Chapter 9

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Chapter 9

Economic Development and the Americas

Learning Objectives (1 of 2)

LO1 The importance of time zones for trade relationships and marketing operations

LO2 The political and economic changes affecting global marketing

LO3 The connection between the economic level of a country and the marketing task

LO4 The variety of stages of economic development among American nations

LO5 Growth factors and their role in economic development

Learning Objectives (2 of 2)

LO6 Marketing’s contribution to the growth and development of a country’s economy

LO7 The foundational market metrics of American nations

LO8 The growing importance of trading associations among American nations

International Time Zones in Trade Relationships

Time zones make a difference and Jet lag is an important problem.

Most countries maintain good trade relationships with contiguous countries.

An associated pattern of economic growth and global trade will extend well into the 21st century.

Virtual meetings are difficult to execute:

They can disrupt sleep and family life.

Of the three kinds of distances—miles, time zones, and cultural distances—time zones have the greatest influence on the success of their commercial efforts abroad.

Time zones do make a difference and it is easier to work with countries and regions in the same/similar time zones. Economic growth and trade is more likely to take place within regions in the same time zone due to the ease of doing business.

Importance of International Time Zones

The Americas, Europe, and Asia are the multinational market regions with major trading blocs.

The common time zones give the Europeans advantages in both Africa and the Middle East.

Within each trading bloc are fully industrialized countries, rapidly industrializing countries, and other countries.

Other countries achieve economic development at more modest rates.

Exhibit 9.1 shows the grossest metrics for each trading bloc.

Many American companies have organized their international operations according to geographic or temporal constraints.

Being in Europe is an advantage for trade with Africa and the Middle East, both due to time zones and geographic proximity.

The United States, Germany, and Japan are fully industrialized. Brazil, Russia, and China are rapidly industrializing.

Quiksilver manages its global operations from three bases: California, Avalon, and Australia.

Exhibit 9.1 Three Regional Trading Areas Roughly Defined by Time Zones

Source: World Bank, 2015.

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Marketing and Economic Development

Latin American and other emerging markets will account for 75 percent of the world’s total growth in the next two decades and beyond (U.S. Department of Commerce estimate)

The way the countries will trade and prosper in the 21st century is changing because of:

Transition from socialist to market-driven economies

The liberalization of trade and investment policies in developing countries

The transfer of public-sector enterprises to the private sector

The rapid development of regional market alliances

There are major changes forthcoming in world regions, with emerging markets accounting for a majority of the growth in the next 20 years. The liberalization of markets due to transition to capitalist governments or just change in political parties as well as the emergence of many regional trade alliances will bring about many changes.

Economic Level and Marketing Task (1 of 2)

Argentina, Brazil, Mexico, China, South Korea, Poland, Turkey, India, and Vietnam are emerging as vast markets.

As countries prosper and their people are exposed to new ideas through global communications, new patterns of consumer behavior emerge.

The economic level of a country is the single most important environmental element.

The stage of economic growth within a country affects the following:

attitudes toward foreign business activity

the demand for goods

the distribution systems found within a country

the entire marketing process

These and other countries have an ever-expanding and changing demand for goods and services. Luxury cars in China; Avon cosmetics in South Korea; Walmart discount stores in Argentina, Brazil, Mexico, China, and Thailand; McDonald’s Big Macs with chicken patties in India; Whirlpool washers and refrigerators in eastern Europe; Sara Lee food products in Indonesia; and Amway products in the Czech Republic represent opportunities in emerging markets.

Knowledge of the dynamism of the economy allows the marketer to prepare for economic shifts and emerging markets.

Economic development is generally understood to mean an increase in national production reflected by an increase in the average per capita gross domestic product (GDP) or gross national income (GNI).

Economic development means rapid economic growth and increases in consumer demand.

Economic Level and Marketing Task (2 of 2)

The current level of economic development dictates the kind and degree of existing market potential.

Stages of Economic Development

The United Nations classifies a country’s stage of economic development on the basis of its level of industrialization into the following three categories:

More-developed countries (MDCs): industrialized countries with high per capita incomes, such as Canada, England, France, Germany, Japan, and the United States

Less-developed countries (LDCs): industrially developing countries just entering world trade with relatively low per capita incomes, such as many countries in Asia and Latin America

Least-developed countries (LLDCs): industrially underdeveloped, agrarian, subsistence societies with rural populations with extremely low per capita income levels, and little world trade involvement, such as some countries in Central Africa and parts of Asia

Exhibit 9.2 illustrates the differences in income and consumer possessions across the eight most populous American nations.

Exhibit 9.2 Standards of Living in the Eight Most Populous American Countries

Source: Euromonitor International 2015

Exhibit 9.2 summarizes data regarding the standards of living in the most populous American countries that evince a spectrum of development despite their similar sizes. The lowest levels of development often do not collect or report data suitable for international resources such as Euromonitor International or the World Bank. It is interesting to note the differences in income and consumer possessions across the eight most populous American nations.

Newly Industrialized Countries (NICs) (1 of 2)

The UN classification has been criticized because it no longer seems relevant in the rapidly industrializing world.

Many countries that are classified as LDCs are industrializing at a very rapid rate and are more typically referred to as NICs.

Chile, Brazil, Mexico, South Korea, Singapore, and Taiwan are some of the countries that fit this description.

These NICs have become formidable exporters of many products, including steel, automobiles, machine tools, clothing, and electronics, as well as vast markets for imported products. Brazil provides an example of the growing importance of NICs in world trade, exporting everything from alcohol-based fuels to carbon steel. Brazilian orange juice, poultry, soybeans, and weapons (Brazil is the world’s sixth-largest weapons exporter) compete with U.S. products for foreign markets.

Newly Industrialized Countries (NICs) (2 of 2)

Newly Industrialized Countries (NICs):

Countries are experiencing rapid economic expansion and industrialization and do not exactly fit as LDCs or MDCs.

They have shown rapid industrialization of targeted industries.

They have per capita incomes that exceed other developing countries.

They have moved away from restrictive trade practices and instituted significant free market reforms.

They attract both trade and foreign direct investment.

Economic Growth Factors (1 of 3)

Political stability in policies affecting development

Economic and legal reforms

Poorly defined and/or weakly enforced contract and property rights are features the poorest countries have in common.

Entrepreneurship

In these nations, free enterprise in the hands of the self-employed was the seed of the new economic growth.

Planning

A central plan with observable and measurable development goals linked to specific policies was in place.

Some analysts attribute the faster growth of some to cultural values, others to cheap labor, and still others to an educated and literate population.

Economic Growth Factors (2 of 3)

Outward orientation

Production for the domestic market and export markets with increases in efficiencies and continual differentiation of exports from competition was the focus.

Factors of production

In an environment with deficient land (raw materials), labor, capital, management, and technology, these factors could come from outside the country and be directed to development objectives.

Industries targeted for growth

Strategically directed industrial and international trade policies

Cuba still struggles to regain its foothold in international markets after the demise of its robust trade with the Communist Bloc countries in the 1990s.

Key industries were encouraged to achieve better positions in world markets by directing resources into promising target sectors.

Economic Growth Factors (3 of 3)

Incentives to force a high domestic rate of savings and direct capital to update the infrastructure, transportation, housing, education, and training

Privatization of state-owned enterprises (SOEs) that had placed a drain on national budgets

Released immediate capital to invest in strategic areas

Provided relief from a continuing drain on future national resources

The new investors modernize and create new economic growth

The final factors are large, accessible markets with low tariffs.

Economic Growth in Chile

The example of Chile shows that economic growth can occur with agricultural development.

Exports of agricultural products have been the star performers.

Chile’s production technology has resulted in productivity increases and higher incomes, indicating that manufacturing is not the only way for economic growth.

Regional cooperation and open markets are also crucial for economic growth.

To have preferential access to regional trade groups, Chile in 2003 and Central American countries in 2005 signed free trade agreements with the United States.

Coffee production

Brazilian production of coffee has almost always determined world prices for the brew. Now this commercial dominance is being challenged in two ways. First, Vietnam’s burgeoning new production caused world coffee prices to crash in recent years, from a high of $1.85 per pound in 1997 to about $.50 in 2001. Circa 2015 prices are now back to about $2.00 per pound, after peaking at $3.00 in 2010. And Starbucks is changing the global game in retail coffee distribution—including in its store in the heart of São Paulo, the historical center of coffee production in Brazil and the world.

Information Technology, the Internet, and Economic Development

A country’s investment in information technology (IT) is an important key to economic growth.

Innovative electronic technologies can be the key to a sustainable future for developed and developing nations alike.

As the Internet cuts transaction costs, it has enabled small firms in Asia or Latin America to work together to develop a global reach.

It accelerates the process of economic growth by speeding up the diffusion of new technologies to emerging economies.

Mobile phones and other wireless technologies greatly reduce the need to lay a costly telecom infrastructure.

Information technology can jump-start national economies and allow them to leapfrog from high levels of illiteracy to computer literacy.

The Internet accelerates economic growth by speeding up the diffusion of new products and innovations. It allows for innovative services at a relatively inexpensive cost.

Objectives of Developing Countries

Industrialization is the fundamental objective of most developing countries.

Economic growth is measured not solely in economic goals but also in social achievements.

Because foreign businesses are outsiders, they often are feared as having goals in conflict with those of the host country.

The trend toward privatization is currently a major economic phenomenon in industrialized and developing countries.

Today, foreign investors are seen as vital partners in economic development. Many countries have deregulated industries, opened their doors to foreign investment, lowered trade barriers, and begun privatizing SOEs. The trend toward privatization is currently a major economic phenomenon in industrialized as well as in developing countries.

Infrastructure and Development (1 of 2)

Infrastructure represents capital goods that serve the activities of many industries. It is a crucial component of the uncontrollable elements facing marketers.

Paved roads, railroads, seaports, communication networks, financial networks, and energy supplies and distribution are included in a country’s infrastructure.

It directly affects a country’s economic growth potential.

Business efficiency is affected by the presence or absence of financial and commercial service infrastructure found within a country.

Infrastructure and Development (2 of 2)

It affects the ability of an enterprise to engage effectively in business.

Infrastructure is a crucial component of the uncontrollable elements facing marketers.

Countries begin to lose economic development ground when their infrastructure cannot support an expanding population and economy.

Exhibit 9.3 compares the infrastructure among the eight largest American countries.

A country that has the ability to produce commodities for export may be unable to export them because of an inadequate infrastructure. For example, Mexico’s economy has been throttled by its archaic transport system.

Exhibit 9.3 Infrastructure of Most Populous American Countries

Source: Euromonitor International, 2012; World Bank, 2012.

* Percentage of those eligible within 5 years of high school graduation.

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Rail: Travel by Rail (passenger-km per capita)

Cars: Passenger Cars/1000 People

Energy: Energy Consumption (tonnes oil equivalent per capita)

Phones: Mobile Phones in Use per 1000

Literacy: Literacy Rate (%)

University Students: % of Eligible within 5 years of High School

Marketing’s Contributions

Marketing (or distribution) is not always considered meaningful to those responsible for planning.

Economic planners frequently are more production oriented than marketing oriented.

Marketing is an economy’s arbitrator between productive capacity and consumer demand.

The marketing process is the critical element in effectively utilizing production resulting from economic growth. It can create a balance between higher production and higher consumption.

Adjustments in Emerging Markets

For adjustments in emerging markets, five crucial characteristics drive the need for different thinking:

Market heterogeneity

Socialpolitical governance

Unbranded competition

Chronic shortage of resources

Inadequate infrastructure

Three adaptations are listed for marketing practice in emerging markets.

The three adaptations are:

1. Rather than adapting global products for local conditions, fusion products may be more appropriate. Example: holistic medicine.

2. Rather than diffusion of innovations, the focus of new product development should be on affordability and accessibility.

3. National brand advantage will be more important than other sorts of country-of-origin advantages.

Marketing in a Developing Country

Marketing efforts must be keyed to each situation, custom tailored for each set of circumstances.

Pricing in a subsistence market poses different problems from pricing in an affluent society.

To evaluate the potential in a developing country, the marketer must assess the existing level of market development and receptiveness within the country, and the firm’s own capabilities and circumstances.

Level of Market Development

The level of market development roughly parallels the stages of economic development.

The more developed an economy, the greater the variety of marketing functions demanded, the more sophisticated and specialized the institutions become to perform marketing functions.

As countries develop, the distribution channel systems develop.

Marketing structures of many developing countries are simultaneously at many stages.

Exhibit 9.4 illustrates the evolution of the marketing process.

It focuses on the logic and interdependence of marketing and economic development.

Exhibit 9.4 (table) is a static model representing an idealized evolutionary process.

Demand in Developing Countries (1 of 2)

Estimating market potential and devising useful segmentation strategies in less-developed countries involve challenges.

Most of the difficulty is from the coexistence of three distinct kinds of markets in each country:

the traditional rural/agricultural sector

the modern urban/high-income sector

the often very large transitional sector usually represented by low-income urban slums

The traditional rural sector tends to work in the countryside.

The modern sector is centered in the capital city with expanding Westernized middle class.

Production and consumption patterns vary across the three sectors.

Demand in Developing Countries (2 of 2)

The transitional sector has those moving from the country to the large cities.

One of the greatest challenges of the 21st century is to manage and market to the transitional sector in developing countries.

Increasingly marketing research efforts are being focused on the lowest income segments in Latin America.

The companies that invest when it is difficult and initially unprofitable will benefit in the future from emerging markets in Latin America and elsewhere.

Exhibit 9.5 represents the diversity of consumption patterns across types of countries.

The most frightening trend in 21st century developed countries is the bifurcation of markets into rich and poor.

Monopoly

The irony of Parker Brothers’ introduction of Monopoly to Ecuador is rather amusing, given President Rafael Correa’s announcement of new antimonopoly laws just a year earlier. He was reacting to Carlos Slim’s giant Mexican Telmex takeover of Ecuador Telecom.

Big Emerging Markets (BEMs) (1 of 2)

Big emerging markets share a number of important traits.

Are all geographically large

Have significant populations

Represent sizable markets for a wide range of products

Have strong rates of growth or the potential for significant growth

Have undertaken significant programs of economic reform

Are of major political importance within their regions

Are “regional economic drivers”

Will engender further expansion in neighboring markets as they grow

Commerce researchers predict that imports to the countries identified as big emerging markets (BEMs), with half the world’s population and accounting for 25 percent of the industrialized world’s GDP today, will soon be 50 percent of that of the industrialized world. With a combined GDP of over $2 trillion, BEMs already account for as large a share of world output as Germany and the United Kingdom combined, and exports to the BEMs exceed exports to Europe and Japan combined.

Big Emerging Markets (BEMs) (2 of 2)

The BEMs differ from other developing countries in that they import more than smaller markets and more than economies of similar size.

As BEMs embark on economic development, demand increases for capital goods.

As their economies expand, there is accelerated growth in demand for goods and services, much of which must be imported.

Much of the expected growth will be in industrial sectors such as information technology, environmental technology, transportation, energy technology, healthcare technology, and financial services.

India, China, Brazil, Mexico, Poland, Turkey, and South Africa are prominent examples of countries the Department of Commerce has identified as BEMs. Egypt, the Philippines, Venezuela, and Colombia may warrant inclusion in the near future.

Because many of these countries lack modern infrastructure, much of the expected growth will be in industrial sectors.

The Americas – CFTA

The United States and Canada had the world’s largest bilateral trade agreement. Each was the other’s largest trading partner.

Despite this unique commercial relationship, tariff and other trade barriers still hindered even greater commercial activity.

They established the United States–Canada Free Trade Area (CFTA), designed to eliminate all trade barriers between them.

The CFTA created a single, continental commercial market for all goods and most services; It provided only for the elimination of tariffs and other trade barriers without involving any political union.

Shortly after, Mexico said that it would seek free trade with the U.S.

The agreement between the United States and Canada was not a customs union like the European Community; no economic or political union of any kind was involved. It provided only for the elimination of tariffs and other trade barriers.

NAFTA (1 of 2)

The United States, Canada, and Mexico need one another to compete more effectively in world markets, and they need mutual assurances that their already dominant trading positions in the others’ markets are safe from protection pressures.

NAFTA was ratified and became effective in 1994.

A single market of 360 million people with a $6 trillion GNP emerged.

NAFTA required the three countries to remove all tariffs and barriers to trade over 15 years.

The purpose of NAFTA was to generate income and employment gains and enhance global competitiveness of NAFTA firms. Combined intra-regional trade represents 40 percent of NAFTA exports and 378 million people have a combined GDP of $7.68 trillion. Each member will have its own tariff arrangements with nonmember countries. Mexican exports grew to both the U.S. and Canada. Mexico was expected to grow at 6 percent annually.

NAFTA (2 of 2)

In 2008, all tariff barriers were officially dropped.

Cross-border cooperation seems to ameliorate other long-standing areas of conflict such as legal and illegal immigration.

Cross-border services such as entertainment and healthcare are also thriving.

NAFTA is a work in progress; at least 20 years are needed for a possible objective evaluation of NAFTA.

Exhibit 9.6 shows some of the key provisions of the trade agreement.

Padres and Taco Bell

NAFTA: Mexico and California.

Geographic proximity allows Mexicans from Baja, California, to attend Padres baseball games in close-by San Diego. The team maintains this successful store just across the border in Plaza Rio shopping center in Tijuana. And of course, historically, Padre Junipero Serra had visited both places in the late 1700s while establishing the chain of missions in old Spanish California. NAFTA also gave Taco Bell a second shot at making it in Mexico; this store was in Monterrey. The company’s 1992, pre-NAFTA incursion failed. Unfortunately the store pictured here also closed in 2010, simply for lack of patronage.

Dominican Republic Free Trade Agreement

DR-CAFTA refers to the Central American Free Trade Agreement–Dominican Republic Free Trade Agreement.

In August 2005, President George Bush signed into law a comprehensive free trade agreement among Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States.

The agreement includes a wide array of tariff reductions aimed at increasing trade and employment among the seven signatories.

DR-CAFTA represents another important step toward the ultimate goal of a free trade agreement encompassing all the Americas.

Exhibit 9.7 provides a listing of American countries involved in trade associations.

The exhibit reflects fundamental measures of their attractiveness to international marketers.

DR-CAFTA represents another important step toward the ultimate goal of a free trade agreement encompassing all the Americas. The Ease of Doing Business Index 30 is a ranking based on a combination of 10 different measures, such as ease of “starting a business,” “registering property,” and “enforcing a contract.”

Southern Cone Free Trade Area (Mercosur) (1 of 2)

Mercosur (including Argentina, Bolivia, Brazil, Chile, Paraguay, and Uruguay) is the second-largest common-market agreement in the Americas after NAFTA.

The Treaty of Asunción, which provided the legal basis for Mercosur, was signed in 1991 and formally inaugurated in 1995.

The treaty calls for a common market that would eventually allow for the free movement of goods, capital, labor, and services among the member countries, with a uniform external tariff.

The agreement envisioned no central institutions similar to those of the European Union institutions.

Because Mercosur members were concerned about sacrificing sovereign control over taxes and other policy matters, the agreement envisioned no central institutions similar to those of the European Union institutions.

Southern Cone Free Trade Area (Mercosur) (2 of 2)

Mercosur has become the most influential and successful free trade area in South America.

With the addition of Bolivia and Chile in 1996, Mercosur became a market of 220 million people with a combined GDP of nearly $1 trillion and the third largest free trade area in the world.

More recently Colombia and Ecuador have become associate members, with Venezuela to follow shortly.

Mexico has observer status as well.

Mercosur has pursued agreements aggressively with other countries and trading groups.

A framework agreement was signed in 1995.

In addition, negotiations have been underway since 1999 for a free trade agreement between the European Union and Mercosur, the first region-to-region free trade accord. Although negotiations will not be easy, Mercosur and the European Union should be able to reach an accord. Mercosur has assumed the leadership in setting the agenda for the creation of a free trade area of the Americas or, more likely, a South American Free Trade Area (SAFTA).

Latin American Progress

Most of the countries have moved from military dictatorships to democratically elected governments.

Privatization of state-owned enterprises and other economic, monetary, and trade policy reforms show a broad shift away from the inward-looking policies of import substitution and protectionism.

In a positive response to these reforms, investors have invested billions of dollars.

Nevertheless, Latin America is still working toward economic reform.

Latin American Economic Cooperation (1 of 2)

Other Latin American market groups

Latin American Integration Association (LAIA)

The long-term goal of the LAIA is a gradual and progressive establishment of a Latin American common market.

There is a differential treatment of member countries according to their level of economic development.

It has a provision that permits members to establish bilateral trade agreements among member countries.

Latin American Economic Cooperation (2 of 2)

Caribbean Community and Common Market (CARICOM)

It has worked toward a single-market economy and in 2000 established the CSME (CARICOM Single Market and Economy) with the goal of a common currency for all members.

The introduction of a common external tariff structure was a major step toward the goal.

CARICOM continues to seek stronger ties with other groups in Latin America and has signed a trade agreement with Cuba.

NAFTA to FTAA or SAFTA?

Initially NAFTA was envisioned as the blueprint for a free trade area extending from Alaska to Argentina.

The first new country to enter the NAFTA fold was to be Chile, then membership was to extend south until there was a Free Trade Area of the Americas (FTAA).

Will there will be an FTAA or a tri-country NAFTA in the north and a South American Free Trade Area (SAFTA) in the south?

Fast-track legislation and the policies of President Obama will answer the question.

Strategic Implications for Marketing

As a country develops, incomes change, population concentrations shift, expectations for a better life adjust to higher standards, new infrastructures evolve, and social capital investments are made.

When incomes rise, new demand is generated at all income levels.

Countries with low per capita incomes are potential markets for a large variety of goods.

As incomes rise to middle-class range, demand for more costly goods increases.

Markets are changing rapidly, and identifiable market segments with similar consumption patterns are found across many countries.

For example, members of the middle class in emerging markets do not own two automobiles and suburban homes, and healthcare and housing in some cases are subsidized, freeing income to spend on refrigerators, TVs, radios, better clothing, and special treats. Exhibit 9.5 illustrates the percentage of household income spent on various classes of goods and services.

Emerging markets will be the growth areas of the 21st century.

Chinese-made bus in Havana

People queued for a Chinese-made bus at city center in Havana. China is making major sales and investments in the infrastructures of the developing world, including in Cuba, a member country of LAIA and a fellow “communist” country.

Summary

The global marketer of today and tomorrow must be able to react to market changes rapidly and to anticipate new trends within constantly evolving market segments.

The impact of the political, social, and economic trends will continue to be felt throughout the world, resulting in significant changes in marketing practices.

Marketers must focus on devising marketing plans designed to respond fully to each level of economic development.