BELLA OKTAVIA

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CHAPTER V. UNDERSTANDING THE GLOBAL CONTEX OF BUSINESS

1. The Rise of International Buisiness

Globalization is process by which the world economy is becoming a single interdependent

system. Imprt-products made or grown abroad but sold domestically. Export- product made or grown

domestically but shipped and sold abroad.

1.1 The Contemporary Global Economy

a. Trade Agreements

Various legal agreements have also sparked international trade. Indeed, virtually every nation has

formal trade treaties with other nations. Among the most significant multilateral agreements are the

General Agreement on Tariffs and trade and the North American free Trade Agreement. The European

Union and the World Trade Organization, both governed by treaties, are also instrumental in promoting

international business activity.

COST OF GLOBAL COMMUNICATION

b. General Agreement on Tariffs and Trade

General Agreement on Tariffs and Trade is international trade agreement to encourage the

multilateral reduction or elimination of trade barriers

c. North American Free Trade Agreement (NAFTA)

North American Free Trade Agreement (NAFTA) is agreement to gradually eliminate tariffs and

other trade barriers among the United States, Canada, and Mexico.

d. European Union

European Union is agreement among major Western European nations to eliminate or make

uniform most trade barriers affecting group members.

e. World Trade Organization

Organization through which member nations negotiate trading nations negotiate trading

agreements and resolve dispute about trade policies and practice. WTO is empowered to pursue three

goals, which are:

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.

1.2 The Major World Marketplace

The World Bank, an agency of the United Nations uses per capita income- average income per person-as

a measure to divide countries into one of three groups:

High-income countries: those with per capita income greater than $9,386 ex United States and

Canada

Middle-income countries: those with per capita income of less than $9,386 but more than $765 ex

Czech Republic, and Greece

Low income countries, also called developing countries: those with per capita income of less than

$765 ex china and India.

US Major Trading Partners

1.3 Forms of Competitive Advantage

a. Absolute Advantage is the ability to produce something more efficiently than any other country

can

b. Comparative Advantage is the ability to produce some products more efficiently or better than

other products.

c. National Competitive advantage derives from four conditions:

1. Factor conditions are the factors of production that we identified in Chapter 1

2. Demand conditions reflect a large domestic customer base that promotes strong demand for

innovative products

3. Related and supporting industries include strong local or regional suppliers and or industrial

customers

4. strategies, structures, and rivalries refer to firms and industries that stress cost reduction,

product quality, higher productivity, and innovative products.

1.4 Import-Export Balances

a. Balance of Trade is economic value of all products a country imports minus the economic value

of all the products it exports

b. Trade Deficit and Surplus

- Trade deficit is situation in which a country’s imports exceed in exports, creating a negative

balance of trade

- Trade surplus is situation in which a country’s exports exceed its imports, creating a positive

balance of trade

c. Balance of Payment is flow of all money into or out of a country

1.5 Exchange Rates

An exchange rate is the rate at which the currency of one nation can be exchanged for the

currency of another country. If the exchange rate between British pounds and U.S. dollars is 1.5 to 1, it

costs 1 dollar to “buy” 1.5 pounds and 1.5 pounds to “buy” one dollar. This also means that 1 dollar and

1.5 pounds have the same purchasing power. A significant development in foreign exchange is the

introduction of the euro-a common currency among most members of the European Union.

Under today’s floating exchange rates, the value of one currency relative to that of another varies

with market conditions. A currency is strong when demand for it is high or there is high demand for the

goods manufactured at the expense of that currency. Companies with international operational operations

must monitor exchange-rate fluctuations because such changes effects overseas demand for their products

can be a major factor in international competition. When the value of a country’s currency rises-becomes

stronger-companies based there find it harder to export products, and it is easier for foreign companies to

enter local markets. When the value of its currency declines-becomes weaker- a nation’s balance of trade

should improve because domestic companies should experience a boost in exports. Foreign companies

would also be less apt to ship products into the domestic market.

2. International Business Management

2.1 Going International

Several factors enter into the decision to go international. One overriding factor is the business

climate in other nations.

a. Gauging International Demand: in considering international expansion, a company should

also consider at least two other questions:

i. Is there a demand for my products aboard?

ii. If so, must I adapt those products for international consumption?

Products that are successful in one country may be useless in another. Snowmobiles are

popular for transportation and recreation in Canada and actually revolutionized reindeer

herding in Lapland, but there’s no demand for them in central America. Although this is an

extreme example, the point is basic: Foreign demand for a company’s product may be greater

than, the same as, or weaker than domestic demand. Market research and/or the prior market

entry of competitors may indicate whether there’s an international demand for a firm’s

products.

b. Adapting to Customer Needs: if there is demand for its product, a firm must decide whether

and how to adapt it to meet the special demands of foreign customers.

2.2 Levels of Involvement

a. Exporters and Importers

- Exporter: is firm that distributes and sells products to one or more foreign countries

- Importer: as firm that buys products in foreign markets and then imports them for resale in its

home country

b. International Firm is firm that conducts a significant portion of its business in foreign countries

c. Multinational firm is firm that design, produces, and markets products in many nations

2.3 International Organizational Structures

a. Independent Agents: foreign individual or organization that agrees to represent an exporter’s

interests

b. Licensing Arrangement: Arrangement in which firms choose foreign individuals or organizations

to manufacture or market their products in another country

c. Branch Office: foreign office set up by an international or multinational firm

d. Strategic Alliance or Joint Venture: 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.

e. Foreign Direct Investment (FDI) is arrangement in which a firm buys or establishes tangible

assets in another country.

3. Barriers to International Trade

3.1 Social and Cultural Differences

Some differences, like language, are obvious, but a wide range of subtle value differences can

also affect operations. For example, because many Europeans shop daily, large American supermarkets

are not the norm in Europe. In addition, people who shop daily don’t need large refrigerators and freezers.

3.2 Economic Differences

Economic differences can be fairly pronounced. In dealing with mixed economies, firms must be

aware of when-and to what extent-the government is involved in a given industry. The impact of

economic differences can be even greater in planned economies.

3.3 Legal and Political differences

Governments can set conditions for doing business and even prohibit it altogether. They can

control the flow of capital and use taxes to influences activity in a given industry. They can even

confiscate foreign-owned property. Common legal and political issues in international business include

the following:

a. Quota: Restriction on the number of products of a certain type that can be imported into a

country.

b. Embargo: Government order banning the exportation and/or important of a particular product or

all products from a particular country.

c. Tariff: Tax levied on imported products.

d. Subsidy: Government payment to help a domestic business compete with foreign firms.

e. The Protectionism Debate: Practice of protecting domestic business against foreign

competition.

f. Local Content Law: Law requiring that products sold in a particular country be at least partly

made there.

g. Business Practice law: Law or regulation governing business practices in given countries.

h. Cartel: Association of producers whose purpose is to control supply and prices

i. Dumping: Practice of selling a product aboard for less than the cost of production.

Question

1. What the meaning of the rise of international businesses?

2. What are the roles of world trade organization in the contemporary global economy?

3. Please mention and explain three measurements used to divide countries based on the major

world marketplaces!

4. Explain how differences in competitive advantage, import-export balances, exchange rates, and

foreign competition determine the ways in which countries and businesses respond to the

international environment!

5. What are and explain the factors involved in deciding to do business internationally?

6. Explain and mention the conditions derived by national competitive advantage?

7. Explain the meaning of gauging international demand?

8. Explain the influence of social and cultural, economic, political and legal differences for barriers

to international trade!

9. What is the difference of quota, embargo, and tariff?

10. What is local content law?