Understanding the Global Context of Business

Chapter 4

Understanding the Global Context of Business

Chapter Overview

Through the process of globalization, the world market is rapidly evolving into a single interdependent economic system.  The three major marketplaces within this system are North America, Europe, and Pacific Asia.

Business success in the international arena is largely dependent on competitive advantage, which can take several different forms.  With an absolute advantage, a country engages in international trade because it can produce a product more efficiently than any other nation.  With a comparative advantage, a nation can produce some products more efficiently than others.  With a national advantage, a country competes effectively in the global marketplace due to factor conditions, demand conditions, related and supporting industries, and organizational strategies, structures, and rivalries.  Additional key factors that influence international business include import-export balances and currency exchange rate differences.

In deciding to engage in international business, individual firms must first determine whether a market exists for their products abroad – either in their current form or with adaptations to suit foreign demands.  If so, firms must also assess whether they have the expertise to manage international trade.  Finally, firms must evaluate whether the conditions of each country they plan to enter are conducive to international trade.

Once firms decide to enter the global market, they must decide how to effectively manage the business.  Levels of involvement range from importing and exporting, to organizing as an international firm, to operating as a multinational firm.  A company’s level of global involvement will directly affect its organizational strategy.  Options include use of independent agents, licensing arrangements, branch offices, strategic alliances, and direct investment.  Depending on local conditions, a company’s international organizational strategy may well vary for different foreign countries.

Several barriers can inhibit global trade.  Social and cultural differences include language, social values, and traditional buying patterns.  Economic differences may compel companies to form close relationships with foreign governments in order to do business abroad.  Political and legal differences can take a range of forms.  Quotas, tariffs, subsidies, and local content laws are designed to protect domestic industries.  Furthermore, local business practice laws can make practices that are standard in one country illegal in another.

 

Chapter Objectives

Discuss the rise of international business and describe the major world marketplaces.

Explain how different forms of competitive advantage, 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, political, and legal differences among nations affect international business.

 

REFERENCE OUTLINE

Opening Case:  Where Does Management Stand on Beer Breaks?

The Rise of International Business

The Contemporary Global Economy

Trade Agreements

a.   General Agreement on Tariffs and Trade (GATT)

North American Free Trade Agreement (NAFTA)

European Union  (EU)

World Trade Organization  (WTO)

The Major World Marketplaces

North America

Europe

Pacific Asia

Forms of Competitive Advantage

Absolute Advantage

Comparative Advantage

National Competitive Advantage

Import-Export Balances

Exchange Rates

Exchange Rates and Competition

The U.S. Economy and Foreign Trade

International Business Management

Going International

Gauging International Demand

Adapting to Customer Needs

Levels of Involvement

Exporters and Importers

International Firms

Multinational Firms

International Organizational Structures

Independent Agents

Licensing Arrangements

Branch Offices

Strategic Alliances

Foreign Direct Investment

 

Barriers to International Trade

Social and Cultural Differences

Economic Differences

Legal and Political Differences

Quotas, Tariffs, and Subsidies

Local Content Laws

Business Practice Laws

LECTURE OUTLINE

The Rise of International Business  (Use PowerPoint 4.4.)

 

An increasingly large number of firms engage in international business.  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.  The total annual volume of world trade is estimated to be $8 trillion.

The Contemporary Global Economy  (Use PowerPoint 4.5, 4.6.)

 

International trade is becoming increasingly important to most nations and their largest businesses.  Governments and businesses are more aware of the benefits of globalization to businesses and shareholders.  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.

Trade Agreements.  Virtually every nation has formed trade treaties with other nations.

 

General Agreement on Tariffs and Trade (GATT).  This agreement reduces or eliminates trade barriers by encouraging nations to protect domestic industries.

North American Free Trade Agreement (NAFTA).  This agreement removes tariffs and other trade barriers among the U.S., Canada, and Mexico.

 

European Union  (EU).  This pact eliminates most quotas and sets uniform tariff levels on products imported and exported within the Western European member-nations.

World Trade Organization  (WTO).  This organization encourages fair trade practices, promotes multilateral negotiations, and resolves disputes among members.

 

Major World Marketplaces  (Use PowerPoint 4.7, 4.8.)

The contemporary world market revolves around three dominant marketplaces:  North America, Europe, and Pacific Asia.

North America.  Though the United States dominates the North American business region, Canada and Mexico are also major commerce centers.

 

Europe.  Germany, the United Kingdom, France, and Italy dominate Western Europe; emerging from its communist foundations, Eastern Europe is now playing a larger role in the European business region.

Pacific Asia.  Though Japan dominates this region, other important commerce centers include China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, Hong Kong, the Philippines, and Australia. 

 

Forms of Competitive Advantage  (Use PowerPoint 4.9, 4.10.)

                        No country is totally self-sufficient; every country relies on
imports and exports.  Countries tend to export those products that
can be produced better or less expensively than in other countries.

Absolute Advantage.  A country enjoys an absolute advantage when it can produce a product more cheaply than any other country. 

 

Comparative Advantage.  A country’s comparative advantage lay in its ability to produce certain products more cheaply or better than other products.

National Competitive Advantage.  A country competes due to factor conditions, demand conditions, related and supporting industries, and organizational strategies, structures, and rivalries.

 

Import-Export Balances  (Use PowerPoint 4.11.)

                         Critical in global business is a country’s acceptable balance
between its imports and exports.  An import-export relationship
can be measured through a country’s balance of trade and balance
of payments.

Balance of Trade.  A nation’s balance of trade is the difference between the economic value of its imports and its exports.  A trade deficit occurs when a country’s imports exceed its exports.  A trade surplus occurs when a country’s exports exceed its imports.

 

Balance of Payments.  Balance of payments refers to the flow of money into or out of a country.  A country’s balance of payments results primarily from its balance of trade, though other contributing factors include money spent by tourists, foreign aid, and the buying and selling of currency.

Exchange Rates  (Use PowerPoint 4.12, 4.13, and 4.14.)

 

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 impact 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.

Exchange Rates and Competition.  Exchange rate fluctuations affect overseas demand for their products and can be a major factor in competition.

 

The U.S. Economy and Foreign Trade.  U.S. imports and exports have increased steadily in the past 10 years.

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

International Business Management

 

The primary key to a firm’s success largely lay in how well the firm is managed.  The basic management responsibilities in international business are extremely complex.

Going International  (Use PowerPoint 4.15.)

 

Not every business is prepared to go international.  A major decision factor is the business climate of other countries.  Other factors include demand and product adaptations.

Gauging International Demand.  Foreign demand for a company’s product may be greater than, the same as, or weaker than domestic demand.  Determining international demand may require market research and/or prior market entry of competitors.

 

Adapting to Customer Needs.  Product modifications may be required to meet the standards of various countries.

Levels of Involvement  (Use PowerPoint 4.16.)

 

A firm may enter the global marketplace through different levels of involvement.

Exporters and Importers.  Representing the lowest level of global involvement, exporters and importers conduct only a small part of their business globally.  An exporter distributes and sells products in a small number of foreign countries.  An importer buys products in foreign markets and then imports them for resale in its home country.

 

International Firms.  More complex than exporters and importers, international firms conduct a significant portion of business in foreign countries.  These firms basically remain domestic with global operations.

Multinational Firms.  Multinational firms do not ordinarily think of themselves as having domestic and international divisions.  Planning and decision-making are geared to international markets.  Headquarters locations are almost irrelevant.

 

International Organizational Structures  (Use PowerPoint 4.17.)

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.

Independent Agents.  Independent agents are foreign individuals or organizations that agree to represent the exporter’s interests, including assisting in product sales, collection of payments, and in helping to ensure customer satisfaction.

 

Licensing Arrangements.  In licensing arrangements, firms give individuals or companies in a foreign country the 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.

Branch Offices.  To gain more direct control and a more tangible presence in foreign countries, a firm sends some of its own managers to overseas branch offices with this arrangement.

 

Strategic Alliances.  Strategic alliances include a company and a foreign partner that combine resources and capital to begin a new business.

Foreign Direct Investment.  Foreign direct investment means buying or establishing tangible assets in a foreign country.

 

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

 

Barriers to International Trade  (Use PowerPoint 4.18.)

 

Success in foreign markets includes a firm’s ability to respond to social, cultural, economic, legal, and political differences.

Social and Cultural Differences  (Use PowerPoint 4.19, 4.20.)

 

These barriers include a plethora of differences in language, religion, perceptions, shopping patterns, etc. between and among different populations.

Economic Differences  (Use PowerPoint 4.21.)

 

       When trading with different types of economic systems, firms
must be aware of the level of government involvement in a given
industry.

Legal and Political Differences  (Use PowerPoint 4.22.)

 

                        Governments can present many trade barriers in international
business, including the control of the flow of capital and the use of
tax legislation to encourage or discourage global activity in given
industries.

Quotas, Tariffs, and Subsidies.  A quota restricts the number of products of a certain type that can be imported into a country; a quota raises the prices of those imports by reducing their supply.  A tariff is a tax placed on imports; tariffs directly affect prices by raising the price of imports.  A subsidy, a form of indirect tariffs, is a government payment to help a domestic firm compete with foreign firms.

 

Local-Content Laws.  Many countries, including the United States, require that products sold in a particular country are partially made there.  This guarantees that a percentage of the profits remain in that country.

Business-Practice Laws.  Firms must learn the local laws in other countries before engaging in global business; what is legal in one country may be illegal in another.

 

 

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

Answers to Questions and Exercises

Questions for Review

How does a nation’s balance of trade differ from its balance of payments?

 

A nation’s balance of trade is the difference between the economic value of its imports and its exports.  A nation’s balance of payments refers to the flow of money into or out of a country; this may be partially attributed to the nation’s balance of trade, as well as to money spent by tourists, foreign aid, the buying and selling of currency, etc.

What are the three possible levels of involvement in international business?  Give examples of each.

 

A firm may enter the global marketplace as an importer, an exporter, an international firm, or as a multinational firm.  Numerous examples of each exist.  In presenting examples of each, students should pay special attention to those firms that primarily remain domestic with global operations so that examples of international firms can be distinguished from multinational firms.

How does a country’s economic system affect the decisions of foreign firms interested in doing business there?

 

In mixed economies, for example, outside firms must be aware of the extent of government involvement, if any, in a given industry.  In planned economies, the outside firm must be aware of unfamiliar relationships of government to business, such as a government’s favor of state-owned companies over foreign investors.

What aspects of the culture in your state or region would be of particular interest to a firm considering doing business there?

 

Answers will vary.  Many foreign firms will likely consider the diversity and subcultures among the citizens of a particular state or region, and the willingness of those citizens to work for or buy from a foreign company.  However, aspects may vary depending on whether the firm plans to set up a production facility in the area or whether the firm is looking to increase its customer base.
Questions for Analysis

List all the major items in your bedroom, including furnishings.  Now try to identify the country in which each item was made.  Offer possible reasons why a given nation might have a comparative advantage in producing a given good.

 

Students’ answers will vary.

Suppose that you are the manager of a small firm seeking to enter the international arena.  What basic information would you need about a particular market that you are thinking of entering?

 

The manager of a small firm will likely be interested in the economic system of the potential market and, thus, the ease with which the firm could enter the new market.  Important, also, will be the nature of the customer base and whether those new customers possess the same buying behaviors as the firm’s current customers.  Of course, attention will need to be given to product demand in the new market.  Some products in mature markets in the United States are still in their early stages in other countries; thus, the small firm may need to modify the product and/or the promotional strategy.  Various information may be important, depending on the small firm’s intended level of involvement in the global arena.

Do you support protectionist tariffs for the United States?  If so, in what instances and for what reasons?  If not, why not?

 

Students’ answers will vary.  Students should comment on the effects of imports on the domestic economy in the absence of protectionist tariffs, as well as the effects of such tariffs on prices, employment, etc. when imports may be limited.

Do you think that a firm operating internationally is better advised to adopt a single standard of ethical conduct or to adapt to local conditions?  Under what kinds of conditions might each approach be preferable?

 

Answers will vary.  Students should comment on the possibility that conduct considered ethical in the home country may damage the firm’s reputation, backfire abroad, or lead to situations in which the legality of its actions could be called into question.

Application Exercises

Interview the manager of a local firm that does at least some business internationally.  Why did the company decide to “go international?”  Describe the level of the firm’s international involvement and the organizational structure(s) that it uses for its international operations.

 

Students’ answers will vary.  Particular attention should be given to the extent to which the answer integrates elements of the involvement levels and the elements of organizational structure as discussed in the chapter.

Select a product familiar to you.  Using library reference works to gain some insight into the culture of India, identify the problems that might arise in trying to market this product to Indian consumers.

 

Many problems identified will include those related to religion and language differences, especially in product advertising, as well as problems stemming from characteristics of one culture with which the other culture may not be able to understand, such as their caste system and our western lifestyles.  Actual product use may have to be considered also.  For example, a bicycle may be viewed as a mode of transportation in India and not as a leisure or physical fitness tool as in the United States.

Answers to Exercising Your Ethics

What are the key ethical issues in this situation?

 

The key ethical issue is whether to pay bribes to establish your business in this foreign country.  Does it make sense to extend the U.S. sense of ethical behavior to a country that does not consider bribes to be unethical or illegal?

What do you think most managers would do in this situation?

 

Answers will vary.  Students may address the temptation that comes from an undetectable source of funds, the responsibility to adhere to U.S. law forbidding bribery domestically or abroad, and the possibility that some managers would hire an intermediary to “do the dirty work” for them.

Answers to Building Your Business Skills

What are the most promising steps that Lang can take to grow her business?  What are the least promising?

 

Anything that will increase brand recognition and therefore sales, both in the United States and abroad, would be promising.  Least promising steps would include focusing solely on local Italian markets where Lang’s products may lack the “made in Italy” cachet that gives them potential elsewhere.

Lang thinks that her trouble breaking into the U.S. retail market stems from the fact that her company is unknown.  How would this circumstance affect the strategies suggested in Steps 1 and 2?

 

It suggests that she should focus on marketing activities that build awareness for her brand and an efficient distribution plan.  Possibilities include:  P.R. placement in upscale U.S. fashion magazines, garnering celebrity interest, or partnering with producers or distributors who offer complementary lines.

How should Lang handle personal invitations that get in the way of business?  How can she say no while still maintaining business relationships?  Why is it often difficult for American women to do business in male-dominated cultures?

 

Cultural differences – including differences in expectations for women and a lack of cultural role models – make it particularly difficult for American women to do business in male-dominated cultures.  Lang should decline unwanted personal invitations politely, but firmly, understanding that she may not be able to maintain business relationships in all cases; she will, however, probably develop a reputation that generates respect from her male business contacts.

The American consulate has given Lang little business help because her products are made in Italy.  Do you think the consulate’s treatment of an American businessperson is fair or unfair?  Explain your answer.

 

Answers will vary.  Some students may feel that since Lang’s firm employs no U.S. workers the consulate’s treatment is fair.  Others may feel that because Lang herself is a citizen the treatment is unfair.

Do you think Lang’s relocation to Italy will pay off?  Why or why not?

 

Some students may think that Lang needs to personally control the design and manufacturing end of her business, while others may think that she should focus on building her brand in the United States and Europe.  In either case, Lang will face the challenge of maintaining quality and cost standards across two continents, and eventually around the globe.

With Lang’s goals of creating a global company, can INDE continue to be a one-person operation?

 

In order to achieve global reach, Lang will need to extend beyond one person.
Classroom Activities

Divide the class into small groups.  Assign groups of three countries – such as Thailand, Norway, and Bulgaria or Singapore, Peru, and Mexico – to each group of students.  Ask the students to assess the social/cultural differences, economic differences, and legal/political differences between and among their assigned countries.  Then ask each group to compare their assigned countries to the United States.  This comparative analysis can also benefit the students after studying the marketing chapters of this textbook.

 

A foreign enterprise has just located within a few miles of your college or university.  The manager, who has never been to the United States, has relocated to your town or city from Italy.  Ask students to make an assessment of the cultural elements to which this foreign manager may have a difficult time adjusting.  In addition, ask students to consider which cultural elements may likely be similar between the U.S. and Italy.