3-1 Chapter 3: Business in a Global Environment Exploring Business 2.0 © 2012 Flat World Knowledge

3-2 Chapter Objectives 1.Explain why nations and companies participate in international trade. 2.Describe the concepts of absolute and comparative advantage. 3.Explain how trade between nations is measured. 4.Define importing and exporting. 5.Explain how companies enter the international market through licensing agreements or franchises. 6.Describe how companies reduce costs through contract manufacturing and outsourcing. 7.Explain the purpose of international strategic alliances and joint ventures. 8.Understand how U.S. companies expand their businesses through foreign direct investments and international subsidiaries. Exploring Business 2.0 © 2012 Flat World Knowledge

3-3 Chapter Objectives 10.Understand the arguments against and in favor of multinational corporations. 11.Appreciate how cultural, economic, legal, and political differences between countries create challenges to successful business dealings. 12.Describe the ways in which governments and international bodies promote and regulate global trade. 13.Discuss the various initiatives designed to reduce international trade barriers and promote free trade. 14.Understand how to prepare for a career in international business. Exploring Business 2.0 © 2012 Flat World Knowledge

Why Do Nations Trade? “Because no national economy can produce all the goods (it) need(s).” 3-4 Exploring Business 2.0 © 2012 Flat World Knowledge

3-5 Absolute Advantage 1)Only source of particular product 2)Can make more of product using same or fewer resources than other countries Exploring Business 2.0 © 2012 Flat World Knowledge

3-6 Comparative Advantage 1)Produce product at lower opportunity cost 2)Opportunity costs- the products that country must decline in order to produce something else 3)When country specializes in particular product, it must sacrifice production of another product Exploring Business 2.0 © 2012 Flat World Knowledge

3-7 Comparative Advantage In The Techs Exploring Business 2.0 © 2012 Flat World Knowledge

3-8 Measuring Trade  Balance of Trade- “…subtract... value of (country’s) imports from the value of its exports.”  Balance of Payments- “…the difference, over...time, between the total flow of money...into a country and the total flow of money...out.” Exploring Business 2.0 © 2012 Flat World Knowledge

3-9 Balance Of Trade Trade Surplus (Favorable Balance) Sells more than it buys Trade Deficit (Unfavorable Balance) Buys more than it sells Managing National Credit Card Exploring Business 2.0 © 2012 Flat World Knowledge

3-10 U.S. Imports, Exports, and Balance of Payments, 1994–2010 Exploring Business 2.0 © 2012 Flat World Knowledge

Importing and Exporting Importing : Buying products overseas and reselling them in one’s own country Exporting : Selling domestic products to foreign customers Exploring Business 2.0 © 2012 Flat World Knowledge

3-12 Licensing And Franchising  Licensing Agreement – Lets foreign company sell products of producer/licensor or use intellectual property for royalty fee  International Franchise Agreement – Company/Franchisor grants foreign company right to use brand name and sell its products Exploring Business 2.0 © 2012 Flat World Knowledge

3-13 Contract Manufacturing “ (also known as outsourcing)…U.S. company… contract(s) with local company in foreign country to manufacture one of its products… retain(s) control of product design and development and… label…” Exploring Business 2.0 © 2012 Flat World Knowledge

Table Selected Hourly Wages, United States and India Source: Data obtained from “Huge Wage Gaps for the Same Work Between Countries – June 2011,” WageIndicator.com, (accessed September 20, 2011) Exploring Business 2.0 © 2012 Flat World Knowledge

3-15 Strategic Alliances And Joint Ventures Strategic Alliance – Agreement between two companies (or company and nation) to pool resources and achieve business goals benefiting both partners Joint Venture – Alliance in which partners fund separate entity to manage joint operation Exploring Business 2.0 © 2012 Flat World Knowledge

3-16 Foreign Direct Investments And Subsidiaries $ Foreign Direct Investment – Formal establishment of business operations on foreign soil $ Foreign Subsidiary – Independent company owned by a foreign firm (parent) $ Offshoring – Occurs when the facilities set up in the foreign countries replace U.S. manufacturing facilities $ Goods are sent back to the U.S. for sale Exploring Business 2.0 © 2012 Flat World Knowledge

3-17 Where FDI Goes Exploring Business 2.0 © 2012 Flat World Knowledge

3-18 The World’s Twenty Largest MNCs Exploring Business 2.0 © 2012 Flat World Knowledge

3-19 MNC Culture Criticism – Destroys livelihoods in home-country – Traditional lifestyles/values weakened or destroyed – Irreversible damage to environment Defense  Better, cheaper products  Creates jobs  Raises standard of living  Increases cross-cultural understanding Exploring Business 2.0 © 2012 Flat World Knowledge

3-20 Global Business Environment CulturalEconomic Legal & Regulatory Exploring Business 2.0 © 2012 Flat World Knowledge

3-21Culture “...system of shared beliefs, values, customs, and behaviors that govern the interactions of members of a society.” Exploring Business 2.0 © 2012 Flat World Knowledge

3-22 Cultural Environment LanguageTime/Sociability High Context- interlocking personal/family connections hold people together High Context- interlocking personal/family connections hold people together Low Context- personal & work relationships more compartmentalized Low Context- personal & work relationships more compartmentalized Intercultural Communication Degrees of animation in expression Degrees of animation in expression Distance Distance Exploring Business 2.0 © 2012 Flat World Knowledge

3-23 Lost In Translation Translated into German, the slogan “Come Alive with Pepsi” became “Come out of the Grave with Pepsi A U.S. computer company in Indonesia translated “software” as “underwear.” A German chocolate product called “Zit” didn’t sell well in the United States. Exploring Business 2.0 © 2012 Flat World Knowledge

3-24 Economic Environment  Economic Development- Gross national income per capita Standard of living Standard of living Infrastructure Infrastructure  Currency Valuations & Exchange Rates  Universal Currency Converter Universal Currency Converter Universal Currency Converter Exploring Business 2.0 © 2012 Flat World Knowledge

3-25 The World’s Wealth, 1970 and 2010 Exploring Business 2.0 © 2012 Flat World Knowledge

3-26 Legal & Regulatory Environment No established global legal system Foreign Corrupt Practices Act Exploring Business 2.0 © 2012 Flat World Knowledge

3-27 Subsidies or Trade Controls?  Protectionism  Tariffs  Quotas/Embargo  Dumping Exploring Business 2.0 © 2012 Flat World Knowledge

3-28 Trade Control Debate Cons  Restricts free trade; countries cannot compete freely  Doesn’t promote level playing field; gives special privileges to some  Cannot bring goods to fair/open market  Detrimental to world economy; nations cannot focus on what they do best Pros – Protect specific industries – Protect new or struggling industries – Shield industries vital to national defense Exploring Business 2.0 © 2012 Flat World Knowledge

3-29 Reducing Trade Barriers  Trade Agreements/Organizations General Agreement on Tariffs & Trade General Agreement on Tariffs & Trade World Trade Organization World Trade Organization  Financial Support for Troubled Economies International Monetary Fund International Monetary Fund World Bank World Bank  Trading Blocs North American Free Trade Association North American Free Trade Association European Union European Union Other Other Exploring Business 2.0 © 2012 Flat World Knowledge

3-30 The Nations of the European Union Exploring Business 2.0 © 2012 Flat World Knowledge

Career in International Business Plan Education Plan Education Develop expertise Develop expertise Knowledge of international politics, economics, & culture Knowledge of international politics, economics, & culture Get Direct Experience Get Direct Experience Interact With Other Cultures Interact With Other Cultures 3-31 Exploring Business 2.0 © 2012 Flat World Knowledge