INTERNATIONAL MANAGEMENT 2nd Semester 20062007

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INTERNATIONAL MANAGEMENT2nd Semester 2006/2007

• Case Study 4.2
• Meet the BRICs

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AGENDA

• Case Presentation
• Case Discussion
• Terminology

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Overview (1)

• Over the next 50 years, changes in the relative
  performance, scale, and scope of the worlds
  economies will be dramatic.
• Data indicate that the combined economies of the
  BRICs should surpass those of the G7 nations by
  2050.
• Brazil
• Russia
• India
• China
• Of the original G7 nations, only Japan and the
  United States will still rank among the worlds
  largest economies at that time.

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Overview (2)

• Managers need to rethink their traditional views
  of the economic environment as they encounter
• fundamental shifts in investment and spending,
• increasing competition for inputs in the worlds
  commodity markets,
• the rapid growth of consumer markets in many
  transition economies.
• Other significant impacts loom as the leaders of
  the BRIC nations seek to collectively develop
  their economies and political presence through
  the creation of a multilateral alliance amongst
  themselves.
• No matter what the outcome, the fallout will be
  momentous as the worlds emerging economies come
  into their own.

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• 1. Debate the relative merits of GNI per capita
  versus the idea of purchasing power and human
  development as indicators of economic potential
  in Brazil, Russia, China, and India.

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GNI per capita

• Gross National Income per capita (GNI per capita)
  represents the market value of all final goods
  and services newly produced in an economy by a
  countrys domestically-owned firms in a given
  year divided by its population.
• GNI per capita serves as a very useful indicator
  of current individual wealth and consumption
  patterns.
• Those countries with high populations as well as
  high per capita GNI are most desirable in terms
  of total market potential.

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Purchasing Power Parity

• Purchasing Power Parity (PPP) represents the
  number of units of a countrys currency required
  to buy the same amount of goods and services in
  the domestic market that one unit of income would
  buy in another country.
• PPP is estimated by calculating the value of a
  universal basket of goods that can be purchased
  with one unit of a countrys currency.
• Serves as a useful indicator of international
  differences in prices that are not reflected by
  nominal exchange rates.

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Human Development Index

• Human Development Index measures life
  expectancy, education (primarily the adult
  literacy rate), and income per person and is
  designed to capture long-term progress rather
  than short-term changes.
• By combining indicators of real purchasing power,
  education, and health, the index provides a
  comprehensive measure of a countrys standard of
  living that incorporates both economic and social
  variables.

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• 2. Map the proposed sequence of the evolution of
  the BRICs economy. What indicators might
  companies monitor to guide their investments and
  organize their local market operations?

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Evolution of the BRICs Economy

• The BRICs economies are on the verge of the
  rapid growth of their consumer markets.
• Experience indicates that consumer demand takes
  off when GNI per capita reaches levels between
  3,000 and 10,000 per year.
• In Russia there is already significant evidence
  of the growth of consumerism during the past
  decade.
• There are also early signs of similar trends in
  China and India, where the growth of their middle
  classes is very rapid.
• It is expected that within a decade or so, each
  of the BRICs will show higher returns, increased
  demand for capital, and stronger national
  currencies.
• Thus, foreign firms will want to monitor major
  economic indicators such as GNI, PPP, and the
  Human Development Index, as well as developments
  in the cultural, political, and legal
  environments of those nations.

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• 3. What are the implications of the emergence of
  the BRICs to careers and companies in your
  country?

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Implications of the Emergence of the BRICs

• Industrialized Countries View
• May feel challenged and express the fear of a
  decline in their standards of living due to
  increased pressures in the labor market and the
  declining cost competitiveness of their
  countries firms.
• Developing Countries View
• May be hopeful that their countries will be able
  to successfully generate and/or compete for the
  investment capital and those business activities
  that lead to significant economic growth and the
  increasing global competitiveness of their
  countries firms.
• However, there is ample room for exceptions to
  these feelings, given the present and future
  comparative advantages of particular nations.

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• Chapter 4
• The Economic Environment

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International Economic Environments

• Key Economic Factors include
• the general economic framework of a country,
• its degree of economic stability,
• the existence and role of capital markets,
• the presence of factor endowments,
• market size,
• the existence of economic infrastructure.
• Factor Conditions represent available inputs to
  the production process, such as human, physical,
  knowledge, and capital resources, as well as
  infrastructure.
• (P.124)

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Inflation

• Inflation is the pervasive and sustained rise
  in the aggregate level of prices as measured by a
  cost of living index.
• When aggregate demand grows faster than aggregate
  supply, i.e., when prices rise faster than
  incomes, the effects can be dramatic.
• Among other things, high inflation results in
  governments setting higher interest rates,
  installing wage and price controls, and imposing
  protectionist trade policies and currency
  controls.
• Consumer Price Index (CPI) measures the average
  change in consumer prices over time in a fixed
  market basket of goods and services.
• (P.131-132)

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Unemployment

• Unemployment Rate represents the number of
  unemployed workers divided by the total civilian
  labor force in a given country.
• Given the wide differences in social policies and
  institutional frameworks, the meaning of the
  unemployment rate varies from one country to
  another.
• Often, the true degree of joblessness and the
  productivity of those who work are distorted.
• Misery Index represents the sum of a countrys
  inflation and unemployment rates.
• (P.133-134)

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Debt

• Debt is the sum total of a governments
  financial obligations.
• It measures the states borrowing from its
  population, foreign organizations, foreign
  governments, and international institutions.
• Internal Debt portion of the government debt
  that is denominated in the countrys own currency
  and is held by domestic residents.
• Results when a government spends more than it
  collects in revenues.
• Subsequent pressure to revise government policies
  often leads to economic uncertainty.
• External Debt portion of the government debt
  that is denominated in foreign currencies and is
  owed by foreign creditors.
• Results when a government borrows money from
  foreign lenders.
• Heavily Indebted Poor Countries initiative is
  designed to alleviate the severe external debt
  burdens of less developed countries, much of
  which was amassed during the oil shocks of the
  70s and the 80s.
• (P.134)

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Income Distribution and Poverty

• Income Distribution describes what share of a
  countrys incomes goes to various segments of the
  population.
• It is a problem for countries rich and poor.
• There is a particularly strong relationship in
  skewed income distributions and growth in per
  capita income between those who live in urban
  settings, where growth is accelerating, and those
  who live in rural settings, where growth is
  nearly stagnant.
• Poverty is the state of having little or no
  money, few or no material possessions, and little
  or no resources with which to enjoy a reasonable
  standard of living.
• Globally, the world is about 78 percent poor, 11
  percent middle income, and 11 percent rich.
• More pointedly, the richest 1 percent of the
  worlds population claims as much income at the
  bottom 57 percent and the gap is growing.
• In poverty-stricken countries, economic
  infrastructure and progress are minimal.
• (P.135-136)

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The Balance of Payments

• Balance of Payments (BOP) records a countrys
  international transactions among companies,
  governments, and/or individuals.
• It reports the total of all money flowing into a
  country less all money flowing out of that
  country to any other country during a given
  period.
• The two primary accounts are
• Current Account tracks all trade activity in
  merchandise and services.
• Includes income and compensation receipts and
  payments, unilateral transfers, which reflect
  both government and private relief grants and
  income transferred abroad.
• Capital Account records transactions in real
  and/or financial assets between residents of a
  given country and the rest of the world.
• Includes changes in the official reserve assets
  of a nation, such as gold, special drawing
  rights, and foreign currencies.
• Trade Surplus indicates that the value of
  exports exceeds the value of imports.
• Trade Deficit indicates that the value of
  imports exceeds the value of exports. (P.137)

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Types of Economic Systems (1)

• Economic System is the set of structures and
  processes that guides the allocation of scarce
  resources and shapes the conduct of business
  activities in a nation.
• Market Economy describes the system where
  individuals, rather than government, make the
  majority of economic decisions.
• Free-market (capitalistic) economies are built
  upon the private ownership and control of the
  factors of production. Key factors include
  consumer sovereignty, the freedom of market entry
  and exit, and the determination of prices
  according to the laws of supply and demand.
• Laissez-faire Principle (Credited to Adam Smith)
  nonintervention by government in a countrys
  economic activity, states that producers are
  driven by the profit motive, while consumers
  determine the relationship between price and
  quantity demanded. Thus, scarce resources are
  allocated efficiently and effectively. (P.140-14
  1)

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Types of Economic Systems (2)

• Command Economy or Centrally-planned Economies
  are built upon the government ownership and
  control of the factors of production.
• Central planning authorities determine what
  products will be produced in what quantities and
  the prices at which they will be sold.
• Most often, the totalitarian aims of communism
  gave the highest priority to industrial
  investments and military spending at enormous
  expense to the consumer sector.
• Most such economies are currently in the process
  of transitioning to more market-based systems.
• Mixed Economy fall between the extremes of
  market and command economies.
• While economic decisions are largely
  market-driven and ownership is largely private,
  government still intervenes in many economic
  decisions.
• The extent and nature of such intervention may
  take the form of government ownership of certain
  factors of production, the granting of subsidies,
  the taxation of certain economic activities,
  and/or the redistribution of income and
  wealth. (P.141-142)

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Economic Freedom

• Economic Freedom Index approximates the extent
  to which a government intervenes in the areas of
  free choice, free enterprise, and market-driven
  prices for reasons that go beyond basic national
  needs.
• Presently, countries are classified as free,
  mostly free, mostly unfree, and repressed.
• Determining factors include trade policy, the
  fiscal burden of the government, the extent and
  nature of government intervention in the economy,
  monetary policy, capital flows and investment,
  banking and financial activities, wage and price
  levels, property rights, other government
  regulation, and informal market activities.
• Over time, more and more countries have moved
  toward greater economic freedom.
• Countries ranking highest on this index tend to
  enjoy both the highest standards of living as
  well as the greatest degree of political
  freedom. (P.143)

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Means of Transition

• Privatization the sale and/or legal transfer of
  government-owned resources to private individuals
  and/or entities, reduces government debt, on the
  one hand, and increases market efficiency on the
  other.
• A key factor is that private enterprises must
  compete in open markets for materials, labor, and
  capital thus, they succeed or fail on their own
  merits.
• Deregulation the relaxation or removal of
  restrictions on the free operation of markets and
  business practices, allows businesses to be more
  productive and thus make investments in the
  innovations and activities that can lead to
  economic growth.
• Antitrust Laws because the anticompetitive
  practices of monopolies contradict the basic
  premise of a free market, antitrust laws that are
  designed to maintain and promote market
  competition must be enacted.
• (P.148-149)