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Chapter 4

THE GLOBAL CONTEXT OF BUSINESS

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L E A R N I N G O B J E C T I V E SL E A R N I N G

O B J E C T I V E SAfter 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.

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L E A R N I N G O B J E C T I V E S (cont’d)

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.

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What’s in It for Me?

This 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

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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

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Annual Global Imports and ExportsAnnual Global Imports and Exports

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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

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Trade Agreements and AlliancesSignificant 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

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The Nations of NAFTAThe Nations of NAFTA

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The Nations of the European UnionThe Nations of the European Union

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

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

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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:

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.

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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

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The Major Trading Partners of the United States

The Major Trading Partners of the United States

Source: The US Census Bureau, http://www.census.gov/foreign-trade/statistics/highlights/top/top0511.html#imports

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U.S. Imports and ExportsU.S. Imports and Exports

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U.S. Trade DeficitU.S. Trade Deficit

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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 anotherFixed exchange rates

Floating exchange rates

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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?

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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

Implications for the balance of trade?

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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) 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)

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Forms of Competitive Advantage (cont’d)

National Competitive Advantage

Conditions 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

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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 NeedsA 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

OffshoringOutsourcing to foreign countries

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Levels of International Involvement

Exporters Make products in one country to distribute and

sell in othersImporters

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

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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

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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

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International Involvement

Foreign Direct Investment

Strategic Alliances

Branch Offices

Licensing Arrangements

Independent Agents

INV

OL

VE

ME

NT

INV

OL

VE

ME

NT

HIGHHIGH

LOWLOW

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Barriers to International Trade

Social and Cultural Differences

Social and Cultural Differences

Economic DifferencesEconomic

Differences

Legal and Political Differences

Legal and Political Differences

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Legal and Political DifferencesQuotas, 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

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Legal and Political Differences (cont’d)

Local Content Laws Requirements that products sold in a country

be at least partly made thereBusiness Practice Laws

Host countries govern business practices within their jurisdictions

Cartels Associations of producers that control supply

and pricesDumping

Selling a product abroad for less than the cost of production at home

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T H E E N D !T H E E N D !

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