Planning and Control

Economic Environment & SystemsLecture 2Learning OutcomesUnderstand the difference in economic environment of countries according to the geographic factorsdifferentiate between market, command and mixed economies.Identify the main macroeconomic indicators that effect the international businessImportance of understanding economic environmentHelps managers to predict the direction & forces that can effect the future performance of the companyWhen going international organizations needs to consider the followingThe economic system of the countryMarket size, potential growthHow does government control the private sectorInvestors are not interested in investing in Hong Kong after China took over in 1997Influences towards international business

ClassificationsBy incomeUsing size of market demand or gross national product (GNP - economic activity of the country)A country with a large population and high GNP has a bigger market potentialOn the other hand a country with low GNP & population is good for investingClassificationsBy geographic regionFor multi-international organizations managers need to understand the region they investData can be used by investors to analyze the development potential and risks that exists in the area they operateClassificationsBy economic systemsOwnership of economic activities by the public sector refers to the business belonging to stateControl of economic activity means how resources are distributed and controlled either by public or private sectorIndia has large state owned companiesChina encourage the growth of private sectorMany countries are moving to privatization of the state owned companies.Market EconomyCountry resources are controlled by private sectorPower of consumer makes this economy stronger as they give the freedom for the consumers to buy their demanding goodsPrice is determined by the competitive free market forcesGovernment plays are limited role just basically providing a legal framework aloneThis is very favorable for the MNC to operateCommand EconomyCommand or central economy is where pricing and production is determined by the government The government assumes it is more qualified in determining the distribution of resources compared to the people and businessesIf government fails to meet demands black markets are producedPreviously china was one but now only Russia, North Korea and Cuba follows this practiceMixed economyGives rise to market socialismPrivate individuals own significant resources but distribution is determined by the price mechanismsAlthough government owns some economic resources the price is determined by the free market forces of supply and demandGovernment regulatesWest Europe, Asia, South Africa practices thisMalaysia, Britain, Spain and France is more into privatization programsMacro-environment Operating globally means you need to monitor the macro-environmentAffect profits, operational strategiesThe indicators of the macro-environment areEconomic growthInflationTrade surplus and deficit Economic GrowthHealth and performance of the economyMeans GNP is high if growth is highShows the living standard is highBrazil, Russia, India & China are economies which are attracting foreign Direct investments (FDI)InflationRate of change in price level in countryConsumer price index (CPI) or Retail price index (RPI) is used to measure inflationInflation affectsInterest ratesExchange ratesCost of livingConfidence of companiesHigh interest rates means lower inflationTrade surplus and deficitCountry with higher deficit for externally or internally denotes a debtor country This results in low FDITransition marketsChina and Russia has started to change the markets they work from 1990But success depends on several factorsInflation controlSpeed of transformationImplementation of market reformsLegal frameworkTutorialWrite briefly for Transition in RussiaCentral Europe and Eastern EuropeChina & Vietnam