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Chapter 2 Kotabe & Helsen's Global MarketingManagement, Third Edition, 2004

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Global Marketing ManagementGlobal Marketing Management

Masaaki Kotabe & Kristiaan HelsenMasaaki Kotabe & Kristiaan HelsenThird EditionThird Edition

John Wiley & Sons, Inc., 2004John Wiley & Sons, Inc., 2004


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Chapter 2

Chapter 2

Global Economic EnvironmentGlobal Economic Environment


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Chapter OverviewChapter Overview

1. Intertwined World Economy1. Intertwined World Economy

2. Country Competitiveness2. Country Competitiveness

3. Evolution of Cooperative Global Trade3. Evolution of Cooperative Global TradeAgreementsAgreements

4. U.S. Position in Foreign Direct Investment4. U.S. Position in Foreign Direct Investment

and Tradeand Trade5. Information Technology and the Changing5. Information Technology and the Changing

Nature of CompetitionNature of Competition


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Chapter Overview (contd.)Chapter Overview (contd.)

6. Regional Economic Arrangements6. Regional Economic Arrangements

7. Multinational Corporations7. Multinational Corporations


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In 2001, the annual global trade in goods andIn 2001, the annual global trade in goods and

services amounted toservices amounted to $7.4 trillion$7.4 trillion..

Daily international financial flows now exceedDaily international financial flows now exceed

$1.2 trillion$1.2 trillion.. From 1990 to 2000, world GDP grew someFrom 1990 to 2000, world GDP grew some 3030

percent

percent..

Total world exports of merchandise and servicesTotal world exports of merchandise and servicesincreased byincreased by 80 percent80

percent..

IntroductionIntroduction


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Introduction (contd.)Introduction (contd.)

According toAccording to Standard & PoorsStandard & Poors Global InsightGlobal In

sight,,world exports of goods and services will reachworld exports of goods and services will reach$11.4 trillion$11.4 trillion by 2005 (24% of world GDP).by 2005 (24% of world GDP).

The net result of these factors has been theThe net result of these factors has been theincreased interdependence of countries/economiesincreased interdependence of countries/economiesand increased competitiveness.and increased competitiveness.

Consumers and companies in the U.S. and JapanConsumers and companies in the U.S. and Japan

tend to be able to find domestic sources for theirtend to be able to find domestic sources for theirneeds since their economies are diversified andneeds since their economies are diversified andextremely large.extremely large.


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1. Intertwined World Economy1. Intertwined World Economy

Despite the increasingly intertwined worldDespite the increasingly intertwined world

economy, the United States is still relatively moreeconomy, the United States is still relatively more

insulated from the global economy than otherinsulated from the global economy than other

nations. In 2003, the U.S. economy was aboutnations. In 2003, the U.S. economy was about$10.5 trillion$10.5 trillion and imports about half as much as itand imports about half as much as it

exports.exports.

Over the next two decades, the big emergingOver the next two decades, the big emerging

markets (BEMs) will hold the greatest potentialmarkets (BEMs) will hold the greatest potential

for U.S. exports.for U.S. exports.


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1. Intertwined World Economy (contd.)1. Intertwined World Economy (contd.)

The larger the countrys domestic economy, theThe larger the countrys domestic economy, theless dependent it tends to be on exports andless dependent it tends to be on exports andimports relative to its GDP.imports relative to its GDP.

Intertwining of economies by the process ofIntertwining of economies by the process ofspecialization due to international trade leads tospecialization due to international trade leads tojob creation in both the exporting and importingjob creation in both the exporting and importingcountry.country.

Foreign direct investment (FDI)Foreign direct investment (FDI) involvesinvolvesinvestment in manufacturing and service facilitiesinvestment in manufacturing and service facilitiesin a foreign country.in a foreign country.


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Cross-border mergers and acquisitions (M&As)Cross-border mergers and acquisitions (M&As)remain the main stimulus, especially in developedremain the main stimulus, especially in developedcountries.countries.

The increase in foreign direct investment has alsoThe increase in foreign direct investment has alsobeen promoted by the efforts of many nationalbeen promoted by the efforts of many nationalgovernments to woo multinationals.governments to woo multinationals.

Portfolio investment or indirect investment refersPortfolio investment or indirect investment refers

to investments in foreign countries that areto investments in foreign countries that arewithdrawable at short notice, such as investmentswithdrawable at short notice, such as investmentsin foreign stocks and bonds.in foreign stocks and bonds.


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The weekly volume of international trade inThe weekly volume of international trade incurrencies exceeds the annual value of the trade incurrencies exceeds the annual value of the trade ingoods and services.goods and services.

All nations with even partially convertibleAll nations with even partially convertiblecurrencies are exposed to the fluctuations in thecurrencies are exposed to the fluctuations in thecurrency markets.currency markets.

A rise in the value of the local currencies makeA rise in the value of the local currencies make

exports more expensive; a rising currency valueexports more expensive; a rising currency valuealso deters foreign investment in a country andalso deters foreign investment in a country andmay encourage outflow of investment.may encourage outflow of investment.


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Examples of severe currency fluctuations are theExamples of severe currency fluctuations are the

1995 Mexican meltdown1995 Mexican meltdown and theand the Asian financialAsian financial

crisis (1997-1999).crisis (1997-1999).

Unfortunately, the influence of these short-termUnfortunately, the influence of these short-termmoney flows are nowadays far more powerfulmoney flows are nowadays far more powerful

regarding exchange rates than an investment by aregarding exchange rates than an investment by a

Japanese or German automaker.Japanese or German automaker.

Recent examples of financial crisis occurred inRecent examples of financial crisis occurred in

Argentina and Brazil.Argentina and Brazil.


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2. Country Competitiveness2. Country Competitiveness

Country competitivenessCountry competitiveness refers to therefers to the

productiveness of a country, which is representedproductiveness of a country, which is represented

by its firms domestic and international productiveby its firms domestic and international productive

capacity.capacity. Country competitiveness is not a fixed thing.Country competitiveness is not a fixed thing.

The role of human skill resources has becomeThe role of human skill resources has become

increasingly important as a primary determinant ofincreasingly important as a primary determinant ofindustry and country competitivenessindustry and country competitiveness


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2. Country Competitiveness (contd.)2. Country Competitiveness (contd.)

The Institute of Industrial Policy StudiesThe Institute of Industrial Policy Studies countrycountry

competitiveness report of 2002 placed two Asiancompetitiveness report of 2002 placed two Asian

Tigers (Hong Kong and Singapore) among theTigers (Hong Kong and Singapore) among the

worlds top 10 economies along with the Unitedworlds top 10 economies along with the UnitedStates, Finland, Sweden, Belgium, the UnitedStates, Finland, Sweden, Belgium, the United

Kingdom, Germany, Norway, and Canada.Kingdom, Germany, Norway, and Canada. (see(see

Exhibits 2-3 & 2-4).Exhibits 2-3 & 2-4).

Although the United States and Switzerland haveAlthough the United States and Switzerland have

been the most innovative in the last three decades,been the most innovative in the last three decades,

other OECD countries have been catching up.other OECD countries have been catching up.


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3. Evolution of Cooperative Global3. Evolution of Cooperative Global

Trade AgreementsTrade Agreements

ITO (International Trade Organization):ITO (International Trade Organization):

ITO was established after World War II.ITO was established after World War II.

GATT (General Agreements on Tariffs &GATT (General Agreements on Tariffs &

Trade):Trade):

After 1950, GATT succeeded ITO.After 1950, GATT succeeded ITO.

The main operating principle of GATT wasThe main operating principle of GATT was

the concept of most favored nations (MFN).the concept of most favored nations (MFN). GATT was successful in lowering tradeGATT was successful in lowering trade

barriers.barriers.


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Trade Agreements (contd.)Trade Agreements (contd.)

WTO (World Trade Organization Trade):WTO (World Trade Organization Trade):

The eighth and last round of GATT talks The eighth and last round of GATT talks called the called the Uruguay RoundUruguay Round (1986-1994) (1986-1994)

established an international body called theestablished an international body called theWTO which took effect on January 1, 1995.WTO which took effect on January 1, 1995.

As of January 1, 2002, WTO had 144 memberAs of January 1, 2002, WTO had 144 member

countries.countries. WTO has statutory powers to adjudicate tradeWTO has statutory powers to adjudicate trade

disputes among nations and has its owndisputes among nations and has its ownsecretariat.secretariat.


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WTO is the new legal and institutionalWTO is the new legal and institutional

foundation for a multilateral trading system.foundation for a multilateral trading system.

WTOs ninth round---called the WTOs ninth round---called the DohaDoha

Development AgendaDevelopment Agenda (Doha Round) was (Doha Round) waslaunched in Doha, Qatar in November 2001 (seelaunched in Doha, Qatar in November 2001 (see

Exhibit 2-5).Exhibit 2-5).

The Doha Round of 2001 also facilitated theThe Doha Round of 2001 also facilitated theway for China and Taiwan to get fullway for China and Taiwan to get full

membership in the WTO.membership in the WTO.


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Although WTO is a global institutional proponentAlthough WTO is a global institutional proponent

of free trade, it is not without critics.of free trade, it is not without critics.

The WTO settlement mechanism is faster, moreThe WTO settlement mechanism is faster, more

automatic, and less susceptible to blockages thanautomatic, and less susceptible to blockages thanthe old GATT system.the old GATT system.

The WTO Work Program on ElectronicThe WTO Work Program on Electronic

Commerce is in the process of defining the trade-Commerce is in the process of defining the trade-related aspects of electronic commerce that wouldrelated aspects of electronic commerce that would

fall under the parameters of WTO mandates.fall under the parameters of WTO mandates.


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4. U.S. Position in Foreign Direct4. U.S. Position in Foreign Direct

Investment and TradeInvestment and Trade

The United States has been a significant overseasThe United States has been a significant overseas

investor since 1945.investor since 1945.

The first wave of major investment was part of theThe first wave of major investment was part of the

Marshall Plan in the 1950s.Marshall Plan in the 1950s. Most U.S. investment abroad has beenMost U.S. investment abroad has been

concentrated in Europe.concentrated in Europe.

In 2000, U.S. firms investedIn 2000, U.S. firms invested $162 billion$162 billion overseas.overseas. Firms based in Britain and the Netherlands haveFirms based in Britain and the Netherlands have

been the largest investors in the United States.been the largest investors in the United States.


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4. U.S. Position in Foreign Direct4. U.S. Position in Foreign Direct

Investment and Trade (contd.)Investment and Trade (contd.)

Throughout the last decade, firms based in Britain,Throughout the last decade, firms based in Britain,

Japan, and the Netherlands were the largestJapan, and the Netherlands were the largest

investors in the United States.investors in the United States.

Regarding theRegarding thebalance of payments (BOP),balance ofpayments (BOP), thetheUnited States has run a persistent deficit on theUnited States has run a persistent deficit on the

current account since the first oil shock in 1973.current account since the first oil shock in 1973.

There is increasing concern that the conventionalThere is increasing concern that the conventional

measures of the deficit may not accurately reflectmeasures of the deficit may not accurately reflect

a countrys transactions with the rest of the world.a countrys transactions with the rest of the world.


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5. Information Technology and the5. Information Technology and the

Changing Nature of CompetitionChanging Nature of Competition

Information technology and the changing natureInformation technology and the changing nature

of competition have created many challenges forof competition have created many challenges for

the firms.the firms.

Over the Internet, any piece of electronicallyOver the Internet, any piece of electronicallyrepresented intellectual property can be copied.represented intellectual property can be copied.

The Trade Related Aspects of Intellectual PropertyThe Trade Related Aspects of Intellectual Property

Rights (TRIPS) Agreement was concluded as partRights (TRIPS) Agreement was concluded as part

of the GATT Uruguay Round.of the GATT Uruguay Round.


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5. Information Technology and the5. Information Technology and the

Changing Nature of Competition (contd.)Changing Nature of Competition (contd.)

Proliferation of E-Commerce and Regulations:Proliferation of E-Commerce and Regulations:Countries regulators have not kept pace with theCountries regulators have not kept pace with therapid proliferation of international e-commercerapid proliferation of international e-commerceand Internet-related activities.and Internet-related activities.

In many countries, rules and regulations are vagueIn many countries, rules and regulations are vagueregarding e-commerce transactions.regarding e-commerce transactions.

The United Nations Commission on InternationalThe United Nations Commission on International

Trade Law (UNCITRAL) has formed a WorkingTrade Law (UNCITRAL) has formed a WorkingGroup on Electronic Commerce to reexamineGroup on Electronic Commerce to reexaminethese treaties.these treaties.


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An evolving trend in international economicAn evolving trend in international economic

activity is the formation of multinational tradingactivity is the formation of multinational trading

blocs.blocs.

There are overThere are over120120 regional free trade areasregional free trade areas

worldwide.worldwide. Market groups take many forms, depending on theMarket groups take many forms, depending on the

degree of cooperation and inter-relationships,degree of cooperation and inter-relationships,

which lead to different levels of integration amongwhich lead to different levels of integration among

the participating countries.the participating countries.


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(contd.)(contd.)

Types of Regional Economic Arrangements:Types of Regional Economic Arrangements:

Free Trade AreasFree Trade Areas: Formal agreement among: Formal agreement among

two or more countries to reduce or eliminatetwo or more countries to reduce or eliminate

customs duties and nontariff barriers.customs duties and nontariff barriers.Examples: NAFTA, MERCOSUR & FTAAExamples: NAFTA, MERCOSUR & FTAA

(proposed)(proposed)

Customs UnionCustoms Union

: Addition of common external: Addition of common external

tariffs to the provisions of free tradetariffs to the provisions of free trade

agreements. Example: ASEAN.agreements. Example: ASEAN.


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(contd.)(contd.)

Common MarketCommon Market: Eliminates all tariffs and: Eliminates all tariffs and

other barriers, adopts a common set of externalother barriers, adopts a common set of external

tariffs on nonmembers, and remove alltariffs on nonmembers, and remove all

restrictions on the flow of capital and laborrestrictions on the flow of capital and laboramong member nations. Example: Europeanamong member nations. Example: European

Union.Union.

Monetary UnionMonetary Union: Represents the fourth level of: Represents the fourth level of

integration with a single currency amongintegration with a single currency among

politically independent countries. Example: EUpolitically independent countries. Example: EU

and the euro.and the euro.


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(contd.)(contd.)

Political UnionPolitical Union: Highest level of integration: Highest level of integration

resulting in a political union. Sometimes,resulting in a political union. Sometimes,

countries come together in a loose politicalcountries come together in a loose political

union for historical reasons, as in the case ofunion for historical reasons, as in the case ofthe British Commonwealth which exists as athe British Commonwealth which exists as a

forum for discussion and common historicalforum for discussion and common historical

ties.ties.


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Chapter 2 Kotabe & Helsen's Global MarketingManagement, Third Edition, 2004 30

7. Multinational Corporations7. Multinational Corporations

The U.S. government defines a multinationalThe U.S. government defines a multinational

corporations (MNC) for statistical purposes as acorporations (MNC) for statistical purposes as a

company that owns or controls 10 percent or morecompany that owns or controls 10 percent or more

of the voting securities, or the equivalent, of atof the voting securities, or the equivalent, of atleast one foreign business enterprise.least one foreign business enterprise.

At present, there areAt present, there are 65,000 MNCs65,000 MNCs withwith 850,000850,000

affiliates in foreign countries.affiliates in foreign countries.

MNCs total sales amount to almost $19 trillion.MNCs total sales amount to almost $19 trillion.


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7. Multinational Corporations (contd.)7. Multinational Corporations (contd.)

One third of multinational companies trade isOne third of multinational companies trade is

accounted for by intra-firm activities.accounted for by intra-firm activities.

Two-thirds of of world trade in goods and servicesTwo-thirds of of world trade in goods and services

is controlled by multinational companies.is controlled by multinational companies. Of the 100 largest economies in the world, 51 areOf the 100 largest economies in the world, 51 are

corporations.corporations.

The sovereignty of nations will perhaps continueThe sovereignty of nations will perhaps continueto weaken due to multinationals and the increasingto weaken due to multinationals and the increasing

integration of economies.integration of economies.


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In 1970, of theIn 1970, of the 7,000 multinationals7,000 multinationals identified byidentified bythe United Nations, more than half were from twothe United Nations, more than half were from twocountries: the United States and Britain.countries: the United States and Britain.

By 1995, less than half of the 36,000By 1995, less than half of the 36,000multinationals identified by the United Nationsmultinationals identified by the United Nationscame from four countries: the United States,came from four countries: the United States,Japan, Germany, and Switzerland.Japan, Germany, and Switzerland.

The nation-state, while considerably weaker thanThe nation-state, while considerably weaker thanits nineteenth century counterpart, is likely toits nineteenth century counterpart, is likely toremain alive and well.remain alive and well.


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Currently, factors such as currency movements,Currently, factors such as currency movements,

capital surpluses, faster growth rates, and fallingcapital surpluses, faster growth rates, and falling

trade and investment barriers have all helpedtrade and investment barriers have all helped

multinationals from other countries join the cross-multinationals from other countries join the cross-border fray.border fray.

It is not unusual for a startup firm to becomeIt is not unusual for a startup firm to become

global at its inception. Those firms are known asglobal at its inception. Those firms are known as

born globalborn global..


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Chapter 2 Kotabe & Helsen's Global MarketingM Thi d Edi i 2004 34

Copyright John Wiley & Sons, Inc. 2004Copyright John Wiley & Sons, Inc. 2004

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