Importance of Decision Making in Economic Geography

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11th Jun 2020 Business Assignment Reference this

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Introduction

Ample preparation and insightful knowledge into the economic conditions of a market could be the reason for success or failure in a business venture. For a business to attain success when launching a product in any economy, it is vital to consider the current economic conditions of said economy and also to understand the market you are entering into.  In this document we will be looking at general market conditions and then focusing on France’s business environment and consumer sentiment. Macroeconomics deals with the large-scale economy as a whole and it’s general economic factors. The macroeconomic conditions of an economy has a real effect on businesses and should therefore be monitored closely. “Stock market returns are significantly correlated with inflation and money growth”. (Flannery & Protopapadakis, 2002) . Values such as consumer spending, inflation and government expenditure all have a direct impact on businesses and their profitability. Another important element of launching a product is the opportunities and threats present in a certain market. Launching a product in France should not be approached in the same way one would do so in China or Australia. Population, culture, government policies and general consumer sentiment can have a huge impact on how a product will be received. In this briefing document we will be looking at: macroeconomic conditions, in particular inflation, government spending, GDP and unemployment. Competition in the French market and French regulations will also be touched upon, as well as consumer sentiment markedly with relation to Brexit.

The purpose of this briefing is to provide the reader with an astute knowledge of macroeconomic principles and the market conditions in France to help launch a product or start a business in France.

French Market Overview

The French market presents itself as an attractive region to conduct business, it has a population of about 66 million and is the 7th largest economy in the world per IMF figures. (World Economic Outlook Database, 2018)

It’s located in western Europe and operates as an open market, meaning that it can trade freely with other countries around the world. Its membership of the European Union makes it especially attractive to do business in as it has open borders and can trade with other European countries without large tariffs being imposed. The French market is also known for its strong resistance to economic shocks. This is advantageous for business as it means recessions are not only less likely to occur but will also be shorter in duration. “It also stands out for its resistance to shocks, from the 2008 financial crisis to the European sovereign debt crisis of 2011-2012. Between 2008 and 2016, real GDP in France rose at an average annual rate of 0.6%”. “The French economy managed at that time (2011) to avoid relapsing into recession”. (Baudchon, Paris)

Macroeconomic Conditions

Importance of macroeconomic conditions

The role of macroeconomics in relation to firms can be seen in the way individual businesses react to external economic conditions. Popular measures of economic activity are: unemployment, GDP, inflation and government expenditure. Factors such as these can greatly affect individual businesses. For example, a rise in inflation indicates a general rise in price which causes a fall in real income of people and hence their purchasing power declines. This creates a fall in demand for business’s products. Inflation leads to people asking for higher wages which leads to rises in labour costs and hence lower profit for businesses. A high and unstable inflation rate isn’t good for business confidence as firms won’t be sure on what their prices and costs may be in the future. This will reduce their capital investment spending. Next we will look at several of these macroeconomic indicators in further detail to attain a better perspective of the French economy.

Unemployment

The unemployment rate is defined as the number of people actively searching for work but cannot find it, as a proportion of the labour force. The unemployment rate is an important figure to be aware of as it is often used to test how healthy the economy is. Unemployment is directly correlated to consumer spending. When there is a high rate of unemployment people are likely to spend less money, this causes demand for a firms goods to decrease, leading to a firm laying off workers, in turn creating more unemployment and further stifling spending and consumption. Firms lay off workers instead of decreasing wages due to a theory called “sticky wages”. This is the theory that wages do not adjust quickly to changes in the market.  This negative cycle indicates the advantage of a low unemployment rate. “Consumer spending – when we trace out the monthly path of nondurable spending, we find a drop of six percent at unemployment onset.” (Ganong & Noel, 2019). According to a survey by Aguiar & Hurst, unemployment decreases both spending and consumption.

In regards to the French economy, it has a historically high level of unemployment averaging 9.1% of the labour force in 2018 in comparison to an OECD average of 5.30%. (OECD,2019).  However, it is a rate which is steadily declining and leading to greater consumer confidence. “Fears of unemployment, in particular, have fallen thanks to the good private job creation figures over the first six months and the decline in unemployment to 8.5%”. “Lower unemployment rates will drive consumer confidence up. As a result, private consumption should pick up in the second half of the year. We expect 1.4% growth in 2020.” (Manceaux, 2019).

GDP

GDP stands for gross domestic product and is one of the most widely used measures of an economy’s production or output. It can be defined as the total value of goods and services produced within a country’s borders within a specific time period, usually annually. GDP is an accurate indication of an economy’s size. “Such like a satellite in space can survey the weather across an entire continent so can the GDP give an overall picture of the state of the economy. It enables the government to judge whether the economy is contracting or expanding, whether the economy needs a boost or should be reined in a bit, and whether a severe recession or inflation threatens. Without measures of economic aggregates like GDP, policymakers would be adrift in a sea of unorganized data.” (Samuelson & Nordhaus, 2010) . GDP tends to rise over time, this is known as economic growth and is one of the most important factors when considering entering a market. The equation for GDP is GDP = C + I + G + NX . This formula shows the relationships between GDP and consumption, investment, government expenditure and net exports.  France can be classed an affluent country due to its high GDP per capita. During the financial crisis of 2008 it was $35,100 compared to the OECD average of $34,936. The current GDP per capita of France is $45,149. (OECD Data, 2018)

Government expenditure and taxation

The role of government expenditure and taxation in the macroeconomic environment can have large implications for business. When launching a product in France one must be aware of the government policies in place. Through monetary (interest rate and money supply) and fiscal (taxation and expenditure) policies a government can have different degrees of input or influence over a societies’ economy. There are 3 main types of government roles within an economy: an economy where a government has little to no intervention, an economy where the government will intervene to stimulate growth when needed and an economy where the government sets prices and intervenes regularly in the market. France has a mixed-market economy whereby the government will intervene in the market to stimulate growth during recessions and will use fiscal policies to fund public services which otherwise would not exist. One of the most famous economists of all time John Maynard Keynes was of the view that government’s role is very important when the economy is in a recession or depression. He believed that governments should increase spending to stimulate a growth in economic activity.  Therefore, during a recession a high level of government spending would be preferable to help the economy to return to growth and recover at a quicker rate. In 2018, government spending in France was 56% of GDP in comparison to an EU average of 46%. (Trading Economics, 2019). (Eurostat, 2019). The level of government spending has many effects on all businesses. For example, for firms selling goods and services to individual consumers and to other firms an increase in government spending may mean higher taxes which would lead to a reduction in the real income of consumers who in turn, will buy less of the firms goods or services. On the other hand, many businesses rely on government spending for their revenues and profits. For any firms that do business directly with the public sector, demand is directly linked to how much the government is spending.

Government taxation is also another component worth considering when launching a product in France. Taxation or abatements policies can hinder or support a product launch depending on policies and the product in question. Tax abatements are defined as a reduction or exemption from taxes granted by a government for a specified period. This is usually to encourage or incentivise certain activities such as investment in capital equipment. This is applicable as a tax abatement on property could significantly reduce the property tax paid on a firms property. The French budget spends $135bn on tax repayments and abatements in 2019. (Statista, 2019). This figure is a very significant part of the French budget and is therefore attractive for businesses.

Competition in the French Market

When assessing the prospects of success or failure in any product launch one of the most obvious aspects to gauge is competition in the market. Competition is the rivalry between firms who are selling similar services and products with a goal of achieving profit, revenue and market share growth.We have already assessed that France has one of the largest markets in the world. While this is attractive from a potential customer point of view, it also implies greater amounts of competition from rival firms. There are 4 main types of competition: perfect competition, oligopolies, monopolies and monopolistic competition.

  • In perfect competition, there are so many buyers and sellers who all are well informed, causing the market price to be beyond the control or influence of individual firms.
  • In an oligopoly, a small number of firms supply a sizable portion of products in the market. They exert some control over price, but due to the similarity between their products, when one business lowers their prices, the others must follow.
  • In a monopoly, there is only one company in the market. The market could be a specific geographical area or a particular service. As there is no competitors the sole seller is able to control prices.
  • In a monopolistic competition setting, many firms offer differentiated products, that is products which differ marginally but serve similar purposes. By making consumers aware of the product differences, firms are able to exert some control over the price of their goods or services.

Many businesses would ideally like to be the sole firm in a given market, creating a monopoly. In this environment the company could set prices as they wish, however this is generally against the interest of consumers and therefore a firm acting as a monopoly are usually part of government providing a public service, or are not allowed to operate at all. A situation where a monopoly arises is also usually due to extreme barriers to entry into the market, therefore most businesses will not attempt to occupy this position.

Whether an economy is free-market or mixed can have a bearing on the attractiveness of the market. These topics have been touched upon earlier when discussing the level of government intervention in an economy. France operates under a mixed-market economy which has numerous advantages. A mixed market economy allows better distribution of resources to where they are needed most. This type of market promotes innovation. Individuals are free to own property in a mixed economy, which encourages people to work even more, resulting in greater consumer spending.

France has the second-highest ratio of spending to GDP and the fourth-highest rate of taxation among all OECD nations. In recent years the government has been attempting to promote more private enterprise, with government holdings being let off in sectors such as telecommunications and airways. This is leading to the French economy to become more free and allowing individual firms to occupy the spaces left by government entities. Today, France is considered to be 63.8% free and ranks among 35th out of 41 for the freest European economies. (Heritage Foundation, 2019)

Market Segmentation

Once a decision has been made to enter a market in an economy, it is essential not to overlook the specific market in which a business may wish to enter. The method of deciding this position is known as market segmentation and is the process of segmenting a market of potential customers into groups on the basis of differentiating factors. The four main types of segments are geographic, demographic, behavioural and psychographic.

We will take a brief look at each of these in relation to France.

  • Geographic segmentation: In terms of geography alone, Paris is one of the most enticing cities in not only France but also the world, to do business. Paris’ GDP is the fifth-largest in the world. If Paris were a country, it would rank as the 17th largest economy in the world. There are 18 regions in France. Île de France, within which Paris is located, has a population of 12.21 million. This makes it the most populous region in France. These are all important factors to consider as a firm would have a much larger potential customer base in Paris than in Brittany for example.
  • Demographic segmentation:  The most frequently used demographic segmentations are age and gender. The largest age demographic in France is 25-54 years. In terms of gender the ratio is 0.96 males to 1 female. Indicating that there is a slightly larger market for a product launched towards women. (Index Mundi, 2018).
  • Psychographic segmentation: This form of segmentation groups potential customers based on personality traits, values, interests and lifestyles. French consumers are particularly interested in services, especially digital, cultural and travel related. The number of French people interested in sustainable development and responsible consumption is growing rapidly, and today France offers the second biggest organic agriculture in the European Union. (Santander Trade, 2019)
  • Behavioural segmentation: Behavioural segmentation is based on the buying patterns of customers like usage frequency, brand loyalty and benefits needed. For example the French take more holidays than anyone else in Europe – “an average of 30 days compared with 26 elsewhere on the continent and 15 worldwide. Domestic travel spending generated 69.7% of direct Travel & Tourism GDP in 2012 in France.” (World Travel & Tourism Council, 2013)

Regulations

Government regulations should too be taken into account when looking at market opportunities and weaknesses. If a product isn’t suitable under the regulations in a certain region then it could be prohibited from launching at all.  Competition law is also a decisive element to take into account. For both of these issues Frances membership of the European Union means that it’s laws are similar to most other EU countries and that EU law applies there.

Strong EU law initiatives have prompted changes in the framework of French laws, which is something businesses will be glad to hear as France often had too much state intervention in this area of the economy because many companies were monopolies owned by the French government. Restructuring in monopoly sectors is having an impact on the legal structure that once supported state intervention, leading it to embrace free market principles. Liberalising reforms pursued by all governments are leading to irreversible changes in France’s traditional approach. All companies that operate in France must abide to the French competition law. These laws all come under EU Competition Law where anti-competitive practices can be fined. These kind of practices include price fixing.

Consumer sentiment and impact of Brexit

Consumer sentiment deals with consumers attitudes and behaviours when it comes to spending and is focused on their level of confidence. It is defined by the consumer confidence index. The confidence perceived is often based on expectations on the development of national unemployment and consumer prices over the upcoming 12 months.  An index value above 100 indicates a more optimistic outlook of consumers on the economic situation. In France this figure stood at 102 in July. (Statista, 2019). While the EU average in July 2019 was 100.32. (OEDC Data, 2019). This is positive for businesses in France as it indicates consumers are more likely to spend more as they are not as fearful of unemployment.

Possibly the most talked-about topic of the past number of years has been the fallout from Brexit and its possible economic impact. Brexit is a term widely used to represent the United Kingdom’s vote to leave the European Union. This is a large issue for France as it can greatly affect consumer confidence and will massively affect trade. There will be possibly 141,320 job losses in France if there is a hard Brexit. (Vandenbussche, 2019). Many firms have begun to “Brexit-proof” themselves in fear of what may occur following the UKs departure. Businesses must consider which markets they are trading with and may have to look at alternative suppliers in wake of Brexit. It is estimated that France would be the third most affected country by a hard Brexit, with new trade terms potentially costing French companies €4 billion a year. France exported 10% of its food and drinks in 2017. Therefore food businesses like cheese and wine producers would be among those hit by tariffs and regulatory controls. (Oliver Wyman, 2018). It is also estimated that Brexit would slow economic growth in France by about 0.2 percentage points. (Bézieux, 2019)

Conclusion

In this document we have looked at the general French market, its macroeconomic conditions, competition, regulations and consumer sentiments. These areas are integral components to take into account when launching a product in France or any foreign market. Every business must have an adept cultural and economical knowledge of a region before they decide to enter the market. We have discussed what macroeconomic conditions are and have shown the real world impacts for businesses that these factors can have. Unemployment, GDP and Inflation are all intrinsically linked and will all have significant impacts on a firm operating in France. This is likewise for competition in the French market and the regulations surrounding it. Brexit and the uncertainty for consumers and companies is also a significant cause for worry. When all of these elements of economic theory are combined, a good starting place for a product launch can be found. A company attempting to enter a market without this economic awareness would simply be setting themselves up for failure. When economic theories are utilised and applied correctly to specific geographical areas, the results can aid businesses to obtain a competitive advantage over their rivals and boost profit.

Overall, the French market appears as an attractive place for firms to do business. It boasts a strong economy, a high level of freedom and equitable regulations.

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