Business Chapter 4
Lesson 4.1: The Contemporary Global Economy
Globalization: Process by which the world economy is becoming a single interdependent
system
Import: Product made or grown abroad but sold domestically
Export: Product made or grown domestically but shipped and sold abroad
International markets o er signi cant growth opportunities for rms like McDonald’s, Microsoft,
Apple, and Starbucks.
However, expanding abroad can be challenging. Home Depot and Best Buy failed in China
due to cultural and economic di erences: Home Depot struggled with low demand for DIY(do-
it yourself) projects, and Best Buy faced competition from cheaper local and online stores.
Globalization also impacts small rms that do not operate internationally. These rms are
impacted because they may still buy from international suppliers or individuals can be a ected
by uctuations in exchange rates.
International Trade is becoming very important to most nations and their businesses, so many
countries are opening borders to foreign businesses, o ering incentives for domestic
businesses to expand internationally, and making it easier for foreign rms to partner with local
rms. As more industries and markets become global, so, too, are the rms that compete in
them.
Advantages of Globalization:
- Higher standard of living
- Improved business pro tability
- International travel, communication, and commerce is faster and cheaper than ever before.
Disadvantages of Globalization:
- Businesses can exploit workers in less developed countries and bypass domestic
environmental and tax regulations. Example: businesses pay workers in Vietnam and
Indonesia lower wages than in the United States.
- The loss of cultural heritages and often bene ts more the rich than the poor. Example: the
English language becomes increasingly widespread throughout the world, some local
languages are disappearing.
Distinctions Based on Wealth:
The World Bank (agency of the United Nations) classi es four di erent categories using the per
capita income, to make distinctions among countries.
1 High-income countries: Those with annual per capita income of $12,055 or more.
2 Upper-middle-income countries: Those with annual per capita income of less than $12,055
but more than $3,896
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3 Lower-middle-income countries: Those with annual per capita income of $3,896 or lower but
more than $996
4 Low-income countries (often called developing countries): Those with annual per capita
income of $996 or less
The world economy revolves around 3 major marketplaces which include the majority of the
upper-middle-and high-income nations:
1. North America
- The world’s largest marketplace and most stable economy
- The United States dominates the North American market.
- The United States and Canada are among each other’s largest trading partners.
- Mexico is a major manufacturing center, especially close to the US border, because of its
cheap labor and low transportation costs compared to the other North American Countries.
This has encouraged many businesses from the United States and other countries to build
factories in Mexico
2. Europe
- Europe is divided in two regions: Western and Eastern.
- Western Europe is dominated by Germany, the United Kingdom, and France.
- This region has been transformed by the European Union into an integrated economic
system that has further increased its importance.
- Example of Businesses: Online start-ups in southeast England, the Netherlands, and the
Scandinavian countries. Barcelona, Spain, has many ourishing software and online
companies
- Eastern Europe: Was previously a communist region.
- Has gained importance as a marketplace, and as a producer.
- Example of Businesses: Multinational corporations have set up operation in Poland
(General Motors and Nestlé); Car Factories in Hungary (Ford, Volkswagen).
- In contrast, governmental instability and corruption have harmed development in parts of
Russia, Bulgaria, and other counties.
3. Paci c Asia
- Consists of Japan, China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan,
Vietnam, the Philippines, and Australia.
- The economies of these countries grew rapidly in the 70’s and 80’s.
- All of these countries were a ected by the COVID-19 Pandemic, specially China.
- Examples of Businesses/large rms: Toyota and Toshiba (Japan), Samsung and Hyundai
(South Korea); Hong Kong is a major nancial center.
Trade Agreements and Alliances
A treaty is a legal agreement that speci es areas in which nations will cooper-ate with one
another.
- Among the most signi cant treaties are the North American Free Trade Agreement (NAFTA),
The European Union, the Association of Southeast Asian Nations, and the World Trade
Organization
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NAFTA: Signed in 1994, signed in 1994, removed most tari s and other trade barriers among
the United States, Canada, and Mexico; it also included agreements on environmental issues
and labor abuses. It created many new jobs.
President Donald Trump in 2018 pushed to replace NAFTA with the United States–Mexico–
Canada Agreement (USMCA), which is intended to promote trade, among the three nations.
The USMCA will eventually replace NAFTA, but this process will take at least a few years to
fully complete.
European Union: Agreement among major European nations to eliminate or make uniform
most trade barriers a ecting group members. They adopted a common currency, the Euro.
Association of Southeast Asian Nations (ASEAN): organization for economic, political, social,
and cultural cooperation among Southeast Asian nations
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World Trade Organization:
- The General Agreement on Tari s and Trade (GATT) was signed in 1947. Its purpose was to
reduce or eliminate trade barriers, such as tari s and quotas.
- To further promote globalization, most of the world’s countries joined to create the World
Trade Organization (WTO), which began on January 1, 1995.
- The 164 member countries (and an additional 23 observer countries) are required to open
markets to international trade.
- The World Trade Organization is empowered to: Promote trade by encouraging members to
adopt fair-trade practices, reduce trade barriers by promoting multilateral negotiations, and
to establish fair procedures for resolving disputes among members.
4.2 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. (Balance of trade = Exports -
Imports)
- A positive balance of trade results when a country exports (sells to other countries) more
than it imports (buys from other countries).
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- A negative balance of trade results when a country imports more than it exports.
- The biggest concern about trade balances involves the ow of currency.
- A trade de cit occurs when a country’s imports exceed its exports, when it has a negative
balance of trade.
- When exports exceed imports, the nation enjoys a trade surplus.
- Several factors, such as general economic conditions and the e ect of trade agreements,
in uence trade de cits and surpluses.
The balance of payments refers to the ow of money into or out of a country. The money that a
country pays for imports and receives for exports, its balance of trade, accounts for much of its
balance of payments.
Money spent by tourists in a country, money spent by a country on foreign-aid programs, and
money exchanged by buying and selling currency on international money markets a ect the
balance of payments.
- An exchange rate is the rate at which the currency of one nation can be exchanged for that
of another. (Example 1 dollar = 157 yen)
- Fixed exchange rate is when the value of any country’s currency relative to that of another
would remain constant.
- In the present day, oating exchange rates are the norm, and the value of one country’s
currency relative to that of another varies with market conditions.
- A currency is strong when demand for it is high. It’s also strong when there’s high demand
for the goods manufactured with that currency.
Euro: Common Currency of the European Union (and Denmark, Sweden, and the United
Kingdom) introduced in 2002.
Forms of Competitive Advantage
Absolute Advantage: exists when a country can produce something that is cheaper or of higher
quality than any other country. (Example: Saudi Arabian Oil, Brazilian Co ee Beans).
Comparative Advantage: the ability to produce some products more e ciently than others.
(Example: Japan has comparative advantages in the high-tech industry).
National Absolute Competition derives from four conditions:
1. Factor Conditions (factors of production)
2. Demand Conditions
3. Related and supporting industries (regional suppliers or industrial customers)
4. Strategies, structures, and rivalries.
4.3 INTERNATIONAL BUSINESS MANAGEMENT
If a rm wants to go international there are many factors it must consider rst:
- A company must determine whether its products are in demand abroad. Products that are
successful in one country may be useless in another.
- Even when there is demand, advertising and promotion may still need to be adjusted.
- Market research or the prior market entry of competitors may indicate whether there’s an
international demand for a rm’s products.
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- A rm must adapt to customer needs depending on the foreign country whether and how to
adapt it to meet their special demands. (Example: McDonald’s sells baguettes in France and
beer in Germany.)
- Outsourcing is the practice of paying suppliers and distributors to perform certain business
processes or to provide needed materials or services, has become a popular option for
going international. it reduces costs by locating certain business functions in areas where
relevant costs are low.
- O shoring is the practice of outsourcing to foreign countries
Levels of International Involvement
1. Exporters and Importers: An exporter makes products in one country to distribute and sell
in others. An importer buys products in foreign markets and brings them home for resale.
- Both conduct most of their business in their home nations.
- Lowest level of involvement
- Most import-export transactions involve both activities (French Wine was sold in New York. It
was exported from France, and Imported by a US wine distributor)
2. International Firms: rm that conducts a signi cant portion of its business in foreign
countries.
- May maintain overseas manufacturing facilities
- It’s a domestic company with international operations.
- Examples: Boeing, Subway, New Balance.
3. Multinational Firms: Firm that has multiple operations that design, produce, and markets
products in many nations.
- Have a huge economic impact.
- Highest level of involvement.
- Examples: Nestlé, Coca Cola, and Toyota.
International Organization Structures
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1. Independent Agents: Is an individual or organization that represents an exporter in foreign
markets. They are also called sales representatives.
- They sell the exporter’s products, collect payment, and make sure that customers are
satis ed.
- They often represent several rms at once.
2. Licensing Arrangements: Is a contract under which one rm allows another to use its brand
name, operating procedures, or proprietary technology.
- Firms give individuals or companies exclusive rights to make or promote their products in
that market. In return, the exporter receives a fee (money) plus ongoing payments (royalties)
that are calculated as a percentage of the license holder’s sales.
- Franchising is an example of licensing.
3. Branch O ces: Foreign o ce set up by an international or multinational rm.
- A rm may send its own managers to overseas branch o ces, where the rm has more
direct control than it does over independent agents or license holders.
4. Strategic Alliances: A company nds a partner in the country in which it wants to do
business.
- Each party agrees to invest resources and capital into a new business or to cooperate in
some mutually bene cial way.
- The new formed business divide its pro ts between the two partners.
- Example: Nestlé and General Mills have a global joint venture called Cereal Partners
Worldwide, or CPW. General Mills provided brand recognition and propriety cereal
processing techniques, and Nestlé provided global distribution channels and marketing
expertise. Today CPW markets cereals and other breakfast foods in over 130 countries.
5. Foreign Direct Investment (FDI): Arrangement in which a rm buys or establishes tangible
assets in another country.
- Example: Coca-Cola has built bottling plants in dozens of di erent countries (Including
Panama.)
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