3.

2 UNDERSTANDING THE GLOBAL ENVIRONMENT

Several significant forces are reshaping today’s global environment. Important features of the

global environment includes regional trading alliances and different types of global organizations.

Global trade today is shaped by two forces: regional trading alliances and trade mechanisms that ensure that
global trade can happen.

A. Regional Trading Alliances

Regional trading alliances are reshaping global competition. Competition is no longer limited to country versus
country, but region versus region. Now, global competition is shaped by regional trading agreements including
the European Union (EU), North American Free Trade Agreement (NAFTA), the Association of Southeast Asian
Nations (ASEAN), and others.

1. The European Union (EU):

The European Union is a union of 27 European nations created as a unified economic and trade entity .Three
more countries (will be gaining membership soon).

a. The primary motivation for the creation of the EU in February 1992 was to allow member nations to reassert
their position against the industrial strength of the United States and Japan. Currently its membership covers a
base of nearly have a billion people and 31% of the

world’s economic output.

b. Sixteen of the 27-member states of the EU have agreed to adopt the common currency of the EU, the euro.
Denmark, the United Kingdom and Sweden have opted out of using the euro.

c. The Lisbon Treaty, signed in December 2007, provides the EU with a common legal framework to meet current
challenges facing European economies, such as climate change, security and energy needs.

d. The concept of solidarity has been a challenge as individual member states struggle with the maintaining a
common currency at the same time valuing protectionist measures that foster nationalism. Another recent
struggle has been the massive debt crisis of Greece which has been bailed out by the International Monetary
Fund.

2. The North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) is an agreement among the Mexican,

Canadian, and U.S. governments in which barriers to trade have been eliminated.
a. NAFTA went into effect on January 1, 1994 and today is the world’s largest trading block in terms of GDP.
Canada is currently the US’s top trading partner with Mexico being number three(China is number two). As of
2010, it remains the largest trading bloc in terms of combined GDP of its members.

b. Eliminating barriers to free trade (tariffs, import licensing requirements, customs user fees)has resulted in a
strengthening of the economic power of all three countries.

c. Colombia, Mexico, and Venezuela signed an economic pact eliminating import duties and tariffs in 1994.

d. The Central American Free Trade Agreement (CAFTA) is agreement between the US and five Central
American countries: Costa Rica,El Salvador, Guatemala, Honduras, and Nicaragua. Currently, only Costa Rica
and El Salvador have signed onto this agreement.

e. Thirty-four countries in the Western Hemisphere continue to negotiate a Free Trade Area of the Americas
(FTAA) agreement. FTAA was to have been in effect no later than 2005, but has not yet become operational; its
future is still undetermined.

3. The Association of Southeast Asian Nations (ASEAN):

The Association of Southeast Asian Nations is a trading alliance of 10 Southeast Asian nations.

a. In addition to these 10 nations, leaders from a group dubbed ASEAN+3, which include China, Japan, and
South Korea, have met to discuss trade issues. Also, leaders from India, Australia, and New Zealand have
participated in trade talks with ASEAN+3 as well.

b. In the future, the Southeast Asian region promises to be one of the fastest-growing and increasingly influential
economic regions of the world.

c. The future economic impact of the Southeast Asian region could rival that of both NAFTA

and the EU.

d. ASEAN’s biggest problem is that individual members haven’t been willing to sacrifice for the common good.
Although Southeast Asian leaders agree that closer regional integration would help economic growth, the large
differences in wealth among ASEAN members have made it “difficult to create common standards because
national standards remain so far apart

4. Other Trade Alliances. The 53-nation African Union (AU) came into existence in July 2002.

AU members plan to achieve greater economic development and unity among Africa’s

nations. The South Asian Association for Regional Cooperation (SAARC) is composed of eight Asian member
states that began eliminating tariffs in 2006.

B. Global Trade Mechanisms:

Global trade among nations doesn’t just happen on its own. As trade issues arise, global trade systems ensure
that trade continues efficiently and effectively. We’re going to look at four important global trade mechanisms:
The World Trade Organization, the International Monetary Fund, the World Bank Group, and the Organization
for Economic Cooperation and Development.

1. The World Trade Organization (WTO)

Formed in 1995 and evolving from General Agreement on Tariffs and Trade GATT, the WTO is the only global
organization dealing with the rules of trade among nations.
a. Membership consists of 153 countries and 30 observer governments as of 2008.
b. The goal of the WTO is to help countries conduct trade through a system of rules. Although critics have staged
vocal protests against the WTO claiming that global trade destroys jobs and the natural environment.
c. The WTO played a pivotal role in keeping global trade active during the global economic crisis.
d. WTO rules and principles have assisted governments in keeping markets open and they now provide a
platform from which trade can grow as the global economy improves.

2. International Monetary Fund:

The International Monetary Fund (IMF) is an organization of 185 countries that promotes international monetary
cooperation and provides member countries with policy advice, temporary loans, and technical assistance to
establish and maintain financial stability and to strengthen economies.

3 World Bank Group:

The World Bank Group is a group of five closely associated institutions, all owned by its member countries, that
provides vital financial and technical assistance to developing countries around the world.
## The goal of the World Bank Group is to promote long-term economic development and poverty reduction by
providing members with technical and financial support

4. Organization for Economic Cooperation and Development (OCED):

The Organization for European Economic Cooperation, formed 194, is a Paris-based international economic
organization whose mission is to help its 30-member countries achieve sustainable economic growth and
employment and raise the standard of living in member

countries while maintaining financial stability in order to contribute to the development of the world economy

Different Types of International Organizations

there’s not a generally accepted approach to describe the different types of international companies;
different authors call them different things. We use the terms multinational, multidomestic, global,
and transnational.
multinational corporation (MNC) A multinational corporation (MNC) is any type of international
company that maintains operations in multiple countries.
multidomestic corporation: Is an MNC that decentralizes management and other decisions to the
local country.
• This type of globalization reflects the polycentric attitude.
• A multidomestic corporation doesn’t attempt to replicate its domestic successes by managing
foreign operations from its home country.
• local employees typically are hired to manage the business and marketing strategies are
tailored to that country’s unique characteristics.
Global Company: Is an MNC that centralizes its management and other decisions in the home
country.
 • This approach to globalization reflects the ethnocentric attitude.
• Global companies treat the world market as an integrated whole and focus on the need for
global efficiency and cost savings.
• Although these companies may have considerable global holdings, management decisions
with company-wide implications are made from headquarters in the home country.
Transnational Corporation (Borderless Organization):
• an arrangement that eliminates artificial geographical barriers. This type of MNC is often called
a transnational, or borderless, organization.
• reflects a geocentric attitude.
• The CEO said, “We don’t want people to think we’re based anyplace.”
• Managers choose this approach to increase efficiency and effectiveness in a competitive
global market place.
How Organizations Go International

• When organizations do go international, they often use different approaches. (See Exhibit 3-3.)
• Managers who want to get into a global market with minimal investment may start with global
sourcing.
• Global sourcing: (also called global outsourcing), which is purchasing materials or labor from
around the world wherever it is cheapest.
o The goal takes advantage of lower costs in order to be more competitive.
o Each successive stage of going international beyond global sourcing.
• Exporting and Importing: This is the next step in going international may involve exporting
and importing the organization’s products to/from other countries
o Exporting: products domestically and selling them abroad.
o Importing: which involves acquiring products made abroad and selling them
domestically.
o Both usually entail minimal investment and risk, which is why many small businesses
often use these approaches to doing business globally.
• licensing or franchising: Managers also might use licensing or franchising
o Licensing: An organization gives another organization the right to make or sell its
products using its technology or product specifications.
o Franchising: An organization gives another organization the right to use its name and
operating methods.
 o The only difference is that licensing is primarily used by manufacturing organizations
that make or sell another company’s products and franchising is primarily used by
service organizations that want to use another company’s name and operating
methods.
• When an organization has been doing business internationally for a while and has gained
experience in international markets, managers may decide to make more of a direct foreign
investment. One way to increase investment is through a strategic alliance.
• strategic alliance A partnership between an organization and a foreign company partner(s) in
which both share resources and knowledge in developing new products or building production
facilities
• joint venture A specific type of strategic alliance in which the partners agree to form a
separate, independent organization for some business purpose.
• foreign subsidiary. Directly investing in a foreign country by setting up a separate and
independent production facility or office.

Managing in a global environment

Any manager who finds himself or herself in a new country faces challenge. In this section, we’ll look at some
of these challenges. Although our discussion is presented through the eyes of a U.S. manager, this framework
could be used by any manager regardless of national origin who manages in a foreign environment.