Week 4: Global Business
What is currency depreciation?
A decrease in the exchange rate value of a nation's currency, has the opposite effect on the relative prices of exports and imports. A weak currency causes exports to become cheaper and imports to become more expensive.
What is near-shoring?
A form of offshoring in which a company moves jobs to a foreign location geographically close or linguistically and culturally similar to its own country.
What are the economic benefits to free trade?
A greater quality and variety of higher-quality products at lower prices
What is currency appreciation?
An increase in the exchange rate value of a nation's currency, causes the relative price of imports to fall as the relative price of exports rise.
What is globalization?
An interconnected and interdependent world economy
What is importing?
Buying products from other countries
Why is cheap foreign labour an argument in favour of protectionist trade barriers?
Centres on the sometimes significantly lower wages paid to workers of foreign companies. How can domestic companies compete with these low wages.?
What are the 6 options for companies entering foreign markets?
Companies may: 1. Export their product 2. Implement a turnkey project 3. Undertake franchising 4. Enter into a licensing agreement. a joint venture, or a strategic alliance 5. Undertake contract manufacturing 6. Establish a wholly owned a subsidiary
What are some economic factors and and challenges?
Deficits and Surpluses - Trade deficits - Trade surpluses Exchange Rate Systems - Fixed - Flexible (or floating) Nonconvertible Currency and Countertrade
What are the 3 strategies for international business?
Global Multidomestic Transnational
What are 2 types of globalization?
Globalization of markets Globalization of production
What are the economic benefits to protectionism?
Increased sales at higher prices improves the profitability of the protected of the protected domestic companies, creating greater job security for their workers.
Why is infant industry an argument in favour of protectionist trade barriers?
Infant Industry - An undeveloped domestic industry needs time to grow and develop in order to acquire a comparative advantage in the global economy.
What are the economic costs to protectionism?
Lower quantity and variety of lower-quality products at higher prices internationally which reduces their profitability and lowers job security for their workers.
What is offshoring?
Movement of production or other functions from a domestic site to a foreign location
What are the arguments in favour of protectionist trade barriers
National security Infant Industry Cheap foreign labour Threat of retaliation
Why is national security an argument in favour of protectionist trade barriers?
National security - Certain industries critical to national security should be protected from foreign company
What are the 3 main types of challenges?
Political, legal, ethical challenges
What are the economic costs of free trade?
Reduced sales and lower prices for domestic firms that find it difficult to compete
Why is threat of retaliation an argument in favour of protectionist trade barriers?
Says that if a trading partner increases its trade barriers on your exports, or fails to reduce trade barriers as you reduce yours, then an uneven, unfair playing field is created.
What is exporting?
Selling domestically produced products to other countries
What is dumping?
Selling product for less than is charged in producing country.
What is a comparative advantage?
A country's ability to produce more of a good or service than any other country
What is the global strategy for international business?
- Standerdized product - Competing on price
What is the World Trade Organization (WTO)?
- 152 member countries - Arbitrates global trade disputes - Has power to enforce decisions
What are the Regional Trade Agreements in the European Union?
- 1957: European Economic Community - 28 member countries - Oldest and largest free trade area - 1/3 of the world's production - Largest exporter/second largest importer
What does APEC (Asia-Pacific Economic Cooperation) compose of?
- 21 member countries - The member of economies of APEC account for: - Approximately 40 percent of the world's population - Approximately 55 percent of the world GDP - About 44 percent of world trade
What are cultural challenges?
- Aesthetics - Attitudes toward time and work - Religion - Language
What does MERCOSUR compose of?
- Brazil, Argentina, Paraguay, Uruguay, Venezuela - Bolivia is in the process of becoming a full member. Chile, Ecuador, Colombia, Peru are associated states.
What are advantages of franchising when entering?
- Costs and risks of opening the foreign market fall on the franchise
What is the General Agreement on Tariffs and Trade (GATT)
- Created in 1948 with 23 member nations - Negotiated international trade treaties - Replaced by the WTO in 1995
What is culture?
- Cross-cultural awareness - Ethnocentrism
What is the multidomestic strategy for international business?
- Custom products to meet unique local needs - Price considerations are secondary
What is the transnational strategy for international business?
- Customized product - Lowest price possible
What are disadvantages of franchising when entering?
- Difficulty in maintaining quality control over distant franchises
What is the North American Free Trade Agreement (NAFTA)?
- Free trade agreement between the United States, Mexico, and Canada - Established on January 1st, 1994 - Exaggerated claims - Proposal: Free Trade Area of the Americas (FTAA)
What are 4 international organizations promoting free trade
- General Agreement on Tariffs and Trade (GATT) - World Trade Organization (WTO) - World Bank - International Monetary Fund (IMF)
What are 3 other economic challenges to conducting international business?
- Growth and development - Government policies and the economic environment - Socioeconomic factors
What are advantages of joint venture when entering?
- High potential for learning - Benefit of combined resources
What are disadvantages of exporting when entering?
- High transport costs - Threat of trade barriers such as tariffs - Lack of access to local information
What are the benefits of international trade?
- Higher standard of living - Greater variety of higher-quality products - Increased competition associated with more open trade
What are advantages of a Turnkey project when entering?
- Increased profits for high-tech firms
What does ASEAN (Association of Southeast Asian Nations) compose of?
- Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunel, Vietnam, Laos, Myanmar, and Cambodia
What are disadvantages of contract manufacturing when entering?
- Lack of quality control over distant subcontractor
What are disadvantages of licensing when entering?
- Licensee may become competitor - Loss of knowledge to potential competitor
What are disadvantages of a turnkey project when entering?
- Loss of technical know-how to potential competitors
What are some other regional free trade areas?
- MERCOSUR - ASEAN (Association of Southeast Asian Nations) - APEC (Asia-Pacific Economic Cooperation)
What are advantages of strategic alliance when entering?
- Pooled talents and expertise - Shared costs and risks
What is the International Monetary Fund (IMF)
- Promotes trade through financial cooperation - Makes short-term emergency loans to member nations and operates as a lender of last resort for troubled nations
What are disadvantages of strategic alliance when entering?
- Risk of losing specialized technology to partner - Difficulty in finding a compatible partner
What are disadvantages of wholly owned subsidiary when entering?
- Risks and costs of entering a foreign market
What are disadvantages of joint venture when entering?
- Shared control of business - Risk of losing specialized technology to find partner
What are advantages of licensing when entering?
- Speed of entry
What are advantages of exporting when entering?
- Speed of entry - Production site in lowest-cost location
What are advantages of contract manufacturing when entering?
- Speed of entry - Low test-marketing costs
What are the "Regional Trade Agreements: Comprehensive Economic and Trade Agreement (CETA)"?
- Tentative free trade agreement between Canada and the European Union. (Ratification expected 2015) - The agreement will give Canada preferential market access to the European Union - It will remove 98 percent of EU tarrifs on wide range of seafood, metals, and mineral products - This deal would also impact Canadian automobile exporters, allowing them greater exports to new and larger markets.
What are the costs of international trade?
- Threat to domestic businesses and their workers - Domestic businesses may lose market share to foreign companies - Uncompetitive are driven out of business
What are advantages of wholly owned subsidiary when entering?
- Total control over all operations - Preservation of proprietary technology
What do successful firms do when competitiveness increases?
- Try to gain access to cheap raw materials - Invest in their workers' training - Purchase state-of-the-art capital (plant and equipment) - Invest in cutting-edge technology in their research and development (R&D) departments - Promote innovativeness throughout their organizations
What are 2 factors towards the rapid acceleration of globalization?
1. Decline in trade and investment barriers 2. Technological innovations - Communications - Transportation - Information technology
What are 4 global business trends?
1. Growing role for developing nations 2. Increase in non-U.S. foreign direct investment 3. Rise in multinational enterprises 4. Increasing democratization
What is outsourcing?
The assignment of certain tasks, such as production or accounting, to an outside company or organization.
What are exchange rates?
The rates at which currencies are converted into another currency
What are some arguments against protectionist trade barriers?
Trade barriers benefit domestic producers and their workers but hurt domestic consumers Educate displaced individuals so they may move into a line of business with comparative advantage and rising demand
