The Economic Environment

The economic environment  represents the economic conditions in the country where the international organization operates. This part of the environment  includes factors such as economic  development,  infrastructure,   resource and product markets, and exchange rates, each of which is discussed next. In addition,  factors such as inflation, interest rates, and economic growth are part of the international economic environment.

1. ECONOMIC DEVELOPMENT

Economic  development differs widely among the countries and regions of the world. Countries  can be categorized as either developing or developed. Developing  countries are referred to as less-developed countries  (LDCs). The criterion traditionally used to classify countries as developed or developing is per-capita income, which is the income generated by the nation’s production of goods and services divided  by total population.

The developing countries have low per-capita incomes. LDCs generally are located in Asia, Africa, and South America. Developed countries generally are located in North Amer- ica, Europe,  and Japan. Most international business firms  are headquartered in the wealth- ier, economically  advanced countries,  but smart managers are investing  heavily  in Asia, Eastern Europe, Latin America, and Africa.24  These companies face risks and challenges today, but they stand to reap huge benefits in the future.

2. INFRASTRUCTURE

A country’s physical facilities that support economic activities make up its infrastructure, which includes transportation  facilities such as airports, highways, and railroads; energy- producing facilities such as utilities and power plants; and communication facilities such as telephone lines and radio stations. Companies operating in LDCs must contend with lower levels of technology and perplexing logistical, distribution,  and communication problems. Undeveloped infrastructures represent opportunities  for some firms, such as United Tech- nologies  Corporation, based  in Hartford, Connecticut,   whose  businesses include jet engines, air-conditioning  and heating systems, and elevators.

As countries  such as China, Russia, and Vietnam  open their markets, new buildings need elevators and air and heat systems, and opening  remote regions for commerce requires more jet engines and helicopters.25  Cellular  telephone companies have found tremendous opportunities in LDCs, where land lines are still limited. China has the world’s biggest base of cell phone subscribers at 350 million, and the number is expected to grow to near 600 million by 2009.26

3. RESOURCE  AND PRODUCT  MARKETS

When  operating in  another country, company  managers  must evaluate  the market demand  for their products.  If market demand is high, managers may choose to export products to that coun- try. To develop plants, however, resource markets for providing  needed raw materials  and labor must be  available. For example, the greatest challenge for McDonald’s, which sells Big Macs on every continent  except Antarctica,  is to obtain supplies of everything from pota- toes to hamburger buns to plastic straws. At McDonald’s in Cracow, the burgers come from a Polish plant, partly owned by Chicago-based  OSI Industries;  the onions come from Fresno,  California; the buns come from a production   and distribution center near Moscow; and the potatoes come from a plant  in Aldrup, Germany.27

American Amanda Knauer found high-quality  raw materials in South America, where she set up her own business.

4. EXCHANGE   RATES

Exchange rate is the rate at which one country’s currency is exchanged for another coun- try’s. Volatility in exchange rates is a major concern for companies doing business interna- tionally.28 Changes in the exchange rate can have major implications for the profitability of international operations that exchange millions of dollars into other currencies every day.29

For example, assume that the U.S. dollar  is exchanged for 0.8 euros. If the dollar increases in value to 0.9 euros, U.S. goods will be more expensive in France because more euros will be required to buy a dollar’s worth of U.S. goods. It will be more difficult to export U.S. goods to France, and profits will be slim. If the dollar drops to a value of 0.7 euros, by con- trast, U.S. goods will be cheaper in France and can be exported at a profit.

Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.