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Part 1 Business in a Changing World © 2015 McGraw-Hill Education.

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1 Part 1 Business in a Changing World © 2015 McGraw-Hill Education.

2 CHAPTER 1 The Dynamics of Business and Economics CHAPTER 2 Business Ethics and Social Responsibility CHAPTER 2 APPENDIX The Legal and Regulatory Environment CHAPTER 3 Business in a Borderless World 3-2

3 Learning Objectives LO 3-1Explore some of the factors within the international trade environment that influence business. LO 3-2 Investigate some of the economic, legal-political, social, cultural and technological barriers to international business. LO 3-3 Specify some of the agreements, alliances and organizations that may encourage trade across international boundaries. LO 3-4 Summarize the different levels of organizational involvement in international trade. LO 3-5 Contrast two basic strategies used in international business. 3-3

4 Role of International Business 3-4 International Business The buying, selling and trading of goods and services across national boundaries Most of the world’s population and two-thirds of its total purchasing power are outside the U.S. Global marketing requires balancing global brands with the needs of local consumers

5 Role of International Business 3-5 »American companies have become widely popular in China »Some have more sales in China than in the United States

6 Role of International Business 3-6 Absolute Advantage A monopoly that exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item Comparative Advantage The basis of most international trade, when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items Outsourcing The transferring of manufacturing or other tasks – such as data processing – to countries where labor and supplies are less expensive

7 Role of International Business 3-7 Exporting – the sale of goods and services to foreign markets 2011 U.S. exports = $2.1 trillion+ Importing – the purchase of goods and services from foreign markets 2011 U.S. imports = $2.6 trillion+

8 3-8 Role of International Business Balance of Trade The difference in value between what a nation exports and its imports Trade Deficit A nation’s negative balance of trade, which exists when that country imports more products than it exports Balance of Payments The difference between the flow of money into and out of a country

9 U.S. Trade Deficit, (in billions of dollars) 3-9

10 China Faces Growing Concerns over Pollution 3-10 With China’s growing middle class, pollution has also grown and the Chinese government has taken action China is closing their worst polluting factories, adopting stringent environmental laws and planning for a cap-and-trade system Even though China releases the most greenhouse gas emissions, they still give off less per person than the U.S.

11 International Trade Barriers 3-11 Completely free trade seldom exists, due to: Economic barriers Ethical, legal and political barriers Social and cultural barriers Technological barriers AT&T has made inroads with consumers who don’t want their cell phones to stop working when they go abroad

12 Economic Barriers 3-12 Economic Development Industrialized nations are economically advanced United StatesJapanGreat BritainCanada Less Developed Countries have low per-capita income Potentially huge, and profitable, untapped market

13 Economic Barriers 3-13 Level of development is determined in part by a country’s Infrastructure The physical facilities supporting a country’s economic activities, such as railroads, highways, ports, airfields, utilities and power plants, schools, hospitals, communication systems and commercial distribution systems

14 Economic Barriers 3-14 Another economic trade barrier is the Exchange Rate The ratio at which one nation’s currency can be exchanged for another nation’s currency Exchange rates vary daily and affect the cost of imports and exports A government may intentionally alter the value of its currency through fiscal policy

15 International Trade Barriers 3-15 When entering the international marketplace, companies must contend with potentially complex relationships  Different laws of its own nation, international laws and the laws of the nation with which its trading  Various trade restrictions  Changing political climates  Different ethical values

16 Legal Barriers 3-16 A firm doing business abroad must understand and obey the laws of the host country Some countries have restrictions on how much local currency can be taken out of its borders Other countries may forbid foreigners from owning property Some countries fail to honor U.S. laws and/or fail to enforce their own laws In some parts of the world, copyright and patent laws are less strict than in the U.S.

17 International Trade Barriers 3-17 The watch on the right, a knockoff developed by Digital Time Co., Ltd, in Thailand, received a special award for falsification The dubious honor is given to the “best” product knockoffs by the organization Action Plagiarius in an effort to shame their makers

18 Tariffs and Trade Restrictions 3-18 Import Tariff A tax levied by a nation on goods imported into the country Fixed tariff is a specific amount of money levied on each unit of product brought into the country Ad valorem tariff is based on the value of the item Exchange Controls Regulations that restrict the amount of currency that can be bought or sold

19 Reshoring 3-19 Economic changes have spurred companies to bring their manufacturing operations from out of the country back to the United States For example, the rise of the middle class in China has spurred employees to demand higher wages and better jobs This is resulting in higher costs for companies whose motivation to take their manufacturing offshore was to decrease expenses Additionally, Americans are wanting manufacturing jobs to come back to America out of a desire for more jobs and American-made products SOURCE: Ed Crooks. “US Manufacturers ‘Reshoring’ From China”. September 24, d-11e feab7de.html#axzz2fpaHeQ5z. (accessed September 24, 2013).www.ft.com 249d-11e feab7de.html#axzz2fpaHeQ5z

20 Tariffs and Trade Restrictions 3-20 Quota Restriction on the number of units of a particular product that can be imported into a country Embargo A prohibition on trade for a particular product Dumping The act of a country or business selling products at less than what it costs to produce them

21 Tariffs and Trade Restrictions 3-21 Dumping can spark trade wars The Obama administration imposed stiff tariffs on Chinese-made tires, allegedly dumped on the U.S. market China retaliated by slapping tariffs on U.S. chicken products exported to China

22 Political Barriers 3-22  Seldom in writing & change rapidly  Political unrest may create a hostile or even dangerous environment for foreign business Cartel A group of firms or nations that agrees to act as a monopoly and not compete with each other, in order to generate a competitive advantage in world markets  OPEC is an example of a cartel Political considerations affect international business daily

23 Social and Cultural Barriers 3-23 Research can help minimize the problems associated with social and cultural differences Differences in the spoken and written language Appropriate body language, posture, facial expressions and personal space may vary by nation Family roles may differ in different societies Other nations often have a different perception of time National customs and holidays must be respected Most nations use the metric system

24 Technological Barriers 3-24 Are creating global marketing opportunities The lack of phone lines opens the market for cellular communications Technological Advances Create new challenges and competition Out of the top five PC companies, three are from countries in Asia Changing Technologies

25 Tax Evasion Among Multinational Corporations 3-25  Many US companies have been criticized for evading American taxes by keeping their funds in foreign bank accounts  Switzerland is the top choice for many American companies  In 2013, the United States government proposed a deal with Switzerland banks to disclose the information of their American clients in exchange for prosecutorial immunity if these companies are taken to trial for tax evasion  Additionally, under the deal the banks will be charged a fine. If the banks refuse to comply, they could be indicted for tax evasion along with the company SOURCE: Patrick Temple-West and Katharina Bart. “U.S., Switzerland Strike Bank Deal Over Tax Evasion”. August 30, (accessed September 24, 2013).www.reuters.com

26 Trade Agreements and Organizations 3-26 General Agreement on Tariffs and Trade (GATT) Trade agreement signed by 23 nations in 1947, provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved World Trade Organization (WTO) International organization dealing with the rules of trade between nations, evolved from GATT

27 Trade Agreements and Organizations 3-27 North American Free Trade Agreement (NAFTA) Agreement that eliminates most tariffs and trade restrictions on agricultural and manufactured products to encourage trade among Canada, the U.S. and Mexico CANADACANADA MEXICOMEXICO USAUSA

28 Trade Agreements and Organizations 3-28 NAFTA Effective January 1, 1994 Easier to invest in Mexico and Canada Protects intellectual property Expands trade by requiring equal treatment Simplifies country- of-origin rules While controversial, NAFTA has become a positive factor for U.S. firms

29 Trade Agreements and Alliances 3-29 A union of European nations established in 1958 to promote trade among its members; one of the largest single markets today The EU has a GDP of $14 trillion+ European Union (EU) An international trade alliance that promotes open trade and economic and technical cooperation among member nations Holds 54% of world GDP Asia-Pacific Economic Cooperation (APEC)

30 Trade Alliances and Organizations 3-30 A trade alliance that promotes trade and economic integration among member nations in Southeast Asia Has a GDP of $2 trillion Association of Southeast Asian Nations (ASEAN) An organization established by the industrialized nations in 1946 to loan money to underdeveloped and developing countries World Bank Organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation International Monetary Fund

31 Getting Involved 3-31 Exporting and Importing  Countertrade agreement is a foreign trade agreement that involves bartering products for other products instead of currency  Export agents are middlemen that help companies by handling their international transactions Top Exporting Countries *2011 estimates in billions, calculated on an exchange rate basis

32 Getting Involved 3-32 Franchising A form of licensing in which a company – the franchiser – agrees to provide a franchisee a name, logo, methods of operation, advertising, products and other elements associated with a franchiser’s business, in return for a financial commitment and the agreement to conduct business in accord with the franchiser’s standard of operation Trading Company A firm that buys goods in one country and sells them to buyers of another country Handles all trade activities; similar to export agents but their role is broader Licensing A trade agreement in which one company – the licensor – allows another company – the licensee – to use its company name, products, patents, brand, trademarks, raw materials and/or production processes in exchange for a fee or royalty An attractive alternative to direct investment when political stability is in doubt

33 Getting Involved 3-33  McDonald’s has expanded around the world via franchising  Although the company will customize some of its meals to the local culture, this menu from McDonald’s in Morocco shows the firm offers similar fare across the world

34 Getting Involved 3-34 The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification; the final product carries the domestic firm’s name For example, Reebok uses contract manufacturers to produce many of its shoes Contract Manufacturing As defined earlier is transferring tasks to other countries where costs are lower Insourcing, where foreign companies transfer tasks to U.S. companies, happens more often Outsourcing

35 Getting Involved 3-35 Offshoring The relocation of business processes by a company or subsidiary to another country Different from outsourcing; the company retains control by not subcontracting to another company Joint Venture The sharing of the costs and operation of a business between a foreign company and a local partner Used in countries forbidding direct investment from foreign companies or when the company lacks resources or expertise

36 Getting Involved 3-36 Strategic Alliance A partnership formed to create competitive advantage on a worldwide basis Used when competition is fierce and costs are high Becoming predominant in the automobile and computer industries Direct Investment The ownership of overseas facilities For companies who want more control and are willing to invest considerable resources May involve new facilities or the purchase of an existing operation

37 Getting Involved 3-37 o Walmart has chosen to directly invest in China o However, it must still make adjustments to fit with the local culture o For instance, Walmart, which is normally against trade unions, was pressured to allow its Chinese employees to unionize

38 Getting Involved 3-38 Multinational Corporation (MNC) A corporation that operates on a worldwide scale, without significant ties to any one nation or region ►They often have greater assets than the countries in which they operate ►Many MNCs are targeted by antiglobalization activists, including some violent protests ►Activists contend the MNCs increase the gap between rich and poor, misuse scarce resources, exploit the labor markets in LDCs and harm natural environments

39 Getting Involved 3-39 Global Strategy (Globalization) Multinational Strategy A strategy that involves standardizing products (promotion and distribution) for the whole world as if it were a single entity A plan used by international companies that involves customizing products, promotion and distribution according to cultural technological, regional and national differences

40 Discussion ? Distinguish between an absolute advantage and a comparative advantage. Cite an example of a country that has an absolute advantage and one with a comparative advantage. ? At what levels might a firm get involved in international business? What level requires the least commitment of resources? What level requires the most? 3-40

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