978-0134728391 Chapter 4 Part 1

Chapter 4: Understanding the Global Context of Business

Chapter Overview

The global market has evolved into major world marketplaces, held together by trade agreements

and alliances. A number of factors affect how countries and businesses respond to the

international environment. Further, managers and entrepreneurs find themselves challenged by a

number of factors that influence their international involvement.

This chapter discusses the overall dynamic nature of international business and how it is shaped

by social, cultural, economic, legal, and political differences among nations. We look at:

 The rise of international business and describe the major world marketplaces, trade

agreements, and alliances.

 How differences in import-export balances, exchange rates, and foreign competition

determine the ways in which countries and businesses respond to the international

environment.

 The factors involved in deciding to do business internationally and in selecting the

appropriate levels of international involvement and international organizational structure.

The Business Plan Project is also introduced in this chapter. It is a substantial project that runs

for the majority of the course, so it is important that you leave time in your lecture plan to

introduce it properly. We have included a FAQ sheet to hand out to students. As an experienced

instructor, you know that the better you are able to introduce the project now, the more

comfortable students will be using it.

Learning Objectives

4-1. Discuss the rise of international business and describe the major world marketplaces,

trade agreements, and alliances.

4-2. Explain how differences in import-export balances, exchange rates, and foreign

4-4. Explain the role and importance of the cultural environment in international business.

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE

Activity

Description

Time Limit

1. Ice–Breaker: Shoes in the

Global Marketplace

Students discuss why certain countries

produce labor-intensive products more

than others in the global marketplace.

20 min.

2. In-Class Activity: Assessing

Your Own Culture

Ask students to describe what a

foreign manager might expect to

experience in our domestic

marketplace.

20 min.

CHAPTER OUTLINE

Learning Objective 4-1:

Discuss the rise of international business and describe the major world marketplaces and

trade agreements and alliances.

The Contemporary Global Economy

The world economy is becoming a interdependent system through the process of globalization.

The total volume of international trade is more than $19.3 trillion. Exports are products that are

made domestically and shipped for sale abroad; imports are products that are made abroad but

sold domestically. International trade is becoming increasingly important to most nations and

their businesses. Governments and businesses are more aware of the benefits of globalization to

businesses and shareholders. New technologies have made travel, communication, and

commerce faster and cheaper. In addition, competitive pressures push firms into foreign markets

to keep up with competitors.

A. Major World Marketplaces

Managers involved with international businesses need to have a solid understanding

of the global economy, including the major world marketplaces.

1. Distinctions Based on Wealth. The World Bank uses per capita income to make

distinctions among countries. Current classifications include:

 High-income countries

 Upper-middle–income countries

2. Geographic Clusters. North America is the world’s largest marketplace and most stable

economy. Europe includes both Western and Eastern regions. The European Union now

China, one of the world’s most densely populated countries, now boasts one of the world’s

largest economies. India, though not part of Pacific Asia, is also emerging as one of the

most important economies.

B. Trade Agreements and Alliances

Virtually every nation has formed treaties with other nations to promote free trade.

1. North American Free Trade Agreement (NAFTA). NAFTA removes most tariffs

2. The European Union (EU). The European Union includes most European nations; these

3. The Association of Southeast Asian Nations (ASEAN). The ASEAN group was founded

4. The World Trade Organization (WTO). The WTO promotes trade by encouraging

members to adopt fair trade practices, reduces trade barriers by promoting multilateral

negotiations, and establishes fair procedures to solve disputes.

KEY TEACHING TIPS

 Emphasize that one of the key roles of the World Trade Organization is to expand

international trade.

 Make sure that students understand the World Bank classification method of high-

income, upper-middle-income, lower–middle-income, and low–income countries.

 Remind students that the world economy revolves around three major marketplaces of

HOMEWORK

Now is a good time to assign Application Exercise 9 from the end–of-chapter materials as

homework. The assignment asks students to research per capita income levels in various

countries.

At-Home Completion Time: 45 minutes

Learning Objective 4-2:

Explain how differences in import-export balances, exchange rates, and foreign

competition determine the ways in which countries and businesses respond to the inter–

national environment.

International Trade

Critical in global business is a country’s acceptable balance between imports and exports. An

import-export relationship can be measured through a country’s balance of trade and balance of

payments.

A. 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. A trade deficit

occurs when a country’s imports exceed its exports. A trade surplus occurs when a country’s

exports exceed its imports.

B. Balance of Payments. Balance of payments refers to the flow of money into or out of a

country. A country’s balance of payments results primarily from its balance of trade, though

other contributing factors include money spent by tourists, foreign aid, and the buying and

selling of currency.

C. Exchange Rates

An exchange rate is the rate at which a nation’s currency can be exchanged for the currency

of another. Fluctuations in exchange rates can greatly affect a country’s balance of trade.

With fixed exchange rates, the value of a country’s currency remains relatively constant to

occurs. In this situation, the country’s balance of trade usually improves because domestic

companies should experience a boost in exports.

D. Forms of Competitive Advantage

Managers need to understand forms of competitive advantage when making decisions about

international competition. Countries tend to export what they can produce better or less

expensively, and import what they can’t produce as effectively.

1. Absolute Advantage. A country enjoys an absolute advantage when it can produce

something that is cheaper or of higher quality than any other country.

3. National Competitive Advantage. National competitive advantage derives from factor

conditions (labor, capital, entrepreneurs, physical resources, and information resources),

demand conditions, related and supporting industries (strong local or regional suppliers or

industrial customers), and strategies, structures, and rivalries (firms and industries that

stress cost reduction, product quality, higher productivity, and innovative products).

KEY TEACHING TIPS

 Students often confuse balance of trade with balance of payments. Make sure they

understand that a country’s balance of trade is the difference between that country’s

exports and imports.

 Make sure that students understand that the balance of payments reflects the inflow and

outflow of money as a result of a country’s balance of trade.

QUICK QUESTIONS

 What are some of the forces that spark and sustain globalization?

 What are some of the features that distinguish the three major marketplaces from one

another?

 What countries are currently members of the European Union?

Use In-Class Activity 1: Ice-Breaker: Shoes in the Global Marketplace

Time Limit: 20 minutes

Learning Objective 4-3:

Discuss the factors involved in deciding to do business internationally and in selecting the

appropriate levels of international involvement and international organizational structure.

International Business Management

The primary key to a firm’s success is based largely in how well the firm is managed. The three

basic decisions that a company must make when considering globalization are whether to go

international at all, the level of international involvement, and the organizational structure that

will best meet the firm’s global needs.

A. Going International

Not every business is prepared to go international. A major decision factor is the business

climate of other countries. Other factors include demand and product adaptations.

1. Gauging International Demand. Foreign demand for a company’s product may be greater

3. Outsourcing and Offshoring. Outsourcing is the practice of paying suppliers and

distributors to perform certain business processes or to provide needed materials or

services. Offshoring involves outsourcing to other countries.

KEY TEACHING TIPS

 A company must make three decisions when considering globalization:

o Whether to go international at all

o Its level of international involvement

o Its organizational structure

 Make sure students do not confuse outsourcing with offshoring. A U.S. company can

outsource to another U.S. company. Offshoring always implies outsourcing to other

countries. Students typically confuse these two terms, so it is worth emphasizing the

difference.

QUICK QUESTION

 How might a U.S. food manufacturer have to change its products in order to successfully

export to Asia?

B. Levels of International Involvement

A firm may enter the global marketplace through different levels of involvement.

1. Exporters and Importers

Representing the lowest level of global involvement, exporters and importers conduct only

2. International Firms

3. Multinational Firms

Multinational firms (firms that design, produce, and market products in many nations) do

$27.6 trillion total revenues. They employed tens of millions of people, paid billions in

taxes, and bought equipment and services from thousands of other firms across the world.

C. International Organizational Structures

Whether an importer, exporter, international firm, or multinational firm, a firm’s level of

global involvement will influence the firm’s choice of international organizational strategies.

1. Independent Agents. Independent agents are foreign individuals or organizations that

agree to represent the exporter’s interests, including assisting in product sales, collection of

payments, and in helping to ensure customer satisfaction.

2. Licensing Arrangements. In licensing arrangements, firms give individuals or

3. Branch Offices. To gain more direct control than it has over agents or license holders and

a more tangible presence in foreign countries, a firm will send some of its own managers to

overseas branch offices with this arrangement.

4. Strategic Alliances. Strategic alliances include a company and a foreign partner that

combine resources and capital to begin a new business. In many countries, laws make

alliances the only way to do international business.

5. Foreign Direct Investment. Foreign direct investment means buying or establishing

tangible assets such as manufacturing plants in a foreign country.

KEY TEACHING TIPS

 Emphasize that firms have the least control when using independent agents or licensing

arrangements. Branch offices and strategic alliances provide the firm with more direct

control.

 Emphasize that international strategic partnerships is one good way to develop local

knowledge to gauge market demand. Often, local experts are in a better position to gauge

likely market demand and future trends because they can understand and interpret how

local cultural factors can affect demand issues.

 Remind students that independent agents often act as sales representatives.

QUICK QUESTIONS

 What are licensing arrangements?

 What are some advantages of forming a strategic alliance with another firm?

 How many U.S. multinational companies can you name?

 How many Japanese multinational companies can you name?

 How many European companies can you name?

Learning Objective 4-4:

Explain the role and importance of the cultural environment in international business.

A major factor in the success—or failure—of international business activity is having a deep

understanding of the cultural environment and how it affects business.

A. Values, Symbols, Beliefs, and Language

Cultural values and beliefs are often unspoken; they may even be taken for granted by those

who live in a particular country. Cultural factors do not necessarily cause problems for

B. Employee Behavior across Cultures

Managers in international business have to understand that there are differences in what

motivates people in different cultures. Although it’s impossible to predict exactly how people

from different cultures will react in the workplace, some insights have been developed from

research on individual behaviors and attitudes across different cultures.

1. The first dimension is social orientation. Social orientation is a person’s beliefs about the

2. A second important dimension is power orientation, the beliefs that people in a culture

3. The third basic dimension of individual differences is uncertainty orientation.

4. The fourth dimension of cultural values is goal orientation. In this context, goal

5. A fifth dimension is called time orientation. Time orientation is the extent to which

members of a culture adopt a long-term versus a short-term outlook on work, life, and other

elements of society. A long-term outlook values dedication and hard work, while a short–

term outlook values traditions and social obligations.

HOMEWORK

Now is a good time to assign Application Exercise 10 that asks students to research China and

the five cultural dimensions.

At-Home Completion Time: 30 minutes

Learning Objective 4-5:

Describe some of the ways in which economic, legal, and political differences among

nations affect international business.

Barriers to International Trade

Success in foreign markets includes a firm’s ability to respond to social, cultural, economic,

legal, and political differences.

A. Economic Differences

When trading with different types of economic systems, firms must be aware of the level of

government involvement in a given industry.

B. Legal and Political Differences

Governments can present many trade barriers in international business, including the control

of the flow of capital and the use of tax legislation to encourage or discourage activity in

given industries. They can even confiscate property of foreign-owned companies.

1. Quotas, Tariffs, and Subsidies. A quota restricts the number of products of a certain type

that can be imported into a country, thereby raising the price of those products. The

2. The Protectionism Debate. Protectionism is the practice of protecting domestic business

at the expense of free market competition and is controversial. Supporters argue that tariffs

and quotas protect domestic firms and jobs, whereas critics cite protectionism as a source

of friction between nations and increasing prices through reduction of competition.

3. Local Content Laws. Many countries, including the United States, have local content

laws—requirements that products sold in a particular country are partially made there. This

guarantees that a percentage of the profits remain in that country.

4. Business Practice Laws. Many businesses entering new markets encounter problems in

complying with stringent regulations and bureaucratic obstacles. Such practices are

affected by the business practice laws by which host countries govern business practices

KEY TEACHING TIPS

 Remind students that economic differences can be much more apparent than cultural

differences and focus on the level of involvement of the government in an industry.

 Governments can affect international business in many ways. They can set conditions for

doing business within their borders and even prohibit doing business altogether. They can

control the flow of capital and use tax legislation to discourage or encourage activity in a

given industry. They can even confiscate the property of foreign-owned companies.

 Quotas, tariffs, subsidies, protectionism, local content laws, and business practice laws

are all methods used by governments to influence international business.

QUICK QUESTIONS

 Do you think the United States should impose import quotas on goods made overseas to

protect U.S. jobs?

 How do you feel when another country puts quotas on U.S. exports?

 How might U.S. foreign policy help or hinder the ability of U.S. companies to be

successful in international trade?

Use In-Class Activity 2: Assessing Your Own Culture Discussion

Time Limit: 20 minutes

Students often think of how different other cultures are from the U.S. culture. This discussion

helps students recognize how foreign the U.S. culture really is to business managers from other

countries.