Economic Environment

1. © Luis Pachón
The Economic Environment

2. © Luis Pachón
McDonald’s Case
• 1976 Montreal Olympics  First contact.
• 1988 final agreement.
• Moscow City Council + McDonald’s
– Not in the five year plan.
– Not enough supplies. 
– Education of Soviet farmers and cattle ranchers. 
– Attracting employees and customers

3. © Luis Pachón
Matt Paull: CFO McDonald’s
• “When planning openings, we consider each
market’s current economic conditions, long
term demographic and lifestyle trends,
competitive environment and stage of
development, as well as the potential effect
on existing McDonald’s restaurants and
returns”.

4. © Luis Pachón
Question
• Which economical aspects would you consider
when facing the decision of
internationalization?

5. © Luis Pachón
Key Questions
1. Under what type of economic system does
the country operate?
2. What are the size, growth potential and
stability of the market?
3. Is the company’s industry in that country’s
public or private sector?
4. If it is in the public sector, does the
government also allow private competition in
that sector?

6. © Luis Pachón
Key Questions
5. If the company’s industry is in the private sector,
is it moving toward public ownership?
6. Does the government view foreign capital as
being in competition with or in partnership with
public or local private enterprises?
7. In what ways does the government control the
nature and extent of private enterprise?
8. How much of a contribution is the private sector
expected to make in the economy of the
country?

7. © Luis Pachón
COUNTRY ANALYSIS
• Understanding the economic environment can help
the company predict how trends and events might
affect its future performance.
• Economic performance can be studied through
economic growth, inflation, budget and trade
deficits.
• Countries can be classified by: Income, Region and
Economic System

8. © Luis Pachón
KEY ECONOMIC FORCES
• The general economic framework of a country.
• Economic stability.
• Existence and influence of capital markets.
• Factor endowments
• Market Size
• Availability of economic infrastructure.

9. © Luis Pachón
Where should managers commit
resources?
• Factor conditions
– Inputs to the production process: human,
physical, knowledge, and capital resources and
infrastructure.
• Demand conditions
– Composition of home demand (quality)
– Size and growth of demand (quantity)
– Internationalization of demand.

10. © Luis Pachón
MEASURING PRODUCTIVITY
• Gross National Income (GNI):
The market value of final goods and services newly
produced by domestic factors of production at home
or abroad.
e.g.: Ford U.S. $ + Ford Mex with U.S. $ = U.S. GNI
• Gross Domestic Product (GDP):
Measures the value of production that occurs within
a country’s borders without regard to whether the
production is done by domestic or foreign factors of
production.

11. © Luis Pachón
KEY ECONOMIC INDICATORS
• Per Capita Income: Income level per person.
• Per Capita GNI: Used by the world bank for lending
policies
• Quality of Life: Life expectancy, educational standards
(Literacy), etc.
• Purchasing Power: What a sum of money actually can
buy.
• Percentage of GDP Generated from Agriculture: Higher
in developing countries.

12. © Luis Pachón
WORLD BANK CLASSIFICATION OF
COUNTRIES BY INCOME*
• BelgiumHigh
• Colombia
Upper-
middle
• Venezuela
Lower-
Middle
• MadagascarLow
*Up to 2014

13. © Luis Pachón
• Economic Growth.
• Privatization.
• Inflation: Affects interest rates, the cost of living, &
consumer & investor confidence.
• Hyperinflation: Is a rate of inflation that is extremely
high for a sustained period of time.
• Balance of payments: Summarizes all international
transactions between domestic residents & foreign
residents.
• External Debt.
KEY ECONOMIC FACTORS

14. © Luis Pachón
Economic Systems
• Market Economy
• Command Economy
• Mixed Economy

15. © Luis Pachón
INFLATION
• Condition in which prices are going up.
• Consumer Price Index (CPI) measures a fixed
basket of goods and compares their prices
over time.
• High Inflation  High Interest Rates
– Banks need to attract money.
– Governments have to slow down economic
growth.

16. © Luis Pachón
BALANCE OF PAYMENTS
• Is a summary statement of all transactions
that take place between a country and the
rest of the world during a given period of time
(usually a year).
• Transactions are recorded as debits and
credits.

17. © Luis Pachón
DEBIT TRANSACTIONS
• A debit transaction is a flow for which the home
country must pay and requires the supply of the
home currency.
– Imports of goods and services
– Transfers to foreign residents (remittances)
– Acquisition of long-term assets or reduction of a long-
term liability (i.e., stocks, bonds, real capital)
– Acquisition of a short-term asset or reduction of a
short-term liability (i.e., bank deposits, cash or short-
term bonds such as treasury bills).

18. © Luis Pachón
CREDIT TRANSACTIONS
• A credit transaction is a flow for which the
home country is paid and increases the
demand for the home currency by foreign
residents.
– Exports of goods and services
– Transfers from foreign residents
– Sale of a long-term asset or increase of a long-
term liability.
– Sale of a short-term asset or increase of a short-
term liability.

19. © Luis Pachón

20. © Luis Pachón
ACCOUNTS IN THE BALANCE OF
PAYMENTS
• Current account: trade in good and services
and income from assets abroad.
– Merchandise trade balance: the net balance of
exports minus imports of merchandise.
– Services: travel, passenger fares, royalties and
fees.
– Income receipts: payments on assets.

21. © Luis Pachón
ACCOUNTS IN THE BALANCE OF
PAYMENTS
• Capital account: transactions in real or
financial assets between countries, such as
the sale of real state to a foreign investor.
• Deficit: imports exceed exports.
• Surplus: exports exceed imports.

22. © Luis Pachón
THE FOREIGN EXCHANGE MARKET
• Exchange rate: relative price, that can be
expressed in either direction.
– If the euro rises against the US dollar, the US dollar
falls against the euro.
• Indirect Quotation: How much foreign currency
exchanges for one unit of the domestic currency.
– 1 home currency unit = x foreign currency units.
• Direct Quotation: A country's home currency as
the price currency.
– 1 foreign currency unit = x home currency units
.

23. © Luis Pachón
14/09/2014
• Direct Quotation
– 1 USD to COP = 2000
• Indirect Quotation
– 1 COP to USD = 0.0005

24. © Luis Pachón
15/09/2015
• Direct Quotation
– 1 USD to COP = 3030
• Indirect Quotation
– 1 COP to USD = 0.00033

25. © Luis Pachón
EXTERNAL DEBT
• The amount of money borrowed from foreign
public or private sector banks.
• Major debtor nations: United States, United
Kingdom, Germany, France and Spain.

26. © Luis Pachón
Rank Country External debt
(millions US$)
Date of
information
1 European Union $ 15,950,000,000,000 31 December 2012
2 United States $ 15,680,000,000,000 31 December 2012
3
United Kingdom
$ 9,577,000,000,000 31 December 2012
4 Germany $ 5,717,000,000,000 31 December 2012
5 France $ 5,371,000,000,000 31 December 2012

27. © Luis Pachón
INTERNAL DEBT
• Excess of government expenditures over tax
receipts.
• Privatization