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

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Global Marketing Management

Masaaki Kotabe & Kristiaan HelsenThird EditionJohn Wiley & Sons, Inc., 2004


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Chapter 2

Global Economic Environment


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Chapter Overview

1. Intertwined World Economy

2. Country Competitiveness

3. Evolution of Cooperative Global TradeAgreements

4. U.S. Position in Foreign Direct Investment

and Trade5. Information Technology and the Changing

Nature of Competition


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4

Chapter Overview (contd.)

6. Regional Economic Arrangements

7. Multinational Corporations


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5

In 2001, the annual global trade in goods and

services amounted to $7.4 trillion.

Daily international financial flows now exceed

$1.2 trillion.

From 1990 to 2000, world GDP grew some 30

percent.

Total world exports of merchandise and servicesincreased by 80 percent.

Introduction


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Introduction (contd.)

According to Standard & Poors Global Insight,world exports of goods and services will reach$11.4 trillionby 2005 (24% of world GDP).

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

Consumers and companies in the U.S. and Japan

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


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1. Intertwined World Economy

Despite the increasingly intertwined world

economy, the United States is still relatively more

insulated from the global economy than other

nations. In 2003, the U.S. economy was about$10.5 trillionand imports about half as much as it

exports.

Over the next two decades, the big emerging

markets (BEMs) will hold the greatest potential

for U.S. exports.


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1. Intertwined World Economy (contd.)

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

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

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


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

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

Portfolio investment or indirect investment refers

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


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

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

A rise in the value of the local currencies make

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


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Examples of severe currency fluctuations are the

1995 Mexican meltdown and the Asian financial

crisis (1997-1999).

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

regarding exchange rates than an investment by a

Japanese or German automaker.

Recent examples of financial crisis occurred in

Argentina and Brazil.


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2. Country Competitiveness

Country competitiveness refers to the

productiveness of a country, which is represented

by its firms domestic and international productive

capacity. Country competitiveness is not a fixed thing.

The role of human skill resources has become

increasingly important as a primary determinant ofindustry and country competitiveness


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2. Country Competitiveness (contd.)

The Institute of Industrial Policy Studiescountry

competitiveness report of 2002 placed two Asian

Tigers (Hong Kong and Singapore) among the

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

Kingdom, Germany, Norway, and Canada. (see

Exhibits 2-3 & 2-4).

Although the United States and Switzerland have

been the most innovative in the last three decades,

other OECD countries have been catching up.


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3. Evolution of Cooperative Global

Trade Agreements

ITO (International Trade Organization):

ITO was established after World War II.

GATT (General Agreements on Tariffs &

Trade):

After 1950, GATT succeeded ITO.

The main operating principle of GATT was

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

barriers.


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Trade Agreements (contd.)

WTO (World Trade Organization Trade):

The eighth and last round of GATT talkscalled the Uruguay Round (1986-1994)

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

As of January 1, 2002, WTO had 144 member

countries.

WTO has statutory powers to adjudicate tradedisputes among nations and has its ownsecretariat.


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WTO is the new legal and institutional

foundation for a multilateral trading system.

WTOs ninth round---called the Doha

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

Exhibit 2-5).

The Doha Round of 2001 also facilitated the

way for China and Taiwan to get full

membership in the WTO.


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Although WTO is a global institutional proponent

of free trade, it is not without critics.

The WTO settlement mechanism is faster, more

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

The WTO Work Program on Electronic

Commerce is in the process of defining the trade-

related aspects of electronic commerce that would

fall under the parameters of WTO mandates.


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4. U.S. Position in Foreign Direct

Investment and Trade

The United States has been a significant overseas

investor since 1945.

The first wave of major investment was part of the

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

concentrated in Europe.

In 2000, U.S. firms invested $162 billionoverseas. Firms based in Britain and the Netherlands have

been the largest investors in the United States.


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4. U.S. Position in Foreign Direct

Investment and Trade (contd.)

Throughout the last decade, firms based in Britain,

Japan, and the Netherlands were the largest

investors in the United States.

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

current account since the first oil shock in 1973.

There is increasing concern that the conventional

measures of the deficit may not accurately reflect

a countrys transactions with the rest of the world.


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5. Information Technology and the

Changing Nature of Competition

Information technology and the changing nature of

competition have created many challenges for the

firms.

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

The Trade Related Aspects of Intellectual Property

Rights (TRIPS) Agreement was concluded as part

of the GATT Uruguay Round.


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5. Information Technology and the

Changing Nature of Competition (contd.)

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

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

The United Nations Commission on International

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


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An evolving trend in international economic

activity is the formation of multinational trading

blocs.

There are over 120 regional free trade areas

worldwide. Market groups take many forms, depending on the

degree of cooperation and inter-relationships,

which lead to different levels of integration among

the participating countries.


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Chapter 2 Kotabe & Helsen's Global MarketingManagement, Third Edition, 2004 26


(contd.)

Types of Regional Economic Arrangements:

Free Trade Areas: Formal agreement among

two or more countries to reduce or eliminate

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

(proposed)

Customs Union: Addition of common external

tariffs to the provisions of free trade

agreements. Example: ASEAN.


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(contd.)

Common Market: Eliminates all tariffs and

other barriers, adopts a common set of external

tariffs on nonmembers, and remove all

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

Union.

Monetary Union: Represents the fourth level of

integration with a single currency amongpolitically independent countries. Example: EU

and the euro.


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(contd.)

Political Union: Highest level of integration

resulting in a political union. Sometimes,

countries come together in a loose political

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

forum for discussion and common historical

ties.


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7. Multinational Corporations

The U.S. government defines a multinational

corporations (MNC) for statistical purposes as a

company that owns or controls 10 percent or more

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

At present, there are 65,000 MNCswith 850,000

affiliates in foreign countries.

MNCs total sales amount to almost $19 trillion.


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7. Multinational Corporations (contd.)

One third of multinational companies trade is

accounted for by intra-firm activities.

Two-thirds of of world trade in goods and services

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

corporations.

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

integration of economies.


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

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

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


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Currently, factors such as currency movements,

capital surpluses, faster growth rates, and falling

trade and investment barriers have all helped

multinationals from other countries join the cross-border fray.

It is not unusual for a startup firm to become

global at its inception. Those firms are known as

born global.


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

Copyright John Wiley & Sons, Inc. 2004

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