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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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Notes:
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Answers to Questions and Exercises
Questions for Review
1. How does a nation’s balance of trade differ from its balance of
payments?
A nation’s balance of trade is the difference between the economic value
of its imports and its exports. A nation’s balance of payments refers to the
flow of money into or out of a country; this may be partially attributed to
the nation’s balance of trade, as well as to money spent by tourists, foreign
aid, the buying and selling of currency, etc.
2. What are the three possible levels of involvement in international
business? Give examples of each.
A firm may enter the global marketplace as an importer, an exporter, an
international firm, or as a multinational firm. Numerous examples of each
exist. In presenting examples of each, students should pay special
attention to those firms that primarily remain domestic with global
operations so that examples of international firms can be distinguished
from multinational firms.
3. How does a country’s economic system affect the decisions of foreign
firms interested in doing business there?
In mixed economies, for example, outside firms must be aware of the
extent of government involvement, if any, in a given industry. In planned
economies, the outside firm must be aware of unfamiliar relationships of
government to business, such as a government’s favor of state-owned
companies over foreign investors.
4. What aspects of the culture in your state or region would be of
particular interest to a firm considering doing business there?
Answers will vary. Many foreign firms will likely consider the diversity
and subcultures among the citizens of a particular state or region, and the
willingness of those citizens to work for or buy from a foreign company.
However, aspects may vary depending on whether the firm plans to set up
a production facility in the area or whether the firm is looking to increase
its customer base.
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Questions for Analysis
5. List all the major items in your bedroom, including furnishings. Now
try to identify the country in which each item was made. Offer
possible reasons why a given nation might have a comparative
advantage in producing a given good.
Students’ answers will vary.
6. Suppose that you are the manager of a small firm seeking to enter the
international arena. What basic information would you need about a
particular market that you are thinking of entering?
The manager of a small firm will likely be interested in the economic
system of the potential market and, thus, the ease with which the firm
could enter the new market. Important, also, will be the nature of the
customer base and whether those new customers possess the same buying
behaviors as the firm’s current customers. Of course, attention will need
to be given to product demand in the new market. Some products in
mature markets in the United States are still in their early stages in other
countries; thus, the small firm may need to modify the product and/or the
promotional strategy. Various information may be important, depending
on the small firm’s intended level of involvement in the global arena.
7. Do you support protectionist tariffs for the United States? If so, in
what instances and for what reasons? If not, why not?
Students’ answers will vary. Students should comment on the effects of
imports on the domestic economy in the absence of protectionist tariffs, as
well as the effects of such tariffs on prices, employment, etc. when
imports may be limited.
8. Do you think that a firm operating internationally is better advised to
adopt a single standard of ethical conduct or to adapt to local
conditions? Under what kinds of conditions might each approach be
preferable?
Answers will vary. Students should comment on the possibility that
conduct considered ethical in the home country may damage the firm’s
reputation, backfire abroad, or lead to situations in which the legality of its
actions could be called into question.
Application Exercises
9. Interview the manager of a local firm that does at least some business
internationally. Why did the company decide to “go international?”
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Describe the level of the firm’s international involvement and the
organizational structure(s) that it uses for its international operations.
Students’ answers will vary. Particular attention should be given to the
extent to which the answer integrates elements of the involvement levels
and the elements of organizational structure as discussed in the chapter.
10. Select a product familiar to you. Using library reference works to
gain some insight into the culture of India, identify the problems that
might arise in trying to market this product to Indian consumers.
Many problems identified will include those related to religion and
language differences, especially in product advertising, as well as
problems stemming from characteristics of one culture with which the
other culture may not be able to understand, such as their caste system and
our western lifestyles. Actual product use may have to be considered also.
For example, a bicycle may be viewed as a mode of transportation in India
and not as a leisure or physical fitness tool as in the United States.
Answers to Exercising Your Ethics
1. What are the key ethical issues in this situation?
The key ethical issue is whether to pay bribes to establish your business in
this foreign country. Does it make sense to extend the U.S. sense of
ethical behavior to a country that does not consider bribes to be unethical
or illegal?
2. What do you think most managers would do in this situation?
Answers will vary. Students may address the temptation that comes from
an undetectable source of funds, the responsibility to adhere to U.S. law
forbidding bribery domestically or abroad, and the possibility that some
managers would hire an intermediary to “do the dirty work” for them.
Answers to Building Your Business Skills
1. What are the most promising steps that Lang can take to grow her
business? What are the least promising?
Anything that will increase brand recognition and therefore sales, both in
the United States and abroad, would be promising. Least promising steps
would include focusing solely on local Italian markets where Lang’s
products may lack the “made in Italy” cachet that gives them potential
elsewhere.
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2. Lang thinks that her trouble breaking into the U.S. retail market
stems from the fact that her company is unknown. How would this
circumstance affect the strategies suggested in Steps 1 and 2?
It suggests that she should focus on marketing activities that build
awareness for her brand and an efficient distribution plan. Possibilities
include: P.R. placement in upscale U.S. fashion magazines, garnering
celebrity interest, or partnering with producers or distributors who offer
complementary lines.
3. How should Lang handle personal invitations that get in the way of
business? How can she say no while still maintaining business
relationships? Why is it often difficult for American women to do
business in male-dominated cultures?
Cultural differences – including differences in expectations for women
and a lack of cultural role models – make it particularly difficult for
American women to do business in male-dominated cultures. Lang should
decline unwanted personal invitations politely, but firmly, understanding
that she may not be able to maintain business relationships in all cases; she
will, however, probably develop a reputation that generates respect from
her male business contacts.
4. The American consulate has given Lang little business help because
her products are made in Italy. Do you think the consulate’s
treatment of an American businessperson is fair or unfair? Explain
your answer.
Answers will vary. Some students may feel that since Lang’s firm
employs no U.S. workers the consulate’s treatment is fair. Others may
feel that because Lang herself is a citizen the treatment is unfair.
5. Do you think Lang’s relocation to Italy will pay off? Why or why
not?
Some students may think that Lang needs to personally control the design
and manufacturing end of her business, while others may think that she
should focus on building her brand in the United States and Europe. In
either case, Lang will face the challenge of maintaining quality and cost
standards across two continents, and eventually around the globe.
6. With Lang’s goals of creating a global company, can INDE continue
to be a one-person operation?
In order to achieve global reach, Lang will need to extend beyond one
person.
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Classroom Activities
1. Divide the class into small groups. Assign groups of three countries –
such as Thailand, Norway, and Bulgaria or Singapore, Peru, and Mexico –
to each group of students. Ask the students to assess the social/cultural
differences, economic differences, and legal/political differences between
and among their assigned countries. Then ask each group to compare their
assigned countries to the United States. This comparative analysis can
also benefit the students after studying the marketing chapters of this
textbook.
2. A foreign enterprise has just located within a few miles of your college or
university. The manager, who has never been to the United States, has
relocated to your town or city from Italy. Ask students to make an
assessment of the cultural elements to which this foreign manager may
have a difficult time adjusting. In addition, ask students to consider which
cultural elements may likely be similar between the U.S. and Italy.
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