Chapter 3: Business in a Global Environment

1. The Globalization of Business

Vocabulary:
Absolute Advantage - a condition in which a country is the only source of a product or is
able to make more of a product using the same or fewer resources than other countries
Comparative Advantage - a condition in which one nation is able to produce a product at a
lower cost compared to another nation
Balance of Trade - the difference between the value of a nation’s imports and its exports
during a specified period
Trade Surplus - a condition in which a country sells more products than it buys
Trade Deficit - a condition whereby a country buys more products than it sells
Balance of Payments - the difference between the total flow of money coming into a
country and the total flow of money going out

1.1 Why Do Nations Trade?

No country produces all the goods and services that its people need.
Importers are countries that buy goods and services from other countries, while exporters
sell products to other nations.

1.2 Absolute and Comparative Advantage

Countries import and export products for two reasons:
● Absolute advantage
● Comparative advantage

A nation has an absolute advantage if it’s either the only source of a particular product or it
can make more of a product using the same amount of or fewer resources than other
countries.
Absolute advantage lasts longer when it is based on a limited natural resource.

A comparative advantage exists when a country can produce a product at a lower

opportunity cost compared to another nation.
Opportunity costs are the products that a country must decline to make in order to produce
something else.
Countries have a lower opportunity cost when they give up less to create more.
Nations trade to benefit from specialization, focusing on what they do best, and trading the
output to other countries for what they do best.

1.3 How Do We Measure Trade Between Nations?

A country’s balance of trade is determined by subtracting the value of its imports from the
value of its exports.
If a country sells more products than it buys, it has a favourable balance, called a trade
surplus.
If it buys more than it sells, it has an unfavourable balance or a trade deficit.

Trade deficits can be positive if a country’s economy is strong enough both to keep
growing and generate the jobs and incomes needed for its citizens to buy the best the world
has to offer.
Trade surpluses are not necessarily good for a nation’s consumers, as both domestic and
imported goods could be priced artificially high.

Balance of payments is the difference between the total flow of money coming into a
country and the total flow of money going out over a period of time.
Factors include the money that comes in and goes out from...
● Imports and exports
● Foreign investment
● Loans
● Tourism
● Military expenditures
● Foreign aid

2. Opportunities in International Business

Vocabulary:
Importing - the practice of buying products overseas and reselling them in one’s own
country
Exporting - the practice of selling domestic products to foreign customers
International Licensing Agreement - an agreement that allows a foreign company to sell a
domestic company’s products or use its intellectual property in exchange for royalty fees
International Franchise -an agreement in which a domestic company (franchiser) gives a
foreign company (franchisee) the right to use its brand and sell its products
International Contract Manufacturing - a practice by which a company produces goods
through an independent contractor in a foreign country
Outsourcing - the practice of using outside vendors to manufacture all or part of a
company’s actual products
Strategic Alliance - an agreement between two companies (or a company
and a nation) to pool resources in order to achieve business goals that benefit both partners
Joint Ventures - an alliance in which the partners fund a separate entity (partnership or
corporation) to manage their joint operations
Foreign Direct Investment (FDI) - the formal establishment of business operations (such as
the building of factories or sales offices) on foreign soil
Offshoring - setting up facilities in a foreign country that replace U.S. manufacturing
facilities to produce goods that will be sent back to the United States for sale
Foreign Subsidiary - an independent company owned by a foreign firm (called its parent)
Multinational Corporation (MNC) - a large corporation that operates in many countries

2.1 Importing and Exporting

Importing is the primary link companies have to the global market.
Other companies get into the global arena by becoming exporters.

2.2 Licensing and Franchising

An international licensing agreement allows a foreign company to sell the products of a
producer or to use its intellectual property in exchange for royalty fees.

An international franchise agreement grants a foreign company the right to use a

company's brand name and to sell its products or services.
The franchisee is responsible for operating the business while operating according to a
business model established by the franchiser. In turn, the franchiser usually provides
advertising, training, and new-product assistance.
Franchising is a natural form of global expansion for companies that operate domestically
according to a franchise model.

2.3 Contract Manufacturing and Outsourcing

International contract manufacturing or outsourcing is manufacturing products in
countries where labour costs are lower.
In the 21st century, nonmanufacturing functions can also be outsourced to nations with
lower labour costs.

2.4 Strategic Alliances and Joint Ventures

A strategic alliance is an agreement between two companies (or a nation) to pool
resources in order to achieve business goals that benefit both partners.

The purpose of an alliance can be:

● Enhancing marketing efforts
● Building sales and market share
● Improving products
● Reducing production and distribution costs
● Sharing technology

A joint venture is an alliance in which the partners fund a separate entity to manage their
joint operation.

2.5 Foreign Direct Investment and Subsidiaries

Foreign direct investment (FDI) is the formal establishment of business operations on
foreign soil.
Offshoring occurs when the facilities set up in the foreign country replace domestic
manufacturing facilities and are used to produce goods that will be sent back to the home
country for sale.

A foreign subsidiary is an independent company owned by a foreign firm (parent).

The parent company has tight control over the operations of a subsidiary, and senior
managers from the parent company often oversee operations.

2.6 Multinational Corporations

A multinational corporation (MNC) is a company that operates in many countries.
They often adjust their operations, products, marketing, and distribution to mix with the
environments of the countries in which they operate.

Cons of the MNC:

● Destroys the livelihoods of home-country workers
● Traditional lifestyles and values are being weakened or destroyed
● Cheaper access to natural resources do irreversible damage to the physical
environment
● Abuses the international trade

Pros of the MNC:

● Large corporations deliver better, cheaper products
● Creates jobs
● Raises the standard of living in developing countries
● Increases cross-cultural understanding

3. The Global Business Environment

Vocabulary:
Culture - a system of shared beliefs, values, customs, and behaviours that govern the
interactions of members of a society
High-Context Cultures - cultures in which personal and family connections have an effect
on most interactions, including those in business
Low-Context Cultures - cultures in which personal and work relationships are
compartmentalized
Exchange Rate - the value of one currency relative to another

3.1 The Cultural Environment

Cultural differences create challenges when it comes to successful international business
dealings.

While English is the international language of business, in most countries, only members
of the educated classes speak English.
The larger population tends to speak the local tongue and advertising messages and sales
appeals must take this fact into account.
Relying on translators and interpreters causes errors, which may be because of a
misinterpretation error.
A native speaker’s willingness to greet a foreign guest in the guest’s native language
encourages a friendly atmosphere.

The expectation that meetings will start on time and adhere to precise agendas is common
in parts of Europe, as well as in the United States, but elsewhere people are often late to
meetings.

In high-context cultures, personal and family connections that hold people together have
an effect on almost all interactions and it’s important to get to know your potential business
partners as human beings and individuals.
In low-context cultures personal and work relationships are more completely separate
and you don’t need to know much about the personal context of a person’s life to deal with
them in the business arena.

Different cultures have different communication styles:

● Degrees of animation in expression
○ Southern Europeans and Middle Easterners favour expressive body language
along with hand gestures and raised voices
○ Northern Europeans are far more reserved and prefer formality
● The distance at which one feels comfortable when talking with someone
○ People from the Middle East like to converse from a distance of a foot or less
○ Americans prefer more personal space.
● Directness of language
○ North Americans and most Northern Europeans prefer to deliver direct, clear
messages
○ Many Asians prefer subtler or more indirect language

3.2 The Economic Environment

A country’s level of economic development can be evaluated by estimating the annual
income earned per citizen.

The World Bank divides countries into four income categories:

● High income—$12,276 or higher (United States, Germany, Japan)
● Upper-middle income—$3,976 to $12,275 (China, South Africa, Mexico)
● Lower-middle income—$1,006 to $3,975 (Vietnam, Philippines, India)
● Low income—$1,005 or less (Kenya, Bangladesh, Haiti)
Factors that contribute to economic growth include a reliable banking system, a strong
stock market, and government policies to encourage investment and competition while
discouraging corruption.

The foreign exchange rate tells you how much one currency is worth relative to another
currency.

If a foreign currency goes up relative to the U.S. dollar:

● Americans must pay more for goods and services purchased from sellers in the
country issuing the currency
● Foreign buyers must pay more for American goods and services

If a foreign currency goes down relative to the U.S. dollar:

● Americans pay less for products from the country issuing the currency.
● Foreign buyers pay less for American products

3.3 The Legal and Regulatory Environment

Companies doing international business often face many inconsistent laws and
regulations.
To navigate this sea of confusion, businesspeople must know and follow both the laws and
regulations of their home country and those of the nations in which they operate.
Approaches to dealing with local laws and regulations are hiring lawyers from the host
country and working with local business people who have experience in complying with
regulations.

The Foreign Corrupt Practices Act prohibits the distribution of bribes and other favours in
the conduct of business.

4. Trade Controls
Vocabulary:
Subsidies - government payments given to certain industries to help offset some of their
costs of production
Trade Controls - the government policies that restrict free trade
Protectionism - the use of trade controls to reduce foreign competition in order to protect
domestic industries
Tariffs - government taxes on imports that raise the price of foreign goods and make them
less competitive with domestic goods
Quota - government-imposed restrictions on the quantity of a good that can be imported
over a period of time
Embargo - an extreme form of quota that bans the import or export of certain goods to a
country for economic or political reasons
Dumping - the practice of selling exported goods below the price that producers would
normally charge home markets

Trade controls that push up the price of imports or push down the price of local goods to
help locally produced goods compete more favourably with foreign goods are called
protectionism.

4.1 Tariffs
Tariffs are taxes on imports to raise the price of foreign-made goods and they make them
less competitive.
Tariffs are also used to raise revenue for a government.

4.2 Quotas
A quota imposes limits on the quantity of a good that can be imported over a period of time
and is used to protect specific industries.

An embargo is an extreme form of quota, which, for economic or political reasons, bans the
import or export of certain goods to or from a specific country.

4.3 Dumping
Dumping is the practice of selling exported goods below the price that producers would
normally charge in their home markets.
Usually, nations resort to this practice to gain entry and market share in foreign markets or
to sell off surplus or obsolete goods.

4.4 The Pros and Cons of Trade Controls

Pros of Trade Controls:
● Domestic governments collect additional taxes
● Local producers’ goods are more competitively priced
● Local employees working in local companies keep their jobs
● Protects specific industries and their workers from foreign competition
● Gives new or struggling industries a chance to get established

Cons of Trade Controls:

● Foreign producers goods are more expensive
● Consumers have to pay higher prices for their products
● Foreign employees lose out on opportunities
● Don’t promote level playing fields
● Detrimental to the world economy

5. Reducing International Trade Barriers

Vocabulary:
General Agreement on Tariffs and Trade (GATT) - An international trade agreement that
encourages free trade by regulating and reducing tariffs and provides a forum for resolving
trade disputes
World Trade Organization (WTO) - An international organization that monitors trade
policies and whose members work together to enforce rules of trade and resolve trade
disputes
International Monetary Fund (IMF) - An international organization set up to lend money to
countries with troubled economies
World Bank - An international financial institution that provides economic assistance to
poor and developing countries
Trading Blocs - Groups of countries that have joined together to allow goods and services to
flow without restrictions across their mutual borders
North American Free Trade Association (NAFTA) - An agreement among the governments
of the United States, Canada, and Mexico to open their borders to unrestricted trade
European Union (EU) - An association of European countries that joined together to
eliminate trade barriers among themselves

5.1 Trade Agreements and Organizations

General Agreement on Tariffs and Trade (GATT) encouraged free trade by regulating and
reducing tariffs and by providing a forum for resolving trade disputes.
GATT was signed by twenty-three nations in 1947.

In 1995 expanded to a global scale and founded the World Trade Organization.

The World Trade Organization (WTO) encourages global commerce and lower trade
barriers, enforces international rules of trade, and provides a forum for resolving disputes.
WTO is based in Geneva, Switzerland, with nearly 150 members.

5.2 Financial Support for Troubled Economies

The International Monetary Fund (IMF) loans money to countries with troubled
economies.
Borrower countries must institute financial and economic reforms, to qualify for IMF.
Some think that the IMF is too harsh in its demands for economic reform.
Others argue that troubled economies can be turned around only with harsh economic
measures.

The World Bank is an important source of economic assistance for poor and developing
countries.
Donor countries include United States, Japan, Germany, and United Kingdom.
Loans are made to help countries improve the lives of the poor through community-
support programs.
Some assert that too many World Bank loans go to environmentally harmful projects.
Others highlight the World Bank’s efforts to direct funding away from big construction
projects and toward initiatives designed to better the lot of the world’s poor.

5.3 Trading Blocs

Trading Blocs are groups of countries have joined together to allow goods and services to
flow without restrictions across their mutual borders.

The North American Free Trade Association (NAFTA) is an agreement among the
governments of the United States, Canada, and Mexico to open their borders to
unrestricted trade.
Each country benefits from NAFTA and each nation is free to produce what it does best and
to trade its goods and services without restrictions.

The European Union (EU) is a group of twenty-seven countries that have eliminated trade
barriers among themselves.
The EU enhances political and social cooperation and binds its members into a single entity
with authority to require them to follow common rules and regulations.

Figure 3.9 - Map of the countries in the EU

In 1999, most EU members agreed to abandon their own currencies and adopt a joint
currency.
In 2002, a common currency, the euro, replaced the separate currencies of participating EU
countries.
The common currency allowed exchange-rate differences to no longer complicate
transactions.

Argentina, Brazil, Paraguay, and Uruguay have established MERCOSUR (for Mercado
Commun del Sur) to eliminate trade barriers.
Indonesia, Malaysia, the Philippines, Singapore, and Thailand, are cooperating to reduce
mutual barriers through ASEAN (the Association of Southeast Asian Nations)