7/24/2021 CGMS522, Module 3 - Introduction

Introduction
An understanding of the economic environment is central to the successful implementation of a firm’s
global marketing strategy. Economic variables such as exchange rates, inflation, income, levels of
unemployment and the pace of economic growth are key drivers of a firm’s decisions to enter or exit
particular country markets. This module will demonstrate how economic variables impact the decisions
of the global marketer bearing in mind that the factors that define the economic health of the target
country are completely beyond the control of the firm.

Topics and Learning Objectives

This module will focus on three key areas. First we will examine the importance of economic and
financial variables in assessing foreign markets. Note that these variables provide support not only for
market entry decisions but also guide the global marketer in her decisions to exit particular country
markets. Second we will address the issue of economic integration, or the trend observed in which
countries form themselves into blocs or economic groupings. Finally we will address the need for firms to
examine issues related to marketing to consumers at the base of the economic pyramid.
Upon completion of this module, you will be able to:
1. Discuss the importance of economic variables such as inflation, income and employment in
assessing potential foreign markets.
2. Explain the challenges and opportunities presented by marketing to low income consumers at the
base of the economic pyramid.
3. Discuss the various forms of economic integration.

Readings
Reading
Farrell, C. (2015). Global Marketing. Sage Publications. Chapter 3
Prahalad, C.K., & Hammond, A. (2002). Serving the World’s Poor Profitably. Harvard
Business Review, September.
Karnani, A. (2007). The Mirage of Marketing to the Bottom of the Pyramid: How the Private
Sector can Help Alleviate Poverty. California Management Review, 9 (4).
Simanis, E. (2012). Reality Check at the Bottom of the Pyramid. Harvard Business Review,
June.

[Note: You can retrieve the readings by going to the “Course Readings” area of your course.]

Income and Income Distribution

Several economic variables are important in assessing foreign markets. The most important of these are
identified in the next few pages.

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The ability of consumers to purchase foreign goods and services is driven by income. Income (in
addition to savings rates, access to credit and debt levels), define consumers’ ability to purchase foreign
products and, therefore, the relative attractiveness of the target market. As we will discuss later in this
module, low income per capita does not necessarily mean that global marketers should ignore such
consumers but it does mean that product and pricing strategies will have to be adjusted. As noted in the
textbook, a country’s income level is measured in terms of gross domestic product (GDP) or gross
national product (GNP) and these are usually expressed on a per capita basis when making
comparisons across countries. GNP is often referred to as gross national income or GNI.

Pause and Reflect

China recently overtook Japan to become the second largest economy in the world. Given this
performance should the World Bank continue to classify China as a “developing country”?

In assessing foreign markets it should be recognized that it is not only

the absolute level of income that
is important but the distribution of that income. Income distribution in the target country has major
implications for the implementation of the firm’s global marketing strategy.

Click-n-Reveal:
Income distribution is important to the assessment of foreign markets.
What metric would you use to assess the degree of income inequality
in a country of interest?

Market Size
The overall size of the foreign market is governed to a large extent by the income level of consumers.
However, the number of consumers is also an important determinant. Populous countries such as India
and China may be relatively more attractive to some marketers despite their low incomes per capita. As
noted in the textbook, the global marketing executive also needs to pay attention to trends in population
growth rates as these provide clues as to the long run viability of particular country markets. There are
many examples of firms having to make major strategic adjustments in the face of traditional markets
with stagnant or declining populations.

Exchange Rates
An exchange rate is simply the price of one country’s currency expressed in terms of some other
country’s currency. Currencies which are weak (say relative to the US dollar) provide a major impetus to
the country’s exporters making their products more price competitive on international markets. By the
same token, however, consumers are penalized as they must now surrender more of their local currency
in order to purchase imported products.

Discussion Question 1
In August of 2019 the Trump Administration charged China with being a currency manipulator. In its
trade war with the United States the Peoples' Bank of China allowed the yuan to depreciate beyond
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the psychologically important 7 yuan to 1 US Dollar level. Do you believe China is manipulating its
currency to circumvent the tariffs imposed by the United States? Why?/Why not?

As noted in the textbook, when comparing countries the use of nominal exchange rates may lead to poor
decisions. If one is comparing, say, income across two countries it is better to use purchasing power
parity exchange rates in the calculations.

Debt Levels
As noted above, consumers’ ability to purchase foreign goods and services is dictated not only by
income but also by debt. Excessive levels of consumer debt will dampen consumers’ incentive (and
ability) to consummate new purchases and will reduce the overall attractiveness of the foreign market.
Of course, the global marketing executive is also concerned about levels of government debt in the
target host countries. Highly indebted host country governments may, for example, be forced to reduce
spending on infrastructure projects that support the ongoing marketing operations of the firm, e.g., port
facilities and highways. Further, public sector workers may be laid off which reduces their demand for
both domestic as well as imported products. The global marketer is well advised to consider debt levels
in assessing the merits of prospective host countries.

Proponents of the Strategy

As the textbook notes, there are over 4 billion people in the world who are forced to live on less than
$2/day. A key question for the global marketer is whether these individuals present an attractive market
opportunity or not.
Scholars such as the late C. K. Prahalad argue that marketing to consumers at the base of the income
pyramid (BoP) is potentially quite lucrative for global firms even though individually these consumers
have little money. He argues that even in the slums of Mumbai and Rio de Janeiro these poor
communities may have combined purchasing power measured in the millions of dollars. Proponents of
the strategy also suggest that poor consumers may be an attractive market even for more expensive,
branded products such as washing machines and mixers. In most instances, however, these products
will have to be modified in some way in order to achieve a more realistic price point.

Opponents of the Strategy

Opponents of the base of the pyramid strategy include writers such as Karnani and Simanis. These
scholars argue that the market size estimate of 4 billion is exaggerated as is the propensity of poor
consumers to purchase luxury items. They argue that in accordance with Engel’s law the bulk of the
income of poor consumers will be devoted to meeting their basic need for food with little left over to
purchase items such as washing machines and mixers. They also argue that the poor are culturally
heterogeneous and geographically dispersed making them difficult and expensive to reach. Further, the
global marketing firm will have to achieve an exceedingly high penetration rate for the strategy to be
successful. Marketing to consumers at the base of the pyramid is essentially a low price-low margin-high
volume business which is not suitable for all companies.

Discussion Question 2
View the following video and answer these questions:
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The Customer at the Bottom of the Pyramid Stuart Hart from Cornell [4:04]
Why is the notion of the poor as producers so important to the success of base of the pyramid
marketing?
Are you convinced that there is a market at the base of the economic pyramid? Why or why
not?

Forms of Economic Integration

Countries form themselves into economic groupings or trading blocs in order to make more efficient use
of their national resources. The process, known as economic integration, has resulted in the creation of
such groupings as the European Union and the North American Free Trade Association (NAFTA).
The major forms of economic integration are described in the textbook and range from free trade areas
in which there is merely the elimination of tariffs and duties between members to economic unions which
involve a single currency and the harmonization of economic policies between member states (see
Figure 3.1).

Figure 3.1: Major Forms of Economic Integration

Source: Adapted from Farrell, C. (2015). Global Marketing. Sage Publications. Chapter 3.

Long Description - Figure 3.1

Free Trade
No trade restrictions on the movement of goods among members.
Each member maintains its own policies towards non-members.
Customs Union
Free movement of goods and services among members.
Common trade policy towards non-members.
Common Market
Free trade in goods and services among members.
Common external tariff.
Factors of production are mobile across member countries.
Economic Union
Free trade in goods and services.
Common external tariff.
Mobility of factors of production.
Harmonization of economic policies among member countries.

Benefits and Costs

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As noted in the textbook, economic integration allows member nations to achieve a number of benefits
that would be difficult to achieve acting alone, such as:
Trade Creation
One of the benefits of economic integration is trade creation. Countries substitute imports
from beneficiary countries within the bloc for their own domestic production. In essence
countries are able to rely on their more efficient trading partners and, therefore, provide their
citizens with products at more competitive prices.
Greater Consensus
Countries are able to make decisions more effectively in smaller groups and arrive more
quickly at mutually beneficial trading decisions.
Trade Negotiations
Economic integration gives countries, particularly smaller trade dependent countries, a bigger
voice in multilateral trade negotiations.

Economic integration may also impose certain costs on member countries. These include:
Trade diversion in which a country diverts imports from more efficient non-beneficiary outside the
bloc to less efficient preferred countries within the bloc.
Shifts in production to low wage countries that are part of the bloc. This, of course, results in job
losses in other member countries with higher wage rates.
Membership in an economic bloc does require that the members give up some national
sovereignty in the interest of the group as a whole. This may prove to be quite difficult for some
nations.

Discussion Question 3
On assuming office as president, Donald Trump withdrew the United States from the proposed
Trans-Pacific Partnership (TPP). What are the implications of this action for the US economy? What
are the implications for China?

Summary
This module has examined the economic environment within which global marketers implement their
strategies. It has examined the economic factors that are important to the assessment of foreign market
opportunities such as income, debt levels and exchange rates. Also discussed were the challenges and
opportunities presented by consumers at the base of the income pyramid. The module concluded with
an examination of the concept of economic integration – its forms, benefits and limitations.

Assignments
Discussion Board Questions
Answer one or more of the discussion questions found throughout the course content. Make
sure to reply to your peers about their answers.

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CountryManager Simulation
Students should play through a practice round of the CountryManager simulation to become
familiar with the decisions required. No group member changes after the first round decision.
However, should some team members drop the course the instructor may allow the
remaining member(s) to join other groups.

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