Chapter 8Global Management

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What Is Global Business?

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Global Business

The buying and selling of goods andservices by people from different countries.

The Impact of Global Business

• Multinational corporations– A corporation that owns businesses

intwo or more countries.

• Direct foreign investment– A method of investment in which a

company builds a new business or buys an existing business in a foreign country

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Trade Barriers

• Tariff – direct tax on imported goods

• Nontariff barriers– quotas– voluntary export restraints– government import standards– subsidies– customs classification

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Trade Agreements

General Agreement on Tariffs and Trade (GATT)

• Existed from 1947 to 1995• Agreement to regulate trade among

more than 120 countries• “Substantial reduction of tariffs and

other trade barriers and the elimination of tariffs.”

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GATT

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GATT made it easier and cheaper for consumers in all countries to buy foreign products.

– Tariffs were cut 40 percent on average worldwide by 2005– Tariffs were eliminated in 10 specific industries– Stricter limits were put on government subsidies– GATT established protections for intellectual property– Trade disputes between countries now are fully settled by

arbitration panels from the WTO

World Trade Organization

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Regional Trading Zones

• Maastricht Treaty of Europe• NAFTA• CAFTA-DR• UNASUR• ASEAN• APEC

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Maastricht Treaty of Europe

• Formed in 1992 with 12 European countries

• Total membership is now 25 countries

• Transformed these countries into the European Union, forming one economic market and one common currency (the Euro)

• Opened up and simplified trade among member nations

http://europa.eu.int/Web Link

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NAFTA

• North American Free Trade Agreement between Canada, United States, & Mexico

• Liberalizes trade among these three nations

• Eliminates most tariffs and barriers

http://www.mac.doc.gov/nafta/Web Link

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CAFTA and USAN

• Central American Free Trade Agreement

• Union of South American Nations

• Fastest-growing place for U.S. exports.

• Common infrastructure to support trade.

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ASEAN and APEC• ASEAN

– Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam

• APEC– Australia, Canada, Chile, China, Hong Kong, Japan,

Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, United States, and ASEAN members (except Cambodia, Laos, and Myanmar)

http://www.aseansec.orghttp://www.apecsec.org.sg

Web Link

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Consumers, Trade Barriers, and Trade Agreements

Decrease price of:food

clothingnecessities

luxuries

Decrease price of:food

clothingnecessities

luxuries

Increase:choices

competitionpurchasing power

Increase:choices

competitionpurchasing power

Free Trade AgreementsFree Trade

Agreements

Consumers, Trade Barriers, and Trade Agreements

• Why do trade barriers and free trade agreements matter to consumers?– Trade agreements increase choices,

competition, and purchase power…decrease prices.

• Why do trade barriers and free trade agreements matter to managers?– Free trade agreements create new business

opportunities……but also intensify competition.

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Going Global

• Once a company has decided that it will go global, it must decide how to go global. – For example, if you decide to sell in Singapore,

should you try to find a local business partner who speaks the language, knows the laws, and understands the customs and norms of Singapore’s culture?

– Or should you simply export your products from your home country?

– What do you do if you are also entering Eastern Europe, perhaps starting in Hungary?

– Should you use the same approach in Hungary that you used in Singapore?

Consistency or Adaptation

• Global consistency– when a multinational company has offices,

manufacturing plants, and distribution facilities in different countries and runs them all using the same rules, guidelines, policies, and procedures

• Local adaptation– when a multinational company modifies its rules,

guidelines, policies, and procedures to adapt to differences in foreign customers, governments, and regulatory agencies

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Forms for Global Business

Exporting

Cooperative contracts

Strategic alliances

Wholly

owned

affiliates

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Exporting

• Selling domestically made products to foreign markets

• Advantages– makes company less dependent on domestic sales– gives company more control

• Disadvantages– goods subject to trade barriers– transportation costs

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Cooperative Contracts• Licensing

– a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce its product, sell its service, or use its brand name in a particular foreign market.

• Advantages– companies earn money without investing more money– companies can avoid trade barriers

• Disadvantages– licensor gives up control over product quality– licensees can become competitors

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Cooperative Contracts

• Franchise – a collection of networked firms in which the

manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organization, the franchisee.

• Advantages– fast way to enter foreign markets– gives franchisor additional cash flow

• Disadvantages– loss of control– culture bound

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Strategic Alliances

When companies combine key resources, costs, risks, technology, and people. Most

common form is joint ventures.

•Advantages– companies avoid trade barriers– companies only bear part of the costs– partners can learn from each other

•Disadvantages– Profits have to be shared– merging of cultures

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Wholly Owned Affiliates

Approximately one-third of multinational companies enter foreign markets through wholly

owned affiliates.

Foreign offices, facilities, and manufacturing plants that are 100 percent owned by the parent

company

• Advantages – parent company receives all of the profits and has complete control

• Disadvantages– losses for parent company can be enormous

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Global New Ventures

• Companies used to evolve slowly from small operations selling in their home markets to large businesses selling to foreign markets.

• As companies went global, they usually followed the phase model of globalization.

• Recently, however, three trends, as shown on this slide, have combined to allow companies to skip the phase model. – Quick, reliable air travel

– Low-cost communication technologies– Critical mass of experienced businesspeople

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Common Factors of Global New Ventures

The company founders successfully develop And communicate the company’s global vision.The company founders successfully develop And communicate the company’s global vision.

Several foreign markets are entered at the same timeSeveral foreign markets are entered at the same time

Finding the Best Business Climate

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Access toGrowingMarkets

Access toGrowingMarkets

Location to

Build

Location to

BuildMinimalPolitical

Risk

MinimalPolitical

Risk

Growing Markets

• Two factors that help companies determine the growth potential of foreign markets– Purchasing power

• comparison of a standard set of goods and services in different countries

• more means greater growth potential

– The degree of global competition• the number and quality of companies already in the

market

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How Consumption of Coca-Cola Varies with Purchasing Power around the World

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Choosing a Location

• Qualitative factors – workforce quality– company strategy

• Quantitative factors – kind of facility being built– trade barriers– exchange rates– transportation and labor costs

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World’s Best Cities for Business

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Minimizing Political Risk• Political uncertainty

– associated with the risk of major changes in political regimes that can result from war, revolution, death of political leaders, social unrest, or other influential events

• Policy uncertainty– refers to the risk associated with changes

in laws and government policies that directly affect the way foreign companies conduct business.

– this is the most common form of political risk in global business and perhaps the most frustrating.

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Strategies for Dealing with Political Risk

• Avoidance– divesting or selling business to avoid risk

• Control – active strategy to prevent or reduce

political risks

• Cooperation– using joint ventures and collaborative

contracts

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Cultural Differences

• National culture is the set of shared values and beliefs that affects the perceptions, decisions, and behavior of the people from a particular country.

• The first step in dealing with culture is to recognize that there are meaningful differences

• Professor Geert Hofstede research shows that there are five consistent cultural dimensions across countries

Becoming Aware of Cultural Differences

Five Dimensions of Culture• Power distance

–the extent to which people in a country accept that power is distributed unequally in society and organizations

• Individualism–the degree to which societies believe that individuals should be self-sufficient

• Masculinity/femininity–the difference between highly assertive and highly nurturing cultures

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Becoming Aware of Cultural Differences

• Uncertainty avoidance–the degree to which people in a country are uncomfortable with unstructured, ambiguous, unpredictable situations.

• Short-term/long-term orientation– addresses whether cultures are oriented to the present and seek immediate gratification or to the future and defer gratification.

Hofstede’s Five Cultural Dimensions

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Language and Cross-Cultural Training

• Documentary training

• Cultural simulations

• Field simulation training

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Spouse, Family, and Dual-Career Issues

• Adaptability screening– assesses how well managers and

families are likely to adjust to a foreign culture

Language and cross-cultural training for the family is just as, if not more,

important than training for employees.

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Holden Outerwear

1. Which stage of globalization characterizes Holden Outerwear’s international involvement?

2. Identify Holden’s primary approach to entering the international market. What are the benefits of this entry strategy?

3. What are the challenges of international management for leaders at Holden?

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