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

© 2007 Prentice Hall, Inc. All rights reserved. 4–1

Chapter 4Chapter 4

The Global Context of BusinessThe Global Context of Business


L E A R N I N G O U T C O M E SL E A R N I N G O U T C O M E SAfter reading this chapter, you should be able to:After reading this chapter, you should be able to:

Discuss the rise of international business and describe the major Discuss the rise of international business and describe the major world marketplaces and trade agreements and alliances.world marketplaces and trade agreements and alliances.Explain how differences in import-export balances, exchange Explain how differences in import-export balances, exchange rates, and foreign competition determine the ways in which rates, and foreign competition determine the ways in which countries and businesses respond to the international countries and businesses respond to the international environment.environment.Discuss the factors involved in deciding to do business Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of internationally and in selecting the appropriate levels of international involvement and international organizational international involvement and international organizational structure.structure.Describe some of the ways in which social cultural, economic, Describe some of the ways in which social cultural, economic, legal, and political differences among nations affect international legal, and political differences among nations affect international business. business.


What’s in It for Me?What’s in It for Me?

This chapter will better enable you to:This chapter will better enable you to:1.1. Understand how global forces affect you as a Understand how global forces affect you as a

customercustomer

2.2. Understand how globalization affects you as an Understand how globalization affects you as an employeeemployee

3.3. Assess how global opportunities and challenges Assess how global opportunities and challenges can affect you as a business owner and as an can affect you as a business owner and as an investorinvestor


The Contemporary Global EconomyThe Contemporary Global Economy

GlobalizationGlobalization

The process by which the world’s various The process by which the world’s various national economies and trading systems are national economies and trading systems are fast becoming a single highly fast becoming a single highly interdependent systeminterdependent system Exports:Exports: Domestically produced products sold in Domestically produced products sold in

foreign marketsforeign markets

Imports:Imports: Foreign products sold in domestic Foreign products sold in domestic marketsmarkets


The Major World MarketplacesThe Major World Marketplaces

Distinctions Based on WealthDistinctions Based on Wealth High-income countriesHigh-income countries Upper middle-income countriesUpper middle-income countries Low middle-income countriesLow middle-income countries Low-income countries (developing countries)Low-income countries (developing countries)

Geographic ClustersGeographic Clusters North AmericaNorth America EuropeEurope Pacific AsiaPacific Asia


Trade Agreements and AlliancesTrade Agreements and Alliances

Significant Agreements and TreatiesSignificant Agreements and Treaties North American Free Trade Agreement (NAFTA)North American Free Trade Agreement (NAFTA)

Canada, Mexico, and the United StatesCanada, Mexico, and the United States

Effects: increases direct foreign investment, increases Effects: increases direct foreign investment, increases exports and imports, creates jobsexports and imports, creates jobs

European Union (EU)European Union (EU) Most European nationsMost European nations

Effects: eliminates quotas, removes trade barriers, and sets Effects: eliminates quotas, removes trade barriers, and sets uniform tariffs on internally traded EU imports and exportsuniform tariffs on internally traded EU imports and exports

Association of Southeast Asian NationsAssociation of Southeast Asian Nations


Trade Agreements and Alliances Trade Agreements and Alliances (cont’d)(cont’d)

Significant Agreements and TreatiesSignificant Agreements and Treaties General Agreement on Tariffs and Trade (GATT):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)World Trade Organization (WTO) Began on January 1, 1995 Goals:Goals:

1.1. Promote trade by encouraging members to adopt Promote trade by encouraging members to adopt fair trade practices.fair trade practices.

2.2. Reduce trade barriers by promoting multilateral Reduce trade barriers by promoting multilateral negotiations.negotiations.

3.3. Establish fair procedures for resolving disputes Establish fair procedures for resolving disputes among members.among members.


Import-Export BalancesImport-Export Balances

Balance of TradeBalance of Trade

The total economic value of all the products that a The total economic value of all the products that a country exports minus the economic value of all the country exports minus the economic value of all the products that it importsproducts that it imports

Trade SurplusTrade Surplus

A positive balance of trade that results when a A positive balance of trade that results when a country exports more than it importscountry exports more than it imports

Trade DeficitTrade Deficit

A negative balance of trade that results when a A negative balance of trade that results when a country imports more than it exportscountry imports more than it exports


Import-Export Balances (cont’d)Import-Export Balances (cont’d)

Balance of PaymentsBalance of Payments The flow of The flow of moneymoney into or out of a country into or out of a country

The money that a country pays for imports and receives for The money that a country pays for imports and receives for exports—its balance of trade—comprises much of its exports—its balance of trade—comprises much of its balance of paymentsbalance of payments

Exchange RateExchange Rate The rate at which the currency of one nation can be The rate at which the currency of one nation can be

exchanged for that of anotherexchanged for that of another Fixed exchange ratesFixed exchange rates

Floating exchange ratesFloating exchange rates


Exchange Rates Impact Global TradeExchange Rates Impact Global Trade

When an economy’s currency is strong:When an economy’s currency is strong: Domestic companies find it harder to export productsDomestic companies find it harder to export products

Foreign companies find it easier to import productsForeign companies find it easier to import products

Domestic companies may move production to Domestic companies may move production to cheaper production sites in foreign countriescheaper production sites in foreign countries

Implications for the balance of trade?Implications for the balance of trade?


Exchange Rates Impact Global Trade Exchange Rates Impact Global Trade (cont’d)(cont’d)

When an economy’s currency is weak:When an economy’s currency is weak: Domestic companies find it easier to export productsDomestic companies find it easier to export products

Foreign companies find it harder to import productsForeign companies find it harder to import products

Foreign companies may invest in domestic Foreign companies may invest in domestic production facilitiesproduction facilities

Implications for the balance of trade?Implications for the balance of trade?


Forms of Competitive AdvantageForms of Competitive Advantage

Absolute AdvantageAbsolute Advantage When a country can produce something that is When a country can produce something that is

cheaper and/or of higher quality than any other cheaper and/or of higher quality than any other countrycountry

An advantage based on possessing a scarce An advantage based on possessing a scarce resource (e.g., oil) or favorable physical locationresource (e.g., oil) or favorable physical location

Comparative AdvantageComparative Advantage When a country can produce goods more efficiently When a country can produce goods more efficiently

or better than other countries can produce the same or better than other countries can produce the same goodsgoods

An advantage based on superior productivity (e.g., An advantage based on superior productivity (e.g., technologically-advanced manufacturing capability)technologically-advanced manufacturing capability)


Forms of Competitive Advantage Forms of Competitive Advantage (cont’d)(cont’d)

National Competitive AdvantageNational Competitive Advantage Conditions favoring heavy involvement in Conditions favoring heavy involvement in

international business:international business:

1.1. Factor conditionsFactor conditions—labor, capital, entrepreneurs, —labor, capital, entrepreneurs, physical resources, and information resourcesphysical resources, and information resources

2.2. Demand conditionsDemand conditions——a large domestic consumer base a large domestic consumer base that promotes strong demand for innovative productsthat promotes strong demand for innovative products

3.3. Related and supporting industriesRelated and supporting industries——strong local or strong local or regional suppliers and/or industrial customersregional suppliers and/or industrial customers

4.4. Strategies, structures, and rivalriesStrategies, structures, and rivalries—domestic —domestic firms firms and industries that stress cost reduction, product quality, and industries that stress cost reduction, product quality, higher productivity, and innovative productshigher productivity, and innovative products


International Business ManagementInternational Business Management

Going InternationalGoing International Gauging International DemandGauging International Demand

Foreign demand for a company’s product may be greater Foreign demand for a company’s product may be greater than, the same as, or weaker than domestic demandthan, the same as, or weaker than domestic demand

Adapting to Customer NeedsAdapting to Customer Needs A firm must decide whether and how to adapt its products to A firm must decide whether and how to adapt its products to

meet the special demands of foreign customersmeet the special demands of foreign customers

OutsourcingOutsourcing Paying suppliers and distributors to perform certain business Paying suppliers and distributors to perform certain business

processes or to provide needed materials or servicesprocesses or to provide needed materials or services

OffshoringOffshoring Outsourcing to foreign countriesOutsourcing to foreign countries


Levels of International InvolvementLevels of International Involvement

ExportersExporters Make products in one country to distribute and sell in Make products in one country to distribute and sell in

othersothers

ImportersImporters Buy products in foreign markets and bring them home Buy products in foreign markets and bring them home

for resalefor resale

International firmsInternational firms Conduct much of their business abroad and may Conduct much of their business abroad and may

maintain overseas manufacturing facilitiesmaintain overseas manufacturing facilities

Multinational firmsMultinational firms Design, produce, and market products in many nationsDesign, produce, and market products in many nations


International Organization StructuresInternational Organization Structures

Independent AgentIndependent Agent A foreign individual or organization that represents A foreign individual or organization that represents

an exporter in foreign marketsan exporter in foreign markets

Licensing Arrangements (or Agreements)Licensing Arrangements (or Agreements) Domestic firms give foreign individuals or companies Domestic firms give foreign individuals or companies

exclusive rights to manufacture or market their exclusive rights to manufacture or market their products in that marketproducts in that market

Branch OfficesBranch Offices A firm sends its own managers to overseas branch A firm sends its own managers to overseas branch

offices so that it will have more direct control than it offices so that it will have more direct control than it does over agents or license holdersdoes over agents or license holders


International Organization Structures International Organization Structures (cont’d)(cont’d)

Strategic Alliance (or Joint Venture)Strategic Alliance (or Joint Venture) A company finds a partner firm in the country in A company finds a partner firm in the country in

which it wants to do businesswhich it wants to do business Each party agrees to invest resources and capital Each party agrees to invest resources and capital

into a new business or to cooperate in some into a new business or to cooperate in some mutually beneficial waymutually beneficial way

Foreign Direct Investment (FDI)Foreign Direct Investment (FDI) Involves buying or establishing tangible assets in Involves buying or establishing tangible assets in

another countryanother country


International InvolvementInternational Involvement

Foreign Direct InvestmentForeign Direct Investment

Strategic AlliancesStrategic Alliances

Branch OfficesBranch Offices

Licensing ArrangementsLicensing Arrangements

Independent AgentsIndependent AgentsINV

OL

VE

ME

NT

INV

OL

VE

ME

NT

HIGHHIGH

LOWLOW


Barriers to International TradeBarriers to International Trade

Social and Cultural DifferencesSocial and Cultural Differences

Legal and Political DifferencesLegal and Political Differences

Economic DifferencesEconomic Differences


Legal and Political DifferencesLegal and Political Differences

Quotas, Tariffs, and SubsidiesQuotas, Tariffs, and Subsidies QuotaQuota: R: Restricts the number of products of a certain type that

can be imported, raising the prices of those imports

EmbargoEmbargo: : Government order forbidding exportation and/or importation of a product or all products from a specific country

Tariffs: Taxes on imported products

SubsidySubsidy: G: Government payment to help a domestic business compete with foreign firms

ProtectionismProtectionism The practice of protecting domestic business at the expense of

free market competition


Legal and Political Differences (cont’d)Legal and Political Differences (cont’d)

Local Content LawsLocal Content Laws Requirements that products sold in a country be at

least partly made there

Business Practice LawsBusiness Practice Laws Host countries govern business practices within their

jurisdictions

CartelsCartels Associations of producers that control supply and

prices

DumpingDumping Selling a product abroad for less than the cost of

production at home

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