From a vantage point of development, performance, and growth, the world’s economies can be evaluated as established economies, emerging economies, and developing econo- mies (some of which may soon become emerging).
Established Economies
North America As noted earlier, North America constitutes one of the four largest trad- ing blocs in the world. The combined purchasing power of the United States, Canada, and Mexico is more than $12 trillion. Even though there will be more and more integration
both globally and regionally as time goes on, effective international management still re- quires knowledge of individual countries.
The free-market-based economy of this region allows considerable freedom in decision-making processes of private firms. This allows for greater flexibility and low barriers for other countries to establish business. Despite factors such as the Iraq War beginning in 2003, Hurricane Katrina in 2005, and high oil prices through 2005 and 2006, the U.S. economy continues to grow. U.S. MNCs have holdings throughout the world, and foreign firms are welcomed as investors in the U.S. market. U.S. firms main- tain particularly dominant global positions in technology-intensive industries, including computing (hardware and services), telecommunications, media, and biotechnology. At the same time, foreign MNCs are finding the United States to be a lucrative market for expansion. Many foreign automobile producers, such as BMW, Honda, Hyundai, Nissan, and Toyota, have established a major manufacturing presence in the United States. Given the near collapse of the “domestic” automotive industries, North American automotive production will come increasingly from these foreign “transplants.”
Canada is the United States’ largest trading partner, a position it has held for many years. The United States also has considerable foreign direct investment in Canada, more than in any other country except the United Kingdom. This helps explain why most of the largest foreign-owned companies in Canada are totally or heavily U.S.-owned. The legal and business environment in Canada is similar to that in the United States, and the similarity helps promote trade between the two countries. Geography, language, and culture also help, as does NAFTA, which will assist Canadian firms in becoming more competitive worldwide. They will have to be able to go head to head with their U.S. and Mexican competitors as trade barriers are removed, which should result in greater effi- ciency and market prowess on the part of the Canadian firms, which must compete successfully or go out of business. In recent years, Canadian firms have begun investing heavily in the United States while gaining international investment from both the United States and elsewhere. Canadian firms also do business in many other countries, including Mexico, Great Britain, Germany, and Japan, where they find ready markets for Canada’s vast natural resources, including lumber, natural gas, crude petroleum, and agriproducts. By the early 1990s Mexico had recovered from its economic problems of the previous decade and had become the strongest economy in Latin America. In 1994, Mexico became part of NAFTA, and it appeared to be on the verge of becoming the major economic power in Latin America. Yet, an assassination that year and related economic crisis underscored that Mexico was still a developing country with consider- able economic volatility. Mexico now has free-trade agreements with over 50 countries, including Guatemala, Honduras, El Salvador, the EU, the European Free Trade Area, and Japan.23 In 2000 the 71-year hold of the Institutional Revolutionary Party on the presidency of the country came to an end, and many investors believe that the admin- istration of Vicente Fox and his successor, Felipe Calderon, have been especially pro- business. Calderon has been battling Mexico’s narcotics gangs which, unfortunately, have been responsible for an ongoing epidemic of violence and casualties, including those of innocent civilians.
Because of NAFTA, Mexican businesses are finding themselves able to take advan- tage of the U.S. market by producing goods for that market that were previously pur- chased by the U.S. from Asia. Mexican firms are now able to produce products at highly competitive prices thanks to lower-cost labor and proximity to the American market. Location has helped hold down transportation costs and allows for fast delivery. This development has been facilitated by the maquiladora system, under which materials and equipment can be imported on a duty- and tariff-free basis for assembly or manufactur- ing and re-export mostly in Mexican border towns. Mexican firms, taking advantage of a new arrangement that the government has negotiated with the EU, can also now export goods into the European community without having to pay a tariff. The country’s trade with both the EU and Asia is on the rise, which is important to Mexico as it wants to reduce its overreliance on the U.S. market.
The EU The ultimate objective of the EU is to eliminate all trade barriers among mem- ber countries (like between the states in the United States). This economic community eventually will have common custom duties as well as unified industrial and commercial policies regarding countries outside the union. Another goal that has finally largely be- come a reality is a single currency and a regional central bank. Since 2007, 27 countries comprise the EU, with 13 having adopted the euro. Another 11 countries, having joined the EU in either 2004 or 2007, are legally bound to adopt the euro upon meeting the mon- etary convergence criteria.24
Such developments will allow companies based in EU nations that are able to man- ufacture high-quality, low-cost goods to ship them anywhere within the EU without paying duties or being subjected to quotas. This helps explain why many North American and Pacific Rim firms have established operations in Europe; however, all these outside firms are finding their success tempered by the necessity to address local cultural differences.
The challenge for the future of the EU is to absorb its eastern neighbors, the former communist-bloc countries. This could result in a giant, single European market. In fact, a unified Europe could become the largest economic market in terms of purchasing power in the world. In 2004 alone, Poland, the Czech Republic, and Hungary all joined the EU, improving economic growth, inflation, and employment rates throughout. Such a develop- ment is not lost on Asian and U.S. firms, which are working to gain a stronger foothold in Eastern European countries as well as the existing EU. In recent years, foreign govern- ments have been very active in helping to stimulate and develop the market economies of Central and Eastern Europe to enhance their economic growth as well as world peace. In 2009 and 2010, the EU faced one of the most severe challenges of its short tenure. Several European governments, including Greece, Portugal, Spain, and Ireland, found themselves with dangerously large deficits that resulted from both structural con- ditions (stagnant population growth, overly generous pension systems, early retirements) and shorter-term economic pressures. These conditions placed pressure on the euro, the currency adopted by most EU countries, and forced a substantial rescue package led by Germany and France.
Emerging Economies
In contrast to the fully developed countries of North America, Europe, and Asia are the less developed countries (LDCs) around the world. An LDC typically is characterized by two or more of the following: low GDP, slow (or negative) GDP growth per capita, high unemployment, high international debt, a large population, and a workforce that is either unskilled or semiskilled. In some cases, such as in the Middle East, there also is considerable government intervention in economic affairs. Emerging markets are devel- oping economies that exhibit sustained economic reform and growth.
Central and Eastern Europe In 1991, the Soviet Union ceased to exist. Each of the indi- vidual republics that made up the U.S.S.R. in turn declared their independence and now are attempting to shift from a centrally planned to a market-based economy. The Russian Re- public has the largest population, territory, and influence, but others, such as Ukraine, also are industrialized and potentially important in the global economy. Of most importance to the study of international management are the Russian economic reforms, the dismantling of Russian price controls (allowing supply and demand to determine prices), and privatiza- tion (converting the old communist-style public enterprises to private ownership).
Russia’s economy continues to grow as poverty declines and the middle class expands. Direct investment in Russia, along with its membership in the International Monetary Fund (IMF), is helping to raise GDP and decrease inflation, offsetting the hyperinflation created from the initial attempt at transitioning to a market-based econ- omy. In addition, the Group of Seven (the United States, Germany, France, England, Canada, Japan, and Italy) has pledged billions of dollars for humanitarian and other types
of assistance. So while the Russian economy likely will have a number of years of pain- fully slow economic recovery and many recurrent problems, most economic experts predict that if the Russians can hold things together politically and maintain social order, the situation could improve in the long run.
Although these economic reforms are being implemented slowly, there are significant problems in Russia associated with growing crime of all kinds as well as political uncer- tainty. Many foreign investors feel that the risk is still too high. Russia is such a large market, however, and has so much potential for the future that many MNCs feel they must get involved, especially with a promising rise in GDP. There also has been a movement toward teaching Western-style business courses, as well as MBA programs, in all the Cen- tral European countries, creating a greater preparation for trends in globalization.
In Hungary, state-owned hotels have been privatized, and Western firms, attracted by the low cost of highly skilled, professional labor, have been entering into joint ven- tures with local companies. MNCs also have been making direct investments, as in the case of General Electric’s purchase of Tungsram, the giant Hungarian electric company. Another example is Britain’s Telfos Holdings, which paid $19 million for 51 percent of Ganz, a Hungarian locomotive and rolling stock manufacturer. Still others include Suzuki’s investment of $110 million in a partnership arrangement to produce cars with local manufacturer Autokonzern, Ford Motor’s construction of a new $80 million car compo- nent plant, and Italy’s Ilwa’s $25 million purchase of the Salgotarjau Iron Works.
Poland had a head start on the other former communist-bloc countries. General political elections were held in June 1989, and the first noncommunist government was established well before the fall of the Berlin Wall. In 1990, the Communist Polish United Workers Party dissolved, and Lech Walesa was elected president. Earlier than its neigh- bors, Poland instituted radical economic reforms (characterized as “shock therapy”). Although the relatively swift transition to a market economy has been very difficult for the Polish people, with very high inflation initially, continuing unemployment, and the decline of public services, Poland’s economy has done relatively well. However, political instability and risk, large external debts, a deteriorating infrastructure, and only modest education levels have led to continuing economic problems.
Although Russia, the Czech Republic, Hungary, and Poland receive the most media coverage and are among the largest of the former communist countries, others also are struggling to right their economic ships. A small but particularly interesting example is Albania. Ruled ruthlessly by the Stalinist-style dictator Enver Hoxha for over four decades following World War II, Albania was the last, but most devastated, Eastern European coun- try to abandon communism and institute radical economic reforms. At the beginning of the 1990s, Albania started from zero. Industrial output initially fell over 60 percent, and inflation reached 40 percent monthly. Today, Albania still struggles but is slowly making progress.
The key for Albania and the other Eastern European countries is to maintain the social order, establish the rule of law, rebuild the collapsed infrastructure, and get facto- ries and other value-added, job-producing firms up and running. Foreign investment must be forthcoming for these countries to join the global economy. A key challenge for Albania and the other “have-not” Eastern European countries will be to make themselves less risky and more attractive for international business.
China China’s GDP has remained strong, growing at 12 percent in 2007, 9 percent in 2008, and 11.5 percent in 2009, despite the global economic crisis. In the first quarter of 2010, GDP grew at a blistering 11.7 percent, causing some concerns that the Chinese gov- ernment had provided too much liquidity to the economy during the global economic downturn when it sponsored a nearly $600 billion stimulus program. China faces other formidable challenges, including a massive savings glut in the corporate sector, the global- ization of manufacturing networks, vast developmental needs, and the requirement for 15–20 million new jobs annually to avoid joblessness and social unrest.26
China also remains a major risk for investors. The one country, two systems (com- munism and capitalism) balance is a delicate one to maintain, and foreign businesses are
often caught in the middle. Most MNCs find it very difficult to do business in and with China. Concerns about undervaluation of China’s currency, the remnimbi (also know as the yuan), and continued policies that favor domestic companies over foreign ones, make China a complicated and high-risk venture.27 Even so, MNCs know that China with its
1.3 billion people will be a major world market and that they must have a presence there. Trade relations between China and developed countries and regions, such as the United States and the EU, remain tense. In early 2010, a senior Chinese official said that China would not bow to pressure from the United States to revalue its currency, which many in the United States argue is kept artificially low, giving China an unfair advantage in sell- ing its exports. The official, Ma Zhaoxu, a Foreign Ministry spokesman, said at a news conference that “wrongful accusations and pressure will not help solve this issue.”
