ADMG 201,,>> 2015 First Exam

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Part 1

Business in a Changing World

We continue part 1 of your textbook, Business in a Changing World.

CHAPTER 1	The Dynamics of Business and Economics
CHAPTER 2	Business Ethics and Social Responsibility
CHAPTER 2 APPENDIX	The Legal and Regulatory Environment
CHAPTER 3	Business in a Borderless World

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Many U.S. firms are finding that international markets provide tremendous opportunities for growth. Accessing these markets can promote innovation, while intensifying global competition spurs companies to market better and less expensive products. Today, the nearly 7 billion people that inhabit earth comprise one tremendous marketplace.

In this chapter, we explore business in this exciting global marketplace with Business in a Borderless World

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.

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Our Learning Objectives for Chapter 3 are laid out here and in your textbook.

First, we’ll look at the nature of international business, including barriers and promoters of trade across international boundaries.

Next, we consider the levels of organizational involvement in international business.

Finally, we contrast two basic strategies used in international business.

Role of International Business

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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

We live in a global economy -- consumers around the world drink Coca-Cola, Pepsi, and eat at McDonalds. As differences among nations continues to narrow along with falling political barriers and new technology, the trend toward globalization of business becomes increasingly important.

We define international business as 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 United States. Global marketing requires balancing global brands with the need of local consumers.

International Business

The buying, selling and trading of goods and services across national boundaries

Role of International Business

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American companies have become widely popular in China

Some have more sales in China than in the United States

Here is a picture of a Kentucky Fried Chicken in China. American companies have become widely popular in China and some have more sales in China than in the U.S.

Role of International Business

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Nations and businesses engage in international trade to obtain raw materials and goods that are either unavailable to them or are available elsewhere at a lower price. A nation, or individuals and organizations from a nation, sell surplus materials and goods to acquire funds to buy the goods, services, and ideas its people need.

Some nations have a monopoly on a resource or product. Such a monopoly, or absolute advantage, 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.

A comparative advantage is the basis of most international trade. This occurs when a country specializes in products that it can supply more efficiently or at a lower cost. Most nations have such an advantage in some areas and trade for those that they do not have.

India and Ireland are examples of countries that are gaining a comparative advantage over the United States in the provision of some services, such as call-center operations, engineering, and software programming. As a result, U.S. companies are increasingly outsourcing, or transferring manufacturing and other tasks to countries where labor and supplies are less expensive. Outsourcing has become a controversial practice in the United States because many jobs have moved overseas, where those tasks can be accomplished for lower costs.

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

Role of International Business

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Exporting – the sale of goods and services to foreign markets

2011 U.S. exports = $2.1 trillion+

Importing – the purchase of goods and services from foreign markets

2011 U.S. imports = $2.6 trillion+

Most nations trade globally. To obtain needed goods and services, and the funds to pay for them, nations trade by exporting and importing.

Exporting is the sale of goods and services to foreign markets. As you can see from this slide, the United States annually exports over two point one trillion dollars in goods and services in 2011.

However, the US also imports goods and services. Imports totaled more than two point six trillion dollars in 2011.

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Role of International Business

The level of imports and exports are important when looking at a country’s economy. It is critically important in global trade. The difference between imports and exports for a country represents the balance of trade for that country.

The difference between the flow of money into and out of a country is called its balance of payments.

A country’s balance of trade, foreign investments, foreign aid, loans, military expenditures, and money spent by tourists constitute its balance of payments.

Where a country imports more than it exports, as is the case in the United States, it is said to have a trade deficit or a nations’ negative 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

The difference between the flow of money into and out of a country

Balance of Payments

U.S. Trade Deficit, 1990-2011 (in billions of dollars)

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As this graph shows, the United States has been working with a trade deficit for quite some time.

China Faces Growing Concerns over Pollution

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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.

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.

International Trade Barriers

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Completely free trade seldom exists, due to:

Economic barriers

Ethical, legal and political barriers

Social and cultural barriers

Technological barriers

AT&T has made inroads with consumers who don’t want their cell phones to stop working when they go abroad

While there is a substantial amount of international trade, completely free trade seldom exists. When a company decides to do business outside its own country, it will encounter a number of barriers to international trade. Barriers to international trade can take a variety of forms including economic, ethical, legal, political, social, cultural, and technological.

AT&T markets their services to customers who travel abroad and don’t want to give up their cell phone service.

Economic Barriers

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When considering doing business in another country, managers consider a number of economic factors, such as economic development, infrastructure and exchange rates.

U.S. businesses must recognize they cannot take for granted that other countries offer the same things found in industrialized nations, or economically advanced countries like the U.S., Japan, Great Britain and Canada.

Many countries in Africa, Asia, and South America, for example, are in general poorer and less economically advanced than those in North America and Europe; they are often called less-developed countries (LDCs).

LDCs are characterized by low per-capita income, which means that consumers are less likely to purchase nonessential products.

LDCs represent a potentially huge, and profitable, market because they may be purchasing technology to improve their infrastructures. As these LDCs develop, their population may desire more consumer products.

Economic Development

Industrialized nations are economically advanced

United States

Japan

Less Developed Countries have low per-capita income

Potentially huge, and profitable, untapped market

Great Britain

Canada

Economic Barriers

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Level of development is determined in part by a country’s

The level of economic development is determined in part by a country’s infrastructure.

Infrastructure is 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.

When doing business in LDCs, for example, a business may need to compensate for rudimentary distribution and communication systems, or even a lack of technology.

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

Economic Barriers

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Another economic trade barrier is the

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

The ratio at which one nation’s currency can be exchanged for another nation’s currency is the exchange rate. Exchange rates vary daily and can be found in newspapers and on many sites on the Internet. Familiarity with exchange rates is important because they affect the cost of imports and exports.

A government may intentionally alter the value of its currency.

Devaluation decreases the value of currency in relation to other currencies, encouraging the sale of domestic goods and tourism.

Revaluation which increases the value of a currency in relation to other currencies, occurs rarely.

Exchange Rate

The ratio at which one nation’s currency can be exchanged for another nation’s currency

International Trade Barriers

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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

While infrastructure and exchange rates are important considerations when deciding whether to trade internationally, there are other important concerns that we must be aware of.

A company that decides to enter the international marketplace must contend with potentially complex relationships among the different laws of its own nation, international laws, and the laws of the nation with which it will be trading; various trade restrictions; changing political climates and different ethical values.

Legal Barriers

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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 may forbid foreigners from owning property

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.

Many of the legal rights Americans take for granted do not exist in other countries and a firm doing business abroad must understand and obey the laws of the host country.

Some countries have strict laws limiting the amount of local currency that can be taken out of the country and the amount of currency that can be brought in; others forbid foreigners from owning real property outright.

Some countries have copyright and patent laws that are less strict than those of the United States, and some countries fail to honor U.S. laws. Because copying is a tradition in China and Vietnam and laws protecting copyrights and intellectual property are weak and minimally enforced, those countries are flooded with counterfeit products.

International Trade Barriers

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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

An example of lax patent laws is shown in this picture.

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.

The real watch on the left was created by FORTIS Uhren AG in Grenchen, Switzerland.

Tariffs and Trade Restrictions

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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

Tariffs and other trade restrictions are part of a country’s legal structure but may be established or removed for political reasons.

An import tariff is a tax levied by a nation on goods imported into the country.

Fixed tariffs are when a specific amount of money is levied on each unit of product brought into the country.

An ad valorem tariff is based on the value of the item.

Exchange controls are regulations that restrict the amount of currency that can be bought or sold. Some countries control foreign trade by forcing foreign exchanges through a central bank.

Import Tariff

A tax levied by a nation on goods imported into the country

Exchange Controls

Regulations that restrict the amount of currency that can be bought or sold

Reshoring

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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

SOURCE: Ed Crooks. “US Manufacturers ‘Reshoring’ From China”. www.ft.com. September 24, 2013. http://www.ft.com/cms/s/0/e14d6cae-249d-11e3-8905-00144feab7de.html#axzz2fpaHeQ5z. (accessed September 24, 2013).

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.

Tariffs and Trade Restrictions

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Other legal barriers to trade are quotas, embargos, and dumping practices.

A quota is a restriction on the number of units of a particular product that can be imported into a country. Quotas may be established by voluntary agreement or by government decree.

An embargo prohibits trade in a particular product. Embargoes are generally directed at specific goods or countries and may be established for political, economic, health, or religious reasons.

One common reason for setting quotas or tariffs is to prohibit dumping, which occurs when a country or business sells products at less than what it costs to produce them.

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

Tariffs and Trade Restrictions

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Dumping can spark trade wars

The Obama administration imposed stiff tariffs on Chinese-made tires, allegedly dumped on the U.S. market

China retaliated by slapping tariffs on U.S. chicken products exported to China

Dumping can spark trade wars.

The Obama administration imposed stiff tariffs on Chinese-made tires it alleged were being dumped on the U.S. market.

China retaliated by slapping tariffs on U.S. chicken products exported to China.

Political Barriers

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Seldom in writing & change rapidly

Political unrest may create a hostile or even dangerous environment for foreign business

OPEC is an example of a cartel

Political considerations affect international business daily

Political considerations affect international business daily as governments enact tariffs, embargoes or other types of trade restrictions in response to political events.

Unlike legal issues, political considerations are seldom written down and often change rapidly. Political unrest may create a hostile or even dangerous environment for foreign business.

Political concerns may lead a group of nations to form a cartel, a group of firms or nations that agrees to act as a monopoly and not compete with each other, to generate a competitive advantage in world markets.

You are undoubtedly familiar with the oil cartel called OPEC and have seen firsthand how a cartel can have an impact on price and supply.

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

Social and Cultural Barriers

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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

Most businesspeople engaged in international trade underestimate the importance of social and cultural differences; but these differences can derail an important transaction.

Research can help minimize the problems associated with social and cultural differences.

Cultural differences include differences in both the spoken and the written language. Although possible to translate words, the true meaning is sometimes misinterpreted or lost.

Differences in appropriate body language, posture, facial expressions and personal space must be acknowledged.

Family roles may differ in different societies. Many countries do not allow children to be used in advertising, for example.

People in other nations often have a different perception of time. Americans value promptness but others may see nothing wrong with starting a meeting a half hour late.

National and religious holidays and local customs must be respected. Workers may expect a break at a certain time of day to observe religious rites.

Most nations use the metric system. The United States is the only exception. This lack of uniformity creates problems for both buyers and sellers.

Technological Barriers

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Another important set of barriers to global trade are technological barriers.

Many countries lack the technological infrastructure found in the United States, and some marketers are viewing such barriers as opportunities. A good example is the lack of private phone lines in India, China and some African countries. Citizens are turning to wireless communication through cell phones.

Changing technologies create new challenges and competition as well. Out of the top five PC companies, three are from Asian countries.

Technological Advances

Are creating global marketing opportunities

The lack of phone lines opens the market for cellular communications

Changing Technologies

Create new challenges and competition

Out of the top five PC companies, three are from countries in Asia

Tax Evasion Among Multinational Corporations

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Many US companies have been criticized for evading American taxes by keeping their funds in foreign bank accounts

Switzerland is the top choice for many American companies

In 2013, the United States government proposed a deal with Switzerland banks to disclose the information of their American clients in exchange for prosecutorial immunity if these companies are taken to trial for tax evasion

Additionally, under the deal the banks will be charged a fine. If the banks refuse to comply, they could be indicted for tax evasion along with the company

SOURCE: Patrick Temple-West and Katharina Bart. “U.S., Switzerland Strike Bank Deal Over Tax Evasion”. www.reuters.com. August 30, 2013. http://www.reuters.com/article/2013/08/30/us-usa-tax-switzerland-idUSBRE97S14B20130830. (accessed September 24, 2013).

Tax evasion among multinational corporations

Many US companies have been criticized for evading American taxes by keeping their funds in foreign bank accounts. Switzerland is the top choice for many American companies. In 2013, the United States government proposed a deal with Switzerland banks to disclose the information of their American clients in exchange for prosecutorial immunity if these companies are taken to trial for tax evasion. Additionally, under the deal the banks will be charged a fine. If the banks refuse to comply, they could be indicted for tax evasion along with the company.

Trade Agreements and Organizations

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Although these economic, political, legal and socio-cultural issues may seem like daunting barriers to international trade, there are organizations and agreements that foster trade and help companies get involved and succeed in global markets.

The General Agreement on Tariffs and Trade (GATT), originally signed by 23 nations in 1947, provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved. More than 100 nations abided by its rules. GATT held rounds of negotiations aimed at reducing trade restrictions.

The last round of negotiations, in 1995, created the World Trade Organization or WTO. The WTO is an international organization dealing with the rules of trade between nations. Key to the World Trade Organization are the WTO agreements, which are legal ground rules for international commerce.

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

Trade Agreements and Organizations

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The North American Free Trade Agreement (NAFTA), is an agreement that eliminates most tariffs and trade restrictions on agriculture and manufactured products to encourage trade among Canada, the U.S. and Mexico.

NAFTA effectively merged Canada, the United States, and Mexico into one market of more than 440 million consumers and virtually eliminated all tariffs on goods produced and traded, creating a free trade area. The estimated annual output for this trade alliance is more than $14 trillion.

European Union (EU)

The EU, also called the European Community or Common Market, was established in 1958 to promote trade among its members and is one of the largest single markets today. Today, the EU has nearly half a billion consumers with a GDP of more than $14 trillion.

The EU is working toward

Standardization of business regulations

The elimination of customs checks

The creation of a standardized currency

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

Trade Agreements and Organizations

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While controversial, NAFTA has become a positive factor for U.S. firms

NAFTA

Went into effect on January 1, 1994

makes it easier for U.S. businesses to invest in Mexico and Canada

provides protection for intellectual property

expands trade by requiring equal treatment

Simplifies country-of-origin rules

Despite its benefits, NAFTA has been controversial, and disputes continue to arise over the implementation of the trade agreement.

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

Trade Agreements and Alliances

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European Union (EU)

The EU is working toward

Standardization of business regulations

The elimination of customs checks

The creation of a standardized currency

The Asia-Pacific Economic Cooperation (APEC), established in 1989, promotes open trade and economic and technical cooperation among member nations.

This 21 member alliance holds 54% of world GDP.

European Union (EU)

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 $14 trillion+

Asia-Pacific Economic Cooperation (APEC)

An international trade alliance that promotes open trade and economic and technical cooperation among member nations

Holds 54% of world GDP

Trade Alliances and Organizations

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The Association of Southeast Asian Nations (ASEAN), established in 1967, promotes trade and economic integration among member nations. This nine-member alliance represents 600 million people with a GDP of $2 trillion.

The World Bank, more formally known as the International Bank for Reconstruction and Development, was established by the industrialized nations, including the United States, in 1946 to loan money to underdeveloped and developing countries.

The International Monetary Fund (IMF) was established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation. The IMF is the closest thing the world has to an international central bank.

Association of Southeast Asian Nations (ASEAN)

A trade alliance that promotes trade and economic integration among member nations in Southeast Asia

World Bank

An organization established by the industrialized nations in 1946 to loan money to underdeveloped and developing countries

International Monetary Fund

Organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation

Has a GDP of $2 trillion

Getting Involved

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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

Businesses become involved in international trade at many different levels.

Most companies first get involved in international trade when they import goods for resale in their own business. Business may enter exporting through a countertrade agreement which is a foreign trade agreement involving bartering of products instead of currency. An estimated 40 percent or more of all international trade agreements contain countertrade provisions.

Export agents are middlemen that help companies by handling their international transactions.

This graph shows some of the world’s largest exporting countries. While China is the leading exporter, the U.S. and Germany are fairly equal in exports.

Getting Involved

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A trading company buys goods in one country and sells them to buyers in another country.

Trading companies handle all activities required to move products from one country to another; similar to an export agent but their role is much broader.

Licensing is a trade arrangement in which one company—the licensor —allows another company—the licensee —to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee or royalty.

Licensing is an attractive alternative to direct investment, especially when political stability is in doubt.

Large companies, such as Coca-Cola and PepsiCo, use licensing but it is especially advantageous for small manufacturers.

You are probably familiar with franchising such as McDonald’s, Wendy’s, Subway, Pizza Hut and Holiday Inn. All franchisers.

Franchising is 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.

Franchising allows companies to enter a marketplace without spending large sums of money.

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

Trading Company

A firm that buys goods in one country and sells them to buyers of another country

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

Handles all trade activities; similar to export agents but their role is broader

An attractive alternative to direct investment when political stability is in doubt

Getting Involved

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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

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.

Getting Involved

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Contract manufacturing occurs when a company hires a foreign company to produce a specified volume of the firm’s product to specification; the final product carries the domestic firm’s name.

For example, Reebok uses Korean contract manufacturers to produce many of its shoes.

Outsourcing, as we 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.

Contract Manufacturing

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

Outsourcing

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

Getting Involved

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We define offshoring as the relocation of business processes by a company or subsidiary to another country. It is different from outsourcing because the company retains control of the offshored processes.

The company retains control because they are not subcontracting to another company.

Joint Ventures are the sharing of costs and operation of a business between a foreign company and a local partner.

This is used in countries that do not allow direct investment from foreign companies. Also used when a company lacks the resources or expertise to operate in that country.

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

Getting Involved

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Strategic Alliances are a partnership formed to create competitive advantage on a worldwide basis.

These alliances are used when competition is fierce and costs are high. Used in the automobile and computer industries.

Direct investment is the ownership of overseas facilities.

This expensive process is reserved for companies who want more control over their products and are willing to invest considerable resources to do so.

Direct investment may involve building new facilities or purchasing an existing operation.

Strategic Alliance

A partnership formed to create competitive advantage on a worldwide basis

Used when competition is fierce and costs are high

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

Becoming predominant in the automobile and computer industries

Getting Involved

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Walmart has chosen to directly invest in China

However, it must still make adjustments to fit with the local culture

For instance, Walmart, which is normally against trade unions, was pressured to allow its Chinese employees to unionize

Walmart has chosen to directly invest in China.

However, it must still make adjustments to fit with the local culture.

For instance, Walmart, which is normally against trade unions, was pressured to allow its Chinese employees to unionize.

Getting Involved

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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

The highest level of international business involvement is the multinational corporation (MNC), a corporation, such as IBM or ExxonMobil, that operates on a worldwide scale, without significant ties to any one nation or region. They often have greater assets than some of the countries in which they do business.

Many MNCs are targeted by antiglobalization activists who contend they increase the gap between rich and poor, they misuse scarce resources, exploit the labor markets in less-developed countries and harm natural environments.

Multinational Corporation (MNC)

A corporation that operates on a worldwide scale, without significant ties to any one nation or region

Getting Involved

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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

Planning in a global economy requires businesspeople to understand the economic, legal, political, and sociocultural realities of the countries in which they will operate. These factors will affect the strategy a business chooses to use outside its own borders.

Companies doing business internationally have traditionally used a multinational strategy, customizing their products, promotion, and distribution according to cultural, technological, regional, and national differences.

More and more companies are moving to a global strategy (globalization), which involves standardizing products (and, as much as possible, their promotion and distribution) for the whole world, as if it were a single entity.

As we have seen, being globally aware is an important quality for today’s managers. It will become a critical attribute for managers of the 21st century.

Global Strategy (Globalization)

Multinational Strategy

Discussion

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.

At what levels might a firm get involved in international business? What level requires the least commitment of resources? What level requires the most?

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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.

A nation with an absolute advantage is the only or most efficient producer of an item. A nation with a comparative advantage specializes in products that it can supply more efficiently; however, it is not the sole producer of those products.

Examples provided by students to the second part of the question will vary, but potential examples include the fact that South Africa has an absolute advantage in gem-quality diamond production, while the United States has a comparative advantage in agricultural products. The United States specializes in agricultural products such as wheat and cotton, but it is not the only producer of those products.

At what levels might a firm get involved in international business? What level requires the least commitment of resources? What level requires the most?

A firm can get involved in a variety of ways. Probably the smallest commitment is through exporting. Many companies first get involved in global business by exporting. A small company may market its products overseas directly, or it may deal with a middleman, commonly called an export agent.

The highest level of international business involvement is the multinational corporation. In between are trading companies, licensing and contract manufacturing arrangements, direct investment, and joint ventures.