International Business Lecture 3:The economic environment
Aims of the lecture • To compare national economies using the tools of macroeconomics • To examine key aspects of national economies, including growth, employment, inflation and balance of payments • To identify differences in national economic systems, spanning developed, developing and transition economies, pointing out implications for business strategy • To assess the extent and depth of regional integration • To highlight the prospects and challenges faced by the least-developed countries
Comparing countries: size and income • GNI and GDP per capita allow comparisons between countries. • Gross national income (GNI) – total income from all final products produced within a country, including that arising from foreign investments of its residents. • Gross domestic product (GDP) – value of total economic activity within a country. • Purchasing power parity (PPP) makes adjustments for differing costs of living among countries.
Figure 3.1: GDP of selected countries Source: IMF (2006) IMF Economic Outlook database, www.imf.org
Economic development • Definition: processes of change in economic activities and organizations, on which the country’s wealth and prosperity depend. • Types of economic activity: 1. Primary– agriculture, mining and fishing 2. Secondary – manufacturing and industrial production 3. Tertiary – services • Economic development usually progresses through these three stages, although in resource-rich countries, wealth is mainly generated by exploiting their resources (often through FDI).
Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan). Table 3.1:Selected high-, middle- and low-income countries
Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan) Table 3.2: Selected developed, transition, developing and least-developed countries
Economic growth • Definition: percentage growth in GDP or GNI from year to year. • High growth rates are typically enjoyed by industrializing countries and those rich in natural resources, both of which attract FDI. • Growth tends to slow as GDP per capita rises. Slowing growth in developed countries has led MNEs to seek new markets in the emerging economies. • Governments seek sustainable growth, but global economic factors constrain governments’ influence.
Figure 3.2:Economic growth in selected countries Source: The Economist Economic Indicators (2007), www.economist.com/indicators
Comparing countries: inflation and employment • Inflation can be measured using the consumer price index (CPI) for each country. • Inflation has become a global (as well as national) phenomenon. • Improving labour productivity can lead to raising economic growth. • Country differences in employment policies and costs of labour are influential in stimulating (or discouraging) business activity. • Unemployment is linked to weak economic growth, and can have social, as well as economic, implications.
Figure 3.3: CPI inflation Sources: Financial Times, 8, 30 November 2004; 30 November 2005; 24 May 2006
Figure 3.4: Annual growth in GDP per hour worked Source: OECD (2008) Databases at Source OECD, oecd.org
Figure 3.5:Productivity and growth
Figure 3.6:Unemployment in selected countries, 2006 Source: UNDP (2007) Human Development Report 2007–2008 (Basingstoke: Palgrave Macmillan)
Balance of payments • Definition: total credit and debit transactions between a country’s residents and those of other countries. • Current account balance – A country may have a surplus (meaning that it exports more than it imports), or a deficit. • A country’s balance of payments reflects the competitiveness of its exporters and the demand of its consumers for imports. • Trade imbalances have become a global issue – the US has a huge trade deficit, while China has a trade surplus.
Figure 3.7:Current account balances (as percentage of GDP) Source: The Economist Economic Indicators (2007), www.economist.com/indicators
Inequality • Income inequality is measured by the Gini coefficient and by calculating the proportion of income earned by each quintile (20%) of the population. • Accumulation of wealth in a few hands is associated with liberal market economic systems of advanced economies, but the concentration of land and wealth in the developing world is also responsible for inequality. • Inequality, especially combined with high levels of poverty, can lead to social tensions and political instability.
Table 3.3: Inequality measurements for selected countries Note on Gini coefficient: 0 = perfect equality, 100 = perfect inequality Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)
Public finances • Governments are responsible for the country’s ‘coffers’, taking in and spending huge sums of money. • The national budget balance and national debt represent the state of government finances. • Budget deficits have become a fact of life in many countries. • Both direct and indirect taxes are raised by governments. • Levels of taxation are important considerations for firms contemplating FDI in a country; the flat tax favoured by new EU member states has helped to attract FDI.
Figure 3.8:Budget deficits in selected countries (as percentage of GDP) Source: The Economist Economic Indicators (2007), www.economist.com/indicators
Figure 3.9:Top rates of corporation tax Source: Financial Times, 3 October 2005
Diverse economic systems • Planned economy – supply, demand and prices controlled by the state. • Liberal market economy – principles of capitalism: • Maximum freedom to carry on enterprises • Protection of private property • Minimum government intervention. • Social market economy – market tempered by state role, especially in social protection and welfare. • Asian economic systems – alliance capitalism: market economies based on links between government and business.
Figure 3.10:Differing models of capitalism
Transition economies • Economies of Central and Eastern Europe – making transition from communism to capitalist market models. • Central European states, including new EU members, have been recognized as market economies. • Countries of South-East Europe and nations of the former Soviet Union are making the transition to market economies, including privatizations; the legacy of the strong state remains in the latter nations. • China’s market reforms – growing influence of market forces in the economy, but continuing dominance of communist party political rule and state-controlled enterprises.
Figure 3.11:FDI flows to selected countries in Central and Eastern Europe Source: UN (2007) World Investment Report 2007 (Geneva: UN)
Regional integration • Regional ties among countries can be between governments, businesses and individuals – both formal and informal. • Regional economic integration … • Has been facilitated by falling trade barriers, enshrined in regional trade agreements. • Is most developed in the EU, and especially in the eurozone. However, divergence in national economic systems continues. • The ‘Triad’theory of trade focuses on three major regions: North America, Europe and Japan (although the 3rd bloc should be broadened to Asia).
The least-developed economies • The world’s poorest countries, mainly dependent on fragile agriculture and vulnerable to effects of climate change (such as desertification and flooding). • Mainly in sub-Saharan Africa, but also Asia (such as Bangladesh). • The challenges: ◊ Poverty alleviation ◊ Building social cohesion ◊ Establishing stable government ◊ Promoting economic development
Conclusions • National economies diverge in their size, the nature of their economic activities, and their economic systems. • A growing number of countries are experiencing economic growth and development, creating opportunities for international business. • Despite growing economic integration globally • Diverse national economic systems persist • Regional integration is growing. • The least-developed countries are attracting international business, but poverty and weak governance persist.
