Provide an overview of the world economic environment and examine different perspectives on economic development. • Address differences between countries of different levels of economic development and discuss the importance of emerging markets. • Examine the indicators of political risk and address international firm approaches to political risk management. • Describe how international law, home-country law, and host-country law affect international firm operations and how to address issues related to jurisdiction. • Discuss different legal systems, intellectual property laws, and national laws with extra-territorial impact that affect international firms. • Examine the natural and technological environments and the potential limitations they present to international firms. CHAPTER SPOTLIGHTS • The Economic Environment of International Marketing: Interdependence is becoming the leading principle of globalization. • Perspectives on Economic Development: The primary Western model of economic development is the Rostow model, which describes economic development as a function of productivity, economic exchange, technological improvements, and income. Alternative models offer different perspectives on economic development – for example, Marxist-Leninism depicts development as a class struggle culminating with a political and economic revolution and subsequent advancement. • Levels of Economic Development: Countries are categorized into three distinct economic development categories, according to the World Bank: high-income countries, middle-income countries (many of which are countries with emerging markets), and low-income countries. • Political Environment of International Marketing: Companies involved in international operations must have extensive knowledge of the international political environment. Firms must consider the stability of government policies, the existence of anti-foreigner sentiment, along with political risk signals such as poor economic performance and political repression. Political risks might include risks related to government trade policies, such as confiscation and expropriation, risks related to labor/action groups, and risks related to terrorism. 11
• International Legal Environment: International marketing is affected by international laws imposed by international and supranational bodies; host-country laws; and home-country laws – U.S. firms are affected by antitrust and corruption laws, in particular. Three legal systems are predominant worldwide: common law, code law, and Islamic law. With many different legal systems and overlapping jurisdiction, it is important to agree upon commonly acceptable venues for resolving international legal disputes. High on the priority of international firms is the protection of intellectual property rights. CHAPTER OVERVIEW This chapter provides an overview of the world economic environment and addresses different views on economic development. The chapter introduces two models of economic development and addresses differences between countries of different levels of economic development, discussing the importance of big emerging markets to regional economic development. Indicators of political risk and international firm approaches to political risk management are examined. The chapter also examines the effect of international law, home-country law, and host-country law on international firm operations. Finally, the chapter offers an overview of different legal systems, intellectual property laws, and national laws that affect the international firm. CHAPTER OUTLINE 2-1 Economic Environment of International Marketing. The economic, political, legal, natural, and technological environments pose many challenges to the international marketing operations of firms, but they also offer many opportunities for growth and return on investment. 2-1a The World Economy Globalization has led to a unified international economy and leading companies cannot afford to have a local, home-country focus, as the market share game is played increasingly on a world scale. Top 100 multinationals control 20 percent of all foreign assets, employ 6 million workers, and account for 7 percent of total world economic activity. 2-1b The Economic Development Disparity: There is an economic development disparity between high-income, industrialized and low-income, developing countries, with firms from the former dominating the world economy. 2-2 Perspectives on Economic Development Two leading models of economic development are introduced here: a Western model, Rostow’s, and the Marxist-Leninist development model, which still constitutes a dominant development philosophy in developing countries. 12
2-2a The Rostow Modernization Model According to this Western development model, each stage of economic development is a function of productivity, economic exchange, technological improvements, and income. Modernization stages are: 1) Traditional society: Economy dominated by agriculture, minimal productivity and low growth in per capita output. 2) Transitional society: Increased productivity in agriculture; manufacturing begins to emerge. 3) Take-off: Growth becomes the norm, income rises, leading sectors emerge. 4) Drive to maturity: Modern technology is applied in all spectrums of the economy. 5) High mass consumption: Leading sectors shift toward durable goods; increased allocation to social welfare programs. 2-2b Alternative Models of Economic Development Alternative models of economic development are embraced by developing nations seeking to avoid domination by industrialized countries. The Marxist-Leninist Model addresses economic advancement is a function of the control of means of production, of production outcomes, of resource allocation, and the development of a non-materialistic mindset. The stages of development are the following: 1) Primitive society, characterized by the joint tribal ownership of primitive means of production centered on agricultural tasks. 2) Slavery-based society, characterized by dominant tribes claiming ownership of conquered tribes and their property. 3) Feudal society, characterized by the dominance of feudal lords, who own the land and its dwellers. 4) Capitalism, characterized, in its early stages, by an emerging bourgeoisie, the shift of production from the agrarian sector to the industrial sector, and, in its later stages, by imperialism, where capital loses its national identity by crossing borders and establishing monopolies. 5) Socialism, characterized by the disappearance of private property and its replacement with collective, state property. 6) Communism, characterized by state and cooperative ownership of all means of production and property. 2-3 Levels of Economic Development: There are three categories of countries based on the categorization used by the World Bank: 1) High-income countries—highly industrialized countries with well-developed industrial and service sectors, with a GNI per capita of US$10,726 or more. 2) Middle-income countries—countries with emerging markets that are both developing rapidly and have great potential, with a GNI per capita of US$875 to US$10,725. 3) Low-income countries—countries that are primarily agrarian, have low per capita income, and a GNI per capita of less than US$875.
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