The Economic Environment

Introduction
Understanding the economic environment of foreign countries and markets can help managers predict how trends and events in those environments might affect their companies future performance there. A company which wants to do business for the first time in another country, needs answer to the questions such as these : 1. Under what type of economic system does the country operate ? 2. What are the size, growth potential and stability of the market? 3. Is the companys industry in that country is public or private sector?

4. Does the government view foreign capital as being in competition with or in partnership with or in partnership with public local private enterprises? 5. In what ways does the government control the nature and extent of private enterprise ? 6. How much of a contribution is the private sector expected to make in helping the government formulate overall economic objectives?

Key Economic Forces

The key economic forces include General framework of the country. Economic stability. The existence and influence of capital markets. Factor endowments. Market size. Availability of economic infrastructure.

Economic Description of Countries

There are 207 in the world with the population of 7 bn. Which of the countries are the ones where the manager should commit resources? The answer may vary from company to company, still the companies do business for variety of reasons such as access to factors of production or demand conditions.

Factors of Production
Factor conditions, or production factors include essential inputs to the production process,such as human resources,physical resources, capital resources and infrastructure. Physical resources include weather ,the existence of water ways to get goods to and from markets and the availability of crucial minerals and agricultural products. Knowledge resources are best represented by research and development conducted by companies and governments. For eg. Sillicon Valley in the U.S. is a hot bed of high tech research.

 Capital resources include availability of debt and equity capital that firms can use to expand. Infrastructure includes roads, ports facilities, energy and communication.

Demand Condition
Demand conditions, also known as market potential, include three dimensions: the composition of home demand; the size and pattern of growth of home demand and internationalization of demands. The composition of demand is known as quality of demand and size is known as quantity of demand. Factor conditions are especially crucial for investments made for the production of goods, but demand conditions are crucial for market seeking investments. The combination of factor and demand conditions along with other qualities makes up the location specific advantage that a country has to offer to the investor.

Countries Classified by Income

The key dimension we use to distinguish one country from another is the size of demand or gross national income(Gross national product). In particular we classify countries according to per capita GNI. Those countries with high populations and high per capita GNI are most desirable in terms of market potential. Similarly countries with low population and low income are least desirable, and other countries fit somewhere in between.

What is GNI?
It is the broadest measure of economic activity.It is the market value of final goods produced by domestically owned factors of productions. An alternative to GNI is gross domestic product(GDP), the value of production that takes place within a nations border, without regards to whether the production is done by domestic or foreign factors of production.

Why do we use GNI to describe countries?

The World Bank a multilateral lending agency, uses per capita GNI as a base for its lending. The world bank is comprised of 187 countries and its major objective is to provide development assistance to countries ;especially the economically weaker ones. It uses per capita income to identify those countries that need the most help. The activities of the World Bank are important to multi nationals because they build infrastructure and promote economic growth and stability, thus improving the quality and quantity of demand.

 In particular World Bank is most interested in eliminating poverty and its demand reducing influences. The world bank classified economies into one of the following categories according to per capita GNI Low Income $1005or less Middle Income $1006 - $12275
Lower Middle Income Upper Middle Income $1006 - $3975 $3976 - $12275

High Income

$12276 or above

 The World Bank refers the low and middle income countries as developing countries, even though it recognizes that not all developing countries are alike ,nor they all are developing. Developing Countries are also known as emerging countries, a term also used to distinguish the capital markets( debt and equity market) in those countries from the capital markets in the more advanced countries. In addition this, the high income countries are also sometimes called developed countries or industrial countries. Initially this was because those countries had higher percentage of their GNP and Employment from industry rather than from agriculture. Now, however these countries have higher percentage of GDP and employment tied up in services rather than industry but the term industrial countries is still popular.

Countries Classified by Economic System

Another way of classifying countries is by their economic system.Every Government struggles with the right mix of ownership and control of the economy.Ownership means those who own the resources engage in economic activityThe Public Sector or the Private Sector or both.

Public Sector ownership of economic activity refers to the existence of state owned enterprises.A good example would be China prior to the reforms intiated in 1978 ,at that time all enterprises in the country were owned by the state.Private enterprises were neither permitted nor encouraged.The same could be said of all the countries under of all countries under the control of Soviet Union.

 However state owned enterprise is not a phenomenon of the communist countries.Countries such as Brazil in South America, India in Asia and France in Europe also have large state owned enterprises that are an important part of the overall economy. Hong Kong and United States are examples of absence of state ownership in major economic activity.Although there are extremes ,most countries are mixture of public and private ownership of economic activities.The degree varies but most countries with significant state owned enterprises such as those mentioned earlier are moving towards less, not more ownership.This is known as the process of Privatization.

 Command Economy- Also known as centrally planned economy, all dimensions of economic activity including pricing and production decisions are determined by the central government plan.The government owns and controls all resources. The government set controls for all business enterprise in the country- how much they produce and for whom.In this type of economy, the government considers itself a better judge of resource allocation than its businesses or citizens. Where supply becomes tight, people line up and buy that particular commodity, until the supply is exhausted.So here the supply is allocated by the length of the que rather than prices.
Mixed Economy- In actuality, no economy is purely market or completely command.Most market economies have some degree of government ownership and control, wherever there is a command economy it is now moving towards market economy .

 Market Economy-Now we need to take the concepts of ownership and control and put them into context of two major economic systems: a market economy and a command economy.

A market economy is one which resources are primarily owned and controlled by the private sector, not the public sector. The key factors that make the market economy work are consumer sovereignty-that is, the right of consumers to decide what to buy and freedom for companies to operate in the market. Prices are determined by demand and supply.
In a market economy, for example the air fares increase during the festive seasons because excess of demand over supply. Rising prices brings demand and supply into balance. At higher prices consumer will eventually consume less, resulting in a drop in demand to match the existing supply.

Countries classified by Regions

There are various ways of dividing the countries of the world into different regional markets. Defining regional markets is an exercise of clustering countries so that similarities within clusters and differences between clusters will be maximized.

Main Regional Markets

Western Europe Eastern and Central Europe North America Asia Pacific Middle East Latin America Africa Oceania

KEY MACRO ECONOMIC ISSUES AFFECTING BUSINESS STRATEGY

Management must learn to scan the environment to determine market conditions in the countries where it is either doing business or contemplating entering the market.

Economic growth
Companies would like every country in which they are investing or to which they are selling to have a high growth rate in GNI and per capita GNI.If this were the case even if the company did not expands its share in the market it would still be able to increase its revenue at the same pace as the general growth in the economy. How to determine that which market to enter and to target. The best approach is to look at past history and to try to forecast the future.Managers need to continue to monitor economic news and to try to predict where the growth areas will be in the future.

Inflation
Another economic factor that management needs to consider is inflation. Inflation means that the prices are going up. The inflation rate is the percentage increase in the change in prices from one period to the next usually a year. Economists use different types of indices to measure inflation. But the one they use the most is Consumer Price Index (CPI). The CPI measures a fixed basket of goods and compares its prices from one period to the next. A rise in the index results in inflation.Inflation affects the interest rates, exchange rates, the cost of living and the general confidence in a countrys political and economic systems.

Surpluses And Deficits

Other measures of countrys stability and potential as a location for investment are external and internal surpluses and deficits. Managers need to monitor these balances as indicators of economic strength or weakness. Surplus rarely are a problem but deficits are. An external deficit is when a countrys cash outflow exceeds its inflows.An internal deficit is when government expenditure exceeds government revenues.