Assignment 1
Sabrinzy
Week3LectureNotesI2.pptxTopic 3 Appreciating the dynamics of the international economic
and financial environment
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With the advent of globalisation, no longer can nations operate in isolation within their boundaries as they are now inextricably linked to the rest of the world. Global markets and global competitors have replaced local markets and local competitors. Tariff and non-tariff barriers have fallen and nations are increasingly entering into free-trade arrangements with other countries, so that trade flows more freely and regional or national advantages can be maximised. This global trend applies not only to the current economic environment but also to the current financial environment. Foreign exchange trading, international financial management and the international financial system have all felt the winds of change due to globalisation.
Learning Objectives
After completing this Topic you should be able to:
identify ways of segmenting the global economic environment
analyse the role of international bodies in regulating the international business environment
determine the impact of international trade agreements
identify the role of aid in creating international business opportunities.
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After completing this Topic, you should be able to:
Introduction
Global markets and global competitors have replaced local markets and local competitors
Global economic environment is volatile and unpredictable
Various crises have shaped the way international marketing is carried out
Pace of globalisation is increasing and the world economies are becoming more interconnected
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One of the most profound changes in the international environment has been the advent of globalisation and its subsequent impact on international marketing. have driven change. This Topic begins with exploration of the economic environment for International Marketing.
Some base concepts include:
This element of the environment is dynamic and unpredictable. For example, do we know what the value of the Australian dollar will be next week? Financial crises around the world have a significant impact on international marketing, not just in a single country or region, but all over the world.
The US bank crisis in 2008 affected virtually every nation as the value of their dollar dropped, their production stalled, and their consumer demand bottomed out.
Trends in the global economic scene
Global financial crises
Emergence of global markets and global competitors has steadily replaced local competitors
Reduction of tariffs and non-tariff barriers to international marketing
Local firms are subject to greater import competition
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Note the emergence of global crises such as the financial crisis highlight the unpredictability of the environment in terms of their impact and spread.
The most profound change in the last 50 years is the emergence of global markets and global competitors which has resulted in an increase in import competition for domestic firms (Keegan and Green 2005, p.46). Why? There are five factors: capital movements rather than trade now the driving force in the world economy
production is no longer directly linked to employment. Employment in manufacturing has declined, but production has continued to grow the world economy has more impact on the economic outcomes within a country than the nation state
the contest between capitalism and socialism is over, with the socialist countries becoming increasingly market oriented growth of e-commerce reduces the importance of national barriers and forces companies to re-evaluate their business models.
Agriculture - crops, fishing, grazing, forestry Industry - mining, manufacturing, infrastructure Services – intangibles
As economies develop, the proportions of these elements change
www.cia.gov/library/publications/resources/the-world-factbook (2014 est)
| Country | Agriculture | Industry | Services |
| Australia | 3.7% | 28.9% | 67.4% |
| China | 9.7% | 43.9% | 46.4% |
| Malaysia | 9.3% | 34.7% | 56% |
| India | 17.9% | 24.2% | 57.9% |
| Singapore | 0% | 25.3% | 74.7% |
Country classification: Economic systems
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The economic structure is the second way of classifying countries. This classification reflects the relative dominance in the economy of the country to the following:
Agriculture:
for example, crop growing, hunting, fishing, grazing and forestry usually more important in poorer, less-developed countries
the importance of agriculture to the wealth of nations has steadily declined in all countries Industry:
for example, mining, manufacturing, construction, electricity, communications infrastructure and gas
in low-income countries, the focus is more at the level of simple transformed manufactures (e.g. steel drums and extruded plastic products)
in middle-income and industrialised countries, the focus is more in the direction of sophisticated transformed manufactures (e.g. computer-driven machines tools and telecommunications equipment) countries may be dependent on ‘smokestack’ (i.e. mature) industries or high-tech industries
Services:
account for an increasing percentage of employment in all countries
are the fastest growing area in all countries except low-income countries.
There are problems with this classification of economic structure, therefore, an alternative classification of stages of market development is also discussed.
Nature of the economy
Old economies
Focus on product, share of market, production, pyramid management and targeting consumers
New economies
Focus on information, leading function is IT rather than production, success measured by revenue
Transition economies
Based on knowledge, leading function is marketing, success measured in profit rather than market share or revenue
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We can also classify by the age of the economy Old economies:
focus is on product, share of market, production, pyramid management and targeting consumers. E.g. USA New economies: e.g. Singapore
business priority is information success is measured by revenue
leading function is IT rather than production flat management structure
vendors are sales target Transition economies: e.g. China
markets of opportunity based on knowledge success is measured by profits
leading function is marketing
team-oriented management structure
customers are the sales target (Ettenberg 2002).
Growth factors in newly industrialised countries (NICs)
Incentives to foster growth in domestic savings
Targeting industry sectors for growth and incentivising them
Creation of achievable plans and funding them
Applying the rule of law in relation to contracts, property and business
Politically stable environment
Conscious policy of catering to foreign markets as well as domestic market
Willingness to import those factors of production in which the country is deficient or uncompetitive
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In the NICs such as China, Brazil, the government often has a strong role in the economy to foster this continued growth.
Tariffs
Customs duties on merchandise imports Purpose:
price advantage to locally-produced goods over imported goods
Protect infant or critical industries
raise revenues for governments
Criticism:
Restrain free trade
Create higher prices
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What are tariffs?
Payments to government for the privilege of importing goods to their nation.
They have more than one purpose, and nations that set high tariffs are frequently criticised as it increases the price of the goods beyond affordability for many, and makes it more expensive to do business in that nation.
Tariff reduction issues
Although tariffs have reduced significantly over time, appropriate tariff levels remain an issue in international trade and marketing
Developing economies find tariff reduction damaging to emerging industries and domestic economies
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With GATT and its successor the WTO, tariffs have reduced in a large number of countries. However, developing nations are hesitant to reduce their tariff rates, particularly when trying to compete with more developed nations.
Within the Asian trading region
ASEAN Free Trade Area
Singapore, Malaysia, Thailand, Indonesia, Philippines, Brunei, Vietnam, Laos, Cambodia, & Myanmar
APEC
ASEAN nations, Australia, New Zealand, Canada, USA, Japan, South Korea, Chile & Mexico
Viewed as a possible counterbalance to EU & NAFTA
Bilateral Free Trade Agreements
For example, Australia - USA, Thailand, Singapore, China ...
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Regional trade agreements in our neighbourhood
Bilateral
These usually involve agreements between two sovereign nations based on the GATT Most Favoured Nation Principles and involve: exchange of information
exchange of commercial, industrial or technical representatives the conduct of trade fairs and exchange of trade missions
list the products the nations wish to trade more of.
Australia’s and New Zealand’s The Closer Economic Relationship Agreement is recognised as the most comprehensive trade agreement in the world.
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Insider/Outsider perspectives
Advantages of being in a regional trade group
Expansion (e.g. larger market)
Production (e.g. closer to materials or cheaper labour)
Rationalisation of existing operations
Standardisation (e.g. produce same product)
Outsiders
Firms can lobby governments to become members
Associate memberships or bilateral trade agreements with a member
Firms can manufacture/assemble in member countries or enter through joint venture, strategic alliance or acquisition
Trade patterns
Balance of payments
Current account - merchandise & services, gifts and aid transactions
Capital account - direct & portfolio investments, & capital inflows
Balance of trade
Difference between monetary value of exports and imports for a country
Deficit = imports > exports (e.g. USA)
Surplus = imports < exports (e.g. China)
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The Balance of Payments is a record of transactions between residents of one country and those of all other countries. It is divided into two sections i.e. the Current Account and the Capital Account. The Current Account is the record of all merchandise and services traded plus gifts and aid transactions between countries. The Capital Account covers the movement of capital (i.e. direct investment, portfolio investment, short term and long term capital flows). Marketers are interested in the balance of payments because it is an indicator of the economic health of a country. A country with a healthy balance of payments (ie the amount of money, goods and services going out is roughly balanced by the amount of money, goods and services coming in) is usually a safer market for a company than a country with a balance of payments showing more spending than income.
Balance of trade is the difference between the monetary value of exports and imports of a specific country's economic output over a certain period of time. It is one of many economic fundamentals that affect the relative value of a country's currency. A positive or favourable balance of trade is known as a trade surplus when exports exceed imports. Conversely, a negative or unfavourable balance is referred to as a trade deficit or trade gap. The balance of trade is also part of a nation's current account, which includes income from the international investment positions, as well as international aid and other cross-border transactions. Factors that can affect the balance of trade include exchange rate movements, relative production costs between trading partners, the availability of raw materials, various taxes or restrictions on trade, the availability of adequate foreign exchange or reserves to pay for imports, and the domestic prices of goods that are exported. Small trade deficits are not viewed as harmful, but large trade deficits are seen as problematic for a country's domestic economy
Consumption patterns
Income and population have an impact on consumption patterns but availability of applicable statistics varies widely between countries.
Engel’s Law - expenditure on ‘other items’ Product saturation
Merchandise trade Services trade
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Engel’s law states: ‘as income rises above a certain minimum, expenditure on food as a percentage of total income decreases’
Consumption patterns are important for the international marketer because they influence the nature of demand in the foreign market.
Investigation would include the saturation level for the product category e.g. how many households have a refrigerator? Saturated in Australia, not in India
- What is the size and composition of merchandise and services trade for the target nation?
Trading environment
Regulated by Governments
Governments desire to control trade flows tends to be motivated by:
Financial issues
Security issues
Safety issues
Health issues
Protectionist issues
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The trading environment is composed of the firms who trade and the governments who regulate. Government motivations may be:
Financial – stable and growing economy
Security – e.g. barriers to foreign ownership of critical infrastructure (U.S. Govt. won’t allow Arab owner of port facilities in the U.S.) Safety – barriers to import of guns, drugs etc.
Health – quarantine regulations in Australia to prevent import of new diseases Protection of new domestic industries
Barriers to entering an international market
Structural barriers
Economies of scale
Capital costs
Switching costs of buyers
Strategic barriers
Tariffs
Non-tariff barriers
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nations tend to introduce protectionist barriers during difficult economic times as evident from increase in calls for protectionism when the global economic conditions worsened in late 2008. Strategic Barriers to trade can be:
tariff barriers, usually a tax by value (ad valorem), volume (specific) or a combination of both non-tariff barriers, which include any other means of limiting trade.
Measuring markets: Overview
Income
Population
Physical quality of life
Infrastructure
Geography
Debt
Resources
Marketing implications
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So to investigate potential new target country markets, we can find measures with which to compare our options.
Measuring markets: income
Income is measured by annual Gross National Income (GNI) per head
Wide variety both between and within countries
Affects ability of country to fund future development
Affects ability of consumers to purchase variations between currencies
Can distort real income and standard of living
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Gross national income depicts the amount of goods and services generated by a nation in a given time period. Income distribution is an indication of how wealth is spread within a country’s economy.
Income is usually measured internationally in terms of GNI per capita however this assumes that each person in that country receives an equal share of that nation’s economic wealth.
Purchasing Power Parity (PPP)
A better indication through the purchasing power (PPP)parity where an identical basket of products is expressed in a single currency across multiple markets
Most famous is the “Big Mac” index
PPP is used to estimate whether currency is over or undervalued
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Indicates how many units of a currency in one country are needed to buy what one unit in another currency will buy in another country.
Measuring markets: population
Significance of population size decreases with the sophistication of the product or service offered
Negative relationship between stage of economic development and population growth rates
Distribution of age and location (rural v urban)
Adapted from www.cia.gov/library/publications/resources/the-world-factbook
| Country | 0-14 yrs | 15-24 yrs | 25-54 yrs | 55-64 yrs | >65 yrs |
| Australia | 18% | 13.3% | 41.8% | 11.8% | 15.1% |
| China | 17.1% | 14.7% | 47.2% | 11.3% | 9.6% |
| India | 28.5% | 18.1% | 40.6% | 7% | 5.8% |
| Malaysia | 28.8% | 16.9% | 41.2% | 7.6% | 5.5% |
| Singapore | 13.4% | 17.8% | 50.3% | 10% | 8.5% |
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The significance of population size diminishes with the sophistication of the product or service. Age:
people at different life stages have different needs
it is important that the international marketing firm looks at a nation’s age distribution within that nation’s population
the need to look at what age range (e.g. 0-14 year olds) within the nation is growing the fastest. This indicates the types of products that may be sought by consumers Location:
where the population (i.e. consumers) live within a nation is important to the international marketer
impacts not only on a firm’s international distribution strategy, but also on trying to reach the international target audience with a marketing communication strategy the use of immigrant workers in countries with a declining population and rising standard of living in developed countries opens up a new and distinct market segment.
Measuring markets: Quality of life
Physical Quality of Life measures the level of welfare in a country and takes into account:
Life expectancy
Infant mortality
Adult literacy rate
OECD Better Life Index
adjusts (GDP) in terms of factors such as environment, human capital, job satisfaction, health and inequality
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Indices of wellbeing give international marketers a better indication of a country’s future attractiveness as a market.
Measuring markets: infrastructure
Facilities and services necessary for the functioning of the economy and includes:
Energy supplies
Transport
Communication
Commercial and financial services
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Internet access and usage relies on infrastructure.
This is the Technology element of a PESTLE environmental analysis. Will the situation in the market make it easier or harder to do business the way you want?
Measuring markets: Geography
Natural resources
Water, land size, accessibility, minerals, climate
Natural barriers created by:
Terrain
Climate and extremes of nature
These affect less-developed countries to a greater degree.
More prosperous nations with greater resources are more able to manage these barriers
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Natural barriers, such as terrain, climate and extremes of nature. Less-developed countries are most affected.
Prosperous nations have the resources to build dams, generate power and deal with floods and droughts.
Level of debt impacts:
Country’s ability to borrow to finance development
Attractiveness as a market
Availability of foreign exchange
Likelihood of payment
Interest on debt consumes a major percentage of export receipts in developing nations
This affects less developed countries to a greater degree
Measuring markets: Debt
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A nation’s level of external debt (i.e. debt to other countries) indicates their capacity and propensity to borrow money to finance economic activity.
Nations that have large external debt often export more than they import hence they could be an international target destination for a firm’s domestic product.
Measuring markets: Resources
Natural, human, intellectual property
Varies country to country with some countries being almost totally dependent on a single resource (e.g. oil)
Influences source and diversity of export income
Greater diversity provides cushioning effect against economic downturn
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A country may be totally dependent on a single resource. In some cases resources lead to resource-related activity.
Geography also has an impact (e.g. topography and climate).
Marketing implications
Need to monitor the economic environment on both a global and individual country basis
Provides knowledge:
To target specific markets
Nature of customers and demand
Most important segments
Entry strategy
Marketing mix
Market potential
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Most common relative measure of markets is GNI, but other measures may impact on a market’s attractiveness. For example: level of unemployment
consumer prices level of productivity
trends in foreign trade
nature of balance of payments exchange rate movements level of country indebtedness foreign currency reserves.
Financial environment: Currency issues
Convertible and non-convertible currencies
Some currencies are more readily convertible for example US dollar, Australian dollar, Japanese yen and New Zealand dollar
Other currencies that are used for domestic purposes and are not freely convertible
This is often the case with developing countries that place restrictions on convertibility
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If a nation’s currency is not convertible, this can lead to international transactions taking the form of countertrade in order to get payment for imports or require buyers to acquire a convertible currency via the black market in order to trade. Very few nations now fit into this category but they include North Korea and Cuba.
Australia has the 5th most traded currency in the world, indicating its easy convertability
Foreign exchange impact
Financial management
Financing - just as important as price
Sources of funds
Banks and governments
Forfeiting and factoring
Types of financial risk
Commercial risk
Political risk
Foreign exchange risk
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Many firms do not have sufficient cash on hand to undertake their international marketing plans. Thus they must look for other sources of funds. These include:
Banks
In Australia or other countries. Trade finance depends on:
commercial relationship with exporter, nature of the transaction, perceived risk of the country of the borrower, availability of export insurance to reduce risk, nature of bank’s overseas networks.
Government
When the risks are not commercially insurable, or when the government decides the funding of a sale with a high credit risk is in the national interest, the government may extend or underwrite a loan. E.g. EFIC
Forfeiting and factoring
Forfeiting – the importer provides the exporter with a promissory note at the time of shipment which the exporter then sells at a discount rate. Factoring – a factoring house purchases the cash. Refer to Figure 2.1 Different methods of export financing on the previous slide
Types of financial risk
Commercial risk (default in payment) may be caused by:
change in personnel, slow payments by the buyer’s other customers, natural disasters
Political risk is beyond the control of either the Australian seller or the overseas buyer and is often caused by:
the buyer wishing to pay, but the government of the host country delaying the approval to remit funds for balance of payments reasons, war , revolution, changes in official policy, cancellation of projects, change in the political party in power, expropriation of firms in the host country Foreign exchange risk.
As discussed on the earlier slides
Coping with recession
Pull out
Emphasise a product’s value
Change the product mix
Repackage the goods
Maintain stricter inventory
Look outside the region for expansion opportunities
Increase advertising in the region
Increase local procurement
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What are a firm’s options when a recession occurs in their international market? Pull out:
this is an easy short-term option but with long-term ramifications, particularly in Asia because of the importance of relationships Emphasise a product’s value:
Asian middle-class consumers will want to maintain their current lifestyle Change the product mix:
push relatively inexpensive elements of the range into a market affected by recession while de-emphasising the more expensive elements Repackage the goods:
offer the goods in smaller packs at more affordable prices Maintain stricter inventory:
reduce unnecessary inventory and do not restock slow-moving items Look outside the region for expansion opportunities:
countries experiencing recession have lower labour costs and can provide a competitive advantage Increase advertising in the region:
a fall in exchange rates means that it is cheaper to advertise in markets experiencing a downturn Increase local procurement:
re-evaluate local sources of supply to improve competitiveness.
International financial system
International Monetary Fund (IMF)
Cooperative monetary policy
Manages international financial system – liquidity
World Bank
Economic & social infrastructure projects
Foster deregulation & market activities
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From the Bretton Woods Agreement at the end of World War II came three major decisions to facilitate post-war construction:
the establishment of a world lending body – the International Bank for Reconstruction and Development (also known as the World Bank)
the establishment of a body to oversee the management of the international financial system and manage currency adjustments – the International Monetary Fund (IMF)
a system whereby exchange rates were to be pegged to the US dollar. Nations agreed to maintain exchange rates to within +/- 1% of the fixed rate. The US dollar was defined in terms of its gold value and convertibility into gold.
After the collapse of this system in 1971, the world moved to a foreign exchange market system.
International Monetary Fund (IMF) www.imf.org The IMF has six objectives:
to promote international cooperation among members on international monetary issues
to facilitate the balanced growth of international trade and to contribute to high levels of real income, employment and production to promote exchange stability and orderly exchange arrangements and to avoid competitive currency devaluation
to foster a multilateral system of payments and transfers and eliminate exchange restrictions to make financial resources available to members
to seek a reduction of imbalances in payments. The World Bank www.worldbank.org
Owned by 188 members.
Its primary focus is on its lending program which until recently has been on project funding for economic and social infrastructure.
International Aid
Historically given as cash from rich to poor economies
Issues with corruption etc.
More recently given as Development Assistance
Motivations:
Political
Financial
Altruistic
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The motives for aid vary. It is given for:
political motives – to increase dependency of a regime in another country on the nation giving the aid
financial motives – designed to assist firms in donor countries to achieve increased business in the overseas country
altruistic motives – until the 1980s, the view was that the recipient country knew best what it needed and that therefore aid should not have any strings. This view changes now depending on who is in power. Aid can be either a grant (gift) or a loan and can come from different sources:
Multilateral Aid
Provided by World Bank, United Nations, Asian Development Bank, …
Criticisms:
conditionality of their loans,
undemocratic governing structures, and
funding large-scale projects that undermine people’s lives and livelihoods.
About 30% of Australian aid money is channelled through multilateral institutions and funds.
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Multilateral aid is funded by member nations of these organisations, who also have a say in how the money is disbursed.
Bilateral Aid
Between any two countries Objective:
'assist developing countries to reduce poverty and achieve sustainable development, in line with Australia’s national interest‘.
Non-Government Aid
Extended by charitable bodies
Red Cross,
Save the Children Fund
Freedom from Hunger campaign
Medicins Sans Frontieres …
Australia’s program
Development partnership with Indonesia Increasing access to education in the Pacific
Expanding Australian development volunteer and NGO programs Eliminating violence against women
Improving water, sanitation and hygiene Tackling avoidable blindness
Humanitarian assistance, stabilisation and peace building
Marketing implications
Need to know the sources of funds when doing business overseas
Need to monitor the financial situation in the economy of the overseas country
Provides an indication of the likely stability of the exchange rate, availability of funds, and the cost of funds
Mechanisms exist to assess and minimise financial risks
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The international financial system not only regulates the financial transactions and provides opportunities for international business, but also contains mechanisms for assessing and minimising the financial risks associated with international business.
Critical to international marketing success is an understanding of international economic and financial environments
Since 1945 there has been increased interdependence among economies as tariffs have been reduced, liquidity increased and international trade partners expanded
Need to have an appreciation of the growth and impact of newly industrialised countries in world trade
Summary
