Global Marketing Management

Masaaki Kotabe & Kristiaan Helsen

Third Edition
John Wiley & Sons, Inc., 2004

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 Chapter 2

Global Economic Environment

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 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
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 Chapter Overview (contd.)

6. Regional Economic Arrangements

7. Multinational Corporations

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 Introduction

 In 2001, the annual global trade in goods and

services amounted to $7.4 trillion.
 Daily international financial flows now exceed
$1.2 trillion.
 From 1990 to 2000, world GDP grew some 30
percent.
 Total world exports of merchandise and services
increased by 80 percent.

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 Introduction (contd.)

 According to Standard & Poor’s Global Insight,

world exports of goods and services will reach
$11.4 trillion by 2005 (24% of world GDP).
 The net result of these factors has been the
increased interdependence of countries/economies
and increased competitiveness.
 Consumers and companies in the U.S. and Japan
tend to be able to find domestic sources for their
needs since their economies are diversified and
extremely large.

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 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. In 2003, the U.S. economy was about
$10.5 trillion and imports about half as much as it
exports.
 Over the next two decades, the big emerging
markets (BEMs) will hold the greatest potential
for U.S. exports.

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 1. Intertwined World Economy (contd.)

 The larger the country’s domestic economy, the

less dependent it tends to be on exports and
imports relative to its GDP.
 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.

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 1. Intertwined World Economy (contd.)

 Cross-border mergers and acquisitions (M&As)

remain the main stimulus, especially in developed
countries.
 The increase in foreign direct investment has also
been promoted by the efforts of many national
governments to woo multinationals.
 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.

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 1. Intertwined World Economy (contd.)

 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.
 A rise in the value of the local currencies make
exports more expensive; a rising currency value
also deters foreign investment in a country and
may encourage outflow of investment.

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 1. Intertwined World Economy (contd.)

 Examples of severe currency fluctuations are the

1995 Mexican meltdown and the Asian financial
crisis (1997-1999).
 Unfortunately, the influence of these short-term
money flows are nowadays far more powerful
regarding exchange rates than an investment by a
Japanese or German automaker.
 Recent examples of financial crisis occurred in
Argentina and Brazil.

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 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 is not a fixed thing.
 The role of human skill resources has become
increasingly important as a primary determinant of
industry and country competitiveness

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 2. Country Competitiveness (contd.)

 The Institute of Industrial Policy Studies’ country

competitiveness report of 2002 placed two Asian
Tigers (Hong Kong and Singapore) among the
world’s top 10 economies along with the United
States, Finland, Sweden, Belgium, the United
Kingdom, Germany, Norway, and Canada. (see
Exhibits 2-3 & 2-4).
 Although the United States and Switzerland have
been the most innovative in the last three decades,
other OECD countries have been catching up.
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 3. Evolution of Cooperative Global
Trade Agreements
 ITO (International Trade Organization):
– ITO was established after World War II.
 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.
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 3. Evolution of Cooperative Global
Trade Agreements (contd.)
 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.
– As of January 1, 2002, WTO had 144 member

– countries.
– WTO has statutory powers to adjudicate trade
disputes among nations and has its own
secretariat.
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 3. Evolution of Cooperative Global
Trade Agreements (contd.)
– WTO is the new legal and institutional
foundation for a multilateral trading system.
 WTO’s ninth round---called the “Doha
Development Agenda” (Doha Round) was
launched in Doha, Qatar in November 2001 (see
Exhibit 2-5).
 The Doha Round of 2001 also facilitated the
way for China and Taiwan to get full
membership in the WTO.

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 3. Evolution of Cooperative Global
Trade Agreements (contd.)
 Although WTO is a global institutional proponent
of free trade, it is not without critics.
 The WTO settlement mechanism is faster, more
automatic, and less susceptible to blockages than
the old GATT system.
 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.

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 4. U.S. Position in Foreign Direct
Investment and Trade
 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.
 Most U.S. investment abroad has been
concentrated in Europe.
 In 2000, U.S. firms invested $162 billion overseas.
 Firms based in Britain and the Netherlands have
been the largest investors in the United States.
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 4. U.S. Position in Foreign Direct
Investment and Trade (contd.)
 Throughout the last decade, firms based in Britain,
Japan, and the Netherlands were the largest
investors 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.
 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.

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 5. Information Technology and the
Changing Nature of Competition
 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.
 The Trade Related Aspects of Intellectual Property
Rights (TRIPS) Agreement was concluded as part
of the GATT Uruguay Round.

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 5. Information Technology and the
Changing Nature of Competition (contd.)
 Proliferation of E-Commerce and Regulations:
Countries’ regulators have not kept pace with the
rapid proliferation of international e-commerce
and Internet-related activities.
 In many countries, rules and regulations are vague
regarding e-commerce transactions.
 The United Nations Commission on International
Trade Law (UNCITRAL) has formed a Working
Group on Electronic Commerce to reexamine
these treaties.

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 6. Regional Economic Arrangements
 An evolving trend in international economic
activity is the formation of multinational trading
blocs.
 There are over 120 regional free trade areas
worldwide.
 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.

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 6. Regional Economic Arrangements
(contd.)
 Types of Regional Economic Arrangements:
– Free Trade Areas: Formal agreement among
two or more countries to reduce or eliminate
customs duties and nontariff barriers.
Examples: NAFTA, MERCOSUR & FTAA
(proposed)
– Customs Union: Addition of common external
tariffs to the provisions of free trade
agreements. Example: ASEAN.

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 6. Regional Economic Arrangements
(contd.)
– Common Market: Eliminates all tariffs and
other barriers, adopts a common set of external
tariffs on nonmembers, and remove all
restrictions on the flow of capital and labor
among member nations. Example: European
Union.
– Monetary Union: Represents the fourth level of
integration with a single currency among
politically independent countries. Example: EU
and the euro.
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 6. Regional Economic Arrangements
(contd.)
– Political Union: Highest level of integration
resulting in a political union. Sometimes,
countries come together in a loose political
union for historical reasons, as in the case of
the British Commonwealth which exists as a
forum for discussion and common historical
ties.

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 7. Multinational Corporations

 The U.S. government defines a multinational

corporations (MNC) 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 65,000 MNCs with 850,000
affiliates in foreign countries.
 MNCs’ total sales amount to almost $19 trillion.

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 7. Multinational Corporations (contd.)

 One third of multinational companies’ trade is

accounted for by intra-firm activities.
 Two-thirds of of world trade in goods and services
is controlled by multinational companies.
 Of the 100 largest economies in the world, 51 are
corporations.
 The sovereignty of nations will perhaps continue
to weaken due to multinationals and the increasing
integration of economies.

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 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.
 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.

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 7. Multinational Corporations (contd.)

 Currently, factors such as currency movements,

capital surpluses, faster growth rates, and falling
trade and investment barriers have all helped
multinationals from other countries join the cross-
border fray.
 It is not unusual for a startup firm to become
global at its inception. Those firms are known as
“born global.”

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 Copyright © John Wiley & Sons, Inc. 2004

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