Economic

environment refers to all those economic factor which have a bearing functioning on the business unit. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods.

Income-wise classification of countries Economic systems Region wise classification of countries Economic scenario Structural adjustments Financial system Economic policies Economies in transition

In this countries are ranked by their levels of gross national income (GNI) per capita. These countries are then classified as: Developing countries Developed countries

Low-income(LIC) - $735 or less Lower-middle income(LMC) - between $736 & $2995 Upper-middle income (UMC)- $2996 & $9265

Most developing countries share a set of common and well defined goals. Developing Countries include many nations in Africa the middle east and Asia. Some of these countries have the potential to emerge as superpowers in the future.

These countries are highly industrialized, highly efficient, and people enjoy a high quality of life. People in these countries receive excellent healthcare and education. Developed nations support programs for helping poorer nations improve their economies and standard of living.

 Economic

environment system refers to the arrangements and process through which society makes its production and consumption decision. It is the method used by society to produce and distribute goods and services.

 Types

of Economic System Capitalism Socialism Mixed Economy

Capitalism, also called market economy is a social system based on the principle of individual rights. It is an economic system based on the private ownership of the means of production, distribution and exchange, characterized by the freedom of capitalist to operate or manage their property for profit in competitive condition.

 In

capitalist economy the govt. plays a minor role. Enterprise can produced almost everything and has freedom to produce and distribute goods and services according to public demand.

In capitalism consumers liberty to buy or not to buy goods and freedom of enterprise leads to competition. Therefore, price and other factors are set to equilibrium by market forces, i.e., demand and supply, etc. Rational talents are better utilizing due to individual freedom and therefore productivity Increases.

 Provides

optimum allocation of resources, development of enterprise, invention and use of new technology etc. due to individual freedom. Provides freedom to save and invest, result in higher growth rate because saving made by sacrificing the consumption are invested for growth.

 Right

to property and freedom of enterprise will lead to accumulation of wealth and income disparities. Theoretically, expressed that there will be free competition but generally larger firms will take advantage, which will lead to monopoly. Absence of central planning results in no definite guidelines for national development.

 Cutthroat

competition among individual may result in imperfection in market & adoption of unfair practices Once the upward and downward cycle starts there is no situation to normality. This results in price hike, inflation, deflation, unemployment etc.

 Socialism

also known as Command Economy, is an economic system in which the means of production are owned by the state. In most important aspect of this type of economy is that all major decision related to the production, prices are all made by the government.

 Govt.

is the final authority to take decision regarding production, utilization of the finished industrial products and the allocation of the revenues earned from their distribution.

 Elimination

of wastage of resources Elimination of concentrate of wealth Elimination of unequal distribution of wealth Provision of necessaries of life Immunity from Economic crisis Elimination of unemployment

 End

of liberty Weakening of the will to work Error in planning Failure in practice

Mixed economy is a mix between socialism and capitalism. It is an economic system where some important production is undertaken by the state, directly or through nationalized industry, & some is left for private enterprise. In this type of economy both the private ownership as well government takes part in the process of production, distribution and other economic activities.

East Asia and pacific Europe and central Asia Latin America and the Caribbean Middle east and north Africa South Asia Sub-Saharan Africa High income countries

Economic scenario determines the attractiveness of a country for MNCs as an investment destination. Such a scenario is characterized by high growth, stable prices, high rates of savings and investment, fiscal stability and favorable balance of payments.

 Inflation

is understood as situation characterized by a sustained increase in the general price level. Economists believe that inflation is an essential condition of growth. For developing country, inflation serves two important purposes: Increased savings Encouragement to invest

Inflation

Germany had its worst inflation in 1923, following the First World War. In 1922, the highest denomination possible in Germany currency was 50,000 Marks. However, by 1923, denominations of 100,000,000,000,000 Marks were being issued, with the exchange rate of December 1923 being 4,200,000,000,000 Marks to $1 U.S. The inflation rate in the country eventually reached an astounding 3.25 x 106 percent per month, which meant that the prices were doubling every two days. People were literally taking wheelbarrows full of money to buy one loaf of bread.

Savings and investments

The extent of domestic savings and investment is one of the indicators of a countrys potential to attract FDI. Developing countries need to invest on infrastructure, agriculture and industry to fuel economic growth. Economists are of the opinion that a savings and investment rate of 30% will sustain a comfortable growth rate of a developing economy without depending too much on external borrowings.

Fiscal stability

A country should have a balanced budget, in which revenue and expenditure match perfectly. For developing country, deficit budget serves useful purposes. Borrowings will create investible resources. Deficit financing adds to the purchasing power of people. There will be inflation that encourages investment

Balance of payments Balance of payments is a statistical statement that systematically summarizes, for specified period of time, the monetary transactions of an economy with the rest of the world. BOP is a principal tool for assessing the potential of a country to attract FDI.

Financial System It consists of two segments: money market capital market Money market is the market in which short term funds are borrowed and lent mainly through monetary assets.

Money market is of great help to an economy as it helps enhance liquidity, stabilizes interest rates and helps financial and commercial institutions and commercial banks earn attractive interest. Capital markets constitute a vital element of an economy. Corporate sector raises its long term funds through capital markets.

Economies policies of a country determine its position in the international arena. The policies include: Industrial policy Trade policy Monetary policy Fiscal policy

It refers to the governments policy towards industries with regard to the establishment, functioning, growth and management. Industrial development of a country will be shaped, guided, fostered, regulated and controlled by its industrial policy. It is an important document that indicates the relationship between government and business.

Trade policy refers to all the procedures and practices that have a bearing on the trade movement of a country. Trade policy of a country may be inward looking or outward looking. An inward looking approach advocates that a country should not trade with other nations. Outward looking strategy calls for easy movement of goods and services among nations.

Monetary policy refers to the process by which the central bank or monetary authority of a country controls the supply of money, RBI in India administers monetary policy. It is the process by which central bank of a country controls Supply of money Availability of money Cost of money/rate of interest

 To

achieve price stability by controlling inflation and deflation. To promote and encourage economic growth in the economy. To ensure the economic stability at full employment or potential level of output.

 The

term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures. Government spending policies that influence macroeconomic conditions are known as fiscal policies.

 Economic

Growth Equitable Distribution of Wealth Full Employment Exchange Stability Balanced Regional Development

Budget - Keeping budget in balance, surplus or deficit is in itself a fiscal instrument. When the govt. keeps its total expenditure equal to its revenue as a matter of policy it means it has adopted a balanced budget policy. Public expenditure results in overall rise in the economic activity. Therefore, govt.s tax revenue will also increase. Hence, there is no increase in the fiscal deficit in such cases.

Taxation- Tax is an important source of raising revenue, taxes may be direct or indirect. Government Borrowings- In developing economies, the govt. resorts to borrowing in order to finance schemes of economic development. Public borrowing becomes necessary because taxation alone cannot provide sufficient funds for economic development.

Many countries with command economy orientation have been remaking themselves to emerge as market friendly economies. This process is called economic transition. It involves changing a countrys fundamental economic organization and creating entirely new market institutions.

Macroeconomic stabilization to reduce budget deficits and expand credit availability Liberalization of economic activity that is decided by prices reflecting supply and demand. Legalization of private enterprises and privatization of state owned enterprises in accordance with an effective system of individual property rights. Removal of trade and investment barriers in goods and services, and removal of controls on convertible of nations currency. Development of a social welfare system designed to ease the transition process.

RUSSIA

There are a number of misconceptions about Russia as a business destination. Some people believe that conducting business in Russia is an easy process and that all it takes are some good connections or simply meeting with the right people. On the other hand, others believe that in Russia, it is almost impossible to do business and that enterprises are not governed by the basic principles of economics.

Russia as a business destination requires its own set of rules. One needs to be ready to do business in an unconventional way. Additionally, one should be ready for the disparity that occur across various sectors and also across a number of geographical areas. In Russia, some areas are oversupplied while others are undersupplied.

The Russian political scene has witnessed numerous fluctuations over the past decade. During the 1990s, it was controlled by its president Yeltsin and these were not good times for the business environment. However, after the Yeltsin era, there was the emergence of the Putin era. This era is much more successful than the latter.

Putin era is much more successful because: Strong tax collection Favorable business environment Lower personal income tax Lower corporate taxes Sound economic measures

These are all aspects that encourage greater investment and better performance for entrepreneurs especially in relation to international business. Because of these changes, the Gross Domestic product (GDP) of the country has undergone numerous changes over the past few years. For instance in 1999, it recorded a 6.5% growth rate, in 2000, it reported a 10% growth rate, in subsequent years, it has continued to grow at a steady pace.

Russia boasts of stable currency This means that any foreign investor who is interested in doing business would be successful if they concentrated on exports rather than imports. Imports to Russia have been very expensive. Consequently, managers should consider creating goods locally or using locally made supplies so as to minimize their costs of business.

In the past, the Russian government has not been very keen on the issue of Information technology. However, this trend is slowly changing owing to the fact that the country has recorded high amounts of tax incentives for IT specialty companies. The government has also instituted plans that it will rebate taxes for families by as much as 39% those families purchase computers. This also means that IT use among members of the population will rapidly increase.

Before one conducts business in Russia, it is essential for one to look for local partners. There are a number of advantages that can emerge out of finding a good local partner and these could be invaluable to the business. Some of them include; -They understand bureaucracy in the country -They know the market dynamics -Are familiar with staffing arrangements -Understand overall business costs -They understand common mistakes made by first time investors -They know how local rent costs are settled -Can give information about taxes

POLAND

Poland has emerged as an important and dynamic market since the country began its transition to democracy and a market driven economy in 1989. With 38 million people, Poland is the largest market among the former Eastern European countries and shares borders with both new EU and old EU-15 countries.

Poland became a member of the European Union (EU) in 2004 and held the presidency of the EU for the last 6 months of 2011. Polands adoption of EU legislation has led to wide ranging reforms in economic regulation, and reduced government intervention in the private sector. Reforms in areas such as financial markets, company and competition law, accounting, and intellectual property rights have improved the environment for private business and boosted economic growth.

Polands plans to eventually adopt the Euro currency will further accelerate the countries integration with the EU. Poland is an active member of NATO, upgrading its armed forces accordingly and participating in joint peacekeeping activities in the region and elsewhere including Afghanistan.

Polands GDP growth remained strong in 2011 at over 4% while the rest of Europe struggled with the global financial crisis. Growing exports, household consumption and business investment fueled the countrys strong economic performance.

Agricultural products including aquaculture, wood products and beverages showed the largest increases in 2011. Other areas that saw substantial increases were transportation, (27%), chemicals (26%), metal manufacturing (27%) and machinery (17%).