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Bus 100
Chapter 4
THE GLOBAL CONTEXT OF BUSINESS
LEARNING
OBJECTIVES
After reading this chapter, you should be able to:
1. Discuss the rise of international business and
describe the major world marketplaces and trade
agreements and alliances.
2. 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.
3. Discuss the factors involved in deciding to do
business internationally and in selecting the
appropriate levels of international involvement and
international organizational structure.
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LEARNING
O B J E C T I V E S (cont’d)
After reading this chapter, you should be
able to:
4. Describe some of the ways in which social,
cultural, economic, legal, and political
differences among nations affect international
business.
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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
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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
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Annual Global Imports and Exports
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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
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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
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The Nations of NAFTA
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The Nations of the European Union
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The Nations of the Association of Southeast
Asian Nations (ASEAN)
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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.
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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
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The Major Trading Partners of the United
States
Source: The US Census Bureau, http://www.census.gov/foreign-trade/statistics/highlights/top/top0511.html#imports
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U.S. Imports and Exports
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U.S. Trade Deficit
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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
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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?
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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?
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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)
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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
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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
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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
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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
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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
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International Involvement
INVOLVEMENT
HIGH
LOW
Foreign Direct
Investment
Strategic Alliances
Branch Offices
Licensing Arrangements
Independent Agents
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Barriers to International Trade
Social and Cultural
Differences
Legal and Political
Differences
Economic
Differences
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Legal and Political Differences
Quotas, Tariffs, and Subsidies
Quota: Restricts the number of products of a certain
type that can be imported, raising the prices of those
imports
Embargo: Government order forbidding exportation
and/or importation of a product or all products from a
specific country
Tariffs: Taxes on imported products
Subsidy: Government payment to help a domestic
business compete with foreign firms
Protectionism
The practice of protecting domestic business at the
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expense of free market competition
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 jurisdictions
Cartels
Associations of producers that control supply and
prices
Dumping
Selling a product abroad for less than the cost of
production at home
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T HE
END!
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