Transcript Trade Agreements and Alliances (cont`d)

Chapter 4
The Global Context of Business
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LEARNING OUTCOMES
After reading this chapter, you should be able to:
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 international organizational
structure.
Describe some of the ways in which social cultural, economic,
legal, and political differences among nations affect international
business.
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What’s in It for Me?
This chapter will better enable you 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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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
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Trade Agreements and Alliances (cont’d)
Significant Agreements and Treaties
 General Agreement on Tariffs and Trade (GATT):

Signed after World War II. Its purpose was to reduce or
eliminate trade barriers, such as tariffs and quotas.
 World Trade Organization (WTO)


Began on January 1, 1995
Goals:
1. Promote trade by encouraging members to adopt
fair trade practices.
2. Reduce trade barriers by promoting multilateral
negotiations.
3. Establish fair procedures for resolving disputes
among members.
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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
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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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International Involvement
INVOLVEMENT
HIGH
Foreign Direct Investment
Strategic Alliances
Branch Offices
Licensing Arrangements
Independent Agents
LOW
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Barriers to International Trade
Social and Cultural Differences
Legal and Political Differences
Economic Differences
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Legal and Political Differences
Quotas, 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
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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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