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Assessing Economic
Environments: Principles,
Measures, and Implications
D270 Final Exam Review Guide: Global
Business Analysis (Indiana University
Bloomington)
The Economic Environment
Various principles help managers better assess economic environments, including: - System Complexity - Market Dynamism - Market Interdependence
Developed Economy
Generally has a high income level, extensive industrialization, advanced technological infrastructure, and a high standard of living. Also has a higher economic freedom ranking. Typically champion political freedom, practice multiparty democratic government, enforce the rule of law, and support free markets. Residents enjoy a high standard of living, long lives, diverse educational opportunities, broad health care, and a variety of goods and services.
Developing Economy
Generally has a low income level, slight industrialization, incomplete infrastructure, and lower standards of living. Corruption, cronyism, and crime complicate efforts to regulate society consistently or adopt prudent economic policies. Emerging Economy: a developing economy that is rapidly industrializing.
Types and Features of Economic Systems
Command Economy: Government owns most or all of the resources. Advocates for a centralized, large-scale, capital-intensive production. Applies the visible hand of the state, central planning, and collectivism. Philosophical Anchor: Communism. Degree of Economic Freedom: Low. Mixed Economy: Government and private ownership of economic resources mixed in varying proportion.
Advocates optimizing economic efficiency, promoting egalitarianism, and preempting self-interest. Philosophical Anchor: Socialism. Degree of Economic Freedom: Medium. Market Economy: Mostly private (individual or business) ownership of resources. Advocates decentralized, entrepreneurial innovation. Applies the invisible hand, laissez faire, property rights, and individualism. Philosophical Anchor: Capitalism. Degree of Economic Freedom: High.
Economic Freedom
"Absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extend necessary for citizens to protect and maintain liberty itself." Economic Freedom Index estimates economic freedom in a particular nation. The index measures the degree that a nation accepts Adam Smith's thesis that "basic institutions protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larder society."
Economic Freedom Index Components
Rule of Law
Property Rights: Ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state. Freedom from Corruption: Degree that corruption introduces insecurity and uncertainty into economic relationships.
Limited Government
Fiscal Freedom: Tax burden imposed by government on its citizens. Government Spending: Government expenditures as a percentage of GDP.
Regulatory Efficiency
Labor Freedom: Aspects of the legal and policy framework that regulates the country's labor market. Business Freedom: The ability to start, operate, and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process. Monetary Freedom: The degree of price stability and the extent of price controls.
Gross National Income (GNI) and Gross Domestic Product
(GDP)
GNI (formerly GNP): The market value of final goods and services newly produced by domestically-owned factors of production. GDP: The market value of production that takes place within a nation's borders, without regard to whether the production is done by domestic or foreign factors of production. Countries with large populations and high per capita GNI or GDP are most desirable in terms of market potential.
Purchasing Power Parity (PPP)
Purchasing Power Parity (PPP) refers to the number of units of a country's currency required to buy the same amount of goods and services in the domestic market that one unit of income would buy in another country. It is calculated by determining the value of a universal "basket of goods" that can be purchased with one unit of a country's currency.
Sustainability and Stability
Green Economics
Green Economics holds that an economy is a component of, and dependent on, the natural world. Measuring the monetary quantity of market activity through GNI, GNP, and GDP without accounting for the associated social and ecological costs that result from the activity that generated the growth misestimates performance and misrepresents potential. Sustainability endorses a broader accounting of the gains and costs of growth that fall beyond monetary metrics but help gauge an economic environment.
Net National Product (NNP)
Net National Product (NNP) measures the depletion of natural resources and degradation of the environment that result from making and consuming products. It depreciates the country's assets commensurate with their wear and tear in generating growth.
Genuine Progress Indicators (GPI)
Genuine Progress Indicators (GPI) begin by applying the same accounting framework used to calculate GDP. It then adjusts for the corresponding costs of reduced environmental quality, health and hygiene, livelihood security, equality, free time, and educational attainment. It values voluntary and unpaid household work as paid labor and subtracts the costs of crime, pollution and family stress. GDP versus GPI is analogous to Gross Profits versus net profits.
Happynomics
Happynomics encourages moving "from the concept of financial prosperity to the idea of emotional prosperity". It is a type of welfare economics.
Your Better Life Index (YBLI)
Your Better Life Index (YBLI) advocates evaluating economic performance in terms of matters that people worldwide believe are important (housing, jobs, social relationships, health, security, work-family balance, education) but fall beyond the narrow scope of monetary measures.
Gross National Wellness Index (GNWI)
Gross National Wellness Index (GNWI) measures a country's capacity to promote individual wellbeing in terms of mental health, work, income, social relations, economic, retirement, political, and environmental factors. It is purposely secular.
Happy Planet Index (HPI)
Happy Planet Index (HPI) holds that the fundamental logic of monetary metrics are misaligned, overly emphasizing growth at all costs while downplaying its costly, destabilizing, and often destructive externalities.
Economy-type Acronyms
LDC - Less Developed Country
LDC stands for Less Developed Country, which is a step before developing countries.
BEM - Big Emerging Market
BEM stands for Big Emerging Market, which is a subset of emerging economies.
BRIC
BRIC stands for Brazil, Russia, India, and China, denoting economies in transition.
RDE - Rapidly Developing Economies
RDE stands for Rapidly Developing Economies.
NIC - Newly Industrialized Countries
NIC stands for Newly Industrialized Countries.
infrastructure - Inefficient distribution channels - Underdeveloped financial markets - High economic and political volatility - Problems finding and working with suitable business partners - High levels of government involvement and control - High levels of corruption
Implications for Current Business Students
and Future Managers
Job opportunities (whether you are from a G7 country or emerging country) Tough, tough competition Potential business partners (as G7 companies need to expand, emerging companies might be at the inside track)
Chapter Cases
Emerging Economies: Comeback or Collapse?
Many emerging countries are applying pro-growth policies, and hard data confirm their success so far. Emerging economies' share of the world exports exceeds more than 50%, versus 20% in 1970. The past generation of progress and prosperity in emerging markets suggest that the revolution has only begun. The transfer of the leadership baton from wealthy countries to emerging markets, for better and for worse, revolutionizes our interpretation of economic environments. Presently, the ambition of emerging economies is straight-forward: Restore their historic stature as the engine of the global economy. However, by mid-2016, a steady stream of foreboding developments sounded alarms, such as a startling collapse in many commodity prices.
Looking to the Future – State Capitalism: Detour or
Destination?
Impressive performance in many countries with emerging and developing economies suggests that free market economics is no longer the only viable route to modernization. State capitalism is an economic system where political officials shape how assets are valued and when and where they are used. The state nurtures national champions, manages trade relations and exchange rates to promote exports and discourage imports, mediates the financial system to provide low-cost capital to domestic industries, and runs the nationalist legal systems. The government manipulates market outcomes for political purposes, aiming to stabilize market cycles, equalize income distribution, and preempt self-interests that threaten social harmony. State capitalism has little need for an independent judiciary; the legal system legitimates state policies as needed.
Presently, some 70 or so strategically important countries worldwide are at a crossroads in determining their political and economic futures, and one should not be surprised if others, particularly authoritarian one-party political systems, find state capitalism attractive.
Economic Environments of the West: Problems, Puzzles,
and the 4th Industrial Revolution
The West wrestles with growing unemployment, faltering productivity, slowing wage growth, and worsening income inequality. Notwithstanding extraordinary monetary expansion in nearly every Western market, falling aggregate demand meant that, for the first time since the Great Depression, deflation, not inflation, posed the greatest risk. Besides farming and manufacturing jobs, business processes, historically the realm of white-collar jobs, are becoming "mechanized" via robots powered by artificial intelligence. Estimates see nearly half of the jobs in the developed economies of the West at high risk from the changes underway in digitization and automation. The 4th Industrial Revolution heralds a radical change, as robots, 3D printing, artificial intelligence, infinite connectivity, and other technologies will reset the dimensions and dynamics of economic environments.
Chapter 7 – Government Influence on Trade
Why do governments get so involved?
Political issues: international security and safety (used to reward or punish other countries) To protect domestic markets, which compete heavily with foreign markets: cushion and support for local companies
Rationales for Government Intervention in trade
Economic Rationales: fighting unemployment, protecting infant industries, promoting industrialization, improving comparative position (economic relationships with other countries) Noneconomic Rationales: Maintaining essential industries, promoting acceptable practices abroad, maintaining or extending spheres of influence, preserving national culture
Government Intervention Tools
Tariffs (various types), subsidies, tied aid and loans, import quotas, voluntary export restraints (VER's), embargoes, domestic content laws/ buy local legislation, regulatory standards and labels, specific permission requirements, administrative delays, anti-dumping actions and countervailing measures, immigration
Problems
Protecting "infant" industries can make foreign products uncompetitive, limit foreign ownership, and raise the question of when an industry reaches "adulthood."
Goal: Maintaining Essential Industries
Governments may want to maintain control over industries that are critical for defense, transportation, or scarce resources, especially in times of war and national emergencies.
Tools
Governments can use FDI regulations, regulatory standards, subsidies, and export bans to maintain control over essential industries.
Problems
Protecting essential industries can hurt foreign competitors, affect other countries' exports, and raise the question of how to define "essential."
Goal: Maintain Spheres of Influence
Governments may want to reward politically friendly countries economically and punish politically unfriendly countries.
Tools
Governments can use tied aid, subsidies, preferential tariffs/quotas, and embargoes to maintain their spheres of influence.
Problems
Maintaining spheres of influence can affect other countries' exports, make non-favored countries less competitive, and hurt firms and individuals who are not responsible for the government's policies.
Goal: Improve Comparative Position (to other
countries)
Governments may want to level the playing field if other countries are subsidizing their firms, employing high tariffs/quotas, or manipulating their currency to make their firms more competitive internationally.
Tools
Governments can use anti-dumping actions and countervailing duties to improve their comparative position.
Problems
It can be difficult to improve dumping versus effective cost containment, and it can lead to prolonged retaliation (tit-for-tat actions).
Another recent example: Wal-Mart in India
Wal-Mart sells $135 billion outside the USA in 26 countries, but not in Germany, South Korea, Russia, or India. The reason for pulling out of India now is that the Indian government is requiring foreign retailers to source 30% of products from small and medium-sized Indian businesses.
Boeing vs. Airbus: Anatomy of a subsidy
The key challenges in the aircraft industry are the high price of aircraft ($80-$380 million) and the high cost of R&D (billions of dollars). Governments intervene by providing direct and indirect subsidies, such as cash disbursements, tax breaks, infrastructure construction, direct government purchases, and indirect government contracts (Defense, NASA).
Why do governments subsidize?
Governments subsidize the aircraft industry to protect it from foreign competition, promote economic development, create local jobs, generate spinoff industries, and generate tax revenue.
Bonus: Trans-Pacific Partnership (TPP)
The Trans-Pacific Partnership (TPP) is a serious multilateral attempt to reduce the level of intervention among 12 countries, representing 40% of world GDP and 33% of world trade ($28 trillion). It is a product of many years of negotiation and was a hallmark accomplishment by President Obama. However, it has faced opposition from both US presidential candidates and most Democrats, while receiving support from President Obama and Republican leaders. Trump's first executive order was to cancel TPP on 1/24/2017.
Who wins by protectionism?
Import-competing industries: They can enjoy more sales and higher prices. Government: They can collect tariffs and gain political appeasement of interest groups.
have had limited success, as many U.S. locales lack truth-in-menu laws, and the name change has not prevented Vietnamese inroads. The U.S. industry's profits have also been affected by increased costs for corn and soybean feed.
Unfair Competition: Dumping
The rise of aquaculture, with farmed rather than wild-caught catfish, has led to a competitive situation where Vietnam has advantages in terms of weather, labor costs, and lack of restrictions on fishpond water discharge. This has allowed Vietnam to increase its share of the U.S. catfish market from 20% in 2005 to 75% in 2013, employing about 1 million people and accounting for 2% of Vietnam's economy.
The U.S. catfish industry, concentrated in just a few states and accounting for 90% of domestic production, has sought to limit Vietnamese imports through various means, such as name changes and lobbying for government intervention. However, these efforts have faced challenges, including the lack of truth-in-menu laws in many U.S. locales, the difficulty of obtaining accurate production cost figures, and the high cost of government enforcement. There are also concerns about potential retaliation by Vietnam toward U.S. beef imports and the possibility of a dispute before the WTO, which could hurt U.S. trade relations.
If protectionism succeeds, the consumer ends up paying higher prices at the supermarket and more taxes for government enforcement.
Chapter 5 – Globalization and Society
What determines societal views toward international
business?
Personal reality and consequences A sense of nationalism – the belief that one's country is unique and different Strong communication within national groups but lack of communication across groups The targeted influence of the media Historical events (wars and foreign policy conflicts) Change is difficult if it is perceived as hardship Deteriorating economic situation
Trade-offs among constituencies
Stakeholders are the collection of constituencies that an organization must satisfy to survive in the long run. This includes shareholders, employees, customers, suppliers, the home and host governments, NGOs, environmental groups, and society at large. In the long run, the aims of all stakeholders must be adequately met, or the firm may not survive.
Balance of Payments Effect of FDI
The balance of payments effect of FDI can be analyzed using the formula:
B = (m-m1) + (x-x1) + (c-c1)
Where: - B = Balance of Payments Effect - m = import displacement - m1 = import stimulus - x = export stimulus - x1 = export reduction - c = capital inflow (other than import and export payments) - c1 = capital outflow (other than import and export payments)
Host Country BOP Effects
Net Import Effect (m-m1): Positive if FDI results in substitution of local production for imports, negative if it results in an increase in imports. Net Export Effect (x-x1): Positive if FDI generates exports, negative if it results in a decline of exports. Net Capital Flows (c-c1): Positive if FDI results in capital inflows to build plants and capacity, negative if it results in outflows to repatriate profits.
Conflicting Economic Growth and Employment Effects of
FDI
Home Country: FDI outflows may create jobs abroad at the expense of jobs in the home country, but may also create additional jobs at home by increasing sales abroad. Host Country: FDI inflows may drive up local labor costs, displace domestic investment, disadvantage local competitors, and destroy local entrepreneurship, but may also result in the transfer of capital, technology, and/or managerial expertise, as well as the creation of new jobs.
Balance of Payments Effects of FDI
Firms doing business abroad should monitor a host country's balance of payments situation, as it might signal corrective actions by the local government, such as import restrictions, export requirements, local content regulations, ownership restrictions, or foreign exchange restrictions.
Volkswagen Emissions Scandal: Clever Managers and
Harsh Consequences
Volkswagen used technology to circumvent government-imposed auto emissions requirements, affecting over 11 million cars worldwide. By the end of 2016, VW had paid over $18 billion in compensation to customers and government fines, and it still faces many pending lawsuits, mounting losses to its reputation, and continued scrutiny by customers, shareholders, and government regulators.
The Foundations of Ethical Behavior
The three levels of moral development (preconventional, conventional, and postconventional/autonomous/principled) provide a framework for understanding ethical behavior. Teleological and deontological approaches to ethical decision-making are also discussed.
Why Companies Care about Ethical Behavior
Companies care about ethical behavior to develop a competitive advantage and avoid being perceived as irresponsible.
The Cultural and Legal Foundations of Ethical Behavior
Relativism holds that ethical truths depend on the values of a particular society and may vary from one country to another, while normativism holds that there are universal standards of behavior that should be accepted by people everywhere.
The legal argument, which suggests that an individual or company can do anything that isn't illegal, is inadequate for several reasons: some unethical things are not illegal, the law is slow to develop in emerging areas, case law creates laws through precedents, and the law reflects careful and wide- ranging discussions.
