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EXPLORING BUSINESS V. 2.1 By Karen Collins

CHAPTER 3 BUSINESS IN A GLOBAL ENVIRONMENT

CHAPTER OBJECTIVES Explain why nations and companies engage in international trade and discuss how trade between nations is measured Identify opportunities in international business Appreciate challenges created by cultural, economic, legal, and political differences Describe ways governments and international bodies promote and regulate global trade Discuss initiatives designed to reduce trade barriers and promote free trade Understand how to prepare for a career in international business

WHY DO NATIONS TRADE? Because no national economy can produce all the goods and services that its people need.

ABSOLUTE ADVANTAGE Nation is the only source of a particular product, or It can make more of product using the same amount of or fewer resources than other nations.

COMPARATIVE ADVANTAGE Nation can produce product at lower opportunity cost. What is an Opportunity cost? Products that country is unable to make in order to produce something else. When a country specializes in a particular product, it sacrifices production of other products.

MEASURING TRADE Balance of Trade: difference between value of country’s exports and the value of its imports. Balance of Payments: difference over time between the total flow of money into a country and the total flow of money out.

BALANCE OF TRADE TRADE SURPLUSTRADE DEFICIT Nation sells more than it buys (favorable) Nation buys more than it sells (unfavorable)

US TRADE AND PAYMENT BALANCE,

IMPORTING VS. EXPORTING Import Goods In Cash Out Export Goods Out Cash In

INTERNATIONAL LICENSING AND FRANCHISING International Licensing Agreement: Allows a foreign company to sell the products of a producer/ licensor or to use intellectual property (patents, trademarks etc.) in exchange for royalty fees. International Franchise Agreement: Company/Franchisor grants foreign company the right to use its brand name and sell its products.

CONTRACT MANUFACTURING (Also known as Outsourcing) U.S. company contracts with a local company in a foreign country to manufacture one of its products. U.S. company retains control of product design and development and puts its own label on product.

SELECTED HOURLY WAGES

STRATEGIC ALLIANCES AND JOINT VENTURES Strategic Alliance: Agreement between two companies (or company and nation) to pool resources and achieve business goals benefiting both partners. Joint Venture: Alliance in which partners fund separate entity to manage joint operation.

FOREIGN DIRECT INVESTMENTS AND SUBSIDIARIES Foreign Direct Investment: Formal establishment of business operations on foreign soil. Foreign Subsidiary: Independent company owned by a foreign firm.

FOREIGN DIRECT INVESTMENT

MULTINATIONAL CORPORATIONS

MNC CULTURE CRITICISMDEFENSE Destroys livelihoods in home- country. Traditional lifestyles/values weakened or destroyed. Irreversible damage to environment. Better, cheaper products Creates jobs Raises standard of living Increases cross-cultural understanding

GLOBAL BUSINESS ENVIRONMENT CULTURALECONOMIC LEGAL AND REGULATORY

CULTURE An important factor in the global business environment, alongside law and economics. Maintaining a firm grasp of culture is key to conducting business in the global age. SYSTEM OF SHARED BELIEFS, VALUES, CUSTOMS, AND BEHAVIORS THAT GOVERN THE INTERACTIONS OF MEMBERS OF A SOCIETY

CULTURAL ENVIRONMENT Language. Time/Sociability: –High Context: family/intimate connections: hold people together. –Low Context: personal & work relationships: more compartmentalized. Intercultural Communication: –Degrees of animation in expression. –Distance.

LOST IN TRANSLATION Translated into German, the slogan “Come Alive with Pepsi” became “Come out of the Grave with Pepsi”. A U.S. IT company in Indonesia translated “software” as “underwear.” A German chocolate product called “Zit” sold poorly in the U.S.

ECONOMIC ENVIRONMENT To effectively do business in a foreign country, you need to know the country’s level of economic development. Currency Valuations/Exchange Rates Universal Currency Converter ney.com

WORLDWIDE WEALTH, 1970 AND 2010

LEGAL AND REGULATORY ENVIRONMENT No established set of laws Foreign Corrupt Practices Act (Prohibits the distribution of bribes and other favors in the conduct of business.)

CORRUPTIBILITY

TRADE CONTROLS: PROTECTIONISM Because they protect domestic industries by reducing foreign competition, the use of controls to restrict free trade is often called protectionism. Quotas/Embargo Dumping

TRADE CONTROLS: TARIFFS, QUOTAS, EMBARGOS Tariffs: Government taxes on imports that raise the price of imported goods and make than less competitive with domestic goods. Quotas/Embargo: –Quota is a government restriction on the quantity of a good that can be imported. –Embargo is an extreme form of quota which bans import of goods from a country for economic or political reasons. Subsidiaries: Government payments given to certain industries (such as farming) to offset the cost of production.

TRADE CONTROLS: SUBSIDIARIES Subsidiaries: Government payments given to certain industries (such as farming) to help offset some of their costs of production. These subsidies allow the farmers to lower the price of their goods to a point below that of imported competitors’ goods.

TRADE CONTROL DEBATE PROSCONS Protect specific industries. Protect new or struggling industries. Shield industries vital to national defense. Restricts free trade; countries cannot compete freely. Doesn’t promote level playing field; gives special privileges to some. Cannot bring goods to fair/open market. Detrimental to world economy; nations cannot focus on what they do best.

REDUCING TRADE BARRIERS Trade Agreements/Organizations World Trade Organization (monitors trade policies) Financial Support for Troubled Economies –International Monetary Fund (loans money to countries with troubled economies) –World Bank (gives support to poor and developing countries)

REDUCING TRADE BARRIERS: NAFTA AND EU North American Free Trade Association (NAFTA): Agreement among the United States, Canada and Mexico to open their borders to unrestricted trade. European Union (EU): Association of European countries that joined together to eliminate trade restrictions amongst themselves.

NATIONS OF THE EUROPEAN UNION

CAREERS IN INTERNATIONAL BUSINESS Plan Your Undergraduate Program to Allow You to: –Develop expertise in one of the basic areas of business –Gain knowledge of international politics, economics, and culture –Develop foreign language skills Gain direct experience with individuals from other counties Interact With People From Other Cultures by studying abroad