Business Essentials, 6th Edition Ebert Chapter 5: The Global Context of Business Business Essentials, 6th Edition Ebert

© 2009 Pearson Education, Inc. 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: Describe the rise of international business and identify the major world marketplaces. Explain how different forms of competitive advantage, import-export balances, exchange rates, and foreign competition determine how countries and businesses respond to the international environment. © 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc. L E A R N I N G O B J E C T I V E S Discuss the factors involved in conducting business internationally and in selecting the appropriate levels of international involvement and organizational structure. Describe some of the ways In which social, cultural, economic, legal, and political differences act as barriers to International trade. Explain how free trade agreements assist world trade. © 2009 Pearson Education, Inc.

Discussion Describe some of the ways in which social, cultural, economic, legal, and political differences among nations affect international business? Trade agreements, currency rates

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 © 2009 Pearson Education, Inc.

Globalization The total volume of world trade today is immense—around $8 trillion each year. In early 2010, China officially passed Germany as the world's top merchandise exporter. Whereas in the past many nations followed strict policies to protect domestic companies, today more and more countries are aggressively encouraging international trade.

Criticism to Globalization It allows businesses to exploit workers in less developed countries and bypass domestic environmental and tax regulations. Leads to the loss of cultural heritages . Benefits the rich more than the poor. As a result, many international gatherings of global economic leaders including the GS and G20 meetings In Toronto in 2010- have been marked by protests and demonstrations.

The Major World Marketplaces Distinctions Based on Wealth 1. High-income countries: per capita income is greater than $11906 dollars per year. 2. Upper middle-income countries: per capita income is between $3,856 and $11,906 per year. E.g., Columbia, Peru, Lebanon, Hungary, Poland, Turkey, Mexico, Argentina, and South Africa. 3. Low middle-income countries: per capita income is between $976 and $3,856 per year. E.g., Thailand 4. Low-income countries (often called developing countries): have an annual per-capita income of U.S. $975 or less. Benin, Ethiopia, Haiti © 2009 Pearson Education, Inc.

The Major World Marketplaces NAFTA countries. European Union (EU) and Eastern Europe. Pacific Asia Pacific Asia consists of Japan, China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, the Philippines, and Australia (which Is technically not In Asia but is included because of proximity).

The Rising Power of Emerging Markets The Role of BR IC: Brazil, Russia, India, and China. The status of these four nations has risen In International trade for different reasons. Brazil is strong in commodities and agriculture, Russia Is a powerful energy supplier, China is a major hub of manufacturing activity. India has become a leading service provider at various levels ranging from basic customer service call centers to engineering solutions providers.

Forms of Competitive Advantage Absolute Advantage When a country can produce something that is cheaper and/or of higher quality than any other country An advantage based on possessing a scarce resource (e.g., oil, Coffee production in Brazil) or favorable physical location Comparative Advantage When a country can produce goods more efficiently or better than other countries can produce the same goods An advantage based on superior productivity (e.g., technologically advanced manufacturing capability) © 2009 Pearson Education, Inc.

Forms of Competitive Advantage (cont’d) National Competitive Advantage Conditions favoring heavy involvement in international business: Factor conditions—labor, capital, entrepreneurs, physical resources, and information resources Demand conditions—a large domestic consumer base that promotes strong demand for innovative products © 2009 Pearson Education, Inc.

Forms of Competitive Advantage (cont’d) Conditions favoring heavy involvement in international business: Related and supporting industries—strong local or regional suppliers and/or industrial customers Strategies, structures, and rivalries—domestic firms and industries that stress cost reduction, product quality, higher productivity, and innovative products. In 2009, the top three countries on the list were Switzerland, the United States, and Singapore. © 2009 Pearson Education, Inc.

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 © 2009 Pearson Education, Inc.

e.g., Canadian Exports to and Imports from in 2009 Exports in Billion $ Imports in Billion $ United States 271.2 236.5 European Union 32.1 38.7 Japan 8.8 9.3 All others 57.4 89.6

FIGURE 4.3 U.S. Imports and Exports © 2009 Pearson Education, Inc.

FIGURE 4.4 U.S. Trade Deficit © 2009 Pearson Education, Inc.

Import-Export Balances (cont’d) Balance of Payments The flow of money into or out of a country The money that a country pays for imports and receives for exports—its balance of trade—comprises much of its balance of payments Exchange Rate The rate at which the currency of one nation can be exchanged for that of another Fixed exchange rates Floating exchange rates © 2009 Pearson Education, Inc.

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 Implications for the balance of trade? Buying petrol from Egypt: 10 letters = 20 E pounds= 10 shekels, when E pound equal 0.5 shekel. If E pound value 1 shekel. It means 10 letters = 20 E pounds= 20 shekels. © 2009 Pearson Education, Inc.

Does It Make Sense to Go International? Is there international demand for the firm’s product? Can the product be modified to fit a foreign market? Is the foreign business climate suited to imports? Does the firm have or can it get the necessary skills and knowledge to do business abroad? YES YES YES NO NO NO NO Stay Domestic Go International YES Copyright ©2003 Prentice Hall, Inc. 2 - 20

International Business Management Managing means making decisions. We examine the three most basic decisions that a company's management must make when faced with the prospect of globalization. First decision: whether to "go International“ at all. company may feel It has to shift its production to a low-cost foreign country to remain competitive. Second decision: decide on company's level of International Involvement. Third Decision: decides on the organizational structure that will best meet its global needs.

International Business Management Going International Gauging International Demand Foreign demand for a company’s product may be greater than, the same as, or weaker than domestic demand Adapting to Customer Needs A firm must decide whether and how to adapt its products to meet the special demands of foreign customers Outsourcing Paying suppliers and distributors to perform certain business processes or to provide needed materials or services Offshoring Outsourcing of production processes to foreign countries. © 2009 Pearson Education, Inc.

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. E.g., Hershey which buys chocolate from different locations but manufactures all in the U.S. Their primary focus remains on their domestic market. Multinational firms: Design, produce, and market products in many nations. E.g., Nestle produces and sells in many nations. They don’t think than they have domestic market. © 2009 Pearson Education, Inc.

The economic importance of multinational firms In 2009, Royal Dutch/Shell ranked number one in the Fortune Global 500 rankings with over 102 000 employees and US$458 billion in sales. Exxon was second with 105 000 employees and US$443 billion. in sales. Walmart ranked third with US$405 billion in sales and 2.1 million employees (with 700 000 International employees in Its 4000 international outlets).

International Organization Structures of firm’s operations Independent Agent A foreign individual or organization that represents an exporter in foreign markets. These people have the advantage of knowing the local market, operating in the market, but also may represent other competitive brands. © 2009 Pearson Education, Inc.

International Organization Structures of firm’s operations 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 © 2009 Pearson Education, Inc.

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 © 2009 Pearson Education, Inc.

International Organizational Structures INVOLVEMENT HIGH LOW Foreign Investment Strategic Alliances Branch Offices Licensing Arrangements Independent Agents

Barriers to International Trade Social and Cultural Differences Legal and Political Differences Economic Differences © 2009 Pearson Education, Inc.

Take Time to Learn the Culture Thoroughly! Este es nuestro nuevo auto: el NOVA! Ha, ha, ha, ha, ha, ha!!!

Cultural and social differences include language, social values, and traditional buying patterns. Whether differences are obvious or subtle, ignorance of them can be embarrassing and expensive. The classic example: General Motors introduced the Chevy Nova in Spanish speaking countries—where “no va” means “doesn’t go.” The original translation of the Intel Pentium IV computer chip in Korean was “chip of death.” (!!!) Discussion: identify other examples from your personal experience.

The Customer’s Language A Critical Business Success Factor In the U.S. alone, 18% of the population does not speak English at home. Only 48% of the world’s Web users are native English speakers. Consumers are four times more likely to buy a product on the Internet if the website is in their preferred language. Source: Time Global Business, Nov. 2001

Economic Differences To operate effectively in another country, businesses must know when, and to what extent, the government is involved in a given industry. (role of government)

Legal and Political Differences Quotas, Embargoes, 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 © 2009 Pearson Education, Inc.

Legal and Political Differences (cont’d) Local Content Laws Requirements that products sold in a country be at least partly made there. E.g., write made in U.S Business Practice Laws Host countries govern business practices within their jurisdictions Cartels Associations of producers that control supply and prices, such as the oil cartel Dumping Selling a product abroad for less than the cost of production at home © 2009 Pearson Education, Inc.

Overcoming Barriers to Trade Through many international free-trade treaties. The most significant of these are: the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), the European Union (EU), and the North American Free Trade Agreement (NAFTA).

Trade Agreements and Alliances Significant Agreements and Treaties North American Free Trade Agreement (NAFTA) Includes Canada, Mexico and the United States. The trade agreement increases direct foreign investment, increases exports and imports and creates jobs. It also eliminates most tariffs and duties between the three countries. © 2009 Pearson Education, Inc.

Trade Agreements and Alliances Significant Agreements and Treaties European Union (EU) This union includes most European nations (27 countries), but notably absent is Switzerland. The effects of this trade union is a common currency, elimination of quotas, removal of trade barriers, and sets uniform tariffs on internally traded EU imports and exports. It also allows its citizen members to travel between member nations without visas. © 2009 Pearson Education, Inc.

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). Members 153 countries 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. © 2009 Pearson Education, Inc.

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