HAPPY FRIDAY! ENT Warm-Up 01/16/15 Get out paper for notes and sit in the center. We don’t have a written warm-up today! HAPPY FRIDAY!

Learning Objective for 01/16/15 Today WE will: explain the nature, labor issues, and impact of cultural and social environments of global trade. discuss the determinants of exchange rates and their effects on the domestic economy. identify strategies for entering international markets. Today YOU will begin a project on globalization.

What Is Globalization? An interconnected and interdependent world economy Globalization of markets: Not a local or national market, but the whole world Globalization of production: Moving production to locations to take advantage of lower costs or better quality Offshore outsourcing (offshoring): Movement of production away from a domestic production site to a foreign location Globalization, the movement toward a more interconnected and interdependent world economy, may be one of the most profound factors affecting people around the globe. Globalization of markets refers to the movement away from thinking of the market as being the local market or the national market to the market being the entire world. Globalization of production, the other facet of globalization, refers to the trend of individual firms moving production to different locations around the globe to take advantage of lower costs or to enhance quality. Outsourcing is the assigning of certain tasks, such as production or accounting, to an outside company or organization. Currently, much outsourcing is offshore outsourcing (or offshoring), a term that describes the movement of production away from a domestic production site to a foreign location. Student Involvement: How do you feel about offshoring? As a business owner, would you avoid offshoring? If so, how?

Nature of Global Trade What is Global Trade and why should it matter to you? Check some of the following items to see where they were made: Shoes Shirt Pants Purse or backpack Cell Phone In recent years, the rise of globalization has made a dramatic impact on the lives of people around the world. The text asks you to calculate the number of countries, other than the United States, that are represented in your personal belongings. If your personal belongings represent: 0 countries, your goods are homegrown. 1–2 countries, your possessions have international flair. 3 or more countries, your goods reflect growing globalization. How many countries do you add up?

Nature of Global Trade Global Trade is Accelerating at a rapid rate. Two main factors: Decline in trade and investment barriers Technological innovations Communications Transportation Information technology Trade and investment barriers are ways the government can prevent the flow of goods, services, and financial capital across national boundaries. The lowering of trade barriers makes global business much cheaper and easier. The lowering of trade and investment barriers also lets international firms move their production facilities to the location with the lowest cost for that activity, serving the world market from that location. Technological innovations have also made it possible to manage the global production and marketing of products. Consider the dramatic advances in communications, transportation, and information technology.

The Global Business Environment GEOGRAPHY location climate terrain waterways natural resources ECONOMICS technology education inflation exchange rate Infrastructure CULTURE language family religion customs traditions Food POLITICAL–LEGAL FACTORS government system political stability trade barriers

Sociocultural Challenges of Global Trade What is culture? Cross-cultural awareness Ethnocentrism Aesthetics Attitudes toward time and work Religion Language (verbal and non-verbal) There are numerous sociocultural challenges to conducting business globally. Culture is the complex set of values, behaviors, lifestyles, arts, beliefs, and institutions of a population that are passed on from generation to generation. Cross-cultural awareness is an understanding, appreciation, and sensitivity to foreign culture. Ethnocentrism, a belief that one’s own culture is superior to all other cultures, is a guaranteed recipe for disaster when undertaking international business. Aesthetics refers to what is considered beautiful or in good taste. Aesthetics encompasses etiquette, customs, and protocol. Attitudes toward time vary considerably across the world. International businesses are well advised to educate themselves on varying religious value systems, customs, and practices if they don’t wish to offend customers in marketing campaigns, among other things. Language, both spoken and unspoken, is also extremely important as different things have different meanings and interpretations around the world.

Political Challenges of Global Trade Not always a free market Not always stable, democratic governments Possible market failure Possible government failure There are many political challenges to conducting international business. Generally, international businesses thrive in nations that have a firm commitment to free market principles with a stable, democratically elected government. Companies are better equipped to pursue their self-interests in a market-based or capitalist economy. Even in market economies, governments must address market failures, or shortcomings associated with free markets. Government intervention in the process of determining which goods are undesirable and deciding whether goods should be regulated, taxed, or banned also varies from country to country. Government failure—government intervention that fails to improve a market outcome—exists around the world. Government failure stems from corruption, ignorance, or pressure that special-interest groups place on politicians. International businesses prefer politically stable democracies because the probability of government failure is lower than for nondemocratic and unstable regimes.

Legal Challenges of Global Trade Laws Regulatory standards Access to unbiased judicial system No universal laws, regulatory standards, or global court exist to settle disputes in the global economy There are many legal challenges to conducting international business. Laws, regulatory standards, and access to unbiased judicial systems based on a rule of law differ considerably around the world. No universal laws, regulatory standards, or global court exist to settle disputes in the global economy. The different laws governing contracts, product safety and liability standards, and property rights are of particular importance when conducting global business.

Ethical Challenges of Global Trade Unique differences in economic conditions and cultural values give rise to many ethical dilemmas surrounding global business For example, should a firm conform to its home country’s environmental, workplace, and product safety standards—even though it’s not legally required to do so—while operating in another country? There are many ethical challenges to conducting international business. Bribery is just one of the many ethical dilemmas surrounding global business. But even when something isn’t illegal, that doesn’t mean it isn’t unethical. Unique differences in economic conditions and cultural values give rise to many ethical dilemmas surrounding global business. For example, should a firm conform to its home country’s environmental, workplace, and product safety standards—even though it’s not legally required to do so—while operating in another country? Should a company do business with a repressive totalitarian regime? When conducting international business, companies must decide whether they’re willing to defy their ethical codes to make a larger profit or even to survive.

Nature of Global Trade The U.S. and other nations are increasingly Importing: Buying products from other countries Exporting: Selling domestically produced products to other countries

The Role of Exchange Rates The rates at which currencies are converted into another currency Foreign exchange markets decide exchange rates A currency is weak when it devalues against currencies of major trading partner Exporters typically prefer a weak dollar because their products are more affordable to foreigners A currency is strong when its value improves compared to trading partners’ currencies Importers prefer a strong dollar because the cost of importing foreign goods is less Foreign exchange markets determine exchange rates, the rates at which currencies are converted into another currency. Depending on a firm’s perspective, it may prefer a strong or weak dollar. U.S. exporters prefer a weak dollar because their products will be more affordable to foreigners. However, U.S. importers prefer a strong dollar because the cost of importing foreign goods is cheaper. If goods are imported cheaply, then those savings can be either passed on to the consumer or kept as higher profits.

How Exchange Rates Effect Int’l Trade Currency appreciation Currency depreciation Trade deficit Trade surplus Fixed exchange rate Freely floating exchange rate Nonconvertible currency Countertrade Currency appreciation is an increase in the exchange rate value of a nation’s currency, causing the relative price of imports to fall as the relative price of exports rises. When currency appreciates, it becomes stronger. Currency depreciation is a decrease in the exchange rate value of a nation’s currency. A weak currency causes exports to become cheaper and imports to become more expensive. A trade deficit exists when the value of a country’s imports exceeds the value of its exports. A trade surplus occurs when the value of a country’s exports exceeds the value of its imports. Fixed exchange rates can be manipulated or fixed by governments. For example, China has fixed its currency to a rate that is weak compared to the dollar. In a freely floating (or flexible) exchange rate system, the global supply and demand for currencies determine exchange rates. Many developing countries have a nonconvertible currency, a currency that can’t be converted into another currency in the foreign exchange market. This protects from capital flight, where the country’s domestic funds are exchanged into foreign currency held outside the country. Countertrade is a form of international barter, the swapping of goods and services for other goods and services, conducted out of necessity or for enhanced profitability.

International Trade & Competition Comparative advantage Absolute advantage National competitiveness How can a country foster national competitiveness? Can a business or a country create a competitive or comparative advantage? Let’s take a closer look at why countries participate in international trade, how trade affects competitiveness, and what costs and benefits are associated with international trade. Many theories apply to international trade. The best theory is the theory of comparative advantage. To possess a comparative advantage means that a country can produce a good or service relatively more efficiently compared with other countries. It suggests that a country should sell to other countries the goods that it manufactures most efficiently and effectively, and buy from other countries the goods it cannot manufacture as efficiently or effectively. Each nation will have a greater quantity and variety of higher-quality products to consume at lower prices. Comparative advantage is really a relative advantage—relative to the competition. Absolute advantage is the ability to produce more of a good or service than any other country. This doesn’t say that the country is more efficient at producing the item, just that they make more. In many nations, governments focus on improving the nation’s resources—natural resources, labor, capital (plant, equipment, and infrastructure), technology, and innovation and entrepreneurialism—to improve competitiveness.

Benefits & Costs of Int’l Trade Higher standard of living Greater quantity and variety of higher-quality product Lower-priced products Costs Threat to domestic businesses and their workers Benefits vs. costs Depends on timing and the extent of both benefits and costs Benefits spread across many members of a society, so they are difficult to see Benefits of international trade include that countries that participate in international trade will experience higher standards of living because of the greater quantity and variety of higher-quality products offered at lower prices. These results stem from the increased competition associated with more open trade. The costs of international trade are borne by those businesses and their workers whose livelihoods are threatened by foreign competition. Domestic businesses may lose market share to foreign companies, stunting their profitability and ability to create jobs. They may even be forced to close. The costs are huge for the victims. After all, they might lose their livelihoods. The benefits, on the other hand, are not always easily recognizable, as they are spread out among millions of consumers.

Entering Foreign Markets Companies may Export their product Implement a turnkey project Undertake franchising Enter into a licensing agreement, a joint venture, or a strategic alliance Undertake contract manufacturing Set up a wholly-owned subsidiary Exporting is the sale of a domestically produced good in a foreign market. Most businesses typically begin serving a foreign market by exporting and may later switch to another mode. Turnkey projects occur when firms export their technological know-how in exchange for a fee, usually for sophisticated and complex manufacturing. Once the facility is up and running, the locals are trained, then the keys are turned over to the foreign owners. Franchising involves selling a well-known brand name or a proven method of doing business to an investor in exchange for a fee and a percentage of sales or profits. Franchising, popular domestically and internationally, will be discussed in depth in Chapter 5. Licensing is an agreement in which the licensor’s intangible property—patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property— may be sold or made available to a licensee in exchange for a royalty fee. Joint ventures involve shared ownership in a subsidiary firm. International joint venture partners involve an international business teaming up with a local partner in order to enter a foreign market. Strategic alliances are cooperative arrangements. Unlike a joint venture, each partner retains its business independence. The agreement lasts for a specific period of time. Contract manufacturing occurs when a firm subcontracts part or all of its good to an outside firm as an alternative to owning and operating its own production facility. International contract manufacturing is really a form of offshore outsourcing. A wholly-owned subsidiary establishes a foreign facility owned entirely by the investing firm.

Entry Mode Considerations The optimal entry mode depends on many factors, including the firm’s strategy. Companies must weigh the advantages and disadvantages of each when making a decision. *Give them time to read and review this slide*

Three Strategies of Int’l Business Global Standardized product Competing on price Multi-domestic Custom products to meet unique local needs Price considerations are secondary Transnational Customized product Lowest price possible Benefits of international trade include that countries that participate in international trade will experience higher standards of living because of the greater quantity and variety of higher-quality products offered at lower prices. These results stem from the increased competition associated with more open trade. The costs of international trade are borne by those businesses and their workers whose livelihoods are threatened by foreign competition. Domestic businesses may lose market share to foreign companies, stunting their profitability and ability to create jobs. They may even be forced to close. The costs are huge for the victims. After all, they might lose their livelihoods. The benefits, on the other hand, are not always easily recognizable, as they are spread out among millions of consumers.

Challenges of Int’l Markets Growth and development Government policies and the economic environment Socioeconomic factors There are many economic challenges to conducting international business. Many developing countries are experiencing more rapid growth than advanced economies are with eager new customers ready to buy products and services. However, these countries may still lack the basic infrastructure necessary for effective transportation, utilities, communication systems and technological tools. Government economic policies and the economic environment can also pose challenges. International businesses prefer free market economies to state-run or socialized economies because the bureaucratic hassles associated with government intervention drive costs up. The debt load of a nation, its unemployment and inflation rates, and its fiscal and monetary policies impact decisions about where to conduct business. Socioeconomic factors to consider include demographics of population density, age distribution, and birth rates, as well as income distribution, ethnicity, and the cultural behaviors of a community.

So CAN YOU? I CAN explain the nature, labor issues, and impact of cultural and social environments of global trade. I CAN determinants of exchange rates and their effects on the domestic economy. I CAN identify strategies for entering international markets. Have them explain each of these outloud and give feedback.

Group Assignment Get into groups of 3 (people that you’ve not worked with) Global Trade depends on being able to work with cultural differences Pick a Country & Visit: executiveplanet.com Create a poster (make it aesthetically pleasing) that outlines the Geography, Economics, Cultural Differences & Political-Legal factors that might affect Global Trade from a US Perspective