Bus 100 zChapter 4 zTHE GLOBAL CONTEXT OF BUSINESS

2 L E A R N I N G O B J E C T I V E S After reading this chapter, you should be able to: 1.Discuss the rise of international business and describe the major world marketplaces and trade agreements and alliances. 2.Explain how differences in import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment. 3.Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure.

3 L E A R N I N G O B J E C T I V E S (cont’d) After reading this chapter, you should be able to: 4.Describe some of the ways in which social, cultural, economic, legal, and political differences among nations affect international business.

4 What’s in It for Me? zThis chapter will better enable you to: 1.Understand how global forces affect you as a customer 2.Understand how globalization affects you as an employee 3.Assess how global opportunities and challenges can affect you as a business owner and as an investor

5 The Contemporary Global Economy zGlobalization yThe process by which the world’s various national economies and trading systems are fast becoming a single highly interdependent system xExports: Domestically produced products sold in foreign markets xImports: Foreign products sold in domestic markets

6 Annual Global Imports and Exports

7 The Major World Marketplaces zDistinctions Based on Wealth yHigh-income countries yUpper middle-income countries yLow middle-income countries yLow-income countries (developing countries) zGeographic Clusters yNorth America yEurope yPacific Asia

8 Trade Agreements and Alliances zSignificant Agreements and Treaties yNorth American Free Trade Agreement (NAFTA) xCanada, Mexico, and the United States xEffects: increases direct foreign investment, increases exports and imports, creates jobs yEuropean Union (EU) xMost European nations xEffects: eliminates quotas, removes trade barriers, and sets uniform tariffs on internally traded EU imports and exports yAssociation of Southeast Asian Nations

9 The Nations of NAFTA

10 The Nations of the European Union

11 The Nations of the Association of Southeast Asian Nations (ASEAN)

12 Trade Agreements and Alliances (cont’d) zSignificant Agreements and Treaties yGeneral Agreement on Tariffs and Trade (GATT): xSigned after World War II. Its purpose was to reduce or eliminate trade barriers, such as tariffs and quotas. yWorld Trade Organization (WTO) xBegan on January 1, 1995 xGoals: 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.

13 Import-Export Balances zBalance of Trade yThe total economic value of all the products that a country exports minus the economic value of all the products that it imports zTrade Surplus yA positive balance of trade that results when a country exports more than it imports zTrade Deficit yA negative balance of trade that results when a country imports more than it exports

14 The Major Trading Partners of the United States Source: The US Census Bureau,

15 U.S. Imports and Exports

16 U.S. Trade Deficit

17 Import-Export Balances (cont’d) zBalance of Payments yThe flow of money into or out of a country xThe money that a country pays for imports and receives for exports—its balance of trade—comprises much of its balance of payments zExchange Rate yThe rate at which the currency of one nation can be exchanged for that of another xFixed exchange rates xFloating exchange rates

18 Exchange Rates Impact Global Trade zWhen an economy’s currency is strong: yDomestic companies find it harder to export products yForeign companies find it easier to import products yDomestic companies may move production to cheaper production sites in foreign countries zImplications for the balance of trade?

19 Exchange Rates Impact Global Trade (cont’d) zWhen an economy’s currency is weak: yDomestic companies find it easier to export products yForeign companies find it harder to import products yForeign companies may invest in domestic production facilities zImplications for the balance of trade?

20 Forms of Competitive Advantage zAbsolute Advantage yWhen a country can produce something that is cheaper and/or of higher quality than any other country yAn advantage based on possessing a scarce resource (e.g., oil) or favorable physical location zComparative Advantage yWhen a country can produce goods more efficiently or better than other countries can produce the same goods yAn advantage based on superior productivity (e.g., technologically-advanced manufacturing capability)

21 Forms of Competitive Advantage (cont’d) zNational Competitive Advantage yConditions 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 3.Related and supporting industries—strong local or regional suppliers and/or industrial customers 4.Strategies, structures, and rivalries—domestic firms and industries that stress cost reduction, product quality, higher productivity, and innovative products

22 International Business Management zGoing International yGauging International Demand xForeign demand for a company’s product may be greater than, the same as, or weaker than domestic demand yAdapting to Customer Needs xA firm must decide whether and how to adapt its products to meet the special demands of foreign customers yOutsourcing xPaying suppliers and distributors to perform certain business processes or to provide needed materials or services yOffshoring xOutsourcing to foreign countries

23 Levels of International Involvement zExporters yMake products in one country to distribute and sell in others zImporters yBuy products in foreign markets and bring them home for resale zInternational firms yConduct much of their business abroad and may maintain overseas manufacturing facilities zMultinational firms yDesign, produce, and market products in many nations

24 International Organization Structures zIndependent Agent yA foreign individual or organization that represents an exporter in foreign markets zLicensing Arrangements (or Agreements) yDomestic firms give foreign individuals or companies exclusive rights to manufacture or market their products in that market zBranch Offices yA 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

25 International Organization Structures (cont’d) zStrategic Alliance (or Joint Venture) yA company finds a partner firm in the country in which it wants to do business yEach party agrees to invest resources and capital into a new business or to cooperate in some mutually beneficial way zForeign Direct Investment (FDI) yInvolves buying or establishing tangible assets in another country

26 International Involvement zForeign Direct Investment zStrategic Alliances zBranch Offices zLicensing Arrangements zIndependent Agents INVOLVEMENT HIGH LOW

27 Barriers to International Trade Social and Cultural Differences Economic Differences Legal and Political Differences

28 Legal and Political Differences zQuotas, Tariffs, and Subsidies yQuota: Restricts the number of products of a certain type that can be imported, raising the prices of those imports yEmbargo: Government order forbidding exportation and/or importation of a product or all products from a specific country yTariffs: Taxes on imported products ySubsidy: Government payment to help a domestic business compete with foreign firms zProtectionism yThe practice of protecting domestic business at the expense of free market competition

29 Legal and Political Differences (cont’d) zLocal Content Laws yRequirements that products sold in a country be at least partly made there zBusiness Practice Laws yHost countries govern business practices within their jurisdictions zCartels yAssociations of producers that control supply and prices zDumping ySelling a product abroad for less than the cost of production at home

30 T H E E N D !

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