Chapter 4

1. Chapter 4 The Global Context of Business Prepared By: Mostafa Kamel

2. Learning Objectives • Discuss the rise of international business and describe the major world marketplaces and trade agreements and alliances. • 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. • Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and organizational structure. • Describe some of the ways in which social, cultural, economic, legal, and political differences among nations affect international business. Prepared By: Mostafa Kamel

3. Chapter Outline • The Contemporary Global Economy • The Major World Marketplaces • Trade Agreements and Alliances • International Trade • Exchange Rates • Forms of Competitive Advantage • International Business Management • Going International • Levels of International Involvement • International Organization Structures • Barriers to International Trade • Social and Cultural Differences • Economic Differences • Legal and Political Differences Prepared By: Mostafa Kamel

4. The Contemporary Global Economy Prepared By: Mostafa Kamel

5. The Global Economy • The world economy is becoming a single interdependent system through the process of globalization. • Exports are products that are produced domestically and shipped for sale abroad. • Imports are products that are produced abroad but sold domestically. • International trade is becoming increasingly important to most nations and their largest businesses. • New technologies have made travel, communication, and commerce faster and cheaper. • In addition, competitive pressures push firms into foreign markets to keep up with competitors. Prepared By: Mostafa Kamel

6. The Major World market place • Managers involved with international business needs to have a solid understanding of the global economy, including the major world marketplaces. • One key economic distinction between countries is based on wealth. • Four different distinctions are being proposed by the World Bank using the annual income per-capita: • High-income countries (Greater than $ 11,115). • Upper-middle-income countries ($ 3,596 – $ 11,115). • Low-middle-income countries ($ 906 – $ 3,595). • Low-income countries Less than ( less than $ 905). Prepared By: Mostafa Kamel

7. Geographic Clusters The world revolves around three major marketplaces: • North America. is the world’s largest marketplace and most stable economy. Dominated mainly by US and Canada. • European Union. It now integrates all regions of Europe, creating a larger unified marketplace. • Pacific Asia.Consist of Japan, China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, the Philippines, and Australia. • China, the world’s most densely populated country now boasts the world’s third-largest economy, behind only the European Union and the United States. Prepared By: Mostafa Kamel

8. Trade Agreements and Alliances • Virtually every nation has formed treaties with other nations to promote free trade. No country is totally self-sufficient; every country relies on imports and exports. • Treaty: is a legal agreement that specifies areas in which nations will cooperate with one another. • Among the most significant treaties are: • North American Free Trade Agreements (NAFTA). • European Union (EU). • Association of southeast Asian Nations (ASEAN). • World Trade Organization (WTO). Prepared By: Mostafa Kamel

9. North American Free Trade Agreements (NAFTA). • Agreement to gradually eliminate tariffs and other trade barriers among united states, Canada, and Mexico. It Also includes agreements regarding environment and labor abuse. • European Union (EU) • Agreement among major European nations to eliminate or make uniform most trade barriers affecting group members. They eliminate most quotas and set uniform tariff levels on products imported and exported. • The Association of southeast Asian Nations (ASEAN) • Founded in 1967 as an organization for economic, political, social, and cultural cooperation among southeast Asian nations. Prepared By: Mostafa Kamel

10. The World Trade Organization (WTO) • Organization through which member nations (152 countries) negotiate trading agreements and resolve disputes about trade policies and practices. • GATT (General Agreement on Tariffs and Trade) is the actual treaty that governs the WTO. • GATTis an international trade agreement which purpose was to reduce or eliminate trade barriers, such as tariffs and quotes by encouraging nations to protect domestic industries within agreed-upon limits and to engage in multilateral negotiation. • The WTO are required to pursue three goals: • Promote trade by encouraging members to adopt fair trade practices. • Reduce trade barriers by promoting multilateral negotiations. • Establish fair procedures for resolving disputes among members. Prepared By: Mostafa Kamel

11. International Trade Prepared By: Mostafa Kamel

12. International trade occurs when an exchange takes place across national boundaries on form of exports and imports. • Two measures are being used to decide whether an over all balance exists between exports and imports : 1. Balance of Trade: is total economic value of all the products that it exports minus the economic value of all the products that it imports. • Positive balance of trade: country’s Export > Imports (Enjoys Trade surplus) • Negative balance of trade: Country’s Import > Exports (Suffers Trade deficit) 2. Balance of payments: Flow of all money into or out of a country. • (includes the money of exports and imports in addition to other financial exchanges such as money spent by tourists and currency exchanges.) Prepared By: Mostafa Kamel

13. US Imports and Exports • Note The difference. • Small trade imbalances are common. • Large negative balance of trade means that many dollars are controlled by the interests outside the united states Prepared By: Mostafa Kamel

14. Exchange Rates • An exchange rate : is the rate at which a nation’s currency can be exchanged for the currency of another. • Fluctuations in exchange rates can greatly affect a country’s balance of trade. • With fixed exchange rates, the value of a country’s currency remains relatively constant to that of another country. • With floating exchange rates, the value of a country’s currency relative to another currency varies with market conditions. Throughout most of 2009 the United States criticized China for its inflexible exchange rate policy—China being one of the few countries that still uses fixed exchange rates. Prepared By: Mostafa Kamel

15. What is important in Exchange Rates ! • Companies with international operations must watch exchange rate fluctuations closely because changes affect overseas demand for their products and can be a major factor in completion. • When the value of currency rises – Becomes stronger – companies based their find it harder to export products to foreign markets and easier to foreign companies to enter local markets. • It Also makes it more cost efficient for domestic companies to move operations to move operations to lower-cost foreign site. • The opposite holds true too. Prepared By: Mostafa Kamel

16. Forms of Competitive Advantage • Because no country can produce everything that it needs, countries tend to export what they can produce better or less expensively than other countries and use the proceeds to import what they can’t produce as effectively. • Managers need to understand forms of competitive advantage when making decisions about international competition. • Absolute Advantage • Comparative advantage. • National competitive Advantage Prepared By: Mostafa Kamel

17. Absolute advantage: the ability to produce something that is cheaper and/or of higher quality than any other country. • Saudi oil, Brazilian coffee beans • Comparative advantage the ability to produce some products more efficiently or better than other goods. • If a businesses in any given country can make computers more efficiently than they can make automobiles, then that nations has a comparative advantage in computer manufacturing. Both absolute and comparative advantages translate into competitive advantage. A theory of national competitive advantage has become widely accepted model of why nations engage in international trade • National Competitive advantage: is international competitive advantage stemming from a combination of factor conditions, demand conditions, related and supporting industries, and firm strategies, structures and rivals. (Example: …) Prepared By: Mostafa Kamel

18. International Business Management Prepared By: Mostafa Kamel

19. The three basic decisions that a company must make when considering globalization are: • Whether to go international at all. • The level of international involvement. • The organizational structure that will best meet the firm’s global needs. Prepared By: Mostafa Kamel

20. Going International Several factors affect the decision to go international: • Gauging international demand • Are there any demand for its products abroad. • Adapting to customer needs • If its products is in demand, the firm must decide whether and how to adapt it to meet the special demands of foreign customers • Outsourcing and offshoring • Outsourcing is the practice of paying suppliers and distributers to perform certain processes or to provide needed materials or services. • Outsourcing became so popular because it helps firms focus on theory core activities and it reduces costs by locating certain business functions in areas where relevant costs are low. • Offshoring: is the practice of outsourcing to foreign countries. Prepared By: Mostafa Kamel

21. Levels of International Involvement After deciding to go international , the firm must determine the level of its involvement. Three levels are possible: • Exporters and importers • Exporters makes products in one country to distribute and sell in others. • Importers buy products in foreign markets and brings them home for resale. • Both exporters and importers conduct most of their operations in their home nations. • Both entail the lowest level of involvement in international operations. • Both are good ways to learn the fine points of global business. • International firms • A more complex form than exporters and importers. Conducts a significant portion of its business in foreign countries. • They might have international operations but still generate most of its revenues from the domestic market. • Multinational firms • A firm that designs, produces, and markets products in many nations. • Planning and decision making are geared to international markets. Prepared By: Mostafa Kamel

22. International Organization Structures Different levels of international involvement entail different kinds of organizational structures. Whether an importer, exporter, international firm, or multinational firm, a firm’s level of global involvement will influence the firm’s choice of international organizational strategies. Prepared By: Mostafa Kamel

23. 5 popular International Organization structures • Independent Agents • Foreign individual or organization that agrees to represent an exporter’s interest. This includes assisting in product sales, collection of payments, and in helping to ensure customer satisfaction. • Licensing Arrangements. • firms give individuals or companies in a foreign country the exclusive right to manufacture or market the firm’s products. In return, the licensor typically receives a fee and royalties, which are usually calculated as a percentage of the license holder’s sales. • Franchising is an increasingly popular form of licensing • Branch Offices • Instead of using foreign agents, a firm might send its own managers to overseas branch offices. • The firm will enjoy more direct control than it has with agents or license holders. • Foreign customers tend to feel more secure when there is a local branch office. • Strategic Alliances • Strategic alliances include a company and a foreign partner that combine resources and capital to begin a new business. This new business (the alliance) is owned by the partners and they divide the profits. • Sometimes called (joint venture). • Foreign direct investment • Arrangement in which a firm buys or establishes tangible assets in another country Prepared By: Mostafa Kamel

24. Barriers to International Trade Whether a business is truly multinational or sells only a few foreign markets, success in foreign markets will largely depend on the ways it respond to social economic, legal, and political barriers to international trade. Prepared By: Mostafa Kamel

25. Barriers to International Trade A. Social and Cultural Differences • These barriers include a plethora of differences in language, religion, perceptions, shopping patterns, and so on, between and among different populations. B. Economic Differences • When trading with different types of economic systems, firms must be aware of the level of government involvement in a given industry. Prepared By: Mostafa Kamel

26. C. Legal and Political Differences • Governments can present many trade barriers in international business, including: • The control of the flow of capital. • The use of tax legislation to encourage or discourage global activity in given industries. • They can even confiscate the property of the foreign-owned companies. • Some of more common legal and political issues include: 1- Quotas, Tariffs, and subsidies • Quotas: Restricts the number of products of a certain type that can be imported and , by reducing supply, raises The prices of those imports. • The ultimate quota is an embargo—a government order forbidding exportation and/or importation of a particular product (or even all products) from a specific country. • A Tariff: is a tax placed on imports; tariffs directly affect prices by raising the price of imports. • A subsidy: is a government payment to help a domestic business compete with foreign firms. What is logic behind imposing Quotas and tariffs?!! Prepared By: Mostafa Kamel

27. 2- Local Content Laws • Law requiring that products sold in a particular country be at least partly made here. 3- Business Practice Laws • Many businesses entering new markets encounter problems in complying with stringent regulations and bureaucratic obstacles. Such practices are affected by the business practice laws by which host countries govern business practices within their jurisdictions. 4- Cartels and dumbing Cartel: Association of producers whose purpose is to control supply and prices such as (OPEC) Organizations of Petroleum Exporting Countries. In some counties cartels are illegal. Dumbing: is the practice of selling a product abroad for less than the cost of production. Prepared By: Mostafa Kamel