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Part 1 Business in a

Changing World

© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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CHAPTER 1 The Dynamics of Business and Economics

APPENDIX A Guidelines for the Development of the Business Plan

CHAPTER 2 Business Ethics and Social Responsibility

APPENDIX B The Legal and Regulatory Environment

CHAPTER 3 Business in a Borderless World

© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Learning Objectives

LO 3-1 Explore some of the factors within the international trade environment that influence business. LO 3-2 Investigate some of the economic, legal-political, social,

cultural and technological barriers to international business. LO 3-3 Specify some of the agreements, alliances and organizations

that may encourage trade across international boundaries. LO 3-4 Summarize the different levels of organizational

involvement in international trade. LO 3-5 Contrast two basic strategies used in international business. LO 3-6 Assess the opportunities and problems facing a small

business that is considering expanding into international markets.


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The Role of International Business

International Business • The buying, selling and trading of goods and

services across national boundaries

• Most of the world’s population and two-thirds of its total purchasing power are outside the U.S.

• Global marketing requires balancing global brands with the needs of local consumers


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McDonald’s in China

» American companies such as McDonald’s have become widely popular in China

» This restaurant in Beijing features elements from the Chinese culture as well as Ronald McDonald


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Why Nations Trade

Absolute Advantage • A monopoly that exists when a country is the only source of

an item, the only producer of an item, or the most efficient producer of an item

Comparative Advantage • The basis of most international trade, when a country

specializes in products that it can supply more efficiently or at a lower cost than it can produce other items

Outsourcing • The transferring of manufacturing or other tasks – such as

data processing – to countries where labor and supplies are less expensive


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Trade between Countries

Exporting – the sale of goods and services to foreign markets

2013 U.S. exports = $2.3 trillion+

Importing – the purchase of goods and services from foreign markets

2013 U.S. imports = $2.7 trillion+


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Balance of Trade

Balance of Trade • The difference in value between what a nation exports and

its imports

Trade Deficit • A nation’s negative balance of trade, which exists when that

country imports more products than it exports

Balance of Payments • The difference between the flow of money into and out of a

country


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U.S. Trade Deficit (in billions of dollars)


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China Faces Growing Concerns over Pollution

• With China’s growing middle class, pollution has also grown and the Chinese government has taken action

• China is closing their worst polluting factories, adopting stringent environmental laws and planning for a cap-and-trade system

• Even though China releases the most greenhouse gas emissions, they still give off less per person than the U.S.


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International Trade Barriers

Completely free trade seldom exists, due to: • Economic barriers • Ethical, legal and political barriers • Social and cultural barriers • Technological barriers

Some countries have copyright and patent laws that are less strict than those of the U.S., and some countries fail to honor U.S. laws


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Economic Barriers

Economic Development

Industrialized nations are

economically advanced

United States Japan Great Britain Canada

Less developed countries have low per-capita

income

Potentially huge, and profitable,

untapped market


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Infrastructure

Level of development is determined in part by a country’s

Infrastructure • The physical facilities supporting a country’s economic

activities, such as railroads, highways, ports, airfields, utilities and power plants, schools, hospitals, communication systems and commercial distribution systems


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Exchange Rate

Another economic trade barrier is the

Exchange Rate • The ratio at which one nation’s currency can be

exchanged for another nation’s currency

• Exchange rates vary daily and affect the cost of imports and exports

• A government may intentionally alter the value of its currency through fiscal policy


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Ethical, Legal, and Political Barriers When entering the

international marketplace, companies must contend with potentially complex relationships

Different laws of its own nation, international laws and the laws of the nation with which its trading

Various trade restrictions Changing political climates Different ethical values

Due to the U.S. embargo against Cuba, many Cubans

drive older automobiles © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,

duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Laws and Regulations

A firm doing business abroad must understand and obey the laws of the host country

Some countries have restrictions on how much local currency can be taken out of its borders Other countries limit how foreign companies can operate within the country Some countries fail to honor U.S. laws and/or fail to enforce their own laws In some parts of the world, copyright and patent laws are less strict than in the U.S.

© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,


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Counterfeiting

The watch on the right, a knockoff developed by Digital Time Co., Ltd, in Thailand, received a special award for falsification The dubious honor is given to the “best” product knockoffs by the organization Action Plagiarius in an effort to shame their makers


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Import Tariff

Import Tariff • A tax levied by a nation on goods imported into the

country

Fixed tariff is a specific amount of money levied on each unit of product brought into the country

Ad valorem tariff is based on the value of the item Countries sometimes levy tariffs for political reasons Critics of protective tariffs argue that their use inhibits

free trade and competition Supporters of protective tariffs say they insulate

domestic industries, particularly new ones, against well-established foreign competitors


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Exchange Controls

Exchange Controls • Regulations that restrict the amount of currency

that can be bought or sold

Some countries control their foreign trade by forcing businesspeople to buy and sell foreign products through a central bank

When foreign currency is in short supply ♦ Government uses foreign currency to purchase

necessities and capital goods and produce other products locally

♦ Limiting its need for foreign imports


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Reshoring

Economic changes have spurred companies to bring their manufacturing operations from out of the country back to the United States For example, the rise of the middle class in China has

spurred employees to demand higher wages and better jobs This is resulting in higher costs for companies whose

motivation to take their manufacturing offshore was to decrease expenses

Additionally, Americans are wanting manufacturing jobs to come back to America out of a desire for more jobs and American-made products


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Tariffs and Trade Restrictions

Quota • Restriction on the number of units of a particular

product that can be imported into a country

Embargo • A prohibition on trade for a particular product

Dumping • The act of a country or business selling products at

less than what it costs to produce them


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Dumping

A company may dump its products for several reasons:

1. Permits quick entry into a market

2. When the domestic market for a firm’s product is too small to support an efficient level of production

3. Technologically obsolete products that are no longer salable in the country

A European complaint has alleged that China is dumping solar panels

and urges the EU to implement import tariffs

(China denies any such activity)


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Political Barriers

Political considerations affect international business daily

Seldom in writing & change rapidly Political unrest may create a hostile or even

dangerous environment for foreign business

Cartel • A group of firms or nations that agrees to act as a

monopoly and not compete with each other, in order to generate a competitive advantage in world markets

OPEC is an example of a cartel


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Social and Cultural Barriers

Research can help minimize the problems associated with social and cultural differences

Differences in the spoken and written language Appropriate body language, posture, facial

expressions and personal space may vary by nation Family roles may differ in different societies Other nations often have a different perception of time National customs and holidays must be respected Most nations use the metric system


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Technological Barriers

• Are creating global marketing opportunities

• Create new challenges and competition

Technological Advances

• Out of the top five PC companies, three are from countries in Asia

• iPad and other tablet computer makers beginning to erode the market share of traditional personal computers

Changing Technologies


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Turning Infrastructure Barriers into Opportunities

Many countries lack the technological infrastructure found in the U.S. Marketers are viewing such barriers as opportunities

Marketers are targeting countries such as India and China and some African countries Where there are few private

phone lines

Citizens are turning to wireless communication through cell phones

Cell phone services are taking off in Africa. They differ a viable alternative to landlines, which require infrastructure

not always available in rural areas. © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,


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Trade Agreements, Alliances, and Organizations

General Agreement on Tariffs and Trade (GATT)

• Trade agreement signed by 23 nations in 1947, provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved

World Trade Organization (WTO) • International organization dealing with the rules of

trade between nations, evolved from GATT


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Trade Agreements, Alliance, and Organizations

North American Free Trade Agreement

(NAFTA) • Agreement that

eliminates most tariffs and trade restrictions on agricultural and manufactured products to encourage trade among Canada, the U.S. and Mexico

NAFTA, which went into effect on January 1, 1994, has

increased trade among Mexico, the U.S., and Canada


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NAFTA

NAFTA

Effective January 1,

1994

Easier to invest in Mexico

and Canada

Protects intellectual property

Expands trade by requiring

equal treatment

Simplifies country-of-origin

rules

While controversial, NAFTA has become a positive factor for U.S. firms


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European Union and Asia-Pacific Economic Cooperation

• A union of European nations established in 1958 to promote trade among its members; one of the largest single markets today

• The EU has a GDP of $17 trillion+

European Union (EU)

• An international trade alliance that promotes open trade and economic and technical cooperation among member nations

• Holds 55% of world GDP

Asia-Pacific Economic

Cooperation (APEC)


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APEC Companies of the APEC have become increasingly competitive and sophisticated in global business in the past 3 decades

The Asia-Pacific Economic Cooperation (APEC) was

established to promote open trade and cooperation among

member nations

Member Nations

Australia Brunei Darsussalam

Canada

Indonesia Japan Korea

Malaysia New Zealand Philippines

Singapore Thailand United States

China Hong Kong Chinese Taipei

Mexico Papua New Guinea

Chile

Peru Russia Vietnam


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ASEAN, World Bank, and International Monetary Fund

• A trade alliance that promotes trade and economic integration among member nations in Southeast Asia

• Has a GDP of $2 trillion

Association of Southeast

Asian Nations (ASEAN)

• An organization established by the industrialized nations in 1946 to loan money to underdeveloped and developing countries

World Bank

• Organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation

International Monetary Fund


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Exporting and Importing

Exporting and Importing

Countertrade agreement is a foreign trade agreement that involves bartering products for other products instead of currency

Export agents are middlemen that help companies by handling their international transactions

Top Exporting Countries *2011 estimates in billions, calculated on an exchange rate basis


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Getting Involved in International Business

Trading Company • A firm that buys goods in one country and sells them to buyers of another

country • Handles all trade activities; similar to export agents but their role is broader

Licensing • A trade agreement in which one company – the licensor – allows another

company – the licensee – to use its company name, products, patents, brand, trademarks, raw materials and/or production processes in exchange for a fee or royalty

• An attractive alternative to direct investment when political stability is in doubt

Franchising • A form of licensing in which a company – the franchiser – agrees to

provide a franchisee a name, logo, methods of operation, advertising, products and other elements associated with a franchiser’s business, in return for a financial commitment and the agreement to conduct business in accord with the franchiser’s standard of operation


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McDonald’s Franchises

McDonald’s has expanded around the world via franchising

Although the company will customize some of its meals to the local culture, this menu from McDonald’s in Morocco shows the firm offers similar fare across the world


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Contract Manufacturing and Outsourcing

• The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification; the final product carries the domestic firm’s name

• For example, Reebok uses contract manufacturers to produce many of its shoes

Contract Manufacturing

• As defined earlier is transferring tasks to other countries where costs are lower

• Insourcing, where foreign companies transfer tasks to U.S. companies, happens more often

Outsourcing


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Offshoring and Joint Venture

Offshoring

• The relocation of business processes by a company, or subsidiary, to another country

• Different from outsourcing: the company retains control by not subcontracting to another company

Joint Venture

• The sharing of the costs and operation of a business between a foreign company and a local partner

• Used in countries forbidding direct investment from foreign companies or when the company lacks resources or expertise


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Strategic Alliance and Direct Investment

Strategic Alliance

• A partnership formed to create competitive advantage on a worldwide basis

• Used when competition is fierce and costs are high

• Becoming predominant in the automobile and computer industries

Direct Investment

• The ownership of overseas facilities

• For companies who want more control and are willing to invest considerable resources

• May involve new facilities or the purchase of an existing operation


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Subway in Kuwait

This subway restaurant is part of the huge Souq

Sharq shopping center in Kuwait City, Kuwait


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International Business Strategies

Multinational Corporation (MNC) • A corporation that operates on a worldwide scale,

without significant ties to any one nation or region

► They often have greater assets than the countries in which they operate

► Many MNCs are targeted by antiglobalization activists, including some violent protests

► Activists contend the MNCs increase the gap between rich and poor, misuse scarce resources, exploit the labor markets in LDCs and harm natural environments


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Global Strategy and Multinational Strategy

Global Strategy (Globalization) Multinational

Strategy

A strategy that involves standardizing products

(promotion and distribution) for the whole

world as if it were a single entity

A plan used by international companies that involves customizing products,

promotion and distribution according to cultural

technological, regional and national differences


Audiotech Electronics currently operates a 35,000-square-foot factor with 75 employees

► Produces control consoles for TV and radio stations and recording studios

► Products are used by all the major broadcast and cable networks

► Newest products allow TV correspondents to simultaneously hear and communicate with their counterparts in different geographic locations

► Very successful meeting its customers needs efficiently

Solve the Dilemma Global Expansion or Business as Usual?

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Solve the Dilemma Global Expansion or Business as Usual?

(cont.)

Global Expansion?

• Audiotech sales have historically been strong in the U.S. • Recently, growth is

stagnating • Even though Audiotech

is a small family-owned firm, it believes it should evaluate and consider global expansion

Discussion Questions • What are the key issues that

need to be considered in determining global expansion?

• What are some of the unique problems that a small firm might face in global expansion that larger firms would not?

• Should Audiotech consider a joint venture? Should it hire a sales force of people native to the countries it enters?


? Distinguish between an absolute advantage and a comparative advantage. Cite an example of a country that has an absolute advantage and one with a comparative advantage.

? What is an import tariff ? A quota? Dumping? How might a country use import tariffs and quotas to control its balance of trade and payments? Why can dumping result in the imposition of tariffs and quotas?

? At what levels might a firm get involved in international business? What level requires the least commitment of resources? What level requires the most?

? Compare and contrast licensing, franchising, contract manufacturing, and outsourcing.

Discussion

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