1 Chapter 1 Introduction to Business Environment

2 Origin of Business Searching for natural resources Searching for human resources Declining of domestic demand of the products Reducing costs of production Standardizing of the products

3 Business Activities Exporting and Importing Domestic & International Investments Licensing, Franchising, and Management Contracts

4 Exporting and Importing Exporting: selling of products made in one’s own country for use or resale in other countries Importing: buying of products made in other countries for use or resale in one’s own country

5 Visible and Invisible Trade Trade in Goods –Merchandise exports and imports –Visible trade Trade in Services –Service exports and imports –Invisible trade

6 Business Investments Capital supplied by residents of one country to residents of another 2 categories: –Foreign direct investments –Portfolio investments

7 Other Forms of Business Activity Licensing: firm in one country licenses the use of its intellectual property to a firm in a second country in return for a royalty payment Franchising: firm in one country authorizes a firm in another country to utilize its operating system and intellectual property

8 Management Contracts A firm in one country agrees to operate facilities or provide other management services to a firm in another country for an agreed-upon fee Common in upper-end international hotel industry

9 Variations of Organizations Multinational Corporation (MNC) Multinational Enterprise (MNE) Multinational Organization (MNO)

10 Multinational Corporations (MNCs) Engage in foreign direct investment Own and control foreign assets Buy resources in multiple countries Create goods and services in multiple countries Sell goods and services in multiple countries

11 Table 1.1 The World’s Largest Corporations – 2007 RankNameCountryRevenues $Mil 1Wal-Mart StoresU.S.351, Exxon MobilU.S.347, Royal Dutch/ShellNetherlands318, BPBritain274, General MotorsU.S.207, Toyota MotorJapan204, ChevronU.S.200, DaimlerChryslerGermany190, ConocoPhillipsU.S.172, TotalFrance168,356.7

12 Case: Wal-mart’s global expansion Largest retailer in the world –Over 4500 stores International expansion in 1991begins with Mexico in response to market saturation in the US –Localization strategy adopted after trial and error Global buying power has allowed it to reap economies of scale Wal-mart faces significant competition from other global retailers, but has the first mover advantage in some markets

13 What is globalization? The shift towards a more integrated and interdependent world economy Two components: –The globalization of markets –The globalization of production

14 Motives for Globalization To leverage core competencies To acquire resources and supplies To seek new markets To better compete with rivals

15 Globalization of markets The merging of distinctly separate national markets into a global marketplace –Tastes and preferences converge onto a global norm –Firms offer standardized products worldwide creating a world market

16 Globalization of markets Significant differences still exist between national markets on many relevant dimensions These differences require that marketing and operating strategies and product features be customized to best match conditions in a country.

17 Globalization of markets Countries are different Range of problems are wider and more complex Government intervention in trade and investment creates problems International investment is impacted by different currencies

18 Globalization of production Refers to sourcing of goods and services from locations around the world to take advantage of –Differences in cost or quality of the factors of production LaborLandCapital

19 Global drivers Macro factors that underlie trend towards greater globalization –Decline in trade barriers –Technological change

20 Pattern of declining tariffs

21 Globalization debate-Pro Lower prices for goods and services Economic growth stimulation Increase in consumer income Creates jobs Countries specialize in production of goods and services that are produced most efficiently

22 Globalization debate-Con Destroys manufacturing jobs in wealthy, advanced countries Wage rates of unskilled workers in advanced countries declines Companies move to countries with fewer labor and environment regulations Loss of sovereignty