THE ECONOMIC ENVIRONMENT

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THE ECONOMIC ENVIRONMENT
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Chapter Objectives

• Learn criteria for dividing countries into
  economic categories
• Understand key measures like Gross National
  Income
• Understand economic systems
• Discuss economic issues that influence
  international business
• Assess the transition process for former command
  economies AKA CEITs

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Economic System

• What is the size, growth potential, and stability
  of the market?
• What type of economic system does the country
  have?
• Is your firms industry in the public or private
  sector of this country?
• If public, does the government allow private
  competition?
• How does the government control the nature and
  extent of private enterprise?

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Factors of Production

• Inputs to the production process
• Human resources
• Physical resources
• Knowledge
• Capital
• Infrastructure
• Factor conditions are most obviously
• critical for mining, manufacturing, and
  agriculture, but are also important in service
  and knowledge-intensive industries.

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Demand Conditions

• Market potential
• Composition of home demand (nature of buyer
  needs, buying power, tastes, etc.)
• Size of home demand
• Growth of home demand
• Internationalization of demand
• Current, Future, International

Composition? Size? Growth? Internationalization?
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Classifying countries by income

• Gross National Income (GNI)(formerly Gross
  National Product - GNP)
• the market value of final goods and services
  newly produced by domestically owned factors of
  production.
• Gross Domestic Product (GDP)
• the value of production that takes place within a
  nations borders, without regard to whether the
  production is done by domestic or foreign factors
  of production

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Examples

• A Ford manufactured in the U.S.
• counts in U.S. GNI (because Ford is a U.S.
  company)
• counts in U.S. GDP (because the work is done in
  the U.S.)
• A Toyota manufactured in the U.S.
• does not count in U.S. GNI (because Toyota is not
  a U.S. company)
• does count in U.S. GDP (because the work is done
  here)
• A Ford produced in Mexico counts in U.S. GNI but
  not in U.S. GDP

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Importance of Per Capita GNI
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Liability of Foreignness

• Myth of survival by brut force--Cowboy
  mentality
• Definition foreign companies lower survival
  rate in comparison to local companies for many
  years after they begin operations

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Economic Systems

• Governments struggle with
• who should own businesses
• how they should be controlled

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Economic Freedom

• Market Economy resources are primarily owned and
  controlled by the private sector, not the public
  sector
• Consumer sovereignty - the right of consumers to
  decide what to buy
• Prices are determined by supply and demand

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Market Economy

• Interaction between individuals and firms
• Economic freedom
• Proper allocation of resources?

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Characteristics ofMarket Economies

• Privately owned production factors
• Competitive markets
• Strong currencies
• Institutional support
• Investment opportunities for individuals
• Well-functioning infrastructure

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Little economic freedom

• Command Economy (Centrally Planned Economy) all
  dimensions of economic activity, including
  pricing and production decisions, are determined
  by a central government plan
• Government owns and controls all resources
• Prices are determined by government

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Command Economy

• Sole actor governments
• Proper allocation of resources?

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Does a perfect market economy exit?

• Large corporations
• Labor unions
• Government policies

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No economy is purely market or command

• Mixed Economy Some degree of government
  ownership and control
• Economic systems are along a spectrum of freedoms
• Most command economies are moving towards a
  market economy

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Economic Systems

• Which kind of an economy do we have in the U.S.?
• Which kind does China have?
• Which kind does Poland have?
• Are these classifications adequate to describe
  the market conditions in a given country for MNEs
  to make strategic decisions on internationalizatio
  n?

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DAEWOO

• How would you describe Koreas economic system?
  In the 1970s? 1990s? Now?
• Market?
• Command?
• Mixed?
• Does Korea look like a good place to invest?
• Why?
• What risks does GM face in taking over Daewoo
  Motor?