X100 Introduction to Business

1. X100Introduction to Business Global Business in a Global Economy Professor Kenneth EA Wendeln

2. The Basis for International Business Some countries are better equipped than others to produce particular goods or services: Absolute advantage - the ability to produce a specific product more efficiently than any other nation Comparative advantage - the ability to produce a specific product more efficiently than other products International Business – exchanges across national boundaries Goods and services are produced more efficiently when each country SPECIALIZES in the products for which it has a comparative advantage Global Business in a Global Economy

3. Principle of a Nation’s ‘Comparative Advantage’ Nations engage in international trade – because they own resources that enable a nation to produce some goods better & more efficiently than other nations In the past, primary sources of comparative advantage were better access to: • Lower cost Labor Markets • Financial Markets • Technology • Natural Resources • Geographic Areas With ‘Globalization’ - these sources of advantage are becoming less important Global Business in a Global Economy

4. Diminishing ‘Comparative Advantage’ Financial markets are now global With telecommunications & the internet, geographical location per se adds very little value Companies find it relatively easy to bring work to employees, wherever workers live Natural resources can be imported from any location around the world Why ?? Global Business in a Global Economy

5. Artificial Restrictions on International Trade Tariff Barriers Import duty (or tariff) – tax that is levied on products entering the country. Raises the price. Dumping – exportation of large quantities of products at a price lower than same product in home market. Drives down the price. • Non-tariff Barriers • Embargo – complete halt to trading of a product. Often used as a political weapon. • Import quota – limits the amount that may be imported. • Foreign Exchange control – limits amount of foreign currency that can be purchased. Has effect of limiting imports. • Currency devaluation – reduction of the value of nation’s currency. Increases cost of foreign sourced goods. • Bureaucratic ‘Red Tape’ – frustrates trade. Global Business in a Global Economy

6. Reasons for & Against Trade Restrictions √ For Restrictions Balance of Trade Protect Industries Protect Domestic Jobs National Security Health of Citizens Retaliate for another Nation’s Restrictions X Against Restrictions Higher Prices for Consumers Restriction of Consumers’ Choices Misallocations of International Resources Loss of Jobs Since WWII there has been a dedicated & significant reduction in trade restrictions – encouraging more global trade Global Business in a Global Economy

7. GATT – Reductions in Trade Tariffs & Barriers The Kennedy Round (1964-1967) - reduced US tariffs by as much as 50% as a result of the US Trade Expansion Act The Tokyo Round (1973-1979) –approximately 100 nations agreed to tariff cuts of up to 35% implemented over an eight year period starting in 1979 The Uruguay Round (1986-1993) –created the WTO and extended GAAT treaty to include textiles, agricultural products, business services and intellectual property rights The Doha Round (2001 - ????) – goal of further reduction in trade barriers on agriculture and services General Agreement on Tariffs & Trade –originally established in 1947 after WWII. It is now known as the WTO or World Trade Organization, an international organization of 150* nations - dedicated to reducing or eliminating tariffs and other barriers of trade. * As of January 2007 Global Business in a Global Economy

8. International Economic Communities North American Free Trade Agreement (NAFTA) –joined US, Canada & Mexico, its 1st and 2nd largest trading partners. European Union (EU) –“Common Market”. Formed in 1957 by 6 European countries (now 27). Organization of Petroleum Exporting Countries (OPEC) – founded in 1960 to provide 11 major oil-producing countries with some control over crude oil prices. Association of Southeast Asian Nations (ASEA) – created ASEAN Free Trade Area (AFTA) in 1992, currently 10 countries. Organization for Economic Cooperation & Development (OECD) – group of 30 industrialized market economy countries in NA, Europe, the Far East and South Pacific. Organization of nations formed to promote the free movement of resources & products among its members via common economic policies. OECD Website Global Business in a Global Economy

9. The Evolving European Union 27 Countries in 2007 EU + Euro Countries EU only Countries http://ec.europa.eu Global Business in a Global Economy

10. US - Major Trading Partners for Goods Goods EXPORT Shares Goods IMPORT Shares All Others ‘Transition’ 25% Canada 17% Canada 24% All Other ‘Transition’ 38% Mexico 11% Mexico 14% Other OECD 30% Japan 9% Other OECD 25% Japan 7% Source: Federal Reserve Bank of St Louis, National Economic Trends, September 2005 US has a ‘trade deficit’ – Imports > Exports Global Business in a Global Economy

11. Value of US Merchandise Exports & Imports in 2004 Global Business in a Global Economy

12. U.S. International Trade in Goods, 1997 to 2004 Trade Deficit Source: US Department of Commerce, International Trade Administration, September 2005 If a country imports more goods than it exports, the balance of trade is negative, as it was in the US from 1997 to 2004 Global Business in a Global Economy

13. Global Growth Remains Strong Percent growth over prior year Global Growth led by the emerging & developing countries Source: International Monetary Fund, World Economic Outlook, 2005 Global Business in a Global Economy

14. World MerchandiseTrade & Output - 1950 to 2000 } +3% } } +2% +5% Average annual % change in volume (real) terms of all merchandise as measured by GDP. Trade Output }+1% Trade Growth>Output Growth Long-term real growth trend in global trade Source: World Trade Organization (WTO) –International Trade Statistics 2001 Global Business in a Global Economy

15. Globalization . . .. . . In Summary ‘Comparative advantage’ is becoming less & less important Significant reductions in trade tariffs & barriers – encouraged by GATT & WTO Expansion of International Economic Communities – eg NAFTA, EU . . . The world is ‘getting smaller’ with increasing int’l trade as: Globalization is a reality today – International trade has tripled since WWII & now accounts for 21% of global income Global Business in a Global Economy

16. Methods of Entering International Business Low High Degree of Control over Business Int’l Contractual Agreements Trade Arrangements International Direct Investments • Joint Ventures • Totally Owned Facilities • Acquisitions • Subsidiaries • Overseas Divisions • Multinational Companies • Trading Companies • Exporting & Importing • Counter Trade • Foreign Licensing • Franchising • Strategic Alliances • Production Agreements Degree of Financial Risk Low High More control usually means more financial risk Global Business in a Global Economy

17. Trade Arrangements • Trading Companies – buy in one country at the lowest price & sell to customers in another country at a higher price. • Provides a link between buyers & sellers in different countries. • Exporting & Importing – firm manufactures products in home country & exports them for sale in foreign markets. • Can be a relatively low risk method to enter foreign markets. • Export/import merchant – essentially a merchant wholesaler • Exporting agent – receives a commission for arranging transactions • Exporting firm – establishes its own offices in foreign countries • CounterTrade – International barter transaction in which goods & services are exchanged for other goods & services. • Used with countries that have weak currencies or currency controls. Global Business in a Global Economy

18. International Contractual Agreements • Foreign Licensing – contractual agreement to market product or use brand name in return for royalty or other compensation. • Simple method to expand into foreign country with little investment. • Franchising – contractual agreement in which a “franchisee” purchases the right to sell the “franchiser’s” products & use brand names under arrangements agreed in the contract. • Franchisee takes franchiser’s brands & products into franchisee’s local markets. • Strategic Alliances – cooperative ‘partnerships’ formed to share or pool resources to create competitive advantages. • Often used to share technology or penetrate geographic markets. • Production Agreements – subcontracting of manufacturing to foreign firms for lower cost and/or sale into foreign regions. • Some countries & economic communities require ‘local content’. Global Business in a Global Economy

19. International Direct Investment • Joint Ventures – separate entities formed to achieve a common goal & usually for a specific or limited time. • May be used to produce & market an existing product in a foreign country or to develop an entirely new product, technology or process. • Totally Owned Facilities – firm develops its own production & marketing facilities in another country. • Provides greater control but also incurs financial investment risks. • Acquisitions – of a foreign company or facility to provide entre’ into foreign markets. • Subsidiaries – companies acquired or established in foreign countries. • Overseas Divisions – headquartered in foreign countries. • Multinational Corporation (MNC) – a multinational enterprise that operates on a worldwide scale without ties to specific nation or region. • Represents the highest level of involvement in international business. Global Business in a Global Economy

20. Export Strategyto Reach Global Markets Sources of Export Assistance SBA Export Assistance:are federal assistance offices, providing assistance in export marketing & trade finance.http://www.sba.gov International Trade Administration (ITA), US Department of Commerce:offers assistance & information to exporters through its units & links from its web site.http://trade.gov A firm manufactures products in its home country and exports them for sale in foreign markets - usually using an import/export agent, merchant or trading company to ease the export of products into foreign markets. Exporting can be a relatively low-risk method of entering foreign markets. However, it opens up several levels of involvement to the exporting firm and usually requires the specialist assistance of a ‘mutually-trusted’ go-between who can assure that payment is made & merchandise delivered according to the terms of the trade contract. Global Business in a Global Economy

21. Licensing & Franchisingto Reach Global Markets √Advantages Method to expand into a foreign country with little investment. Company can gain additional revenues & profits from products & services that it would not have normally generated domestically. Licensees or Franchisees make the investments and generally work very hard to see that product succeeds in their market. X Disadvantages Usually requires a longer term commitment (up to 20 years). Loss of trade secrets & agreed-upon royalties if licensee breaks agreement. A contractual agreement to use a brand name or to market a product or in return for a royalty or for other compensation. Coca-Cola generates 61% of its revenues & 71% of its operating profits in foreign countries. Many of these sales are the result of licensing agreements in various countries.http://www.cocacola.com Global Business in a Global Economy

22. Joint Venture Strategyto Reach Global Markets √ Advantages May be used to produce & market an existing product in a foreign nation or to develop an entirely new product. A JV with an established firm in a foreign country – provides immediate market knowledge & access, reduced risk and control over product attributes. X Disadvantages JV agreements established across national borders can be extremely complex. Requires a high degree of commitment from all parties involved. A‘partnership’ formed to achieve a specific goal or to operate for a specific period of time. New United Motor Manufacturing, Inc is a pioneering joint venture of General Motors and Toyota. Established in Fremont, CA in 1984, NUMMI helped change the automobile industry by introducing the Toyota Production System and a teamwork-based environment to the US. Today, NUMMI produces the Toyota Corolla, the Toyota Tacoma and the Pontiac Vibe.http://www.nummi.com Global Business in a Global Economy

23. MNCs Multinational Corporations Have become increasingly common over the last two decades, trading more & more value. Tend to develop their strategy over time. Initially, bring their existing products & marketing strategies into emerging markets. Over time develop product & marketing strategies aimed at the specific needs of the emerging markets. Capitalize on global ‘product platforms’ & comparative cost & technology advantages. Global organizational structure & management teams representing MNC’s global diversity. A multinational enterprise that operates on a worldwide scale, without ties to specific nation or region. ABB Ltd is a global leader in power and automation technologies that enable utility and industry customers to improve their performance while lowering their environmental impact. ABB has 160,000 employees in more than 100 countries. ABB was formed in 1988 by the merger of Asea & BBC. http://www.abb.com/ Think Global Act Local Global Business in a Global Economy

24. Examples of the New Global Economy Electronic Commerce Geography does not matter. Country of origin does not matter. Corporate resources do not matter. Contract Manufacturing Services - CMS CMS’s have developed extraordinary levels of efficiency in production. Many of the worlds’ products are no longer manufactured by the owners of brands. Increasingly, companies are focusing on product design, marketing, promotion & customer service. CMS’s are responsible for production, support & logistics. Contract manufactures can operate anywhere in the world since production and sales are no longer linked. http://www.sanmina.com/ Global Business in a Global Economy

25. X100 Global Business in a Global Economy Global Business in a Global Economy L2-25