What is the medium-term impact of the bric countries?

CONTENTS

ABSTRACT

LIST OF TABLES

LIST OF FIGURES

LIST OF ABBREVIATIONS

CHAPTER 1
1. INTRODUCTION
1.1 CHAPTER OVERVIEW
1.2 THE BACKGROUND TO THE STUDY: THE BRIC ECONOMIES
1.3 RESEARCH AIM AND OBJECTIVES
1.4 KEY TERMS
1.5 OUTLINE OF THE DISSERTATION

CHAPTER 2
2 LITERATURE REVIEW
2.1 CHAPTER OVERVIEW
2.2 MACRO ENVIRONMENTAL ANALYSIS
2.2.1 PESTLE framework’s definition
2.2.2 Brief history of PESTLE
2.2.3 Advantages and disadvantages of PESTLE
2.2.4 Discussion
2.3 HOFSTEDE’S STUDY OF CULTURAL DIMENSIONS
2.3.1 Arguments for and against Hofstede’s study
2.3.2 Discussion
2.4 ECONOMIC GROWTH AND FACTORS UNDERPINNING ECONOMIC GROWTH…
2.4.1 Actual and potential economic growth
2.4.2 Factors underpinning economic growth
2.5 BUSINESS CYCLES THEORY
2.5.1 Economic growth and business cycles
2.5.2 Discussion
2.6 RELATIONSHIP BETWEEN COMPETITIVENESS AND GROWTH
2.6.1 Determinants of competitiveness
2.6.2 The diamond of competitive advantage
2.6.3 The World Economic Forum’s The Global Competitiveness Report 2010-2011
2.7 GLOBAL RISKS 2011, SIXTH EDITION
2.8 SUMMARY

CHAPTER 3
3. METHODOLOGY
3.1 CHAPTER OVERVIEW
3.2 RESEARCH PHILOSOPHIES
3.3 RESEARCH APPROACHES
3.4 RESEARCH STRATEGIES
3.4.1 Different tactics for pursuing research…
3.4.2 Methods of investigation
3.5 RESEARCH CHOICES
3.6 TIME HORIZONS
3.7 DATA COLLECTION METHOD
3.7.1 Primary and secondary data
3.7.2 Quantitative and qualitative techniques
3.7.3 Limitations in the data collection
3.8 ECONOMIC MODEL
3.9 THE CREDIBILITY OF THE FINDINGS.
3.9.1 Reliability
3.9.2 Validity
3.9.3 Generalisation
3.10 RESEARCH ETHICS
3.11 LIMITATIONS

CHAPTER 4
4 FINDINGS AND ANALYSIS
4.1 CHAPTER OVERVIEW
4.2 PESTLE ANALYSIS
4.2.1 Brazil
4.2.2 Russia
4.2.3 India
4.2.4 China
4.3 PROJECTED GDP PER CAPITA UNTIL 2050…
4.3.1 Initial findings
4.3.2 Analysis
4.3.3 Overall findings…
4.3.4 Analysis

CHAPTER 5
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 CHAPTER OVERVIEW
5.2 CONCLUSIONS
5.3 Further research and recommendations

REFERENCES

APPENDICES

ABSTRACT

What is the medium-term impact of the BRIC countries? An investigation into the macro-economic future prospects and evaluation of trends for the BRIC economies from 2011-2050

Mercedes Sobrino Salvá

11 March 2011

The reason for this theme is based on a series of studies that began in 2001 with the Goldman Sachs (GS) Global Economic Teams and their document Dreaming with BRICs: The Path to 2050, which developed the BRIC hypothesis that groups together Brazil, Russia, India and China. Its relevance is based on the fact that the rise of the BRIC economies has been one of the major economic changes over the past few decades, and the fact that the BRICs are predicted by many to become the leading economies by 2050. However, these countries are predicted to be poorer on average than the G6 in per capita terms.

The first step of the current dissertation was to conduct a macro- environmental analysis with the purpose of investigating the future prospects of the BRICs, and, therefore, the socio-economic challenges that are believed to be actual and future constraints for the BRICs’ sustainable growth. As a result, it can be concluded that Brazil’s growth may not be sustainable unless there is a long-term financial shift; Russia’s growth sustainability requires an increase in population; India’s growth seems sustainable, yet the uneducated population might have negative effects at some point by 2050; and China’s growth is not likely to decline by 2020, but the socioeconomic challenges it faces might start to have an effect by 2030, meaning its growth rate might not be as robust as is now by 2050.

This study is also based on an economic model developed by the researcher, with the objective of investigating the BRICs’ prospects in GDP per capita terms, whose initial findings were analysed considering GS’s and PricewaterhouseCoopers’ (PwC) studies. As a result of this study, the BRICs are projected not to be the leader economies in per capita terms by 2050. However, considering that the long term and uncertainty are highly correlated, overall there is a high likelihood that neither GS’s predictions nor PwC’s nor the researcher’s can happen in the future.

LIST OF TABLES

TABLE I: ADVANTAGES AND DISADVANTAGES OF PESTLE

TABLE II: KEY DRIVERS FOR GROWTH

TABLE III: PILLARS OF COMPETITIVESS AND THE COUNTRY’S STAGE OF DEVELOPMENT

TABLE IV: TOP 10 RISKS BY LIKELIHOOD OR IMPACT COMBINED

TABLE V: SUMMARY OF BRAZIL’S KEY MACRO-ENVIROMENTAL FACTORS

TABLE VI: SUMMARY OF RUSSIA’S KEY MACRO-ENVIROMENTALFACTORS

TABLE VII: SUMMARY OF INDIA’S KEY MACRO-ENVIROMENTALFACTORS

TABLE VIII: SUMMARY OF CHINA’S KEY MACRO ENVIROMENTALFACTORS

TABLE IX: COMPARISON WITH PWC’s AVERAGES (2007-2050)

TABLE X: GS’s (2003) AVERAGES

TABLE XI: COMPARISON WITH GS’s (2003) AVERAGES

TABLE XII: COMPARISON BETWEEN PWC (2008) AND GS (2003).

TABLE XIII: SUMMARY OF THE AVERAGE OF JAPAN, US, GERMANY AND THE UK

LIST OF FIGURES

FIGURE 1: PHASES OF BUSINESS CYCLES

FIGURE 2: PORTER’S DIAMOND.

FIGURE 3: THE RESEARCH ONION

FIGURE 4: BRAZIL’S INFLATION EVOLUTION FROM 1980 TO 2008

FIGURE 5: THE EVOLUTION OF BRAZIL’S EXPORTS, IMPORTS AND INTERNATIONAL TRADE FROM 1980 TO 2009 (CONSTANT$2000)

FIGURE 6: BRAZILIAN POPULATION BY AGE GROUP

FIGURE 7: RUSSIA’S INFLATION EVOLUTION FROM 1996 TO 2009

FIGURE 8: THE EVOLUTION OF RUSSIA’S EXPORTS, IMPORTS AND INTERNATIONAL TRADE FROM 1990 TO 2009 (CONSTANT $2000)

FIGURE 9: RUSSIAN POPULATION BY AGE GROUP

FIGURE 10: INDIA’S INFLATION EVOLUTION FROM 1980 TO2009

FIGURE 11: THE EVOLUTION OF INDIA’S EXPORTS, IMPORTS AND INTERNATIONAL TRADE FROM 1990 TO 2009 (CONSTANT $2000)

FIGURE 12: INDIAN POPULATION BY AGE GROUP

FIGURE 13: CHINA’S INFLATION EVOLUTION FROM 1987 TO

FIGURE 14: THE EVOLUTION OF CHINA’S EXPORTS, IMPORTS AND INTERNATIONAL TRADE FROM 1990 TO 2009 (CONSTANT $2000)

FIGURE 15: CHINESE POPULATION BY AGE GROUP

FIGURE 16: PROJECTED GDP PER CAPITA FOR THE BRICs, US, JAPAN GERMANY AND THE UK (INITIAL)

FIGURE 17: PROJECTED GDP PER CAPITA FOR THE BRICs, US, JAPAN GERMANY AND THE UK (FINAL)

LIST OF ABBREVIATIONS

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CHAPTER 1
INTRODUCTION

1.1 CHAPTER OVERVIEW

The rise of the emerging markets, specifically the BRIC (Brazil, Russia, India, China) economies, has been one of the major economic changes over the past few decades (Enderwick, 2009). This trend is predicted to continue over the next 40 years at least. Thus, this chapter aims to introduce the significance of this statement, the research objectives, and key terms. Moreover, the structure of the current dissertation will be developed.

1.2 THE BACKGROUND TO THE STUDY: THE BRIC ECONOMIES

The background to the previous statement is based on a series of studies that began in 2001 when the Goldman Sachs (GS) Global Economic Teams in their document Dreaming with BRICs: The Path to 2050, developed the BRIC hypothesis that groups together Brazil, Russia, India and China. These countries could become the leader economies by 2050 (Selloverseas, 2010). Specifically, GS’s main conclusions are that the BRICs together, could become larger than the G6 in US dollar terms. By 2025 they could be more than half the size of the G6. Moreover, of the current G6, only the US and Japan might be among the six largest economies in US dollar terms in 2050. However, in per capita terms, the BRICs, apart from Russia, are expected to be poorer on average than the G6 (Wilson and Purushothaman, 2003). In addition to this, GS indentified some key requirements that are essential in order for these countries to develop into the dominant economies. These requirements are:

- Sound macroeconomic policies and a stable macroeconomic background.
- Strong and stable political institutions.
- Openness to trade and foreign direct investment.
- High levels of education.

Moreover, the relative significance of the BRIC economies could be seen as an instrument of growth in new demand and spending power, which might compensate for the impact of slower growth of the advanced economies, since rising incomes in emerging markets will change local spending patterns for a range of commodities (Wilson and Purushothaman, 2003). Therefore, if this hypothesis comes true, the importance of the BRICs in terms of investment may increase considerably as they can provide opportunities for today’s global companies. Indeed, having investments in and being involved in the right markets, especially in specific emerging markets, may become a strategic choice for global firms (Wilson and Purushothaman, 2003). The main reason for this is that these countries have not only wealthy consumers, but also an important potential for the creation of new multinational companies (Fan, 2008). Furthermore, the economic power that the BRIC countries control cannot be undervalued by any corporation that trades in a foreign country. In fact, the BRIC economies represent 40 per cent of the world’s population, making them in aggregate a huge market (Selloverseas, 2010), whose capabilities can be developed by overseas investors and buyers through the provision of knowledge of market requirements and quality expectations (Enderwick, 2009). Enderwick (2009) continues by adding that this has enabled the emerging countries to achieve the sales levels of the developed countries at lower cost and risk, which has encouraged suppliers to invest in the creation of manufacturing, quality and logistics capabilities.

However, regarding forecasts that the BRICs will become leader economies, it is also important to highlight, firstly, that history shows that any type of long- term projection is subject to discussion due to the huge likelihood of uncertainty, and secondly, that some conditions for growth are required in order to fulfil these forecasts (Wilson and Purushothaman, 2003). Moreover, BRICs need to enhance their strategic capabilities; particularly the key requirements documented by Enderwick (2009) are as follows:

- The investments made by the national governments and local firms.
- The import of technology and advanced machinery.
- Production specialisation and scale.
- Employment movement, and specifically, the return of expatriates who have acquired skills and expertise in the developed markets.

An additional complication is that BRICs are very competitive between themselves, and as a consequence of this lack of cooperation, it is difficult for them as a group to compete with the force of individual goals. Indeed, it can be stated that “even when BRIC countries agree in general, they often disagree in detail” (Kambayashi, 2010, emphasis added).

1.3 RESEARCH AIM AND OBJECTIVES

The aim of this dissertation is to answer the following research question:

- What is the medium-term impact of the BRIC countries?
- An investigation into the macro-economic future prospects and evaluation of trends for the BRIC economies from 2011-2050. Therefore, the research objectives related to the research question are:
- To conduct a critical Literature Review that identifies and evaluates the main frameworks, theories, studies, and reports with the purpose of conducting the mentioned investigation.
- To indentify and analyse the key environmental factors of the BRIC
economies and the impact of these factors on the BRICs’ further development.
- To analyse the extent to which the BRIC economies will be the leader economies in per capita terms by 2050.

1.4 KEY TERMS

In order to achieve accuracy and to avoid any kind of confusion, particularly in the third research objective, clarification of key terms is needed. The term ‘leader economy’ will be considered in terms of gross domestic product (GDP) per capita at purchasing power parity rates (PPP) 2005 international dollars. The reasons for using these measurements are as follows:

Individuals in the BRICs, apart from Russia, are likely to be poorer than citizens in the G6 economies (Wilson and Purushothaman, 2003). For instance, by some measurements, China is claimed to be the world’s second largest economy. However, China is still a reasonably poor state in per capita terms (Morrison, 2009). Hence, the relevance of investigating whether this will still be the case by 2050.

It will also be considered at purchasing power parity rates (PPPs) since “living standards depend on the relative price levels in each country” (Hawksworth and Cookson, 2008, p.30). Moreover, in order to compare and contrast the results, the data obtained by the World Bank (2010) are in constant 2005 international dollars, which have the same purchasing power over GDP as the US dollar has in the United States.

1.5 OUTLINE OF THE DISSERTATION

The purpose of this section is to provide an overview of the structure of the current dissertation, which is as follows:

- Chapter II provides a critical Literature Review of the frameworks and reports that will be implemented with the purpose of gaining in-depth answers to the second and third research objectives.
- Chapter III explains research methodology literature and its particular implementation in this dissertation, and also describes how the findings will be obtained.
- Chapter IV is the main body of this dissertation. The findings, which are a result of the implementation of relevant frameworks and an economic model that the researcher developed during the dissertation process, will be critically analysed with relevant theory, as well as contrasted with relevant studies.
- Chapter V is a concluding chapter with recommendations for further research.

CHAPTER 2
2 LITERATURE REVIEW

2.1. CHAPTER OVERVIEW

This chapter analyses the key theoretical frameworks necessary to fulfil the study’s research objectives. Hence, the PESTLE framework will be explained and evaluated in order to analyse the key macro environments of the BRIC economies. The ‘Hofstede’s study of cultural dimensions’, which is the framework that has been chosen with the aim of analysing the socio-cultural factors of the PESTLE analysis, will also be explained and evaluated. Additional theory such as economic growth and factors underpinning growth; the business cycle theory; the relationship between growth and competitiveness, which is based on Porter’s Diamond and the World Economic Forum’s The Global Competitiveness Report 2010-2011; and the Global Risks Report 2011, Sixth Edition will be introduced with the aim of helping the researcher to carry out her PESTLE analysis and her longitudinal study.

2.2 MACRO-ENVIRONMENTAL ANALYSIS

As a consequence of globalisation, developing countries are aiming to catch up with the developed nations as fast as possible (Zhouying, 2005). Therefore, with the objective of ascertaining to what extent the predictions regarding the BRICs becoming leader economies by 2050 will come true, it is a requirement not only to evaluate the conditions that will enable these countries to grow as predicted, but to focus on the risks that can hinder these developments as well. Hence, it is relevant to analyse the macro environment as it is considered to be a condition for gaining competitiveness (Zhouying, 2005). Thus, the framework chosen is the PESTLE analysis since it provides comprehensive lists of influences on the possible success or failure of particular strategies (Johnson, et al., 2008).

2.2.1 PESTLE framework’s definition

As Johnson, et al. (2008) state, PESTLE is the acronym for Political, Economic, Social, Technological, Environmental and Legal factors. Specifically, it can be highlighted that:

- Politics emphasises the position of governments.
- Economics is linked to macroeconomic factors such as exchange rates, trade cycles and disparity in economic growth rates among countries.
- Social influences are mainly related to changing cultures and demographics.
- Technological influences are related to innovations.
- Legal refers to legislative restrictions.
- Environmental refers to ‘green issues’.

This framework can provide long and complex lists of factors and their interrelations, which need refining and rating in terms of the key drivers for change that are likely to have an impact on the success or failure of a given strategy (ibid). Therefore it needs to be used in the context of a specific objective in order to add value and aid understanding of the dissertation context.

2.2.2 Brief history of PESTLE

This framework has been used as a scanning tool for the external environment for more than three decades (Thakur, 2010).

The origin of this technique, named ETPS, whose purpose is to investigate macro environments, is attributed to Frances Aguilar in 1967. It is also believed that the first four factors, previously mentioned, were emphasised afterwards by Arnold Brown, who rearranged them to STEP with the aim of also referring to the Strategic Trend Evaluation Process (RapidBi, n.d; Basilone and Busin-Nicola, 2009; Thakur, 2010).

Furthermore, Porter (2004) cited in (Ketels, 2006), refers to the macroeconomic dimension (PEST) to differentiate aspects that effect competitiveness.

Overall, the aim of these models is to create a structured analysis of critical environmental factors. Thus, they incorporate, in varying order, the political, social, technical, economic, and, occasionally, environmental factors (Basilone and Busin-Nicola, 2009). Moreover, Thakur (2010) claimed that legal extension is commonly added, and, occasionally ethical considerations are included as well.

To conclude, it has been argued that there might not be obvious evidence regarding when PEST evolved from ETPS. However, PEST and PESTLE are currently the most common names for this framework (Thakur, 2010).

2.2.3 Advantages and disadvantages of PESTLE

Some advantages and disadvantages that are associated with using a PESTLE analysis, according to the CIPD (2011), are presented in Table I.

TABLE I:

ADVANTAGES AND DISADVANTAGES OF PESTLE

Abbildung in dieser Leseprobe nicht enthalten

Source: Adapted from: Thakur, 2010; CIPD 2011

2.2.4 Discussion

The disadvantages of PESTLE are mainly related to the data, such as its availability and quality, research methods and the changing environment, which hinders the anticipation of future consequences. Despite this, the PESTLE framework is relevant to understanding the opportunities that should be maximised and the threats that should be minimised in order to understand the impact of the environment on the growth of the BRIC economies. This argument is supported not only by Porter (2004) cited in (Ketels, 2006), but also by the CIPD (2011), which states that detecting and understanding broad and long-term trends requires scanning of the economic environments. However, with the aim of overcoming its disadvantages and to provide an outstanding and updated PESTLE analysis, it is essential to consider key success factors and to be critical of the analysis.

2.3 HOFSTEDE’S STUDY OF CULTURAL DIMENSIONS

The reason for including Hofstede’s cultural dimensions is that they will be extremely useful in enabling the researcher to evaluate the BRICs culture. The background of Hofstede’s (1980) study of cultural dimensions is that it is based on significant surveys, which include IBM’s employees from 40 different countries and Hofstede’s students from 15 different countries with diverse backgrounds (Hofstede and Hofstede, 2010). The ‘Dimensions of national Cultures’, which evolved from those studies are currently defined as follows:

- Power Distance (PD): This can be defined not only as the expectation of, but also the acceptance of unequal distribution of power away from less powerful members of institutions (such as families, schools and communities), and companies within a nation (Hofstede et al., 2010).
- Individualism vs. Collectivism (IDV): Individualism refers to people looking after themselves and their closest relatives, whereas people belonging to a group to which they are loyal are referred to as collectivism (Hofstede and de Mooij, 2010).
- Masculinity vs. Femininity (MAS): Emotional roles distinguish a masculine society, where roles are clearly distinct such as men being self-confident and women being concerned with quality of life issues, from a feminine society, where these roles overlap and, therefore, men are modest, tender and concerned with quality of life as well (Hofstede et al., 2010).
- Uncertainty Avoidance (UA): This refers to the degree to which
confusing or unknown circumstances cause a country’s citizens to experience threat, which is expressed by stress and a need for certainty and rules (Hofstede et al., 2010).
- Long-Term Orientation (LTO): This was originally called the Confucian Work Dynamic as it was based on the Confucian values of the Chinese culture such as “ordering relationships, thrift, persistence and having a sense of shame” (Wu, 2006, p. 34). It was renamed in 2001 as LTO, which refers to future rewards coming from perseverance; while short-term orientation is related to the past and present with emphasis on traditions, conservation of ‘face’, and satisfying social responsibilities (Hofstede et al., 2010, p. 239).
- Indulgence vs. Restraint (IVR): Happiness and life control are the key components for the most recent dimension (Hofstede et al., 2010), where indulgence refers to a culture that enjoys life and tolerates reasonably uncontrolled enjoyment , while restraint reflects a society that limits gratifications by controlling them with severe societal regulations (Hofstede and Hofstede, 2010).

2.3.1 Arguments for and against Hofstede’s study

With the aim of justifying the application of Hofstede’s cultural dimensions, arguments for and against his study will be considered in this section. Hofstede’s study is claimed to have produced one of the most relevant theories of culture, since its relevance and rigour are Hofstede’s main added value; it was widely-reviewed with several replications (Søndergaard, 1994). In fact, the reason for criticism of his study is claimed to be due to these replications rather than the failure of his theories (Chapman, 1997) cited in (Dawson and Young, 2003). Moreover, Dawson and Young (2003) continue by arguing that the dynamism in Hofstede’s theories permits variety in the approach to a culture’s development. Last but not least, Jones (2007) summarised the strengths of Hofstede’s study as follows: relevance, rigorous design with methodical data collection, and relative accuracy with Hofstede’s predictions.

Nevertheless, Hofstede’s concept of cultural differences has also been criticised. The major reasons seem to be its methodology, particularly the fact that any cultural study requires several research strategies, not just questionnaires (Søndergaard, 1994); and also the small number of the population interviewed, and the fact that even a large amount of respondents does not guarantee its representativeness (McSweeney, 2002). Therefore, generalisations about national cultures are based on the micro data obtained from IBM, thus questioning the representativeness at a national level of the assumption of a one-company approach and the fact that cultures cannot be limited by borders (Jones, 2007). Finally, the value of his study has also been questioned not only because it might be too old, but also due to the fact that six dimensions may not be sufficient to generalise about cultural differences (ibid).

2.3.2 Discussion

Although it has been claimed that Hofstede’s study is outdated as a consequence of changing global environments (McSweeney, 2002; Jones, 2007), there is ongoing evidence of the robustness and significance of his study, and therefore, continuous interest in his research (French, 2010). Hence the reason for including Hofstede’s cultural dimensions in the socio- cultural section of the PESTLE analysis. Indeed, his study will complement the socio-cultural analysis of the changes that are taking place in the BRICs with the purpose of providing a critical evaluation of the socio-cultural factor. Therefore, determining whether his study is either outdated or still representative is not an objective of this dissertation, rather it will implement his cultural dimension as a supporting and complementary framework due to Hofstede being regarded as one of the most important academics in the field of cultural studies.

2.4 ECONOMIC GROWTH AND FACTORS UNDERPINNING ECONOMIC GROWTH

The purpose of this section is to evaluate the factors underpinning economic growth in order to provide a better understanding of the high growth rates that have led to the rise of the BRICs economies (Enderwick, 2009). However, before analysing the causes of economic growth, it is important to make the distinction between actual and potential economic growth.

2.4.1 Actual and potential economic growth

Actual growth is the proportional annual growth rise in national output or ‘GDP’, also defined as the rate of growth in actual output produced (Sloman and Sutcliffe, 2004).

Potential growth is the speed at which the economy can grow. In fact, it is the percentage annual increase in the economy’s capacity to produce or the rate of growth in potential output (ibid).

However, there are two main issues related to economic growth: firstly, the challenge of maintaining actual output at a level as close as possible to potential output - this is relevant in the short term. Secondly, there is the long-term question of what establishes the rate of potential economic growth (ibid).

2.4.2 Factors underpinning economic growth

Porter (1990a) argued against classical economists such as Adam Smith (1776) and David Ricardo (1876), who believed that national prosperity is based on a country’s national resources: labour, land, natural resources, capital and infrastructure. However, according to Sloman and Sutcliffe (2004), the causes of potential growth are increases in the quantity of resources, labour, land and raw materials, the rate of return on factors of production, and increases in the productivity of resources.

Additionally, Hawksworth (2006) states that relevant studies such as the one provided by Goldman Sachs (GS) and his own research commissioned by PricewaterhouseCoopers (PWC) are in line with established neoclassical economic theory, whose origin is based on the work of Solow (1956, 1957). Another study that is in accordance with the previous studies mentioned, is the one of Dadush and Stancil (2010) commissioned by the Carnegie Endowment for International Peace (CEFIP). These studies argue that long- term GDP growth is believed to be driven by the factors shown in Table II.

TABLE II: KEY DRIVERS FOR GROWTH

illustration not visible in this excerpt

Source: Author’s creation based on the following reports: GS, 2003; GS, 2007; PWC, 2006; PWC, 2008; and CEFIP, 2010

2.5 BUSINESS CYCLES THEORY

The aim of this section is to explain the relationship between economic growth and business cycles since this will enable the researcher to explore her research objectives.

2.5.1 Economic growth and business cycles

Fluctuations are facets of actual growth. In fact, nations can experience either booms as a result of high rates of economic growth or recessions as a consequence of low or negative rates. This cycle of booms and recessions is known as the “business cycle” or “trade cycle” (Sloman and Sutcliffe, 2004, p. 549). As shown in Figure 1, it is characterised by the following stages: expansion, contraction, peaks and troughs.

illustration not visible in this excerpt

FIGURE 1: PHASES OF BUSINESS CYCLES Source: Bergman, 2005, p.6

According to the classic definition:

Business cycles are a type of fluctuations found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar character with amplitudes approximating their own (Burns and Mitchell, 1946, p. 1) cited in (Bergman, 2005, pp.1-2).

Burns and Mitchell suggested a method called the NBER methodology. According to Bergman (2005), it consists of different stages: Firstly, data must be analysed with the objective of determining and redefining peaks and troughs. Yet, the main drawbacks of this method are that it is not based on any one decision rule, and that there are considerable time lags between actual turning points in the trade cycle and the most recent published data available, which may reduce accuracy. Secondly, Burns and Mitchell’s method is based on one particular technique, which consists of using a computing algorithm aimed at replicating the NBER methodology, developed by Bry and Boshman (1971). Specifically, aggregate output is measured monthly by isolating minima and maxima subject to constraints in the length of cycles, expansions and contractions. Furthermore, Lucas (1977) cited in (Bergman, 2005) stated that business cycles can be characterised as repeated fluctuations in relevant macroeconomic time series, such as output and employment. He suggested that these oscillations show a high degree of coherence since production in different sectors of the economy tends to move together and this is a characteristic of all decentralised economies. Hence, he concluded that “business cycles are all alike” (Lucas, 1977, p.10, emphasis in original).

To sum up, the most commonly used definition of business cycles is the one provided by Burns and Mitchell (Wilkinson, 2009). Business cycles are also believed to be inevitable and difficult to anticipate as economic and financial shocks will always occur and, consequently, reactions will take place after the contraction stage or even the trough (Greenspan, n.d.) cited in (Wilkinson, 2009).

2.5.2 Discussion

It can be argued that Burns and Mitchell’s methodology is not based on any decision rule, and also that it is difficult to obtain current data for the actual time period of any study. However, its relevance to the current dissertation is that it will enable the researcher to understand the evolution of the BRIC economies up to the present day, with the aim of predicting their future evolution in terms of GDP per capita, which is in accordance with the macroeconomic data suggested. Therefore, a decision rule will be established in the Methodology Chapter after having observed the GDP growth rates evolution.

Finally, the fact that business cycles are inevitable must be highlighted as this will have a significant impact on the further analyses.

2.6 RELATIONSHIP BETWEEN COMPETITIVENESS AND GROWTH

With the purpose of establishing a relationship between competitiveness and growth with relevance for the PESTLE analysis, Porter’s theoretical framework will be introduced, followed by The Global Competitiveness Report 2010-2011 (GCR) published by the World Economic Forum (WEF).

2.6.1 Determinants of competitiveness

According to Porter (1990a, p.73), a “nation’s competitiveness depends on the capacity of its industry to innovate and upgrade ”. He continues by arguing that productivity is the unique considerable perception of competitiveness at a nationwide level. Hence, generating high and increasing standards of living for its citizens, by employing its labour and capital in a way that will allow increased productivity, should be the main goal of any state. Specifically, individual productivity is the level of GDP per capita essentially employed. Indeed, it is the most important determinant of a nation’s long-term standard of living and it is the origin of national per capita income (Porter, 1990b), as well as being the measure commonly used for economy-wide productivity (Ketels, 2006). Hence, the reason for having chosen this measure for the long-term projections.

2.6.2 The diamond of competitive advantage

As previously mentioned, Porter (2004) cited in (Ketels, 2006), distinguishes two sets of factors that impact on competitiveness:

- Firstly, the factors that constitute the PEST framework when the macroeconomic environment is considered.
- Secondly, the factors that belong to the microeconomic foundation, which constitutes the base of ‘Porter’s Diamond’, are believed to affect 80 per cent of the disparities of GDP per capita. Key economic factors of the BRIC economies can be analysed using this framework.

In fact, this approach to competitiveness, which was named the “Diamond of National Advantage”, highlights that not only companies, but also countries contribute as a system to increase productivity (Porter, 1990a, p.77). It is illustrated in Figure 2:

illustration not visible in this excerpt

FIGURE 2: PORTER’S DIAMOND

Source: Stone and Ranchhod, 2006, p. 285

According to Porter (1990a), each point of the diamond represents a key element to achieving competitive advantage. Specifically, these factors are:

- Factor conditions: Porter identifies two main requirements to succeed in an industry: skilled labour or infrastructure on the one hand, and the capability for countries to be the best at creating competition factors on the other hand. Moreover, knowledge-based industries are believed to be the most significant factor of production in sophisticated industries.
- Demand conditions: Importing not only products but also values and tastes can lead to competitive advantage when local buyers anticipate global trends.
- Related and supporting industries: Supporting industries that are internationally competitive are believed to be another source of competitive advantage. For instance, suppliers and end-users located near each other can take advantage of short lines of communication, ideas, and innovation.
- Firm strategy, structure and rivalry: The conditions of the nation governing how firms are managed, as well as the nature of the competitive rivalry.

Since the global competitiveness of a nation is challenging, governments should encourage change, promote domestic rivalry and stimulate innovation with the aim of amplifying the effects of the four elements of the diamond. Consequently, these are some of the specific approaches that have been suggested to guide nations seeking to gain competitive advantage: focus on specialised factor creation, interventionism avoidance, regulation of patents to promote product development, facilitation of cooperative research and investment, deregulation of competition, facilitation of companies’ organic growth rather than inorganic, and open market access wherever a country has competitive advantage (Porter, 1990a).

Arguments for and against Porter’s Diamond: It must be emphasised that his contribution is unique since it offers a systematic explanation of competitive advantage instead of just an analysis of components (O´Shaughnessy, 1997). This conceptual framework remains extraordinarily significant, particularly among practitioners. Indeed, it is the origin of reports such as the GCR published annually by the WEF (Ketels, 2006).

Nevertheless, as with any framework, it has been the subject of criticism. The main criticism is that this study is based on identifying the successful industries of just 10 countries and its findings are generalised for all nations (O’Shaughnessy, 1997; Stone and Ranchhod, 2006). It has also been suggested that it fails in understanding the role of culture, history and politics (O’Shaughnessy, 1997). Moreover, Stone and Ranchod (2006) argue that Porter’s Diamond has received much criticism from diverse authors as it seems to be a framework that is not applicable to small nations (Rugman and D’Cruz, 1990; Brouthers and Brouthers, 1997); that does not consider either national resources industries (Cartwright, 1993); or the analysis of threats (Rugman and Verbeke, 1993); and excludes multinational activities (Chang Moon, et al., 1998).

Discussion: Despite the criticism, Porter’s framework is extremely relevant as it is the pillar of the GCR, thus it can be applicable in order to analyse the BRICs business environment since these nations are believed to be the leader economies of the future. Moreover, this framework will not be implemented in isolation, but others will complement its weaknesses such as Hofstede’s studies for the understanding of culture, and the Global Risks 2011, Sixth Edition in order to evaluate the threats that can dampen the BRICs growth. Additionally, natural resources, commodities and macroeconomic data will be considered with the aim of having a better understanding of what can provide competitive advantage for the BRICs future development.

2.6.3 The World Economic Forum’s The Global Competitiveness Report 2010-2011

The World Economic Forum’s The Global Competitiveness Report 2010- 2011 has examined several enabling factors for national economies to achieve sustained economic growth and long-term prosperity (Sala-i-Martin, et al., 2010). Hence, its relevance to the current dissertation since it will allow the researcher to study the macroeconomic environment and consider the factors needed for the BRICs to be leader economies by 2050. According to Sala-i-Martin, et al., competitiveness can be defined as:

“the set of institutions, policies, and factors that determine the level of productivity of a country ” (2010, p. 4 emphasis in original).

The level of productivity not only sets the sustainable level of prosperity that can be gained by an economy, but also establishes the rates of return achieved by investments (physical, human, and technological). Since, as previously mentioned, the rates of return are essential drivers of the growth rates of the economy, a more competitive economy is one that is likely to grow quicker in the medium to long term. Consequently, the productivity of a nation determines its ability to sustain high levels of income, and it is one of the basic determinants of returns on investments, which is one of the crucial causes of an economy’s growth potential (Sala-i-Martin, et al., 2010).

As previously stated, there has been wide disagreement regarding the factors that drive productivity and competitiveness. However, Sala-i-Martin, et al., (2010) stress that these ideas are not mutually exclusive, and 12 pillars of economic competitiveness with their effects on economic growth have, therefore, been considered and classified according to the country’s stage of development. These can be observed in TABLE III.

TABLE III:

PILLARS OF COMPETITIVESS AND THE COUNTRY’S STAGE OF DEVELOPMENT

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Source: Adapted from Sala-i-Martin, et al., 2010, pp. 4-9

To conclude, the relevance of this report is based on the classification of the factors that will sustain competitive growth. Hence, the significance of evaluating the strengths and weaknesses of the BRICs economies in the PESTLE analysis, as a failure in these factors can diminish the growth potential of the BRIC countries in the long term.

2.7 GLOBAL RISKS 2011, SIXTH EDITION

The reason for introducing this report in the Literature Review is that it is important to consider not only the factors that underpin and sustain growth, but the risks that can diminish growth as well. Hence, the WEF (2011), apart from considering climate change and geopolitical conflict to be causes of diminishing growth, also includes economic disparity, biodiversity loss, corruption and global governance failure. Indeed, the report Global Risks 2011, Sixth Edition illustrates the awareness of risk likelihood, risk impact and risk interconnections from 2010 to 2020 for 37 global risks (World Economic Forum, 2011). Specifically, the top 10 likely risks to occur with high impact are shown in TABLE IV.

TABLE IV:

TOP 10 RISKS BY LIKELIHOOD OR IMPACT COMBINED

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Source: World Economic Forum 2011, p.44

It is essential for the researcher to take into account the likelihood of these risks in the next 10 years in order not to base her longitudinal study on calculations alone. Hence, the relevance of applying these factors to test the relativity of her calculations, which will be further explained in the Methodology Chapter.

2.8. SUMMARY

The aim was to conduct a critical Literature Review that identifies and evaluates the main frameworks, theories, studies, and reports, with the purpose of gaining in-depth answers to the second and third research objectives.

CHAPTER 3
METHODOLOGY

3.1 CHAPTER OVERVIEW

Research methodology is “the procedural framework within which the research is conducted ” (Remenyi et al., 1998, p. 23). Therefore, this chapter introduces the literature of methodology, whose research process can be illustrated as an onion whose layers need to be peeled off in order to reach the data collection and data analysis (Saunders et al., 2007). The latest version of the research onion, which is shown in Figure 3, illustrates the outline of this chapter.

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FIGURE 3: THE RESEARCH ONION

Source: Adapted from Saunders, et al., 2009, p. 108

This chapter also aims to explain the steps that the researcher will follow in order to construct an economic model during the dissertation process and test the validity of her findings.

3.2 RESEARCH PHILOSOPHIES

As Remenyi et al., (1998) have stated, a discussion of research philosophy is crucial before doing any research project, and the starting point should be to focus on ensuring that the particular study adds value to existing knowledge. The research philosophy of this particular dissertation is about developing knowledge of the BRICs economies in general and their growth in particular. Certain knowledge of research philosophies is required so as to allow the researcher to clarify the research design (Blumberg et al., 2005), which deals with objectives, uses, purposes, goals and plans (Robson, 2007).

There are three main ways of thinking about research philosophy: epistemology, ontology and axiology (Saunders et al., 2007). First of all, epistemology is related to what represents acceptable knowledge. This can be divided into positivism, interpretivism and realism (Saunders et al., 2007). The main belief of positivism is that the social world exists externally and, consequently, its properties should be evaluated by objective methods rather than being interpreted subjectively (Easterby-Smith et al., 2008; Blumberg et al., 2005). Therefore, being a positivist implies:

…working with an observable social reality and that the end product of such research can be law-like generalisations similar to those produced by the physical and natural scientist (Remenyi et al.,1998, p32).

Moreover, the researcher is seen as an objective analyst and interpreter of a tangible social reality. In fact, neither the researcher nor the subjects of research should affect each other (Remenyi et al., 1998; Blumberg et al., 2005). Only phenomena that can be observed will lead to the production of credible data. The research is undertaken in a value-free way (Blumberg et al., 2005; Saunders et al., 2007). Positivism is more likely to be expressed mathematically (Remenyi et al., 1998). Interpretivism highlights that the world is socially constructed and subjective, the researcher is part of what is being observed and the research is conducted by human interest. Its main assumptions are not only that subjective interpretations of meanings are being observed, but also that a wide range of phenomena are used to explain beyond current knowledge (Blumberg et al., 2005). Realism is based on the fact that “what the senses show us as reality is the truth: that objects have an existence independent of the human mind” (Saunders et al., 2007, p. 104). However, it also stresses that subjectivity is required in order to understand individuals and their behaviours. Consequently, this philosophy is believed to share some of the principles of positivism and realism (Blumberg et al., 2005).

Secondly, ontology is concerned with the nature of reality, in other words, it evaluates the assumptions that researchers have regarding how the world works and the commitment held to certain views (Saunders et al., 2007). It discusses mainly subjectivism and objectivism. On the one hand, subjectivists are believed to try to stress what is exclusive to human beings and, consequently, natural and social sciences are contrasted. In fact, subjective phenomena could be studied by connections and overt behaviour. On the other hand, objectivists believe in subjecting knowledge to public verification and criticism. Indeed, publicly observable and replicable facts are said to be a requirement in these methods.

Thirdly, axiology is the branch of research that investigates judgements about value, in other words the chosen philosophical approach is a reflection of the researcher’s own values, as it is her choice of data collection techniques. The following dissertation is going to use forecasting techniques which tend to follow a positivist epistemological approach (Remenyi et al., 1998) as quantitative data is going to be analysed (Creswell, 1994) cited in (Collis and

Hussey, 2003); and although it has been suggested that the results can be interpreted in a more phenomenological way (Remenyi et al., 1998), rigorous statistical procedures will be used in order not to manifest any personal opinion leading to an objectivist ontological approach (Collis and Hussey, 2003). Moreover, the study will be carried out on a basis of being external to the researcher, who is aiming to reach unbiased and critically evaluated conclusions.

3.3 RESEARCH APPROACHES

The significance of the research approach is that it enables the researcher to make a more knowledgeable decision about the research design so as to provide high-quality answers to the original research question. Moreover, it helps the researcher to think about feasible research strategies and choices (Easterby-Smith et al., 2002) cited in (Saunders et al., 2007).

There are two main research approaches: deduction and induction. The deductive approach involves developing theories and hypotheses, and then designing a research strategy to test those hypotheses; whereas the inductive approach involves collecting data first, and as a result of the data analysis, theory is developed. Moreover, deduction is related to positivism, while induction is in accordance with interpretivism (Saunders et al., 2007).

The same source summarises the deductive approach in the following:

“Deduction emphasises:

- scientific principles
- moving from theory to data
- the need to explain causal relationships between variables
- the collection of quantitative data
- the application of controls to ensure the validity of data
- the operationalisation of concepts to ensure clarity of definition
- a highly-structured approach
- researcher independence of what is being researched
- the necessity to select samples of sufficient size in order to generalise conclusions” (Saunders et al., 2007, p. 121).

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