Global Marketing Management Masaaki Kotabe & Kristiaan Helsen Third Edition John Wiley & Sons, Inc., 2004

Global Marketing Management

• Masaaki Kotabe & Kristiaan Helsen Third Edition John Wiley & Sons, Inc., 2004

Chapter 2

• Global Economic Environment

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

Chapter Overview (contd.)

• 6. Regional Economic Arrangements

• 7. Multinational Corporations

In 2001, the annual global trade in goods and services amounted to $7.4 trillion.

• 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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.”