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BUSINESS MANAGEMENT 061

TOPIC 3: THE GLOBAL
CONTEXT OF BUSINESS

The Business
Environment

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

Discuss the rise of international business and describe the major

world marketplaces and trade agreements and alliances.

2.

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.

3.

Discuss the factors involved in deciding to do business internationally

and in selecting the appropriate levels of international involvement
and international organisational structure.

4.

Describe some of the ways in which social, cultural, economic, legal

and political differences among nations affect international business.

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 globalisation affects you as
an employee
3. Assess how global opportunities and
challenges can affect you as a business owner
and as an investor

The Contemporary Global Economy

Globalisation
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

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

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

FIGURE 4.1 The Nations of the European Union

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

Trade Agreements and Alliances

(contd)

Significant Agreements and Treaties

General Agreement on Tariffs and Trade (GATT):

Signed after World War II. Its purpose was to reduce or

eliminate trade barriers, such as tariffs and quotas.

World Trade Organisation (WTO)

Began on January 1, 1995
Goals:
1. Promote trade by encouraging members to adopt fair
trade practices.
2. Reduce trade barriers by promoting multilateral
negotiations.
3. Establish fair procedures for resolving disputes
among members.

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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

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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

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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?

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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?

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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)

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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

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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

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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

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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

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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

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Barriers to International Trade

Social and Cultural
Differences
Economic
Differences

Legal and Political

Differences

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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

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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