Gbm unit-04 (global economic environment)
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This document discusses concepts related to global business management and the global economic environment. It covers several topics: 1. It introduces the importance of understanding international business and being prepared to work in foreign environments for management graduates. 2. It outlines course topics for a global business management course, including globalization, trade, technology, economics, politics, and business strategy. 3. It discusses classifications of countries' economic environments, including by income level, economic systems (market, command, mixed), and countries in economic transition (e.g. India, China, Russia). 4. It provides examples and analyses of different economic systems and the characteristics of market, command, and mixed economies.
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Gbm unit-04 (global economic environment)
- 1. 07/06/10 1 By : Prof. Amit Kumar
- 2. 07/06/10 2 “A student pursuing management education from IILM- Graduate School of Management, for example may find himself or herself placed in a firm located in a totally different country. Knowledge about international business keeps the youngster mentally prepared to accept assignment in an alien environment. Forewarning is definitely forearming, for the fresh management graduate”. IILM-GSM Importance of this course Global Business Management
- 3. 07/06/10 3 Course: Global Business Management 1. Globalization 2. Global Trade & Theory 3. Global Technological Environment 4. Global Economic Environment 5. Global Political-Legal Environment 6. Foreign Direct Investments 7. Regional Economic Integration 8. Strategy and Structure of International Business IILM-GSM Global Business Management
- 4. 29/07/10 4 IILM-GSM International Business Management
- 5. 29/07/10 5 Contents 1. Economic Liberalization in India-1991 2. Income Classification of Economic Environment 3. Economic System Classification (Market, Command, Mixed) 4. Presentation: On International Institution (UN, World Bank, IMF, ILO) IILM-GSM Global Business Management Global Economic Environment
- 6. 29/07/10 6 The economic liberalization in India refers to ongoing reforms in India. After Independence in 1947, India adhered to socialist policies. In the 1980s, the PM initiated some reforms. His government was blocked by politics. In 1991, after the IMF had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. Economic Liberalization in India-1991 IILM-GSM Global Business Management Global Economic Environment
- 7. 29/07/10 7 The fruits of liberalization reached their peak in 2007, with India recording its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China. Any MNC seeking to invest in any country should analyze and understand the local economic environment. Indian Economic Environment IILM-GSM Global Business Management Global Economic Environment
- 8. 29/07/10 8 Component of Economic Environment Economic Environment Income Classification of Countries Economic Institutions Economic System Classification Region-wise Classification of Countries Economics in Transition Economic Trade Policies IILM-GSM Global Business Management Global Economic Environment
- 9. 29/07/10 9 • Several international agencies including the Organization for Economic Cooperation and Development (OECD) and United nations classify countries by their economic status. • But the best known system of classification is the one recommended by the world bank in which 211 economics with the population of at least 30,000 are ranked by their levels of gross national income (GNI) per capita. Income-wise Classification of Countries IILM-GSM Global Business Management Global Economic Environment
- 10. 29/07/10 10 • Then these economics are then classified as low- income (LIC), lower-middle income (LMC), upper- middle income (UMC), high-income countries (HI). • LIC countries are those having per capita GNI in 2012 of $735 or less; LMC between $736 and $2995; UMC between $2996 and $9265 and high- income countries with $9266 or more. • Generally speaking, LIC, LMC, and UMC are developing countries and the rest are developed nations. Income-wise Classification of Countries IILM-GSM Global Business Management Global Economic Environment
- 11. 29/07/10 11 • Developing countries – most developing countries shares set of common and well-defined goals. These include a reduction in poverty, inequality and unemployment, provision of minimum level of education, health, housing and food for every citizen. Nations like, Africa, the Middle East and few are in Europe & Asia. • Some of these countries (India, China) have the potential to emerge as superpower in near future. • Developed nations are..... Income-wise Classification of Countries IILM-GSM Global Business Management Global Economic Environment
- 12. 29/07/10 12 • Developed nations are highly industrialized, highly efficient and whose people enjoy a high quality of life are developed countries. They support programmes for helping poorer nations improve their economics and standards of living. Like, US, Australia, Canada, Japan, UK, New Zealand and Europe. • Geographically, developed countries are clustered in few areas. • They generate nearly 80% of the world’s wealth, but they represent a relatively small number of countries and population. Income-wise Classification of Countries IILM-GSM Global Business Management Global Economic Environment
- 13. 29/07/10 13 Another way of classifying countries is by their economic system. Keeping this in view, countries are classified as ..... Economic System Classification Economic System Classification Market Economies Command Economies Mixed Economies IILM-GSM Global Business Management Global Economic Environment
- 14. 29/07/10 14 Market Economies 1. In countries where individual goals are uppermost over collective goals, market economies do find their place. 2. Consumers are sovereign. Consumers decide what the producers should produce and supply. 3. Also called Capitalism, all productive functions are privately owned. 4. If demand for a product exceeds its supply, producer tends to rise promoting producers to produce more and vice-versa. E.g. The US, Canada, UK, Hong Kong Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 15. 29/07/10 15 Market Economies: Requires fulfilment of certain conditions, if it were to function effectively. Failure to fulfil the conditions may destroy capitalism. These are: 1. Trust ( In banks, insurance, companies, suppliers, etc) 2. Law and Order (enforcement of contracts) 3. Security of persons and of property 4. Balancing competition between Cooperation 5. Division of responsibility and diffusion of power 6. Materialistic values as a stimulus to greater production 7. Honesty in government 8. Freedom of information (along with protection of privacy) Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 16. 29/07/10 16 Market Economies (Merits & Demerits) • Capitalism encourages individual initiatives, allows market forces to have free play, promotes a competitive spirit, and directs the scare resources to most profitable uses. • The weakness of market economy stems from the fact that it results in gross inequities of income, exploitation of the poor by the rich. • Capitalism tends to have devastating effect on environment. Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 17. 29/07/10 17 Analyze this situation at Russia ‘Before prices were freed in Russia, people used to say that if they ever saw a line, they just stood in it. When they got to the front of the line, they bought whatever was being sold. Even if they didn’t need the item, they figured that someone in their extended family did, so they just bought it. When the supply ran out, there wouldn’t be any more left, no matter what price you were willing to pay’. Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 18. 29/07/10 18 Command Economies • Also called socialism, in a command economy planning is must. • Decision relating to all economic activities- what to produce, how to price- are determined by economy, a central government plan. • Historically, command economies were found in communist countries where collective goals were given priority over individual goals. • Since the demise of Communism in the late 1980s, the number of command economy nations has fallen drastically. E.g. Vietnam & North Korea Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 19. 29/07/10 19 Command Economies ‘The great October Revolution of 1917 saw, for the first time, the emergence of a state based on Marxist principles. It was Lenin who set up a Communist state in Russia and from here, the ideology spread to Czechoslovakia, Poland, Hungry, Romania, and China. Firmly entrenched in these countries, socialism appeared to have answers for all the ills associated with capitalism. The structure started crumbling all of sudden. We recently witnessed country after country going back on socialism and almost embracing capitalism. Several reasons have contributed to the reversal of the socialist economy’. Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 20. 29/07/10 20 Command Economies (Merits & Demerits) 1. Denial of Individual Freedom 2. Commitment to Work 3. Rate of Economic Growth- One of the most striking failures of state or collective ownership has been in agriculture where a superpower like Soviet Union, possessing one-sixth of the land surface on earth, found unable to feed its people even after 70 years of revolution. 4. Lack of Flexibility- Capitalism survives because of its flexibility. Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 21. 29/07/10 21 Mixed Economies • Largely followed in France, India, Italy and Sweden, mixed economies admit existence of private sector along with government ownership. • The economic set-up under this philosophy is split into three parts: 1. Sector in which both production & distribution are entirely managed & controlled by the state 2. Sector in which the state & private enterprise jointly participate in production as well as in distribution 3. Sector in which the private enterprise has complete access subject only to the general control and regulation of the state Economic System Classification IILM-GSM Global Business Management Global Economic Environment
- 22. 29/07/10 22 Mixed Economies (Merits & Demerits) • Mixed economy also has its share of criticisms. It has, for example, not enabled its followers to become either Americans or Russians. • Mixed economy has been approximately compared to the amber colour on a signal post which keeps the driver of a vehicle guessing about what the next move should be. Economic System Classification ‘The international manager needs to know the system of economy prevailing in a country where he or she intends to do business. Obviously, countries with market economies are good places to locate business units’. IILM-GSM Global Business Management Global Economic Environment
- 23. 29/07/10 23 • During the past two decades, many countries with command economy orientation have been remaking themselves to emerge as market friendly economies. • This process, called economic transition, involves changing a country’s fundamental economic organization and creating new market institutions. Economic In Transition IILM-GSM Global Business Management Global Economic Environment
- 24. 29/07/10 24 • By 1992, the Communist empire had ceased to exist, with democratic governments replacing the communist parties. East Germany had been reunited with West Germany, and Hungry & Poland had all accepted as associate members of the EU. The Soviet Union had disappeared with its former republics declaring their independence, but realigned in the Commonwealth of Independent States (CIS). • Main focus on some of the countries in transition in this section: – India, China, Russia – Africa (Tanzania, Zambia, South Africa, Mozambique) – Latin America ( Brazil, Argentina, Chile, Peru) Economic In Transition IILM-GSM Global Business Management Global Economic Environment
- 25. 29/07/10 25 BRIC- GDP Comparison IILM-GSM Global Business Management Global Economic Environment
- 26. 29/07/10 26 GDP Comparison IILM-GSM Global Business Management Global Economic Environment
Editor's Notes
- To arm or prepare in advance of a conflict The part of the arm between the wrist and the elbow.
- The economic liberalization in India refers to ongoing reforms in India. After Independence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "License Raj"; the slow growth rate was named the "Hindu rate of growth". In the 1980s, the Prime Minister Rajiv Gandhi initiated some reforms. His government was blocked by politics. In 1991, after the International Monetary Fund (IMF) had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalization has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.
- However, the year 2009 saw a significant slowdown in India's GDP growth rate to 6.8%...current GDP 1.86 Trillion on 2011...World Bank Report Any MNC seeking ...talks about the importance of analyzing economic environment... Any MNC seeking to invest in any country should analyze and understand the local economic environment. Understanding the economic environment of foreign countries can help international managers predict how trends and events in those environments might affect performance of business there. There are 6 components of economic environment. “Economic reforms have ensured ample supplies of everything, ending the perennial scarcities of the bad old days. Low import duties have ended the smuggling of gold, synthetics and consumer electronics. The black market premium on foreign exchange has gone. Inflation and interest rate have fallen with the reduction of external barriers. Thus, positives of Indian economy are many and varied. No wonder, in the days to come, India is prophesied to play a much bigger role in world economy”. 2007.....groth rate...9% highest 2009.....................6.8 2010.....................7.4% with 1.235 Trillion
- Moving from BRIC to BRICSM..adding Mexico and South Korea (Seoul) These are 6 components..or important elemenst of the economic environment..that means in the economic envirormnet it is necessary to understand thsees all..6 elemts or components..s
- United nations 193 countries...other says 196 countries...Gross national income (GNI) comprises the total value produced within a country (i.e. its gross domestic product), together with its income received from other countries (notably interest and dividends), less similar payments made to other countries. The GNI consists of: the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the indirect business taxes. The GNI is similar to the gross national product (GNP), except that in measuring the GNP one does not deduct the indirect business taxes. For example, the profits of a US-owned company operating in the UK will count towards US GNI and UK GDP, but will not count towards UK GNI or US GDP. Similarly, if a country becomes increasingly in debt, and spends large amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a country sells off its resources to entities outside their country this will also be reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.
- Brazil...8070 Russia ..9370 Indian GNI..in 2009...1170 China...3620 So on the basis of GNI..right sequence is RBCI Swiss 56370 US 47210
- Discuss private ownership/sector Vs public sectors..private ownership is market, public is command Market economy where individual goals are at the top but in command economies collective goals are at the top Also known as free market economies In countries where individual goals are uppermost over collective goals, market economies do find their place. Also called Capitalism, all productive functions are privately owned. Production of goods/services is not planned by individuals. Rather production is determined by the interaction of supply and demand forces. Whether to produce more or less depends on the price factor. If demand for a product exceeds its supply, producer tends to rise promoting producers to produce more and vice-versa. In market economy consumers are sovereign. Consumers decide what the producers should produce and supply. E.g. The US, Canada, UK, Hong Kong
- Together with trust and law..in order to maintain these two ..we have anti-trust law or Competition law, known in the United States as antitrust law, are laws that promote or maintain market competition by regulating anti-competitive conduct.[1] The history of competition law reaches back to the Roman Empire. The business practices of market traders, guilds and governments have always been subject to scrutiny, and sometimes severe sanctions. Since the twentieth century, competition law has become global. The two largest and most influential systems of competition regulation are United States antitrust law and European Union competition law. National and regional competition authorities across the world have formed international support and enforcement networks. Competition law, or antitrust law, has three main elements: * prohibiting agreements or practices that restrict free trading and competition between business. This includes in particular the repression of free trade caused by cartels.(A cartel is a formal (explicit) agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production.[1] Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition.) * banning abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position. Practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal, and many others. * supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to "remedies" such as an obligation to divest part of the merged business or to offer licenses or access to facilities to enable other businesses to continue competing.
- Each economic system has its own strengths and weaknesses. Capitalism encourages individual initiatives, allows market forces to have free play, promotes a competitive spirit, and directs the scare resources to most profitable uses. The weakness of market economy stems from the fact that it results in gross inequities of income, exploitation of the poor by the rich. Capitalism tends to have devastating effect on environment. People in capitalist societies earn more and consequently indulge in excessive and wasteful expenditure on consumer durables and luxuries.
- Now check republic and Slovakia Freed means to set free
- Planning si government planning…china, russia is country moving from command to market economy..i;e country in transition states Also called socialism, in a command economy planning is must. Decision relating to all economic activities- what to produce, how to price- are determined by economy, a central government plan. In fact, in a pure command economy the tools of production are organized, managed and owned by the government, with the benefits accruing to public. Consistent with collective ideology, the objective of a command economy is for government to own and run business for the good of society. Historically, command economies were found in communist countries where collective goals were given priority over individual goals. Since the demise of Communism in the late 1980s, the number of command economy nations has fallen drastically. E.g. Vietnam & North Korea
- Now check republic and Slovakia
- Denial of Individual Freedom- One of the essential requirements of human organism is freedom- to work, to earn, to express, to choose and to indulge in expenditure of one’s choice. Commitment to Work- Socialism assumes total commitment of people to work and to continue to the country’s welfare. Rate of Economic Growth- One of the most striking failures of state or collective ownership has been in agriculture where a superpower like Soviet Union, possessing one-sixth of the land surface on earth, found unable to feed its people even after 70 years of revolution. Lack of Flexibility- Capitalism survives because of its flexibility.
- This falls midway between a market economy and a command economy. Largely followed in France......... 1. oil and natural gas sector, coal sector, other natural ore sector like Mg, Bauxite, U, Titanium etc...rail transport...roadways...nuclear plant atomic centre ISRO research 2. settel secot..like Tata Steel , Bhushan Steel and SAIL.. also...telecom like MTNL, BSNL and Vodafone, IDEA nd Tata Indicom Education sector like IIT and IIMs by Govt..but IBS, MDI, BIMTECH, by private 3. automobile like Tata, Hero Electonice like Mobile phones, LCD, etc..software industries etc
- Process of transition typically involves five reform measures: Macroeconomic stabilization to reduce budget deficit and expand credit availability. Liberalization of economic activity that is decided by price reflecting supply and demand. Legalization of private enterprises and privatization of state-owned enterprise in accordance with an effective system of individual property rights. Removal of trade and investment barriers in goods & services, and removal of controls on convertibility of the nation’s currency. Development of a social-welfare system designed to ease the transition process.
- Now BRICSM..south korea(seoul) and Mexico In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries" or known as the "Big Four") is a grouping acronym that refers to the related countries of Brazil, Russia, India, and China. The acronym was coined by Jim O'Neill in a 2001 paper entitle "The World Needs Better Economic BRICs" [1][2][3]. The acronym has come into widespread use as a symbol of the shift in global economic power away from the developed G7 economies toward the developing world. According to a paper published in 2005, Mexico and South Korea are the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed[4]. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.[5][6] The growth rate in GDP India vs. GDP China has increased outstandingly in the recent period due to several factors leading to an economic upsurge in both the countries. China and India jointly account for 2.4 billion people, which is roughly 40 percent of the total population of the world. It has been assumed that China is likely to excel Japan in terms of population by the year 2016. By the end of the year 2045, China is expected to surpass United States in the population strength also. According to a survey report on the growth rate of China and India GDP, it has been stated that the institutional investors have made a notable contribution in the country's economy, which led to the hike in the GDP of both the countries.
- $1.16 Trillion US dollars at current prices – 2008 However, the year 2009 saw a significant slowdown in India's GDP growth rate to 6.8%