Intro to Buiss Ch4: The Contemporary Global Economy

Globalization

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

Imports

product made or grown abroad but sold domestically

Exports

product made or grown domestically but shipped and sold abroad

International Trade with SB’s

Small firms with no international operations (for example, an independent coffee shop) may still buy from international suppliers, and even individual contractors or self-employed individuals can be affected by fluctuations in exchange rates.

Advantages of Globalization

• higher standards of living

• improved business profitability

• quickness in communication and commerce

Disadvantages of Globalization

• allows businesses to exploit workers in less developed countries

• bypass domestic environmental and tax regulation

• loss of cultural heritages

  • local languages disappearing (English in Africa)

• makes the rich richer and the poor helpless

High-income countries

Those with annual per capita income greater than $12,695

Upper-middle income countries

Those with annual per capita income between $4,096 and $12,695

Lower-middle income countries

Those with annual per capita income between $4,095 and $1,046

low-income/developing countries

Those with annual per capita income less than $1,046

Three major marketplaces

• Pacific-Asia

• North America (Canada as well)

• Europe

North American Markets

• largest and most stable

• Mexico provides low-cost labor

  • Markets have been shifting to China since it’s cheaper and due to drug-related violence

Western European Markets

• Germany, UK, France (EU has raised importance)

• mature but fragmented

• Digital Commerce and Tech

  • Ireland —> one of the largest software exporters

  • Strasbourg, France —> bio-tech startups

  • Frankfurt as well

Eastern European Markets

• Marketplace and Producer

  • Poland —> Daewoo, Nestlé, General Motors, and ABB Asea Brown Boveri

  • Hungary —> Ford, General Motors, Suzuki, and Volkswagen

  • Russia, Bulgaria, Albania, Romania and more —> governmental instability, corruption, and uncertainty

Pacific Asia

• Japan, China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, Vietnam, the Philippines, and Australia

  • automobile, electronics, and banking industries (start-up in 70’s/80’s)

  • Heavy impacts on China from pandemic

• Major players in global economy —>Toyota, Toshiba, and Nippon Steel (Japan); Samsung and Hyundai (South Korea); and Chinese Petroleum (Taiwan)

• Vietnam —> major manufacturing center

• Hong Kong —> major financial center

• China —> world’s most densely populated country

• Hamper tech-start up —> poorly developed electronic infrastructures, slower adoption of computers and information technology, and a higher percentage of lower-income consumers hamper the emergence of technology firms.

• India —> rising up as well

Mexico VS China

people were looking for cheap labor

• Mexico

  • fueled in part by its role as a center of manufacturing

  • led to increases in the cost of living

  • followed quickly by wage increases so workers

  • made a lot of economic flourshment when America wanted to produce cars (autoparts)

    • 20% of GDP (2023), 5th largest autoproducer in the world

• China

  • no shortage of workers

  • 1/3 of the wages offered in Mexico

  • Time differences between USA and China made communication difficult

North American Free Trade Agreement/United States–Mexico–Canada Agreement of 1994

• (NAFTA) agreement to gradually eliminate tariffs and other trade barriers among the United States, Canada, and Mexico

  • agreements on environmental and labor issues

• new jobs

• Disadvantages: did not help w. trade balance in America

  • Trump —> USMCA

    • 2020, negotiated trade to increase exports from USA to Canada and Mexico

European Union (EU)

• eliminated most quotas and set uniform tariff on exported/imported products

• largest free marketplace in the world (1992), production of the Euro (2002)

  • German Deutsche Mark, the Italian lira, and the French franc

• UK departed from EU (2016)

  • gravest economic crisis in a generation

  • people blamed the withdrawal

Association of Southeast Asian Nations

1967 as an organization for economic, political, social, and cultural cooperation

• due to difference in size, ASEAN is smaller impact than EU and USMCA

• 1995 —> Vietnam became first communist country

General Agreement on Tariffs and Trade (GATT)

international trade agreement to encourage the multilateral reduction or elimination of trade barriers

• reduce or eliminate trade barriers, such as tariffs and quotas

• protect domestic industries, multilateral negotiations

World Trade Organization (WTO)

January 1, 1995

• 164 member countries

• Promote trade by encouraging members to adopt fair-trade practices.

• Reduce trade barriers by promoting multilateral negotiations.

• Establish fair procedures for resolving disputes among members.

Balance of Trade

A country’s balance of trade is the total economic value of all the products that it exports minus the economic value of all the products that it imports.

• Positive Balance of Trades:

  • results when a country exports (sells to other countries) more than it imports (buys from other countries)

• Negative Balance of Trades:

  • results when a country imports more than it exports

Flow of Currency

When U.S. consumers and businesses buy foreign products, dollars flow from the United States to other countries; when U.S. businesses are selling to foreign consumers and businesses, dollars flow back into the United States.

Trade Deficit

situation in which a country’s imports exceed its exports, creating a negative balance of trade

Trade Surplus

situation in which a country’s exports exceed its imports, creating a positive balance of trade

Balance of Payments

• flow of all money into or out of a country

  • tourist’s money

  • foreign aid programs

  • exchanged by buying and selling currency on international money markets

Exchange Rate

• rate at which the currency of one nation can be exchanged for the currency of another nation

  • This means that it costs £1 to “buy” $2 or $1 to “buy” £0.5. Stated differently, £1 and $2 have the same purchasing power, or £1=$2

  • doesn’t fluctuate much day-to-day

  • Gov can regulate it (like China), but also leave it unregulated

Floating Exchange Rates

• The norm

• value of one country’s currency relative to that of another varies with market conditions (USA)

Currency and High Demand

• currency is strong when demand for it is high

• high demand for the goods manufactured with that currency

Falling currency value

its balance of trade usually improves because domestic companies should experience a boost in exports.

Absolute Advantage

the ability to produce something more efficiently than any other country can

Comparative Advantage

the ability to produce some products more efficiently than others

National Competitive Average

international competitive advantage stemming from a combination of factor conditions, demand conditions, related and supporting industries, and firm strategies, structures, and rivalries

Factor conditions/factors of production

Labor, capital, entrepreneurs, physical resources, and information resources.

Demand Conditions

Reflect a large domestic consumer base that promotes strong demand for innovative products.

Related and supporting industries

include strong local or regional suppliers or industrial customers

Strategies, structures, and rivalries

firms and industries that stress cost production, product quality, higher productivity, and innovating products

Process of Going International

Gauging International Demand

a company must determine whether its products are in demand abroad. Products that are successful in one country may be useless in another. Even when there is demand, advertising and promotion may still need to be adjusted.

Adapting to customer needs

a firm must decide whether and how to adapt it to meet the special demands of foreign customers. For example, to satisfy local tastes, McDonald’s sells wine in France.

Outsourcing

the practice of paying suppliers and distributors to perform certain business processes or to provide needed materials or services, has become a popular option for going international

Offshoring

the practice of outsourcing to foreign countries

• outsourcing but internationally

Exporter

firm that distributes and sells products to one or more foreign countries

Importer

firm that buys products in foreign markets and then imports them for resale in its home country

Women Entrepreneurs Grow Global (WEGG)

• focused on helping women entrepreneurs expand their businesses internationally

• 40,000 women business owners and entrepreneurs

International Firms

• firm that conducts a significant portion of its business in foreign countries

• basically a domestic company with international operations

• buys and sells across national boundaries but also generates most of its revenues from its domestic market.

Multi-national firms

• firm that designs, produces, and markets products in many nations

• Don’t think of themselves as having domestic and international divisions.

• Headquarters locations are almost irrelevant,

• planning and decision making are geared to international markets.

Independent Agents (Organizational Strategies)

• Individual or organization that agrees to represent an exporter’s interests

• sell the exporter’s products, collect payment, and make sure that customers are satisfied

• don’t usually specialize

Licensing Agreements (Organizational Strategies)

• arrangement in which firms choose individuals or organizations to manufacture or market their products in another country

  • For example, McDonald’s, Pizza Hut, and Hertz Car Rental have franchises around the world.

Branch Offices (Organizational Strategies)

• Instead of developing relationships with foreign agents or licensing companies, a firm may send its own managers to overseas branch offices, where the firm has more direct control than it does over agents or license holders

  • Halliburton, a Houston-based oil field supply and services company, opened a branch office in Dubai to more effectively establish relationships with customers in the Middle East

Strategic Alliances (Organizational Strategies)

• company finds a partner in the country in which it wants to do business. Each party agrees to invest resources and capital into a new business or to cooperate in some mutually beneficial way.

  • dividing of profits

  • both organizations have their strengths (brand name working together with great manufacturers)

  • give firms greater control over foreign activities than agents and licensees

  • sharing of knowledge makes both companies better from the alliance

Foreign Direct Investment

• (FDI) arrangement in which a firm buys or establishes tangible assets in another country

  • Dell Computer, for example, has built assembly plants in Europe and China

Social Orientation

• Relative importance of the individual v.s. the interests of the group

  • Individualism —> individual’s interests take priority

    • US, UK, Australia, Canada, New Zealand, Netherlands

  • Collectivism —> group’s interest take priority.

    • Mexico, Greece, Hong Kong, Taiwan, Peru, Singapore, Colombia, and Pakistan

Power Orientation

• the appropriateness of power/authority within organizations

  • Power Respect —> authority is inherent in a known hierarchy

    • France, Spain, Mexico, Japan, Brazil, Indonesia, and Singapore

  • Power Tolerance —> individuals assess power in their own personal perspective or personal interests.

    • US, Israel, Austria, Denmark, Ireland, Norway, Germany, and New Zealand

Uncertainty Orientation

• Emotional response to uncertainty

  • Uncertainty Acceptance —> positive response to change and opportunities

    • United States, Denmark, Sweden, Canada, Singapore, Hong Kong, and Australia

  • Uncertainty Avoidance —> Prefer structure and a consistent routine

    • Israel, Austria, Japan, Italy, Colombia, France, Peru, and Germany

Goal Orientation

• What motivates people to achieve different goals

  • Aggressive Goal Behavior —> values materials, money, possessions

    • Japan (extreme), Germany, Mexico, Italy, and the United States (moderate)

  • Passive Goal Behavior —> values social relevance, quality of life, and welfare of community.

    • Norway, Sweden, Denmark, and Finland, Netherlands

Time Orientation

• extent to which members of a culture adopt a long-term or short-term outlook on work and life.

  • Long-term outlook —> value dedication, handwork, thrift

    • Japan, Hong Kong, Taiwan, South Korea

  • Short-term outlook —> value tradition, social obligation

    • Pakistan and West Africa

  • Immediate Outlook —> balance between short and long term

    • United States, Germany

Quota

restriction on the number of products of a certain type that can be imported into a country

Embargo

government order banning exportation or importation of a particular product or all products from a particular country

Tariffs

tax levied on imported products

Subsidy

government payment to help a domestic business compete with foreign firms

Protectionism

practice of protecting domestic business against foreign competition

Local Content Laws

law requiring that products sold in a particular country be at least partly made there

Business Practice Laws

law or regulation governing business practices in given countries

Cartels

association of producers whose purpose is to control supply and pricespractice of selling a product abroad for less than the cost of production

Dumping

practice of selling a product abroad for less than the cost of production

• the low-valued foreign product messes with domestic markets