part ii: business environment introduction to business 3e 6 copyright © 2004 south-western. all...

Copyright © 2004 South-Western. All rights reserved.

Part II: Business EnvironmentPart II: Business Environment

Jeff MaduraIntroduction to

Business 3e

Introduction to Business 3e

66Assessing Global Assessing Global ConditionsConditions

Assessing Global Assessing Global ConditionsConditions

Copyright © 2004 South-Western. All rights reserved. 6–2

Learning GoalsLearning Goals• Explain motives for engaging in international business.

• Describe global opportunities.

• Describe how firms conduct international business.

• Explain influence of foreign characteristics on a firm’s international business.

• Explain how movements in exchange rates can affect business performance.


Assessing Global Assessing Global ConditionsConditions


Motives to Engage in Motives to Engage in International BusinessInternational Business

•Attract foreign demand– Competition may prevent firm from

increasing market share in U.S.– Changes in consumer tastes may decrease

demand in U.S.

•Capitalize on technology– Expand into countries where technology is

not as advanced.


The Coca-Cola Company’s Global The Coca-Cola Company’s Global ExpansionExpansion

Exhibit 6.1


Approximate Hourly Compensation Approximate Hourly Compensation Costs for Manufacturing across Costs for Manufacturing across

CountriesCountries

Exhibit 6.2


Motives to Engage in Motives to Engage in International Business International Business

(cont’d)(cont’d)•Use inexpensive resources– Find locations where land and labor are

inexpensive.

•Diversify internationally– Reduce risk and increase performance

stability by selling in other countries.– Geographic diversification reduces exposure

to economic risk in U.S.


Dupont’s Geographic Diversification Dupont’s Geographic Diversification (measured by annual sales in millions of (measured by annual sales in millions of

dollars)dollars)

Exhibit 6.3

Source: 2001 annual report


Global OpportunitiesGlobal Opportunities•Opportunities in Europe

– Single European Act Created more uniform regulations Removed taxes on goods traded between member

countries Increased competition

– Removal of the Berlin Wall (1989) Encouraged free enterprise and privatization of

businesses

– Inception of the Euro Allows single monetary policy Eliminates transaction costs


Global OpportunitiesGlobal Opportunities•Opportunities in Latin America

– NAFTA Eliminated trade barriers between U.S.,

Mexico, and Canada. U.S. firms have moved production to

Mexico to reduce costs. U.S. firms now export products to Mexico.

– Uruguay Round GATT Removed import trade restrictions over 10

years among 117 countries. World Trade Organization (WTO)


Global OpportunitiesGlobal Opportunities•Opportunities in Asia

– Large population base– In 1990s many Asian countries reduced their

excessive restrictions on foreign investment Easier for foreign firms to acquire Asian

companies or negotiate licensing agreements with Asian firms.

– Asian economic crisis Forced many local firms into bankruptcy Created opportunities for foreign firms to

acquire struggling Asian companies


Foreign Expansion in the Foreign Expansion in the U.S.U.S.•Foreign firms expanded into the U.S.

by:– Establishing new subsidiaries.– Acquiring U.S. firms.

•U.S. industries are susceptible to foreign competition– U.S. firms in labor-intensive industries must

compete with foreign firms’ lower labor costs.– Foreign-made products may be perceived as

higher quality than U.S.-made products.


International BusinessInternational Business• Importing

– The purchase of foreign products or services

• Exporting– The sale of products or services to purchasers

residing in other countries

• Direct foreign investment– A means of acquiring or building subsidiaries in one

or more foreign countries

• Strategic alliances– A business agreement between firms whereby

resources are shared to pursue mutual interests


ImportingImporting• Involves the purchase of foreign products or services:– U.S. consumers purchase foreign

automobiles, clothing, cameras, etc.– U.S. firms import materials or supplies that

are used to produce products.

•Trade barriers restrict importing– Tariffs are taxes on imported products.– Quotas limit the amounts of specific products

that can be imported.


ExportingExporting• Involves the sale of products or services to purchasers residing in other countries

•U.S. Balance of Trade– The level of U.S. exports less the level of its

imports; if imports are greater than exports, the result is a trade deficit.

• Internet facilitates exporting– Provide information to prospective importers– Accept orders online and track shipments


Trend of U.S. Exports and Trend of U.S. Exports and Imports Imports

Exhibit 6.4


Foreign Direct InvestmentForeign Direct Investment• Investments in acquiring or building subsidiaries in one or more foreign countries to:– Reduce transportation costs.– Overcome trade barriers – Acquire advanced technology by offering

incentives to firms to establish subsidiaries.– Reduce labor costs by shifting production

facilities to a developing country with lower labor costs.


Strategic AlliancesStrategic Alliances•Various types of alliances between U.S. and foreign firms can be made:– Joint venture involves an agreement

between two firms about a specific project U.S. firm makes the product, foreign firm sells the

product in their home country. Two firms share production of the product - common

in the auto industry.

– International licensing agreement Firm allows a foreign company (licensee) to produce

its product according to specific instructions in exchange for a licensing fee.


Influence of Foreign Influence of Foreign CharacteristicsCharacteristics•Culture

– Tastes, habits, and customs vary by country– U.S. products might need to be adjusted to

fit the culture

•Economic systems– Capitalism– Communism– Socialism– Privatization


Influence of Foreign Influence of Foreign CharacteristicsCharacteristics

•Economic conditions– Economic growth in foreign countries can

influence demand for U.S. products: Strong economy might increase demand. Weak economy might decrease demand.

– U.S. firm’s exposure to foreign country’s economy depends on proportion of U.S. firm’s business conducted in that country.


Comparing the Influence of the Comparing the Influence of the Canadian Economy on Two U.S. Canadian Economy on Two U.S.

FirmsFirms

Exhibit 6.5


Small Business SurveySmall Business Survey

Many successful small firms rely on international sales for a significant portion of their business.


Political RiskPolitical Risk•Risk that a country’s political actions may adversely affect a business– Expropriation: extreme form of risk occurs

when foreign government takes over a U.S. subsidiary without compensating the U.S. firm. More common risk occurs when foreign

governments impose higher corporate tax rates on foreign subsidiaries.

Other risks impact costs of doing business in the foreign country - stringent building codes, waste disposal restrictions, and pollution controls.


Exchange RatesExchange Rates•Exchange rates between the U.S. dollar and other currencies fluctuate over time– Number of dollars needed by a U.S. firm to

purchase foreign supplies may change, even if the actual price does not change When U.S. dollar weakens - foreign currency

strengthens - U.S. firms need more dollars to purchase a given amount of foreign supplies

Exchange rate affects foreign demand for U.S. products because they impact the actual price paid by the foreign customer.


Example of Importing by a U.S. Example of Importing by a U.S. FirmFirm

Exhibit 6.6


business onlinebusiness online ee -- businessbusiness


Impact of Exchange Rates Impact of Exchange Rates on Firm Performanceon Firm Performance

• International trade transactions usually require the exchange of one currency for another currency– Exchange rates vary on a daily basis.– Exchange rate fluctuations have a favorable

or unfavorable effect on firm performance. Impact on U.S. importers Impact on U.S. exporters


Impact of Exchange Rate Impact of Exchange Rate Fluctuations on U.S. Fluctuations on U.S.

ImportersImporters•When foreign currency appreciates against the U.S. dollar–the dollar weakens and loses value– Causes prices of foreign supplies to increase

and adversely impacts U.S. firms that import supplies.



ImportersImporters•When foreign currency depreciates against the U.S. dollar–the dollar strengthens and gains value– Causes prices of foreign supplies to

decrease - reduces expenses of U.S. firms that import supplies.



ExportersExporters•When foreign currency appreciates against the U.S. dollar–the dollar weakens and loses value– Causes prices of U.S. products to decrease

and demand to increase - has a positive impact on U.S. exporter’s revenues and profits.


How Exchange Rates Can How Exchange Rates Can Affect the Price of ImportsAffect the Price of Imports

Exhibit 6.7



ExportersExporters•When foreign currency depreciates against the U.S. dollar–the dollar strengthens and gains value– Causes prices of U.S. products to increase

and demand to decrease - has a negative impact on U.S. exporter’s revenues and profits.


Example of Exporting by a U.S. Example of Exporting by a U.S. Firm Firm

Exhibit 6.8


Hedging Against Exchange Hedging Against Exchange Rate MovementsRate Movements

• Hedging means to take actions to protect a firm against exchange rate movements– Hedging future payments and future receivables

in foreign currencies Request forward contract at a specified exchange rate on

a future date. Rate is called a forward rate

– Reduces risk because firm knows in advance what the exchange rate will be

– Prevents both favorable and unfavorable exchange rate fluctuations


How How Exchange Exchange

Rates Affect Rates Affect the Degree the Degree of Foreign of Foreign

CompetitionCompetition

Exhibit 6.9


Chapter SummaryChapter Summary• U.S. firms engage in international business to attract foreign demand, capitalize on technology, use inexpensive resources or diversify internationally.

• Reduction of trade barriers has increased global expansion opportunities for U.S. firms.

• Firms conduct international business via importing, exporting, direct foreign investment and strategic alliances.


Chapter SummaryChapter Summary• Firms must assess culture, economic systems and conditions, exchange rate risk and political risk when entering foreign markets.

• Exchange rate fluctuations affect importers and exporters in different ways.


Business EnvironmentBusiness Environment

part ii: business environment introduction to business 3e 6 copyright © 2004 south-western. all...

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