© 2007 Prentice Hall, Inc. All rights reserved.4–1 Chapter 4 The Global Context of Business

© 2007 Prentice Hall, Inc. All rights reserved.4–2 L E A R N I N G O U T C O M E S After reading this chapter, you should be able to: Discuss the rise of international business and describe the major world marketplaces and trade agreements and alliances. 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. Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure. Describe some of the ways in which social cultural, economic, legal, and political differences among nations affect international business.

© 2007 Prentice Hall, Inc. All rights reserved.4–3 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

© 2007 Prentice Hall, Inc. All rights reserved.4–4 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

© 2007 Prentice Hall, Inc. All rights reserved.4–5 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

© 2007 Prentice Hall, Inc. All rights reserved.4–6 Trade Agreements and Alliances Significant 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

© 2007 Prentice Hall, Inc. All rights reserved.4–7 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.

© 2007 Prentice Hall, Inc. All rights reserved.4–8 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

© 2007 Prentice Hall, Inc. All rights reserved.4–9 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 another  Fixed exchange rates  Floating exchange rates

© 2007 Prentice Hall, Inc. All rights reserved.4–10 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?

© 2007 Prentice Hall, Inc. All rights reserved.4–11 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?

© 2007 Prentice Hall, Inc. All rights reserved.4–12 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)

© 2007 Prentice Hall, Inc. All rights reserved.4–13 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

© 2007 Prentice Hall, Inc. All rights reserved.4–14 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 Needs  A 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  Offshoring  Outsourcing to foreign countries

© 2007 Prentice Hall, Inc. All rights reserved.4–15 Levels of International Involvement Exporters  Make products in one country to distribute and sell in others Importers  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

© 2007 Prentice Hall, Inc. All rights reserved.4–16 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

© 2007 Prentice Hall, Inc. All rights reserved.4–17 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

© 2007 Prentice Hall, Inc. All rights reserved.4–18 International Involvement Foreign Direct Investment Strategic Alliances Branch Offices Licensing Arrangements Independent Agents INVOLVEMENT HIGH LOW

© 2007 Prentice Hall, Inc. All rights reserved.4–19 Barriers to International Trade Social and Cultural Differences Legal and Political Differences Economic Differences

© 2007 Prentice Hall, Inc. All rights reserved.4–20 Legal and Political Differences Quotas, Tariffs, and Subsidies  Quota: R  Quota: Restricts the number of products of a certain type that can be imported, raising the prices of those imports  Embargo:  Embargo: Government order forbidding exportation and/or importation of a product or all products from a specific country   Tariffs: Taxes on imported products  Subsidy: G  Subsidy: Government payment to help a domestic business compete with foreign firmsProtectionism   The practice of protecting domestic business at the expense of free market competition

© 2007 Prentice Hall, Inc. All rights reserved.4–21 Legal and Political Differences (cont’d) Local Content Laws   Requirements that products sold in a country be at least partly made there Business Practice Laws   Host countries govern business practices within their jurisdictionsCartels   Associations of producers that control supply and pricesDumping   Selling a product abroad for less than the cost of production at home