GLOBAL BUSINESS

The World is Flat - Globalization and its consequences

Lecture Objectives
Discuss the meaning of international business and world trade. Explain the importance of understanding international business. Identify and describe the basic forms of international business activities. Describe the nature and scope of world trade from a global perspective.

Lecture Objectives
Explain the effects of economic protectionism and the implications of economic integration for global business practices. Discuss the causes of globalization.

The Business of the Olympics

Cities compete for the privilege to host the Olympic games to be in the international spotlight and to promote economic growth. Both the IOC and national Olympic committees are always on the alert for ways to generate revenue.

Television coverage provides one significant source of revenue. Corporate sponsors are another important source of revenue.

International Business
International business consists of business transactions between parties from more than one country.

World Trade
World trade refers to the flow of goods and services among different countries - the value of all the exports and imports of the worlds nations.

International Business vs. Domestic Business

..Differs for a number of reasons:

The countries involved may use different currencies, forcing at least one party to convert its currency into another.
The legal systems of the countries may differ, forcing one or more parties to adjust their practices to comply with local law.

International Business vs. Domestic Business

..Differs for a number of reasons:
(cntd)

The cultures of the countries may differ, forcing each party to adjust its behavior to meet the expectations of the other. The availability of resources differs by country; the way products are produced and the types of products that are produced vary among countries.

Countertrade Effect
The practice of using barter rather than money for making global sales.
20% of world trade involves counter trade. Popular with many Eastern European nations.

Why Study International Business?

Almost any large organization you work for will have international operations or be affected by the global economy. Small businesses also are becoming more involved in international business. Studying international business will help you keep pace with your future competitors.

International Business Activities

Importing and exporting International investments
Foreign direct investments (FDI) Portfolio investments

Licensing Franchising Management contracts

Importing and Exporting

Importing is the buying of products made in other countries for use or resale in ones own country. Exporting is the selling of products made in ones own country for use or resale in other countries.

Leading exporters and importers in world merchandise trade, 2008

ECONOMIC PERFORMANCES BY COUNTRY/REGION

Average annual export, import and GDP growth (1990-2004)

20 18
Average annual import growth (%)

16 14 12 10 8 Sub-Saharan Africa 6 4 2 0 0 2 4 6 8 10 12 14 16 Japan EMU UK World Latin America & Caribbean India

China

18

20

Average annual export growth (%)

Trade Feedback Effect

As a countrys exports increase, its national output and income increase, which leads to a increase in the demand for imports. Hence, imports affect exports and vice versa.

This trade feedback effect is one argument for free trade among nations.

International Investments
Foreign direct investments (FDI) are investments made for the purpose of actively controlling property, assets, or companies located in host countries. Portfolio investments are purchases of foreign financial assets (stocks, bonds, and certificates of deposit) for a purpose other than control.

Licensing
Licensing - a legal arrangement whereby a firm in one country licenses the use of its intellectual property royalty payment.

(patents, trademarks, brand names, copyrights, or trade secrets) to a firm in a second country in return for a

Franchising
Franchising, a specialized form of licensing, occurs when a firm in one country (the franchisor) authorizes a firm in a second country (the franchisee) to utilize its operating systems as well as its brand names, trademarks, and logos, in return for a royalty payment.

Franchising

Management Contracts
A management contract is an arrangement wherein a firm in one country agrees to operate facilities or provide other management services to a firm in another country for an agreed-upon fee.

Multinational Corporation
A multinational corporation is a firm that engages in foreign direct investment and owns or controls valueadding activities in more than one country.

The Contemporary Causes of Globalization

Several basic motives have compelled firms to become more global in both their orientation and actions: To leverage core competencies To acquire resources and supplies To seek new markets To better compete with rivals

Environmental Change and Globalization

Firms would not have been able to expand their international activities to the extent we have observed in the post-World War II period without significant changes in two key areas:

The political environment The technological environment

Illustrative World Trade Flows (billions of dollars)

194 Western Europe intratrade: 1430 227 241 North America intratrade: 465 200 Asia / Pacific Rim intratrade: 632 393

382

279
365 140 137 Rest of world intratrade: 175 313 381

GDP Per Capita 2009 (in USD)

How Purchasing Power differs Around the World

Percent Distribution of Households by
Annual Purchasing Power Level Less than $5,000 $10,000 to $19,999 South Asia Sub-Saharan Africa East Asia/Pacific $5,000 to $9,999 $20,000 and above 4% 1% 2% 4%

75%
75% 73% 21% 22% 24% 3% 8% 0% 20% 24% 40% 60% 80% 23% 32% 32% 26%

21%
16% 7% 17% 7% 30% 28%

Former Socialist economies

Middle Eastern Crescent Latin America Established market economies

17% 18% 27% 65% 100%

Note: Consumption is in U.S. dollars on a purchase-power-parity basis. Percentages may add to more than 100 percent due to rounding.

Economic Protectionism International Trade System

Protectionism is a government policy which seeks to provide home companies an advantage over foreign companies by implementing trade barriers

How Protectionism Affects World Trade

Protectionism

Tariffs

Quotas

Increase Prices

Limit Supply

Decreased Global Trade

The Internet and International Business

The growth of the Internet and other information technologies affect international business in at least three different ways:
The Internet and associated technologies facilitate international trade in services. The Internet tends to level the playing field between larger and smaller enterprises. The Internet holds considerable potential as an efficient networking mechanism among businesses.