The economic environment is a major determinant of global market potential and opportunity. In today’s global economy, capital movements are the key driving force, production has become uncoupled from employment, and capitalism has vanquished communism. Based on patterns of resource allocation and ownership, the world’s national economies can be categorized as market capitalism, centrally planned capitalism, centrally planned socialism, and market socialism. The final years of the twentieth century were marked by a transition toward market capitalism in many countries that had been centrally controlled. However, great disparity still exists among the nations of the world in terms of economic freedom. Countries can be categorized in terms of their stage of economic development: low income, lower-middle income, upper-middle income, and high income. Gross domestic product (GDP) and gross national income (GNI) are commonly used measures of economic development. The 50 poorest countries in the low-income category are sometimes referred to as least developed countries (LDCs). Upper-middle-income countries with high growth rates are often called newly industrializing economies (NIEs). Several of the world’s economies are notable for their fast growth; for example, the BRICS nations include Brazil (lower-middle income), Russia (upper-middle income), India (low income), China (lower-middle income), and South Africa (upper middle income). The Group of Seven (G-7), the Group of Eight (G-8), the Group of Twenty (G-20), and the Organisation for Economic Co-operation and Development (OECD) represent efforts by high-income nations to promote democratic ideals and free market policies throughout the rest of the world. Most of the world’s income is located in the
Triad, which includes Japan, the United States, and Western Europe.
Companies with global aspirations generally have operations in all three areas. Market potential for a product can be evaluated by determining product saturation levels in light of income levels. A country’s balance of payments is a record of its economic transactions with the rest of the world; this record shows whether a country has a trade surplus (value of exports exceeds value of imports) or a trade deficit (value of imports exceeds value of exports). Trade figures can be further divided into merchandise trade and services trade accounts; a country can run a surplus in both accounts, a deficit in both accounts, or a combination of the two. The U.S. merchandise trade deficit was $701 billion in 2013. However, the United States enjoys an annual service trade surplus. Overall, the United States is a debtor; China enjoys an overall trade surplus and serves as a creditor nation. Foreign exchange provides a means for settling accounts across borders. The dynamics of international finance can have a significant impact on a nation’s economy as well as the fortunes of individual companies. Currencies can be subject to devaluation or revaluation as a result of actions taken by a country’s central bank. Currency trading by international speculators can also lead to devaluation. When a country’s economy is strong or when demand for its goods is high, its currency tends to appreciate in value. When currency values fluctuate, global firms face various types of economic exposure. Firms can manage exchange rate exposure by hedging.
Type of economy. Is the nation an advanced industrial state, an emerging economy, a transition economy, or a developing nation?
Type of government. Is the nation ruled by a monarchy, a dictatorship, or a tyrant? Is there an autocratic, one-party system? Is the nation dominated by another state, or is it a democracy with a multiparty system? Is it an unstable or terrorist nation?
Trade and capital flows. Is the nation characterized by almost completely free trade or incomplete free trade, and is it part of a trading bloc? Is there a currency board, or are there exchange controls? Is there no trade, or does the government dominate trade possibilities?
The commanding heights (e.g., the transportation, communications, and energy sectors). Are these sectors state owned and operated? Is there a mix of state and private ownership? Are they all private, with or without controlled prices? Services provided by the state and funded through taxes. Are pensions, health care, and education provided? Pensions and education but not health care? Do privatized systems dominate?
Institutions. Is the nation characterized by transparency, standards, the absence of corruption, and the presence of a free press and strong courts? Or is corruption a fact of life and the press controlled by the government? Are standards ignored and the court system compromised? Markets. Does the nation have a free market system characterized by high-risk/highreward entrepreneurial dynamism?
Is it a free market that is dominated by monopolies, cartels, and concentrated industries? Is it a socialized market with cooperation among business, government, and labor (but with little entrepreneurial support)? Or is planning, including price and wage controls, dominated by the government?
The seven criteria for describing a nation’s economy introduced at the beginning of this chapter can be combined in a number of different ways. For example, the United States can be characterized as follows:
Type of economy: advanced industrial state
Type of government: democracy with a multiparty system
Trade and capital flows: incomplete free trade and part of a trading bloc
The commanding heights: mix of state and private ownership
Services provided by the state and funded through taxes: pensions and education, but
not health care
Institutions: transparency, standards, no corruption, a free press, and strong courts
Markets: free market system characterized by high-risk/high-reward entrepreneurial
Use these seven criteria to develop a profile of one of the BRICS nations, or any
other country that interests you. What implications does this profile have for marketing
opportunities in the country?