Business Administration Chapter 3 Notes
Business Administration Chapter 3 Notes BSAD 180
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This 14 page Class Notes was uploaded by Chase Siegfried on Wednesday September 14, 2016. The Class Notes belongs to BSAD 180 at University of Wisconsin - Eau Claire taught by Professor Mark Alfuth in Fall 2016. Since its upload, it has received 10 views. For similar materials see Business Administration in Business Administration at University of Wisconsin - Eau Claire.
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Date Created: 09/14/16
Business Administration Notes: Chapter 3 The World Marketplace Business without Borders Learning Objectives: 3-1: Discuss business opportunities in the world economy 3-2: Explain the key reasons for international trade 3-3: Describe the tools for measuring international trade 3-4: Analyze strategies for reaching global markets 3-5: Discuss barriers to international trade and strategies to surmount them 3-6: Describe the free-trade movement and discuss key benefits and criticism Section 1: An Unprecedented Opportunity Vocabulary Notes: There are none. In-text Notes: As access to technology skyrockets and barriers to trade continue to fall, individual economies around the world have become more interdependent than ever before. The result is a tightly woven global economy marked by intense competition and huge, shifting opportunities. The future of business growth lies outside our borders. Below is a list of the top countries in terms of population, GDP, and per capita GDP. Nation Population Per Capita (GPD) GDP Growth Rate China 1,361,512,535 $9,800 +7.7% India 1,251,695,584 $4,000 +3.2% European Union 511,434,812 $34,500 +0.1% United States 321,362,789 $52,800 +1.6% Indonesia 255,993,674 $5,200 +5.3% Brazil 204,259,812 $12,100 +2.3% Note than even though that U.S. consumers clearly have more money, China and India represent a much bigger opportunity in terms of both sheer size and economic growth. Section 2: Key Reasons for International Trade Vocabulary Notes: Opportunity Cost: The opportunity of giving up the second best choice when making a decision Absolute Advantage: The benefit a country has in given industry when it can produce more of a product than other nations using the same amount of resources Comparative Advantage: The benefit a country has in a given industry if it can make products at a lower opportunity cost than other countries. In-text Notes: Companies engage in global trade for more reasons than you might think. Some of the reasons are access to factors of production, reduced risk, and inflow of innovation. Access to factors of production: International trade offers valuable opportunity for individual firms to capitalize on factors of production that simply aren’t present in the right amount for the right price in each individual country. An example is China. China attracts multi-billion dollar investments because of their large amount of technically skilled workers who work for about one fifth the pay of an American worker with the same skills. Reduced Risk: Global trade reduces dependence on one economy, lowering the economic risk for multinational firms. Inflow of innovation: International trade can also offer companies an invaluable source of new ideas. An example is Japan. Japan is much farther down the road of innovation for cell phone service. They are the birthplace of “extras”, including games, ringtones, videos, and stylish new accessories. Companies with a presence in foreign markets experience budding trends giving them a jump in other markets around the world. 3-2a: Competitive Advantage: Beyond individual companies, industries tend to succeed on a worldwide basis in countries that enjoy a competitive advantage. To master competitive advantage, one must master opportunity cost. When a country produces more of one good, it must produce less of another good. The opportunity cost, in this instance, would be how much you could have produced of the other good in expense of the first good. A country has an absolute advantage when it can produce more of a good than other countries with the same amount of resources. Example would be clothing production in China. China can produce more clothes than the United States can without having to use more resources. Comparative advantage, on the other hand, means countries who tend to turn out goods with a less opportunity cost compared to other countries, will produce that product. Keep in mind that comparative advantage rarely remains static (meaning unmovable). As technology changes and the work force evolves, nations may gain or lose comparative advantage in various industries. Section 3: Global Trade: Taking Measure Vocabulary Notes: Balance of Trade: A basic measure of the difference in value between a nation’s exports and imports, including both goods and services. Trade Surplus: Overage that occurs when the total value of a nation’s exports is higher than the total value of its exports. Trade Deficit: Shortfall that occurs when the total value of a nations imports is higher than the total value of its exports. Balance of Payment: A measure of the total flow of money into or out of a country. Balance of Payments Surplus: Overage that occurs when more money flows into a nation than out of that nation. Balance of Payments Deficit: Shortfall that occurs when more money flows out of a nation than into that nation. Exchange Rate: A measurement of the value of one nation’s currency of other nations. Countertrade: International trade that involves the barter of products for products rather than currency. In-text Notes: After a decade of fast-paced growth, global trade began slowing in 2007, due largely to turbulence in the worldwide financial markets. Between 2007 and 2010, trade plummeted. After 2010, global trade slowly started rising and has continued ever so slowly since. Measuring the impact of international trade on individual nations requires a clear understanding of balance of trade, balance payments, and exchange rates. 3-3a: Balance of Trade: The balance of trade is a basic measure of the difference between a nation’s exports and imports. If the total value of exports is higher than the total value of imports, the country has a trade surplus. If the total value of exports is lower than the total value of imports, the country has a trade deficit. Balance of trade includes the value of both goods and services, and it incorporates all trade within foreign nations. The United States has faced a trade deficit since 1976, but experts believe that growth of exports will soon slow down over the next couple of years. 3-3b: Balance of Payments: Balance of payments is a measure of the total flow of money into or out of a country. Clearly, the balance of trade plays a central role in determining the balance of payments. But the balance of payments also includes other financial flows such as foreign borrowing and lending, foreign aid payments and receipts, and foreign investments. Balance payment surplus means more money is flowing in than out. Vice versa, a balance payment deficit means more money is flowing out than in. Keep in mind though that balance payments pretty much reflect the balance of trade, since trade is the biggest component. 3-3c: Exchange Rates: Exchange rates measure the value of one nation’s currency relative to the currency of other nations. Although exchange rates don’t directly measure global commerce, it certainly has a powerful influence on how global trade affects individual nations and their trading partners. The exchange rate of one currency must be expressed in terms of another currency. An example of the comparison of the Euro and the Dollar. A strong dollar would be $1.00 = 1.20 Euros. A weak dollar would be $1.00 = .60 Euros. 3-3d: Countertrade: A complete evaluation of global trade must also consider exchanges that don’t actually involve money. Surprisingly, about 25% of trade involves the exchange of one product for another product, rather than one product for currency. Companies typically engage in countertrade to meet the needs of customers that don’t have access to hard currency or credit (usually developing countries). Performed well, countertrade can end up leading multiple nations to having products that normally wouldn’t be present. Performed poorly, countertrading can be a confusing nightmare for everyone involved. Section 4: Seizing the Opportunity: Strategies for Reaching Global Markets Vocabulary Notes: Foreign Outsourcing: (Also contract manufacturing) Contracting with foreign suppliers to produce products, usually at a fraction of the cost of domestic production. Importing: Buying products domestically that have been produced or grown in foreign nations. Exporting: Selling products in foreign nations that have been produced or grown domestically Foreign licensing: Authority granted by a domestic firm to a foreign firm for the rights to produce and market its product or to use its trademark/patent rights in a defined geographical area. Foreign franchising: A specialized type of foreign licensing in which a firm expands by offering businesses in other countries the right to produce and market its products according to specific operating requirements. Direct Investment: (or foreign direct investment). When firms either acquire foreign firms or develop new facilities from the ground up in foreign countries. Joint Ventures: When two or more companies join forces – sharing resources, risks, and profits, but not actually merging companies – to pursue specific opportunities. Partnership: A voluntary agreement under which two or more people act as co- owners of a business for profit. Strategic alliance: An agreement between two or more firms to jointly pursue a specific opportunity without actually merging their businesses. Strategic alliances typically involve less formal, less encompassing agreements than partnerships. In-text Notes: There is no one “right way” to seize the opportunity in global markets. In fact, the opportunity may not even make sense for every firm. Firms that are ready though have a couple options for how to move forward. One way is to seek foreign suppliers through outsourcing and importing. Another way is to seek foreign customers through exporting, licensing, franchising, and direct investment. These market development options fall in a spectrum from low- cost control to high-cost control. In other words, companies that choose to export products to a foreign country spend less to enter that market than companies that choose to build their own factories. But companies that build their own factories have a lot more control than exporters over how their business unfolds. Smaller firms tend to begin with exporting and move along the spectrum as the business develops. But larger firms may jump straight to the strategies that give them more control over their operations. 3-4a: Foreign Outsourcing and Importing: Foreign outsourcing means contracting with foreign suppliers to produce products, usually at a fraction of the cost of domestic production. H&M, for example, relies on a network for manufacturers around the globe, mostly in less developed parts of the world, including Kenya, Cambodia, Indonesia, Myanmar, Sir Lanka, and Bangladesh. Although foreign outsourcing lowers costs, it involves significant risk. Quality control typically requires very detailed specifications to ensure that a company gets what it actually needs. Another key risk involves social responsibility. A firm that contracts with foreign producers has an obligation to ensure that those factories adhere to ethical standards. Importing means buying products overseas that have already been produced, rather than contracting with overseas manufacturers to produce special orders. Although imported products don’t carry the brand name of the importer, they don’t carry as much risk. 3-4b: Exporting: Exporting is the most basic level of international market development. It simply means producing products domestically and selling them abroad. Exporting represents an especially strong opportunity for small and mid-sized companies. 3-4c: Foreign Licensing and Foreign Franchising: Foreign licensing and foreign franchising, the next level of commitment to international markets, are quite similar. Foreign licensing involves a domestic firm granting a foreign firm the rights to produce and market its product or to use its trademark/patent rights in a defined geographical area. The company that offers the rights, or the licensor, receives a fee from the company that buys the rights, or licensee. This approach allows firms to expand into foreign markets with little or no investment, and it also helps circumvent government restrictions on importing in closed markets. Foreign franchising is a specialized type of licensing. A firm that expands through foreign franchising, called a franchisor, offers other businesses, or franchisees, the right to produce and market its products if the franchisee agrees to specific operating requirements – a complete package of how to do business. One key difference between franchising and licensing is that franchisees assume the identiy of the franchisor. A McDonald’s franchise in Paris, for instance, is clearly a McDonalds’ not, say, a Pierre’s Baguette outlet that also carriers McDonald’s products. 3-4d: Foreign Direct Investment: Direct investment in foreign production and marking facilities represents the deepest level of global involvement. The cost is high, but companies with direct investments have more control over how their business operates in a given country. Most direct investment takes the form of either acquiring foreign firms or developing new facilities from the ground up. Developing new facilities from scratch – or “offshoring” – is the costliest form of direct investment. It also involves the most risk. But the benefits include complete control over how the facility develops and the potential for higher profits, which makes the approach attractive for corporations that can afford it. Joint ventures involve two or more companies joining forces – sharing resources, risks, and profits, but not merging companies – to pursue specific opportunities. A formal, long term agreement is usually called a partnership while a less formal, less encompassing agreement is usually called a strategic alliance. Section 5: Barriers to International Trade Vocabulary Notes: Sociocultural Differences: Differences among cultures in language, attitudes, and values. Infrastructure: A country’s physical facilities that support economic activity. Protectionism: National policies designed to restrict international trade, usually with the goal of protection domestic businesses. Tariffs: Taxes levied against imports. Quotas: Limitations on the number of specific products that may be imported from certain countries during a given time period. Voluntary Export Restrains (VERs): Limitations on the number of specific products that one nation will export to another nation. Embargo: A complete ban on international trade of a certain item, or a total halt in trade with a particular nation. In-text Notes: Every business faces challenges, but international firms face more hurdles than domestic firms. Understanding and surmounting those hurdles is the key to success in global markets. Most barriers to trade fall into the following categories: sociocultural differences, economic differences, and legal/political differences. 3-5a: Sociocultural Differences: Sociocultural differences include differences among countries in language, attitudes, and values. Some specific, and perhaps surprising elements that affect business include nonverbal communication, forms of address, attitudes toward punctuality, religious celebrations and customs, business practices, and expectations regarding meals and gifts. The best way to jump over sociocultural barriers is to conduct thorough consumer research, cultivate firsthand knowledge, and practice extreme sensitivity. 3-5b: Economic Differences: Before entering a market, it is critical to understand and evaluate the local economic conditions. Key factors to consider include population, per capita income, economic growth rate, currency exchange rate, and stage of economic development. Effectively serving less-developed markets requires innovation and efficiency. Emerging consumers often need different product features, and they almost always need lower costs. Infrastructure should be another key economic consideration when entering a foreign market. Infrastructure refers to a country’s physical facilities that support economic activity. It includes basic system in each of the following areas: Transportation (roads, airports, railroads, and ports) Communication (TV, radio, Internet, and cell phone coverage) Energy (Utilities and power plants) Finance (Banking, checking, and credit) 3-5c: Political and Legal Differences: Political regimes obviously differ around the world, and their policies have a dramatic impact on business. The specific laws and regulations that governments create around business are often less obvious, yet they can still represent a significant barrier to international trade. Laws and Regulations: o International businesses must comply with international legal standards, the laws of their host countries. This can be a real challenge, since many developing countries change business regulations with little notice and less publicity. The justice system can pose another key challenge, particularly with regard to legal enforcement of ownership and contract rights. The key benefit of an effective legal system is that it reduces risk for both domestic and foreign businesses. Bribery, the payment of money for favorable treatment, and corruption, the solicitation of money for favorable treatment, are also major issues throughout the legal world. Political Climate: o The political climate of any country deeply influences whether that nation is attractive to foreign businesses. Stability is crucial. Poor enforcement of intellectual property rights across international borders is another tough issue for business. International Trade Restrictions: o National governments also have the power to erect barriers to international business through a variety of international trade restrictions. The arguments for and against trade restrictions – also called protectionism – are summarized below. Notice that most economists find the reasons to eliminate trade restrictions much more compelling than the reasons to create them. Tariffs: Tariffs are taxes levied against imports. Governments tend to use protective tariffs either to shelter fledgling industries that couldn’t compete without help, or to shelter industries that are crucial to the domestic economy. Quotas: Quotas are limitations on the number of specific products that may be imported from certain countries during a given time period. Voluntary Export Restraints (VERs): VERs are limitations on the number of specific products that one nation will export to another nation. Although the government of the exporting country typically imposes VERs, they usually do so out of fear that the importing country would impose even more onerous restrictions. Ironically, VERs aren’t as voluntarily as the name suggests. Embargo: An embargo is a total ban on the international trade of a certain item, or a total halt in trade with a particular nation. The intention of most embargoes is the pressure the targeted country to change political policies or to protect national security. Quotas, VERs, and embargoes are relatively rare compared to tariffs, and tariffs are falling to new lows. But tariffs decrease, some nations are seeking to control imports through nontariff barriers such as: Requiring red-tape-intensive import licenses for certain categories. Establishing nonstandard packaging requirements for certain products. Offering less-favorable exchange rates to certain importers. Establishing standards on how certain products are produced or grown. Promoting a “buy national” consumer attitude among local people. Nontariff barriers tend to be fairly effective because complaints about them can be hard to prove and east to counter. Section 6: Free Trade: The Movement Gains Momentum Vocabulary Notes: Free Trade: The unrestricted movement of goods and services across international borders. General Agreement on Tariffs and Trade (GATT): An international trade treaty designed to encourage worldwide trade among its members. World Trade Organizations (WTO): A permanent global institution to promote international trade and to settle international trade disputes. World Bank: An international cooperative of 188 member countries, working together to reduce poverty in the developing world. International Monetary Fund (IMF): An international organization of 188 member nations that promotes international economic cooperation and stable growth. Trading Bloc: A group of countries that have reduced or even eliminated tariffs, allowing for the free flow of goods among the member nations. Common Market: A group of countries that have eliminated tariffs and harmonized trading rules to facilitate the free flow of goods among the member nations. North American Free Trade Agreement (NAFTA): The treaty among the United States, Mexico, and Canada that eliminated trade barriers and investment restrictions over a 15-year period starting in 1994. European Union (EU): The world’s largest common market, composed of 28 European nations. In-text Notes: Perhaps the most dramatic change in the world economy has been the global move toward free trade – the unrestricted movement of goods and services across international borders. Even though complete free trade does not exist, the emergence of regional trading blocks, common markets, and international trade agreements has moved the world economy much closer to that goal. 3-6a: GATT and the World Trade Organization: The General Agreement on Tariffs and Trade (GATT) is an international trade accord designed to encourage worldwide trade among its members. The Uruguay Round also created the World Trade Organization (WTO), a permanent global institution to promote international trade and to settle international agreements, promotes further reduction of trade barriers, and mediates disputes among members. The decisions of the WTO are binding, which means that all parties involved in disputes must comply to maintain good standing in the organization. 3-6b: The World Bank: Established in the aftermath of WWII, the world bank is an international cooperative of 188 member countries, working together to reduce poverty in the developing world. The World Bank influences the global economy by providing financial and technical advice to the governments of developing countries for projects in a range of areas, including infrastructure, communications, health, and education. 3-6c: The International Monetary Fund: Like the World Bank, the International Monetary Fund (IMF) is an international organization accountable to the governments of its 188 member nations. The basic mission of the IMF is to promote international economic cooperation and stable growth. Funding comes from member nations, with the United States contributing more than twice as much as any other country. To achieve these goals, the IMF does the following: Supports stable exchange rates Facilitates a smooth system of international payments Encourages member nations to adopt sound economic policies Promotes international trade Lends money to member nations to address economic problems Although all of its functions are important, the IMF is best known as a lender of last resort to nations in financial trouble. 3-6d: Trading Blocs and Common Markets: Another major development in the past decade is the emergence of regional trading blocs, or groups of countries that have reduced or even eliminated all tariffs, allowing the free flow of goods among the member nations. A common market goes even further than a trading bloc by attempting to harmonize all trading rules. NAFTA: The North American Free Trade Agreement is the treaty that created the free-trading zone among the United States, Mexico, and Canada. The agreement took effect in 1994, gradually eliminating trade barriers and investment restrictions over a 15-year period. European Union: Composed of 28 nations and more than half a billion people, and boasting a combined GDP of nearly $17 trillion, the European Union (EU) is the world’s largest common market. The goal of the EU is to bolster Europe’s trade position and to increase its international political and economic power. To help make this happen, the EU has removed all trade restrictions among member nations and unified internal trade rules, allowing goods and people to move freely among EU countries. The EU has also created standardized policies for import and export between EU countries and the rest of the world, giving the member nations more clout as a bloc than each would have had on its own. Perhaps the EU’s most economically significant move was the introduction of a single currency, the euro, in 2002.
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