Forms of Business Organization

Forms of Business Organization

Sole Proprietorship

• A sole proprietorship is a business owned by one person.

• Three elements are needed: a product or service to sell, money for start-up expenses, and the knowledge to manage the business.

• Advantages include ease of starting, freedom in decision making, retention of all profits, and pride of ownership.

• Disadvantages include limited funding sources, long working hours, unlimited risks, and a limited business life.

Corporation

• Corporations account for nearly 90% of sales in the United States, despite sole proprietorships being more common.

• Corporations raise money by selling stock, with stock certificates representing ownership, and owners are called stockholders/shareholders.

• Stockholders have the right to earn dividends, vote on company policies, and indirectly control company management; each share typically equals one vote.

• The board of directors hires managers to run the company.

• Corporations can act as a legal entity, unlike sole proprietorships and partnerships.

• Advantages include more funding sources, fixed financial liability for owners, specialized management, and an unlimited lifespan for the company.

• Disadvantages include a difficult creation process, limited control for owners, and double taxation.

Other Forms of Organization for Internationalization

• Municipal corporations are incorporated towns or cities providing services for citizens, sometimes engaging in partnerships internationally for goods, services, and cultural exchanges.
• Nonprofit corporations provide a service without concern for profit; these include churches, hospitals, private colleges/universities, and charities.
• Cooperatives are businesses owned and operated for the benefit of their members, and consumer cooperatives may form within communities or places of worship.

Multinational Companies (MNCs)

• Multinational companies (MNCs) operate in several countries and are also known as global, transnational, or worldwide companies.
• MNCs usually have a parent company in a home country and divisions/companies in one or more host countries.
• MNCs view the entire world as their potential market and seek product ideas through foreign subsidiaries while obtaining raw materials globally.
• MNCs standardize products to cater to market similarities.
• Their hiring policies involve consistent hiring while being culturally sensitive to host countries, companies recruit managers internationally instead of just countries of orgin.
• They distribute, price, and promote with both an international and local perspective.

Methods of International Business Involvement

• There are eight main ways for companies to engage in international business.
• As a firm moves up the steps, it has both more control and more risk with its foreign business activities.

Indirect Exporting

• This process occurs when a company sells products in a foreign market without intentional effort.
• It is also known as 'casual' or 'accidental' exporting.
• Agents and brokers connect sellers and buyers, making it a low-cost, low-risk method.

Direct Exporting

• It happens when a company actively seeks and conducts exporting, forming its own exporting department.
• While more costly than indirect exporting, it gives the company more control.

Management Contracting

• Companies sell only their management skills.
• The risk is low, allowing managers to leave if the business environment becomes too risky.
• Contract manufacturing is a variation.

Licensing

• Selling the right to use intangible property for a fee or royalty.
• It has a low monetary investment, resulting in low potential financial return, but also low risk.

Franchising

• Grants the right to use a company name or business process.
• Organizations set up businesses in other countries to operate like the parent company.
• Franchise agreements are popular with fast-food companies.
• Companies will adapt to cultural sensitivities and meet legal requirements with marketing.
• Both franchising and licensing require a royalty payment for the right to use a famous name or process.
• Licensing usually involves a manufacturing process; franchising typically involves selling a product or service.

Joint Ventures

• A joint venture refers to an agreement between two or more companies from different countries to share a business project.
• Joint ventures share raw materials, shipping and production facilities, and management activities.
• They can share costs, risks, and profits in any combination.

Foreign Direct Investment (FDI)

• Foreign direct investment (FDI) occurs when a company buys land or other resources in another country.
• Purchases of real estate and existing companies are examples of FDI.
• A wholly-owned subsidiary is an independent company owned by a parent company as a result of FDI, as is the case for many multinational companies.
• To prevent economic control, nations may limit the percentage of a company that can be owned by a foreign investor.

Importance of Importing

• Imports are services or products bought by a company or government from businesses in other countries.
• A company gets involved in importing due to consumer demand, lower costs, or the need for foreign-made parts in domestic manufacturing.
• The U.S. Customs Department of the Treasury provides information on import regulations.

Exporting

• Companies commonly export goods or services to companies in other countries.
• Exporting activities are the opposite side of importing transaction.
• Indirect exporting occurs when a company sells its products without actively seeking opportunities. It goes another way when a business will conduct direct exporting so they can actively seek export opporutnities

Process of Exporting

• Find buyers with trade leads for international businesses.

• Determine if the product/service is suitable for people in other countries.

• Standardized products are sold the same worldwide.

• Every business transaction will involve shipping and payment terms.

• After sales agreements, finished goods are shipped.

• Free on board (FOB) means the price includes loading the exported goods onto transport vessels.

• Cost, insurance, and freight (CIF) means that the price also includes the cost of the goods, insurance, and freight.

• Cost and freight (C&F) indicates that the price includes the cost of the goods and freight, but the buyer has to pay the insurance separetly.

• A freight forwarder arranges to ship goods to customers.

• A bill of lading confirms the agreement between the exporter and the transportation company.

• A certificate of origin states the country in which the goods were produced.

• Financial institutions process the currency conversion and the payment.

The Economic Effect of Foreign Trade

• Balance of trade is the difference between a country's exports and imports.

• Balance of payments is the total flow of money coming into a country minus the total flow going out.

• A positive/favorable balance of payments means more money comes into a nation than it pays out in a year.

• A negative balance of payments is unfavorable and happens when a country sends more money out than it brings in.

Trade Agreements

• Aimed at promoting economic development, trade agreements can be between countries worldwide or in a geographic regions while they can also be individual nations and companies reach agreements encouraging international business activities.

The World Trade Organization

• After World War II, leaders created the General Agreement on Tariffs and Trade (GATT) in 1947 to guide international trade.
• Multi-country agreements reduce trade barriers and promote trade to increase global eco growth.
• As of 1995, GATT was replaced by the World Trade Organization (WTO), with over 140 member countries.
• WTO can settle trade disputes and enforce free-trade agreements across its members.
• Based in Geneva, Switzerland, it's several main goals are: lowering tariffs, eliminating import quotas, subsidies, and unfair technical standards, recognizing protection for patents, copyrights, trademarks, and other intellectual properties, reducing barriers for banks, insurance companies, and other financial services, and assiting poor countries with trade policies and economic growth.

Economic Communities

• An economic community is an organization of countries allowing the free flow of products and known as a common market.
• Examples: the European Union (EU), Latin American Free Trade Association (LAFTA), the Association of Southeast Asian Nations (ASEAN), the Economic Community of West African States (ECOWAS), and the North American Free Trade Agreement (NAFTA).

Free-Trade Zones

• A free-trade zone is an area designated by a government for duty-free entry of non-prohibited goods and are located at a point of entry into a nation, such as a harbor or an airport.
• Imposed Duties or import taxes are imposed on the goods when the items pass from the free-trade zone into an area of the country subject to customs.

International Business Competition

• Companies compete in the domestic market, consisting of companies selling similar products within the same country, and the international market, which is made up of companies that compete against companies in several countries.
• Factors affecting competition are number of companies, business costs, and product difference.

Types of Competitive Situations

• Pure competition is a market situation with many sellers, each offering the same product.
• Monopolistic competition is a market situation with many sellers, each with a similar product.
• Oligopoly is when a few large companies control an industry.
• Monopoly is a situation in which one seller controls the entire market for a product or service