commerce 0trategies. /ason, :"% Thomson "igher 2ducation, 8''K. .oberts, =aul $., and Jaren Ge ;ollette 3raujo. The Capitalist 6evolution in 9atin 8merica. :#ford% :#ford )niversity =ress, 6779. ,hapiro, 3lan $. Multinational /inancial Management, &th ed. )pper ,addle .iver, ?0% =rentice "all, Inc., 677&. =orter, /ichael 2. The Competitive 8dvantage of :ations. ?ew Rork% The ;ree =ress, 677'. Thurow, Gester. 5ead to 5ead: The Coming .conomic 'attle 8mong ;apan, .urope, and 8merica. ?ew Rork% 1illiam /orrow and $ompany, Inc., 6778. Articles $avusgil, ,. Tamer. B/easuring the =otential of 2merging /arkets% 3n Inde#ing 3pproach.C 'usiness 5ori+ons I', no. 6 *0anuaryH;ebruary 6779+, pp. 59(76. $!inkota, /ichael .. BThe 1orld Trade :rgani!ation L =erspectives and =rospects,C ;ournal of 3nternational Marketing >, no. 6 *677&+, pp. 5&(78. @owlah, $.3.;. BThe ;uture of the .eadymade $lothing Industry in the =ost()ruguay .ound 1orld.C -orld .conomy 88, no. 9 *,eptember 6777+, pp. 7>>(7&>.

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Aolden, =eggy 3., =atricia /. @oney, @enise /. 0ohnson, and 0erald .. ,mith, BThe @ynamics of a /arketing :rientation in Transition 2conomies% 3 ,tudy of .ussian ;irms,C ;ournal of 3nternational Marketing >, no. 8 *677&+, pp. 87(I7. Jaikati, 0ack A., Aeorge /. ,ullivan, 0ohn /. Mirgo, T. .. $arr, and Jatherine ,. Mirgo, BThe =rice of International Business /orality% Twenty Rears under the ;oreign $orrupt =ractices 3ct,C ;ournal of 'usiness .thics 8K, no. > *8'''+, pp. 86>(888. Jnight, Aary and ,. Tamer $avusgil. BInnovation, :rgani!ational $apabilities and the Born Alobal ;irm,C ;ournal of 3nternational 'usiness 0tudies >&, no. 8 *8''I+, pp. 686( 6I6. =rowse, /ichael. BIs 3merica in @eclinePC 5arvard 'usiness 6eview 9', no. I *0ulyH3ugust 6778+, pp. >K(>9. Ran, .ick, TTo .each $hina s $onsumers, 3dapt to *uo <ing,T 5arvard 'usiness 6eview 98, no. & *,eptemberH:ctober 677I+, pp. KK(9I.

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