Gbm unit-04 (global economic environment)

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By :

Prof. Amit Kumar

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“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”.

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Importance of this course

Global Business Management

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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

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Global Business Management

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International Business Management

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Contents

1. Economic Liberalization in India-19912. Income Classification of Economic Environment3. Economic System Classification (Market,

Command, Mixed)4. Presentation: On International Institution (UN,

World Bank, IMF, ILO)

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Global Business Management Global Economic Environment

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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

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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

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Component of Economic Environment

EconomicEnvironment

IncomeClassification of

Countries

EconomicInstitutions

EconomicSystem

Classification

Region-wiseClassification of

CountriesEconomics in

Transition

EconomicTrade

Policies

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• 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

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• 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.


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• 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.....


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• 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.


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Another way of classifying countries is by their economic system. Keeping this in view, countries are classified as .....

Economic System Classification

EconomicSystem

Classification

MarketEconomies

CommandEconomies

MixedEconomies

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Market Economies1. 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


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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 property4. Balancing competition between Cooperation5. Division of responsibility and diffusion of power6. Materialistic values as a stimulus to greater production7. Honesty in government8. Freedom of information (along with protection of privacy)


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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.


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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’.


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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


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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’.


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Command Economies (Merits & Demerits)

1. Denial of Individual Freedom2. Commitment to Work3. 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.


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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


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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.


‘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’.

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• 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

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• 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

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BRIC- GDP Comparison

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GDP Comparison

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Documents

Gbm unit-04 (global economic environment)