ICS 200 Week 2 Notes
ICS 200 Week 2 Notes ICS 200
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This 17 page Class Notes was uploaded by Tatum Notetaker on Sunday September 25, 2016. The Class Notes belongs to ICS 200 at DePaul University taught by Paul Kessenich in Summer 2016. Since its upload, it has received 7 views. For similar materials see Introduction to Business in Business at DePaul University.
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Date Created: 09/25/16
Notes 9/20 CHAPTER 3 Business in the Global Market o Over 90% of companies doing business globally believe it is important for employees to have international experience o US organizations are also expanding abroad Importing and Exporting o Importing – buying products from another country o Exporting – selling products to another country o The US is the largest importing and the second largest exporting nation in the world Trading with other nations o Countries with abundant natural resources need technological resources from other countries o Global trade allows countries to produce what they make best and buy what they need from others o Free Trade – the movement of goods and services among nations without political or economic barriers Pros: global market contains over 7 billion potential customers, productivity grows when countries produce goods and services in which they have a comparative advantage, global competition and less-costly imports keep prices down, inspires innovation, uninterrupted flow of capital gives countries access to foreign investments Cons: domestic workers can lose their jobs due to increased imports or production shifts to low-wage global markets, workers may be forced to accept pay cuts from employers (who can threaten to move their jobs to lower-cost global markets), moving operations overseas because of intense competitive pressure often means the loss of service jobs and growing numbers of white collar jobs, domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries Comparative and Absolute Advantage o Comparative Advantage – A country should sell the products it produces most efficiently and buy the products it cannot produce as efficiently o Absolute Advantage – a country has a monopoly on producing a specific product of is able to produce it more efficiently than all other countries Going Global with a small business o Small businesses may be the key in global job growth o Only 1% of US small businesses export, yet they account for 30% of total US exports Getting involved in importing o Students attending schools abroad tend to notice products that they’re used to are unavailable in their new country o By working with producers in their native country, some become importers while still in school Getting involved in exporting 2 o Exporting provides a great boost to the US economy o It’s estimated every $1 billion in US exports generate over 7,000 US jobs How to measure global trade o Balance of trade – the total value of a nation’s exports compared to its imports measured over a particular period o Trade surplus (favorable) – when the value of a country’s exports is more than that of its imports o Trade deficit (unfavorable) – when the value of a country’s exports is less than that of its imports Balance of Payments o Balance of payments – the difference between money coming into a country (from exports) and money leaving the country (from imports) plus other money flows o The goal is to have more money flowing in a country than out – a favorable balance o An unfavorable balance is when more money flows out of a country Unfair Trade Practices o Dumping – selling products in a foreign country for lower prices than those charged in the producing country o Dumping is prohibited o China, brazil, and Russia have been penalized for dumping steel in the US Licensing 3 o Licensing – when a firm (licensor) provides the right to manufacture its product or use its trademark to a foreign company (licensee) for a fee (royalty) o Licensing can benefit a firm by Gaining revenues it wouldn’t have otherwise generated Spending little or no money to produce or market their products Export Assistance Centers and Export Trading Centers o EAC’s provide hands-on exporting assistance and trade-finance support for small and medium-sized businesses that wish to directly export goods and services o ETC’s help companies engage in indirect exporting by Matching buyers and sellers Dealing with foreign custom offices, documentation, and coversions Franchising o Franchising – a contractual agreement whereby someone with a good idea for a business sells others the rights to use the name and sell a product/service in a given area o Franchisors need to be careful to adapt their product to the countries they serve Food preferences differ all over the world Contract Manufacturing o Contract manufacturing – a foreign company produces private-label goods to which a domestic 4 company then attaches its own brand name or trademark, a form of outsourcing o Contract manufacturing can be used to Allow a company to experiment in a new market incurring heavy start-up costs such as building a manufacturing plant Temporarily meet an unexpected increase in orders Joint Ventures o Joint venture – a partnership in which two or more companies join to undertake a major project o The benefits Shared technology and risk Shared marketing and management expertise Entry into markets where foreign companies are often not allowed unless goods are produced locally Strategic Alliances o Strategic alliance – a long-term partnership between two or more companies established to help each company build a competitive market advantage o They don’t typically share costs, risks, management, or profits o Strategic alliances provide broad access to markets, capital and technical expertise Foreign Direct Investment o Foreign direct investment (FDI) – the buying of permanent property and businesses in foreign nations 5 o Foreign subsidiary – a company owned in a foreign country by another company called the parent company, the most common form of FDI Primary advantage – parent company maintains complete control over its technology or expertise Primary disadvantage – must commit funds and technology within foreign boundaries Multinational corporation o Multinational corporation – a company that manufactures and markets products in many different countries and has multinational stock ownership and management o Not all large global businesses are multinational o Only firms that have manufacturing capacity or some other physical presence in different nations can truly be multinational Sovereign wealth funds o Sovereign wealth funds (SWF’s) – funds controlled by gov’t holding investment stakes in foreign companies o The size of the funds and the fact that they are gov’t- owned make some fear they might be used for Geopolitical objectives Gaining control of strategic natural resources Obtaining sensitive technologies Undermining the management of the companies in which they invest Forces affecting global trade 6 o Sociocultural o Economic and financial o Legal and regulatory o Physical and environmental Cultural differences o To be involved in global trade, you must be aware of the cultural differences among nations including Social structures Religion Manners Values Language Personal communication From setting picks to picking grapes o When Yao Ming was facing retirement, he moved on to other ventures o Yao has set himself apart from others by opening high-end winery o His cheapest bottles go for about $87 Exchange rates o Exchange rate – the value of one nation’s currency relative to the currencies of other countries o High value of the dollar – dollar is trading for more foreign currency; foreign goods are less expensive o Low value of the dollar – dollar is trading for less foreign currency; foreign goods are more expensive o Currencies float in value depending on the supply and demand for them in the global market 7 Devaluation and countertrading o Devaluation – lowers the value of a nation’s currency relative to others o Countertrading – complex form of bartering in which several countries each trade goods or services for other goods or services Legal and regulatory forces o There’s no global system of laws o Laws may be inconsistent o US businesses must follow US laws while conducting global business o Organization for Economic Cooperation and Development and Transparency International fight to end corruption and bribery in foreign markets and have had limited success Environmental forces o Developing countries have transportation and storage systems that make international distribution difficult or impossible o Often, technological capabilities are far from those in the US which make for a tough business environment Trade Protectionism o Trade protectionism – the use of gov’t regulations to limit the import of goods and services o Advocates of protectionism believe it allows domestic producers to survive, grow, and produce jobs Tariffs 8 o Tariffs – taxes on imports, making imported goods more expensive o Two kinds of tariffs Protective – raise the retail price of imports so domestic goods are competitively priced Revenue – raise money for governments Import quotas and embargos o Import quota – limits the number of products in certain categories a nation can import o Embargo – a complete ban on the import or export of a certain product or the stopping of all trade with a particular country o Political disagreements can lead to embargos, like the US embargos against Cuba, Iran, and North Korea World Trade Organization o General agreement on tariffs and trade (GATT) – a global forum for reducing trade restrictions on goods, services, ideas, and cultural problems o World trade organization (WTO) – an independent entity of 159 member nations whose purpose is to oversee cross-border trade issues and global business practices Common Markets o Common market – a regional group of countries with a common external tariff, no internal tariffs and coordinated laws to facilitate exchange among members o The EU European Union, Mercosur, the ASEAN, and the COMESA are common markets 9 NAFTA and CAFTA o NAFTA – ratified in 1994, created a free-trade area among the US, Canada, and Mexico Objectives: eliminate trade barriers and facilitate cross-border movement of goods and services Promote conditions of fair competition Increase investment opportunities Provide effective protection and enforcement of intellectual property rights Establish a framework for further regional trade cooperation Improve working conditions in North America o Central American Free-Trade Agreement – passed in 2005, created a free-trade zone with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua New Free Trade Agreements o Today, free trade agreements are being negotiated Colombia and Panama o The US is considering an agreement with a 9-nation free trade bloc called the Trans-Pacific Partnership Future of Global Trade o Brazil is expected to be one of the wealthiest economies by 2030 o Russia is a large oil producing country with many multinationals interested in developing there o India has seen huge growth in information technology, pharmaceuticals and biotechnology 10 o With over 1.3 billion people, China has transformed the world economic map, many multinationals invest heavily in China Outsourcing o Outsourcing – process by which a firm contracts with other companies to do some or all of its functions o US firms have outsourced payroll functions, accounting and manufacturing for years o With the growth of global markets, companies have been shifting to offshore outsourcing (outsourcing with other countries) CHAPTER 20 What’s money? o Money – anything people generally accept as payment for goods and services o Barter – the direct trading of goods or services for other goods or services Standards for a useful form of money * o Portability o Divisibility o Stability – backed by a gov’t o Durability o Uniqueness The BITCOIN is in the mail o Bitcoin is a digital currency created in 2008 11 o It is attractive to many users because there is no central regulating authority o Transactions are between only two people without middlemen o Makes valuing Bitcoin difficult The money supply o Money supply – the amount of money the federal reserve makes available for people; referred to as M1 – money that can be accessed quickly (coins, paper money, traveler’s checks, etc.) M2 – M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.) M3 – M2 + big deposits like institutional money market funds Exchanging money globally o Falling dollar value – the amount of goods and services you can buy with a dollar decreases o Rising dollar value – the amount of goods and services you can buy with a dollar increases o What makes the dollar fall or rise is the position of the US economy relative to other global economies Five major parts of the federal reserve system o The board of governors o The federal open market committee o 12 federal reserve banks o 3 advisory councils o the member banks of the system Managing the money supply 12 o Reserve requirements Increase: banks put more money into the fed, reducing money supply, thus there is less money available to led to customers (economy slows) Decrease: banks put less money into the fed, increasing the money supply, thus there is more money available to lend to customers (economy speeds up) o Open-Market Operations Fed sells bonds: money flows from the economy to the fed (economy slows) Fed buys bonds: money flows into the economy from the fed (economy speeds up) o Managing the discount rate Rate increases: banks borrow less from the fed, there is less money to lend (economy slows) Rate decreases: banks borrow more from the fed, there is more money to lend (economy speeds up) The Establishment of the Federal Reserve System o A cash shortage problem in 1907 led to the creation of the federal reserve system o Under the federal reserve act of 1913, all federally chartered banks had to join the federal reserve The US Banking System o Commercial banks o Savings and loan associations o Credit unions o Nonbanks 13 Commercial Banks o Commercial bank – a profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans o Two types of customers Depositors Borrowers o Services Demand deposit – the technical name for a checking account; money is available on demand from the depositor Time deposit – a savings account; a bank can require prior notice before you make a withdrawal Certification of deposit – a savings account that earns interest, to be delivered on the certificate’s maturity date Savings and loan associations o Savings and loan associations – a financial institution that accepts both savings and checking deposits and provides home mortgage loans o Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership Credit Unions o Credit unions – nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members 14 o As nonprofits, credit unions enjoy an exemption from federal income taxes Nonbanks o Nonbanks – financial institutions that accept no deposits, but offer many of the services provided by regular banks Life insurance companies Pension funds Brokerage firms Commercial finance companies Corporate financial services Taking a bite out of the sharks o Dealstruck is a new type of alternative, nonbank lender o It uses a peer-to-peer model where wealthy investors provide capital for the loans o Interest rates range from 8 to 24% for loans up to $250,000 and can stretch for a period of three years The Banking Crisis o Almost 5 million households suffered through housing foreclosures since 2007 o Since the banks owned the mortgages, their profits declined o This led to a banking crisis and the government had to help the banks out o Assigning blame to only one agency is not possible, but it had to be fixed Protecting the depositor’s money 15 o The Federal Deposit Insurance Corporation (FDIC) – an independent agency of the US government that insures bank deposits up to $250,000 o The Savings Association Insurance Fund (SAIC) – insures holders of accounts in savings and loan associations o The National Credit Union Administration (NCUA) – Provides up to $250,000 coverage per individual depositor per institution Technological advancements in banking o Electronic funds transfer system – messages about a transaction are sent from one computer to another so funds can be transferred quickly and more economically o Debit card – serves the same function as a check; it withdrawals funds from a checking account o Smart cards – a combination of a credit card, debit card, phone card, driver’s license, and more Making Transactions in other countries o Letter of credit – a promise by the bank to pay the seller a given amount if certain conditions are met o Banker’s acceptance – a promise the bank will pay some of the specified amount at a particular time o Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros) Leading institutions in international banking o World bank – lends most of its money to less- developed nations to improve their productivity and help raise standards of living and quality of life 16 o International Monetary fund (IMF) – fosters cooperative monetary policies that stabilize the exchange of one national currency for another About 188 countries are a part of the IMF New Issues Across the Globe o The IMF and the World Bank are both trying to come up with answers to the global issues that have become very serious o Christine Lagarde, managing director of the IMF, fears the financial crisis did lasting harm to the potential pace of growth in many global economies o The IMF and World Bank are both trying to solve key global issues before there is another serious crisis 17
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