MBA 713 - Chapter 02

Editor's Notes

• #2: Because astute international managers must understand the opportunities available in each of the six inhabited continents, this chapter provides a brief overview of all the world’s marketplaces. Providing an overview of the world economy is a challenge because of its vast size. Much of the world’s current economic activity (about 63 percent) is concentrated in the developed countries of North America, the European Union, and Japan. This is not to suggest that international managers can ignore other markets if they wish to compete successfully. The emerging markets (particularly China and India) are responsible for much of the growth in the world economy. In the twenty-first century, the growth rates of China and India, 10.9 percent and 7.8 percent respectively, have far outpaced Japan’s 1.1 percent, Germany’s 0.9 percent, or the United States’ 2.1 percent.
• #3: This chapter’s learning objectives include the following:Evaluating the impact of the political and economic characteristics of the world’s various marketplaces on the opportunities available to international businesses. Appreciating the uses of national income data in making business decisions. Discussing North America as a major marketplace and business center in the world economy.
• #4: Additional learning objectives include:Describing Western Europe as a major marketplace and business center in the world economy.Discussing Asia as a major marketplace and business center in the world economy. Assessing the development challenges facing African, Middle Eastern, and South American Countries.
• #5: North America includes the United States, Canada, Mexico, Greenland, and the countries of Central America and the Caribbean. Home to 531 million people, these countries produce approximately 29 percent of the world’s output.
• #6: This table provides an overview of the major contributors to economic activity in North America. As you can see, the United States has the largest Gross Domestic Product. It also enjoys the highest per capita income of the North American countries.
• #7: The United States has the world’s third largest population and fourth largest land mass, yet it possesses the largest economy, accounting for 24 percent of the world’s $58.2 trillion GDP in 2009. Because of its size and political stability, the USA occupies a unique position in the world’s economy, accounting for about one-tenth of exports of goods and services and about one-eighth of imports of goods and services. It is the prime market for lower-income countries trying to raise their standards of living through export-oriented economic development strategies. It is also the prime market for firms from higher-income countries trying to attract business from its large, well-educated middle class.
• #8: The U.S. dollar serves as the invoicing currency—the currency in which the sale of goods and services is denominated—for about half of all international transactions. It also is an important component of foreign-currency reserves worldwide. Because of its political stability and military strength, the United States also attracts flight capital—money sent out of a politically or economically unstable country to one perceived as a safe haven. Citizens unsure of the value of their home country’s currency often choose to keep their wealth in dollars. Furthermore, the United States is an important recipient of long-term foreign investment. Foreigners have invested over $2.3 trillion in U.S. factories, equipment, and property as of 2010. 
• #9: Canada has the world’s second largest land mass, although its population is only 34 million. Eighty percent of the population is concentrated within a 100-mile band along the country’s southern border with the United States. Exports are vital to the Canadian economy, accounting for 24 percent of its 2009 GDP of $1,336 billion (in U.S. Dollars). Canada’s most important exports reflect its rich natural resources: forest products, petroleum, minerals, and grain. The United States is the dominant market for Canadian goods, receiving over three-quarters of Canada’s exports in a typical year. Two-way trade between the United States and Canada, which totaled $609 billion in 2010, forms the single largest bilateral trading relationship in the world.
• #10: International investors have long been attracted to Canada because of its proximity to the huge U.S. market and the stability of its political and legal systems. Canada’s excellent infrastructure and educational systems also contribute to the performance of its economy. However, there is a lingering threat of political instability related to the long-standing conflict between Canadians who speak French and those who speak English.
• #11: Mexico uses a federal system like the U.S., but its president is elected every 6 years. For many years, Mexico implemented economic nationalism under which it discouraged foreign investment and erected high tariff walls to protect its domestic industries. Over the past two decades, Mexico has abandoned these policies and opened its markets to foreign goods and investors. It joined NAFTA in 1994. To take advantage of NAFTA, thousands of companies have established factories in Mexico. It also has free-trade pacts with El Salvador, Guatemala, Honduras, Japan, Uruguay, and the European Union.
• #12: Besides the United States, Canada, and Mexico, the North American continent is occupied by two dozen other countries that are divided geographically into two groups: Central America and the island states of the Caribbean. Collectively their population equals 83 million—more than twice the population of Canada. However, their total GDP of $393 billion is a third of that of Canada. With a few exceptions (notably Costa Rica), the economic development of these countries has suffered from a variety of problems: political instability, chronic U.S. military intervention, inadequate educational systems, a weak middle class, economic policies that have created large pockets of poverty, and import limitations by the United States and other developed countries on Central American and Caribbean goods.
• #13: This section covered The Marketplaces of North America. The discussion started by presenting the population, GDP, and per capital GDP for the marketplaces of North America. Then, it provided an overview of the economies of the United States, Canada, Mexico, Central America, and the Caribbean. The next section will focus on The Marketplaces of Western Europe.
• #14: Western European countries are among the world’s most prosperous, attracting the attention of businesses eager to market their products to the region’s wealthy consumers. These countries can be divided into two groups: members of the European Union (EU) and other countries in the region.
• #15: The European Union comprises 27 countries that are seeking to promote European peace and prosperity by reducing mutual barriers to trade and investment. During the past two decades, the EU has made tremendous strides in achieving this objective. With a 2009 GDP of $16.4 trillion and a population of 499 million, it is one of the world’s richest markets. EU members are free-market-oriented, parliamentary democracies. However, government intervention and ownership generally play an important role. Seventeen EU members have eliminated their national currencies, replacing them with a new common currency known as the Euro.
• #16: From an economic perspective, Germany is the EU’s most important member. With a 2009 GDP of $3.3 trillion, it possesses the world’s fourth largest economy. Germany has played a major role in formulating the economic policies of the EU. Politically, France exerts strong leadership within the EU. The French government has been a leading proponent of promoting common European defense and foreign policies, as well as strengthening human rights and workers’ rights in the EU. The United Kingdom’s capital city, London, is a major international finance center. The UK is also a major exporter and importer of goods, an important destination for and source of foreign investment, and home to the headquarters or regional divisions of numerous MNCs.
• #17: Some of the newest EU members (Estonia, Latvia, and Lithuania) were part of the Soviet Union. Bulgaria, Hungary, Poland, Slovakia, Romania, and the Czech Republic were allied with the Soviet Union politically. EU member Slovenia declared its independence from communist Yugoslavia in 1991. After the regional trading system established by the Soviet Union broke down in the early 1990s, former Soviet satellite states had to adjust to the loss of guaranteed export markets. They also had to restructure their economies from centrally planned communist systems to decentralized market systems and implement necessary political, legal, and institutional reforms. The Czech Republic, Estonia, and Slovenia are the furthest along in this process, already achieving high-income status according to the World Bank’s measures.
• #18: Rich Western European countries that are not EU members include Iceland, Norway, and Switzerland, plus several small, “postage stamp” countries such as Andorra, Monaco, and Liechtenstein. Classified as high income by the World Bank, these free-market-oriented countries collectively account for 2 percent of the world’s GDP. The economies of the Balkan countries of Albania, Bosnia and Herzegovina, Macedonia, Kosovo, Montenegro, and Serbia are classified as middle income by the World Bank. The exception to this is Croatia, which is in the high-income category. Their post-Cold War economic progress was slowed by the chaos that surrounded the disintegration of Yugoslavia in 1991.
• #19: This section covered The Marketplaces of Western Europe. The discussion started with an overview of the European Union. The rest of this section discussed the most influential members of the EU and the newest members of the EU. It closed with an overview of countries that have not joined the European Union. The next section will focus on Marketplaces of Eastern Europe and Central Asia.
• #20: No area of the world has undergone as much economic change in the past decade and a half as the countries carved out of the former Soviet Union. Many of these countries are still dealing with the aftermath of converting from communism to capitalism and from totalitarianism to democracy. Soviet leader Mikhail Gorbachev’s 1986 reform initiatives of glasnost (openness) and perestroika (economic restructuring) triggered the region’s political, economic, and social revolutions.
• #21: The area’s modern economic history begins with the creation of the Union of Soviet Socialist Republics (the Soviet Union or U.S.S.R.), which emerged from the disintegration of the Russian Empire after World War I. The communists outlawed the market system, abolished private property, and collectivized the country’s vast rich farmlands. By doing so, they succeeded in reducing the enormous income inequalities that had existed under czarist rule. Despite this success, the population’s standard of living increasingly fell behind that of the Western democracies.Gorbachev’s economic and political reforms led to the Soviet Union’s collapse in 1991 and subsequent declarations of independence by the 15 Soviet republics, which are now often referred to as the Newly Independent States (NIS). In 1992, 12 of the NIS formed the Commonwealth of Independent States (CIS) as a forum to discuss issues of mutual concern.
• #22: The most important CIS member is the Russian Federation (Russia), which was the dominant republic within the former Soviet Union. As an independent state, Russia is the world’s largest country in land mass (6.5 million square miles) and the sixth largest in population (142 million people). The country is well endowed with natural resources, including gold, oil, natural gas, minerals, diamonds, and fertile farmland.The transformation of the Russian economy from communism to a free-market system was not easy. Russia’s first democratically elected president was Boris Yeltsin. In August 1998, Yeltsin’s government was forced to devalue the ruble and impose a 90-day moratorium on payments to foreign creditors. However, Russia’s economy has rebounded in the past decade. The second president, Vladimir Putin, overhauled the country’s taxation system. This initiative worked, and government revenues have increased. As the world’s second largest oil producer and exporter, Russia has benefited from the increased prices of oil and other raw materials. Since 2000, the country’s GDP has increased at an annual rate of 5.9 percent per year. By early 2011, Russia had accumulated $513 billion in currency reserves, the third largest in the world after China and Japan. Going forward, Russia’s prospects for continued economic growth look strong.
• #23: The five Central Asian republics of the former Soviet Union—Kazakhstan, Uzbekistan, Tajikistan, Turkmenistan, and Kyrgyzstan—have much in common. One common feature is the importance of Russia in their recent political history. The five republics were part of czarist Russia. Each became a Socialist Republic of the Soviet Union after the communists deposed the czars. When the Soviet Union dissolved in 1991, the five declared their independence. The Muslim faith is the dominant religion in all of them. Their languages share Turkic or Persian roots. All suffer from a scarcity of arable land; mountains and deserts dominate their landscapes. Their peoples are poor, with per capita incomes ranging from $700 in Tajikistan to $6,740 in Kazakhstan. However, extensive fossil fuel reserves can be found throughout Central Asia, particularly in Kazakhstan and Turkmenistan.
• #24: This section covered the Marketplaces of Eastern Europe and Central Asia. The discussion started with an overview of the economics and politics of this region. The rest of the discussion covered Russia and the Central Asian Republics. The next section will focus on The Marketplaces of Asia.
• #25: Asia’s importance to international business cannot be overstated. The region is a source of both high-quality and low-quality products and of both skilled and unskilled labor. Asia is a major destination for foreign investments by MNCs, as well as a major supplier of capital to non-Asian countries. More important, its aggressive, efficient entrepreneurs have increasingly put competitive pressure on European and North American firms to boost their productivity and improve the quality of their products.
• #26: Japan is an island country of 126 million people. It is the third largest economy in the world, with a GDP of $5.1 trillion in 2009. Japan’s rapid growth during the past 50 years is due in part to the partnership between its Ministry of International Trade and Industry (MITI) and its industrial sector. (In 2001, MITI was renamed the Ministry of Economy, Trade, and Industry.) The formal and informal powers wielded by MITI have guided production and investment strategies of the country’s corporate elite. MITI has been aided by Japan’s concentrated industrial structure. Japanese industry is controlled by large families of interrelated companies, called keiretsu, that are typically centered on a major Japanese bank. The bank meets the keiretsu’s financing needs. Keiretsu members often act as suppliers to each other, thus making it more difficult for outsiders to penetrate Japanese markets. Members are also protected from hostile takeovers by an elaborate system of cross-ownership, in which keiretsu members own shares in one another’s companies.
• #27: Since 2000, Japan’s GDP has grown at an annual rate of 1.1 percent, well below the 2.9 percent average growth in the world economy. Many experts are concerned that the Japanese political and economic systems have not been able to adjust quickly enough to the changes in the world economy, such as the growth of e-commerce and the emerging markets. Moreover, Japan has received much international criticism because of the perception that it employs unfair trading practices to market its exports, while using numerous nontariff barriers to restrict imports to its domestic market. Perhaps Japan’s greatest challenge, however, is dealing with its growing demographic crisis: the aging of its population.
• #28: Although Australia and New Zealand share a common cultural heritage, significant differences exist between the two countries.Australia’s 22 million people live in an area of 2.97 million square miles, with approximately 40 percent living in either Sydney or Melbourne. Merchandise exports, which in 2009 accounted for 17 percent of its $925 billion GDP, are concentrated in natural resource industries (such as gold, iron ore, and coal) and land-intensive agricultural goods (such as wool, beef, and wheat).New Zealand’s 4.3 million people live on two main islands—the more populous North Island and the more scenic but less temperate South Island. Merchandise trade is extremely important to the country. In 2009, exports constituted 20 percent of its $126 billion GDP. These exports include dairy products, meat, and wool.
• #29: The Four Tigers are South Korea, Taiwan, Singapore, and Hong Kong. The World Bank has classified them ashigh-income countries for over a decade.South Korea (The Republic of Korea), was born after the Cold War divided the Korean peninsula into communist North Korea and capitalist South Korea. Exports accounted for 44 percent of its 2009 GDP of $833 billion. Taiwan (the Republic of China) is an island country off the coast of mainland China. It is home to 23 million people. It was born after the civil war between nationalist forces and Chinese communists. During the past 30 years, it has been one of the world’s fastest-growing economies. Exports of $275 billion in 2009 were 64 percent of Taiwan’s GDP of $427 billion.The Republic of Singapore is a small island country off the southern tip of the Malay Peninsula. In 2009, Singapore’s exports totaled $270 billion, or 148 percent of its GDP of $182 billion. That figure is not a misprint. Singapore thrives on re-exporting from its excellent port facilities. It also provides communications and financial services, and it is a center of high technology in the region. After the “opium war” (1839–1842) between the United Kingdom and China, Hong Kong was ceded to the British. On July 1, 1997, China assumed control of Hong Kong, designating it as a special administrative region (SAR) and granting it a fair degree of autonomy. As a re-exporter, Hong Kong exported $330 billion worth of goods in 2009, or 194 percent of its $215 billion GDP.
• #30: With 1.3 billion people, China is the world’s most populous country. It was ruled by a series of emperors from 2000 B.C., until the early 1900s, when a republic was founded. In 1949, the communist forces of Mao Tse-tung defeated the nationalist army led by General Chiang Kai-shek. After Mao’s death in 1976, the government adopted limited free-market policies. Agriculture was returned to the private sector, and entrepreneurs were allowed to start small businesses. Foreign companies were permitted to establish joint ventures with Chinese firms. However, Communist Party leaders have not been unwilling to step aside. Therefore, China is following a unique path. It continues to adopt market-oriented economic policies under the Communist Party’s watchful eye.
• #31: China’s vibrant economy, which grew 10.9 percent a year from 2000 to 2009, has attracted the attention of firms worldwide. As a result, FDI in China has exploded. Of particular note are the increased investments by overseas Chinese investors living in Taiwan, Hong Kong, and Singapore, who see China as a source of hard-working, low-cost labor. While China’s cities have boomed economically, this is less the case for the country’s estimated 750 million rural residents. A major challenge facing China’s leaders is closing the growing income gap between its urban and rural residents.
• #32: India is the world’s second most populous country, having reached the 1 billion mark in 2000. India was part of the British Empire until 1947. Then, the Indian subcontinent was partitioned along religious lines into India, where Hindus were in the majority, and Pakistan, where Muslims were dominant. The new country of India adopted many aspects of British government, including a strong independent judiciary, a professional bureaucracy, and the parliamentary system. For most of its post–World War II history, the country has relied on state ownership of key industries as a critical element of its economic development efforts. Before1991, India discouraged foreign investment. Then, Prime Minister Rao enacted market-openingreforms. Since then, India has attracted FDI from MNCs based in developed countries, and its GDP growth has averaged 7.8 percent annually since 2000. However, problems remain. For example, corruption is widespread, and the country’s infrastructure is overburdened. Opaque government policies have discouraged foreign investments, leading the World Bank to warn that failure to trim red tape may staunch the flow of foreign capital into sectors that are crucial to India’s economic growth.
• #33: Asia is home to numerous other countries at various stages of economic development. Thailand, Malaysia, and Indonesia are countries with low labor costs that have been recipients of significant FDI during the 1980s and 1990s. As labor costs have risen in their homeland, many Japanese MNCs have built satellite plants in these three countries to supply low-cost parts to parent factories in Japan. In addition, U.S. and European MNCs have used these countries as production platforms. Although their growth temporarily slowed as a result of the 1997 Asian currency crisis, the Malaysian, Thai, and Indonesian economies have boomed as a result of exports generated by FDI. Vietnam is also becoming important to MNCs. For example, Intel constructed a billion dollar chip testing and assembly factory in Ho Chi Minh City, which began operating in 2010.
• #34: This section covered The Marketplaces of Asia. The discussion focused on Japan, Australia and New Zealand, the Four Tigers, China, India, and Southeast Asia. The next section will focus on The Marketplaces of Africa and the Middle East.
• #35: Africa covers approximately 22 percent of the world’s total land area and is rich in natural resources. Egypt occupies the northeastern tip of the African continent and represents the western boundary of what is commonly known as the Middle East.
• #36: The African continent is home to 1.0 billion people and 55 countries. Most of Africa was colonized in the late nineteenth century by major European countries for strategic military purposes and domestic political demands. The tide of colonialism began to reverse in the mid-1950s. Vestiges of colonialism remain in today’s Africa, however, affecting opportunities available to international businesses. The commodity boom has boosted the economies of many African countries. Algeria, Angola, Gabon, Libya, and Nigeria are major exporters of oil; Zambia is a rich source of copper; and Botswana has diamond fields. However, the governments of these countries face the challenge of leveraging the growth in their commodities sector to create broad-based economies that can benefit their entire populations. Agriculture also is important to many African countries. It accounts for over 40 percent of the GDPs of the Central African Republic, Sierra Leone, Tanzania, and Rwanda. Unfortunately, the population in many African countries is largely employed in subsistence farming.Many experts believe South Africa will be the dominant economic power and the continent’s growth engine during the twenty-first century. South Africa possesses fertile farmland and rich deposits of gold, diamonds, chromium, and platinum. Nobel Peace Prize winner Nelson Mandela was elected president in May 1994 in the country’s first multiracial elections. In 2009 South Africa’s exports—primarily minerals—accounted for 22 percent of its $286 billion GDP.
• #37: The Middle East includes the region between southwestern Asia and northeastern Africa. This area is called the “cradle of civilization” because the world’s earliest farms, cities, governments, legal codes, religions, and alphabets originated there. The Middle East has had a history of conflict and political unrest, which has raised the risk of doing business in the region. In 2011, uprisings against the lack of democracy, poor employment opportunities, and high income inequality led to the ousting of long-time rulers in Egypt and Tunisia and to a civil war in Libya.In 2009, Saudi Arabia, with a GDP of $369 billion, had the largest economy in the Middle East; however, Israel enjoyed the highest per capita income at $25,740 per annum. The region is home to many oil-rich countries. In Saudi Arabia, oil accounts for 45 percent of GDP and 90 percent of total export earnings. Some of the oil-rich nations of the Middle East are attempting to diversify their economies for “life after oil.” Dubai offers foreign investors all the benefits of a foreign trade zone, an excellent infrastructure, and an entry point for exports to the region. Many of these petro-states have amassed impressive portfolios of foreign investments. Some of these sovereign wealth funds have grown so large that they have created political concerns.
• #38: This section covered The Marketplaces of Africa and the Middle East. The discussion focused on the continent of Africa and reviewed market conditions in the Middle East. The next section will focus on The Marketplaces of South America.
• #39: South America’s 13 countries share a common political, social, and economic history. Spanish and Portuguese explorers subjugated the native populations, exploited their gold and silver mines, and converted their fields to plantations. By the end of the eighteenth century, the hold of the two European powers on their South American colonies had weakened. Led by such patriots as Simon Bolivar, one colony after another won its independence by 1825. However, independence did not cure the continent’s problems. Many South American countries suffer from huge income disparities and widespread poverty among their peoples, leading to political instability and continual cries for reform.
• #40: For much of the post–World War II period, the majority of South American countries followed what international economists call import substitution policies as a means of promoting economic development. With this approach, a country attempts to stimulate the development of local industry by discouraging imports via high tariffs and nontariff barriers. The opposite of import substitution is export promotion, whereby a country pursues economic growth by expanding its exports.
• #41: For most South American industries, the domestic market is too small to enable domestic producers to gain economies of scale through mass-production techniques or to permit much competition among local producers. Thus, prices of domestically produced goods tend to rise above prices in other markets. This benefits domestic firms that face import competition. However, it hampers domestic exporters in world markets because they must pay higher prices for domestically produced inputs. Inevitably, the government must subsidize these firms and often nationalize them to preserve urban jobs. The high costs of doing this are passed on to taxpayers and to consumers through higher prices. Ultimately, the government runs a budget deficit. The result is inflation and destruction of middle-class savings.
• #42: Many major South American countries (including Argentina, Brazil, and Chile) adopted these well-intentioned but ultimately destructive import substitution policies. In the late 1980s, however, the countries began to reverse their policies. They lowered tariff barriers, sought free trade agreements, privatized their industries, and positioned their economies to compete internationally. Chile, for example, is now one of the most free-market-oriented economies in the world. The continent’s economies boomed during the 1990s, as a result of these policies. More recently, increasing demand for raw materials and food stuffs has benefited many South American firms. However, the continent is still plagued by the chasm between the rich and the poor. The lack of economic and social mobility has trapped generations of South Americans in poverty and despair and created political instability in many of their countries.
• #43: This section covered The Marketplaces of South America. The discussion started by comparing import substitution and export promotion as economic policies. It then examined the problems associated with import substitution. The discussion closed by examining the current situation in South American markets. This presentation will close with an overview of the learning objectives for this chapter.
• #44: This concludes the PowerPoint presentation on Chapter 2, “Global Marketplaces and Business Centers.” During this presentation, we have accomplished the following learning objectives: Evaluated the impact of the political and economic characteristics of the world’s various marketplaces on the opportunities available to international businesses. Appreciated the uses of national income data in making business decisions. Discussed North America as a major marketplace and business center in the world economy.Described Western Europe as a major marketplace and business center in the world economy.Discussed Asia as a major marketplace and business center in the world economy. Assessed the development challenges facing African, Middle Eastern, and South American Countries. For more information about these topics, refer to Chapter 2 in International Business.