Business in a Global Economy

© 2014 Pearson Education, Inc.4-1

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Better Business

3rd EditionSolomon (Contributing Editor) ·

Poatsy · Martin

What Is Globalization?Globalization: an interconnected and interdependent world economy

• Globalization of markets, the movement toward a more interconnected and interdependent world economy, may be one of the most profound factors affecting people around the globe. (ex. Apple selling its iPhones in China)

• Globalization of production, the other facet of globalization, refers to the trend of individual firms moving production to different locations around the globe to take advantage of lower costs or to enhance quality. (ex. Ford outsourcing its car manufacturing to Mexico).

– Outsourcing, the assignment of certain tasks, such as production or accounting, to an outside company or organization

Globalization is why you’ll notice that many products you own were made in countries other than the United States. Not only has globalization affected individual lives, it has also affected the way companies conduct business around the world.

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Why has globalization accelerated?

1. Decline in trade and investment barriers

2. Technological innovations– Communications– Transportation– Information technology

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Global Business Trends

1. Growing role for developing nations

2. Increase in non-U.S. foreign direct investment

3. Rise in multinational enterprises or MNC’s

4. Increasing democratization

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International Business and Trade

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International business• All business activities that involve exchanges across national boundaries

Is International Trade (Business) Good?– Absolutely!– No single country (or business) has the resources and capabilities to

produce everything its citizens want or need at prices they are willing to pay • Does Spain produce enough corn for its citizens?• Does the US produce enough oil for its citizens?

– PROFIT PURSUIT; Global = Bigger Market • Can you think of any MNC’s (multi-national companies)?

Some countries are better equipped than others to produce particular goods or services.• Absolute advantage

– The ability to produce more of a product than any other nation– Ex. Saudia Arabia->crude oil; South Africa->diamonds; Australia->wool

• Comparative advantage– The ability to produce a specific product more efficiently than any other

nation Goods and services are produced more efficiently when each country specializes

in the products for which it has a comparative advantage.

Imports and ExportsThe U.S. and other nations are increasingly

- Importing: Buying products from other countries

- Exporting: Selling domestically produced products to other countries

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Balance of trade• The total value of a nation’s

exports minus the total value of its imports over some period of

time

Trade deficit• A negative (unfavorable)

balance of trade (imports>exports) Trade surplus

• A positive (favorable) balance of trade (exports>imports)

Benefits and Costs of International Trade

Benefits: Higher standard of living

Costs: Threat to domestic businesses and their workers

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Free Trade and Trade Barriers• What is free trade? The unencumbered flow of goods and services across

national borders.• Trade barriers (i.e. restrictions to free trade)

- Tariffs – tax on imports- Subsidies – gov’t makes payment to domestic producers- Quotas – limit on number of imports- Embargo – total restriction on an import (or export), a complete halt in

trade – Local content requirements – gov’t requirement that some portion of a

good be produced locally

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Protectionism and Trade Barriers

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Arguments in Favor of Protectionist Trade Barriers

• National security

• Infant-industry

• Cheap foreign labor

• Threat of retaliation

• Protect domestic jobs

• Protect health of domestic citizens

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Economists’ Arguments Against Protectionist Trade Barriers

• Trade barriers benefit domestic producers and their workers but hurt domestic consumers (raises prices on goods)

• Educate displaced individuals so they may move into a line of business with comparative advantage and rising demand

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International Organizations Promoting Free Trade

• General Agreement on Tariffs and Trade (GATT)- Created in 1948 with 23 member nations

- Negotiated international trade treaties

- Replaced by the WTO in 1995

• World Trade Organization (WTO)- 152 member countries

- Arbitrates global trade disputes

- Has power to enforce decisions© 2014 Pearson Education, Inc. 4-12

Regional Trade Agreement: The European Union

• 1957: European Economic Community

• 27 member countries• Largest free trade area

- 1/3 of the world’s production

- Largest exporter/second largest importer

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North American Free Trade Agreement (NAFTA)

• Free trade agreement between the United States, Mexico, and Canada

• Established on January 1, 1994• Exaggerated claims• Proposal: Free Trade Area of the Americas

(FTAA)

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Other Regional Free Trade Areas

• Merged South American areas- Andean Group

• Bolivia, Chile, Ecuador, Colombia, Peru - Mercosur

• Brazil, Argentina, Paraguay, Uruguay• ASEAN (Association of Southeast Asian Nations)

- Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, and Cambodia

• APEC (Asia-Pacific Economic Cooperation)- 21 member countries

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Three Strategies of International Business

• Global- Standardized product- Competing on price

• Multidomestic- Custom products to meet unique local needs- Price considerations are secondary

• Transnational- Customized product- Lowest price possible

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Strategies for Entering Foreign Markets

• Companies may- Export their product

- Implement a turnkey project

- Undertake franchising

- Enter into a licensing agreement, a joint venture, or a strategic alliance

- Undertake contract manufacturing

- Set up a wholly-owned subsidiary

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Entry Mode Considerations

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The Role of Exchange Rates in Global Expansion

Exchange rates: The rates at which currencies are converted into another currency

– Strong dollar

– Weak dollar

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How Exchange Rates Affect International Business

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Deficits and Surpluses:

• Trade Deficits

• Trade Surpluses

Exchange Rate Systems

• Fixed

• Freely Floating

Nonconvertible Currency and Countertrade

Other International Economic Challenges

• Growth and development

• Government policies and the economic environment

• Socioeconomic factors

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Sociocultural Challenges

What is culture?

Cultural challenges:• Aesthetics• Attitudes toward time

and work• Religion• Language

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Political, Legal, and Ethical Challenges

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Political

EthicalLegal

Chapter Summary1. What are the implications of the globalization of markets and the

globalization of production?

2. Why has globalization accelerated so rapidly?

3. What are the costs and benefits of international trade?

4. What are the different types of trade barriers?

5. What are the three basic strategies of international business?

6. How can international firms successfully enter foreign markets?

7. What are exchange rates and how do they affect international business?

8. What economic factors and challenges play a role in conducting business on a global scale?

9. What are the sociocultural, political, legal, and ethical challenges to conducting business in a global marketplace?

© 2014 Pearson Education, Inc. 4-24

© 2014 Pearson Education, Inc. 4-25