CHAPTER 4
THE ECONOMIC ENVIRONMENT
Case: McDonald's Corporation
- Burgers round trip back to Russia
- Overseas moves compatible with McDonald's growth strategy
- From 1990-1995, 56% of the new restaurants have been opened
overseas
- Of the 1,007 restaurants added in 1995, 45% were from 6 foreign
markets (Australia, Canada, England, France, Germany, and Japan)
- Supply procurement, a major problem
- 27,000 Russian aplicants for its 650 positions
- 30,000 people were served during the first day of operations
- strong investment in training
I - Introduction
As a company considers where in the world to build factories and
sells products, it must analyze the countries in which it may
do business
Country analysis requires, understanding national goals, priorities,
and policies. It also involves understanding economic performance,
as indicated by economic growth, inflation, and budgte and trade
deficits.
II - CLASSIFYING ECONOMIC SYSTEMS
Economic Systems usually are classified as capitalist, socialist,
or mixed. No country is purely market or purely command.
As the economy moves to more balance, between market and command
or between public and private ownership, it is considered mixed.
We can also classify economic systems according to two other criteria:
- Type of property ownership
- Method of resource allocation and control
Market Economy:
The individual and the company play important roles.
The market mechanism involves an interaction of price, quantity,
supply and demand for resources and products.
The key factors that make the market economy work:
- - consumer sovereignty
- - freedom of the enterprise to operate in the market
In addition, freedom from government restrictions, and legal and
Institutions frameworks to safeguard economic freedoms
Centrally Planned Economy:
The government coordinates the activities of the different economic
sectors.
Goals are set for every enterprise in the country.
The government determines how much is produced, by whom, and for
whom.
Input-Output Tables
Mixed Economy
Partly Free, Mostly Not Free
Government intervention can be classified in two ways:
- government ownership of the means of production
- government influence in decision making
Ex: MITI was organized to guide industrial development through
"strategic planing and authority over investment and production
priorities."
Political-Economic Synthesis
Clearly, numerous combinations of political and economic systems
are possible
Asian experience, Latin American experience, European, U.S.
III - CLASSIFYING COUNTRIES
A country's international competitiveness is a function of several
factors, including factor conditions and demand conditions
Factors Conditions: essential inputs to the production process
(human resources, physical resources, knowledge resources, capital
resources, and infrastructure)
Demand Conditions: composition of home demand, the size and pattern
of growth of home demand.
Gross National product (GNP): broadest measure of economic activity.
Defined as the market
value of final goods and services newly produced by domestic factors
of demand.
Note: the production by domestic factors could take place at home
or abroad.
Gross Domestic Product: measures the value of production that
occurs within a country's borders without regard to whether the
production is done by domestic or foreign factors of production.
Per Capita GNP: low-income ($725 or less),Mozambique ($80)
Middle-income ($726-$8,955) Colombia ((2,140)
High-Income ($8,956 or more)
Ex: Luxemburg (45,360)
Japan (40,940)
U.S. (28,020)
Low-and middle-income countries is where the vast majority of
the world's population lives.
North-South Dialogue
Relative Importance of High-Income Countries:
They represent only 21% of the number of economies and 15.2% of
the population, but they generate 79.5% of the world's GNP.
Relative Importance of Middle-Income Countries
They represent 28.1% of the world's population, 15.6% of its GNP,
and represent 48.3% of the total countries.
Relative Importance of Low-Income Countries:
Account for 30.6% of the number of economies in the world, 56.7%
of the population, but only 4.9% of the GNP.
Purchasing Power Parity (PPP):
The basic idea is to identify the number of units of a country's
currency required to buy the same amounts of goods and services
in the domestic economy as one dollar would buy in the U.S.
Thus, even though per capita GNP is the primary measure of wealth
in a country, purchasing power GNP is an alternative way to measure
wealth that is more indicative of the purchasing power of a country's
currency.
Structure of Production: percentage of GDP generated by agriculture,
industry, manufacturing, and services.
The key is to note that as income rises, the percentage of GDP
devoted to agriculture falls, and the percentage devoted to services
rises.
Other Indicators
- Quality of Life: (life expectancy, educational standards, individual
purchasing power, health, sanitation, and treatment of women (Canada,
the U.S., Japan, Norway, the Netherlands)
- Capability Poverty Measures: rate of female illiteracy, number
of children in school, proportion of tended births.
- Widening Gap between the Rich and Poor; Income Distribution