Download Introduction to Business 3e - Jeff Madura

Part II: Business Environment
Assessing Global Conditions
Introduction to Business 3e
Jeff Madura
Copyright © 2004 South-Western. All rights reserved.
6
Learning Goals
•
Explain motives for engaging in international
business.
•
Describe global opportunities.
•
Describe how firms conduct international
business.
•
Explain influence of foreign characteristics on a
firm’s international business.
•
Explain how movements in exchange rates can
affect business performance.
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6–2
Assessing Global Conditions
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6–3
Motives to Engage in
International Business
•
Attract foreign demand
– Competition may prevent firm from
increasing market share in U.S.
– Changes in consumer tastes may decrease
demand in U.S.
•
Capitalize on technology
– Expand into countries where technology is
not as advanced.
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6–4
The Coca-Cola Company’s Global Expansion
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Exhibit 6.1
6–5
Approximate Hourly Compensation Costs
for Manufacturing across Countries
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Exhibit 6.2
6–6
Motives to Engage in
International Business (cont’d)
•
Use inexpensive resources
– Find locations where land and labor are
inexpensive.
•
Diversify internationally
– Reduce risk and increase performance
stability by selling in other countries.
– Geographic diversification reduces exposure
to economic risk in U.S.
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6–7
Dupont’s Geographic Diversification
(measured by annual sales in millions of dollars)
Source: 2001 annual report
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Exhibit 6.3
6–8
Global Opportunities
•
Opportunities in Europe
– Single European Act



Created more uniform regulations
Removed taxes on goods traded between member
countries
Increased competition
– Removal of the Berlin Wall (1989)

Encouraged free enterprise and privatization of
businesses
– Inception of the Euro


Allows single monetary policy
Eliminates transaction costs
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6–9
Global Opportunities
•
Opportunities in Latin America
– NAFTA
 Eliminated
trade barriers between U.S.,
Mexico, and Canada.
 U.S. firms have moved production to
Mexico to reduce costs.
 U.S. firms now export products to Mexico.
– Uruguay Round GATT
 Removed
import trade restrictions over 10
years among 117 countries.
 World Trade Organization (WTO)
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6–10
Global Opportunities
•
Opportunities in Asia
– Large population base
– In 1990s many Asian countries reduced their
excessive restrictions on foreign investment
 Easier
for foreign firms to acquire Asian
companies or negotiate licensing
agreements with Asian firms.
– Asian economic crisis
 Forced
many local firms into bankruptcy
 Created opportunities for foreign firms to
acquire struggling Asian companies
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6–11
Foreign Expansion in the U.S.
•
Foreign firms expanded into the U.S. by:
– Establishing new subsidiaries.
– Acquiring U.S. firms.
•
U.S. industries are susceptible to foreign
competition
– U.S. firms in labor-intensive industries must
compete with foreign firms’ lower labor costs.
– Foreign-made products may be perceived as
higher quality than U.S.-made products.
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6–12
International Business
•
Importing
– The purchase of foreign products or services
•
Exporting
– The sale of products or services to purchasers
residing in other countries
•
Direct foreign investment
– A means of acquiring or building subsidiaries in one
or more foreign countries
•
Strategic alliances
– A business agreement between firms whereby
resources are shared to pursue mutual interests
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6–13
Importing
•
Involves the purchase of foreign products
or services:
– U.S. consumers purchase foreign
automobiles, clothing, cameras, etc.
– U.S. firms import materials or supplies that
are used to produce products.
•
Trade barriers restrict importing
– Tariffs are taxes on imported products.
– Quotas limit the amounts of specific products
that can be imported.
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6–14
Exporting
Involves the sale of products or services
to purchasers residing in other countries
• U.S. Balance of Trade
•
– The level of U.S. exports less the level of its
imports; if imports are greater than exports,
the result is a trade deficit.
•
Internet facilitates exporting
– Provide information to prospective importers
– Accept orders online and track shipments
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6–15
Trend of U.S. Exports and Imports
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Exhibit 6.4
6–16
Foreign Direct Investment
•
Investments in acquiring or building
subsidiaries in one or more foreign
countries to:
– Reduce transportation costs.
– Overcome trade barriers
– Acquire advanced technology by offering
incentives to firms to establish subsidiaries.
– Reduce labor costs by shifting production
facilities to a developing country with lower
labor costs.
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6–17
Strategic Alliances
•
Various types of alliances between U.S.
and foreign firms can be made:
– Joint venture involves an agreement
between two firms about a specific project


U.S. firm makes the product, foreign firm sells the
product in their home country.
Two firms share production of the product - common
in the auto industry.
– International licensing agreement

Firm allows a foreign company (licensee) to produce
its product according to specific instructions in
exchange for a licensing fee.
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6–18
Influence of Foreign Characteristics
•
Culture
– Tastes, habits, and customs vary by country
– U.S. products might need to be adjusted to
fit the culture
•
Economic systems
– Capitalism
– Communism
– Socialism
– Privatization
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6–19
Influence of Foreign Characteristics
•
Economic conditions
– Economic growth in foreign countries can
influence demand for U.S. products:


Strong economy might increase demand.
Weak economy might decrease demand.
– U.S. firm’s exposure to foreign country’s
economy depends on proportion of U.S.
firm’s business conducted in that country.
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6–20
Comparing the Influence of the
Canadian Economy on Two U.S. Firms
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Exhibit 6.5
6–21
Small Business Survey
Many successful small firms rely on international
sales for a significant portion of their business.
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6–22
Political Risk
•
Risk that a country’s political actions may
adversely affect a business
– Expropriation: extreme form of risk occurs
when foreign government takes over a U.S.
subsidiary without compensating the U.S.
firm.


More common risk occurs when foreign
governments impose higher corporate tax rates on
foreign subsidiaries.
Other risks impact costs of doing business in the
foreign country - stringent building codes, waste
disposal restrictions, and pollution controls.
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6–23
Exchange Rates
•
Exchange rates between the U.S. dollar
and other currencies fluctuate over time
– Number of dollars needed by a U.S. firm to
purchase foreign supplies may change, even
if the actual price does not change


When U.S. dollar weakens - foreign currency
strengthens - U.S. firms need more dollars to
purchase a given amount of foreign supplies
Exchange rate affects foreign demand for U.S.
products because they impact the actual price paid
by the foreign customer.
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6–24
Example of Importing by a U.S. Firm
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Exhibit 6.6
6–25
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e-business
business online
6–26
Impact of Exchange Rates
on Firm Performance
•
International trade transactions usually
require the exchange of one currency for
another currency
– Exchange rates vary on a daily basis.
– Exchange rate fluctuations have a favorable
or unfavorable effect on firm performance.
 Impact
on U.S. importers
 Impact on U.S. exporters
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6–27
Impact of Exchange Rate
Fluctuations on U.S. Importers
•
When foreign currency appreciates
against the U.S. dollar–the dollar
weakens and loses value
– Causes prices of foreign supplies to increase
and adversely impacts U.S. firms that import
supplies.
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6–28
Impact of Exchange Rate
Fluctuations on U.S. Importers
•
When foreign currency depreciates
against the U.S. dollar–the dollar
strengthens and gains value
– Causes prices of foreign supplies to
decrease - reduces expenses of U.S. firms
that import supplies.
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6–29
Impact of Exchange Rate
Fluctuations on U.S. Exporters
•
When foreign currency appreciates
against the U.S. dollar–the dollar
weakens and loses value
– Causes prices of U.S. products to decrease
and demand to increase - has a positive
impact on U.S. exporter’s revenues and
profits.
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6–30
How Exchange Rates Can
Affect the Price of Imports
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Exhibit 6.7
6–31
Impact of Exchange Rate
Fluctuations on U.S. Exporters
•
When foreign currency depreciates
against the U.S. dollar–the dollar
strengthens and gains value
– Causes prices of U.S. products to increase
and demand to decrease - has a negative
impact on U.S. exporter’s revenues and
profits.
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6–32
Example of Exporting by a U.S. Firm
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Exhibit 6.8
6–33
Hedging Against Exchange
Rate Movements
•
Hedging means to take actions to protect
a firm against exchange rate movements
– Hedging future payments and future
receivables in foreign currencies


Request forward contract at a specified exchange
rate on a future date.
Rate is called a forward rate
– Reduces risk because firm knows in advance what the
exchange rate will be
– Prevents both favorable and unfavorable exchange rate
fluctuations
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6–34
How Exchange
Rates Affect
the Degree of
Foreign
Competition
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Exhibit 6.9
6–35
Chapter Summary
•
U.S. firms engage in international business to
attract foreign demand, capitalize on
technology, use inexpensive resources or
diversify internationally.
•
Reduction of trade barriers has increased global
expansion opportunities for U.S. firms.
•
Firms conduct international business via
importing, exporting, direct foreign investment
and strategic alliances.
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6–36
Chapter Summary
•
Firms must assess culture, economic systems
and conditions, exchange rate risk and political
risk when entering foreign markets.
•
Exchange rate fluctuations affect importers and
exporters in different ways.
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6–37
Business Environment
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6–38