Chapter 3 (Business in Global Market)

Global Trade

The exchange of goods and services among nations to satisfy their respective needs.

Free Trade

The movement of goods and services among nations without political or economic barriers.

Pros of Free Trade

Access to a massive global market (+7.9B consumers), drives innovation, boosts productivity growth, improves capital flows, and controls inflation.

Cons of Free Trade

Domestic jobs threatened by cheap imports/relocation, loss of service and white-collar jobs, downward pressure on wages, and unfair competition for local businesses.

Comparative Advantage (David Ricardo)

A country should sell to other countries the goods it produces most efficiently, and buy goods it produces less efficiently (focusing on lowest opportunity cost).

Absolute Advantage (Adam Smith)

A country has a monopoly or can produce a specific product more efficiently than any other nation.

Balance of Trade

The total value of a nation's exports compared to its imports over a particular period (Surplus = Exports > Imports; Deficit = Imports > Exports).

Balance of Payments

The difference between money coming into a country (from exports) and money leaving the country (for imports plus other financial flows).

Licensing

A global strategy in which a firm (licensor) allows a foreign company (licensee) to produce its product for a fee (royalty). Has the lowest risk, commitment, and control.

Exporting

Selling products to another country. Involves low-to-moderate commitment and financial risk.

Franchising

A contractual agreement where someone with a good business idea sells rights to use the business name and sell a product/service within a specified territory.

Contract Manufacturing

A foreign company's production of private-label goods to which a domestic company attaches its brand name or trademark (a form of outsourcing).

International Joint Venture

A partnership in which two or more companies (often from different countries) join to undertake a major project, sharing costs, risks, management, and profits.

Strategic Alliance

A long-term partnership between two or more companies established to build competitive advantage without sharing costs, risks, management, or profits.

Foreign Direct Investment (FDI)

The buying of permanent property and businesses in foreign nations. Most common form: Foreign Subsidiary (a company owned in a foreign country by a parent company). Carries the highest financial risk.

4 Forces in Global Trade

1. Sociocultural forces, 2. Economic & financial forces, 3. Legal & regulatory forces, 4. Physical & environmental forces.

Ethnocentricity

An attitude that one's own culture is superior to all others, which can lead to severe marketing and management failures abroad.

Exchange Rate Impacts

High Dollar Value: Foreign products become cheaper for US consumers, but US products become more expensive for foreign buyers (lowering export competitiveness).

Devaluation

Lowering the value of a nation's currency relative to other currencies to boost export competitiveness.

Countertrading

A complex form of bartering in which several countries may trade goods and services for other goods and services without direct money payments.

Protective Tariffs vs. Revenue Tariffs

Protective: Import taxes designed to raise the retail price of imported products to protect domestic producers. Revenue: Import taxes designed to raise money for the government.

Import Quotas vs. Embargoes

Quotas: Limits on the physical quantity of products that a country can import. Embargoes: A complete ban on the import or export of a specific product with a specific country.

Nontariff Barriers

Non-tax obstacles to trade, such as complex licensing procedures, restrictive product testing standards, and local content requirements.

Trade Protectionism

The use of government regulations to limit the import of goods and services to protect domestic producers and jobs.

Mercantilism

An 17th-18th century economic philosophy endorsing favorable balance of trade (Exports > Imports) using tariffs.

World Trade Organization (WTO)

An international organization of 164 member nations that mediates global trade disputes.

Major Trading Blocs

European Union (EU), USMCA (NAFTA replacement), RCEP (Asia-Pacific), and AfCFTA (Africa).

Offshore Outsourcing vs. Reshoring

Offshore Outsourcing: Contracting business functions to foreign companies to cut costs. Reshoring: Bringing production and operations back home to secure supply chains.

Role of SMEs in Global Market

Small and medium-sized enterprises are more agile and can react quicker to new international market opportunities than multinational corporations.

Ethics vs. Legality

Legality refers to laws we must obey; Ethics refers to moral standards and accepted principles of right vs. wrong. Legal acts can still be unethical.

Ethics

Society's accepted standards of moral behavior, defining conduct that is right rather than wrong.

Golden Rule

Do unto others as you would have them do unto you.

3 Questions for Ethical Decisions

1. Is it legal? 2. Is it balanced? 3. How will it make me feel about myself?

Business Ethics

Standards of conduct that guide business actions. Benefits: Maintains reputation, retains customers, reduces employee turnover, avoids lawsuits and government regulation.

Compliance-Based Ethics Codes

Ethical standards that emphasize preventing unlawful behavior by increasing control and penalizing wrongdoers.

Integrity-Based Ethics Codes

Ethical standards that define the organization's guiding values, create an environment that supports ethically sound behavior, and stress shared accountability.

Corporate Social Responsibility (CSR)

A business's concern for the welfare of society as a whole, going beyond ethical and legal compliance based on integrity and fairness.

Pro CSR (Adam Smith) vs. Anti CSR (Milton Friedman)

Pro: Virtuous behavior attracts customers, quality talent, and long-term investor returns. Anti: The only social responsibility of business is to make money for shareholders.

Corporate Philanthropy

Includes charitable donations of money or assets to nonprofit groups and communities.

Corporate Social Initiatives

Enhanced philanthropy directly linked to the company's core competencies (e.g., logistics firms assisting in disaster relief).

Corporate Responsibility vs. Corporate Policy

Responsibility: Ethical performance in daily operations (e.g., fair labor). Policy: A company's official position on social and political issues.

4 Basic Consumer Rights (J.F. Kennedy)

1. The right to safety, 2. The right to be informed, 3. The right to choose, 4. The right to be heard.

Insider Trading

An unethical activity in which insiders use private company information to trade securities for personal financial gain.

Regulation FD (Fair Disclosure)

SEC rule requiring companies to release information publicly and transparently to everyone at the same time.

Responsibility to Employees

Providing fair compensation, growth opportunities, and safe conditions to foster mutual respect, high morale, and profitability.

Green Movement & Carbon Footprint

Business efforts to minimize environmental impact by calculating total carbon footprint across the full product lifecycle, not just packaging.