Download X100 Introduction to Business

X100
Introduction to Business
Global Business
in a
Global Economy
Professor Kenneth EA Wendeln
X100
©2008 KEAW L2
The Basis
for International Business
International Business –
exchanges across national boundaries
Some countries are better equipped than others
to produce particular goods or services:
 Absolute advantage - the ability to
produce a specific product more efficiently
than any other nation
 Comparative advantage - the ability to
produce a specific product more efficiently
than other products
Goods and services are produced more efficiently
when each country SPECIALIZES in the products
for which it has a comparative advantage
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Principle of a Nation’s
‘Comparative Advantage’
Nations engage in international trade – because they
own resources that enable a nation to produce some
goods better & more efficiently than other nations
In the past, primary sources of comparative
advantage were better access to:
 Lower cost Labor Markets
 Financial Markets
 Technology
 Natural Resources
 Geographic Areas
With ‘Globalization’ these sources of advantage are
becoming less important
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Diminishing
‘Comparative Advantage’
Why
??
 Financial markets are now global
 With telecommunications & the
internet, geographical location per se
adds very little value
 Companies find it relatively
easy to bring work to employees,
wherever workers live
 Natural resources can be imported
from any location around the world
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Artificial Restrictions on
International Trade
Tariff Barriers


Import duty (or tariff) – tax that is levied on products
entering the country. Raises the price.
Dumping – exportation of large quantities of products
at a price lower than same product in home market.
 Drives down the price.
Non-tariff Barriers





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Embargo – complete halt to trading of a product.
Often used as a political weapon.
Import quota – limits the amount that may be imported.
Foreign Exchange control – limits amount of foreign
currency that can be purchased. Has effect of limiting
imports.
Currency devaluation – reduction of the value of nation’s
currency. Increases cost of foreign sourced goods.
Bureaucratic ‘Red Tape’ – frustrates trade.
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Reasons for & Against
Trade Restrictions
√ For Restrictions
X Against Restrictions
1. Balance of Trade
2. Protect Industries
1. Higher Prices for
Consumers
3. Protect Domestic
Jobs
2. Restriction of
Consumers’ Choices
4. National Security
3. Misallocations of
International Resources
5. Health of Citizens
6. Retaliate for
another Nation’s
Restrictions
4. Loss of Jobs
Since WWII there has been a dedicated &
significant reduction in trade restrictions –
encouraging more global trade
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GATT – Reductions in
Trade Tariffs & Barriers
General Agreement on Tariffs & Trade –
originally established in 1947 after WWII. It is now known as
the WTO or World Trade Organization, an international
organization of 150* nations - dedicated to reducing or
eliminating tariffs and other barriers of trade. * As of January 2007
 The Kennedy Round (1964-1967) -
reduced US tariffs by as much as 50% as a result of the US
Trade Expansion Act
 The Tokyo Round (1973-1979) –
approximately 100 nations agreed to tariff cuts of up to 35%
implemented over an eight year period starting in 1979
 The Uruguay Round (1986-1993) –
created the WTO and extended GAAT treaty to include textiles,
agricultural products, business services and intellectual
property rights
 The Doha Round (2001 - ????) –
goal of further
reduction in trade barriers on agriculture and services
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International Economic
Communities
Organization of nations formed to promote the
free movement of resources & products among
its members via common economic policies.
 North American Free Trade Agreement (NAFTA) –joined
US, Canada & Mexico, its 1st and 2nd largest trading partners.
 European Union (EU) – “Common Market”.
Formed in 1957 by 6 European countries (now 27).
 Organization of Petroleum Exporting Countries (OPEC) –
founded in 1960 to provide 11 major oil-producing
countries with some control over crude oil prices.
 Association of Southeast Asian Nations (ASEA) – created
ASEAN Free Trade Area (AFTA) in 1992, currently 10 countries.
 Organization for Economic Cooperation & Development
(OECD) – group of 30 industrialized market economy countries
in NA, Europe, the Far East and South Pacific. OECD Website
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The Evolving European Union
27 Countries in 2007
EU + Euro
Countries
EU only
Countries
http://ec.europa.eu
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US - Major Trading Partners
for Goods
Goods EXPORT Shares Goods IMPORT Shares
All Others
‘Transition’
25%
Other OECD
30%
Canada
24%
All Other
‘Transition’
38%
Mexico
11%
Mexico
14%
Japan
7%
Canada
17%
Other OECD
25%
Japan
9%
Source: Federal Reserve Bank of St Louis,
National Economic Trends, September 2005
US has a ‘trade deficit’ – Imports > Exports
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Value of US Merchandise
Exports & Imports in 2004
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U.S. International Trade
in Goods, 1997 to 2004
Trade
Deficit
Source: US Department of
Commerce, International Trade
Administration, September 2005
If a country imports more
goods than it exports, the
balance of trade is negative,
as it was in the US from
1997 to 2004
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Global Growth
Remains Strong
Percent growth over prior year
Global Growth
led by the
emerging
&
developing
countries
Source: International Monetary
Fund, World Economic Outlook,
2005
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World Merchandise
Trade & Output - 1950 to 2000
Average annual % change in volume (real) terms
of all merchandise as measured by GDP.
Trade
}+2%
Output
}
+3%
}
+5%
}+1%
Trade Growth > Output Growth
Long-term real growth trend in global trade
Source: World Trade Organization (WTO) –International Trade Statistics 2001
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Globalization . . .
. . . In Summary
The world is ‘getting smaller’
with increasing int’l trade as:
1. ‘Comparative advantage’ is becoming
less & less important
2. Significant reductions in trade tariffs &
barriers – encouraged by GATT & WTO
3. Expansion of International Economic
Communities – eg NAFTA, EU . . .
Globalization is a reality today –
International trade has tripled since WWII
& now accounts for 21% of global income
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Methods of Entering
International Business
Low
High
Degree of Control over Business
Trade
Arrangements
1. Trading
Companies
2. Exporting
&
Importing
3. Counter
Trade
Int’l Contractual
Agreements
4. Foreign Licensing
5. Franchising
6. Strategic Alliances
7. Production
Agreements
International Direct
Investments
8. Joint Ventures
9. Totally Owned Facilities
•
Acquisitions
•
Subsidiaries
•
Overseas Divisions
10.Multinational Companies
Degree of Financial Risk
Low
High
More control usually means more financial risk
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Trade Arrangements
1. Trading Companies – buy in one country at the lowest
price & sell to customers in another country at a higher price.
Provides a link between buyers & sellers in different countries.
2. Exporting & Importing – firm manufactures products in
home country & exports them for sale in foreign markets.
Can be a relatively low risk method to enter foreign markets.
 Export/import merchant – essentially a merchant wholesaler
 Exporting agent – receives a commission for arranging
transactions
 Exporting firm – establishes its own offices in foreign countries
3. CounterTrade – International barter transaction in which
goods & services are exchanged for other goods & services.
Used with countries that have weak currencies or currency
controls.
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International
Contractual Agreements
4. Foreign Licensing – contractual agreement to market product
or use brand name in return for royalty or other compensation.
Simple method to expand into foreign country with little investment.
5. Franchising – contractual agreement in which a “franchisee”
purchases the right to sell the “franchiser’s” products & use brand
names under arrangements agreed in the contract.
Franchisee takes franchiser’s brands & products into franchisee’s local
markets.
6. Strategic Alliances – cooperative ‘partnerships’ formed to
share or pool resources to create competitive advantages.
Often used to share technology or penetrate geographic markets.
7. Production Agreements – subcontracting of manufacturing
to foreign firms for lower cost and/or sale into foreign regions.
Some countries & economic communities require ‘local content’.
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International
Direct Investment
8. Joint Ventures – separate entities formed to achieve
a
common goal & usually for a specific or limited time.
May be used to produce & market an existing product in a foreign
country or to develop an entirely new product, technology or process.
9. Totally Owned Facilities – firm develops its own production &
marketing facilities in another country.
Provides greater control but also incurs financial investment risks.
 Acquisitions – of a foreign company or facility to provide entre’ into
foreign markets.
 Subsidiaries – companies acquired or established in foreign
countries.
 Overseas Divisions – headquartered in foreign countries.
10.Multinational Corporation (MNC) – a multinational
enterprise that operates on a worldwide scale without ties to
specific nation or region.
Represents the highest level of involvement in international business.
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Export Strategy
to Reach Global Markets
A firm manufactures products in its home country and
exports them for sale in foreign markets - usually using
an import/export agent, merchant or trading company to ease
the export of products into foreign markets.
Sources of Export Assistance
1.
SBA Export Assistance: are federal assistance offices,
2.
International Trade Administration (ITA), US
Department of Commerce: offers assistance & information
providing assistance in export marketing & trade finance.
http://www.sba.gov
to exporters through its units & links from its web site.
http://trade.gov
Exporting can be a relatively low-risk method of entering foreign
markets. However, it opens up several levels of involvement to the
exporting firm and usually requires the specialist assistance of a
‘mutually-trusted’ go-between who can assure that payment is made
& merchandise delivered according to the terms of the trade contract.
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Licensing & Franchising
to Reach Global Markets
A contractual agreement to use a brand
name or to market a product or in return for
a royalty or for other compensation.
√ Advantages
1.
2.
3.
X
Method to expand into a foreign country with little investment.
Company can gain additional revenues & profits from products
& services that it would not have normally generated
domestically.
Licensees or Franchisees make the investments and generally
work very hard to see that product succeeds in their market.
Disadvantages
1.
2.
Usually requires a longer term commitment (up to 20 years).
Loss of trade secrets & agreed-upon royalties if licensee breaks
agreement.
Coca-Cola generates 61% of its revenues & 71% of its operating
profits in foreign countries. Many of these sales are the result of
licensing agreements in various countries. http://www.cocacola.com
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Joint Venture Strategy
to Reach Global Markets
A ‘partnership’ formed to achieve a specific
goal or to operate for a specific period of time.
√
Advantages
1.
2.
X
May be used to produce & market an existing product in a
foreign nation or to develop an entirely new product.
A JV with an established firm in a foreign country – provides
immediate market knowledge & access, reduced risk and
control over product attributes.
Disadvantages
1.
2.
JV agreements established across national borders can be
extremely complex.
Requires a high degree of commitment from all parties involved.
New United Motor Manufacturing, Inc is a pioneering joint venture
of General Motors and Toyota. Established in Fremont, CA in 1984,
NUMMI helped change the automobile industry by introducing the
Toyota Production System and a teamwork-based environment to
the US. Today, NUMMI produces the Toyota Corolla, the Toyota
Tacoma and the Pontiac Vibe. http://www.nummi.com
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MNCs
Multinational Corporations
A multinational enterprise that operates on a worldwide
scale, without ties to specific nation or region.






Have become increasingly common over the last two decades,
trading more & more value.
Tend to develop their strategy over time.
Initially, bring their existing products & marketing strategies
into emerging markets.
Over time develop product & marketing strategies aimed at
the specific needs of the emerging markets.
Capitalize on global ‘product platforms’ & comparative cost &
technology advantages.
Global organizational structure & management teams
representing MNC’s global diversity.
Think Global
Act Local
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ABB Ltd is a global leader in power and automation technologies
that enable utility and industry customers to improve their
performance while lowering their environmental impact. ABB has
160,000 employees in more than 100 countries. ABB was formed
in 1988 by the merger of Asea & BBC. http://www.abb.com/
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Examples of the
New Global Economy
1. Electronic Commerce



Geography does not matter.
Country of origin does not matter.
Corporate resources do not matter.

CMS’s have developed extraordinary
http://www.sanmina.com/
levels of efficiency in production.
Many of the worlds’ products
are no longer manufactured
by the owners of brands.
Increasingly, companies are focusing on product design,
marketing, promotion & customer service.
CMS’s are responsible for production, support & logistics.
Contract manufactures can operate anywhere in the world
since production and sales are no longer linked.
2. Contract Manufacturing Services - CMS




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