Chapter 4
The Global Context of Business
Prepared By: Mostafa Kamel
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
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
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The Contemporary Global
Economy
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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.
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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:
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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).
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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.
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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:
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North American Free Trade Agreements (NAFTA).
European Union (EU).
Association of southeast Asian Nations (ASEAN).
World Trade Organization (WTO).
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• 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.
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• 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.
• GATT is 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.
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International Trade
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• 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.)
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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
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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.
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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.
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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
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• 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: …)
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International Business
Management
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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.
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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.
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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
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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
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
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
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.
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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.
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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?!!
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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.
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