ECONOMIC AND FINANCIAL ENVIRONMENT

Among the entire uncontrollables, economic environment is perhaps the most important factor. An analysis of economic environment enables a firm to know how big the market and what its nature is. Answers to these questions in  turn  determine  whether  a firm should enter a given  foreign market,  and if  yes, what strategies it should use to successfully run  its business operations, Closely related to the economic environment is the financial environment which  affects a firm's capital structure, investment decisions  and  accounting practices.

Various dimensions one needs to consider while attempting an economic and financial analysis include: foreign country’s level of economic development, income, expenditure pattern, infrastructure including financial institutions and system, inflation, foreign investment in the country, commercial policy, balance of payments account, accounting systems and practices, and integration of the foreign country’s foreign exchange, money and capital markets with the rest of the world. Let us learn this economic and financial environment in detail.

Economic Environment

Economic environment is the most important indicator of the global market analysis. Let us discuss the major economic indicator influencing the foreign market decisions.

Economic Development: Economic development is directly related to the development of marketing in a country. Countries characterized by high levels of economic development not only have high demand for a variety of products, but also have better infrastructure and more developed marketing systems. Competition is also high in these countries. In the less developed countries, on the other hand, not only demand is low, but infrastructure is also poor. It, therefore, becomes quite difficult and more expensive to do business in such nations.

Income:  Income is an important indicator of the country’s level of development and also its market size. Gross national product (GNP) and per capita income are among the major measures of income.  While sales of most of the industrial goods and capital equipment generally correlate with GNP, demand for consumer products depends on per capita income.

Besides income, one should acquire information about the sectoral distribution of the GNP as it is an important determinant of kinds of goods in demand in a foreign country. If the majority of a country’s GNP comes from agriculture, it implies that the country is agriculture based and it shall have a good demand for agricultural inputs such as seeds, fertilizers, pesticides and agricultural machinery and tools. An industrial nation with relatively higher dependence on manufacturing, on the other hand, shall have a good market for raw materials, plant and machinery, and also for a variety of consumer durables and non-durables.

Though per capita income is a useful measure, it is not a full-proof measure of the country's development and prosperity. What is more relevant is the distribution of income. While in the developed countries income distribution is relatively more even, it is highly skewed in the developing countries. Since only a small portion of the population accounts for 60 to 70 per cent of the country’s GNP and the rest are poor in the developing countries, market for high priced product and non-essential products is limited only to select rich people.

Expenditure Pattern:  Data on expenditure patterns are useful in judging as to how the money is spent on different item and which products receive more weight age.

Infrastructure: Infrastructure is another vital dimension of the country’s economic environment and is directly related to the country’s economic development. Infrastructure refers to various social overheads such as transportation, telecommunications, commercial and financial services like advertising, marketing research, various media, warehousing, insurance, and distribution, credit and banking facilities.  Absence of adequate infrastructure not only hinders country’s development but also affects firms’ costs and capacity to reach various market segments. Companies find it difficult to co-ordinate and control their business in countries with poor communication systems.

Financial Environment

Sound financial positions of the country coupled by the favorable investment policies reflect strong demand potential.  Let us briefly learn important financial indicators.

Monetary and Fiscal Policies:  Inflation, interest rate, various kinds of duties and exchange rates are the variables related  to the country's monetary and fiscal policies and have a substantial impact on the costs and profitability of business operations. These variables also influence firm's decision to move funds from one nation to another.

Commercial and Foreign Investment Policies: Each country has its own commercial and foreign investment policies which must be studied in detail to ascertain country’s openness to trade and investment with other countries. A proper understanding of these policies can be quite helpful in ascertaining what tariff and non-tariff barriers the particular country uses to protect its domestic industry from foreign competition. The country may plan to minimize the incidence of these trade measures.

Balance of Payments Account: A country's balance of payments account is another major source of information about the country’s foreign trade and foreign currency reserves. The current account throws light on the country’s exports and imports as well as its major sources of imports and destinations of exports.  Capital account reveals stocks of foreign investments, borrowings, lending and foreign exchange reserves. An international firm must be duly aware of exchange controls prevalent in the foreign countries. Countries running deficit in their balance of payment accounts generally impose controls on movement of foreign exchange into and out of their economies. These controls prompts the multinational corporations to resort to transfer pricing mechanism,  i.e.,  over invoicing  of imports and under pricing of exports so as to move out more than permitted finds from such countries.