The Global Business Environment

Key PointsKey VariablesPopulationEconomic DevelopmentTrade and Natural Resources Foreign Investment

Key Variables

Businesses operate in a complex environment,often full of uncertainty and turmoil Uncertainty makes it difficult to operate

efficiently Four main aspects of the global business

environment which differ and create uncertainty and complexity: Socio-cultural Political/Legal Economic Technological

The Business Environment

Cultural distance can make it difficult to operate the way you want – could lead to ethical issues. Cross-cultural problems are often the greatest barrier to gaining a competitive advantage operating in a different country: Language Religion Culture/Customs Demographic trends Health/Education Urbanisation Labour force availability and skills Wage levels/Working hours Unionisation Environmental concerns

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The Business Environment

Political and Legal Environment Government regulation

Restrictions Taxes Incentives

Legal Regime Employment law Health and safety law Environmental policy

Bureaucracy

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The Business Environment

Economic and financial conditions will affect a firm’s profits from a given country Inflation Interest rates Exchange rates Credit availability Financial stability Rates of return

The Business Environment

Weak or non-existent technological infrastructure can reduce or eliminate location advantages: Science and technology infrastructure Patent protection Road network/Public transport Telephony/Internet capacity Air transport Ports Power supply and reliability

Market Identification

Entails analysis of trends in demand arising from changes in population, income levels, and consumer preferences in potential export markets.

If there is a demand for the firm's products in a market, the supply capabilities of domestic firms and other exporters worldwide to meet this demand at lower prices or higher quality must be assessed.

Country Populations - 2014 (Source: CIA World Factbook)

1 China 1,355,692,576 11 Japan 127,103,3882 India 1,236,344,631 12 Mexico 120,286,6553 European Union 511,434,812 13 Philippines 107,668,2314 United States 318,892,103 14 Ethiopia 96,633,4585 Indonesia 253,609,643 15 Vietnam 93,421,8356 Brazil 202,656,788 16 Egypt 86,895,0997 Pakistan 196,174,380 17 Turkey 81,619,3928 Nigeria 177,155,754 18 Germany 80,996,6859 Bangladesh 166,280,712 19 Iran 80,840,713

10 Russia 142,470,272 20Congo, Democratic Republic of the

77,433,744

21 Thailand 67,741,401

38 Canada 34,834,841

Demographics

7 billion + in 2013 – estimated to grow to 8.5 billion by 2025

Half of world’s population is in Asia-Pacific region

30% of the world’s population is under the age of 15

Demographics

Implications exist for the types of products demanded

Rural – urban divides exist in population distribution within a country

Migration to other countries can have a major impact on overall trade and balance of payments of a country

Income inequality creates social problems

Economic Development

GDP growth*:

Rich world economic growth is much slower than that of the developing world

Region GNI/capita GNI (b) GDP growth rate

Population (m)

Low Income 1,780 1,510 5.8 849

Mid Income 9,517 47,298 4.8 4,970

High Income 40,324 52,668 1.3 1,306

*Source: http://wdi.worldbank.org/table/1.1

Trade and Natural Resources

Trends in the trade of manufactured products Volume of trade in manufactured products

has risen dramatically Number of source countries has risen Composition of the trade of many countries

has changed - trade in services has increased as a percentage of international trade (eg. Trade in tourism)

Trade and Natural Resources

Location of large amounts of natural resources has swung from developed (initial discoveries), to developing (exploration), to developed (new technologies “fracking”) – changes in geopolitical power

A combination of technology transfer and relatively low labor costs has led to increase in the number of countries exporting fresh and processed agricultural and fishery products.

Foreign Investment

FDI is highly concentrated among a relatively few countries. Three-fourths of FDI flows are among the

high-income countries in Europe, Japan, and North America.

Of the FDI flows to lower-income countries, about two-thirds is concentrated among 10 countries

The World of International Trade

Key PointsA Framework for Trade AnalysisAbsolute and Comparative AdvantageNew Theories of International TradeOther Factors affecting International Trade

International Trade – Current Issues Internationalization is the process and

mindset of looking at countries outside as markets for exports and sources of imports.

Trade and non-tarriff barriers to trade and government incentives promote or reduce trade.

Technology linking producers and buyers through trade intermediaries works around governments.

International Trade – Current Issues Rise of the BRICs (Brazil, Russia, India and

China) Lots of money for investment Rising domestic consumer class provides domestic

firms with resources to enter foreign markets with reduced risk

Focusing on other developing markets which are often either untapped by developed world firms or, due to liability of foreignness, have failed

Recent agreement to create $100 billion BRICs Development Bank outside of IMF – exerting power

International Trade – Current Issues Rise of China

Most of the largest firms are domestically oriented and state owned - lots of money for investment

Last year, combined total volume of merchandise handled by Taobao and Tmall surpassed 1 trillion yuan, or about $160 billion. Amazon’s was $86 billion and eBay’s 67.8 billion*

Alibaba’s revenue for ‘14 Q2, rose 61% to $1.74 billion, operating profit rose to $856 million. Amazon’s sales for 2014 Q2 rose 22% to $15.7 billion from $12.8 billion last year with a net loss of $7 million. Amazon’s operating profit margin is 0.5%, compared to Alibaba’s 49% operating profit margin.

EBay, revenue increased 14% to $3.88 billion in 2014 Q2 and net profit fell 7.5% to $640 million from $692 million.

*Source:http://blogs.wsj.com/digits/2013/10/16/alibaba-isnt-the-amazon-of-china/

Impediments to Trade

Government policies to restrict and to promote trade can have a decisive influence on Trade flows The competitive position of firms in export

markets The availability and price of imports The ability of firms to compete with imports

Impediments to Trade

Governments can also facilitate exports directly by such measures as: Concessional export financing Export subsidies Differential taxation of export earnings Financing for export market development

Trade Intermediaries

A competitive product and a receptive market are not enough; the product must be: Transported from the factory to the point of

shipment (port or airport) Transported to export market Be received in the export market Clear customs

Trade Intermediaries

A competitive product and a receptive market are not enough; the product must be: Move through distribution channels to the

point of sale Sold to the customer Be serviced after sale

Trade Intermediaries

International channels of distribution are often long, multilayered, complex, difficult to analyze and understand, and expensive to access or to develop.

Channel costs may represent three times the production cost of a product.

Aspects of Theories of International TradeThe theories also show that: Trade improves the relative welfare of the

factors of production that are used intensively in the exported product.

If labor and capital are immobile among sectors, then the returns to the factors of production (labor and capital) in the exporting industry will improve relative to those in the importing sector.

Aspects of Theories of International Trade The welfare of consumers of the export

products will decline relative to consumers of imported products.

Countries will tend to export products that use their relatively inexpensive and abundant factors of production intensively.

Trade brings about an equalization of the returns to factors of production; that is, trade tends to equalize capital costs and wage rates among countries over time.

New Theories of International Trade Intra-industry Trade Clusters of Interconnected Companies

Exchange of ideas among personnel. Building of support infrastructure.

Benefits of Trade Trade flows also influenced by:

Real Exchange Rates. Demand conditions over the business

cycle.

Real Exchange Rate

An increase in a country's real exchange rate has many of the same effects as a reduction in its tariff rate.

A fall in the real exchange rate has the opposite effect.

Real exchange rate is important to large and small countries and for high-income and developing countries alike.

Real Exchange Rate

Real exchanges rates may change due to: A gap between investment demand and

domestic savings. Short-term government macroeconomic

policy. Change in a country's terms of trade. Discovery of valuable natural resources.

Demand

Demand conditions over the business cycles in the domestic market and in export markets, and source countries for imports influence international trade.

If the domestic economy is expanding relative to the economies of other countries, exporters will tend to divert production to the domestic market.

Demand

If the domestic demand is slack, producers will tend to try to push excess production onto export markets.