CHAPTER 4
THE ECONOMIC ENVIRONMENT
Chapter Outline
A. Market Characteristics
1. Population
2. Infrastructure
B. Impact of the Economic Environment on Social Development
C. Regional Economic Integration
1. Levels of Economic Integration
2. Other Economic Alliances
3. Economic Integration and the International Marketer
D. Emerging Markets
1. Adjust Entry Strategy
2. Manage Affordability
3. Invest in Distribution
E. Developing Markets
1. Research
2. Creating Buying Power
3. Tailoring Local Solutions
4. Improving Access
5. Shaping Aspirations
Chapter Objectives
This chapter introduces the most basic variables that international marketers use in screening
foreign markets for both short-term and long-term opportunity. These are economic
variables relating to the individual market's characteristics: (1) population, (2) income, (3)
consumption patterns, (4) infrastructure, (5) geography, and (6) attitudes towards foreign
involvement in the economy. Apart from the major variable groups discussed above; a
number of others exist, as even the most casual perusal of any statistical handbook will
reveal. They form the basis for the analysis on two critical questions for the international
marketer: (1) what is the (potential) size of the market, and (2) what are the unique
characteristics of each of the markets and how might they be similar. These variables are
easily accessible from secondary databases provided by both individual countries, such as the
Statistical Abstracts, as well as larger entities such as World Bank and the United Nations.
Data are available on past developments as well as on projections of broader categories such
as population and income. Since the volume of these data is overwhelming, the international
marketer has to decide which groups of variables to use in order to facilitate decision-
making. It is also important to realize that they usually have to be used in conjunction with
other data which allow their proper interpretation. The chapter focuses on economic
integration highlighting the challenges faced by international marketers as well as possible
reactions to these challenges. While the focus is on the European Union (EU) and on
(NAFTA), discussions on other integrative efforts are also included. Furthermore, the
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implications of the "triad" consisting of the Americas, Asia, and Europe forming the major
three trading blocs are presented. Since the 1997 Asian currency crisis, similar situations
have emerged in Argentina, Brazil, and Russia. Marketer adjustments to the challenge of
lower consumer buying power are highlighted.
Suggestions for Teaching
Of the environmental issues, economic dimensions form the most concrete ones along which
individual markets can be analyzed and compared. The chapter by necessity features a
considerable amount of numbers which may make for what the student considers boring
reading. One of the best approaches to this dilemma is assign exercises for this section in
class. This can take several formats: (1) updating the tables presented in the case and
discussing the significance of the changes that may have emerged, (2) developing
country/product specific exercises of the kind featured in discussion questions 1 and 3, or (3)
assigning one specific market (and product) for class discussion and assigning different
groups to collect different economic data pertinent to the issue. Especially with this chapter's
material it is very important indeed to get the students involved and let them see for
themselves what data are available and what they can do with them.
Students can be asked to provide innovative suggestions for marketing a particular product in
developing countries which vary in terms of population, income, consumption patterns and
infrastructural developments. The intent of this exercise is to reiterate the various aspects that
an international marketer must consider to take advantage of and thrive in developing
markets. Also, differences in the degree of urbanization of target markets in lesser-developed
countries influence international marketers’ product strategies.
Rather than trying to accomplish too much in one session, it is worthwhile to concentrate on
one data set; e.g., exhibit 4.6, which shows the percentage of households owning selected
appliances. Critical issues to the international marketer are that the data may not be available
for each and every market considered, as well as the fact that the data may not be current.
For the students who are getting their education in a developed, industrialized country the
availability of, and access to, data may seem evident. As a matter of fact, marketing
educators very often get the answer of "let's collect the data" for a number of their questions.
The fact may well be that not all the desired data even exist; some countries have not had a
census for twenty or thirty years!
Another rude awakening that has to be delivered at this stage is that terminology used in a
particular country may very from those used elsewhere. The text refers to the example of an
urban area; other definitional differences are usually discussed in statistical resource books;
e.g., "household" for most Northern Americans means the parents and their children.
In most of the world the concept refers to an extended family. Similarly, age does not
necessarily correlate with similar product usage patterns worldwide. An excellent (however,
quite involved) case that makes this point is the "Choufont Salva" case (available from the
ICCH) in which the target market in terms of age categories has to determined for the
marketing of oral contraceptives in the Philippines. Most students assign age groups that
might be consumers in their own market without consideration of unique market factors.
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Data abound on economic integration, especially on the EU and its development and
expansion as well as the NAFTA process. It is a worthwhile exercise to show one of the
available videos (for example, "The Single Market") on economic integration in Europe and
follow that with a discussion of how international marketers, especially those outside of the
EU, are adjusting to the development. Given the current discussion of economic integration
in the Western Hemisphere, the instructor can discuss NAFTA specifically in terms of the
arguments for and against it as well as how companies are adjusting to it. The video case on
NAFTA is highly applicable at this stage of the class to debate topics beyond traditional
marketing; e.g., the need for social marketing.
The instructor may also want to selectively introduce students to some of the data sources
available for the international marketer (which are discussed in detail in Chapter 8).
Key Terms
Group of Five: Five industrialized nations regarded as economic superpowers: The United
States, Britain, Germany, France, and Japan.
Group of Seven: Seven industrialized nations regarded as economic superpowers: The
United States, Britain, France, Germany, Japan, Italy, and Canada.
Group of Ten: Ten industrialized nations regarded as economic superpowers: The
United States, Britain, France, Germany, Japan, Italy, Canada, the Netherlands, Belgium,
and Sweden.
Household: All the persons, both related and unrelated, who occupy a housing unit.
Urbanization: The concept has different meanings depending on where one operates;
descriptions of urbanization range from a densely-populated city’s built-up areas to small towns
with proclaimed legal limits.
Purchasing Power Parities (PPP): A measure of how many units of currency are needed in
one country to buy the amount of goods and services that one unit of currency will buy in
another country.
Inflation: The increase in consumer prices compared with a previous period; it affects the
ability of both industrial customers and consumers to buy and also introduces uncertainty
into both the marketer’s planning process and consumers’ buying habits.
Physical Quality of Life Index (PQLI): A composite measure of the level of welfare in a
country, including life expectancy, infant mortality, and adult literacy rates.
Free trade area: The least restrictive and loosest for of economic integration among nations;
here all barriers to trade among member countries are removed; goods and services are freely
traded .
Customs union: A group of nations committed to removing all barriers to the free flow of
goods and services between each other; it also establishes a common trade policy with respect to
nonmembers..
Common market: Goods and services, including labor, capital, and technology, are freely
exchanged among member countries; restrictions are removed on immigration and
cross-border investment; member countries adopt common trade policies with nonmembers.
Factor mobility: The loosening of restrictions on the trade of capital, labor, and technology
among nations.
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Single European Act: Ratified in 1987 by twelve European countries to allow free exchange
of goods, services, capital, and people among countries.
Economic union: Integration of economic policies among member countries; harmonization of
monetary policies, taxation, and government spending.
Political union: Unification of policies among member nations and establishment of
common institutions.
European Union: Effective January 1, 1994; formed by the ratification of the Maastricht
Treaty; set the foundation for economic and monetary union among member countries and
the establishment of the euro (€), a common currency.
Fortress Europe: Term expressing the fear that unified European nations will raise barriers
to trade with other nations, including setting rules about domestic content restricting imports.
Maquiladoras: Mexican plants that make goods and parts or process food for export to the
United States.
Import substitution: A policy that requires a nation to produce goods that were formerly
imported.
Microfinance: A program which allows consumers without collateral property to avail loans
averaging $100 to make purchases and utilize retail banking services..
Questions for Discussion
1. Place the markets in the framework that follows:
Income level: Low, Middle, High
Trade structure: Industrial, Developing (semi-industrial, oil-exporting, primary producing,
populous S. Asia, least developed)
GNP p/c Income Trade structure
1. Indonesia 909 middle to low oil-exporting, populous
2. Mozambique 86 low income least developed
3. India 328 low income semi-industrial
4. Bangladesh 219 low income populous S. Asia
5. Niger 156 low income least developed
6.Brazil 3,730 middle-income industrial
7. Turkey 2,144 middle income semi-industrial
8. Spain 12,335 middle to high industrial
9. Singapore 23,259 middle to high semi-industrial
10. Nigeria 434 middle income oil-exporting
11. Algeria 1,478 middle income oil-exporting
12. Zambia 346 low income primary producing
13. Peru 2,164 middle income semi-industrial
14. Jamaica 1,576 middle income primary producing
15. Poland 2,405 middle to high industrial
16. U.K. 17,572 high income industrial
17. Iraq 841 middle income oil-exporting, embargoed
18. S. Arabia 6,886 high income oil exporting
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2. Using available data, assess the market potential for a) power generators and b) consumer
appliances in (1) the Philippines, (2) Jordan, (3) Portugal.
As per the country level data available in NationMaster
(http://www.nationmaster.com/graph/eco_hou_fin_con_exp_etc_cur_us-consumption-
expenditure-etc-current-us&date=2005), final consumption expenditure on household
durables for the fiscal 2005, in terms of U.S. $ was the highest in Portugal ($120 billion),
followed by Philippines ($79 billion), and Jordan ($13 billion). This is indicative of the fact
that Portugal had the largest market potential for consumer appliances, while Jordan had the
lowest for the same. Marketers can also study the overall market size for the product with
reference to population and per capita income.
Gross electricity production in kWh, for the fiscal 2005, was maximum in Philippines, thus,
possessing the highest market potential for electric generators. Portugal ranked second in this
respect. Data used for this exercise can be found in NationMaster
(http://www.nationmaster.com/graph/ene_ele_gro_pro_pub_amp_sel-production-public-amp-
self-producer&date=2005).
Based on 1997 figures, in order of volume of consumer spending, Portugal would have the
highest market potential for consumer appliances, the Philippines the second, and Jordan the
third. In Portugal, consumption expenditures per capita were $5,656, with $340 (6%) of that
spent on household durables. For the population of 10 million, total expenditures on
household durables were approximately $3.4 billion. Consumption expenditures per capita
in the Philippines were $712, with $71 going to household durables, and total expenditures
on household durables were $3.3 billion. Jordan’s per-capita expenditures on household
durables was $42, and the resulting total expenditures on household durables were
approximately $225 million, the least of the three countries.
In the power generator market, Portugal seems to have the greatest potential in view of the
electricity production (in kWh).
Data needed in this exercise can be secured from, for example, Crossborder Monitor’s annual
compilation of economic data. Euromonitor also publishes World Consumer Income &
Expenditure Patterns, which covers 49 countries around the world.
3. From the international marketer's point of view, what are the opportunities and problems
caused by increased urbanization in developing countries?
Increased urbanization in developing countries is advantageous for international marketing
because it centralizes the potential market, thereby centralizing the market research area and
advertising area. Urbanization also simplifies the logistics of product distribution. The
greater ease of distribution to urban areas brings down the costs of the product, and the
savings may be passed on to consumers, thereby potentially increasing consumption. One
phenomenon of marketing that occurs in urban areas is that consumers are influenced by
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other consumers around them. This can result in advertising affecting more people than it
directly reaches, through the demonstration effect. In contrast, in rural areas where there are
few stores and products are not displayed, consumers are not as aware of what is available to
satisfy their existing needs.
Newly urban environments in developing countries are different than urban settings in
developed countries, and marketers must adjust their techniques accordingly. For example,
in developing countries people who are entering the urban environment often have left poor
economic situations and are looking for new opportunities in the city. Thus, they often have
very little money and might not buy many things other than subsistence items for a few
years. They may also send most of their income to family members outside of the urban
setting in order to support them. Another difference is that the infrastructure needed in order
to use certain products may not be in place. For example, China's per capita energy
consumption increased by 6.6 per cent over the fiscal 2004-05, whereas that of U.S. dropped
by 0.12 per cent. This would have a large impact on a company planning to market electrical
appliances or any energy related product there.
It has to also be noted that explosive urbanization may bring problems that complicate the
operations of international marketers, not only in the country of question but elsewhere as
well. An excellent example of this is the infant formula controversy which involved 25 large
multinational companies with Nestlé getting most of the negative publicity. In this case,
urbanization meant less breast feeding and more reliance on substitutes such as infant
formula, the proper preparation of which may be difficult if not impossible in developing
countries.
4. Comment on this statement: "A low per-capita income will render the market useless."
For relatively low cost products, a market can be profitable even if the per capita income is
low. As in the example of the market potential of the Philippines for household durables, the
large size of the market makes it profitable even though the per capita income is low, if the
product is generally affordable. Population is a weighty factor in marketing low cost staple
goods, while income is more important in marketing more expensive goods.
The lack of income in a market may preclude the marketing of a standardized product but, at
the same time, provide an opportunity for an adjusted product. By substituting cheaper parts
and materials, successful international marketers can make both consumer and industrial
products more affordable in less affluent markets and therefore reach a wider target audience.
Although a country's per capita income may be low, there is usually a certain percentage of
wealthy consumers who buy expensive products. Research on individual countries to
determine the size of this upper class is required of the international marketer
Consider, for example, the market for personal computers in China. While China's Per-
capita income is low and ownership of PCs is low (1 in 6,000), the country's GNP growth in
the 1990s has been 12-13 percent annually and will make the market quite attractive.
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5. What can a marketer do to advance regional economic integration?
A marketer can use a three-pronged strategy. The first approach focuses on executives
working with government representatives from the United States, European Union, and Japan
to dismantle the greatest flaws. Especially larger companies can use their clout in this regard
but also smaller companies through associations can have a similar effect. On the second
level, the marketer should work within existing frameworks to balance the effects of
nationalistic policies. Finally, by their very activities and investments marketers can
“reward” countries pursuing free-trade policies.
6. Explain the difference between a free trade area and a common market. Speculate why
negotiations were held for a North American Free Trade Agreement rather than for a North
American Common Market.
A free trade area allows for free trade among members. No discriminatory taxes, quotas,
tariffs, or other barriers are allowed. However, each member sets its own trade policies with
nonmembers. The customs union, on the other hand, establishes a common external trade
policy with regard to nonmembers. This is mostly in the form of a common external tariff,
whereby imports from nonmembers are subject to the same tariff when sold to any member
country. The Southern African Customs Union is an example of economic integration in
Africa.
Many argue that economic integration is much more likely to be viable among countries at
common levels of economic development. In fact, most successful integrative efforts have
taken place among the industrialized countries.
Although the North American Common Market has been discussed at various levels for the
last 30 years, its implications of free movement of things beyond goods is not meeting with
interest in the potential member countries. Also, the significant size (physical and economic)
in favor of the United States makes Canada and Mexico hesitate.
Internet Exercises
1. Compare and contrast two different points of view on expanding trade by accessing the Web
site of The Business Roundtable—an industry coalition promoting increased to and from
world markets (http://www.businessroundtable.org), and the AFL-CIO, American Federation
of Labor—Congress of Industrial Organizations (http://www.aflcio.org).
The Business Roundtable is an organization that develops positions on
international trade and investments in order to improve the United States
competitiveness in the world market. Other objective of the Business
Roundtable includes promoting worldwide economic growth as well as
promoting initiatives to address bilateral issues with major U.S. trade partners such as China,
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Japan, India and Europe. The American Federation of Labor—Congress of Industrial
Organizations (AFL-CIO), which is a voluntary federation of 56 national and international
labor unions, discourages the expansion of trade globally because of a growing U.S. trading
deficit and unfair competitive advantages by other countries. AFL-CIO believes that China
systematically violates worker’s rights and unfairly manipulates it’s currency to get an unfair
advantage over the United States.
The Business Roundtable supports economic expansion, while AFL-CIO discourages
economic trade. AFL-CIO believes that expanding trade will lead to an increased U.S. deficit
and a continuation of unfair trading by other countries. The Business roundtable firmly
believes that expanding trade will give the U.S. an improved competitive advantage while
simultaneously improving the global economy. They do share a common goal in resolving
issues with China and other countries in which a trading relationship exists. The goal of both
of these organizations is to improve the United States economic position; however the method
in which to achieve this task is still in question.
2. Why do marketers engage in major projects in developing countries, such
as Hewlett-Packard’s e-inclusion project (
http://www.hp.com/e-inclusion/en/project/dikhotole1.html). Outline both the short-term and
long-term benefits.
A lack of access to computers and internet connectivity prevents more than four billion
individuals to experience the benefits of social and economic development. Hewlett
Packard’s e-inclusion project is aimed at improving their competitiveness globally while
simultaneously closing the digital divide and stimulating economic growth in developing
countries. The short-term benefits include introducing technology to improve the
effectiveness, efficiency, and productivity of developing countries. Introducing this new
technology to developing countries will open up a new market for HP, which will
potentially mean huge profits down the road. HP’s social responsiveness from this project
will also improve HP’s competitiveness domestically and globally. In the long-term, HP will
increase their market share, profits, and ability to continue spending money on research and
development. Closing the digital divide is a task no other firm could achieve in the past,
which will give them instant credibility and trust in untapped global markets.
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