Flashcards in L3: International MR (economic) Deck (39)
Economic environment definition (Hollensen, 2013)
It is determined by total buying power, availability of infrastructure, and market size and growth.
How exchange rates affect business decisions (Hollensen, 2013)
- Affect demand for a company’s products. Weak currency => ↓ export price, ↑ import price => ↑ export, ↑ profits.
- Should be stable as it improves the accuracy of financial planning including cash flow forecasts.
Devaluation and Revaluation (Hollensen, 2013)
↓ value of currency by the nation’s gov.
↑ value of currency by the nation’s gov.
Devaluation pros and cons (Hollensen, 2013)
- Pros: good for domestic firms when compete with other countries, and ↑ exports to eliminate trade deficit.
- Cons: ↓ consumers’ buying power; domestic firms less concern with production costs, which may lead to inflation.
Law of one price (Hollensen, 2013)
- An identical product must have an identical price in all countries when price is expressed in a common-denominator currency.
- Products must be identical in quality and content, and must be entirely produced within each particular country.
Big Mac Index (Hollensen, 2013)
The index is based on theory of PPP: a dollar should buy the same amount in all countries. PPP calculated for a ‘basket’ of products, which is a McDonald’s Big Mac.
Pros and cons of Big Mac Index (Hollensen, 2013)
* Pros: Predict the movement of currency value and Estimate exchange rate
* Cons: a simplistic method.
- Cannot reflect local production and delivery cost, advertising cost, and what the local market bears.
- Price is affected by subsidies for agricultural products, or different tax imposed on restaurants.
- Not a ‘traded’ product to buy in low-priced countries and sell in high-priced ones.
Index to measure a nation's income (Hollensen, 2013)
GNI ( = GNP) = GDP + NI
Classify countries by income (3 main levels of industrialization) (Cateora et al., 2012; Hollensen, 2013)
- Less developed countries (LDCs)
- Newly industrialized countries (NIC)
- More-developed countries (MDCs)
LDCs characteristics (Hollensen, 2013)
- Heavily reliant on one product and often on one trading partner, usually agricultural crop or on mining.
- Low capita per income
- Ex: Cuba (sugar), Vietnam (rice).
- Considerably vary in quality of distribution channels between countries.
Risks of LDCs (Hollensen, 2013)
Unreal prospects for rapid economic development:
- Changing supply and demand patterns can affect the nation’s earnings.
- Private sources of capital (L-T infrastructure) are reluctant to invest in such countries. Important capital spending projects rely heavily on world aid programs.
NICs characteristics (Hollensen, 2013)
- Countries with an emerging industrial base, rapid industrialization, medium per capita income, become the formidable exporters and importers
- Ex: Singapore, Taiwan, South Korea, Brazil, Mexico.
Risk of NICs (Hollensen, 2013)
Although the infrastructure develops considerably, high growth in the economy results in difficulties with producing what is demanded by domestic and foreign customers.
MDCs characteristics (Hollensen, 2013)
Considerable GDP per capita, a wide industrial base, considerable development in the services sector and substantial investment in the infrastructure of the country.
11 Economic growth factors in NICs (Cateora et al., 2012)
1) Accessible markets with low tariff
2) Economic and legal reforms
4) Factors of production
5) Incentives to force high domestic rate of savings and direct capital.
6) Industries targeted for growth
7) Investment in IT
8) Outward orientation
10) Political stability
11) Privatization of state-owned enterprises
Three roles of IT and the Internet to Economic development (Cateora et al., 2012)
1) Internet cuts transaction costs and reduces economies of scale from vertical integration. => Small firms to work together to develop a global reach.
2) Internet speeds up the diffusion of new technologies to emerging economies.
3) Mobile phones and other wireless technologies reduce the need to lay a costly telecom infrastructure to bring telephone service to areas not served.
Two roles of Infrastructure to Economic development (Cateora et al., 2012)
1) Represent capital goods that serve the activities of many industries, support distribution and mkt.
- Ex: paved roads, railroads, communication networks, financial networks, and energy supplies and distribution
2) Directly affect a country’s economic growth potential and the firm's ability to engage effectively in business.
Marketing in developing countries (Cateora et al., 2012)
- The ↑ developed an economy, the ↑ variety of MKT functions demanded, the ↑ sophisticated and specialized the firms become to perform MKT functions.
- MKT structures of many developing countries are simultaneously at many stages. Ex: traditional small retailer
- Estimate market potential in developing countries is difficult as coexistence of three different markets - rural sector, urban sector and transitional sector (urban slum).
Types of markets
- Big emerging countries (BEM): BRIC
- Bottom-of-the-pyramid (BOP)
- Europe: EU, EMU, Eastern Europe, Baltic States
- The Americas: NAFTA & Mercosur
- Asia: ASEAN, APEC
- Africa: SADC
- Middle East: GAFTA, OPEC
Characteristic of BEMS (Cateora et al., 2012)
Ex: China, India, Brazil, Mexico, South Africa, Turkey
- Geographically large with great population
- Represent sizable market for a wide range of products
- Economic driven and political importance of the region
- Strong and potential growth rate
- Lack of modern infrastructure => Need to develop IT, environmental technology, transportation, energy, healthcare technology and financial services.
Bottom-of-the-pyramids (BOP) (Hollensen, 2013)
- ⅔ population of the world earn < USD2,000/ year.
- Regional areas: Africa, Asia, eastern Europe and Latin America and the Caribbean.
4 key elements to thrive in low-income market (BOP)
- Creating buying power
- Shaping aspirations through product innovation and consumer education
- Improving access through better distribution and communication system
- Tailoring local solutions
Two-stage models to reach BOP customers (Gollakota et al., 2010)
1) The poor as consumers: deep cost management and deep benefit management.
2) The poor as marketers: Access to credit and Establishment of alliances.
Deep cost management in BOP market (Gollakota et al., 2010)
Identify core value proposition to match customers’ needs and wants, then re-engineering the value chain to reduce costs.
=> Solutions: cheaper inputs, reduce package sizes (ex: Chotukool refrigerator in India), using credit to reduce the up-front payments and accepting payment in installment, adopt pay-per-use strategies (ex: laundry service for students).
Deep benefit management in BOP market (Gollakota et al., 2010)
Identify different needs from poor customers in affluent society.
=> Solutions: Add important features - offering convenient locations, transport or other services. (Ex: Vodacom positions mobile phone as an income-earning asset).
Access to credit in BOP market (Gollakota et al., 2010)
- Consumers gain a small loan (USD100) and become a producer contributing to family income and independence.
- Role: widen a nation’s economic base and promote the growth that leads to real increases in living standards.
- Ex: Grameen bank in Bangladesh with microfinance banks.
Establishment of alliances in BOP market (Gollakota et al., 2010)
Requires the involvement of multiple players like private companies, gov, NGOs, financial institutions, etc.
- Private companies take the leading role in serving BOP and alleviate poverty.
- Change from traditional gov assistance delivery to different ways of creating a sustainable environment. Ex: funding and training entrepreneurs.
- Alliances in health care sector: reduce daily doses or fewer full-strength doses to breed drug-resistant organisms.
Five major forms of regional economic forms (Cateora et al., 2012; Hollensen, 2013)
- Regional cooperation groups (RCD)
- Free trade area: free trade among members
- Custom union: common external trade policy
- Common market: factor mobility
- Economic union: harmonization of economic policies
Regional cooperation groups
Govs participate jointly to develop basic industries beneficial to each other. Each country commit to financing of a JV and purchase a specified share of the output.
- Ex: Colombia and Venezuela built hydroelectric generating plant