Economic Environment

& Systems
Lecture 2

Learning Outcomes
Understand the difference in economic environment of
countries according to the geographic factors
differentiate between market, command and mixed
economies.
Identify the main macroeconomic indicators that effect the
international business

Importance of understanding
economic environment
Helps managers to predict the direction & forces that can
effect the future performance of the company
When going international organizations needs to consider the
following
The economic system of the country
Market size, potential growth
How does government control the private sector
Investors are not interested in investing in Hong Kong after
China took over in 1997

Influences towards
international business

Classifications
By income
Using size of market demand or gross
national product (GNP - economic activity of
the country)
A country with a large population and high
GNP has a bigger market potential
On the other hand a country with low GNP &
population is good for investing

Classifications
By geographic region
For multi-international organizations
managers need to understand the region
they invest
Data can be used by investors to analyze the
development potential and risks that exists in
the area they operate

Classifications
By economic systems
Ownership of economic activities by the public sector
refers to the business belonging to state
Control of economic activity means how resources are
distributed and controlled either by public or private sector
India has large state owned companies
China encourage the growth of private sector
Many countries are moving to privatization of the state
owned companies.

Market Economy
Country resources are controlled by private sector
Power of consumer makes this economy stronger as
they give the freedom for the consumers to buy their
demanding goods
Price is determined by the competitive free market
forces
Government plays are limited role just basically
providing a legal framework alone
This is very favorable for the MNC to operate

Command Economy
Command or central economy is where pricing and
production is determined by the government
The government assumes it is more qualified in
determining the distribution of resources compared
to the people and businesses
If government fails to meet demands black markets
are produced
Previously china was one but now only Russia, North
Korea and Cuba follows this practice

Mixed economy
Gives rise to market socialism
Private individuals own significant resources but distribution is
determined by the price mechanisms
Although government owns some economic resources the price
is determined by the free market forces of supply and demand
Government regulates
West Europe, Asia, South Africa practices this
Malaysia, Britain, Spain and France is more into privatization
programs

Macro-environment
Operating globally means you need to monitor the
macro-environment
Affect profits, operational strategies
The indicators of the macro-environment are
Economic growth
Inflation
Trade surplus and deficit

Economic Growth
Health and performance of the economy
Means GNP is high if growth is high
Shows the living standard is high
Brazil, Russia, India & China are economies
which are attracting foreign Direct investments
(FDI)

Inflation
Rate of change in price level in country
Consumer price index (CPI) or Retail price index (RPI) is used
to measure inflation
Inflation affects
Interest rates
Exchange rates
Cost of living
Confidence of companies
High interest rates means lower inflation

Trade surplus and deficit

Country with higher deficit for externally or

internally denotes a debtor country
This results in low FDI

Transition markets
China and Russia has started to change the
markets they work from 1990
But success depends on several factors
Inflation control
Speed of transformation
Implementation of market reforms
Legal framework

Tutorial
Write briefly for Transition in
Russia
Central Europe and Eastern Europe
China & Vietnam