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Chapter 2: International marketing environment

Political and economic environment

 The Political/Legal environment

International Marketing  Home country environment
 Host country environment
 Trade barriers from home country to host country
 The political risk analysis procedure
 The economic environment
Lecturer: Pham Thi Minh Chau (Ms.) | MSc.  The economic system
School of Economics and International Business  Classification by income
Phone: 094.202.4060  Stages of economic development
Email: minhchaupham@ftu.edu.vn  Regional economic integration
 The European Economic and Monetary Union and the euro
 Major trading blocs
 BRIC – the slowing growth is hitting the emerging countries
 ‘Bottom of pyramid’ (BOP) as a market opportunity
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The political/legal environment Home country environment

 Promotional activities (sponsored by governmental organizations)
The political/legal environment comprises primarily 2 dimensions:
 The home country environment
 Financial activities
 The host country environment.
 Information services
Besides these two dimensions there is also a third:
 The general international environment
 Export-facilitating activities

 Promotions by private organization

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Home country environment Home country environment

 Promotional activities (sponsored by governmental organizations)
 Financial activities
 Direct government attempts to make its country’s products more competitive in
Through the membership of international financial
world markets or a to encourage greater participation in exporting.
organizations such as the International Monetary Fund
 The granting of subsidies: to ensure the profitability of industries and individual (IMF) and the World Bank, the national government can
assume its role as an international banker.
firms that might well succumb if exposed to the full force of competition
• Revenue is supplemented, or costs are reduced by subsidies to certain input factors  This offer exporters the opportunity of transferring
• Lower taxes on profits attributable to export sales/ refunding of various indirect taxes some of the risk to governmental organizations through
credit insurance. Export credit insurance and guarantees
• In the form of a direct grant
cover certain commercial and political risks that might be
 Government export promotion programmes, and programmes for global associated with any given export transaction.
marketing activities are designed to deal with the following internal barriers:
 The exporter that can offer better payment terms and
• Lack of motivation, as global marketing is viewed as more time-consuming, costly and financing conditions may make a sale, even though its
risky, and less profitable, than domestic business price may be higher or the quality of its product inferior to
that of its competitors
• Lack of adequate information
• Operational/resource-based limitations.
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Home country environment Home country environment

 Information service
 Export-facilitating activities
For most companies or newcomers to global marketing, the national government is
A number of national government activities can stimulate export:
the major source of basic marketing information.
• Trade development offices abroad, either as a separate entity or as part of the
• Economic, social and political data on individual countries
normal operations of an embassy or consulate
• Summary and detailed information on aggregate global marketing transactions
• Government-sponsored trade fairs and exhibitions – a trade fair is a convenient
• Individual reports on foreign firms
marketplace in which buyers and sellers can meet, and in which an exporter can
• Specific export opportunities
display products
• Lists of potential overseas buyers, distributors and agents for various products in
• Sponsoring trade missions of business people who go abroad for the purpose of
different countries
making sales and/or establishing agencies and other foreign representation
• Information on relevant government regulations both at home and abroad
• Operating permanent trade centres in foreign market areas, which run trade shows
• Sources of various kinds of information not always available from the government, e.g.
often concentrating on a single industry.
foreign credit information
• Information that will help the company manage its operation, e.g. information on export
 Provide companies with relatively low-cost ways of making direct contact with
procedures and techniques. potential buyers in overseas markets.
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Home country environment

Host country environment
 Promotion by private organizations
Various non-governmental organizations play a role in the promotion of global Managers must continually monitor the government, its policies and its

marketing. stability to determine the potential for political change that could adversely
• Industry and trade associations, national, regional and sectoral industry affect operations of the firm.
associations, associations of trading houses, mixed associations of manufacturers
and traders, and other bodies
Three major types of political risk can be encountered:
• Chambers of commerce
• Other organizations concerned with trade promotion: organizations carrying out 1. Ownership risk, which exposes property and life

export research, regional export promotion organizations, world trade centres, etc. 2. Operating risk, which refers to interference with the ongoing operations of a
• Export service organizations, banks, transport companies, freight forwarders, firm
export merchants and trading companies. 3. Transfer risk, which is mainly encountered when companies want transfer
capital between countries.
The type of assistance available to firms includes information and publications,
education and assistance in ‘technical’ details, and promotion in foreign countries

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Host country environment Political risks in host country

Political risk can be the result of government action, but it can also be outside  Import restrictions

the control of government. The types of action and their effects can be Selective restrictions on the import of raw
materials, machines and spare parts are fairly
classified as follows:
common strategies to force foreign industry to
 Import restrictions
purchase more supplies within the host country
 Local-content laws
and thereby create markets for local industry.
 Exchange controls
 Market control
Although this is done in an attempt to support
 Price controls
the development of domestic industry, the result
 Tax controls
is often to hamstring and sometimes interrupt
 Labour restrictions
the operations of established industries. The
 Change of government party
problem then becomes critical when there are
 Nationalization
no adequately developed sources of supply
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Political risks in host country

Political risks in host country
 Local-content laws. In addition to restricting imports of essential supplies
to force local purchase, countries often require a portion of any product
 Market control. The government of a country sometimes imposes control
sold within the country to have local content, i.e. to contain locally made
to prevent foreign companies from competing in certain markets.
parts. This requirement is often imposed on foreign companies that
assemble products from foreign-made components.
 Price controls. Essential products that command considerable public
interest, such as pharmaceuticals, food, petrol and cars, are often
 Exchange controls. Exchange controls stem from shortages of foreign
subjected to price controls. Such controls can be used by a government
exchange held by a country. When a nation faces shortages of foreign
during inflationary periods to control the environmental behaviour of
exchange, controls may be levied over all movements of capital or,
consumers or the cost of living.
selectively, to conserve the supply of foreign exchange for the most
essential uses. A problem for the foreign investor is getting profits and
investments into the currency of the home country (transfer risks).
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Political risks in host country Political risks in host country

 Tax controls. Taxes must be classified as a political risk when used as a

 Change of government party. A new government may not honour an
means of controlling foreign investments. In many cases, they are raised
agreement that the previous government has made with the company.
without warning and in violation of formal agreements.
E.g: In some developing countries, where the economy is constantly
threatened with a shortage of funds, unreasonable taxation of successful  Nationalization (expropriation). Defined as official seizure of foreign
foreign investments may appeal to some governments as the most property, this is the ultimate government tool for controlling foreign
convenient and quickest way of finding operating funds. firms. This most drastic action against foreign firms is fortunately
occurring less often as developing countries begin to see foreign direct
investment as desirable
 Labour restrictions. In many nations labour unions are very strong and
have great political influence. Using their strength, unions may be able to
persuade the government to pass very restrictive laws that support labour
at heavy cost to business.
E.g: Labour unions are gradually becoming strong in Western Europe.
Germany and a number of other European nations require labour
representation on boards of directors.

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Trade barriers from home country to host country Trade barriers from home country to host country
Frequently, an importing nation will take steps to inhibit the inward flow of goods
Trade barriers: Trade laws (often tariffs) that favour local firms and and services by effecting trade barriers. There are two main reasons why
discriminate against foreign ones. countries levy tariffs:

1. To protect domestic producers. Because import tariffs raise the effective cost
of an imported good, domestically produced goods can appear more attractive to
buyers. In this way, domestic producers gain a protective barrier against imports.

2. To generate revenue. Using tariffs to generate government revenue is most

common among relatively less-developed nations. The main reason is that these
nations tend to have less formal domestic economies that presently lack the
capability to record domestic transactions accurately. The lack of accurate record-
keeping makes the collection of sales taxes within the country extremely difficult.
Nations solve the problem by simply raising their needed revenue through import
and export tariffs. Those nations obtaining a greater portion of their total revenue
from taxes on international trade are mainly the poorer nations.

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Trade barriers from home country to host country Trade barriers from home country to host country

Tariff barriers Tariff barriers

 Specific: Charges are imposed on particular products, by either weight or
Tariffs: Tariffs are direct taxes and charges imposed on imports. volume, and usually stated in the local currency.
They are a tool used by governments to protect local companies
from outside competition. The most common forms are specific, ad  Ad valorem: The charge is a straight percentage of the value of the goods (the
valorem and discriminatory. import price)
E.g: a 5 per cent tariff means that the import tariff is 5 per cent of the appraised
value of the good in question.
 Generally simple, straightforward and easy for the country to administer. While  Discriminatory: In this case, the tariff is charged against goods coming from a
they are a barrier to trade, they are a visible and known quantity and so can be particular country, either where there is a trade imbalance or for political
accounted for by companies when developing their marketing strategies. purposes.
Under the WTO agreements, countries cannot normally discriminate between their
 Sometimes used by poorer nations as the easiest means of collecting revenue trading partners. If one country grants another country a special favour (such as a
and protecting certain home industries. lower customs duty rate for one of their products), the first country will have to do the
same for all other WTO members. This principle is known as most-favoured-nation
 A useful tool for politicians to show indigenous manufacturers that they are (MFN) treatment.
actively trying to protect their home markets. This was also the case when US
President Trump started a trade war with China in 2018.
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Trade barriers from home country to host country Trade barriers from home country to host country

Non-tariff barriers Non-tariff barriers

In the past 40 years, the world has seen a gradual reduction in tariff barriers  Quotas: A restriction on the amount (measured in units or weight) of a
in most developed nations, though they reappeared in 2016–20 under good that can enter or leave a country during a certain period of time.
President Trump with his campaign ‘America First’. However, in parallel to
this, non-tariff barriers have substantially increased.  Embargoes: A complete ban on trade (imports and exports) in one or
more products with a particular country is called an embargo.

Non-tariff barriers: Non-monetary barriers to foreign products, such  Administrative delays: Regulatory controls or bureaucratic rules
as biases against a foreign company’s bids, or product standards designed to impair the rapid flow of imports into a country
that go against a foreign company’s product features.
 Local-content requirements: Laws stipulating that a specified amount
of a good or service be supplied by producers in the domestic market
Non-tariff barriers are much more elusive and can be more easily disguised.
However, in some ways the effect can be more devastating because they are an  Historical development of barriers: After World War II there was a
unknown quantity and are much less predictable. reaction against the high tariff policy of the 1930s and significant efforts
were made to move the world back to free trade.
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Quotas Embargoes One example of a total ban on trade with another country has been
the US embargo on trade with Cuba, more recently with Iran
After tariffs, a quota is the second most common type of trade barrier. (2018) as a consequence of the United States’ withdrawal from the
international nuclear deal with Iran.
Governments typically administer their quota systems by granting quota
licences to the companies or governments of other nations (in the case of Administrative This may include a wide range of government actions such as:
import quotas) and to domestic producers (in the case of export quotas). delays • requiring international air carriers to land at inconvenient airports;
Governments normally grant such licences on a year-by-year basis. • requiring product inspections that damage the product itself;
• deliberately understaffing customs offices to cause unusual time delays;
• requiring special licences that take a long time to obtain.
The objective of such administrative delays for a country is to
discriminate against imported products – in a word, it is
protectionism.

Local-content These requirements can state that a certain portion of the end
requirements product consist of domestically produced goods, or that a certain
portion of the final cost of a product have domestic sources. The
purpose of local-content requirements is to force companies from
other nations to employ local resources in their production
processes – particularly labour.
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There are two reasons why a government imposes import quotas: There are at least two reasons why a country
imposes export quotas on its domestic
1. It may wish to protect its domestic producers by placing a limit on the amount producers:
of goods allowed to enter the country.
 Domestic producers win because they can maintain their market shares and 1. It may wish to maintain adequate supplies
prices when competitive forces are restrained of a product in the home market. This
 Consumers lose because of higher prices and less selection due to lower motive is most common among countries
competition.
exporting natural resources that are
 Other losers include domestic producers whose own production requires the
import to be slapped with a quota (final cost of their own products increases) essential to domestic business or the
long-term survival of a nation.
2. It may wish to force the companies of other nations to compete against one
another for the limited amount of imports allowed. Thus those wishing to get 2. It may restrict exports to limit supply on
a piece of the action will likely lower the price that they are asking for their world markets, thereby increasing the
goods. international price of the good. This is the
 Domestic consumers win from the resulting lower prices. motive behind the formation and activities
 Domestic producers of competing goods win if external producers do not undercut of the Organization of Petroleum
their prices, but lose if they do. Exporting Countries (OPEC). This group
of nations from the Middle East, Latin
America and Africa attempts to restrict the
world’s supply of crude oil to earn greater
profits
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A unique version of the export quota is called a voluntary export restraint The political risk analysis procedure
(VER). It is an arrangement between exporting and importing countries in which
the exporting country self-impose a voluntary export restraint in response to the
threat of an import quota or total ban on the product by an importing nation.

The classic example of the use of a

VER is the automobile industry in
the 1980s. Japanese car makers
were making significant market
share gains in the US market. The
closing of US car makers’
production facilities in the US was
creating a volatile anti-Japan
sentiment among the population and
the US Congress. Fearing punitive
legislation in Congress if Japan did
not limits car exports to the US, the
Japanese government and its car
makers imposed a voluntary export
restraint on cars headed for the US.
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The political risk analysis procedure The political risk analysis procedure
Building relationships with government
Generally political risks are addressed through the building of
Managers must be able to deal with the political risks, rules and regulations that apply
relationships with the various stakeholders of the company
in each national business environment. Moreover, laws in many nations are
susceptible to frequent change, with new laws continually being enacted and existing
ones modified.
• The government
To influence local politics in their favour, managers can propose changes that
positively affect their local activities:
• Customers • Lobbying. Influencing local politics always involves dealing with local lawmakers
and politicians, either directly or through lobbyists. Lobbying is the policy of hiring
people to represent a company’s views on political matters. Lobbyists meet with
• Employees local public officials and try to influence their position on issues relevant to the
company. They describe the benefits that a company brings to the local economy,
natural environment, infrastructure and workforce. Their ultimate goal is getting
• The local community favourable legislation passed and unfavourable legislation rejected.

• Corruption/bribery. Although illegal in most countries, bribes are common for

29 gaining political influence and building relationships with political decision-makers.
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The political risk analysis procedure The economic environment

Building relationships with Local customers support companies that have provided them
customers with desirable products and services. For example, in the  The economic environment is a major determinant of market
case of expropriation, the firm that has excelled in potential and opportunity.
relationship-building with its customers will have
considerable support from them, as they will fear losing the
benefits that the firm provides.  Significant variations in national markets originate in economic
differences.
Building relationships with Local employees can be very protective of a company, even
employees in times of instability, especially if they perceive that their  Population characteristics, income and wealth of the nation’s
jobs could be affected by government interference.
Therefore, well-treated employees will usually be interested
people are important because these key figures determine
in the company’s survival, because they perceive it to be key people’s purchasing power.
to their own survival.
 Countries and markets may be at different stages of economic
Building relationships with The local community may be concerned that a foreign development, each stage having different characteristics.
the local community company will extract materials and labour and make a profit,
but fail to give something back to the local environment and
the local people. Therefore the company needs to be a good
‘local citizen’ and reinvest in the local community.
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The economic environment The economic environment

Economic development results from one of three types of economic Formal methods for gauging economic development in other nations
activity: include:
(a) national production, such measures as gross national product and
1. Primary. These activities are concerned with agriculture and gross domestic product;
extractive processes (e.g. coal, iron ore, gold, fishing).
(b) purchasing-power parity, or the relative ability of two countries’
2. Secondary. These are manufacturing activities. There are several currencies to buy the same ‘basket’ of goods in those two countries. This
evolutions. Typically countries will start manufacturing through index is used to correct comparisons that are made.
processing the output of primary products.

3. Tertiary. These activities are based upon services, e.g. tourism,

insurance and healthcare. As the average family income in a country
rises, the percentage of income spent on food declines, the
percentage spent on housing and household activities remains
constant, and the percentage spent on service activities (e.g.
education, transport and leisure) will increase.
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Economic system Economic system

Traditionally, economists identified four main types of economic systems: market List of criteria to define a country economic system
capitalism, centrally planned socialism, centrally planned capitalism, and market
socialism.  Type of economy. Is the nation an advanced industrial state, an emerging
economy, a transition economy, or a developing nation?
As shown in the figure below, this classification was based on the dominant
method of resource allocation (market versus command) and the dominant form  Type of government. Is the nation ruled by a monarchy, a dictatorship, or a
of resource ownership (private versus state). 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. Are these sectors (e.g., the transportation,

communications, and energy sectors) state owned and operated? Is there a mix of
state and private ownership? Are they all private, with or without controlled prices?

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Economic system Economic system

List of criteria to define a country economic system (cont.)

 Services provided by the state and funded through taxes. Are pensions,
health care, and education provided? Pensions and education but not health
Market Capitalism
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 Centrally planned socialism
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- Centrally planned capitalism.
risk/high-reward 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, Market socialism
dominated by the government?

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Economic system Economic system

Market Capitalism Centrally planned socialism
 This is an economic system in which individuals and firms allocate resources
and production resources are privately owned. Simply put, consumers decide  In this type of economic system, the state has broad powers to serve the public
which goods they desire and firms determine what and how much of those interest as it sees fit. State planners make “top-down” decisions about which
goods to produce; the role of the state in market capitalism is to promote goods and services are produced and in which quantities; consumers can
competition among firms and to ensure consumer protection. spend their money on what is available.

 Today, market capitalism is widely practiced around the world, most notably in  Because demand typically exceeds supply in this model, the elements of the
North America and the European Union (EU) marketing mix are not used as strategic variables. Little reliance is placed on
product differentiation, advertising, or promotion; to eliminate “exploitation” by
intermediaries, the government also controls distribution.

 For decades, the economies of China, the former Soviet Union, and India
functioned according to the tenets of centrally planned socialism. Today,
however, all three countries are engaged in economic reforms characterized, in
varying proportions, by increased reliance on market resource allocation and
private ownership. The clear superiority of market capitalism in delivering the
goods and services that people need and want has led to its adoption in many
formerly socialist countries.
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Economic system In Sweden, where the government controls two-thirds of all expenditures,
resource allocation is more “voter” oriented than “market” oriented. Also, as
Centrally planned capitalism and market socialism indicated in Table 2-2, the Swedish government has significant holdings in key
business sectors. Thus, Sweden’s “welfare state” is based on a hybrid
economic system that incorporates elements of both centrally planned
 In reality, market capitalism and centrally planned socialism do not exist socialism and capitalism. The Swedish government is embarking on a
in “pure” form. In most countries, to a greater or lesser degree, privatization plan that calls for selling its stakes in some of the businesses
command and market resource allocation are practiced simultaneously, listed in Table 2-2. For example, in 2008 Vin & Spirit was sold to France’s
as are private and state resource ownership. The role of government in Pernod Ricard for $8.34 billion.
modern market economies varies widely.

 Centrally planned capitalism: an economic system in which command

resource allocation is utilized extensively in an overall environment of
private resource ownership.

 Market socialism: market-allocation policies are permitted within an

overall environment of state ownership

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Economic system

The Index of Economic Freedom is an annual index and ranking created in

1995 by conservative think-tank The Heritage Foundation and The Wall Street
Journal to measure the degree of economic freedom in the world's nations.

A number of key economic variables are considered in the rankings: trade policy,
taxation policy, government consumption of economic output, monetary policy,
capital flows and foreign investment, banking policy, wage and price controls,
property rights, regulations, and the black market.

 Hong Kong and Singapore are currently ranked first and second in terms of
economic freedom;

 Cuba, Venezuela, and North Korea are ranked lowest. Coincidentally, Cuba
and North Korea are the only two countries where Coca-Cola is not available
through authorized channels

A high correlation exists between the degree of economic freedom and the extent
to which a nation’s mixed economy is market oriented.

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Classification by income Classification by income

• The United Nations designates 50 countries in the bottom ranks of the low-income
 Countries can be classified in a variety of ways. Most classifications category as least-developed countries (LDCs); the term is sometimes used to
are based on national income and the degree of industrialization. The contrast them with developing countries (i.e., upper ranks of low-income plus
lower-middle- and upper-middle-income countries) and developed countries
broadcast measure of economic development are GNP and GDP.
(high-income countries).

 GNP: Gross national product is the value of all goods and services • The World Bank has developed a four-category classification system that uses per
produced by the domestic economy over a one-year period, including capita gross national income (GNI) as a basis for categorizing countries
income generated by the country’s international activities.

 GDP: Gross domestic product is the value of all goods and services
produced by the domestic economy over a one-year period.

 When we add to GDP the income generated from exports, imports and
the international operations of a nation’s companies, we get GNP.

 Both GNP per capita and GDP per capita measure a nation’s income
per person.

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Stages of economic development

With per capita income of less than $700,
Low-income countries Ethiopia is a poor country located in sub-
Saharan Africa.
Low-income countries have a GNI per capita of $1,005 or less. Countries at this
income level share the following general characteristics: However, Ethiopians have enjoyed more than a
decade of double-digit economic expansion.
1. Limited industrialization and a high percentage of the population engaged in Buoyed by foreign investment from China, several
agriculture and subsistence farming industrial parks have opened in the past few years.
2. High birth rates, short life expectancy This has paved the way for garment workers to
3. Low literacy rates earn the equivalent of $45 per month making
4. Heavy reliance on foreign aid garments for global brands such as J Crew and
5. Political instability and unrest Burberry.
6. Concentration in Africa south of the Sahara
Hong Kong– based TAL Apparel has opened a
Approximately 9 percent of the world’s population resides in countries included in factory in one of the industrial parks. Roger Lee,
this economic category. Many low-income countries have such serious economic, chief executive of TAL, recently summed up the
social, and political problems that they represent extremely limited opportunities advantages of Ethiopia: “We were looking for a
for investment and operations. Countries embroiled in civil wars are dangerous country that has a sufficient available workforce, is
areas; most companies find it prudent to avoid them. sufficiently near a seaport for exports, low enough
wage levels . . . and duty-free access to the key
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Stages of economic development

Lower-middle-income countries

 Lower-middle-income countries have a GNI per capita between $1,006 and

$3,955.

 Consumer markets in these countries are expanding rapidly. Countries in this

group represent an increasing competitive threat as they mobilize their
relatively cheap—and highly motivated—labor forces to serve the world
market.

 The developing countries in the lower-middle income category have a major

competitive advantage in mature, standardized, labor-intensive light industry
sectors such as footwear, textiles, and toys.
Vietnam (GNI per capita +$2,050), Indonesia ($3,400) are the top two
countries in terms of line employee head count in Nike’s worldwide
network of more than 500 contractor factories.

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With a 2016 GNI per capita of Stages of economic development

$1,680, India has transitioned
out of the low-income category
Upper-middle-income countries
and now is classified as a lower-
middle-income country.
 Upper-middle-income countries, also known as industrializing or developing
countries, are those with GNI per capita ranging from $3,956 to $12,235.

 In these countries, the percentage of the population engaged in agriculture

drops sharply as people move to the industrial sector and the degree of
urbanization increases.

 Chile, Malaysia, Mexico, Venezuela, and many other countries in this stage are
For many decades, economic growth was weak. Indeed, as the 1990s began, India was in the rapidly industrializing. They have high literacy rates and strong education
throes of an economic crisis: Inflation was high, and foreign exchange reserves were low. systems; wages are rising, but they are still significantly lower than in the
Country leaders opened India’s economy to trade and investment and dramatically improved advanced countries. Innovative local companies can become formidable
market opportunities. During this era, Manmohan Singh was placed in charge of India’s competitors and help contribute to their nations’ rapid, export-driven economic
economy. He set about dismantling the planned economy by eliminating import licensing growth.
requirements for many products, reducing tariffs, easing restrictions on foreign investment, and
liberalizing the rupee. India is now home to a number of world-class companies with growing
global reach, including Infosys, Mahindra & Mahindra, Tata, and Wipro. Meanwhile, the list of
global companies operating in India is growing longer. India’s huge population base presents
attractive opportunities for them.
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China (GNI per capita was $8,260 in 2016)

represents the largest single destination for
In 2016, Russia slipped from the foreign investment in the developing world.
high-income category as its per capita Attracted by the country’s vast size and market
GNI decreased from $14,840 in 2013 to potential, companies in Asia, Europe, and North
$9,720 (upper-middle income). Overall, and South America are marking China as a key
Russia’s economic situation rises and target in their global strategies. Shenzhen and
falls as the price of oil fluctuates. The other special economic zones have attracted
current slump in world oil prices has billions of dollars in foreign investment.
impacted Russia, as have international For years, China’s economic growth has been built on exports and low-wage
sanctions. Strong local companies have manufacturing. More recently, GDP growth has begun to weaken. A new
appeared on the scene, including leadership team is in place, and Beijing is shifting from an external focus to an
Wimm-Bill-Dann Foods, Russia’s internal one in an effort to deal with urgent problems related to the country’s
largest dairy company; PepsiCo infrastructure, bribery, and corruption. Meanwhile, China is moving to become less
acquired it in 2011. However, corruption reliant on exports.
in Russia is pervasive, and the
bureaucracy often creates a mountain Beijing has also launched a new industrial strategy dubbed “Made in China 2025.”
of red tape for companies such as The aim is for China to become a world leader in advanced industries such as
Diageo, Mars, McDonald’s, Nestlé, and robotics and electric vehicles. However, Beijing’s state involvement in industry is
SAB Miller. one reason why the World Trade Organization (WTO) has still not granted China
“market economy” status.
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Stages of economic development

High income countries
High-income countries, also known as advanced, developed, industrialized, or In 2009, the Financial Times Stock Exchange
postindustrial countries, are those with a GNI per capita of $12,236 or higher. With (FTSE) upgraded South Korea’s
the exception of a few oil-rich nations, the countries in this category reached their economic status from “emerging” to
present income level through a process of sustained economic growth. “developed.” The change is consistent with the
World Bank’s ranking and reflects South
 Intellectual technology is more important than machine technology, and Korea’s emergence as a global powerhouse.
scientists and professionals play a more dominant role than do engineers and
semiskilled workers. It is the 11th-largest economy by GDP, and a
major importer and exporter. South Korea is
 Product and market opportunities are heavily dependent upon new products home to Samsung Electronics, LG Group, Kia
and innovations. Ownership levels for basic products are extremely high in Motors Corporation, Daewoo Corporation,
most households. As a consequence, organizations seeking to grow often face Hyundai Corporation, and other well-known
a difficult task if they attempt to expand their share of existing markets. global enterprises
Alternatively, they can endeavor to create new markets.

 The service sector accounts for more than half of national output, the
processing and exchange of information become increasingly important, and
knowledge trumps capital as the key strategic resource.
55 56

Stages of economic development

Marketing implications

 The stages of economic development described previously can serve as a guide

to marketers in evaluating product saturation levels, or the percentage of
potential buyers or households that own a particular product.

 Product saturation levels for many products are low in emerging markets.

 While Indian consumers have 700 million debit cards, only 700,000 retail
outlets in India had card machines in 2016. Overall, India has one card
07 high-income democracies—the United States, Japan, Germany, France, Britain, machine for every 1,785 people. By contrast, in Europe the ratio is one
Canada, and Italy—comprise the Group of Seven (G-7). Finance machine per 119 people; China has one machine for every 60 people. In the
ministers, central bankers, and heads of state from the seven nations have worked United States, the corresponding figures are one machine for every 25
together for more than a quarter of a century in an effort to steer the global people.
economy in the direction of prosperity and to ensure monetary stability. Whenever a
global crisis looms—be it the Latin American debt crisis of the 1980s or Russia’s  Automobile ownership exhibits similar disparity. In India, just 8 out of every
struggle to transform its economy in the 1990s or the economic crisis in Greece in 1,000 adults own a car. In Russia, 200 people out of 1,000 own cars; in
2007–2008—representatives from the G-7 nations gather and try to coordinate Germany, the figure is 565 out of 1,000. Low levels of vehicle ownership are
policy. one reason Myanmar represents an attractive market opportunity for global
57 automakers. 58

Regional economic integration

Regional economic integration
Economic integration has been one of the main economic developments
affecting world markets since World War II.

 Free trade area: The free trade area is the least restrictive and loosest
Countries have form of economic integration among nations. In a free trade area all
wanted to engage in barriers to trade among member countries are removed. Each member
economic cooperation country maintains its own trade barriers vis-à-vis non-members.
to use their respective
resources more
effectively and to  Customs union: The customs union is one step further along the
provide large markets spectrum of economic integration. As in the free trade area, goods and
for member-country services are freely traded among members. In addition, however, the
producers. customs union establishes a common trade policy with respect to non-
members. Typically, this takes the form of a common external tariff,
These economic whereby imports from non-members are subject to the same tariff when
integration efforts are sold to any member country.
dividing the world into
trading blocs.
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Regional economic integration Major trading blocs

Table 6.1 shows the major trading blocs together with their population,
GNI and GNI per capita.
 Common market: The common market has the same features as a
customs union. In addition, factors of production (labour, capital and GNI (= GNP) is the current income indicator used by the World Bank.
technology) are mobile among members. Restrictions on immigration and Previously the World Bank used gross domestic product (GDP) which is
cross-border investment are abolished. the total value of all goods and services produced by capital and workers
in a country. GNI is GDP plus net income from assets abroad (e.g.
subsidiaries). This means that GNI is the total value of all goods and
services produced by a country’s residents or corporations, regardless of
 Economic Union: Under an economic union, members harmonize their location.
monetary policies, taxation and government spending. In addition, a
common currency is used by members and this could involve a system of
fixed exchange rates.

61 62

Major trading blocs Major trading blocs

63 64

The European Economic and Monetary Union

BRIC – the slowing growth is hitting the
and the euro
Today, the euro is one of the world’s most powerful currencies, used by more than
emerging countries
320 million Europeans in 23 countries. As at 1 January 2019, the 19 eurozone
countries that officially use the euro are:
 Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the The acronym BRIC – which stands for Brazil, Russia, India and China – was coined
Netherlands, Austria, Portugal and Finland (joined 1999) in 2001 by Goldman Sachs. (BRIC has since been expanded to BRICS, by
 Greece (joined 2001) including South Africa). These are countries to watch, the emerging markets where
 Slovenia (joined 2007) we will see high future growth. The BRIC term is also used by companies who
 Cyprus, Malta (joined 2008) consider these countries as key to their emerging markets strategies.
 Slovakia (joined 2009)
 Estonia (joined 1 January 2011) The term ‘Chindia’ (for China and India) is also often used.
 Latvia (joined 1 January 2014)
 Lithuania (joined 1 January 2015) Together, the four BRIC countries account for 44 per cent of the world’s population
• Notably, the EU-members Denmark and Sweden have thus far decided not to and approximately 25 per cent of the world’s gross domestic product (GDP; World
join the euro. Bank, 2018b).
• On the other hand, Andorra, Kosovo, Montenegro, Monaco, San Marino and the
Vatican City are not EU-members but do officially use the euro as their
currencies.
• A total of 19+6=25 countries are using the euro as at 1 January 2019.
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BRIC – the slowing growth is hitting the

Leaders of the BRICS nations met
at a summit in Xiamen in 2017
(from left): Brazilian President emerging countries
Michel Temer, Russian President
Vladimir Putin, Chinese President
Xi Jinping, South African President
Jacob Zuma, and Indian Prime
Minister Narendra Modi Some have questioned the BRIC categorization from the
start.

South Africa joined the BRICS group in 2011. In 2017, the Chinese president
? Fundamentally, the four countries have very little in common. Two
countries are manufacturing-based economies and big importers
(China and India), and two are huge exporters of natural
welcomed leaders from the other four BRICS nations to a summit in Xiamen.
resources (Brazil and Russia).
One topic of discussion at this meeting was the opening of the Africa Regional
Centre, funded by the BRICS-supported National Development Bank. The Centre
will serve as a source of financing for infrastructure development and other projects.
South Africa hosted the tenth BRICS summit in Johannesburg in 2018, providing
President Jacob Zuma with an opportunity attract more direct investment in the
African continent as a whole
67 68

BRIC – the slowing growth is hitting the

BRIC – the slowing growth is hitting the
emerging countries
emerging countries

The Chinese economy experienced a moderation in

In 2009, the BRIC political leaders met for the first BRIC summit.
growth to 6.4 per cent in 2018 on account of slowing
Following a meeting in Brasilia in 2010, to which South Africa was invited
services and a slowing manufacturing sector. The
as a guest, the group invited South Africa to join as a full member in 2011
‘low’ growth has continued in 2019, partly as a result
and the group formerly called BRIC officially became BRICS.
of the trade war with the US.
In the future, BRIC economies will face challenges from:
The key risks to China’s economic outlook are from
• a slow-growing global economy;
its trade exposure to the slowing growth in Europe
• a reversal of investor risk appetite moving capital from the BRICs (and
and a sharp correction in property prices, but the
other emerging markets) to safe havens;
Chinese government has plenty of financial
• a loss of confidence in the BRICs.
ammunition with which to respond if a sharper
slowdown becomes evident. China’s authorities are
trying to engineer a controlled slowdown as they
seek to transform the country’s growth model to one
driven by consumer spending, as opposed to heavy
69 infrastructure investment. 70

BRIC – the slowing growth is hitting the

‘Bottom of pyramid’ (BOP) as a market opportunity
emerging countries
Russia went into recession in 2016 because of Western Poverty is a widespread reality in the
sanctions, a weakening ruble and falling oil prices. In 2017 modern world. Two-thirds of the world’s
and 2018 the growth was again positive. In 2019, a GDP population earn less than US$2,000 per
growth of 1.5–2.0 per cent is expected. year. The poor people’s market has been
seen as a gold mine for reaping business
In the past few years, Brazil’s economy has disappointed. In profits and it has been called the ‘bottom
of the pyramid’ (BOP) market.
2016 there was negative GDP growth. In 2017 and 2018 the
 Focusing on the BOP market should
growth was around 1 per cent. In 2019 the projected growth be a part of core business and not just
is around 2 per cent. corporate social responsibility (CSR)
initiatives.
 Catering to the BOP market (by
The Indian economy – today the eighth largest by total GDP satisfying unmet social needs and new
(purchasing power) – is set to become the world’s third consumer preferences), business
largest by 2030. While China’s growth has slowed, India’s organizations can create market
GDP is still growing (approximately 7–8 per cent in the years opportunities of substantial value.
2017–20) making it the fastest-growing major economy
among the BRIC countries. 71 72

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‘Bottom of pyramid’ (BOP) as a market opportunity

Prahalad and Hammond have identified several assumptions and misconceptions
about the “bottom of the pyramid” (BOP) that need to be correct
Mistaken assumption #1: The poor have no money. In fact, the aggregate buying power of poor
communities can be substantial. In rural Bangladesh, for example, villagers spend considerable
sums to use village phones operated by local entrepreneurs.

Mistaken assumption #2: The poor are too concerned with fulfilling basic needs to “waste”
money on nonessential goods. In fact, consumers who are too poor to purchase a house do
buy “luxury” items such as television sets and gas stoves to improve their lives.

Mistaken assumption #3: The goods sold in developing markets are so inexpensive that there is
no room for a new market entrant to make a profit. In fact, because the poor often pay higher
prices for many goods, there is an opportunity for efficient competitors to realize attractive
margins by offering quality and low prices.

Mistaken assumption #4: People in BOP markets cannot use advanced technology. In fact,
residents of rural areas can and do quickly learn to use cell phones, PCs, and similar devices.
Despite the many problems in ‘bottom of the pyramid’ (BOP) market, it is possible
to nurture long-term market opportunities there. Today, Nike produces and sells Mistaken assumption #5: Global companies that target BOP markets will be criticized for
only a small portion of its output in China, but when the firm refers to China as a exploiting the poor. In fact, the informal economies in many poor countries are highly
“2-billion-foot market,” it clearly has the future in mind. exploitative. A global company offering basic goods and services that improve a country’s
73 standard of living can earn a reasonable return while benefiting society. 74

‘Bottom of pyramid’ (BOP) as a market opportunity People everywhere need affordable,

safe drinking water. Recognizing this
fact, Nestlé launched Pure Life bottled
Marketers who believe that the BOP is a valuable unserved market also believe water in Pakistan. The price was set at
that even the poor can be good customers. Despite their low level of income, they about 35 cents per bottle, and
are discerning consumers who want value and are well aware of the value brands advertising promised, “Pure safety. Pure
favoured by more affluent consumers. This school of thought recognizes the trust. The ideal water.” Pure Life quickly
obstacles created by low income. It postulates that if companies take the correct captured 50 percent of the bottled water
steps and devote sufficient resources to satisfying the needs of the BOP market, market in Pakistan; the brand has since
they can overcome barriers to consumption. been rolled out in dozens of other low-
income countries.

4 proposed key elements to thrive in the low-income market:

1. Creating buying power The Coca-Cola Company recently
began to address dietary and health
2. Shaping aspirations through product innovation and consumer education
needs in low-income countries by
3. Improving access through better distribution and communication systems developing Vitango, a beverage product
that can help fight anemia, blindness,
4. Tailoring local solutions.
and other ailments related to
malnutrition.
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