Global environment Exam 1

What is a business?

An economic unit formed by entrepreneur(s) who employ resources to produce goods and services for sale.

Businesses can range from what to what?

From very small businesses to large international operations.

Why do businesses exist?

Because specialization and trade make us better off, and businesses reduce the high transaction costs of production and trade.

What are transaction costs?

The costs of using the price system to organize activity (finding suppliers, negotiating, enforcing contracts, etc.).

Example: Why is knitting a sweater costly without a business?

You must separately find wool, spinning, and knitting specialists, then negotiate each time. High transaction costs erase benefits of specialization

How does a business reduce transaction costs in the sweater example?

An entrepreneur organizes production by contracting long-term with specialists, replacing multiple contracts with one

Who is an entrepreneur?

Someone who organizes, manages, and assumes the risks of a business, coordinating the factors of production

Two broad types of entrepreneurship?

Subsistence and Transformational

What is subsistence entrepreneurship?

Running very small businesses to earn income, often temporary or as an alternative to unemployment

Where is subsistence entrepreneurship most common?

In developing countries

Characteristics of subsistence entrepreneurship

Low human capital (skills/education), motivated by family support, businesses stay small

What is transformational entrepreneurship?

Entrepreneurship aimed at building larger businesses with potential for growth

Characteristics of transformational entrepreneurs?

High human capital, higher risk-taking, often come from large companies or are serial entrepreneurs.

Why undertake transformational entrepreneurship?

To solve problems (pharmaceuticals), create variety (cars), lower costs (streaming services), and earn profits by adding value for customers

What are two main reasons some countries get stuck in subsistence entrepreneurship?

Regulatory environment and limited access to financing.

How can regulation limit entrepreneurship?

Barriers to entry (registration costs, licensing), informal businesses face bribes/fines, labor/product laws restrict growth.

Example of regulation limiting growth?

In India, retailers were capped at 20 employees. This forced many into subsistence entrepreneurship and prevented transformational growth

Why is financing important for entrepreneurship

Growth requires investment, which needs access to credit (banks, private loans) or equity (venture capital, stock markets

What’s a saying about business and financing?

Cash for a business is like air for a human

What is globalization?

The shift toward a more integrated and interdependent world economy, where products, people, companies, money, and information move quickly worldwide

Two most prominent facets of globalization

Globalization of markets and globalization of production

What is globalization of markets?

The merging of historically distinct national markets into one global marketplace

How do MNEs serve customers worldwide?

By offering both standardized products (same everywhere, e.g., Big Mac, Coca-Cola) and localized products (adapted for local tastes, e.g., McPinto Deluxe in Costa Rica).

Why are some products standardized?

Familiarity, cost efficiency, converging global tastes, and universal needs (commodities like metals, software, microprocessors).

Why are some products localized

To compete with local companies, due to differences in tastes, culture, business systems, distribution, and legal systems

What is globalization of production?

Businesses coordinate production stages across countries to maximize advantages

Three main drivers of globalization?

Declining trade and investment barriers, transportation improvements, and advances in information transmission

Example of trade barriers before WWII?

Smoot-Hawley Tariff Act (U.S., 1930), Abnormal Importation Act (UK, 1931), Import Duties Act (UK, 1932

Post-WWII trade developments?

GATT (1947) reduced tariffs on goods, succeeded by WTO (1995) covering goods, services, and intellectual property

Transportation improvements that fueled globalization

Railroads, commercial jets, super-freighters, and containerization reduced costs and travel times

How has information transmission improved?

From 3 weeks by sailing ship to instant internet communication, with drastic drops in cost (e.g., $300 in 1930 for a 3-min call, now free online

Major concerns fueling anti-globalization protests

Jobs and income, labor policies, and environmental concerns

What is the jobs and income argument against globalization?

Offshoring to low-cost countries destroys jobs and lowers wages in developed nations

Economists’ response to jobs argument?

Benefits outweigh costs: cheaper products, greater consumer choice, and employment shifts into new industries

Labor argument against globalization?

Businesses move to nations with lax labor laws, leading to sweatshops with poor conditions, low pay, and child labor

Economists’ response to labor concerns?

Sweatshops are bad, but often better than alternatives. Factories bring capital, technology, and skills, raising productivity and wages over time. Attempts to ban child labor can cause worse outcomes (e.g., Bangladeshi children losing jobs).

Environmental argument against globalization

Firms seek lax regulations, leading to more pollution in developing countries

Economists’ response to environmental concerns

Globalization can reduce pollution over time, following the Environmental Kuznets Curve (low-income = low pollution, middle-income = high, high-income = low again). Development does not necessarily mean permanent environmental damage

Why do firms internationalize

To access new markets and more efficient, higher-quality production

Main modes of internationalization

Exporting, portfolio investment, licensing, production under license, franchising, foreign direct investment (FDI), greenfield investment, acquisition, and joint ventures

What is production under license?

A contractor manufactures a product under agreement with the IP owner

Benefit of production under license?

Outsourcing lowers production costs and avoids investment in facilities

Example of production under license?

Nike relies heavily on independent contractors worldwide for footwear and apparel.

What is franchising?

A business grants a third-party the right to use its brand and model in exchange for fees and royalties

Benefits of franchising?

Cost-effective, rapid expansion, capital investment made by franchisees

Example of franchising?

McDonald’s (about 95% franchised), ensuring global quality and consistency

What is FDI?

A company invests in productive assets abroad, creating deeper integration in production

What are the main types of FDI

Greenfield investment, acquisition, and joint ventures

What is a greenfield investment?

Establishing new operations in a foreign country from scratch

Benefits of greenfield investment

Long-term cost savings, access to skilled labor, and avoidance of trade restrictions

Example of greenfield investment?

Japanese auto firms building U.S. plants in the 1980s to avoid quotas

What is an acquisition in FDI?

Buying an existing company in a foreign country

Benefit of acquisition

Faster entry into foreign markets, lower costs, and access to better resources

Example of acquisition?

PepsiCo buying Pioneer Food Group in South Africa for $1.7B

What is a joint venture

Two or more firms create a new entity, sharing ownership, profits, and risks

Benefit of a joint venture?

Reduces risk of entering a foreign market and avoids restrictions on foreign ownership

Example of a joint venture?

ADM (U.S.) and Vland (China) creating a 50-50 probiotics company

Why might firms prefer FDI over exporting

High transportation costs, tariffs, and quotas make exporting less attractive

Why might firms prefer FDI over licensing

Licensing risks revealing competitive advantages, losing control over strategy, and some skills (like Toyota’s lean production) cannot be licensed effectively

What is Standard of Living

The overall quality of life, including access to goods, services, health, and opportunities

What is Gross Domestic Product (GDP

The market value of all finished goods and services produced within a country in a year

Why can total GDP be misleading?

A large country may have a big GDP simply because of its size, not because citizens are wealthy

What is GDP per capita

GDP divided by population; measures average income per person and is used as a standard of living indicator.

Give an example of GDP per capita differences.

India ≈ $9,000 vs Singapore ≈ $127,000

What is the poverty rate?

The percent of people whose income falls below the poverty line

What are national poverty lines?

Country-specific income thresholds based on local cost of living

What are international poverty lines (World Bank, 2025)?

Standardized thresholds for comparing across countries:

• $3/day → extreme poverty

• $4.20/day → lower-middle-income poverty

• $8.30/day → upper-middle-income poverty

What is the unemployment rate?

The percentage of the labor force actively seeking but not finding work.

What is the labor force participation rate

The percentage of the working-age population that is employed or seeking work

What is income inequality

The uneven distribution of income across a population

Why is it important

High inequality means wealth is concentrated in fewer hands, even if GDP per capita looks high