business essentials, 6 th edition ebert chapter 5: the global context of business 1

BUSINESS ESSENTIALS, 6TH EDITION EBERT

Chapter 5: The Global Context of Business

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After reading this chapter, you should be able to:

1. Describe the rise of international business and identify the major world marketplaces.

2. Explain how different forms of competitive advantage, import-export balances, exchange rates, and foreign competition determine how countries and businesses respond to the international environment.

© 2009 Pearson Education, Inc.

L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S

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1. Discuss the factors involved in conducting business internationally and in selecting the appropriate levels of international involvement and organizational structure.

2. Describe some of the ways In which social, cultural, economic, legal, and political differences act as barriers to International trade.

3. Explain how free trade agreements assist world trade.

© 2009 Pearson Education, Inc.

L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S

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Discussion Describe some of the ways in

which social, cultural, economic, legal, and political differences among nations affect international business?

Trade agreements, currency rates

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The Contemporary Global Economy

• Globalization

– The process by which the world’s various national economies and trading systems are fast becoming a single, highly interdependent system

• Exports: Domestically produced products sold in foreign markets

• Imports: Foreign products sold in domestic markets

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Globalization

The total volume of world trade today is immense—around $8 trillion each year.

In early 2010, China officially passed Germany as the world's top merchandise exporter.

Whereas in the past many nations followed strict policies to protect domestic companies, today more and more countries are aggressively encouraging international trade.

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Criticism to Globalization1. It allows businesses to exploit workers in less2. developed countries and bypass domestic

environmental and tax regulations. 3. Leads to the loss of cultural heritages .4. Benefits the rich more than the poor. As a result, many international gatherings of global

economic leaders including the GS and G20 meetings In Toronto in 2010- have been marked by protests and demonstrations.

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The Major World Marketplaces• Distinctions Based on Wealth1. High-income countries: per capita income is greater

than $11906 dollars per year.

2. Upper middle-income countries: per capita income is between $3,856 and $11,906 per year. E.g., Columbia, Peru, Lebanon, Hungary, Poland, Turkey, Mexico, Argentina, and South Africa.

3. Low middle-income countries: per capita income is between $976 and $3,856 per year. E.g., Thailand

4. Low-income countries (often called developing countries): have an annual per-capita income of U.S. $975 or less. Benin, Ethiopia, Haiti


The Major World Marketplaces

1. NAFTA countries.1. European Union (EU) and Eastern Europe.2. Pacific Asia Pacific Asia consists of Japan,

China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, the Philippines, and Australia (which Is technically not In Asia but is included because of proximity).

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The Rising Power of Emerging Markets

The Role of BR IC: Brazil, Russia, India, and China. The status of these four nations has risen In

International trade for different reasons. Brazil is strong in commodities and agriculture, Russia Is a powerful energy supplier, China is a major hub of manufacturing activity. India has become a leading service provider at

various levels ranging from basic customer service call centers to engineering solutions providers.

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Forms of Competitive Advantage• Absolute Advantage

– When a country can produce something that is cheaper and/or of higher quality than any other country

– An advantage based on possessing a scarce resource (e.g., oil, Coffee production in Brazil) or favorable physical location

• Comparative Advantage– When a country can produce goods more efficiently or

better than other countries can produce the same goods– An advantage based on superior productivity (e.g.,

technologically advanced manufacturing capability)

© 2009 Pearson Education, Inc. 11

Forms of Competitive Advantage (cont’d)

• National Competitive Advantage– Conditions favoring heavy involvement in

international business:

1. Factor conditions—labor, capital, entrepreneurs, physical resources, and information resources

2. Demand conditions—a large domestic consumer base that promotes strong demand for innovative products


Forms of Competitive Advantage (cont’d)

– Conditions favoring heavy involvement in international business:

1. Related and supporting industries—strong local or regional suppliers and/or industrial customers

2. Strategies, structures, and rivalries—domestic firms and industries that stress cost reduction, product quality, higher productivity, and innovative products.

In 2009, the top three countries on the list were Switzerland, the United States, and Singapore.


Import-Export Balances

• Balance of Trade– The total economic value of all the products that a country

exports minus the economic value of all the products that it imports

• Trade Surplus– A positive balance of trade that results when a country

exports more than it imports

• Trade Deficit– A negative balance of trade that results when a country

imports more than it exports© 2009 Pearson Education, Inc.

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e.g., Canadian Exports to and Imports from in 2009

Exports in Billion $ Imports in Billion $

United States 271.2 236.5European Union 32.1 38.7Japan 8.8 9.3All others 57.4 89.6

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FIGURE 4.3 U.S. Imports and Exports


FIGURE 4.4 U.S. Trade Deficit


Import-Export Balances (cont’d)• Balance of Payments

– The flow of money into or out of a country

• The money that a country pays for imports and receives for exports—its balance of trade—comprises much of its balance of payments

• Exchange Rate

– The rate at which the currency of one nation can be exchanged for that of another

• Fixed exchange rates

• Floating exchange rates© 2009 Pearson Education, Inc.18

Exchange Rates Impact Global Trade• When an economy’s currency is strong:

– Domestic companies find it harder to export products

– Foreign companies find it easier to import products

– Domestic companies may move production to cheaper production sites in foreign countries

• Implications for the balance of trade?

• Buying petrol from Egypt: 10 letters = 20 E pounds= 10 shekels, when E pound equal 0.5 shekel.

• If E pound value 1 shekel.

• It means 10 letters = 20 E pounds= 20 shekels.© 2009 Pearson Education, Inc.

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Does It Make Sense to Go International?Does It Make Sense to Go International?

Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc. 2 - 2 - 2020

YESYES

Is there international demand for the firm’s product?

NONO

Stay Domestic

Can the product be

modified to fit a foreign market?

NONO

YESYES

Is the foreign business

climate suited to imports?

NONO

Does the firm have or

can it get the

necessary skills and

knowledgeto do

business abroad?

YESYES

NONO

YESYES

Go International20

International Business ManagementManaging means making decisions. We examine the three most basic decisions that a

company's management must make when faced with the prospect of globalization.

First decision: whether to "go International“ at all. company may feel It has to shift its production to a low-cost foreign country to remain competitive.

Second decision: decide on company's level of International Involvement.

Third Decision: decides on the organizational structure that will best meet its global needs.

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International Business Management• Going International

– Gauging International Demand• Foreign demand for a company’s product may be greater

than, the same as, or weaker than domestic demand– Adapting to Customer Needs

• A firm must decide whether and how to adapt its products to meet the special demands of foreign customers

– Outsourcing• Paying suppliers and distributors to perform certain

business processes or to provide needed materials or services

– Offshoring• Outsourcing of production processes to foreign countries.


Levels of International Involvement• Exporters: Make products in one country to

distribute and sell in others• Importers: Buy products in foreign markets and bring

them home for resale• International firms: Conduct much of their business

abroad and may maintain overseas manufacturing facilities. E.g., Hershey which buys chocolate from different locations but manufactures all in the U.S. Their primary focus remains on their domestic market.

• Multinational firms: Design, produce, and market products in many nations. E.g., Nestle produces and sells in many nations. They don’t think than they have domestic market.


The economic importance of multinational firms

A. In 2009, Royal Dutch/Shell ranked number one in the Fortune Global 500 rankings with over 102 000 employees and US$458 billion in sales.

B. Exxon was second with 105 000 employees and US$443 billion. in sales.

C. Walmart ranked third with US$405 billion in sales and 2.1 million employees (with 700 000 International employees in Its 4000 international outlets).

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International Organization Structures of firm’s operations

• Independent Agent–A foreign individual or organization

that represents an exporter in foreign markets.

–These people have the advantage of knowing the local market, operating in the market, but also may represent other competitive brands.


International Organization Structures of firm’s operations

• Licensing Arrangements (or Agreements)– Domestic firms give foreign individuals or

companies exclusive rights to manufacture or market their products in that market.

• Branch Offices– A firm sends its own managers to overseas

branch offices so that it will have more direct control than it does over agents or license holders


International Organization Structures (cont’d)

• Strategic Alliance (or Joint Venture)– A company finds a partner firm in the country in

which it wants to do business– Each party agrees to invest resources and capital

into a new business or to cooperate in some mutually beneficial way

• Foreign Direct Investment (FDI)– Involves buying or establishing tangible assets in

another country


International Organizational Structures

• Foreign Investment

• Strategic Alliances

• Branch Offices

• Licensing Arrangements

• Independent Agents

INV

OL

VE

ME

NT

HIGH

LOW

Barriers to International Trade

Social and Cultural Social and Cultural DifferencesDifferences

Social and Cultural Social and Cultural DifferencesDifferences

Economic Economic DifferencesDifferencesEconomic Economic

DifferencesDifferences

Legal and Political Legal and Political DifferencesDifferences

Legal and Political Legal and Political DifferencesDifferences


Take Time to Learn the Culture Thoroughly!

Este es nuestro

nuevo auto: el NOVA!

Ha, ha, ha, ha, ha, ha!!!

Cultural and social differences

A. include language, social values, and traditional buying patterns. Whether differences are obvious or subtle, ignorance of them can be embarrassing and expensive.

B. The classic example: General Motors introduced the Chevy Nova in Spanish speaking countries—where “no va” means “doesn’t go.”

C. The original translation of the Intel Pentium IV computer chip in Korean was “chip of death.” (!!!)

D. Discussion: identify other examples from your personal experience.

The Customer’s LanguageA Critical Business Success Factor

A. In the U.S. alone, 18% of the population does not speak English at home.

B. Only 48% of the world’s Web users are native English speakers.

C. Consumers are four times more likely to buy a product on the Internet if the website is in their preferred language.

Source: Time Global Business, Nov. 2001

Economic Differences

To operate effectively in another country, businesses must know when, and to what extent, the government is involved in a given industry. (role of government)

Legal and Political Differences• Quotas, Embargoes, Tariffs, and Subsidies

– Quota: Restricts the number of products of a certain type that can be imported, raising the prices of those imports

– Embargo: Government order forbidding exportation and/or importation of a product or all products from a specific country

– Tariffs: Taxes on imported products

– Subsidy: Government payment to help a domestic business compete with foreign firms

• Protectionism

– The practice of protecting domestic business at the expense of free market competition


Legal and Political Differences (cont’d)

• Local Content Laws– Requirements that products sold in a country be

at least partly made there. E.g., write made in U.S• Business Practice Laws

– Host countries govern business practices within their jurisdictions

• Cartels– Associations of producers that control supply and

prices, such as the oil cartel• Dumping

– Selling a product abroad for less than the cost of production at home


Overcoming Barriers to Trade

Through many international free-trade treaties. A. The most significant of these are: the General

Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), the European Union (EU), and the North American Free Trade Agreement (NAFTA).

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Trade Agreements and Alliances

• Significant Agreements and Treaties– North American Free Trade Agreement

(NAFTA)• Includes Canada, Mexico and the United

States.• The trade agreement increases direct

foreign investment, increases exports and imports and creates jobs.

• It also eliminates most tariffs and duties between the three countries.


Trade Agreements and Alliances• Significant Agreements and Treaties

–European Union (EU)• This union includes most European nations

(27 countries), but notably absent is Switzerland.

• The effects of this trade union is a common currency, elimination of quotas, removal of trade barriers, and sets uniform tariffs on internally traded EU imports and exports.

• It also allows its citizen members to travel between member nations without visas.


Trade Agreements and Alliances (cont’d)

• Significant Agreements and Treaties– General Agreement on Tariffs and Trade (GATT):

• Signed after World War II. Its purpose was to reduce or eliminate trade barriers, such as tariffs and quotas.

– World Trade Organization (WTO). Members 153 countries• Began on January 1, 1995• Goals:

1. Promote trade by encouraging members to adopt fair trade practices.

2. Reduce trade barriers by promoting multilateral negotiations.

3. Establish fair procedures for resolving disputes among members.


Homework

Page 133: answer the questions 1-6

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business essentials, 6 th edition ebert chapter 5: the global context of business 1

Documents

international trade

lessdeveloped countries

developing countries

highincome countries

lowincome countries

rise of international

international environment

upper middleincome countries