The Effects of Economic Factors on International Business - Article Example

Number The Effects of Economic Factors on International Business Perhaps the most important considerations that affect the operation of multi-national corporations are the economic factors in play in their region of operation and other potential investment areas. Firms participating in international business must be familiar with the economic conditions of their home country and the foreign factors as well (UNCTAD, 2008, p.27). In essence, international business and the global economy need each other to thrive. Every other international business has core goal, to maximise its profits. For this paper, the economic elements to be discussed are Gross Domestic Product (GDP), Gross National Product (GNP), Human Development Index (HDI), Inflation, Deflation, Unemployment levels and Privatisation. Gross Domestic Product (GDP) Evaluating the GDP of a country is arguably the best way to understand the dynamics of a country’s economy. The GDP as an economic indicator measures the total output of country. It is inclusive of everything produced by the people and all the industries in the country. The GDP of a country has an effect on global firms in that, a multinational company wishing to make new investments or analyse the performance of the foreign subsidiaries would use the GDP per capita to make comparison of the GDP of different countries. A country’s GDP gives a clear reflection of what the country’s output is and the GDP growth rate tells you exactly how fast a country’s economy is growing (Hamilton & Webster, 2012, p.79). A global firm would thus make informed decisions based on the GDP. Although the GDP is a good indicator of economic performance, it has its fatal flaws. For instance, the output generated in a country from the underground economy is not accounted for in calculations. The GDP also ignores the productive non-market activities of a country. In addition, certain “economically bad” activities can increase the value of the GDP whilst at the same time reducing social welfare. This makes it an inappropriate measure of social welfare. Gross National Product (GNP) The GNP is also a measure of the country’s economic performance. It measures the total market value of the goods and services produced by within a country’s borders within a given time period (usually one year). Unlike the GDP measure, the GNP measures only the income supplied to the economy by the residents, whether at home or abroad. GNP can be a good measure for use by international businesses to measure economic growth but it can be misleading due to its shortcomings. Since GNP is a viable option for measuring overall demand, the GNP of a country can affect the levels of demand in a country and hence affect the performance of the global firms. Despite being an important tool in evaluating economic investment viability for global firms, the GNP statistic has its shortcomings. In measuring economic development, the GNP statistic may pose problems in that the exchange rates vary on a daily basis hence the real value of goods is difficult to estimate. The GNP also hides the wealth distribution in a country and reveals minimal information about the quality of life and social welfare in a country which are key aspects of the economy when considering a country as being conducive to conduct business. Human Development Index (HDI) The human development index is a statistical measure of the social and economic dimensions of a country. It is a composite measure of the economic and social welfare which incorporates the indicators of life expectancy, educational attainment and income. This three main components of HDI are useful for global businesses seeking to invest in foreign countries. A good measure of HDI is a sign of good education and a healthy population with good standards of living. This in turn serves as a good market with potentially high demand to global businesses seeking to expand into such a country. The reverse being true. The HDI, therefore, can have a positive or negative effect on a business depending on the indexes calculated each year. The Human Development Index of a country can also cause an imbalance in the balance of payment on international trade. This could potentially affect the exports and imports of a country thus hampering the general performance of businesses in a country (Shenkar et al. 2003, p. 111). Inflation Inflation is a term that is used to describe the general and persistent rise in the prices of goods and services throughout the economy over a certain time period. As the general price of goods and services increase, each monetary unit buys a smaller amount of goods and services. As a result, inflation is a reflection of the reduction in the purchasing power of money (Sharan, 2011, p.56). In international business, inflation levels in a country are a vital statistic in determining the viability of making investments in that country or for a business already in operation in a particular country, it helps in the cost-benefit analysis of continuity of doing business. A country with a high inflation rate is likely to increase the cost of production and the general cost of operations in the long run. This would hence increase the prices of the end product that gets to the market. Coupled with the low demand as a result of high commodity prices, a business may start operating at a loss. Global firms hence tend to expand in regions with a stable or low inflation rate and avoid countries with high inflation rates. Inflation rates are a good indicator of the economic environment of a country but the use of it as a sole statistic in assessing the economic suitability of a region is potentially dangerous. This is because inflation is concerned with the movement in the level of prices of the output and does not give proper insight to the nature of the operating environment of a region. It has also been termed as a subjective measure. Deflation Deflation is the exact opposite scenario of inflation. Deflation is an economic scenario characterised by a general decrease in the price levels of goods and services in an economy often attributed to a shortage in the money supply or the unavailability of credit. Deflation is said to occur when the inflation rates move below 0% in a country (Hamada, Kashyap& Weinstein, 2011, p. 34). Even though it is characterised by general reduction in the price levels, it also poses a great risk to the economic performance of a country. In an economic perspective, deflation is purported to be caused by a shift in the demand and supply curve which leads to a general decrease in the aggregated level of demand. Due to the falling prices, consumers develop a sense of laxity and tend to delay purchases awaiting the prices to fall further. This in turn reduces the level of economic activity. A country facing a deflation crisis would therefore be a no-go for global businesses. Unemployment levels The level of unemployment in a country is a good indicator of the economic performance of the country. A high level of unemployment is indicative of the low levels of economic activity in a country and vice versa. In a business perspective, high unemployment levels indicate a gap in the economic position of a country. High unemployment levels indicate the presence of an opportunity to provide job opportunities while undertaking productive economic activities. Holding other relevant factors constant, a country with a high level of unemployment, both skilled and unskilled serves as great opportunity for a global business to expand and capitalise on the readily available labour. Low levels of unemployment exemplify high levels of economic activities but also portrays the possible lack of sufficient labour in the case of new entry by a global business. The unemployment level, as a measure of economic performance has potential flaws. The unemployment levels of a country are usually stated as a ballpark figure without giving specifics as to the type that is unemployed whether skilled, semi-skilled or unskilled. A multinational hence wanting to invest would not be aware of the exact labour situation in potential regions of investment. Privatisation Privatisation is the process of transferring previously owned government assets or business enterprises to the private sector. It can also be defined as the process by which a company transitions from being a publicly owned company to a privately owned and which no longer trades on a stock exchange. In the eyes of a global business entity, when state owned businesses are privatised in their country of operation or in a potential market, it is a positive action. Privatisation reduces government dominance in certain areas of the economy and may hence serve as viable opportunity for multinationals to explore greater profits. Privatisation may however have setbacks in operation. For example, the privatisation of essential utility company’s would mean that, as a private company, the business would be subject to many regulations in terms of price and the terms of operation. As much as privatisation is a good opportunity for privately owned businesses, it has potential operation threats for an industry. When the government steps out of the control of a particular industry, it may affect the amount of regulation and standardisation. This could in turn affect the industry environment and thus deter multinationals investing in the country. Investment Opportunities and Risks in Developed and Emerging Economies Developed economies and emerging economies both have opportunities for investment and the risks associated with them. However, due to the differences in the dynamics of the economies, the opportunities available and the risks faced are also differentiated. The purpose of this section is to identify the potential opportunities and threats present in both economies citing Germany and Thailand as representatives of the economies. Germany as a developed economy and Thailand as an emerging economy. Investment Opportunities Developed economy (Germany) Developed economies are characterised by high levels of industrialisation and high standards of living. Citing Germany as an example, it is characterised by dominance in the industrial sector. A major portion of the national income is obtained from the industries while agriculture plays a minor role as an occupation. The country is characterised by a good education system, good transportation, and good health services. It is also characterised by a well organised government that supports the nature of economic activities. This distinguishing characteristics are what provides good investment opportunities for multinational corporations. For examples, as it is characterised by heavy industrialisation and large scale production, large multinationals can gain from the policies an infrastructure in place by investing heavily in order to maximise on the economies of scale (Oleynik, 2004, p.98). Citing the economic factors in the previous section that affect multinational corporations, Germany had a GDP of $3.6 billion dollars in 2011, a GDP growth of 0.9% and a GDP per capita of $43 741. The inflation rate was 1.83% in June 2013, the unemployment levels were 5.3% in January 2013. This figures indicate that the economy is stable and that there is a high level of economic activities. This hence means that the market gaps might be very few and the barriers to entry very high. This being a representation of other developed economies, other potential opportunities are the agricultural sector which is not tapped into. Agriculture accounts for a very small percentage of the GDP. Emerging economies (Thailand) Contrary to developed economies, emerging economies are characterised by relatively lower levels of industrialization and infrastructure. They are nations that invest more in the productive capacity in a bid to move away from their traditional economies which relied on agriculture and the export of raw materials (Pelle, 2007, p.123). Citing Thailand as a representative of emerging economies, the leaders of developing countries are portrayed as wanting to give their people a better quality life than what they are currently having. As a result, Thailand is rapidly industrializing and adapting the principles of a mixed economy. As most developing countries are a target of foreign investment, Thailand also poses great opportunities for multinational companies to invest. Potential business opportunities would be in the industrial sector and service sector which account for approximately 39.2% and 52.4% of the GDP respectively. Since the government has made it easier to do business, agriculture also plays a big role in the economy and is also a big investment opportunity for multinational corporations. In addition, economic activities involving textiles, foot wear, rubber, jewellery, automobiles and electrical appliances are also a major investment opportunity for multinational firms. Investment Risks Developed economies (Germany) As developed economies such as Germany are characterized by high levels of industrialization, large scale production and effective policies, the level of competition existent between firms in the market is high. Companies strive to gain competitive advantage over their competitors in order to make superior profit (Nafziger&Nafziger, 2005, p.66). This is a potential investment threat to global firms. This is because a high level of competition would hence mean that a company has to differentiate its product and service offering such that maximum utility is obtained by a consumer. In this situation, quality is key and this is likely to increase production costs. In addition the barriers to entry set in place by the existent industries and firms are likely to affect the performance of a multinational corporation that may invest in the economy. Emerging economies (Thailand) Emerging economies are a bit “backward”. The intensity of setting up industries is a positive factor to the economy but there is a flip side. Most developing countries are faced by political risks. Thailand is not an exception. The political risk refers to the political decisions made in a country that could potentially lead to losses to the investors. In addition to political risks, Thailand is also prone to economic risks in that it has higher frequencies of booms and bursts (Bickerstaff, 2010, p.31). In assessing the GDP per capita of Thailand compared to Germany, Thailand records a significantly lower GDP per capita contrary to the higher GDP overall. This could be extended to the level of demand of commodities in the market. It signifies that the amount of disposable income among the individual citizens of the country is low. As a result, a risk of low demand for commodities produced by global firms investing in the country is also higher. As much as there is risk in this emerging economies, this risks can be turned into strengths for multinational corporations to maximise on. References Bickerstaff, B. (2010). Your investment guide to Thailand. Chiang Mai, Thailand, Silkworm Books. Hamada, K., Kashyap, A. K., & Weinstein, D. E. (2011). Japan's bubble, deflation, and long-term stagnation. Cambridge, Mass, MIT Press. Hamilton, L., & Webster, P. (2012). The international business environment. Oxford, Oxford University Press. Nafziger, E. W., & Nafziger, E. W. (2005). Economic development. New York, Cambridge University Press. Oleynik, I. S. (2004). Germany: business and investment opportunities yearbook. Washington, DC, International Business Publications. Pelle, S. (2007). Understanding emerging markets: building business BRIC by brick. New Delhi, Response Books. Sharan, V. (2011). International business concept, environment and strategy. 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