Part 1 Business in a
Changing World
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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
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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
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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.
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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
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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
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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?
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? 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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