Session 5

Management Tools & Principles

The Firm’s Environment: Part B

Professor Leticia Ponce

IE Business School
 Chapter 3
The Global
Marketplace

Business in Action
8e, Global Edition
Bovée/Thill
 Recap Session 4

• Types of economic systems

• The free-market system

• Economic indicators
 Learning Objectives

1. International trade

2. International finance

3. The multinational firm

The World’s Most
Competitive Countries

Copyright © 2017 Pearson Education, Ltd. 3-5

 Why Nations Trade

• Expanding markets
• Pursuing economies of scale
• Acquiring materials, goods, and services
• Keeping up with customers and
competitors
 Globalization

Globalization: integration and interdependence

of national economies around the world
 Tripled in last 30 years
 Reduction of barriers to trade and advances in
communication and transportation make global
trade easier, safer and more profitable.
 How International Trade is Measured

• Balance of trade
• Value of exports minus value of imports
• Trade surplus if exports>imports
• Trade deficit if exports<imports

• Balance of payments
• Total money inflows into country minus total money
outflow of country
• Broadest indicator of international trade
 How International Trade is Measured

Exchange rate
 The rate at which money of one country is traded for
money of another
 Supply and demand determined in part what is
happening in the country’s own economy
Strong and Weak Currencies:
Who Gains? Who Loses?

Copyright © 2017 Pearson Education, Ltd. 3-10

Trade Challenges Faced Today?

Copyright © 2017 Pearson Education, Ltd. 3-11

 Free Trade

• Free trade
 International trade unencumbered by
restrictive measures
 Government Intervention in
International Trade

• Protectionism
 Government policies aimed at shielding a
country’s industries from foreign competition
• Tariffs: taxes on imported goods
• Import quotas: amount of a particular good imported
• Embargo: complete ban of product or country
• Export subsidies: help domestic industries export
• Antidumping: selling large quantities below cost
• Sanctions: politically motivated embargoes that
revoke a country’s normal trade relations status
 Fostering Trade Among Countries

• Three types of trade arrangements:

 free trade agreements (low integration)
 custom unions (intermediate)
 common markets (high)
• Eliminating trade barriers among members
• Raising barriers against non-members
• Allowing people and money to move across
members
 International Trade Organizations

• World Trade Organization (WTO):

• 150 member countries
• Negotiate, implement, and monitor international trade and for
mediating trade disputes among
• International Monetary Fund (IMF):
• 188 member countries
• Monitor global financial developments, provide technical advice
and training, provide short-term loans to countries in financial
problems, and alleviate poverty in developing economies
• World Bank:
• Made up of 5 financial institutions
• Eradicating extreme poverty and raising income of poorest
countries
 Trading Blocs

Organizations of nations that remove trade

barriers among themselves and establish
uniform barriers with non-member nations

Copyright © 2017 Pearson Education, Ltd. 3-16

 Trading Blocs (cont.)

• North American Free Trade Agreement

(NAFTA): U.S., Canada and Mexico: free flow
of goods/services/capital
• European Union (EU): 28 countries that have
eliminated hundreds of local regulations,
variations in product standards, and
protectionist measures that once limited trade
among member countries
• Asia-Pacific Economic Cooperation (APEC):
21 countries working to liberalize trade in the
Pacific Rim
Members of Major
Trading Blocs

Copyright © 2017 Pearson Education, Ltd. 3-18

Members of Major
Trading Blocs (cont.)

Copyright © 2017 Pearson Education, Ltd. 3-19

 The Multinational Firm
Level of investment
(and risk !)
• Importing and exporting LOW

• Licensing and franchising

• Strategic alliances and joint ventures

• Foreign subsidiary
HIGH
 Strategic Approaches to
International Markets
• Global strategy: centralized, headquarters in
the home country make all major decisions,
ethnocentric attitude
• Multidomestic strategy: decentralized, highly
independent operating units in each new
country, polycentric attitude
• Transnational strategy: hybrid, reaps benefits
of international scale while being responsive to
local market dynamics, geocentric attitude

Copyright © 2017 Pearson Education, Ltd. 3-21

 Chapter 20
The Money Supply
and Banking
Systems

Business in Action
8e, Global Edition
Bovée/Thill
 International Financial System

In economic terms, globalization is the

integration of world economies through the
reduction of barriers to trade and the
facilitation of the free movement of
financial capital, technologies and people.

Copyright © 2017 Pearson Education, Ltd. 3-23

 The Meaning of Money

• Money
 Anything generally accepted as a means of
paying for goods and services
Challenges Faced by the Global
Financial System Today
Trade unbalances and exchange rates
 Central Banks

• Regulate banks
Regulates amount of money in economy (thus the exchange rate,
interest rates, currency markets operations, etc.

• Implement monetary policy

 President, Mario Draghi

 Based in Frankfurt, Germany

 Objective: control inflation

 Investment Banking

• Investment banks
 Help firms grow: public stock offerings,
mergers and acquisitions, etc.
 Commercial Banking

• Commercial banks
 Accept deposits, offer
checking and savings
accounts, and provide
loans to large
businesses

• Retail banks
 Provide financial
services to consumers
 Other Financial Services

• Finance companies • Credit rating

 Nonbank institutions agencies
that lend money to  Offer opinions about
consumers and the creditworthiness
businesses of borrowers and of
specific investments
 Banking and Financial Bubbles

• Bubble
 A market situation in which frenzied demand
for an asset pushes the price of that asset far
beyond its true economic value

2000 2008

Video
 Conclusions

• INTERNATIONAL TRADE SYSTEM BASED

ON REDUCTION OF TRADE BARRIERS

• INTERNATIONAL FINANCIAL SYSTEM

BASED ON EASY CIRCULATION OF
FINANCIAL CAPITAL

• BOTH SYSTEMS ARE FACING KEY

CHALLANGES AND FIRMS MUST
CONSTANTLY ADAPT
 Preparation Session 6

Managers: functions, roles & skills

Read chapter 7