4 chapter

The Global Context of Business

Business Essentials, 7th Edition Ebert/Griffin

Instructor Lecture PowerPoints

PowerPoint Presentation prepared by

2009 Pearson Education, Inc.

Carol Vollmer Pope Alverno College

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

2009 Pearson Education, Inc.

LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1.
2.

Discuss the rise of international business and describe the major world marketplaces and trade agreements and alliances.
Explain how differences in import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment. Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure.
2009 Pearson Education, Inc.

3.

L E A R N I N G O B J E C T I V E S (contd)
After reading this chapter, you should be able to: 4. Describe some of the ways in which social, cultural, economic, legal, and political differences among nations affect international business.

2009 Pearson Education, Inc.

Whats in It for Me?

By understanding the material discussed in this chapter, youll be better prepared to:
1. Understand how global forces affect you as a customer 2. Understand how globalization affects you as an employee 3. Assess how global opportunities and challenges can affect you as a business owner and as an investor
2009 Pearson Education, Inc.

The Contemporary Global Economy Globalization

The process by which the worlds various national economies and trading systems are fast becoming a single, highly interdependent system
Exports: Domestically produced products sold in foreign markets Imports: Foreign products sold in domestic markets

2009 Pearson Education, Inc.

The Major World Marketplaces

Distinctions Based on Wealth
High-income countries Upper middle-income countries Low middle-income countries Low-income countries (developing countries)

Geographic Clusters
North America Europe Pacific Asia
2009 Pearson Education, Inc.

WORLDWIDE ECONOMIC GROWTH

2009 South-Western, a division of Cengage Learning

Trade Agreements and Alliances

Significant Agreements and Treaties
North American Free Trade Agreement (NAFTA)
Canada, Mexico, and the United States Effects: increases direct foreign investment, increases exports and imports, creates jobs

European Union (EU)

Most European nations Effects: eliminates quotas, removes trade barriers, and sets uniform tariffs on internally traded EU imports and exports

Association of Southeast Asian Nations (ASEAN) Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Vietnam
2009 Pearson Education, Inc.

FIGURE 4.1 The Nations of the European Union

2009 Pearson Education, Inc.

FIGURE 4.2 The Nations of the Association of Southeast Asian Nations (ASEAN)

2009 Pearson Education, Inc.

Import-Export Balances
Balance of Trade
The total economic value of all the products that a country exports minus the economic value of all the products that it imports

Trade Surplus
A positive balance of trade that results when a country exports more than it imports

Trade Deficit
A negative balance of trade that results when a country imports more than it exports
2009 Pearson Education, Inc.

FIGURE 4.3 U.S. Imports and Exports

2009 Pearson Education, Inc.

FIGURE 4.4 U.S. Trade Deficit

2009 Pearson Education, Inc.

Import-Export Balances (contd)

Balance of Payments
The flow of money into or out of a country
The money that a country pays for imports and receives for exportsits balance of tradecomprises much of its balance of payments

Exchange Rate
The rate at which the currency of one nation can be exchanged for that of another
Fixed exchange rates
Floating exchange rates
2009 Pearson Education, Inc.

Exchange Rates Impact Global Trade

When an economys currency is strong:
Domestic companies find it harder to export products
Foreign companies find it easier to import products Domestic companies may move production to cheaper production sites in foreign countries

Implications for the balance of trade?

2009 Pearson Education, Inc.

Exchange Rates Impact Global Trade (contd)

When an economys currency is weak:
Domestic companies find it easier to export products
Foreign companies find it harder to import products Foreign companies may invest in domestic production facilities

Implications for the balance of trade?

2009 Pearson Education, Inc.

Forms of Competitive Advantage

Absolute Advantage
When a country can produce something that is cheaper and/or of higher quality than any other country An advantage based on possessing a scarce resource (e.g., oil) or favorable physical location

Comparative Advantage
When a country can produce goods more efficiently or better than other countries can produce the same goods An advantage based on superior productivity (e.g., technologically advanced manufacturing capability)

2009 Pearson Education, Inc.

Forms of Competitive Advantage (contd)

National Competitive Advantage
Conditions favoring heavy involvement in international business:
1. Factor conditionslabor, capital, entrepreneurs, physical resources, and information resources

2. Demand conditionsa large domestic consumer base that promotes strong demand for innovative products
3. Related and supporting industriesstrong local or regional suppliers and/or industrial customers

4. Strategies, structures, and rivalriesdomestic firms and industries that stress cost reduction, product quality, higher productivity, and innovative products
2009 Pearson Education, Inc.

International Business Management

Going International
Gauging International Demand
Foreign demand for a companys product may be greater than, the same as, or weaker than domestic demand

Adapting to Customer Needs

A firm must decide whether and how to adapt its products to meet the special demands of foreign customers

Outsourcing
Paying suppliers and distributors to perform certain business processes or to provide needed materials or services

Offshoring
Outsourcing to foreign countries

2009 Pearson Education, Inc.

Levels of International Involvement

Exporters
Make products in one country to distribute and sell in others

Importers
Buy products in foreign markets and bring them home for resale

International firms
Conduct much of their business abroad and may maintain overseas manufacturing facilities

Multinational firms
Design, produce, and market products in many nations
2009 Pearson Education, Inc.

International Organization Structures

Independent Agent
A foreign individual or organization that represents an exporter in foreign markets

Licensing Arrangements (or Agreements)

Domestic firms give foreign individuals or companies exclusive rights to manufacture or market their products in that market

Branch Offices
A firm sends its own managers to overseas branch offices so that it will have more direct control than it does over agents or license holders
2009 Pearson Education, Inc.

International Organization Structures (contd)

Strategic Alliance (or Joint Venture)
A company finds a partner firm in the country in which it wants to do business Each party agrees to invest resources and capital into a new business or to cooperate in some mutually beneficial way

Foreign Direct Investment (FDI)

Involves buying or establishing tangible assets in another country
2009 Pearson Education, Inc.

Barriers to International Trade

Social and Cultural Differences Economic Differences

Legal and Political Differences

2009 Pearson Education, Inc.

Legal and Political Differences

Quotas, Embargoes, Tariffs, and Subsidies
Quota: Restricts the number of products of a certain type that can be imported, raising the prices of those imports Embargo: Government order forbidding exportation and/or importation of a product or all products from a specific country Tariffs: Taxes on imported products Subsidy: Government payment to help a domestic business compete with foreign firms

Protectionism
The practice of protecting domestic business at the expense of free market competition
2009 Pearson Education, Inc.

Legal and Political Differences (contd)

Local Content Laws
Requirements that products sold in a country be at least partly made there

Business Practice Laws

Host countries govern business practices within their jurisdictions

Cartels
Associations of producers that control supply and prices

Dumping
Selling a product abroad for less than the cost of production at home
2009 Pearson Education, Inc.

Key Terms
absolute advantage Association of Southeast Asian Nations (ASEAN) balance of payments balance of trade branch office business practice law cartel comparative advantage dumping embargo euro European Union (EU) exchange rate export exporter foreign direct investment (FDI) General Agreement on Tariffs and Trade (GATT) globalization import importer independent agent international firm licensing arrangement local content law multinational firm national competitive advantage

2009 Pearson Education, Inc.

Key Terms (cont.)

North American Free Trade Agreement (NAFTA) offshoring outsourcing protectionism quota strategic alliances subsidy tariff trade deficit trade surplus World Trade Organization (WTO)
2009 Pearson Education, Inc.