, CHAPTER 2
ECONOMIC ENVIRONMENT
CHAPTER OBJECTIVES
1. Intertwined World Economy
2. Country Competitiveness
3. Emerging Economies
4. Evolution of Cooperative Global Trade Agreements
5. Information Technology and the Changing Nature of Competition
6. Regional Economic Arrangements
7. Multinational Corporations
CHAPTER OVERVIEW
In today’s business world, countries are more economically interdependent than they
were before. The world economy is becoming increasingly intertwined and virtually no
country is immune from this interdependence. At the global level, changing markets and
global convergence are a fact of life. Countries continue to participate in the world
economy, however, this participation has risks because of forces beyond the control of
the individual countries. On the other hand, world exports of goods and services
amounted to $11 trillion in 2004. In addition, the world economy grew at four percent in
2004.
Growth in international financial flows (which include foreign direct investment,
portfolio investment, and trading in currencies) has achieved a life of its own. The
annual trade in goods and services totaled nine trillion dollars in 1995. Daily financial
flows now exceed a $1.2 trillion. Global merchandise trade rose by 9 percent in real
terms in 2004. These numbers are expected to increase as barriers to international trade
and financial flows get lower and lower.
Some of the factors that have lead to interdependency and integration are emerging
markets, transportation, and communications. These areas are making information
acquisition faster, cheaper, and more widely accessible. The nature of value adding
activities is changing in the advanced countries from manufacturing to services and
15
, information manipulation. All countries are attempting to remain competitive by adding
to and increasing their telecommunications effort.
For all practical purposes, the capital markets of the world are already integrated. This
integration affects exchange rates, interest rates, investments, employment, and growth
across the world. Multinational corporations are common. The world is becoming a true
global village, bringing a multitude of opportunities and new markets. The challenge for
the next century will be to manage this increasingly interconnected environment for the
betterment of all mankind.
CHAPTER OUTLINE
A. Intertwined World Economy
1. Despite the relative insularity of the U. S. economy, it is getting increasingly
integrated into the world economy.
2. At the global level, economies are extremely large and diversified.
3. A nation that is successful trader displays a natural inclination to be competitive
in the world market.
4. Apart from trade flows, foreign direct investment, daily financial flows, and
Foreign money markets profoundly influence the economies of countries that
may be seemingly completely separate.
*****Use Exhibit 2-1 Here*****; *****Use Exhibit 2-2 Here*****
5. Foreign Direct Investment.
a. This concept means that a firm invests in manufacturing and service
facilities in a foreign country.
b. It is an alternative to exporting.
c. This is on the increase because of wooing from governments.
d. Foreign direct investment can also result from trade friction (you can invest
with me if I can invest with you).
e. The world inflow of foreign direct investment increased in the last two
decades 25 times fold and in 2000, the inflow of FDI reached a record high of
$1.39 trillion.
*****Use Exhibit 2-3 Here*****
6. Portfolio Investment.
a. This is sometimes called indirect investment (investments can be withdrawn
on short notice).
b. With respect to this concept, international borders have disappeared.
c. In today’s international financial markets, traders trade currencies most of the
time without an underlying trade transaction.
d. The increase in trading makes nations vulnerable to currency fluctuations. The
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ECONOMIC ENVIRONMENT
CHAPTER OBJECTIVES
1. Intertwined World Economy
2. Country Competitiveness
3. Emerging Economies
4. Evolution of Cooperative Global Trade Agreements
5. Information Technology and the Changing Nature of Competition
6. Regional Economic Arrangements
7. Multinational Corporations
CHAPTER OVERVIEW
In today’s business world, countries are more economically interdependent than they
were before. The world economy is becoming increasingly intertwined and virtually no
country is immune from this interdependence. At the global level, changing markets and
global convergence are a fact of life. Countries continue to participate in the world
economy, however, this participation has risks because of forces beyond the control of
the individual countries. On the other hand, world exports of goods and services
amounted to $11 trillion in 2004. In addition, the world economy grew at four percent in
2004.
Growth in international financial flows (which include foreign direct investment,
portfolio investment, and trading in currencies) has achieved a life of its own. The
annual trade in goods and services totaled nine trillion dollars in 1995. Daily financial
flows now exceed a $1.2 trillion. Global merchandise trade rose by 9 percent in real
terms in 2004. These numbers are expected to increase as barriers to international trade
and financial flows get lower and lower.
Some of the factors that have lead to interdependency and integration are emerging
markets, transportation, and communications. These areas are making information
acquisition faster, cheaper, and more widely accessible. The nature of value adding
activities is changing in the advanced countries from manufacturing to services and
15
, information manipulation. All countries are attempting to remain competitive by adding
to and increasing their telecommunications effort.
For all practical purposes, the capital markets of the world are already integrated. This
integration affects exchange rates, interest rates, investments, employment, and growth
across the world. Multinational corporations are common. The world is becoming a true
global village, bringing a multitude of opportunities and new markets. The challenge for
the next century will be to manage this increasingly interconnected environment for the
betterment of all mankind.
CHAPTER OUTLINE
A. Intertwined World Economy
1. Despite the relative insularity of the U. S. economy, it is getting increasingly
integrated into the world economy.
2. At the global level, economies are extremely large and diversified.
3. A nation that is successful trader displays a natural inclination to be competitive
in the world market.
4. Apart from trade flows, foreign direct investment, daily financial flows, and
Foreign money markets profoundly influence the economies of countries that
may be seemingly completely separate.
*****Use Exhibit 2-1 Here*****; *****Use Exhibit 2-2 Here*****
5. Foreign Direct Investment.
a. This concept means that a firm invests in manufacturing and service
facilities in a foreign country.
b. It is an alternative to exporting.
c. This is on the increase because of wooing from governments.
d. Foreign direct investment can also result from trade friction (you can invest
with me if I can invest with you).
e. The world inflow of foreign direct investment increased in the last two
decades 25 times fold and in 2000, the inflow of FDI reached a record high of
$1.39 trillion.
*****Use Exhibit 2-3 Here*****
6. Portfolio Investment.
a. This is sometimes called indirect investment (investments can be withdrawn
on short notice).
b. With respect to this concept, international borders have disappeared.
c. In today’s international financial markets, traders trade currencies most of the
time without an underlying trade transaction.
d. The increase in trading makes nations vulnerable to currency fluctuations. The
16
