Exploring Global BusinessChapter 4

Reasons for Expanding Globally

Achieve Economies of ScaleThe cost advantage that comes with increased

output of a product.What causes economies of scale?

An inverse relationship between the number of products produced and the per unit fixed costs .Fixed costs are those costs that will not change due to

an increased output. Examples: Rent, parts of utilities, insurance

Reasons for Expansion (con’t)

New opportunities for profitEmerging markets grow faster than settled

markets. New customers, new opportunities

Ability to spread out the risk

Advantages and Capabilities

Companies and countries need to look at what they do well and capitalize on thatAbsolute Advantage

Occurs when one company or country is more efficient at producing a particular product than another company or country.

This can be developed throughNatural resourcesEfficient processes that have been developed

This, however, can quickly change as other companies or countries can learn to capitalize on this.

Comparative AdvantageCountries should specialize in certain class of products

for exports, but import the rest, even if the country holds an absolute advantage in all products.

Measuring International Trade

Exports-Imports

Balance of Trade

Top Countries

Deficits Surpluses

China Hong Kong

Japan Netherlands

Germany United Arab Emirates

Mexico Australia

Balance of Payments

exports + Receipts of Loans + Investments-imports+ investments in foreign countries

Balance of Payments (BoP)

Currency Exchange Rates

Value of one nation’s currency relative to the currencies of other nations.

Can cause an economic barrier to trade“floating” system

Barriers: Social and Cultural

CultureThe beliefs and values on the basis which people

interpret experiences and behave, individually or in a group.

Cultural DifferencesWestern World Eastern and Latin America

Autonomy Harmony

Self Expression Relatedness

Individual achievement Success of the group

Tend to think analytically Tend to think holistically

Build trust through “coming through” Build trust first by building a relationship

Language Barriers

“Effective communication between international business partners is critical for global success.”Cultural ValuesLocal customsReligious attitudes

Economic Barriers

Currency Rate (already discussed)Government Controls

A high level of government control, as in a command or socialist economy, usually results in a greater number of regulations, taxes, and laws that directly and indirectly restrict international trade.

Tariff

Tax on imports: transaction cost!!!!!Done under the guise of “protecting”

domestic products from foreign competition

Anti-Dumping Legislation

Dumping: foreign companies sell goods at prices far lower than domestic market prices.

GATT: General Agreement on Tariffs and TradeA treaty that was implemented after WWII to regulate

world trade in order to aid in recovery following the war.

Requires that a country proves that there are dumped imports and that there is injury to a domestic industry and a link between the two before implementing Anti-Dumping legislation.

Arguments against Trade Restrictions

Tariffs: Raise the prices on imports.

Trade restrictions may cause retaliatory action on the part of other countries.

Cause job loss

U.S. Foreign Corrupt Practices Act of 1978

Prohibits US firms and individuals from paying bribes to foreign officials to further a business deal.

Organization of Economic Cooperation and Development

Reducing Trade Barriers

What steps can be taken to reduce trade barriers?GATTWTO

Regional Trade Partnerships

European Union (EU)Original members

Country Year admitted Euro?

Belgium 1958 Y

France 1958 Y

Germany 1958 Y

Italy 1958 Y

Luxembourg 1958 Y

Netherlands 1958 Y

Subsequent membersCountry Year Euro?

Denmark 1973 No

Ireland 1973 Yes

United Kingdom 1973 No

Greece 1981 Yes

Portugal 1986 Yes

Spain 1986 Yes

Austria 1995 Yes

Finland 1995 Yes

Sweden 1995 No

Former Soviet Union StatesCountry Year Euro?

Cyprus 2004 Yes

Czech Republic 2004 No

Estonia 2004 Yes

Hungary 2004 No

Latvia 2004 Yes

Lithuania 2004 Yes

Malta 2004 Yes

Poland 2004 Yes

Slovakia 2004 Yes

Slovania 2004 Yes

Last countries addedCountry Year Euro?Bulgaria 2007 No

Romania 2007 No

Croatia 2013 No

NAFTA

North American Free Trade AgreementMembers: United States, Canada, Mexico“giant sucking sound of American jobs going to

Mexico”

OPECOrganization of Petroleum Exporting Countries

September 1960 in Iraq

Algeria Angola

Ecuador Iran

Iraq Kuwait

Libya Nigeria

Qatar Saudi Arabia

United Arab Emirates Venezuela

Before going global

1. Assess the demand for the product

2. Can the product be adapted to the particular needs and culture of the customers in the target market? Can McDonalds sell a Big Mac to a culture that is vegetarian?

How much Involvement?How much risk?

HighDirect Foreign Investment

ProfitPotential

Joint Venture/Strategic Alliance

Licensing/Franchising

Importing/ExportingLow

Low HighFinancial commitment, Risk, Marketing control