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CHAPTER 4
THE ECONOMIC ENVIRONMENT
Chapter Outline
A. Market Characteristics
1. Population
3. Impact of the Economic Environment on Social Development
B. Regional Economic Integration
1. European Integration
C. Emerging Markets
1. Adjust Entry Strategy
2. Manage Affordability
D. Developing Markets
1. Research
E. Economic Integration and the International Marketer
1. Effects of Change
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
Suggestions for Teaching
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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.
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.
Another rude awakening that has to be delivered at this stage is that terminology used in a
particular country may vary 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 be 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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Introduction
Three types of corporate players are jockeying for position in global middle-class markets that
include local upstarts, global aspirant, and multinational incumbents.
There are major groupings of countries of the world like Group of Five, Group of Seven, Group
of Ten, and Group of Twenty and so on.
Exhibit 4.1 illustrates the GDP of top economies of the world.
A. Market Characteristics
1. Population
The number of people in a particular market provides one of the most basic indicators of
market size and is in itself indicative of the potential demand for certain staple items that
An important variable for the international marketer is the size of the household. A
household includes all the persons, both related and unrelated, who occupy a housing
unit.
When using international data sources, the international marketer must recognize that
definitions of a construct may vary among the many secondary sources.The concept of
urbanization has different meanings, depending on where one operates.
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2. Infrastructure
The availability and quality of an infrastructure is critically important in evaluating
marketing operations abroad. Each international marketer will rely heavily on services
provided by the local market for transportation, communication, and energy as well as on
3. Impact of the Economic Environment on Social Development
The Physical Quality of Life Index (PQLI) is a composite measure of the level of welfare
in a country. It has three components: life expectancy, infant mortality, and adult literacy
rates.
B. Regional Economic Integration
Economic integration has been one of the main economic developments affecting world
markets since World War II. Countries have wanted to engage in economic cooperation
1. European Integration
In 1957, the European Economic Community (EEC) was formally established by the
Treaty of Rome. The treaty was based on the premise that the mobility of goods, services,
labor, and capital—the “four freedoms”—was of paramount importance for the economic
2. The North American Free Trade Agreement
Negotiations on a North American Free Trade Agreement (NAFTA) began in 1994 to
create the world’s largest free market, between United States, Canada, and Mexico.
3. Integration in Latin America
Mercado Común del Sur (MERCOSUR) was created in 1991 and includes Brazil,
Argentina, Paraguay, and Uruguay. Bolivia, Chile, Colombia, Ecuador, Peru, and
4. Integration in Asia
The fact that regional integration is increasing around the world may drive Asian interest
to it for pragmatic reasons.
5. Integration in Africa and the Middle East
The objective of the Economic Community of West African States (ECOWAS) was to
form a customs union and eventual common market. It represents the largest economic
entity in sub-Saharan Africa.
The blocs, for the most part, have not been successful due to the small size of the
C. Emerging Markets
An emerging market is a country making an effort to change and improve its economy
with the goal of raising its performance to that of the world’s more advanced nations.
Improved economies can benefit emerging-market countries through higher personal
income levels and better standards of living, more exports, increased foreign direct
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D. Developing Markets
Five elements of success are required for an international marketer to take advantage of
and thrive in developing markets.
• Research that is to learn about the needs, aspirations, and habits of targeted
populations for whom traditional intelligence gathering may not be the most
E. Economic Integration and the International Marketer
Decisions regarding integrating markets must be assessed from four different perspectives:
• Effects of Change, the range and impact of changes resulting from integration
F. Summary
Economic variables relating to the various markets’ characteristics—population, income,
consumption patterns, infrastructure, geography, and attitudes toward foreign
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Key Terms
Local upstarts: Local corporate players that understand and embrace the local culture and have
traditionally provided low-priced goods for the bottom-of-the-pyramid consumers in their home
markets.
Global aspirant: Companies that have already developed products for their domestic middle
markets and are now seeking to parlay their existing capabilities to serve the external global
Group of Twenty: It comprises the Group of Seven plus Argentina, Australia, Brazil, China,
India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey.
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.
Questions for Discussion
1. Place these markets in the framework that follows:
Income level: Low, Middle, High
Trade structure: Developed, Emerging, Developing (semi-industrial, oil-exporting, primary
producing, populous S. Asia, least developed)
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
2. Using available data, assess the market potential for a) power generators and b) consumer
appliances in (1) the Philippines, (2) Jordan, and (3) Portugal.
As per the country level data available in NationMaster
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.
was $3.3 billion. Jordan’s per–capita expenditure on household durables was $42, and the
resulting total expenditure on household durables was 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).
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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
4. In addition to Brazil, Russia, India, and China, identify three other emerging markets that make
sense for international business growth. Why?
Important among the middle-income developing countries are the newly industrialized countries
(NICs), like Korea, Philippines, and Mexico. These are the other emerging markets that make
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
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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
Internet Exercises
1. Compare and contrast two different points of view on expanding trade by accessing the
websites of the U.S. Chamber of Commerce, an industry coalition promoting increased access to
and from world markets (www.uschamber.com), and the American Federation of Labor–
Congress of Industrial Organizations (AFL-CIO) (www.aflcio.org).
The U.S. Chamber of Commerce is one of the largest lobbying groups of the U.S. It is the
world’s largest business federation representing the interests of more than 3 million businesses of
all sizes, sectors, and regions, as well as state and local chambers and industry associations.
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2. Alibaba.com (www.alibaba.com) is a business–to-business e-commerce company. It
operates two marketplaces: the first is an international marketplace based in English and
tailored to global importers and exporters in China; the second is a Chinese marketplace that
focuses on suppliers and buyers trading domestically in China. Is a company able to operate
in both capacities?
Alibaba.com, the China’s largest listed e-commerce company, links Chinese businesses with
overseas buyers. More than half of its sales come from the international marketplace. The e-