International Business 10e Daniels/Radebaugh/Sullivan

International Business
Chapter Four The Economic Environment

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Chapter Objectives

Learn differences among the worlds major economic systems Learn criteria for dividing countries into economic categories Discuss economic issues that influence international business Assess the transition process for market economies
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Economic Issues for International Businesses

What type of economic system does the country have? What is the size, growth potential, and stability of the market? Is the companys industry in that countrys public or private sector?
If public, does the government allow private competition? If private, is it moving towards public ownership?

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Economic Issues for International Businesses, cont

Does the government view foreign capital as competition with or in partnership with public or local private enterprises? How does the government control the nature and extent of private enterprise? How much of a contribution is the private sector expected to make in assisting the government formulate overall economic objectives?
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Key Economic Forces

General economic framework Economic size and stability Existence and influence of capital markets Factor endowments Indicators
Growth Inflation Surpluses Deficits

Economic transitions Availability of economic infrastructure

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Factor Conditions

Inputs to the production process

Human resources Physical resources Knowledge Capital Infrastructure

Factor conditions are especially critical for the production of goods

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Demand Conditions

Market potential
Composition of home demand (nature of buyer needs) Composition? Size of home demand Size? Growth of home demand Growth? Internationalization of demand Internationalization?

Demand conditions are especially critical for market-seeking investments

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Gross National Income

Tool to measure one country against another Gross National Income (formerly the Gross National Product) GNI is the market value of final goods and services newly produced by domestically owned factories of production. Countries with high populations and high per capita GNI are most desirable in terms of market potential
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Size Demand

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Gross Domestic Product

GDP: the value of production that takes place within a nations borders, without regard to whether the production is done by domestic or foreign factors of production Example Both a Ford and Toyota manufactured in the United States counts towards our GDP A Ford produced in Mexico would not

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Importance of Per Capita GNI

Common Name Developing/Emerging Country Developing/Emerging Country Developing/Emerging Country Developing/Emerging Country Developed/Industrial Country
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Per Capita GNI ($) 755 or less (in 2000) 756-2,995 756-9,265 2,996-9,265 9,266 or more

World Bank Category Low Income Lower Middle Income Middle Income Upper Middle Income High Income
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Purchasing Power Parity

PPP is the number of units of a countrys currency required to buy the same amounts of goods and services in the domestic market that $1 would buy in the United States PPP is a useful measure since it accounts for international differences in price
Example: China has a higher PPP than Japan

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Countries Classified by Region

From Map 4.2

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Countries Classified by Economic System

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Figure 4.2

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Economic Freedom

Market Economy: resources are primarily owned and controlled by the private sector, not the public sector
Consumer sovereignty is the right of consumers to decide what to buy Prices are determined by supply and demand

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Economic Freedom, cont

Command Economy (Centrally Planned Economy): all dimensions of economic activity, including pricing and production decisions, are determined by a central government plan
Government owns and controls all resources Prices are determined by government

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Economic Freedom, cont

Mixed Economy: Some degree of government ownership and control No economy is purely market or command Economic systems are along a spectrum of freedoms Most command economies are moving towards a market economy
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Economic Factors International Businesses Must Address

Inflation Surpluses Deficits Balance of Payments External Debt Internal Debt Privatization
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Reforms and Economic Progress

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Figure 4.3

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Physical & Societal Influences

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Chapter Review

Learn differences among the worlds major economic systems Learn criteria for dividing countries into economic categories Discuss economic issues that influence international business Assess the transition process for market economies
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