Content Review: Global Business

Central Concept

 The foreign exchange market is a market for

converting the currency of one country into that
of another country

 An exchange rate is the rate at which one

currency is converted into another
 Concept of Free Trade

Free trade refers to a situation where a government

does not attempt to restrict what its citizens can buy
from another country or what they can sell to another
country
 While many nations are nominally committed to free trade,
they tend to intervene in international trade to protect the
interests of politically important groups
 Currency Exchange must be facilitated by domestic banking
policy and international organizations like the WTO, World
Bank and the IMF to cerate and maintain a foreign exchange
market.
 Instruments of Trade Policy
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Seven main instruments of trade policy

1.Tariffs
2.Subsidies
3.Import quotas
4.Voluntary export restraints
5.Local content requirements
6.Administrative policies
7.Antidumping duties
 Instruments of Trade Policy
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Nontariff barriers include

1.Subsidies
2.Quotas
3.Voluntary export restraints
4.Antidumping duties
 Instruments of Trade Policy
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Tariffs
 A tariff is a tax levied on imports that effectively raises
the cost of imported products relative to domestic
products
 Specific tariffs: levied as a fixed charge for each unit of a good
imported
 Ad valorem tariffs: levied as a proportion of the value of the
imported good
 Instruments of Trade Policy
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Subsidies
 Subsidy: a government payment to a domestic producer
 Subsidies help domestic producers
 Compete against low-cost foreign imports
 Gain export markets
 Consumers typically absorb the costs of subsidies
 Instruments of Trade Policy
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Import Quotas and Voluntary Export Restraints

Import quota
 A direct restriction on the quantity of some good that may be
imported into a country
Tariff rate quota
 A hybrid of a quota and a tariff where a lower tariff is applied to
imports within the quota than to those over the quota
Voluntary export restraint (VER)
 Quota on trade imposed by the exporting country, typically at the
request of the importing country’s government
Quota rent
 The extra profit that producers make when supply is artificially
limited by an import quota
Hypothetical Tariff Rate Quota

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Figure 7.1 description

 Instruments of Trade Policy
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Export Tariffs and Bans

 Export tariff is a tax placed on the export of a good
 Goal is to discriminate against exporting
 Export ban is a policy that partially or entirely restricts
the export of a good
 Ban of exports of U.S. crude oil in 1975 to ensure sufficient
supply of domestic oil at home
 The Case for Government Intervention
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Political arguments
 Concerned with protecting the interests of certain
groups within a nation (normally producers), often at
the expense of other groups (normally consumers)
Economic arguments
 Concerned with boosting the overall wealth of a
nation (to the benefit of all, both producers and
consumers)
 The Case for Government Intervention
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Political Arguments for Intervention

 Protecting jobs and industries
 Protecting national security
 Retaliating
 Use intervention as a bargaining tool and force trading
partners to “play by the rules of the game”
 Protecting consumers
 Ban unsafe products
 Furthering foreign policy objectives
 Grant preferential trade terms to a country it wants to build
relations with
 Pressure or punish “rogue” states
 Protecting human rights
 The Case for Government Intervention
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Economic Arguments for Intervention continued

 Strategic trade policy
 By appropriate actions, government can help raise
national income if it can ensure first-mover advantages
in an industry are domestic
 Might be beneficial for a government to intervene in an
industry by helping domestic firms overcome barriers to
entry created by foreign firms with first-mover
advantages
 The Revised Case for Free Trade
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Retaliation and Trade War

Krugman: strategic trade policies to establish
domestic firms in a dominant position in a global
industry are ‘beggar-thy-neighbor’ policies that
boost national income at the expense of other
countries
 A country that attempts to use such policies will
probably provoke retaliation
 A trade war could leave both countries worse off
 Don’t engage in retaliation but help establish rules to
minimize the use of trade-distorting subsidies
 Development of The World Trading System
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Since World War II (1945), an international trading

framework has evolved to govern world trade
 In its first fifty years, the framework was known as the
General Agreement on Tariffs and Trade (GATT)
 Since 1995, the framework has been known as the World
Trade Organization (WTO)
The WTO
 Development of The World Trading System
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The Uruguay Round and the World Trade Organization

 Uruguay Round emphasized services, intellectual
property, and agricultural subsidies
 Trade issues related to services and intellectual property
and agriculture were emphasized
 Dragged on for seven years
 The World Trade Organization
 The WTO encompassed GATT, the General Agreement on
Trade in Services (GATS), and the Agreement on Trade
Related Aspects of Intellectual Property Rights (TRIPS)
 Procedures subject to strict time limits
Latest Meeting of the WTO – 1st in 5 years
Development of The World Trading System
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WTO: Experience to Date

 Members account for 98% of world trade
 It was hoped that it would emerge as an effective
advocate and facilitator of future trade deals
 So far, most countries have adopted WTO
recommendations for trade disputes
 In general, countries involved in disputes accept
WTO recommendations
 Global telecommunication and financial service
industries targeted for reform
 Supply-chain failures and COVID response
disappointing
The response to the latest meeting of WTO:
India objects
 Development of The World Trading System
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The Future of the WTO: Unresolved issues and the Doha

Round continued
 Market access for nonagricultural goods and services
 Tariffs on services remain higher than on industrial goods
 A new round of talks moving passed Doha
 Doha ended in 2015 without resolving outstanding concerns
with cutting tariffs on industrial goods and services, phasing
out subsidies to agricultural and fisheries producers, reducing
barriers to cross-border investment, limiting the use of
antidumping laws
 The first talks in 5 years happened in Geneva recently
 Development of The World Trading System
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The Future of the WTO: Unresolved issues and the

Doha Round continued
 Multilateral and Bilateral Trade Agreements
 Designed to capture gain from trade beyond those agreements
currently attainable under WTO treaties
 Tariff barriers raise the costs of exporting products to a country
 Quotas may limit a firm’s ability to serve a country from
locations outside that country
 A firm may have to locate more production activities in a given
market than it would otherwise.
 The threat of antidumping action limits the ability of a firm to
use aggressive pricing to gain market share in a country
 Policy Implications
 Do you know:
The historical development of the modern global monetary system.
The role played by the World Bank and the IMF in the international
monetary system.
Exchange rate regimes used in the world today and why countries adopt
different exchange rate regimes.
The debate surrounding the role of the IMF in the management of
financial crises.
The implications of the global monetary system for currency
management and business strategy.
 Global Money
 The international monetary system is the institutional arrangement that
govern exchange rates
• Recall that the foreign exchange market is the primary institution for determining exchange
rates

 A floating exchange rate system exists where the foreign exchange market
determines the relative value of a currency

 A pegged exchange rate system exists when the value of a currency is fixed to
a reference country and then the exchange rate between that currency and
other currencies is determined by the reference currency exchange rate
 Exchange Rate Regimes in Practice
Currently, there are several different exchange rate regimes in
practice

1. 21% of IMF members allow their currencies to float freely

2. 23% of IMF members follow a managed float system
3. 5% of IMF members have no legal tender of their own (excluding
EU countries that use the euro)
4. The remaining countries use less flexible systems such as pegged
arrangements, or adjustable pegs
 Things to remember:
The concept of strategy.
How firms can profit by expanding globally.
How pressures for cost reductions and pressures for
local responsiveness influence strategic choice.
Different strategies for competing globally and their
pros and cons.
The pros and cons of using strategic alliances to
support global strategies.
 Strategy and the Firm

Strategy: the actions taken by managers to attain the

goals of the firm

Profitability: the rate of return the firm makes on its

invested capital
Profit growth: the percentage increase in net profits
over time
Determinants of Enterprise Value

Source: C. W. L. Hill and G. T. M. Hult, G. T. M., International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
 Strategy and the Firm
Value Creation
The difference between V (the price that the firm can charge for
that product given competitive pressures) and C (the costs of
producing that product)

Two basic strategies

1. Differentiation
2. Low cost
 Value Creation

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description
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global
Marketplace (New York: McGraw-Hill Education, 2017).
 The Value Chain

Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Organization Architecture
Strategic Fit
 Global Expansion, Profitability and Profit
Growth
 Expanding the Market: Leveraging Products and Competencies
 To increase growth, a firm can sell products or services developed
at home in foreign markets

 Success depends on the type of goods and services, and the firm’s
core competencies (skills within the firm that competitors cannot
easily match or imitate)
 Enable the firm to reduce the costs of value creation
 Create perceived value so that premium pricing is possible
 They are the source of a firm’s competitive advantage
 The Experience Curve

Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
 Changes in Strategy over Time

Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
 Strategic Alliances
Making Alliances Work
 Partner Selection
• Collect as much information as possible
• Gather data from informed third parties
• Get to know the potential partner well before committing
 Alliance Structure
• Can be designed to make it difficult to transfer technology meant to be transferred
• Contractual safeguards can be written into alliance agreement to guard against risk of
opportunism
• Both parties can agree in advance to swap skills and technologies that the other covets
 Don’t forget:
The promises and risks associated with exporting.
The steps managers can take to improve their firm’s
export performance.
The information sources and government programs that
exist to help exporters.
 Company Readiness to Export

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description
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
 Study the following:
 Why it might make sense to vary the attributes of a product from country to
country.
 Why and how a firm’s distribution strategy might vary among countries.
 Why and how advertising and promotional strategies might vary among
countries.
 Why and how a firm’s pricing strategy might vary among countries.
 How to configure the marketing mix globally.
 The importance of international market research.
 How globalization is affecting product development.
 Marketing
Marketing and R&D can be performed so they will reduce the
costs of value creation and add value by better serving
customer needs in the global marketplace (distribution
strategy)
Global marketing function needs to consider
 When product standardization is appropriate
 How standardized it can be, and
 When it is not in the business’s best interest to standardize a
product too much
 Marketing Mix
The marketing function is to identify gaps in the
market so that the firm can develop new products to
fill those gaps
The marketing mix (the choices the firm offers to its
targeted market) (4Ps – Product…)
 Product attributes
 Distribution strategy (place)
 Communication strategy (promotion)
 Pricing strategy
 Market Segmentation

Market segmentation
Identifying distinct groups of consumers whose needs, wants,
and purchasing behavior differs from others in important ways
 Geography
 Demography
 Sociocultural factors
 Psychological factors