X100 Introduction to Business

X100 ©2008 KEAW L2

Professor Kenneth EA Wendeln Professor Kenneth EA Wendeln

X100Introduction to Business

X100Introduction to Business

Global Business in a

Global Economy

Global Business in a

Global Economy

X100 Global Business in a Global Economy L2-2

The Basis for International Business

Some countries are better equipped than others to produce particular goods or services: Absolute advantage - the ability to

produce a specific product more efficiently than any other nation

Comparative advantage - the ability to produce a specific product more efficiently than other products

International Business – exchanges across national boundaries

Goods and services are produced more efficiently when each country SPECIALIZES in the products

for which it has a comparative advantage


In the past, primary sources of comparative advantage were better access to: Lower cost Labor Markets Financial Markets Technology Natural Resources Geographic Areas

Principle of a Nation’s ‘Comparative Advantage’

With ‘Globalization’ - these sources of advantage are

becoming less important

Nations engage in international trade – because they own resources that enable a nation to produce some goods better & more efficiently than other nations


Diminishing ‘Comparative Advantage’

Financial markets are now global

With telecommunications & the internet, geographical location per se adds very little value

Companies find it relatively easy to bring work to employees, wherever workers live

Natural resources can be imported from any location around the world

Why ??


Artificial Restrictions on International Trade

Tariff Barriers Import duty (or tariff) – tax that is levied on products

entering the country. Raises the price. Dumping – exportation of large quantities of products at

a price lower than same product in home market. Drives down the price.

Non-tariff Barriers Embargo – complete halt to trading of a product. Often

used as a political weapon. Import quota – limits the amount that may be imported. Foreign Exchange control – limits amount of foreign

currency that can be purchased. Has effect of limiting imports.

Currency devaluation – reduction of the value of nation’s currency. Increases cost of foreign sourced goods.

Bureaucratic ‘Red Tape’ – frustrates trade.


Reasons for & Against Trade Restrictions

√ For Restrictions

1. Balance of Trade

2. Protect Industries

3. Protect Domestic Jobs

4. National Security

5. Health of Citizens

6. Retaliate for another Nation’s Restrictions

X Against Restrictions

1. Higher Prices for Consumers

2. Restriction of Consumers’ Choices

3. Misallocations of International Resources

4. Loss of Jobs

Since WWII there has been a dedicated & significant reduction in trade restrictions –

encouraging more global trade


GATT – Reductions in Trade Tariffs & Barriers

The Kennedy Round (1964-1967) - reduced US tariffs by as much as 50% as a result of the US Trade Expansion Act

The Tokyo Round (1973-1979) – approximately 100 nations agreed to tariff cuts of up to 35% implemented over an eight year period starting in 1979

The Uruguay Round (1986-1993) – created the WTO and extended GAAT treaty to include textiles, agricultural products, business services and intellectual property rights

The Doha Round (2001 - ????) – goal of further reduction in trade barriers on agriculture and services

General Agreement on Tariffs & Trade – originally established in 1947 after WWII. It is now known as the WTO or World Trade Organization, an international organization of 150* nations - dedicated to reducing or eliminating tariffs and other barriers of trade. * As of January 2007


International Economic Communities

North American Free Trade Agreement (NAFTA) –joined US, Canada & Mexico, its 1st and 2nd largest trading partners.

European Union (EU) – “Common Market”. Formed in 1957 by 6 European countries (now 27).

Organization of Petroleum Exporting Countries (OPEC) – founded in 1960 to provide 11 major oil-producing countries with some control over crude oil prices.

Association of Southeast Asian Nations (ASEA) – created ASEAN Free Trade Area (AFTA) in 1992, currently 10 countries.

Organization for Economic Cooperation & Development (OECD) – group of 30 industrialized market economy countries in NA, Europe, the Far East and South Pacific.

Organization of nations formed to promote the free movement of resources & products among its members via common economic policies.

OECD Website


The Evolving European Union 27 Countries in 2007

EU + Euro Countries

EU only Countries

http://ec.europa.eu


US - Major Trading Partners for Goods

Source: Federal Reserve Bank of St Louis, National Economic Trends, September 2005

Goods EXPORT Shares

Canada24%

Mexico14%

Japan7%

Other OECD30%

All Others‘Transition’

25%

Goods IMPORT Shares

Other OECD25%

All Other ‘Transition’

38%

Canada17%

Mexico11%

Japan9%

US has a ‘trade deficit’ – Imports > Exports


Value of US Merchandise Exports & Imports in 2004


U.S. International Trade in Goods, 1997 to 2004

If a country imports more goods than it exports, the balance of trade is negative, as it was in the US from 1997 to 2004

Source: US Department of Commerce, International Trade Administration, September 2005

TradeDeficit


Global Growth Remains Strong

Source: International Monetary Fund, World Economic Outlook, 2005

Percent growth over prior year

Global Growth led by the emerging

& developing

countries


World MerchandiseTrade & Output - 1950 to 2000Average annual % change in volume (real) terms of all merchandise as measured by GDP.

Trade GrowthTrade Growth > Output GrowthOutput GrowthLong-term real growth trend in global trade

Source: World Trade Organization (WTO) –International Trade Statistics 2001

}+1% }+5%Trade

Output

}+3%}+2%


Globalization . . .. . . In Summary

1. ‘Comparative advantage’ is becoming less & less important

2. Significant reductions in trade tariffs & barriers – encouraged by GATT & WTO

3. Expansion of International Economic Communities – eg NAFTA, EU . . .

The world is ‘getting smaller’ with increasing int’l trade as:

Globalization is a reality today –International trade has tripled since WWII & now accounts for 21% of global income


8. Joint Ventures

9. Totally Owned Facilities

• Acquisitions

• Subsidiaries

• Overseas Divisions

10.Multinational Companies

International Direct Investments

Trade Arrangements

1. Trading Companies

2. Exporting & Importing

3. Counter Trade

Int’l Contractual Agreements

4. Foreign Licensing

5. Franchising

6. Strategic Alliances

7. Production Agreements

Low

Degree of Control over Business

High

Degree of Financial Risk

Low High

More control usually means more financial risk

Methods of Entering International Business


Trade Arrangements1.Trading Companies – buy in one country at the lowest

price & sell to customers in another country at a higher price.

Provides a link between buyers & sellers in different countries.

2.Exporting & Importing – firm manufactures products in home country & exports them for sale in foreign markets.

Can be a relatively low risk method to enter foreign markets.

Export/import merchant – essentially a merchant wholesaler

Exporting agent – receives a commission for arranging transactions

Exporting firm – establishes its own offices in foreign countries

3.CounterTrade – International barter transaction in which goods & services are exchanged for other goods & services.

Used with countries that have weak currencies or currency controls.


International Contractual Agreements

4.Foreign Licensing – contractual agreement to market product or use brand name in return for royalty or other compensation.

Simple method to expand into foreign country with little investment.

5.Franchising – contractual agreement in which a “franchisee” purchases the right to sell the “franchiser’s” products & use brand names under arrangements agreed in the contract.

Franchisee takes franchiser’s brands & products into franchisee’s local markets.

6.Strategic Alliances – cooperative ‘partnerships’ formed to share or pool resources to create competitive advantages.

Often used to share technology or penetrate geographic markets.

7.Production Agreements – subcontracting of manufacturing to foreign firms for lower cost and/or sale into foreign regions.

Some countries & economic communities require ‘local content’.


International Direct Investment

8. Joint Ventures – separate entities formed to achieve a common goal & usually for a specific or limited time.May be used to produce & market an existing product in a foreign

country or to develop an entirely new product, technology or process.

9.Totally Owned Facilities – firm develops its own production & marketing facilities in another country.Provides greater control but also incurs financial investment risks. Acquisitions – of a foreign company or facility to provide entre’ into

foreign markets. Subsidiaries – companies acquired or established in foreign

countries. Overseas Divisions – headquartered in foreign countries.

10.Multinational Corporation (MNC) – a multinational enterprise that operates on a worldwide scale without ties to specific nation or region.Represents the highest level of involvement in international business.


Export Strategyto Reach Global Markets

Sources of Export Assistance1. SBA Export Assistance: are federal assistance offices, providing

assistance in export marketing & trade finance. http://www.sba.gov

2. International Trade Administration (ITA), US Department of Commerce: offers assistance & information to exporters through its units & links from its web site. http://trade.gov

A firm manufactures products in its home country and exports them for sale in foreign markets - usually using an import/export agent, merchant or trading company to ease the export of products into foreign markets.

Exporting can be a relatively low-risk method of entering foreign markets. However, it opens up several levels of involvement to the exporting firm and usually requires the specialist assistance of a ‘mutually-trusted’ go-between who can assure that payment is made & merchandise delivered according to the terms of the trade contract.


Licensing & Franchisingto Reach Global Markets

√ Advantages1. Method to expand into a foreign country with little investment.2. Company can gain additional revenues & profits from products

& services that it would not have normally generated domestically.

3. Licensees or Franchisees make the investments and generally work very hard to see that product succeeds in their market.

X Disadvantages1. Usually requires a longer term commitment (up to 20 years).2. Loss of trade secrets & agreed-upon royalties if licensee breaks

agreement.

A contractual agreement to use a brand name or to market a product or in return for a royalty or for other compensation.

Coca-Cola generates 61% of its revenues & 71% of its operating profits in foreign countries. Many of these sales are the result of licensing agreements in various countries. http://www.cocacola.com


Joint Venture Strategyto Reach Global Markets

√ Advantages1. May be used to produce & market an existing product in a

foreign nation or to develop an entirely new product.2. A JV with an established firm in a foreign country – provides

immediate market knowledge & access, reduced risk and control over product attributes.

X Disadvantages1. JV agreements established across national borders can be

extremely complex.2. Requires a high degree of commitment from all parties

involved.

A ‘partnership’ formed to achieve a specific goal or to operate for a specific period of time.

New United Motor Manufacturing, Inc is a pioneering joint venture of General Motors and Toyota. Established in Fremont, CA in 1984, NUMMI helped change the automobile industry by introducing the Toyota Production System and a teamwork-based environment to the US. Today, NUMMI produces the Toyota Corolla, the Toyota Tacoma and the Pontiac Vibe. http://www.nummi.com


MNCs Multinational Corporations

Have become increasingly common over the last two decades, trading more & more value.

Tend to develop their strategy over time. Initially, bring their existing products & marketing strategies

into emerging markets. Over time develop product & marketing strategies aimed at

the specific needs of the emerging markets. Capitalize on global ‘product platforms’ & comparative cost &

technology advantages. Global organizational structure & management teams

representing MNC’s global diversity.

A multinational enterprise that operates on a worldwide scale, without ties to specific nation or region.

ABB Ltd is a global leader in power and automation technologies that enable utility and industry customers to improve their performance while lowering their environmental impact. ABB has 160,000 employees in more than 100 countries. ABB was formed in 1988 by the merger of Asea & BBC. http://www.abb.com/

Think GlobalAct Local


Examples of the New Global Economy

1. Electronic Commerce Geography does not matter. Country of origin does not matter. Corporate resources do not matter.

2. Contract Manufacturing Services - CMS CMS’s have developed extraordinary

levels of efficiency in production. Many of the worlds’ products

are no longer manufactured by the owners of brands.

Increasingly, companies are focusing on product design, marketing, promotion & customer service.

CMS’s are responsible for production, support & logistics. Contract manufactures can operate anywhere in the world

since production and sales are no longer linked.

http://www.sanmina.com/

X100 Global Business in a Global Economy L2-25 X100 Global Business in a Global Economy L2-25

X100 Introduction to Business

Documents

Transcript of X100 Introduction to Business