IGNOU : MCOM : IBO 1 : UNIT 1 : Q- 3. How economic environment affect the business decision of a firm ?

Ans. 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 co-relate 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 Machinary 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 percent 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 weightage.

 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, 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.