IM 535 International Operations Management 4 Economic Environment Facing Business Prof. Aziz Ezzat ElSayed, Ph.D. Professor of Industrial Engineering College of Engineering and Technology Arab Academy for Science and Technology Abu-Kir Campus, Alexandria, Egypt Main reference: International Business: Environment and Operations, John Daniels, Lee Radebaugh, and Daniel Sullivan (15 th Ed), 2015 Pearson Higher Education Lecture handout site: http://ind.aast.googlepages.com/ 4-1 Learning Objectives 1. To communicate the importance of economic analysis. 2. To discuss the idea of economic freedom. 3. To profile the characteristics of the types of economic systems. 4. To introduce the notion of state capitalism. 5. To profile indicators of economic development, performance, and potential. 4-2 1
Leading Emerging Markets الناشئة = Emerging 24 countries are emerging markets because of their market development and high rate of economic growth 4-3 Emerging Markets make a comeback الناشئة = Emerging 4-4 2
Dimensions of the Index Property Rights Freedom from Corruption Fiscal Freedom Government Spending Labor Freedom Business Freedom Monetary Freedom Trade Freedom Investment Freedom Financial Freedom 4-13 Dimensions of the Index 1 Property Rights Freedom from Corruption Business Freedom The ability of individuals to accumulate private property, secured by clear laws that are Monetary fully enforced Freedom by the state. Fiscal Freedom Trade Freedom Government Spending Investment Freedom Labor Freedom Financial Freedom 4-15 3
Dimensions of the Index 2 Property Rights Freedom from Corruption Fiscal Freedom Government Spending Labor Freedom Business Freedom Degree that corruption introduces Monetary insecurity and Freedom uncertainty into economic relationships. Trade Freedom Investment Freedom Financial Freedom 4-16 الحرية المالية = Freedom Fiscal Dimensions of the Index 3 Property Rights Business Freedom Freedom from Corruption Fiscal Freedom Government Spending Monetary Freedom Tax burden imposed by a government on its citizens. Trade Freedom Investment Freedom Labor Freedom Financial Freedom 4-17 4
GDP: Gross Domestic Product Dimensions of the Index 4 Property Rights Business Freedom Freedom from Corruption Monetary Freedom Fiscal Freedom Trade Freedom Government Spending Labor Freedom Government expenditures as a percentage of GDP. Investment Freedom Financial Freedom 4-18 5 Dimensions of the Index Property Rights Freedom from Corruption Fiscal Freedom Government Spending Labor Freedom Business Freedom Monetary Freedom Trade Freedom the legal and regulatory framework of a country s labor market, e.g. minimum wages, Financial layoffs, Freedom hiring and hours worked. Investment Freedom 4-19 5
Dimensions of the Index The ability to start, operate, and close Property Rights a business. Business Freedom 6 Freedom from Corruption Monetary Freedom Fiscal Freedom Government Spending Labor Freedom Trade Freedom Investment Freedom Financial Freedom 4-20 الحرية النقدية = Freedom Monetary Dimensions of the Index Property Rights Business Freedom The degree of price stability and the extent Freedom of price controls. from Corruption Monetary Freedom 7 Fiscal Freedom Trade Freedom Government Spending Labor Freedom Investment Freedom Financial Freedom 4-21 6
Dimensions of the Index Property Rights Freedom from Corruption Government Spending Labor Freedom Business Freedom Monetary Freedom The absence of tariff and non-tariff barriers Fiscal that affect Freedom imports and exports of goods and services. Trade Freedom 8 Investment Freedom Financial Freedom 4-22 Dimensions of the Index Property Rights Freedom from Corruption Ability of individuals and firms to move Fiscal resources Freedom without restrictions into and out of activities internally Business Freedom Monetary Freedom Trade Freedom and across Government the country s Spending borders. Investment Freedom 9 Labor Freedom Financial Freedom 4-23 7
الحرية المالية = Freedom Financial Dimensions of the Index Property Rights Freedom from Corruption Fiscal Freedom Efficiency of banking and independence Government of the financial Spending sector from Labor government Freedom control and interferences Business Freedom Monetary Freedom Trade Freedom Investment Freedom Financial Freedom 4-24 10 (Region-Population) 4-25 8
Global Distribution of 4-26 Value of Economic freedom affects: Growth rates Productivity Income levels Inflation Employment Life expectancy Literacy (the ability to read and write) Political openness Environmental sustainability 4-27 9
GDP: Gross Domestic Product Free Economy and GDP per Capita Standard of Living Free Economy Countries have the highest GDP per Capita (Standard of living) GDP per Capita = GDP Population منغلق = Repressed 4-29 Economic Systems 4-31 10
Types of Economic Systems An economic system refers to the mechanism that deals with the production, distribution, and consumption of goods and services. It has the following types: 1. Market economy 2. Command economy 3. Mixed economy 4-32 Types of Economic Systems Command Economy Mixed Economy Market Economy 1 Government owns most or all of resources Mixed Government & Private ownership of economic resources Private or individual ownership of economic resources 2 Large Scale Capital Intensive Production Balanced Economic Efficiency Entrepreneurial innovation 3 Visible State Control Central Planning - Collectivism Protect against excess of greed and self interest Laissez Faire property rights - Individualism 4 Communism Socialism Capitalism 4-33 11
State Capitalism: Detour or Destination? State capitalism refers to a system in which the government explicitly manipulates market outcomes for political purposes. promote certain industries to encourage economic development. develop national companies into global leaders. foreign companies restricted from strategic industries. 4-37 World Bank Economic Development Data 4-38 12
Measures of Economic Performance GNI (Gross National Income) GNI is the sum of value of all production in the domestic economy plus the income received from other countries minus similar payments made to other countries. e.g. All production value of Saudi companies in Saudi Arabia and the production value of all Saudi companies abroad (e.g. Saudi companies in Egypt, France, UK., etc.) GDP (Gross Domestic Product) GDP is the total market value of output produced within a nation s border whether generated by a domestic or foreign-owned company. e.g. All production value of Egyptian and non Egyptian companies operating in Egypt (e.g. Saudi, French, Canadian companies, etc.) 4-40 The 10 Largest Economies, 2016 Rank Country name GNI ($ Billions) % of world Total 1 United States 17,601 23.6% 2 China 10,097 13.5% 3 Japan 5,339 7.2% 4 Germany 3,854 5.2% 5 France 2,844 3.8% 6 United Kingdom 2,801 3.8% 7 Brazil 2,375 3.2% 8 Italy 2,102 2.8% 9 India 2,028 2.7% 10 Russian Federation 1,931 2.6% Source: http://data.worldbank.org/ (retrieved 05-04-2016) GNI, Atlas method (current US$) 4-41 13
Adjusting Analytics Economic Growth Rate: Growth rate of GNI indicates a country s economic potential. GNIThis Year GNILastYear GrowthRate(%) [ ] 100% GNI GNI per Capita : GNI per capita is supposed to be an indicator for the standard of living between countries. Purchasing Power Parity (PPP): LastYear PPP is an adjustment (conversion) to the GNI per capita to reflect the cost of living in different countries with US as the base. International Dollar has the same purchasing power of 1$ has in USA 4-42 Country Classification Developing countries largest number of countries low per capita income Emerging economies fast growing, relatively prosperous E.g. BRICS Brazil, Russia, India, China, South Africa. Developed countries high per capita income and high standard of living. like the U.S., Japan, France, Australia. 4-43 14
2016 Statistics World Bank Country Classification 215 Countries World Bank member countries = 188 + all other countries with populations > 30,000 Common Name GNI Per Capita WB Calcification Developing Country $1,045 or less Low Income 31 Number of Countries Developing Country $1,046 to $4,125 Lower Middle 51 Income Developing Country $4,126 to $12,735 Upper Middle 53 Income Developed and $12,736 or more High Income 80 OECD Country Source: http://data.worldbank.org/about/country-classifications/ Accessed (05/04/2016) OECD = Organisation for Economic Co-operation and Development = 32 countries 4-44 GNI per Capita, 2011 4-45 15
GNI per Capita Measured Two Ways (2014) Country Current US$ PPP (Current international $) Algeria 5,490 13,880 Bangladesh 1,080 3,330 PPP is an adjustment in GNI per capita to Belgium 47,260 43,220 reflect differences in Brazil 11,530 15,590 the cost of living Canada 51,630 43,360 Denmark 61,310 46,210 Egypt 3,050 10,260 France 42,960 39,610 Ghana 1,590 3,900 Japan 42,000 37,920 Nigeria 2,970 5,710 PPP: Purchasing Power Parity UK 43,430 39,040 PPP is the number of units of a country s currency required to buy the same amounts of goods and services in the domestic market that $1 would buy in the United States. PPP is a useful measure since it accounts for international differences in price. Data Derived from : http://data.worldbank.org/indicator/ny.gnp.pcap.cd/countries (retrieved 06/04/2016) 4-46 The 10 Largest Economies, 2016 GNI, Adjusted for PPP (current international $) Rank Country name GNI ($ Billions) % of world Total 1 China 17,967 17.8% 2 United States 17,813 17.6% 3 India 7,293 7.2% 4 Japan 4,821 4.8% 5 Germany 3,790 3.8% 6 Russian Federation 3,610 3.6% 7 Brazil 3,213 3.2% 8 France 2,623 2.6% 9 Indonesia 2,592 2.6% 10 United Kingdom 2,518 2.5% Source: http://data.worldbank.org/ (retrieved 05-04-2016) 4-47 16
Economic Analysis Managers should also consider Inflation Unemployment Debt Income distribution Poverty Balance of payments 4-50 Inflation Inflation A measure of the increase in the cost of living Deflation When prices for products go down not up Reflation Increase the money supply and reduce taxes to accelerate economic activity كساد = Depression Deflation = إنعاش = Reflation 4-51 17
Unemployment Unemployment rate share of unemployed workers seeking employment for pay relative to the total civilian labor force Misery index the sum of a country s inflation and unemployment rates 4-52 Debt Total of a government s financial obligations Internal debt : Debt owed domestic residents and dominated in local currency. External debt: Debt owed to foreign creditors and dominated in foreign currency. Growing public debt signals Tax increases Reduced growth Rising inflation Increasing austerity تقشف = Austerity 4-53 18
Income Distribution Income distribution estimates the proportion of the population that earns various levels of income. There is a growing gap between the rich and poor in every country in the world. Gini coefficient measures the extent to which the distribution of resources deviates from a perfectly equal distribution. A score of zero implies perfect equality (everybody has the same income. 4-54 Poverty رخيص إقتصادي = Frugal Poverty is the state of having little or no money and few or no material possessions extreme poverty less than $1.25 per day moderate poverty less than $2.00 per day Today the world population is 80% poor, 10% middle income, and 10% rich Base of the Pyramid Frugal engineering (e.g. Tata Nano car Hassan Fathy -...) 4-55 19
Balance of Payments Balance of payments Reports a country s trade and financial transactions with the rest of the world Current account Tracks value of exports and imports of services and merchandise trade Capital account Tracks long and short-term capital flows (money investments in foreign firms and currencies and profits made) 4-56 Balance of Payments Current Account Balances: The Top and Bottom Five 4-57 20