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Chapter 4
Understanding the Global Context of Business
Chapter Overview
Through the process of globalization, the world market is rapidly evolving into a
single interdependent economic system. The three major marketplaces within this
system are North America, Europe, and Pacific Asia.
Business success in the international arena is largely dependent on competitive
advantage, which can take several different forms. With an absolute advantage, a
country engages in international trade because it can produce a product more
efficiently than any other nation. With a comparative advantage, a nation can
produce some products more efficiently than others. With a national advantage, a
country competes effectively in the global marketplace due to factor conditions,
demand conditions, related and supporting industries, and organizational
strategies, structures, and rivalries. Additional key factors that influence
international business include import-export balances and currency exchange rate
differences.
In deciding to engage in international business, individual firms must first
determine whether a market exists for their products abroad – either in their
current form or with adaptations to suit foreign demands. If so, firms must also
assess whether they have the expertise to manage international trade. Finally,
firms must evaluate whether the conditions of each country they plan to enter are
conducive to international trade.
Once firms decide to enter the global market, they must decide how to effectively
manage the business. Levels of involvement range from importing and exporting,
to organizing as an international firm, to operating as a multinational firm. A
company’s level of global involvement will directly affect its organizational
strategy. Options include use of independent agents, licensing arrangements,
branch offices, strategic alliances, and direct investment. Depending on local
conditions, a company’s international organizational strategy may well vary for
different foreign countries.
Several barriers can inhibit global trade. Social and cultural differences include
language, social values, and traditional buying patterns. Economic differences
may compel companies to form close relationships with foreign governments in
order to do business abroad. Political and legal differences can take a range of
forms. Quotas, tariffs, subsidies, and local content laws are designed to protect
domestic industries. Furthermore, local business practice laws can make practices
that are standard in one country illegal in another.
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Chapter Objectives
1. Discuss the rise of international business and describe the major world
marketplaces.
2. Explain how different forms of competitive advantage, 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.
4. Describe some of the ways in which social, cultural, economic, political,
and legal differences among nations affect international business.
REFERENCE OUTLINE
Opening Case: Where Does Management Stand on Beer Breaks?
I.
The Rise of International Business
A. The Contemporary Global Economy
1. Trade Agreements
a. General Agreement on Tariffs and Trade
(GATT)
b. North American Free Trade Agreement
(NAFTA)
c. European Union (EU)
d. World Trade Organization (WTO)
B. The Major World Marketplaces
1. North America
2. Europe
3. Pacific Asia
C. Forms of Competitive Advantage
1. Absolute Advantage
2. Comparative Advantage
3. National Competitive Advantage
D. Import-Export Balances
E. Exchange Rates
1. Exchange Rates and Competition
2. The U.S. Economy and Foreign Trade
II.
International Business Management
A. Going International
1. Gauging International Demand
2. Adapting to Customer Needs
B. Levels of Involvement
1. Exporters and Importers
2. International Firms
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3. Multinational Firms
C. International Organizational Structures
1. Independent Agents
2. Licensing Arrangements
3. Branch Offices
4. Strategic Alliances
5. Foreign Direct Investment
III.
Barriers to International Trade
A. Social and Cultural Differences
B. Economic Differences
C. Legal and Political Differences
1. Quotas, Tariffs, and Subsidies
2. Local Content Laws
3. Business Practice Laws
LECTURE OUTLINE
I.
The Rise of International Business (Use PowerPoint 4.4.)
An increasingly large number of firms engage in international
business. The world economy is becoming a single interdependent
system through the process of globalization. Exports are products
that are produced domestically and shipped for sale abroad; imports
are products that are produced abroad but sold domestically. The total
annual volume of world trade is estimated to be $8 trillion.
A. The Contemporary Global Economy (Use PowerPoint 4.5,
4.6.)
International trade is becoming increasingly important to most
nations and their largest businesses. Governments and businesses
are more aware of the benefits of globalization to businesses and
shareholders. New technologies have made travel,
communication, and commerce faster and cheaper. In addition,
competitive pressures push firms into foreign markets to keep up
with competitors.
1. Trade Agreements. Virtually every nation has formed
trade treaties with other nations.
a. General Agreement on Tariffs and Trade
(GATT). This agreement reduces or eliminates
trade barriers by encouraging nations to protect
domestic industries.
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b. North American Free Trade Agreement
(NAFTA). This agreement removes tariffs and
other trade barriers among the U.S., Canada,
and Mexico.
c. European Union (EU). This pact eliminates
most quotas and sets uniform tariff levels on
products imported and exported within the
Western European member-nations.
d. World Trade Organization (WTO). This
organization encourages fair trade practices,
promotes multilateral negotiations, and resolves
disputes among members.
B. Major World Marketplaces (Use PowerPoint 4.7, 4.8.)
The contemporary world market revolves around three dominant
marketplaces: North America, Europe, and Pacific Asia.
1. North America. Though the United States dominates the
North American business region, Canada and Mexico are
also major commerce centers.
2. Europe. Germany, the United Kingdom, France, and
Italy dominate Western Europe; emerging from its
communist foundations, Eastern Europe is now playing a
larger role in the European business region.
3. Pacific Asia. Though Japan dominates this region, other
important commerce centers include China, Thailand,
Malaysia, Singapore, Indonesia, South Korea, Taiwan,
Hong Kong, the Philippines, and Australia.
C. Forms of Competitive Advantage (Use PowerPoint 4.9, 4.10.)
No country is totally self-sufficient; every country relies on
imports and exports. Countries tend to export those products that
can be produced better or less expensively than in other countries.
1. Absolute Advantage. A country enjoys an absolute
advantage when it can produce a product more cheaply
than any other country.
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2. Comparative Advantage. A country’s comparative
advantage lay in its ability to produce certain products
more cheaply or better than other products.
3. National Competitive Advantage. A country competes
due to factor conditions, demand conditions, related and
supporting industries, and organizational strategies,
structures, and rivalries.
D. Import-Export Balances (Use PowerPoint 4.11.)
Critical in global business is a country’s acceptable balance
between its imports and exports. An import-export relationship
can be measured through a country’s balance of trade and balance
of payments.
1. Balance of Trade. A nation’s balance of trade is the
difference between the economic value of its imports and
its exports. A trade deficit occurs when a country’s
imports exceed its exports. A trade surplus occurs when
a country’s exports exceed its imports.
2. Balance of Payments. Balance of payments refers to
the flow of money into or out of a country. A country’s
balance of payments results primarily from its balance of
trade, though other contributing factors include money
spent by tourists, foreign aid, and the buying and selling
of currency.
E. Exchange Rates (Use PowerPoint 4.12, 4.13, and 4.14.)
An exchange rate is the rate at which a nation’s currency can be
exchanged for the currency of another. Fluctuations in exchange
rates can greatly impact a country’s balance of trade. With fixed
exchange rates, the value of a country’s currency remains
relatively constant to that of another country. With floating
exchange rates, the value of a country’s currency relative to
another currency varies with market conditions.
1. Exchange Rates and Competition. Exchange rate
fluctuations affect overseas demand for their products and
can be a major factor in competition.
2. The U.S. Economy and Foreign Trade. U.S. imports
and exports have increased steadily in the past 10 years.
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Notes:
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II.
International Business Management
The primary key to a firm’s success largely lay in how well the firm is
managed. The basic management responsibilities in international
business are extremely complex.
A. Going International (Use PowerPoint 4.15.)
Not every business is prepared to go international. A major
decision factor is the business climate of other countries. Other
factors include demand and product adaptations.
1. Gauging International Demand. Foreign demand for a
company’s product may be greater than, the same as, or
weaker than domestic demand. Determining international
demand may require market research and/or prior market
entry of competitors.
2. Adapting to Customer Needs. Product modifications
may be required to meet the standards of various
countries.
B. Levels of Involvement (Use PowerPoint 4.16.)
A firm may enter the global marketplace through different levels of
involvement.
1. Exporters and Importers. Representing the lowest
level of global involvement, exporters and importers
conduct only a small part of their business globally. An
exporter distributes and sells products in a small number
of foreign countries. An importer buys products in
foreign markets and then imports them for resale in its
home country.
2. International Firms. More complex than exporters and
importers, international firms conduct a significant
portion of business in foreign countries. These firms
basically remain domestic with global operations.
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3. Multinational Firms. Multinational firms do not
ordinarily think of themselves as having domestic and
international divisions. Planning and decision-making
are geared to international markets. Headquarters
locations are almost irrelevant.
C. International Organizational Structures (Use PowerPoint
4.17.)
Whether an importer, exporter, international firm, or multinational
firm, a firm’s level of global involvement will influence the firm’s
choice of international organizational strategies.
1. Independent Agents. Independent agents are foreign
individuals or organizations that agree to represent the
exporter’s interests, including assisting in product sales,
collection of payments, and in helping to ensure customer
satisfaction.
2. Licensing Arrangements. In licensing arrangements,
firms give individuals or companies in a foreign country
the right to manufacture or market the firm’s products. In
return, the licensor typically receives a fee and royalties,
which are usually calculated as a percentage of the
license holder’s sales.
3. Branch Offices. To gain more direct control and a more
tangible presence in foreign countries, a firm sends some
of its own managers to overseas branch offices with this
arrangement.
4. Strategic Alliances. Strategic alliances include a
company and a foreign partner that combine resources
and capital to begin a new business.
5. Foreign Direct Investment. Foreign direct investment
means buying or establishing tangible assets in a foreign
country.
Notes:
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III.
Barriers to International Trade (Use PowerPoint 4.18.)
Success in foreign markets includes a firm’s ability to respond to
social, cultural, economic, legal, and political differences.
A. Social and Cultural Differences (Use PowerPoint 4.19, 4.20.)
These barriers include a plethora of differences in language,
religion, perceptions, shopping patterns, etc. between and among
different populations.
B. Economic Differences (Use PowerPoint 4.21.)
When trading with different types of economic systems, firms
must be aware of the level of government involvement in a given
industry.
C. Legal and Political Differences (Use PowerPoint 4.22.)
Governments can present many trade barriers in international
business, including the control of the flow of capital and the use of
tax legislation to encourage or discourage global activity in given
industries.
1. Quotas, Tariffs, and Subsidies. A quota restricts the
number of products of a certain type that can be imported
into a country; a quota raises the prices of those imports
by reducing their supply. A tariff is a tax placed on
imports; tariffs directly affect prices by raising the price
of imports. A subsidy, a form of indirect tariffs, is a
government payment to help a domestic firm compete
with foreign firms.
2. Local-Content Laws. Many countries, including the
United States, require that products sold in a particular
country are partially made there. This guarantees that a
percentage of the profits remain in that country.
3. Business-Practice Laws. Firms must learn the local
laws in other countries before engaging in global
business; what is legal in one country may be illegal in
another.
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1. Italy.
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