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Business Essentials, 7th EditionEbert/Griffin

© 2009 Pearson Education, Inc.

The Global Context of Business

Instructor Lecture PowerPointsPowerPoint Presentation prepared by

Carol Vollmer Pope Alverno College

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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 organizational structure.

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L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S

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.

L E A R N I N G O B J E C T I V E S (cont’d)L E A R N I N G O B J E C T I V E S (cont’d)

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What’s in It for Me?

• By understanding the material discussed in this chapter, you’ll 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

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The Contemporary Global Economy• Globalization

– The process by which the world’s 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

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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

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© 2009 South-Western, a division of Cengage Learning 8

WORLDWIDE ECONOMIC GROWTH

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

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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)

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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© 2009 Pearson Education, Inc.

FIGURE 4.3 U.S. Imports and Exports

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FIGURE 4.4 U.S. Trade Deficit

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Import-Export Balances (cont’d)

• Balance of Payments– The flow of money into or out of a country

• The money that a country pays for imports and receives for exports—its balance of trade—comprises 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 economy’s 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 (cont’d)

• When an economy’s 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 (cont’d)

• National Competitive Advantage– Conditions favoring heavy involvement in international

business:1. Factor conditions—labor, capital, entrepreneurs, physical

resources, and information resources

2. Demand conditions—a large domestic consumer base that promotes strong demand for innovative products

3. Related and supporting industries—strong local or regional suppliers and/or industrial customers

4. Strategies, structures, and rivalries—domestic 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 company’s 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 (cont’d)

• 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 Social and Cultural DifferencesDifferences

Social and Cultural Social and Cultural DifferencesDifferences

Economic Economic DifferencesDifferencesEconomic Economic

DifferencesDifferences

Legal and Political Legal and Political DifferencesDifferences

Legal and Political Legal and Political DifferencesDifferences

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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© 2009 Pearson Education, Inc.

Legal and Political Differences (cont’d)

• 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

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Key Terms

absolute advantageAssociation of Southeast Asian

Nations (ASEAN)balance of paymentsbalance of tradebranch officebusiness practice lawcartelcomparative advantagedumpingembargoeuroEuropean Union (EU)exchange rate

exportexporterforeign direct investment (FDI)General Agreement on Tariffs and

Trade (GATT)globalizationimportimporterindependent agentinternational firmlicensing arrangementlocal content lawmultinational firmnational competitive advantage

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Key Terms (cont.)

North American Free Trade Agreement (NAFTA)

offshoringoutsourcingprotectionismquotastrategic alliancessubsidytarifftrade deficittrade surplusWorld Trade Organization (WTO)

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