Our Agenda:

Part 1: A Global Marketer’s Economic Perspective

- A brief history
- A country’s economic structure
- Economic freedom
- National income classifications
- International Finance (from a Marketer’s Perspective)

Learning Objectives:

- A century of global trading patterns

- Different types of economic (and politically-controlled) systems
- The evolution of economic development within a country
- Leading importers/exporters
- Exchange rates and managing financial exposure

A Country’s Economic Structure (being a function of its Political System)

Type of Economy: Agriculture, transition, developing or an advanced industrial country (or an

urban/rural combination).

Democracy: single-party (a “false” democracy), two-party, multiple?

Monarchy: with or without a democracy (with or without real influence).

Dictatorship: In singular control (usually through military control) or inserted by another country.

Trade Policies: Open or restrictive.

Logistic Infrastructure: Government or private ownership (ranging from ‘substantial’ to ‘non-existent’).

Education Systems: they often reflect on an organization’s ability to hire pre-trained staff.

Financial Markets: Open and subject to (market-driven) micro and macro-economic factors, or under
rigid government controls (being subject to political influence)?
Market-Driven (Capitalistic) Organizations

- Organizations are independently owned, equity positions are publically traded.

- Strategic planning is based on criteria beyond direct government control.
- Government role is minimal; often limited to trade and consumer protection laws.
- Diverse examples:
o US – decentralized structure (state laws as powerful as federal laws)
o Japan – centralized structure (federal laws are dominant power)

Government-Managed Capitalism

- Similar to market-driven capitalism, organizations are independently owned; equity positions

are openly traded. However, strategic planning is based on criteria provided by government
(through a combination of restrictive laws and preferential tax structures).
- An example would be a monopoly such as an electrical utility; it could be privately-owned but
controlled through government legislation.
- This model often follows a combination of business principles (such as making an acceptable
profit with tolerable risk) and political motivation (using infrastructure capital investment for
selective political gain).

Market-Driven Socialism

- Organizations are often independently owned (through entitlement from government

structures); they can also be government-owned but managed as independent entities.
- Strategic planning is based on a combination of market demand and criteria provided by the
government.

Government-Managed Socialism

- The government owns and controls all industry, distribution.

- This is an extreme example of ‘supply management’. Supply-and-demand market forces (in
combination with pricing models) are meaningless; the government defines all parameters.
o This result; a lack of innovation which creates a low-to-average quantity of low-quality
products (i.e., no high quality goods).
- Most countries that once followed this model (such as Russia or China) now acknowledge that
private ownership under rigid government control is a more effective model.

Economic Freedom

- Defined as the freedom to prosper within a country without intervention from a government or
economic authority.
o Individuals are free to secure and protect human resources, labor and private property.
- Varying levels of economic freedom exist in capitalist economies but must incorporate other
civil liberties to be recognized as being ‘truly free’ (very rare).
- The scoring of various countries (as part of a third-party independent global survey) is based on
a combination of key variables such as:
o Tax, trade and banking policies
o Property rights
 o The legal system
o Foreign investment
o Tolerance of a ‘Black Market’

Stages of Economic Development

- The World Bank has defined four categories of development using Gross National Income (GNI)
as a base.
- In each country, factors such as income growth, inflation, exchange rates, and population
change will influence the ‘GNI Category’
- To keep the dollar thresholds which separate the classifications fixed in real terms, values are
adjusted for inflation.

Low-Income Countries

- GNI per capita: $1,015 (2018)

- Characteristics:
o Limited industrialization; farming is the primary occupation.
o High birth rates; low literacy rates.
o Reliance on foreign aid.
o A history of political instability.

Mistaken Assumptions about ‘Bottom-of-Pyramid’ Target Markets

- The poor have no money.

- The poor will not “waste” money on non-essential goods.
- Entering developing markets cannot be profitable because products would need to be made too
‘cheap’ to still make a profit.
- People in POB (bottom of the pyramid) countries don’t have the basic knowledge to learn how
to use technology.
- Counter-point; doing business in poor countries is actually a form of exploiting; ethics become
questionable.

Low-Middle-Income Countries

- GNI per capita: $1,006 to $3,955 (2018)

- Characteristics:
o Early stages of a consumer market.
o Low wages; common for factory workers to not earn enough money to buy the products
they produce.
 Example: footwear, textiles and toys.

Upper-Middle-Income Countries

- GNI per capita: $3,956 to $12,235 (2018)

- Characteristics:
o Rapidly industrializing, less agricultural employment.
o Population is moving off farms into cities.
 o Rising wages, a ‘middle class’, but still lower than high-income countries.
o Rising literacy rates and education levels.
o Substantial foreign direct investment.
o Factory workers now make enough money to buy the products they produce.

High-Income Countries

- GNI per capita: $12,476 or more

- Characteristics:
o Moving from industrialized to post-industrial economy (serviced-focused countries).
o Knowledge has a greater value than actual production.
 As a result, ‘knowledge management’ (such as economics and finance) have a
greater perceived value than ‘production management’ (such as operational
engineering and semi-skilled trades staff).

G-7: The Group of Seven

Their Mandate; global economic stability and prosperity.

- US, Japan, Germany, France, Britain, Canada, Italy, Russia (joined in 1998 but its membership
was suspended in 2014)

G-20: The Group of Twenty

- The G20 was developed based on recommendations from the G7 finance ministries in 1999.
They believed that a larger body was required to better reflect global finances.
- After the 2008 global financial crisis, the G20 expanded their agenda to include additional issues
that affect financial markets, trade and development.

OECD, the Organization for Economic Cooperation and Development

- 36 nations; established in 1961.

- Post-WWII European origin; based in Paris.
- Promotes economic growth and social well-being.
- Focuses on world trade, global issues, labor market deregulation.
Overview of International Finance

- Foreign exchange allows companies to do business globally with different currencies.

- Currency of various countries are traded for both immediate (spot) and future (forward)
delivery.
- Exchange risk occurs when the value of a currency changes as it is traded.
- Spot market; immediate delivery. (transactions occur on the stop at the current market prices)
- Forward market; future delivery (predetermined price for future delivery, used in commodities,
currencies, and financial contracts.)
- Currency market participants include:
o Countries’ central banks
o Companies that convert foreign currency into their home currency
o Currency speculators
- Forex makes it possible to do business across the boundary of a national currency.
o Currency of various countries are traded for both spot and forward delivery.
- Currency risk adds turbulence to global commerce.
- Devaluation: the reduction of a nation’s currency against other currencies.
- Mercantilism or Competitive-Currency Politics: countries that do not allow their currency to
fluctuate.
- Revaluation: A nation allows its currency to strengthen (usually after getting pressure from its
trading partners in regard to artificially depressing its currency to gain an economic advantage).

Foreign Exchange Market Dynamics

- Currency supply and demand interaction:

- When a country sells more goods/services than it buys, there is a greater demand for the
currency.
o Their currency will appreciate in value (reflected as ‘confidence’ in the currency’s value)
- The daily value of a currency is a reflection of:
o Long-term asset value.
o Short-term emotions and manipulations.

Managing Economic Exposure

- Economic expose refers to the impact of currency fluctuations on the present value of the
company’s financial performance. This occurs when sales are in a foreign currency.
- Numerous techniques and strategies have been developed to reduce this exchange-rate risk.
Two common tools are:
o Hedging: balancing the risk of loss in one currency with a corresponding gain in another
currency.
o Forward Contracts: set he price of the exchange rate at some point in the future to
reduce some risk.