Understanding the Global Context of

Business
 Chapter Outline
 The Rise of International
Business
 International Business
Management
 Barriers to International Trade
 What Is Globalization?

Process by which the world

economy is becoming a single
interdependent system
 What Are Imports and Exports?

• Imports are products

made or grown abroad
but sold domestically
• Exports are products
made or grown
domestically but
shipped and sold
abroad
The Contemporary Global Economy

Several forces have combined to spark and

sustain globalization:
 Governments and businesses are aware of the
benefits of globalization to businesses and
shareholders.
 New technologies make international travel,
communication and commerce much faster and
cheaper.
 Competitive pressures sometimes force a firm to
expand into foreign markets to keep up with
competitors
 Trade Agreements
 General Agreement on Tariffs and Trade
(GATT)
 North American Free Trade Agreement
(NAFTA)
 European Union (EU)
 World Trade Organization (WTO)
 General Agreement on Tariffs
and Trade (GATT)
• Signed after World war II
• was a legal agreement between many
countries (62 countries), whose overall
purpose was to promote international trade
by reducing or eliminating trade barriers such
as tariffs or quotas
• It does so by encouraging nations to protect
domestic industries within agreed upon limits
 North American Free Trade Agreement
(NAFTA)
• Removes tariffs and other barriers among the United States, Canada,
and Mexico and includes agreements on environmental issues and labor
abuses
• NAFTA is a formal agreement that establishes clear rules for commercial
activity between Canada, the United States, and Mexico
• Since NAFTA came into effect, trade and investment levels in North
America have increased, bringing strong economic growth, job creation,
and better prices and selection in consumer goods. North American
businesses, consumers, families, workers, and farmers had all benefited. 
The North American Marketplace and the
Nations of NAFTA
 The European Union
•  European Union (EU) is a political and economic union of 28
member states that are located primarily in Europe.
• The EU has developed an internal single market through a
standardized system of laws that apply in all member states. EU
policies aim to ensure the free movement of people, goods,
services, and capital within the internal market.
• The EU traces its origins from the European Coal and Steel
Community(ECSC) and the European Economic
Community(EEC), established, respectively, by the 1951 Treaty
of Paris and 1957 Treaty of Rome.
• The original members of what came to be known as
the European Communities, were the Inner Six; Belgium,
France, Italy, Luxembourg, the Netherlands and West Germany.
 The European Union

• Originally called the Common Market.

• Includes principal European nations
• Eliminated most quotas and set uniform tariff levels
on products imported and exported within the group
• All internal trade barriers are down making EU the
largest free market place in the world
•  A monetary union was established in 1999 and came
into full force in 2002, and is composed of 19 EU
member states which use the euro currency.
Europe and the Nations of the
European Union
The Nations of ASEAN
World Trade Organization (WTO)
• Was born in January 1, 1995
• The 140 member countries are required to open markets to
international trade
• replacing the General Agreement on Tariffs and Trade (GATT),
which commenced in 1948. It is the largest international
economic organization in the world.
• The WTO deals with regulation of trade in goods, services and
intellectual property between participating countries by
providing a framework for negotiating trade agreements and
a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements, which are signed by
representatives of member governments[
 World Trade Organization (WTO)

• WTO is empowered to pursue three goals

1. Promote free trade by encouraging
members to adopt free trade
2. Reduce trade barriers for promoting
multilateral negotiations
3. Establish fair procedures for resolving
disputes among nations
 The Major World Marketplaces
 North America
 World’s largest marketplace and most stable
economy
 U.S. dominates
 Europe
 Western Europe is a mature but fragmented
marketplace
 Eastern Europe has gained importance as a
marketplace and a producer

 Pacific Asia
 Though Japan dominates this region, other important
commerce centers include China, Thailand, Malaysia,
Singapore, Indonesia, South Korea, Taiwan, Hong Kong, the
Philippines, and Australia.
 Nations of the ASEAN are an important force in the
world economy and a major source of competition
for North American firms
Absolute Advantage and comparative Advantage

• Absolute and comparative advantage are two important concepts in

international trade that largely influence how and why nations devote limited
resources to the production of particular goods.

• it is not economically feasible for a country to import all of the food needed to
sustain its population, the types of food a country produces can largely be
affected by the climate, topography, and politics of the region.

• Spain, for example, is better at producing fruit than Iceland. The

differentiation between the varying abilities of nations to produce goods
efficiently is the basis for the concept of absolute advantage.
 Absolute Advantage
• Absolute advantage is predominantly a theory of
international trade in which a country can produce a
good more efficiently than other countries.
•
• Countries that have an absolute advantage can decide to
specialize in producing and selling that specific product
or service, using the funds generated to purchase other
goods and services that it does specialize in producing.
Absolute Advantage and comparative Advantage

• If Japan and the United States can both produce cars, but Japan
can produce cars of a higher quality at a faster rate, then it is said
to have an absolute advantage in the auto industry.
• A country's absolute advantage or disadvantage in a particular
industry plays a crucial role in the types of goods it chooses to
produce.
• In this example, the U.S. may be better served to devote
resources and manpower to another industry in which it has the
absolute advantage, rather than trying to compete with the more
efficient Japan.
 Comparative Advantage
• Given limited resources, a nation's choice to specialize in the
production of a particular good is also largely influenced by
its comparative advantage.
 
• comparative advantage is based on the concept of opportunity
cost.

• If the opportunity cost of choosing to produce a particular good

is lower for one nation than for others, then that nation is said
to have a comparative advantage.
 Example: Comparative Advantage
• Assume that both France and Italy have enough resources to produce either
wine or cheese, but not both.
• France can produce 20 units of wine or 10 units of cheese. The opportunity
cost of each unit of wine, therefore, is 10 / 20, or 0.5 units of cheese.
• The opportunity cost of each unit of cheese is 20 / 10, or 2 units of wine. Say
Italy can produce 30 units of wine or 22 units of cheese.
• Italy has an absolute advantage for the production of both wine and cheese,
but its opportunity cost for cheese is 30 / 22, or 1.36 units of wine, while the
cost of wine is 22 / 30, or 0.73 units of cheese.
• Because France's opportunity cost for the production of wine is lower than
Italy's, it has the comparative advantage despite Italy being the more
efficient producer.
• Italy's opportunity cost for cheese is lower, giving it both an absolute and
comparative advantage.
National Competitive Advantage
 National Competitive Advantage
• Factors of Production:
• Include the inputs necessary for producing goods and services.
•
• The basic factors to carry out a business include natural resources and labor;
whereas, advanced factors include infrastructure, such as communication
systems.

• The skilled personnel form the part of specialized factors. If a country is

endowed with all these factors of production, it would be successful in the global
market.
• However, there may be countries that have advanced and specialized factors but
lack in the basic factors.
• For example, South Korea lacks natural resources, but have specialized
engineers. Thus, it can be said that the countries that lack in natural resources
develop new methods or processes that lead to a national comparative
advantage.
 National Competitive Advantage
• Demand Conditions:
• Refer to the nature and size of the customers
of the products in the home market. The
strong demand conditions in the home country
persuade the domestic organizations to
constantly improve the product. If the demand
of a product is more in the domestic market
then it can influence the demand of customers
in the foreign market.
 National Competitive Advantage
• Related and Supporting Industries:
• Involve industries in the country that are
considered as the leader of a particular product.
These industries help in innovation that helps
organization under them to produce at low cost.
• In addition, the growth of one industry
influences the growth of other industries. For
instance, the growth and development of the
automobile industry would enhance the growth
opportunities of the steel industry.
 National Competitive Advantage
• Organizational Strategy, Structure, and Rivalry

• Varies from country to country. The strategies, structures,

and rivalry are very important for the success of an
organization.
• The strategies help in setting new goals, the structure helps
in managing operations, and rivalry helps in generating
innovative ideas in organizations.
• These four determinants can also be called as the
dimensions of the diamond model that help in contributing
to the national advantage.
 Import-Export Balances
 Balance of trade is the economic value of all
products a country imports minus the economic
value of all products it exports
 Trade deficit occurs when a country’s imports exceed
its exports (a negative balance of trade), while a trade
surplus occurs when exports exceed imports (a
positive balance of trade)
 Import-Export Balances
 Balance of payments is the flow of money into or out
of a country
• The money that a nation pays for imports and
receives for exports – its balance of trade – comprises
much of its balance of payments
• Other financial exchanges are also factors like:
 Money spent by tourists
 Money spent on foreign aid programs
 Money exchanged by buying and selling currency to
international money markets
 Exchange Rates
Exchange rate is the rate at which the currency of one nation can
be exchanged for that of another

• Fixed exchange rates

• A fixed exchange rate is a country's exchange rate regime under which
the government or central bank ties the official exchange rate to
another country's currency or to the price of gold.
• The purpose of a fixed exchange rate system is to maintain a country's
currency value within a very narrow band.

Floating exchange rates

A floating exchange rate is a regime where the currency price is set by
the forex market based on supply and demand compared with other
currencies.
Exchange Rates and
Competition
 When a country’s currency rises—
becomes stronger—companies based
there find it harder to export products to
foreign markets and easier for foreign
companies to enter local markets
 When the value of a currency declines—
becomes weaker—companies based there
find it easier to export to foreign markets
and harder for foreign companies to enter
local market
Going International
 Levels of Involvement
 Exporters make products in one country to distribute and sell in others
 Importers buy products in foreign markets and import them for resale at
home
 International firms conduct a significant portion of their business abroad
 An international firm may be large but still is a domestic company with
international operations
 Its main concern is domestic market, product and manufacturing decisions
typically reflect domestic concern
 Multinational firms design, produce and market products in many nations
 Don’t think of themselves as having domestic and international divisions
 Headquarters location is almost irrelevant, and planning and decision
making is geared to international markets
 International Organizational
Structures
 Independent agents are foreign individuals or
organizations that represent an exporter in
foreign markets
 Licensing arrangements are arrangements in
which firms choose foreign individuals or
organizations to manufacture or market their
products in another country
 Branch offices are foreign offices set up by an
international or multinational firm
 International Organizational
Structures
 Strategic alliance (also called Joint venture) is
an arrangement in which a company finds a
foreign partner to contribute approximately half
of the resources needed to establish and
operate a new business in the partner’s country
 Foreign Direct Investment (FDI) involves
buying or establishing tangible assets in another
country
 Barriers to International Trade:
Social and Cultural Differences
Firms planning to conduct business abroad must
understand the social and cultural differences
between host country and home country.
Differences in:
 Language
 Tastes and preferences
 Shopping habits
 Barriers to International Trade:
Legal and Political Differences
Governments can affect international
business in many ways. They can:
 Set conditions for doing business
within their borders and even
prohibit doing business together
 Control the flow of capital and
use tax legislation to discourage
or encourage activity in a given
industry
 Confiscate the property of
foreign-owned companies
 Legal and Political Differences:
Quotas, Tariffs and Subsidies
 Quota is a restriction on the number
of products of a certain type that can
be imported into a country
 Tariff is a tax levied on imported
products
 Subsidy is a government payment to
help a domestic business compete
with foreign firms
 What Is Protectionism?

Practice of
protecting domestic
business against
foreign competition
 Legal and Political Differences:
Local Content Laws
Local content laws require that
products sold in a particular country
be at least partly made there.
 Firms seeking to do business in a
country must either invest there directly
or take on a domestic partner.
 Profits from doing business in a foreign
country stay there rather than
flowing to another nation
 Legal and Political Differences:
Business Practice Laws
Business practice laws are laws or regulations
governing business practices in given countries.
 Cartels are associations of producers that control
supply and prices
 Dumping is the practice of selling a product abroad for less
than the cost of production. The objective of dumping is to
increase market share in a foreign market by driving out
competition and thereby create a monopoly situation
where the exporter will be able to unilaterally dictate price
and quality of the product.