INTRODUCTION TO BUSINESS

CHAPTER THREE

 

More and more enterprises are recognizing that pursuing opportunities in the global market is the key to their present and future success.

 

Benefits of involvement with foreign markets:

1.               Generate increased sales

2.               Produce operational efficiencies

3.               Expose companies to new technologies

4.               Provide greater consumer choices

 

Unique differences of how to do business must be learned:

1.               laws

2.               customs

3.               consumer preferences

4.               ethical standards

5.               labor skills

6.               political and economic stability

7.               volatile currencies

8.               international trade relationships

9.               the threat of terrorism

 

Cultural differences present a number of challenges in the global marketplace:

1.               Companies must recognize and respect differences in social values

2.               Languages

3.               Ideas of status

4.               Decision-making habits

5.               Attitudes toward time, use of space, body language, and manners

6.               Ethical standards

7.               Adapt the product to meet the unique needs of international customers

 

Before doing business in another culture, that culture should be studied in advance.  Intercultural communication can be improved.

1.               Be alert to the other person’s customs

2.               Deal with the individual – do not stereotype the other person or react with preconceived ideas.

3.               Clarify your intent and meaning – ask questions and listen carefully.

4.               Adapt your style to the other person’s

5.               Show respect – learn how respect is communicated in other cultures.

 

Companies must be familiar with U.S. laws, international laws, and the laws of the specific countries where business is being transacted.

 

All U.S. companies doing international business must comply with the 1978 Foreign Corrupt Practices Act.  This U.S. law outlaws actions such as bribing government officials in other nations to approve deals.  It does allow certain payments, including small payments to officials to expedite routine government actions.

 

Any company can become involved in world trade through a range of activities that reflect an increasing level of ownership, financial commitment, and risk.

1.               Importing and exporting – one of the most common forms of international business is to import and export merchandise.

a.      Importing is buying goods or services from a supplier in another country.

b.     Exporting is selling products outside the country in which they are produced.  Exporting permits:

i.                 a firm to enter a foreign market gradually

ii.               assess local conditions

iii.             fine tune its product to meet the needs of foreign customers

iv.             Export management companies are domestic firms that specialize in performing international marketing services on a commission basis.

v.               Export trading companies are general trading firms that buy a product for resale overseas, as well as perform general importing, exporting, and manufacturing functions.

vi.             Foreign distributors are another option to management exporting.

vii.           Foreign trade offices also help importers and exporters.

c.      Extensive increase in these activities has caused the economies of the world to become more tightly linked.

 

2.               International Licensing – a licensing agreement entitles one firm to use another company’s intellectual property (patents, trademarks, brand names, copyrights) in return for a royalty or fee.  It involves little out-of-pocket costs.

3.               International Franchising – the franchisee obtains the rights to duplicate a product or process and pays a royalty fee in exchange.  McDonald’s, Kentucky Fried Chicken, and Pizza Hut have franchises all over the world. 

a.      This is among the fastest growing form of international business activity.

b.     This allows a firm to minimize the costs and risks of global expansion and bypass certain trade restrictions.

4.               International Joint Ventures and Strategic Alliances

a.      A strategic alliance is a long-term partnership between two or more companies to jointly develop, produce, or sell products in the global marketplace.

i.                 The companies typically share ideas, expertise, resources, technologies, investment costs, risks, management, and profits.

ii.               It is very popular due to ease of market entry, shared risk, shared knowledge and expertise, and synergy.

b.      A joint venture is a partnership in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.

i.                 In some countries, foreign companies are prohibited from owning facilities outright or from investing in local business.  A joint venture with a local partner may be the only way to do business in that country.

5.               Foreign Direct Investment – the most comprehensive form of international business.

a.      Allows firms to enter international markets through ownership and control of assets in foreign countries.

b.     There is no financial participation of a local partner.

i.                 Many U.S. firms operate this way.

ii.               Created to exploit the availability of raw materials, low wage rates, minimize transportation costs.

iii.             Typically at least part of the workforce is drawn from the local population.

iv.             Multinational corporations have operations in several countries.

1.               Multinational corporations can increase their involvement by establishing production or marketing facilities in the countries where they operate or purchase existing foreign firms.

2.               This is the highest level of international involvement.

3.               This carries the greatest economic and political risk, and is more complex than any other form of entry in the global marketplace.

4.               Big emerging markets are countries that comprise 70% of the world’s land, 85% of the world’s population, and 99% of the anticipated growth in the world’s labor force.  The U.S. International Trade Administration indicates these countries have the greatest potential for the largest increase in U.S. exports during the next two decades (China, Hong Kong, South Korea, Thailand, Vietnam, India, and Turkey.)

5.               Foreign direct investment in the U.S. has been rising steadily over the past few years.  These boost the economy by adding jobs and demand for local supplies and services.

 

Why nations trade

1.               The Benefits

a.                Increases a country’s total output

b.               Offers lower prices and greater variety to consumers

c.                Subjects domestic oligopolies and monopolies to competition

d.               Creates jobs

e.                Allows companies to expand their markets

f.                 Helps to achieve cost, production, and distribution efficiencies

2.               Absolute advantage

a.                When a country can produce a particular item more efficiently than ALL other nations, or it is virtually the only country producing that product

b.               This rarely exists unless based on the availability of natural resources.

3.               Comparative advantage theory

a.                A country should produce and sell to other countries those items it produces more efficiently or at a lower cost, and it should trade for those it cannot produce economically.

b.               The two countries will be better off if each specializes in the industry in which it is more efficient and if the two trade with each other.

c.                In theory, such an approach should increase a country’s total output and allow both trading partners to enjoy a higher standard of living.

 

The U.S. objective is to balance the interests of U.S. companies, U.S. workers, and U.S. consumers.

 

How international trade is measured

            1.         Balance of trade

a.         The total value of a country’s exports minus the total value of its imports, over some period of time.

b.         Trade surplus occurs when the value of exported goods and services exceed the value of imported goods and services.

c.         Trade deficit occurs when the value of imported goods and services exceeds the value of exported goods and services.

            2.         Balance of Payments

                        a.         The broadest indicator of international trade.

b.         The total flow of money into a country minus the total flow of money out of the country over some period of time.

c.         Includes the balance of trade plus the net dollars received and spent on foreign investment, military expenditures, tourism, foreign aid, and other international transactions.

d.         All governments desire a favorable balance where more money is coming into the country than flowing out.

 

4.               Import and export restrictions

a.                Protectionism – practiced by countries to restrict trade

i.                 Sometimes to shield specific industries from foreign competition

ii.               To minimize loss of jobs

iii.             To protect certain industries that are critical to national defense, and/or health and safety of its citizens

iv.             To give a new or weak industry an opportunity to grow

v.               Studies show that, in the long run, protectionism hurts the country because:

it removes competition

stifles innovation

allows domestic producers to charge more for their goods

b.               There are many forms of trade restrictions, including:

i.                 Tariffs

1.     They are special taxes levied against goods imported into a country. 

2.     Sometimes levied to generate revenue for the government.

3.     More often used to restrict trade or punish other countries for disobeying international trading laws.

4.     In 2002, the U.S. imposed tariffs of up to 30% on certain imported steel products to protect the steel industry from a surge of imports.

ii.               Quotas

1.     Limit the number of specific items that may be imported. 

2.     Limits can be set in quantities, such as pounds, or in values, such as the total dollar value.

iii.             Embargo

1.     The most extreme form of quotas

2.     A complete ban on the import or export of certain products.

iv.             Sanctions

1.     They are politically motivated embargoes that revoke a country’s normal trade relations status. 

2.     They are used as forceful alternatives short of war.

3.     Can include arms embargoes, foreign-assisted reductions and cutoffs, trade limitations, tariff increases, import-quota decreases, visa denials

4.     Typically used sparingly because studies indicate that sanctions are usually ineffective in producing desired change.

c.                There are also projectionist tactics that give domestic producers a competitive edge

i.                 Restrictive import standards

1.     Domestic producers can restrict the import of certain goods or require goods to pass special tests.

2.      May require a special license to do business and then make it difficult for foreign companies to obtain the license.

ii.               Subsidies

1.     A country subsidizes domestic producers so that their prices are competitive.

2.     The idea is often to help build an infant industry until it is strong enough to compete.

3.     May later move from subsidizing to some other form of international business arrangement when market share has been gained.

iii.             Dumping

1.     The practice of selling large quantities of a product below the cost of production or at a lower price than they are in the home market

2.     Often used to win foreign customers or to reduce product surpluses.

3.     Most industrialized countries have antidumping regulations.

4.     U.S. Trade Act of 1988 obligated the U.S. president to retaliate against foreign producers that dump products on the U.S. market.

 

To deal with the trade disputes and ensure that business is conducted in a fair and orderly fashion, the countries of the world have created a number of agreements to facilitate and finance global trade.  Most support the basic principle of free trade, the assumption is that each nation will ultimately benefit by freely exchanging goods and services it produces most efficiently for the goods and services it produces less efficiently.

 

The major agreements and organizations include:

  1. The General Agreement on Tariffs and Trade (GATT) is a large scale pact established after World War II.  The pact’s guiding principle, Most Favored Nation, means that any trade advantage a GATT member gives to one country must be given to all GATT members, and no GATT nation can be singled out for punishment.  In 1995 GATT established the World Trade Organization (WTO) as the world forum for trade negotiation.
  2. The World Trade Organization (WTO) is a permanent negotiating forum for implementing and monitoring international trade procedures and for mediating trade disputes between 144 member countries.  It has legal status to settle disputes.  Its goals are to facilitate free trade, lower the costs of doing business, enhance the international investment environment, simplify customs, and promote technical and economic cooperation.  All WTO members enjoy favored access to foreign markets in exchanges for adhering to fair-trading rules.
  3. The Asia Pacific Economic Cooperation Council (APEC) is an organization of 18 countries that are making efforts to liberalize trade in the Pacific Rim, including the U.S., Japan, China, Mexico, Australia, S. Korea, and Canada.  In 1994 the members agreed to eliminate all tariffs and trade barriers among the industrialized Pacific Rim countries by 2010 and among developing countries by 2020.
  4. The International Monetary Fund was founded in 1945.  It is affiliated with the United Nations.  Its primary function is to provide short-term loans to countries unable to meet budgetary expenses.
  5. The World Bank, officially known as the International Bank for Reconstruction and Development, was founded to finance reconstruction after World War II.  It now offers low-interest loans to developing nations for the improvement of transportation, telecommunications, health, and education.  It is currently focused to bringing the Internet to less-developed regions.  It is funded by deposits from its 182 member nations, the same as the IMF, with the bulk of the funds coming from the U.S., western Europe, and Japan.

 

Within specific regions of the world, a number of countries have formed economic communities, called trading blocs, to encourage free trade among member nations.  They are generally comprised of neighboring countries.  The primary objective is to ensure economic growth and benefit the members.  They generally promote trade inside the region while creating uniform barriers against outside goods and services.

 

Trading blocs can be both advantageous and disadvantageous in promoting world trade:

  1. Some economists fear that the world is splitting into three camps, revolving around the Americas, Europe, and Asia.  Any nation that does not belong to one of the blocs could suffer from trade restrictions against nonmember countries creating a decline in overall trade.
  2. Others believe the growth of commerce and increased availability of customers and suppliers is helpful to smaller or younger nations by limiting trade barriers and by increasing ties to more stable economies.

 

Trading blocs

1.               The European Union (EU) combines 15 countries and a population of over 370 million.  It is working to eliminate many local regulations, product standards, and other barriers that limit trade.  It is striving to function as a single market. It has become a commanding force in the world economy.

a.      European Union’s impact on the Rules of Global Trade

                                                    i.     Increasing numbers of business decisions are set in Brussels, the unofficial capital of the EU

                                                  ii.     Regulates more frequently and more rigorously than the U.S., especially regarding consumer protection; thus, significantly influencing global product standards.

b.     The Euro

                                                              i.     In 1999, 11 of the 15 countries formed an economic and monetary union (EMU) and turned over control of the individual monetary policies to the newly created European Central Bank.

                                                            ii.     They created a unified currency called the Euro.  It could eliminate some $65 billion annually in currency exchange costs.

                                                          iii.     It accounts for about 20% of the world’s gross domestic product (GDP.)

                                                          iv.     They believe it will create a more stable bond and will increase trade.

 

2.               In 1994, the United States, Canada, and Mexico formed a powerful trading bloc by signing the North American Free Trade Agreement (NAFTA.)  It paves the way for the free flow of goods, services, and capital by eliminating all tariffs and quotas.  Overall it seems to be an economic success.  The fear of U.S. jobs moving to Mexico has largely been unfounded.  Supporters hope to eventually include all of Central and South America.

3.               The Association of Southeast Asian Nations (ASEAN) is made up of Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Brunei.  It seeks to reduce trade barriers within the region.

4.               South America’s Mercosur is made up of Argentina, Brazil, Paraguay, and Uruguay.  Some U.S. officials hope that Mercosur will eventually join NAFTA to form a Free Trade Area of the Americas (FTAA.)

 

When companies buy and sell goods and services in the global marketplace, they complete the transaction by exchanging currencies.

1.               Companies exchange their currency at any international bank that handles foreign exchange, the conversion of one currency into an equivalent amount of another currency.

2.               The number of yen, francs, or pounds that must be exchanged for every dollar, marc, or lira is known as the exchange rate between those two currencies.

3.               We operate under a flexible or floating exchange rate system, which is governed by the forces of supply and demand, and is influenced by what is occurring in a country’s own economy.

4.               Exchange rates change daily.

5.               Most governments do not intervene.

6.               When governments do intervene and adjust the exchange rate of its country’s currency, they are attempting to make goods and services more affordable in the global marketplace and to protect the nation’s economy against trade imbalances.

7.               Devaluation, or the drop in the value of a nation’s currency relative to the value of other currencies, can at times boost a country’s economy because it makes the country’s products and services more affordable in foreign markets while it increases the price of imports.

8.               Some countries fix, or peg, the value of their currency to the value of more stable currencies.  If a currency is pegged, its value fluctuates proportionately with the value of the foreign currency to which it is linked.  This system works well as long as the proportionate relationship between the two currencies remains valid.  But if one partner suffers economic hardship, demand for its currency will decline significantly and the exchange rate at which the two are pegged will become unrealistic.

 

Terrorism’s impact on the global business environment

1.               Problems in one country created by terrorism can greatly affect other countries’ economies.

2.               Uncertain what long-term impact terrorism will have on the attitudes of U.S. businesspeople towards globalization.

3.               Most likely outcome of the 9/11 terrorist attacks is that world trade will face new obstacles.

4.               Despite new obstacles, most businesses have too much at stake to abandon a global approach to the marketplace, and further cooperation, which is one approach to reduce terrorism, is likely to occur.