THE GLOBAL CONTEXT OF BUSINESS 4 THE GLOBAL CONTEXT OF BUSINESS © 2007 Prentice Hall, Inc. All rights reserved.

What’s in It for Me? This chapter will better enable you to: Understand how global forces affect you as a customer Understand how globalization affects you as an employee Assess how global opportunities and challenges can affect you as a business owner and as an investor © 2007 Prentice Hall, Inc. All rights reserved.

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 © 2007 Prentice Hall, Inc. All rights reserved.

The Major World Marketplaces Distinctions Based on Wealth High-income countries Upper middle-income countries Low middle-income countries Low-income countries (developing countries) Geographic Clusters North America Europe Pacific Asia © 2007 Prentice Hall, Inc. All rights reserved.

Trade Agreements and Alliances Significant Agreements and Treaties North American Free Trade Agreement (NAFTA) Canada, Mexico, and the United States Effects: increases direct foreign investment, increases exports and imports, creates jobs European Union (EU) Most European nations Effects: eliminates quotas, removes trade barriers, and sets uniform tariffs on internally traded EU imports and exports Association of Southeast Asian Nations © 2007 Prentice Hall, Inc. All rights reserved.

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) Began on January 1, 1995 Goals: Promote trade by encouraging members to adopt fair trade practices. Reduce trade barriers by promoting multilateral negotiations. Establish fair procedures for resolving disputes among members. © 2007 Prentice Hall, Inc. All rights reserved.

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 © 2007 Prentice Hall, Inc. All rights reserved.

Import-Export Balances (cont’d) Balance of Payments The flow of money into or out of a country Exchange Rate The rate at which the currency of one nation can be exchanged for that of another Fixed exchange rates Floating exchange rates © 2007 Prentice Hall, Inc. All rights reserved.

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 © 2007 Prentice Hall, Inc. All rights reserved.

Exchange Rates Impact Global Trade (cont’d) When an economy’s currency is weak: Domestic companies find it easier to export products Foreign companies find it harder to import products Foreign companies may invest in domestic production facilities © 2007 Prentice Hall, Inc. All rights reserved.

Forms of Competitive Advantage Absolute Advantage When a country can produce something that is cheaper and/or of higher quality than any other country Comparative Advantage When a country can produce goods more efficiently or better than other countries can produce the same goods © 2007 Prentice Hall, Inc. All rights reserved.

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 Multinational firms Design, produce, and market products in many nations © 2007 Prentice Hall, Inc. All rights reserved.

International Organization Structures Independent Agent A foreign individual or organization that represents an exporter in foreign markets 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 © 2007 Prentice Hall, Inc. All rights reserved.

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 © 2007 Prentice Hall, Inc. All rights reserved.

International Involvement HIGH LOW Foreign Direct Investment Strategic Alliances Branch Offices Licensing Arrangements Independent Agents © 2007 Prentice Hall, Inc. All rights reserved.

Barriers to International Trade Social and Cultural Differences Legal and Political Differences Economic Differences © 2007 Prentice Hall, Inc. All rights reserved.

Legal and Political Differences Quotas, 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 © 2007 Prentice Hall, Inc. All rights reserved.

Legal and Political Differences (cont’d) Local Content Laws Requirements that products sold in a country be at least partly made there Business Practice Laws Host countries govern business practices within their jurisdictions Cartels Associations of producers that control supply and prices Dumping Selling a product abroad for less than the cost of production at home © 2007 Prentice Hall, Inc. All rights reserved.

K E Y T E R M S absolute advantage Association of Southeast Asian Nations (ASEAN) balance of payments balance of trade branch office business practice law cartel comparative advantage dumping embargo euro European Union (EU) exchange rate export exporter foreign direct investment (FDI) General Agreement on Tariffs and Trade (GATT) globalization import importer independent agent international firm licensing arrangement local content law multinational firm national competitive advantage © 2007 Prentice Hall, Inc. All rights reserved.

K E Y T E R M S (cont’d) North American Free Trade Agreement (NAFTA) protectionism quota strategic alliances subsidy tariff trade deficit trade surplus World Trade Organization (WTO) © 2007 Prentice Hall, Inc. All rights reserved.