4

chapter The Global Context of Business

Business Essentials, 7th Edition

Ebert/Griffin

Instructor Lecture PowerPoints

PowerPoint Presentation prepared by
© 2009 Pearson Education, Inc. Carol Vollmer Pope Alverno College
 The Contemporary Global Economy
• Globalization
– The process by which the world’s various
national economies and trading systems
are fast becoming a single, highly
interdependent system
• Exports: Domestically produced products sold
in foreign markets
• Imports: Foreign products sold in domestic
markets

© 2009 Pearson Education, Inc.

 The Major World Marketplaces
• Distinctions Based on Wealth
– High-income countries
– Upper middle-income countries
– Low middle-income countries
– Low-income countries (developing countries)
• Geographic Clusters
– North America
– Europe
– Pacific Asia

© 2009 Pearson Education, Inc.

 Trade Agreements and Alliances
• Significant Agreements and Treaties
– North American Free Trade Agreement (NAFTA)
• Canada, Mexico, and the United States
• Effects: increases direct foreign investment, increases
exports and imports, creates jobs
– European Union (EU)
• Most European nations
• Effects: eliminates quotas, removes trade barriers, and sets
uniform tariffs on internally traded EU imports and exports
– Association of Southeast Asian Nations (ASEAN)
• Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Vietnam

© 2009 Pearson Education, Inc.

FIGURE 4.1 The Nations of the European Union

© 2009 Pearson Education, Inc.

FIGURE 4.2 The Nations of the Association of
Southeast Asian Nations (ASEAN)

© 2009 Pearson Education, Inc.

 Trade Agreements and Alliances (cont’d)
• Significant Agreements and Treaties
– General Agreement on Tariffs and Trade (GATT):
• Signed after World War II. Its purpose was to reduce or eliminate
trade barriers, such as tariffs and quotas.
– World Trade Organization (WTO)
• Began on January 1, 1995
• Goals:
1. Promote trade by encouraging members to adopt fair trade
practices.
2. Reduce trade barriers by promoting multilateral
negotiations.
3. Establish fair procedures for resolving disputes among
members.

© 2009 Pearson Education, Inc.

 Import-Export Balances

• Balance of Trade
– The total economic value of all the products that a country
exports minus the economic value of all the products that
it imports
• Trade Surplus
– A positive balance of trade that results when a country
exports more than it imports
• Trade Deficit
– A negative balance of trade that results when a country
imports more than it exports
© 2009 Pearson Education, Inc.
 Import-Export Balances (cont’d)

• Balance of Payments
– The flow of money into or out of a country
• The money that a country pays for imports and receives for
exports—its balance of trade—comprises much of its balance of
payments

• Exchange Rate
– The rate at which the currency of one nation can be
exchanged for that of another
• Fixed exchange rates
• Floating exchange rates

© 2009 Pearson Education, Inc.

 Forms of Competitive Advantage
• Absolute Advantage
– When a country can produce something that is cheaper
and/or of higher quality than any other country
– An advantage based on possessing a scarce resource (e.g.,
oil) or favorable physical location
• Comparative Advantage
– When a country can produce goods more efficiently or
better than other countries can produce the same goods
– An advantage based on superior productivity (e.g.,
technologically advanced manufacturing capability)

© 2009 Pearson Education, Inc.

 Forms of Competitive Advantage (cont’d)

• National Competitive Advantage

– Conditions favoring heavy involvement in international
business:
1. Factor production conditions—labor, capital, entrepreneurs,
physical resources, and information resources
2. Demand conditions—a large domestic consumer base that
promotes strong demand for innovative products
3. Related and supporting industries—strong local or regional
suppliers and/or industrial customers
4. Strategies, structures, and rivalries—domestic firms and
industries that stress cost reduction, product quality, higher
productivity, and innovative products

© 2009 Pearson Education, Inc.

 International Business Management

• Going International
– Gauging International Demand
• Foreign demand for a company’s product may be greater than, the
same as, or weaker than domestic demand
– Adapting to Customer Needs
• A firm must decide whether and how to adapt its products to meet
the special demands of foreign customers
– Outsourcing
• Paying suppliers and distributors to perform certain business
processes or to provide needed materials or services
– Offshoring
• Outsourcing to foreign countries

© 2009 Pearson Education, Inc.

 Levels of International Involvement

• Exporters
– Make products in one country to distribute and sell in
others
• Importers
– Buy products in foreign markets and bring them home for
resale
• International firms
– Conduct much of their business abroad and may maintain
overseas manufacturing facilities
• Multinational firms
– Design, produce, and market products in many nations

© 2009 Pearson Education, Inc.

 International Organization Structures

• Independent Agent
– A foreign individual or organization that represents an
exporter in foreign markets
• Licensing Arrangements (or Agreements)
– Domestic firms give foreign individuals or companies
exclusive rights to manufacture or market their products in
that market
• Branch Offices
– A firm sends its own managers to overseas branch offices
so that it will have more direct control than it does over
agents or license holders

© 2009 Pearson Education, Inc.

 International Organization Structures (cont’d)

• Strategic Alliance (or Joint Venture)

– A company finds a partner firm in the country in
which it wants to do business
– Each party agrees to invest resources and capital
into a new business or to cooperate in some
mutually beneficial way
• Foreign Direct Investment (FDI)
– Involves buying or establishing tangible assets in
another country

© 2009 Pearson Education, Inc.

Barriers to International Trade

Social and Cultural Legal and Political

Differences Differences

Economic
Differences

© 2009 Pearson Education, Inc.

 Legal and Political Differences
• Quotas, Embargoes, Tariffs, and Subsidies
– Quota: Restricts the number of products of a certain type that
can be imported, raising the prices of those imports
– Embargo: Government order forbidding exportation and/or
importation of a product or all products from a specific
country
– Tariffs: Taxes on imported products
– Subsidy: Government payment to help a domestic business
compete with foreign firms
• Protectionism
– The practice of protecting domestic business at the expense of
free market competition
© 2009 Pearson Education, Inc.
 Legal and Political Differences (cont’d)

• Local Content Laws

– Requirements that products sold in a country be at least
partly made there
• Business Practice Laws
– Host countries govern business practices within their
jurisdictions
• Cartels
– Associations of producers that control supply and prices
• Dumping
– Selling a product abroad for less than the cost of
production at home

© 2009 Pearson Education, Inc.