business in a global environment exploring business chapter 3 9/27/11

Business In a Global Environment

Exploring BusinessChapter 39/27/11

Why Do Nations Trade?Why Do Nations Trade?

Because no national economy can produce all the Because no national economy can produce all the goods and services (it) need(s)goods and services (it) need(s)

Because of an abundance of (cheaper) natural Because of an abundance of (cheaper) natural resourcesresources

Because of an abundance of (cheaper) laborBecause of an abundance of (cheaper) labor

Because of an imbalanceBecause of an imbalance

in currency valuein currency value

Exploring Business © 2009 FlatWorld Knowledge

Absolute AdvantageAbsolute Advantage

1)1) Only source of particular productOnly source of particular product

* Example – DeBeers Consolidated Mines* Example – DeBeers Consolidated Mines

2)2) Can make more of product using Can make more of product using same or fewer resources than other same or fewer resources than other countriescountries


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Comparative AdvantageComparative Advantage

1) A country specializes in products that it can supply more efficiently or at a lower cost than it can

produce other items. * Example – US agricultural commodities like corn & wheat

2) Produce product at lower 2) Produce product at lower opportunity costopportunity cost, i.e., the , i.e., the cost of purposely missing out on another cost of purposely missing out on another production investment in exchange for an production investment in exchange for an opportunity to make a much better returnopportunity to make a much better return

3) When country specializes in particular product, it 3) When country specializes in particular product, it must sacrifice production of another productmust sacrifice production of another product


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Measuring TradeMeasuring Trade

Balance of TradeBalance of Trade = difference in the value = difference in the value

of a countryof a country’’s exports from the value s exports from the value

of its imports over timeof its imports over time

Imports exceed exports Imports exceed exports = negative balance or= negative balance or

trade deficittrade deficit

exports exceed imports exports exceed imports = = trade surplustrade surplus

Balance of PaymentsBalance of Payments = an accounting = an accounting record of all of a country’s transactions record of all of a country’s transactions with other countries over time.with other countries over time.

U.S. Exports/Imports & Balance of Trade U.S. Exports/Imports & Balance of Trade (1994-2003)(1994-2003)


Top 10 Countries Maintaining Trade Top 10 Countries Maintaining Trade Deficits & Surpluses with the USDeficits & Surpluses with the US

International Trade BarriersInternational Trade Barriers

• Economic

• Legal/political

• Social/cultural

• Technological

Economic BarriersEconomic Barriers

• The level of a country’s economic development– Industrialized nations – U.S., Japan, Great

Britain, Canada– Less-developed countries – Africa, Asia, and

South America

• The level of existing infrastructure

• Currency exchange rates

Political & Legal BarriersPolitical & Legal Barriers

• Laws and regulations

• Tariffs and trade restrictions

– Import tariffs, exchange controls, quotas, embargos, anti-dumping regulations

• Political barriers

– Political instability, cartels

Social & Cultural BarriersSocial & Cultural Barriers

Understanding the differences among the cultures of countries can be important to a firm

– Spoken and written language

– Body language and personal space

– Family roles

– Perception of time

– Religious holidays and local customs

Cultural Behavioral DifferencesCultural Behavioral Differences

Technological BarriersTechnological Barriers

• Basic infrastructure– Power– Water, waste disposal– Telephones

• Information technology– Computers– Broadband networks

Trade Agreements, Alliances & Trade Agreements, Alliances & OrganizationsOrganizations

• GATT• WTO• NAFTA• EU• APEC• World Bank• IMF

Levels of Involvement Levels of Involvement in International Tradein International Trade

• Import/Export

• Trading Companies

• Licensing & Franchising

• Contract Manufacturing

• Joint Ventures & Alliances

• Direct Investment

• The Multi-National Corporation

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LicensingLicensingAnd FranchisingAnd Franchising

Licensing Agreement Licensing Agreement – Lets foreign – Lets foreign company to sell products of company to sell products of producer/licensor or use intellectual producer/licensor or use intellectual property for royalty feeproperty for royalty fee

International Franchise Agreement International Franchise Agreement – – Company/Franchisor grants foreign Company/Franchisor grants foreign company right to use brand name company right to use brand name

and sell its productsand sell its products


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Contract ManufacturingContract Manufacturing


Outsourcing – US company contracts witheither (another US company) or foreign company to manufacturer one or more of its products. US Company generally retains control of product design, development, and branding.

Potential Issues: Foreign-made products meeting USCompany’s internal quality standards, as well as US standards for meeting codes, safety requirements, regulations, engineering specifications, etc.

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Strategic AlliancesStrategic Alliancesand Joint Venturesand Joint Ventures

Strategic Alliance Strategic Alliance – Agreement between – Agreement between two companies (or company and nation) to two companies (or company and nation) to pool resources achieve business goals pool resources achieve business goals benefiting both partnersbenefiting both partners

Joint Venture Joint Venture – Alliance in which partners – Alliance in which partners fund separate entity to manage joint fund separate entity to manage joint operationoperation


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Foreign DirectForeign DirectInvestments And SubsidiariesInvestments And Subsidiaries

$ Foreign Direct Investment Foreign Direct Investment – –

Formal establishment of business Formal establishment of business

operations on foreign soiloperations on foreign soil

$ Foreign Subsidiary Foreign Subsidiary – Independent – Independent

company owned by a foreign firm company owned by a foreign firm

(parent)(parent)


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WorldWorld’’s Largest Multi Nationals Largest Multi NationalCorporationsCorporations


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Cultural EnvironmentCultural Environment

LanguageLanguageTime/SociabilityTime/Sociability• High Context- interlocking personal/family High Context- interlocking personal/family

connections hold people togetherconnections hold people together• Low Context- personal & work relationships more Low Context- personal & work relationships more

compartmentalizedcompartmentalizedIntercultural CommunicationIntercultural Communication• AnimationAnimation• DistanceDistance


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Economic EnvironmentEconomic Environment

Economic Development- Gross national income Economic Development- Gross national income per capita per capita

• Standard of livingStandard of living

• InfrastructureInfrastructure

Currency Valuations & Exchange RatesCurrency Valuations & Exchange Rates

Universal Currency Converter


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Legal &Legal &Regulatory EnvironmentRegulatory Environment

No established No established globalglobal legal system legal system

Foreign Corrupt Practices ActForeign Corrupt Practices Act


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Subsidies orSubsidies orTrade Controls?Trade Controls?

ProtectionismProtectionism

TariffsTariffs

Quotas/EmbargoQuotas/Embargo

DumpingDumping


ProsPros

* Protect specific * Protect specific industriesindustries

* Protect new or * Protect new or struggling industriesstruggling industries

* Shield industries vital * Shield industries vital to national defenseto national defense

ConsCons

* Restricts free trade; * Restricts free trade; countries cannot compete freelycountries cannot compete freely

* Doesn* Doesn’’t promote level t promote level playing field; gives special playing field; gives special privileges to someprivileges to some

*Cannot bring goods to *Cannot bring goods to fair/open marketfair/open market

*Detrimental to world *Detrimental to world economy; nations cannot focus economy; nations cannot focus on what they do beston what they do best

Trade Control Debate

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Reducing Trade BarriersReducing Trade Barriers

Trade Agreements/OrganizationsTrade Agreements/Organizations• General Agreement on Tariffs & Trade (1947)General Agreement on Tariffs & Trade (1947)• World Trade Organization (1995)World Trade Organization (1995)

Financial Support for Troubled Economies (1944)Financial Support for Troubled Economies (1944)• International Monetary FundInternational Monetary Fund• World BankWorld Bank

Trading BlocsTrading Blocs• North American Free Trade Association (1994)North American Free Trade Association (1994)• European UnionEuropean Union• OtherOther


27 Members of the EU27 Members of the EU

business in a global environment exploring business chapter 3 9/27/11

Documents

us slide

flatworld knowledge

nations trade

trade agreements

trade restrictions

exploring business

trade deficits surpluses

economic barriers