The document summarizes key topics in the global economic environment: 1) The world economy has become highly intertwined through increased trade and foreign direct investment. However, large economies like the US remain relatively insulated. 2) Country competitiveness depends on factors like innovation and human capital. Emerging markets like China and India now represent areas of great potential. 3) International institutions like the WTO and regional trade agreements have lowered trade barriers but face challenges in regulating new issues like e-commerce.

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Global Marketing Management, 5e
Chapter 2
Global Economic
Environment

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Chapter Overview
1. Intertwined World Economy
2. Country Competitiveness
3. Evolution of Cooperative Global Trade Agreements
4. U.S. Position in Foreign Direct Investment and
Trade
5. Information Technology and the Changing Nature of
Competition
6. Regional Economic Arrangements
7. Multinational Corporations

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 In 2008, the annual global merchandise trade
amounted to $16.8 trillion.
 From 1997 to 2007, world GDP grew more than 30
percent.
 In the same period, total world exports of
merchandise increased by more than 60 percent.
Introduction

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Please Insert Exhibit 2-1 Here
“Growth in the Volume of World Merchandise Trade
and GDP, 1997-2007”
Exhibit 2-1: Growth in the Volume of
World Merchandise Trade and GDP,
1997 - 2007

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Introduction
According to the World Trade Organization (WTO),
the top five merchandise exporting countries in
2008 were:
Germany ($1,530 billion),
China ($1,465 billion)
United States ($1,377 billion)
Japan ($777 billion)
France ($630 billion)

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Introduction
 Collectively, the top five export nations
accounted for 35% of global trade in 2008.
 The Triad Regions (North America,
Western Europe, and Japan) of the world
collectively produced nearly 60 percent of
world GDP in 2007, down from 78 percent in
2004.

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Introduction
 The net result of these factors?
– Increased interdependence of
countries/economies
– Increased competitiveness
– Need for firms to keep a constant watch on the
international economic environment.
 Consumers and companies in the U.S. and Japan
are able to find domestic sources for their needs
because of their diversified and extremely large
economies.

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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 2008, the U.S. economy was about
$14.3 trillion and imports about 63% more than it
exports.

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Exhibit 2-2: Top 10 Exporters and
Importers in World Merchandise Trade,
2008
Please insert Exhibit 2-2 here
“Top 10 Exporters and Importers in World
Merchandise Trade, 2008”

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1. Intertwined World Economy
 The larger the country’s domestic economy, the
less dependent it tends to be on exports and
imports relative to its GDP.
 Intertwining of economies by the process of
specialization due to international trade leads to
job creation in both the exporting and importing
country.
 Foreign direct investment (FDI) involves
investment in manufacturing and service facilities
in a foreign country.

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1. Intertwined World Economy
 As firms invest in manufacturing and distribution
facilities outside their home countries to expand
into new markets around the world, they have
added to the stock of foreign direct investment.
 The increase in foreign direct investment has also
been promoted by the efforts of many national
governments to woo multinationals.
 Portfolio investment or indirect investment refers
to investments in foreign countries that are
withdrawable at short notice, such as investments
in foreign stocks and bonds.

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Exhibit 2-3: Foreign Direct Investment
Inflows, 1980 - 2007
Please insert Exhibit 2-3 here
“Foreign Direct Investment Inflows, 1980-2007”

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1. Intertwined World Economy
 The weekly volume of international trade in
currencies exceeds the annual value of the trade
in goods and services.
 All nations with even partially convertible
currencies are exposed to the fluctuations in the
currency markets.
 A rise in the value of the local currencies make
exports more expensive; a rising currency value
also deters foreign investment in a country and
may encourage outflow of investment.

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1. Intertwined World Economy
 Examples of severe currency fluctuations are the
1995 Mexican meltdown, and the Asian financial
crisis (1997-1999).
 Unfortunately, the influence of these short-term
money 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 (2002).

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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 fixed.
 The role of human skill resources has become
increasingly important as a primary determinant of
industry and country competitiveness.

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2. Country Competitiveness
 In 2008-9, one Asian Tiger (Singapore at #5) was
among the world’s top 10 economies. Others
were the U.S., Switzerland, Denmark, Sweden,
Finland, Germany, Netherlands, Japan and
Canada (see Exhibit 2-4).
 Taiwan, another Asian Tiger, dropped from #5 to
#17 between 2005 and 2008.
 The U.S. and Switzerland have been the most
innovative in the last three decades
 Other OECD countries (especially Japan) have
been increasingly catching up.
(see Exhibit 2-5)

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Exhibit 2-4: Global Competitiveness
Ranking
Please insert Exhibit 2-4 here
“Global Competitiveness Ranking”
(Source is Global Competitiveness Report
2008-2009
Scores should reflect 2008-2009 rankings)

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Exhibit 2-5: Change in Country
Innovativeness: A Key to a Country’s
Long-Term Competitiveness
Please Insert New Exhibit 2-5 here
“Change in Country Innovativeness:
A Key to a Country’s Long-Term
Competitiveness”

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3. Emerging Economies
 Over the next two decades, the big emerging
markets (BEMs) will hold the greatest potential
for U.S. exports
 Largest BEMs: Chinese economic area
(including China, Hong Kong region, and
Taiwan), India, C.I.S. (Russia, Central Asia, and
the Caucasus states), South Korea, Mexico,
Brazil, and Argentina
 B.R.I.C.- Brazil, Russia, India, China
 Each BEM offers opportunities and challenges
for local policy makers, businesses and the
international business and economic community

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Exhibit 2-6: Leading Emerging
Economies in 2008
Please insert Exhibit 2-6 here
“Leading Emerging Economies in 2008”

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4. 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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4. Evolution of Cooperative Global Trade
Agreements
 WTO (World Trade Organization):
– The eighth and last round of GATT talks – called the
Uruguay Round (1986-1994) established an
international body called the WTO which took effect
on January 1, 1995.
– As of July 2008, WTO had 153 member countries.
– WTO has statutory powers to adjudicate trade
disputes among nations and has its own secretariat.
– WTO is the new legal and institutional foundation for a
multilateral trading system.

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4. Evolution of Cooperative Global Trade
Agreements
 WTO’s ninth round---called the “Doha
Development Agenda” (Doha Round) was
launched in Doha, Qatar in November 2001 (see
Exhibit 2-7). Interim deal in December 2005 to
end farm export subsidies by 2013 prevented
collapse of the latest round of the talks.
 The Doha Round of 2001 facilitated the way for
China and Taiwan to get full membership in the
WTO.

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Exhibit 2-7: Agenda for the Doha Round

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4. Evolution of Cooperative Global Trade
Agreements
 Although WTO is a global institutional proponent
of free trade, it is not without critics.
 The WTO dispute settlement mechanism is faster,
more automatic, and less susceptible to blockages
than the 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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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 electronically
represented intellectual property can be copied.
 The Trade Related Aspects of Intellectual
Property Rights (TRIPS) Agreement was
concluded as part of the GATT Uruguay Round.
Update to accord ensuring patent protection does
not block developing countries’ access to
affordable medicines is the top of the agenda.

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5. Information Technology and the
Changing Nature of Competition
 Proliferation of E-Commerce and Regulations:
Countries’ regulators have not kept pace with the
rapid proliferation of international e-commerce and
Internet-related activities.
 In many countries, rules and regulations are vague
regarding e-commerce transactions.
 The United Nations Commission on
International Trade Law (UNCITRAL) has
formed a Working Group on Electronic Commerce
to reexamine these treaties.

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6. Regional Economic Arrangements
 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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6. Regional Economic Arrangements
 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, CAFTA-DR &
FTAA (proposed and currently stalled)
– Customs Union: Addition of common external
tariffs to the provisions of free trade
agreements. Example: ASEAN.

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6. Regional Economic Arrangements
– 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 labor among
member nations. Example: European Union.
– Monetary Union: Represents the fourth level of integration
with a single currency among politically independent countries.
Example: EU and the euro.
– 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 of the
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 at
least one foreign business enterprise.
 At present, there are 78,000 MNCs with 780,000
affiliates in foreign countries.
 MNCs’ total sales exceeded 52% of world GDP in
2006.

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7. Multinational Corporations
 In 1970, of the 7,000 multinationals identified by
the United Nations, more than half were from two
countries: the United States and Britain.
 By 1995, less than half of the 36,000
multinationals identified by the United Nations
came from four countries: the United States,
Japan, Germany, and Switzerland.
 The nation-state, while considerably weaker than
its nineteenth century counterpart, is likely to
remain alive and well.

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Exhibit 2-8: Outward Foreign Direct
Investment (FDI) Stock and Employment
in Foreign Affiliates, 1982-2006
Please Insert Exhibit 2-8 Here
“Outward Foreign Direct Investment (FDI)
Stock and Employment in Foreign
Affiliates, 1982-2006”

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7. Multinational Corporations
 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 start-up firm to become
global at its inception. Those firms are known as
“born global.”