Business & Economics Basics - Part III: Business in a Global Environment

© 2012 by Theocharis Vagelis

Continuing the "Business & Economics Basics" series and following Business & Economics Basics - Part I: Fundamentals of Business Dynamics and

Business & Economics Basics - Part II: Fundamentals of Business Ethics & Social Responsibility, this Hub is trying to give an insight to the concepts of nowadays Global Business Environment.

Our main learning goals are the following:

• Explore some factors within the international trade environment that influence business
• Investigate some of the barriers to international business
• Specify some of the agreements and alliances that encourage trade across international boundaries.

It is a fact that we are currently in a globalized business environment. The current key world is “Globalization”. Globalization is the process of making something worldwide in scope or application (Theocharis V, 2011). Most large and well known corporations follow Global Strategies. By Global Strategy we mean “a strategy that focuses on improving worldwide performance through the sales and marketing of common goods and services with minimum product variation by country. Its competitive advantage grows through selecting the best locations for operations in other countries” (Theocharis V, 2011).

Therefore an international Business is buying, selling, and trading goods and services across national boundaries. At the same time, nations themselves are engaged into trading with other nations and businesses.

Nations and businesses engage in trade to: a) obtain otherwise unavailable raw materials, goods and services, b) obtain raw materials, goods and services at a better price, c) sell surplus materials or goods in order to acquire funds.

International trading has enhanced the business market for many business owners and corporations, whilst it provides additional economic activity to many nations, thus providing decreased reliance on their own domestic market place.

In a Global business environment there are various nations that may have an “Absolute Advantage”. According to “MBA Terms and Glossary” (Theocharis V, 2011) a country has an absolute advantage over another country in the production of a good if it can produce that good more efficiently (with fewer inputs). Furthermore, a country has a Comparative Advantage over another country in one good as opposed to another good if its relative efficiency in the production of the first good is higher than the other country’s (Theocharis V, 2011). The same applies to businesses. For instance DeBeers Consolidated Mines Ltd has an Absolute Advantage as it virtually controls the world’s diamond trade.

The International Factors that may or may not provide absolute or comparative advantages are the following:

Human resources

• Price
• Availability
• Technology and Know-how

Natural resources

• Price
• Availability

Capital

• Regulatory conditions
• Economic conditions
• A healthy business climate may provide expansive capital possibilities

Entrepreneurship

• Rotating business cycle
• Spread of risk

International Market Size
The size of the global market place alone is significant for business growth and development. Approximately 20% of the world population (more than 6.2 billion people) lives in relatively well developed countries.

Another categorization of International Factors that Provide Advantage has been made by Michael Porter. Porter developed a somehow different economic model called "Diamond Model". The Model classifies the following 6 factors:

• Factor Conditions: Human Resources, Physical Resources, Knowledge Resources, Capital and Infrastructure.
• Demand Conditions
• Related and Supporting Industries
• Firm Strategy, Structure and Rivalry
• Government
• Chance

The gap between the developed and developing nations is closing (at least before the current economic and financial crisis). It is a fact that while size is a drawing factor, purchasing power is also required.

The International Market is “fed” via importing and exporting. Exporting is the sale of goods and services to foreign markets and importing is the purchase of goods and services from foreign sources (Theocharis V, 2011)

The relationship between a country’s exports and imports (difference in money value) is called Balance of Trade. If a country’s exports are more than its imports, it achieves a favorable balance of trade (trade surplus) and vice versa (trade deficit).

For example, in the case of my mother country, Greece, the trade deficit that was recorded the 9 first months of 2011 - according to Eurostat - reached 13.2 billion euros . As it was calculated by Eurostat, even though Greece did not achieve a favourable balance of trade, Greek exports increased by 42%, compared to the same period of 2010, whilst Greek imports decreased by 20%. As a result the Nations trade deficit declined 25.1 billion euros (2010) to 13.2 billion euros (2011). For the same period (first 9 months of 2011), in the EU, the greatest trade surplus was achieved by Germany (117, 9 billion euros), followed by that of the Netherlands (32.8 billion euros). The highest trade deficit occurred in Great Britain (88.1 billion euros), followed by France (65.8 billion euros), Spain (36.7 billion euros), Italy (23.1 billion euros) and Greece (13.2 billion euros).

Balance of Trade also affects Balance of Payments. Balance of Payments is the overall flow of money into and out of a country (Theocharis V, 2011). Other factors that affect the Balance of Payments are the following:

• Overseas borrowing
• International investments
• Profits from international investments
• Money gained from tourists
• Foreign aid, etc.

Trade between nations is measured by evaluating Infrastructure and Exchange Rates:

• Infrastructure – the physical facilities that support a country’s economic activities (roads, ports, airfields, public utilities, etc.)
• Exchange Rate – the rate at which a nation’s currency can be exchanged for the currencies of other nations.

The Barriers to Global Business are divided into the following categories:

A. Economic Differences

1. Country size
2. Income/per capita
3. Stage of economic development and Infrastructure
4. Exchange rate
5. Currency stability

B. Laws and Regulations

1. Local law
2. Laws of the nation(s) traded with
3. International Regulations

C. Political environment

1. Government Stability
2. Political Regime and Life Cycle
3. Trade restrictions
4. History

D. Tariffs and Trade Restrictions

1. Import tariffs(Theocharis V, 2011)

• Fixed tariff: A specific amount of money levied on each unit of product brought into the country.
• Ad valorem tariff: Tariff is based on the value of the item.
• Revenue tariff: Designed to raise funds for the government.
• Protective tariff: designed to raise the retail price of an imported good to help local firms compete price-wise.

2. Types of Trade Restrictions:

• Quotas: sets the limit on the number of certain products that can be imported
• Embargo: total ban on imported or exported products
• Exchange controls: restrict the amount of currency that can be bought or sold (Theocharis V, 2011).

A common reason for setting quotas is to prohibit dumping. Dumping is when a company sells products at below production-cost prices or a company exports a large quantity of a product at a lower price than the same product in the home market in order to drive down prices of the domestic product (Theocharis V, 2011).

E. Physical Barriers

• Geographic location
• Different time zones

F. Technological barriers

• Lack of technological infrastructures can be viewed as a barrier (or for some an opportunity).

G. Social and Cultural Differences

• Language
• Customs
• Educational background
• Religion
• Social values and ethics

Organizations that try to influence free trade include among others:

• World Trade Organization
• World Bank
• International Monetary Fund, etc

General Agreement on Tariffs and Trade (GATT)

GATT was negotiated during the UN Conference on Trade and Employment. It was the outcome of the failure to create teh International Trade Organization (ITO). GATT was signed in 1947 and was replaced by the World Trade Organization (WTO) in 1995. GATT is a trade agreement that provides a forum for tariff negotiations and a place where international trade problems can be discussed.

North American Free Trade Agreement (NAFTA)
NAFTA agreement eliminates almost all tariffs and trade restrictions on agricultural and manufactured products between Canada, Mexico, and the United states of America. U.S. (1994-2009).

Major World Markets

The major markets of the world are the following:

• Western Europe: The combined GDP (Gross Domestic Product) is comparable to that of the U.S.A.
• European Union: Prior to 2008 the E.U. had solidified its importance and strength as a market
• Latin America: Mercosur (or Mercosul) is an economic and political agreement among Latine America countries. Its largest trading partner is the United States
• Pacific Rim
• APEC (Asian Pacific Economic Cooperation): It is a forum of 21 Pacific Rim countries that seeks to rpomote free trade throughout the Asia-Pacific region.
• North America
• NAFTA – U.S.A, Canada & Mexico(see above)

Licensing/Franchising

• International Licensing: An arrangement whereby a foreign licensee buys the rights to produce a company's product in the licensee's country for a negotiated fee (normally, royalty payments on the number of units sold) (Theocharis V, 2011).
• Franchising: A strategy whereby the parent company (franchiser) grants the franchisee the right to use the parent's name, reputation, and business skills at a particular location or area; a specialized form of licensing in which the franchiser sells intangible property (i.e., a trademark) to the franchisee, but also insists that the franchisee agree to abide by rules as to how it does business (Theocharis V, 2011).

Contract Manufacturing
Occurs when a foreign company produces a specified volume of a firm’s product to specifications but uses the local firm’s name on the final product (Theocharis V, 2011).

Joint Ventures and Alliances
Joint venture: A vehicle companies use to enter and develop new business areas involving the establishment of a new business with the assistance of a partner (Theocharis V, 2011).

Strategic Alliance: Business relationship in which two or more independent organizations cooperate and willingly modify their business objectives and practices to help achieve long-term goals and objectives (Theocharis V, 2011).

Direct Investment

• Ownership of overseas facilities
• Outsourcing manufacturing or other activities/tasks to "cheap" countries

Multinational Corporation
Company that operates on a global scale, without significant ties to any one nation. It represents the highest level of international business involvement (i.e. Toyota, Honda, Budweiser, McDonalds, Coca Cola, Pepsico, Nike, Nissan, Carrefour, Makro, etc)

Developing a Strategy for Global Business

• Global Strategy: A strategy that focuses on improving worldwide performance through the sales and marketing of common goods and services with minimum product variation by country. Its competitive advantage grows through selecting the best locations for operations in other countries (Theocharis V, 2011).
• Multidomestic Business Strategy: the firm treats each national market in a different way.

Multinational Corporation create wealth and jobs all around the world. Investment from multinational companies may offer much needed foreign currency - especially by developing and underdeveloped countries. Furthermore, Multinational Corporations benefit from economies of scale as they have what is called "critical mass". This simply means that they can benefit from low unit cost production, thus offer high quality products and/or services at a low price. Moreover, Multinational Corporations have the money and resources to invest in R&D. This may mean that the world can benefit from the supply of innovative, high quality products and/or services, such as pharmaceutical drugs, medical services, green energy, food and many more.

However, there are a lot of criticisms.

Multinational Corporations are often interested in profit over people. In some cases, corporations have aggressively supported regimes that are favourable to them. This is less practical today as companies are interested in their public image. Nowadays, most coporations are financing Corporate Social Responsibility (CSR) Projects with millions and millions of dollars. owever, it is a fact that some Corporations have supported military interventions (especially in Africa), pushed favourable economic policies and imposed foreign investment treaties that were at the expense of local businesses.

Moreover, there is a current downward pressure from Multinationals on workers' wages. Many multinationals seek and encourage the formation of "export processing zones" in underdeveloped and developing countries, which end up being zones where workers' rights are dramatically reduced (i.e. China, Egypt, South africa, Latvia, etc).

Globalization: Good or Bad?

It is a fact that - sadly - globalisation has not aided the poor and has failed to rid the world of poverty. We expected a Globalized business environment to act as a force for development. Globalization has promised but not delivered - up to date -. The GDP gap as well as the Income per Capita gap between rich and poor countries has increased dramatically.

Some economic theorists claim that this is because not all countries have gotten rid of their protectionist measures.They claim that if all countries (rich industrialized, developing and underdeveloped) got rid of all their protectionist measures, everyone would benefit from the consequent increase in international trade.

Other economic theorists respond to the above argument by presenting examples of countries which followed the above "philosophy" and got destroyed. For instance, many countries followed the Chicago School Free-Market Model (Argentina, Brazil, Ecuador, Greece, Latvia, Poland, etc) and they have failed to see any benefits. It must be noted that even American corporations were protected from foreign competition in the 19th century. More recent examples include South Korea, Japan and Russia under Putin.

Furthermore, it seems that the unwanted effects of globalization affect the poorer countries, increasing inequalities and income per capita gap. It seems that, sadly, the power of the global financial markets affect the sovereignty of countries by limiting:

• governments' ability to determine tax rate policies
• governments' ability to determine exchange rate policies
• governments' ability to impose necessary regulations on companies' behaviour.

Last but least, an ethical issue rises. Multilateral organisations such as the IMF, the World Bank and the World Trade Organisation, are not elected by any country's voters, by any country's population.
So, is globalization good or bad? There are always two sides of a coin and the final conclusion is yours.

Business & Economics Basics - Part I: Fundamentals of Business Dynamics

Business & Economics Basics - Part II: Fundamentals of Business Ethics & Social Responsibility

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