Video Transcript: Lecture 7

Welcome to lecture number seven, where today we're going to be talking about  economic and social economic forces. You may also hear me call them  economic and social economic forces. So one of the things that I hope that is  coming through from all these lectures is how complex owning a international  company or a multinational company, is from legal forces to marketing. There's a whole host of challenges that that need to be overcome when operating an  international business. This complexity, it extends to the economic analysis that  is necessary when operating in a multinational firm, and you you not only have  to contend with economic policy domestically, but consider international policy  as well. And this is, this is best managed through intense analysis. And I mean  intense analysis you have people's full time job is for these major companies to  look through the economic indicators and the economic data. So speaking of  data, analysts use data from a variety of sources when looking at potential  market opportunities. There is data from the World Bank, the International  Monetary Fund. Private consultants certainly make a lot of money providing  economic analysis, and industry associations also provide data as well. So  there's certain like so for an example, the American Psychological Association  does studies. This is this is an example besides beyond economics, but the  studies that psychologists and other people affiliated with their association can  use, and the same thing can be said for other industry partners as well. For  instance, the RV industry has a has people who do economic analysis. Now,  most of that is domestically, but certainly internationally, as well as a state of  previously. Analysis of the foreign market adds complexity, because you not only have to understand these economic forces and factors, but you have to  understand every other factor as well. So political factors, legal factors, social  factors, etc. So say you started a business in Cuba. So not only do you have to  understand all the economic factors in Cuba, but also China and Russia and the influence that they have as well. So the trading blocks and how those impact  your company is important. And if you're doing business with an EU property  partner, then understanding all the EU regulations as well. So as you can see,  this gets extremely complex extremely quickly, and there's a whole host of  factors that you have to consider. So this brings up the point that policies that  are suitable in a host country may need to be modified for the international  market. So there's not a one size fits all approach to economics. For instance,  different countries have different standards of living, which require different price points, which require different things that are necessary to operate in one of my  favorite phrases, a hybrid hyper turbulent and complex environment. If you think  about our world today, it is both hyper turbulent and it is also extremely complex. So one of the things that's important to note is economic development, and the  level of economic development plays a significant role in businesses conducted.  And I just talked about that how you operate a business depends on what  country you are operating in. So the World Bank has a nifty little formula that 

determines if a country is a high income economy or if or not. And it is related to  this thing called GNI or capita, and it classifies the country as high, middle or  low, and then it breaks down the middle income levels further. So developing  countries is on the rise, and these are middle, but they're rising. So India is  considered an emergent market, and it's transitioning from low to middle, as well as China, although I would argue that China certainly has arrived, and it's not  just an emerging market, but is firmly planted in the middle category. So the  gross national income, or GNI, as I talked about, is a measure of all the income  generated by residents of the nation. So this includes production of goods and  services that occur both nationally and internationally, as well as as well as the  fact that this is used over the gross domestic product, which you'll hear a lot of  US people refer to the gross domestic product, but this is used over the gross  domestic product because it's more of a holistic view of a nation's economy, so  the GNI per capita so countries, GNI is divided by its population, and a higher  value means it's more advanced economy, and then a lower level would indicate that it's not as advanced. Growth Rate is important, because a high growth rate  indicates a fast growing market like China, like India. So just remember that  economists that use GNI have to be careful, because government economies  can impute monetary values for goods and services that are not sold in the  marketplace, like things like items bartered, or food that is not used for personal  consumption, and things like that. So those costs are calculated differently,  which you know does affect this. So an example I can think of is if we have  national stores of food, obviously, that would not calculate into this whole thing  as well. So how does this work? So you're going to hear this, this term GNI, and  convert it to common currency, and then purchasing power parity. And what  does all that mean? So common currency is you use an exchange rate which  goods are worth different things to different nations, and then you can convert  those to a currency rate, so wheat may be worth like $2.43 or whatever.  Purchase purchasing power parity in PPP, it's a means of adjusting exchange  rates for two currencies so the currencies have equivalent purchasing power. So I hope that makes sense. So you take our exchange rate, which says this. You  take somebody else's exchange rate that says this, you look at them on the on  the common currency and and the goods, and then you figure out what that rate  is. So that that's purchasing power parity, if that makes sense. So there's also,  you can modify GNI using other techniques called the Atlas conversion factor.  And what this is, is it reduces the impact of exchange rates fluctuate.  Fluctuations. So what it does is it takes the arithmetic average of the current  exchange rate and the exchange rate in two preceding years adjusted adjusted  by the ratio of domestic inflation to the combined inflation rates of the Eurozone,  which is Japan, UK and US. So. So what this does is it measures income, and  then it and then it's considered more stable because it's taking multiple inputs. I  know all this could be considered super confusing if you understand it, then, 

then that's awesome. But the point I'm trying to make by talking about this, all  this is to one show the complexity of all these factors and then show how, when  you're doing the economic analysis, that you want as many data points as  possible so you understand exactly what's happening. So there's complexity  when when products are taken out of the supply chain, or when income isn't  paid for certain things, that doesn't give you a true economic picture of what's  going on, and that stuff occurs at a micro level and then also macro level. So  these things, like the Atlas conversion factor, are used to try to mitigate some of  those unknowns and try to give you a true economic predictor of how a country  is doing, this is very important. If you're an international business and you want  to go operate somewhere, then you need to understand what is a true picture of  a nation's economy, because what you don't want to do is a company country to  report one thing because they're over inflating or under inflating their currency.  And then you go into that country, and then you find out the picture is completely different. And then you invested all these resources, and you can't be  successful. So there's these indicators that try to mitigate those factors when  you're operating in a country, if that makes sense. Remember that there's also  the underground economy, and that would be stuff that's undeclared, so that you think about illegal goods and services, you know, concealing income, those kind  of things, that is also part of the economic picture. That needs to be considered  if you think about it, higher income tax levels and increased government red  tape creates a bigger underground economy, because people are trying ways to  make money and not make the most money they can. So certainly, if you're  paying a I'm just going to make a number of a number of a 90% tax rate, then  you're not going to want to report income to the government, because you don't  want to pay 90% of what you earned. So so people who understand this very  well, what they do is they supplement measures of an economy's absolute size  with measures of growth rate. So it's not only important to know the size of the  government or the country or the entity or whatever, but it's also to understand  their growth rate and where they're going. So you'll hear figures like the  economy grew by the US. Economy grew by 2% if you're hearing the US  economy had zero growth, or, you know, point 1% growth, or something very  low, even though we're a large economy, then that might give a company pause  before operating in this country. They might sit back and go, Well, you know, the  US economy is not doing very well right now. There's high inflation, there's this,  there's that we are going to sit back and wait and see if their growth improves.  Because, remember, when there isn't growth, there's a retraction of the  economy. There's not as much money. People don't have disposable income to  go out and buy things like computers and trucks and cars and those kind of  things, or do services like for instance, I found the other day somebody who  comes and organizes your house and your closets to make the most efficient life possible. But if I had no income and I couldn't pay my bills, then I would not be 

able to afford those kind of things. So this, this is what, this is the impact, where  you have to look at growth rate as well as the size of the economy as well. So  rapid and rising economic growth rates suggest consumer demand and  increased trade. So if you have rapid growth rates, then what that says is, okay,  people want stuff, and I think you are seeing that now, or you have seen that  over a couple different times in history, certainly COVID. As countries emerge  from COVID, you're seeing demand increase and and growth rates increase,  and then that is an indicator that there's demand for whatever product or service you were offering. One thing to remember, and this is tends to be somewhat of a touchy subject, sometimes, is that wealth is not evenly distributed, and that  there's a gap, and you have to understand how that gap works. And the reason  this is important is because, let's say you always heard the term the top 1% the  top 1% and if you're talking about the top 1% and there's 100 people, and only  the top 1% have the wealth, have 90% of wealth, or 95% of wealth, or whatever  the case may be, then the top 1% of 100 is one. So that's one person that can  buy your product or your service, and the other 99 may be out of it. So that. So  that is why the wealth gap and the income gap is so important, because  obviously, you know, things to think about is, you know, if there's not enough  people that can afford your product, then you don't want to operate there.  Income is generally more evenly distributed in richer nations, which probably  makes sense to you. You know, the United States's income gap would not be  and I know this point can be argued and controversial, but it's not as significant  as some other countries out there income redistribution efforts, which you have  seen, if you live in the United States, certainly you've seen some of those  redistribution efforts, and There's certainly been efforts in other countries as  well, those proceed very slowly, and then remember that inequality for income  increases in the early stages of development and then reverses in later stages.  What that means is if, if you. Are emerging from a lower economy to to an  emergent market, to a middle and then into an upper that that it's going to take a while before that income inequality catches up. So the people who are rich are I  have the idea, are going to get rich very quick, and there's going to be a real  gap. But then, as the standard of living goes up and more people use services  as more people have more money. As that goes back in the economy, blah,  blah, blah, that gap will close a little bit. You've heard the saying the rich get  richer. I am not arguing that point. I'm just saying that generally what happens as as an economy improves, through free trade policies, through other policies, that people get richer, and the income gap decreases, and that's, again, that's  general, and it's not absolute. And there is income distribution, uneven income  distribution is an opportunity for for all sides. So you know, certainly there have  been companies that have taken advantage of the income disparity in the United States, both on the high end and on the low end. So you know, just one thing to  think about is that just because there's some income inequality doesn't mean 

that there is an opportunities for a business. And that's important point to  remember. You know, I kind of alluded to disposable income, and that's the  income you have after you, after you pay taxes, your personal income. So  again, using the illegal market example, if you make 1000 or $100 and you have to give 90% after the government, then your disposable income will be $10 and  then, you know, you think about bills and everything else, discretionary income  is the income less essential purchases and taxes. So I just talked about, I just  talked about that with your bills and everything else. So you have $10 up. Your  bills are $7 plus food, plus all that, your housing and all that, you have $3 left as  discretionary income. So knowing knowing this and being able to figure out  people's discretionary income, their disposable income, and then what happens  with that, with their consumption of like automobile, cell phones, stuff like that.  Energy gives a pretty good picture of the health and economy and whether you  want to do business there or not. Remember if you're selling Tiffany jewelry,  which is a very expensive jewelry company, you're not going to do well in an  area that's depressed, where the average worker makes $1 a month. Or, I think I said 250 a couple lectures ago, 250 a month. $2.50 that you're not going to be  successful. So you want to look and understand the factors and where people  are spending, what's their disposable income, what's their discretionary income,  and how all that works together before deciding to go into that country. Other  things to look at is labor costs. So this is something that is people are keenly  aware of in the United States that it costs more money for the Labor Workforce  in the United States than it does having Labor Workforce other places. That's  why, that's why you see a lot of companies go other places for labor costs  because of different HR rules, and also because of lower standards of living,  allow for workers to be paid less. Other economic dimensions to consider. So  there's other things. So remember that international debt plays a role. So  certainly, if you have a lot of debt, it can cause problems for firms. It can cause  problems for governments. You know, obviously inflation, anytime there's a  hindrance to foreign currency, high debt may cause price controls, cut in  government spending, wage controls, and sometimes this debt can encourage  political crisis, which leads to instability. And again, if there's nothing else you  take from these lectures, I want you to take this from the lectures, which is that  instability is bad, and companies do not like instability, so just remember that  that whenever possible, we want to be as stable as possible. Okay, so other  factors are total population. So obviously, starting a business in Antarctica is not  necessarily a good idea, because there's not really a large population there. So  if you opened up a McDonald's there, the scientists might be happy, but it's not a very sustainable business model. Something else, remember that that  population size is a poor indicator of market potential, unless your products are  very low priced by age distribution is important. So if the majority of your  population is, let's say, under the age of 20, obviously that would be completely 

different. Products would have different success rates than than a population  that is average ages in their 70s. Again, I'm using extreme examples, but I'm just trying to show and prove a point. Also population density. So in the United  States, if you live in the United States, or if you travel overseas, certainly you've  been to country, places that has a larger population, and you've been to rural  areas as well. So, you know, a McDonald's may may choose to open in  Johannesburg, South Africa, where or Pretoria, South Africa. But it doesn't make sense to operate, you know, out in in the bush where there's a small village. So  population density is important. Also keep in mind that there's evidence of a rural to urban shift that is occurring. People are moving to larger cities, as opposed to smaller cities. About 60% of the world now lives in cities. Oh, I'm sorry, 50% of  the world lives in cities in 2008, and it's supposed to be 60% by 2030 obviously,  the reason for that is economic opportunity, and then also higher wages and  more things to do in larger cities, which is driving population shifts. We have  seen a little bit of a shift from that shift, which I know is kind of weird to say, but  you know certainly policies, political policies and economic policies have caught  a shift as well. So if you look at the United States, for example, and chart  political population moves, you can see that there that there's a general shift in  the population that's going from certain areas to Other areas based on politics  restrictions, based on political desires based on tax structures, based on a  bunch of things which make some places a little more desirable, to operate a  business in which brings a brings opportunity, etc, etc. So again, I'm keeping it  generic, because I'm not. I'm certainly not advocating for any political side or  any philosophy. I'm just presenting the data, and then you can decide to do with  it what you will. Let's see socio economic dimensions that we need to consider  that obviously as as countries, some countries have relaxed some policies on  women in the workplace that that that increases opportunity for the number of  working women, which leads to a larger labor force, which also leads to more  economic power, purchasing power, and that discretionary income that we  talked about, which which has certainly positive effects On an economy. So let's  see. The other thing, yeah, the other thing that I wanted to mention real fast  was, and I had this written down, was that divorce rate is important to this  discussion as well, because obviously single parent families and single  individual households may have certain requirements on them that are  necessary to operate, that are different. You know, if you're a single parent of,  let's say, four children, then you may have to have some flexibility around your  work arrangements and things like that. So international companies need to look at those kind of figures as well to determine what kind of HR policies that they  need to put in place in order to be successful, both for themselves and mainly  for their employees. Well, certainly you need to take care of your employees,  because they ultimately take care of you. So in. That is it for this lecture. But I  did want to talk about a company, and this is a company that sells tools. And 

there are Hilti if you've ever heard of them. So they are an international  company. Again, they talk about diversity and inclusion and how important that is to them. So, you know, at Hilti North America, they certainly have some some  things that they want to do to make sure that they are being fair and equitable. I  love that they have this engage our team concept, where they have an inclusion  strategy. They have a commitment to building inclusivity behavior, employee led  groups, teams and then mentoring is all part of what they do. But this  international company sells tools, and certainly they are looking for people all  over the place. So So anyway, I wanted to just point them out and also show you that they have been around for a long time, and as an international company,  Unitech International, that that brings in talent, as they say, they have talented  engineering students from around the world come and that is important because also, and I think We talked about this in a later lecture. But as you open up the  workforce, and then you bring it, you bring in talent from all over the world that  makes your company better and makes you better as an organization, it  obviously helps you to provide better value for your shareholders, your  stakeholders and everybody else. So So certainly, there's a lot to be gained by  having an international mindset, that global mindset that we talked about in  earlier lecture. I remember Javidan was the one who is the big theorist in that  area, but, but yeah, so wanted to talk a little about that, and we are gonna now  shift a little bit, kind of, we're still kind of talking about economic policy a little bit,  but we're going to talk about the monetary system and financial forces in lecture  eight. So we have that to look forward to. But before we do, let us go to the Lord in prayer and let us thank him for this day. So Dear Heavenly Father, thank you  so much for the opportunity to learn together. Thank you for giving us the  technology and the medium to be able to learn. You know, this is truly an  international experience, and we're just so grateful to you Lord. We're so grateful that that you are using Christian leaders to to to connect with people all around  the world and to teach them concept concepts that are important for them to to  do their work for you, Lord, so Jesus, we just wanted to take a moment to Thank you. Want to take a moment to to just ask for peace and understanding, to ask  you to bless us, to ask you to help us. And just want to thank you for all the  many ways that that and many things that you do for us each and every day.  Thank you for our salvation, Lord. Thank you for your promises, Lord, and I pray that that this class, that we will just be strong and powerful voices and witnesses to you, Lord, in Jesus name, amen. Thank you so much, and I will see you back  here very soon for the monetary system and financial forces.