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CHAPTER 2
Global Marketplaces and Business
Centers
Chapter Objectives
After studying this chapter, students should be able to:
1. Evaluate the impact of the political and economic characteristics of the
world’s various marketplaces on opportunities available to international
businesses.
3. Discuss North America as a major marketplace and business center in
the world economy.
5. Discuss Asia as a major marketplace and business center in the world
economy.
6. Assess the development challenges facing African, Middle Eastern, and
South American countries.
LECTURE OUTLINE
OPENING CASE: The Northwest Passage
The opening case explores the historic search for the Northwest Passage, which may
make Artic trade routes possible.
Key Points
• The diminishing ice cap may make a Northwest Passage feasible.
• One possible route goes from North America, through the Canadian Artic islands, to
Greenland, making a route to Europe or the eastern coast of the Americas possible.
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• .These regions may also hold a great deal of commercially recoverable reserves of
oil and natural gas.
• The Arctic Council is the primary international organization addressing the region’s
issues.
CHAPTER SUMMARY
Chapter Two provides a basic foundation of geographic, economic, and political factors
necessary for understanding international business. The chapter considers the major
centers of international business and analyzes existing patterns of trade. It is designed
to act as a reference chapter for students as they develop their knowledge of the field of
international business.
Teaching Note:
Students are often surprised to find out that they may actually know very
little about basic world geography. An interesting exercise for students at
this point in the course is to provide them with a blank world map and ask them to fill in
various countries, cities, capitals, etc. This exercise not only provides students with a
measure by which to gauge their knowledge, but it also provides instructors with a basic
idea of what students already know about world geography.
THE MARKETPLACES OF NORTH AMERICA
The United States, Canada, Mexico, Greenland, the nations of Central America, and the
various island nations of the Caribbean make up North America.
The United States
• The United States is the world’s largest economy. It accounts for 21 percent of the
world’s $69.9 trillion GDP (as of 2011). It has the highest per capita income in North
America.
EMERGING OPPORTUNITIES
Classifying Countries by Income Level
This box discusses the importance of knowing income levels when internationalizing.
The box explains the differences among high-income countries (at least $12,476
• The size and political stability of the United States provide the country with a unique
position in the world economy. It accounts for one-eleventh of world trade in goods
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• International trade, although growing in recent years, is still a relatively small
component of the U.S. economy. This phenomenon is probably due in part to the
large geographic size of the country. Transactions that might constitute international
trade and investment in other parts of the world are just domestic transactions in the
United States.
• Many of the world’s 500 largest industrial companies (as of the year 2010) are
headquartered in the United States. Discuss Figure 2.2 here.
Canada
• Although the second largest country in the world, Canada has a relatively small
population of 34 million, most of which is concentrated along its southern border with
the United States. The country has close political and economic ties with the United
• Canada’s strong infrastructure and proximity to the U.S. market make it an attractive
location for international businesses.
• Canada’s political stability is currently being threatened by a long-standing conflict
between French-speaking Canada and English-speaking Canada. The conflict is not
only affecting investment in the country, but it is also affecting international business
because firms exporting products to Canada must be aware of the country’s labeling
laws.
Mexico
• Mexico, the world’s largest Spanish-speaking nation. Mexico follows a federal
system similar to that of the United States under which a new president is elected
every six years.
• In 1994, Canada, Mexico, and the United States initiated the North American Free
Central America and the Caribbean
• The two dozen other nations that make up the North American continent, Central
America, and the island states of the Caribbean have suffered economically as a
result of political instability, a history of U.S. military intervention, inferior educational
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Bring the World into Focus
The Canals of Commerce
This box discusses the strategic importance of both the Suez Canal and Panama
Canal, including the impacts upon global trade. This section also highlights the
political and historical significance of the canals.
THE MARKETPLACES OF WESTERN EUROPE
• The countries of Western Europe make up the second component of the Triad, and
are among the most prosperous nations in the world. They can be divided into (1)
the members of the European Union (EU) and (2) the other nations in the region.
• The members of the European Union have agreed to reduce barriers to trade and
investment among themselves in an effort to achieve greater prosperity. The EU will
be discussed in more detail in Chapter Ten.
• In 2002, twelve of the EU nations eliminated their national currencies, replacing them
with the euro.
Central Europe
• The countries of Central Europe face some common problems as they move toward
capitalism. The Czech Republic, Hungary, and Poland are all now classified by the
World Bank as “high-income” countries and are further along in their economic
development than some of their former peers. They have become attractive sites to
foreign investors.
• Economic development has been slower in Albania, Bulgaria, and Romania because
these countries were slower to develop a consensus as to the direction they wanted
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THE MARKETPLACES OF EASTERN EUROPE AND CENTRAL ASIA
The regions of Central (Austria, Albania, the former Soviet satellite states of Bulgaria,
the Czech Republic, Slovakia, Hungary, Poland, Romania, Bosnia-Herzegovina, Croatia,
Macedonia, Montenegro, Serbia, and Slovenia) and Eastern Europe (the former Soviet
Union) continue to undergo the vast economic change that began in 1986 with glasnost
(openness) and perestroika (restructuring the economy).
• The Soviet Union collapsed in 1991 as a result of economic and political reforms.
The various countries, of which Russia is the largest, are now part of the Newly
Independent States (NIS).
• The process of transforming their economies from a communist to a capitalist system
was not easy. One of the most important challenges in this process is that of
privatization (selling state-owned property to the public sector). The process is a
painful one that has caused massive unemployment.
THE MARKETPLACES OF ASIA
Asia, home to over half the world’s population, produces less than 25 percent of the
world’s GDP. Asia is unique in that it is a source of both high– and low-quality products
and of both expensive and inexpensive labor. Further, the region attracts MNC
investments, and is a major supplier of capital to non-Asian countries. Moreover, its
companies are increasingly pressuring European and North American companies to
improve their operations.
Japan
• Japan, with a population of 128 million, has enjoyed rapid growth over the last 50
years in part because of the close relationship between the Ministry of International
Trade and Investment and the industrial sector.
• Japan, through the use of keiretsus, has also made it difficult for foreign firms to
penetrate its marketplace. A keiretsu is a large family of interrelated firms. Sogo
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Teaching Note:
The question of whether Japan practices free trade usually generates
good discussion among students. Instructors can raise the question in
a very broad sense, and then play devil’s advocate to really get students thinking.
Australia and New Zealand
• Australia and New Zealand are traditional economic powers in Pacific Asia. Some
40 percent of its population lives in Sydney or Melbourne.
• Australia’s exports capitalize on its natural resources (gold, iron ore, coal, etc.) and
land-intensive agricultural goods (wool, beef, and wheat).
The Four Tigers
The Four Tigers – South Korea, Taiwan, Singapore, and Hong Kong – enjoy the position
of being among the fastest industrializing nations in the world. While many publications
still classify the Four Tigers as Emerging Markets, they have in fact already emerged as
indicated by their having achieved high income classification by the World Bank for more
than a decade.
• South Korea has grown rapidly through tight cooperation between the government
and chaebol. Chaebol are large, privately owned conglomerates such as Samsung,
Hyundai, and Daewoo. Today, however, many of the chaebol are experiencing
out.
• Taiwan, the island off mainland China, has relied on private businesses and export-
oriented trade policies to bring about its phenomenal growth. The country exports
• Singapore is another nation that can no longer compete with low-cost labor
countries, and instead has shifted to higher value-added activities, including oil
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• Hong Kong was ceded back to the PRC in 1997 but will continue to enjoy special
privileges under Chinese rule until 2047. Hong Kong has a highly educated and
productive labor force for industries such as textiles and electronics. The country is
China
• The People’s Republic of China (PRC), the most populous nation in the world, is also
the world’s largest communist country. The PRC’s growth has been governed by a
India
• India, the second most populous country in the world (over one billion persons), is
also one of the world’s poorest (with per capita income of $1,488/year). It has relied
on state ownership of key industries as a key to its economic development. India
has also discouraged foreign investment and limited foreign ownership of
companies.
Southeast Asian Countries
Other countries in Asia that are affecting international business include Thailand,
Malaysia, and Indonesia. Their GDPs enjoyed annual growth rates averaging over 7
percent from 1980 to 1995. However, the 1997-1998 currency crisis seriously hurt these
countries. Even so, they have continued to be the target of large flows of foreign
investment, particularly by Japanese companies seeking low-cost labor. U.S. and
European MNCs have used these countries as production platforms as well.
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THE MARKETPLACES OF AFRICA AND THE MIDDLE EAST
The continent of Africa covers roughly 22 percent of the world’s total land area and is
composed of 55 countries. Egypt occupies the northeastern tip of the African continent
and represents the western boundary of what is commonly known as the Middle East.
Africa
• The African continent is home to 1.1 billion people. Though countries on the African
continent are now independent, some vestiges of colonialism remain and affect
international business. The text provides an example of colonial ties, specifically that
Chad, Niger, and the Ivory Coast retain their ties with France and in doing so, link
In Practice
Sovereign Wealth Funds
Sovereign wealth funds are a new and controversial source of capital in the world
economy. These are monies derived from a country’s reserves that have been set
Middle East
• The Middle East (the region located between northwestern Asia and northeastern
Africa) is home to many oil-rich countries. It is also home to political unrest and
conflict, and the region has been plagued with various wars in the last century,
THE MARKETPLACES OF SOUTH AMERICA
widespread poverty.
• Until recently, most South American countries have followed an economic policy of
import substitution. Under such a policy, a nation attempts to stimulate the
development of local industry by discouraging imports through high tariff and
nontariff barriers. The trouble with the policy is that in most cases the domestic
market is too small to allow producers to gain the necessary economies of scale and
mass production. Consequently, domestic prices rise above prices in other markets,
CHAPTER REVIEW
2-1 Describe the U.S. role in the world economy.
The United States has a unique position in the world economy because of its size and
political stability. Approximately 21 percent of the world’s GDP is accounted for by the
United States. Furthermore, it acts as a magnet for lower-income nations that are
attempting to raise their standard of living through export-oriented economic development
strategies and for higher-income country firms that target the country’s large, well-educated
2-2 How do differences in income levels and income distribution among nations affect
international businesses?
A country’s income level is a key indicator of how attractive it will be to international
businesses because it provides companies with information about the nature of a nation’s
2-3 What role did MITI serve in the Japanese economy?
2-4 What is a keiretsu?
2-5 Who are the Four Tigers? Why are they important to international business?
The Four Tigers are South Korea, Taiwan, Singapore, and Hong Kong. The Four Tigers are
important to international business because of their rapid strides toward economic
2-6 What is a chaebol?
2-7 Discuss the role of natural resources and agriculture in Africa‘s economy.
Much of Africa‘s economy is tied to its natural resources. Several countries (such as
2-8 How did import substitution policies affect the economies of Brazil and Argentina?
Import substitution policies attempt to stimulate the development of local industry by
discouraging imports through tariff and nontariff barriers. The policies create problems,
QUESTIONS FOR DISCUSSION
2-9 Regional trading blocs, such as the EU and NAFTA, are growing in importance. What are
the implications of these trading blocs for international business? Are they helpful or harmful?
How may they affect a firm’s investment decisions?
Trading blocs, such as the North American Free Trade Agreement and the European Union,
stand to have a great impact on international business because they change the rules of
trade and in some cases, investment, presenting new opportunities but also new threats to
2-10 Many American and European business people argue that the keiretsu system in Japan
acts as a barrier to foreign companies entering the Japanese market. Why do you think they
believe this?
The fact that the Japanese market is closed to foreign companies is a popular, and some
would argue mistaken, belief among American and European executives. The Japanese
2-11 Ethnic ties, old colonial alliances, and shared languages appear to affect international
trade. Why might this be so? If true, how does this affect international businesses’ strategies
regarding which markets to enter?
Ethnic ties, old colonial alliances, and shared languages affect international trade because
they may provide the basis from which a nation emerged. For example, although the United
States, a former colony of Great Britain, declared its independence centuries ago, it still
2-12 South Korea is prominently featured in many lists of “emerging markets.” (For example:
see Table 1.2 on page 11) Is South Korea an emerging market? Defend your answer. How
would you define an emerging market?
Emerging markets are countries whose recent growth or prospects for future growth exceed
that of traditional markets. Economic growth is defined as the increasing capacity of the
2-13 What can African countries do to encourage more foreign investment in their economies?
The nations of Africa are in a difficult situation. Years of political unrest and civil war have
labeled the region as a high risk one. If Africa expects foreign firms to invest in the region, it
BUILDING GLOBAL SKILLS
Essence of the exercise
Keeping with the reference style of this chapter, the Building Global Skills exercise introduces
the student to several different publications that can be used by international business persons
to obtain information about foreign countries and markets. Students who complete the exercise
will not only find out more about Belgium (see questions below), but they will also become
familiar with the process of conducting secondary research on international markets.
Answers to the follow-up questions:
(Note: The answers to these questions will change from year to year and may differ from one
information source to another due to measurement parameters. Provided below are “baseline”
figures to provide the instructor a reference point for considering whether the data students
collect are reasonable.)
2-14 What was the total value of U.S. imports from Belgium last year? Of U.S. exports to
Belgium?
2-15 What is the total level of U.S. investments in Belgium? Of Belgian investments in the
U.S.?
These figures include foreign direct investment as of 2011:
2-16 Profile the economy of Belgium: What is its GDP? What is its per capita income? How
fast is its economy growing? What are its major exports and imports? Who are its major
trading partners?
Belgian GDP (PPP adjusted) = $420.3 Billion (2012)
2-17 Profile the people of Belgium: What language do they speak? What is their average
educational level? What is their life expectancy? How fast is their population growing?
Population: 11.14 million (2012)
Other Applications
Since many students may be unfamiliar with trade and investment figures for other countries
and information about different economies, it is worthwhile to spend some time exploring
CLOSING CASE
Fracturing the Energy Market
The case explores the concept of fracking, including the economic and political considerations.
Key Points:
• Fracking could potentially turn the world energy markets upside down.
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• Although developed a long time ago, nations are now becoming more interested and
aggressive with the process.
Case Questions
2-18 How important is it for nations to control natural resources? Is China’s growth
threatened if it needs to rely on foreign owned sources of raw materials?
2-19 Should there be separate rules for state owned acquirers like SINOPEC?
2-20 Should countries have special rules for acquisitions of natural resource companies
by foreign-based companies?
2-21 If China’s growth rate slows, what will be the impact on commodity prices?
