Chapter 2Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 1 Global Marketing...

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

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Global Marketing ManagementGlobal Marketing Management

Masaaki Kotabe & Kristiaan HelsenMasaaki Kotabe & Kristiaan Helsen Third EditionThird Edition

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


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Chapter 2Chapter 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 Trade 3. Evolution of Cooperative Global Trade AgreementsAgreements

4. U.S. Position in Foreign Direct Investment 4. U.S. Position in Foreign Direct Investment and Tradeand Trade

5. Information Technology and the Changing 5. 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 and In 2001, the annual global trade in goods and services amounted to services amounted to $7.4 trillion$7.4 trillion..

Daily international financial flows now exceed Daily international financial flows now exceed $1.2 trillion$1.2 trillion..

From 1990 to 2000, world GDP grew some From 1990 to 2000, world GDP grew some 30 30 percentpercent..

Total world exports of merchandise and services Total world exports of merchandise and services increased by increased by 80 percent80 percent..

IntroductionIntroduction


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Introduction (contd.)Introduction (contd.)

According to According to Standard & Poor’s Standard & Poor’s Global InsightGlobal Insight, , world exports of goods and services will reach world 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 the The net result of these factors has been the increased interdependence of countries/economies increased interdependence of countries/economies and increased competitiveness.and increased competitiveness.

Consumers and companies in the U.S. and Japan Consumers and companies in the U.S. and Japan tend to be able to find domestic sources for their tend to be able to find domestic sources for their needs since their economies are diversified and needs since their economies are diversified and extremely large.extremely large.


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1. Intertwined World Economy1. Intertwined World Economy

Despite the increasingly intertwined world Despite the increasingly intertwined world economy, the United States is still relatively more economy, the United States is still relatively more insulated from the global economy than other insulated from the global economy than other nations. In 2003, the U.S. economy was about nations. In 2003, the U.S. economy was about $10.5 trillion$10.5 trillion and imports about half as much as it and imports about half as much as it exports.exports.

Over the next two decades, the big emerging Over the next two decades, the big emerging markets (BEMs) will hold the greatest potential markets (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 country’s domestic economy, the The larger the country’s domestic economy, the less dependent it tends to be on exports and less dependent it tends to be on exports and imports relative to its GDP.imports relative to its GDP.

Intertwining of economies by the process of Intertwining of economies by the process of specialization due to international trade leads to specialization due to international trade leads to job creation in both the exporting and importing job creation in both the exporting and importing country.country.

Foreign direct investment (FDI)Foreign direct investment (FDI) involves involves investment in manufacturing and service facilities investment in manufacturing and service facilities in 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 developed remain the main stimulus, especially in developed countries.countries.

The increase in foreign direct investment has also The increase in foreign direct investment has also been promoted by the efforts of many national been promoted by the efforts of many national governments to woo multinationals.governments to woo multinationals.

Portfolio investment or indirect investment refers Portfolio investment or indirect investment refers to investments in foreign countries that are to investments in foreign countries that are withdrawable at short notice, such as investments withdrawable at short notice, such as investments in foreign stocks and bonds.in foreign stocks and bonds.


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The weekly volume of international trade in The weekly volume of international trade in currencies exceeds the annual value of the trade in currencies exceeds the annual value of the trade in goods and services.goods and services.

All nations with even partially convertible All nations with even partially convertible currencies are exposed to the fluctuations in the currencies are exposed to the fluctuations in the currency markets.currency markets.

A rise in the value of the local currencies make A rise in the value of the local currencies make exports more expensive; a rising currency value exports more expensive; a rising currency value also deters foreign investment in a country and also deters foreign investment in a country and may encourage outflow of investment.may encourage outflow of investment.


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Examples of severe currency fluctuations are the Examples of severe currency fluctuations are the 1995 Mexican meltdown1995 Mexican meltdown and the and the Asian financial Asian financial crisis (1997-1999).crisis (1997-1999).

Unfortunately, the influence of these short-term Unfortunately, the influence of these short-term money flows are nowadays far more powerful money flows are nowadays far more powerful regarding exchange rates than an investment by a regarding exchange rates than an investment by a Japanese or German automaker.Japanese or German automaker.

Recent examples of financial crisis occurred in Recent 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 the refers to the productiveness of a country, which is represented productiveness of a country, which is represented by its firms’ domestic and international productive by 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 become The role of human skill resources has become

increasingly important as a primary determinant of increasingly important as a primary determinant of industry and country competitivenessindustry and country competitiveness


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

The Institute of Industrial Policy Studies’The Institute of Industrial Policy Studies’ country country competitiveness report of 2002 placed two Asian competitiveness report of 2002 placed two Asian Tigers (Hong Kong and Singapore) among the Tigers (Hong Kong and Singapore) among the world’s top 10 economies along with the United world’s top 10 economies along with the United States, Finland, Sweden, Belgium, the United States, 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 have Although 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 Global 3. 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 was The 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 trade GATT was successful in lowering trade

barriers.barriers.


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3. Evolution of Cooperative Global 3. Evolution of Cooperative Global 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 the established an international body called the WTO which took effect on January 1, 1995.WTO which took effect on January 1, 1995.

– As of January 1, 2002, WTO had 144 member As of January 1, 2002, WTO had 144 member – countries. countries. – WTO has statutory powers to adjudicate trade WTO has statutory powers to adjudicate trade

disputes among nations and has its own disputes among nations and has its own secretariat.secretariat.


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– WTO is the new legal and institutional WTO is the new legal and institutional foundation for a multilateral trading system.foundation for a multilateral trading system.

WTO’s ninth round---called the “WTO’s ninth round---called the “Doha Doha Development AgendaDevelopment Agenda” (Doha Round) was ” (Doha Round) was launched in Doha, Qatar in November 2001 (see launched in Doha, Qatar in November 2001 (see Exhibit 2-5).Exhibit 2-5).

The Doha Round of 2001 also facilitated the The Doha Round of 2001 also facilitated the way for China and Taiwan to get full way 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 proponent Although 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, more The WTO settlement mechanism is faster, more automatic, and less susceptible to blockages than automatic, and less susceptible to blockages than the old GATT system.the old GATT system.

The WTO Work Program on Electronic The 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 would related 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 Direct 4. U.S. Position in Foreign Direct Investment and TradeInvestment and Trade

The United States has been a significant overseas The United States has been a significant overseas investor since 1945.investor since 1945.

The first wave of major investment was part of the The 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 been Most U.S. investment abroad has been concentrated in Europe.concentrated in Europe.

In 2000, U.S. firms invested In 2000, U.S. firms invested $162 billion$162 billion overseas. overseas. Firms based in Britain and the Netherlands have Firms 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 Direct 4. 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 largest Japan, and the Netherlands were the largest investors in the United States.investors in the United States.

Regarding the Regarding the balance of payments (BOP),balance of payments (BOP), the the United States has run a persistent deficit on the United 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 conventional There is increasing concern that the conventional measures of the deficit may not accurately reflect measures of the deficit may not accurately reflect a country’s transactions with the rest of the world. a country’s transactions with the rest of the world.


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5. Information Technology and the 5. Information Technology and the Changing Nature of CompetitionChanging Nature of Competition

Information technology and the changing nature Information technology and the changing nature of competition have created many challenges for of competition have created many challenges for the firms.the firms.

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

The Trade Related Aspects of Intellectual Property The Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement was concluded as part Rights (TRIPS) Agreement was concluded as part of the GATT Uruguay Round.of the GATT Uruguay Round.


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5. Information Technology and the 5. 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 the Countries’ regulators have not kept pace with the rapid proliferation of international e-commerce rapid proliferation of international e-commerce and Internet-related activities.and Internet-related activities.

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

The United Nations Commission on International The United Nations Commission on International Trade Law (UNCITRAL) has formed a Working Trade Law (UNCITRAL) has formed a Working Group on Electronic Commerce to reexamine Group on Electronic Commerce to reexamine these treaties.these treaties.


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6. Regional Economic Arrangements6. Regional Economic Arrangements

An evolving trend in international economic An evolving trend in international economic activity is the formation of multinational trading activity is the formation of multinational trading blocs.blocs.

There are over There are over 120120 regional free trade areas regional free trade areas worldwide.worldwide.

Market groups take many forms, depending on the Market 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 among which lead to different levels of integration among the participating countries.the participating countries.


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6. Regional Economic Arrangements 6. Regional Economic Arrangements (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 eliminate two or more countries to reduce or eliminate customs duties and nontariff barriers. customs duties and nontariff barriers. Examples: NAFTA, MERCOSUR & FTAA Examples: NAFTA, MERCOSUR & FTAA (proposed)(proposed)

– Customs UnionCustoms Union: Addition of common external : Addition of common external tariffs to the provisions of free trade tariffs to the provisions of free trade agreements. Example: ASEAN.agreements. Example: ASEAN.


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– Common MarketCommon Market: Eliminates all tariffs and : Eliminates all tariffs and other barriers, adopts a common set of external other barriers, adopts a common set of external tariffs on nonmembers, and remove all tariffs on nonmembers, and remove all restrictions on the flow of capital and labor restrictions on the flow of capital and labor among member nations. Example: European among member nations. Example: European Union.Union.

– Monetary UnionMonetary Union: Represents the fourth level of : Represents the fourth level of integration with a single currency among integration with a single currency among politically independent countries. Example: EU politically independent countries. Example: EU and the euro.and the euro.


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– 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 political countries come together in a loose political union for historical reasons, as in the case of union for historical reasons, as in the case of the British Commonwealth which exists as a the British Commonwealth which exists as a forum for discussion and common historical forum for discussion and common historical ties. ties.


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7. Multinational Corporations7. Multinational Corporations

The U.S. government defines a multinational The U.S. government defines a multinational corporations (MNC) for statistical purposes as a corporations (MNC) for statistical purposes as a company that owns or controls 10 percent or more company that owns or controls 10 percent or more of the voting securities, or the equivalent, of at of the voting securities, or the equivalent, of at least one foreign business enterprise.least one foreign business enterprise.

At present, there are At present, there are 65,000 MNCs65,000 MNCs with with 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 is One 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 services Two-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 are Of the 100 largest economies in the world, 51 are corporations.corporations.

The sovereignty of nations will perhaps continue The sovereignty of nations will perhaps continue to weaken due to multinationals and the increasing to weaken due to multinationals and the increasing integration of economies.integration of economies.


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In 1970, of the In 1970, of the 7,000 multinationals7,000 multinationals identified by identified by the United Nations, more than half were from two the United Nations, more than half were from two countries: the United States and Britain.countries: the United States and Britain.

By 1995, less than half of the 36,000 By 1995, less than half of the 36,000 multinationals identified by the United Nations multinationals identified by the United Nations came 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 than The nation-state, while considerably weaker than its nineteenth century counterpart, is likely to its nineteenth century counterpart, is likely to remain 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 falling capital surpluses, faster growth rates, and falling trade and investment barriers have all helped trade 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 become It is not unusual for a startup firm to become global at its inception. Those firms are known as global at its inception. Those firms are known as ““born globalborn global.”.”

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