Chapter 6 Notes On Entrepreneurship PDF

Chapter 6 Notes I. THE AGE OF THE ENTREPRENEUR A. Today, young people will probably not have the traditional 30-year career in one job. B. ENTREPRENEURSHIP is accepting the risk of starting and running a business. II. THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED S...

Chapter 6 Notes I. THE AGE OF THE ENTREPRENEUR A. Today, young people will probably not have the traditional 30-year career in one job. B. ENTREPRENEURSHIP is accepting the risk of starting and running a business. II. THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED STATES A. The need to CREATE MORE JOBS is a major issue in the U.S. today. B. The success of great American entrepreneurs shows the JOB-CREATING POWER of entrepreneurship. C. The text lists examples including PAST ENTREPRENEURS George Eastman (Kodak), Henry Ford (Ford Motor Company), and Jeff Bezos (Amazon). D. CONTEMPORARY ENTREPRENEURIAL TALENT include Chad Hurley and Steve Chen (YouTube), Mark Zuckerberg (Facebook), and Jack Dorsey (Twitter). III. WHY PEOPLE TAKE THE ENTREPRENEURIAL CHALLENGE A. Reasons why people are WILLING TO TAKE THE RISKS of business ownership include: 1. OPPORTUNITY to share in the American dream through initiative and hard work 2. PROFIT: Entrepreneurship made Bill Gates the richest person in the world 3. INDEPENDENCE a. Many entrepreneurs don’t enjoy working for someone else. b. They want the freedom to make the decisions that lead to success or failure. 4. CHALLENGE a. Some believe that entrepreneurs are excitement junkies who enjoy taking risks. b. In reality, entrepreneurs take MODERATE, CALCULATED RISKS. c. In general, entrepreneurs seek ACHIEVEMENT more than POWER. B. WHAT DOES IT TAKE TO BE AN ENTREPRENEUR? 1. ENTREPRENEURIAL ATTRIBUTES Entrepreneurs tend to be: a. SELF-DIRECTED: Be self-disciplined and comfortable being the boss. b. SELF-NURTURING: Believe in your own ideas. c. ACTION-ORIENTED: Have a desire to build the dream into reality. d. HIGHLY ENERGETIC: Be emotionally, mentally, and physically able to work long hours in order to succeed. e. TOLERANT OF UNCERTAINTY: Have the ability to take calculated risks and give up some security.  Chapter 6 Notes C. TURNING YOUR PASSION AND PROBLEMS INTO OPPORTUNITIES 1. Many entrepreneurs see business opportunities in problems or challenges. 2. The ideas for entrepreneurs’ products and services don’t usually come from some FLASH of inspiration—often the source of innovation is more like a FLASHLIGHT. 3. Not all ideas are opportunities—an idea must meet someone else’s needs. 4. A business idea is a GOOD OPPORTUNITY if: a. It fills customers’ needs b. You have the skills and resources to start a business c. You can sell the product or service at a price customers are willing and able to pay and still make a profit d. You can get your product or service to customers before your window of opportunity closes e. You can keep the business going D. ENTREPRENEURIAL TEAMS 1. An ENTREPRENEURIAL TEAM is a group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product. 2. This COMBINATION OF SKILLS is needed to get the new company off to a great start. 3. The text uses the example of the “smart team” of entrepreneurs who founded Apple Computers. E. ENTREPRENEURSHIP WITHIN FIRMS 1. INTRAPRENEURS are creative people who work as entrepreneurs within corporations. 2. They launch new products and generate new profits by using company’s existing resources—human, financial, and physical. 3. The text focuses on the development of Post-it Notes at 3M through the entrepreneurial efforts of Art Fry. F. MICROPRENEURS AND HOME-BASED BUSINESSES 1. MICROPRENEURS are entrepreneurs willing to accept the risk of starting and managing the type of business that remains small, lets them do the kind of work they want to do, and offers them a balanced lifestyle. 2. Micropreneurs are content with limited growth. 3. Many micropreneurs are HOME-BASED BUSINESS OWNERS. 4. Many are owned by people who are trying to combine career and family. 5. Reasons for the GROWTH OF HOME-BASED BUSINESSES:  Chapter 6 Notes a. COMPUTER TECHNOLOGY allows home-based businesses to look and act as big as corporations. b. CORPORATE DOWNSIZING has eroded job security, leading many to start new ventures. c. SOCIAL ATTITUDES have changed to encourage home-based businesses. d. New TAX LAWS have loosened the restrictions regarding deductions for home offices. 6. MAJOR CHALLENGES facing home-based businesses include: a. Getting new customers b. Managing time c. Keeping work and family tasks separate d. Abiding by city ordinances e. Managing risk 7. HOME OFFICE ENTREPRENEURS SHOULD FOCUS ON: a. Finding opportunity instead of accepting security b. Getting results instead of following routines c. Earning a profit instead of earning a paycheck d. Trying new ideas instead of avoiding mistakes e. Creating a long-term vision instead of seeking a short-term payoff G. ONLINE BUSINESSES 1. There’s a multitude of small businesses online. 2. Online sales in 2019 were over $365 billion. 3. The text uses the example of Marc Resnik’s website ThrowThings.com. 4. To succeed, online businesses must offer unique products or services. H. ENCOURAGING ENTREPRENEURSHIP: WHAT GOVERNMENT CAN DO 1. The government passed the IMMIGRATION ACT OF 1990 to encourage more entrepreneurs to come to the United States. a. It created a category of “INVESTOR VISAS” that allows 10,000 people to come to the U.S. each year if they invest at least $900,000 in an enterprise that creates or preserves 10 full-time jobs. 2. One way to encourage entrepreneurship is through ENTERPRISE ZONES that feature low taxes and government support. a. ENTERPRISE ZONES are specific geographic areas to which governments try to attract private business investment by offering lower taxes and other government support.  Chapter 6 Notes b. The government could encourage entrepreneurship by offering investment TAX BREAKS to businesses that invest in creating jobs. 3. States also provide support for entrepreneurs. a. State commerce departments serve as clearinghouses for information and programs. b. States also create incubators and technology centers to reduce start-up capital needs. c. INCUBATORS are centers that offer low-cost offices with basic business services (such as accounting, legal advice, and secretarial help). d. Incubators help companies survive because they provide assistance in the CRUCIAL EARLY DEVELOPMENT STAGE. 4. A few states offer assistance under the SELF-EMPLOYMENT ASSISTANCE (SEA) program. a. SEA allows participants to collect unemployment while building their business. b. The checks can help launch the company. IV. GETTING STARTED IN SMALL BUSINESS A. In general, the SAME PRINCIPLES apply to small and large companies, government, and nonprofits. 1. All organizations need: a. Capital b. Good ideas c. Planning d. Information management e. Budgets f. Accounting g. Marketing h. Employee relations i. Good overall managerial know-how B. SMALL VERSUS BIG BUSINESS 1. As defined by the SBA, SMALL BUSINESS: a. Is independently owned and operated b. Is not dominant in its field of operation c. Meets certain standards of size (set by the Small Business Administration) in terms of employees or annual receipts (for example, less than $2 million a year for service companies) 2. SMALL-BUSINESS STATISTICS  Chapter 6 Notes a. There are over 30 million small businesses in the U.S. b. Almost 96% of all nonfarm businesses are considered small by SBA standards. c. Small businesses account for over 43% OF THE GROSS DOMESTIC PRODUCT. d. Nearly 400,000 tax-paying, employee-hiring business are started each year. e. Small businesses employ more than half of all private-sector employees. f. The first jobs of about 80% of all Americans are in small business. C. IMPORTANCE OF SMALL BUSINESSES 1. Small businesses have advantages over big companies—they give more personal customer service and are able to respond quickly to opportunities. 2. There is plenty of room for small businesses in MARKET NICHES not served by big businesses. D. SMALL-BUSINESS SUCCESS AND FAILURE 1. FAILURE RATE a. About half of new businesses don’t last five years. b. However, data misinterpretation may have overestimated the failure rate. c. Business failures may be much lower than traditionally reported. 2. Many small businesses fail because of managerial incompetence and inadequate financial planning. 3. Choosing the RIGHT TYPE OF BUSINESS is critical to success. a. The businesses with the lowest failure rates often require advanced training to start. b. High-growth businesses are not easy to start and even more difficult to keep going. c. In general, the easiest businesses to start are the ones that have the least growth and the greatest failure rate. d. The ones that can make you rich are both hard to start and hard to keep going. V. LEARNING ABOUT SMALL-BUSINESS OPERATIONS A. LEARN FROM OTHERS 1. Many LOCAL COMMUNITY COLLEGES offer entrepreneur programs and classes. 2. Talk to ENTREPRENEURS who have already done it. 3. Entrepreneurs will tell you that: a. Location is critical.  Chapter 6 Notes b. You should be keeping good records and hire an accountant and lawyer before you start. c. You should not be undercapitalized. B. GET SOME EXPERIENCE 1. Go to work for others and learn all you can. 2. The general rule is: THREE YEARS OF EXPERIENCE in a comparable business. 3. Cornelius Vanderbilt sold his own sailing vessels and went to work for a steamboat company so he could learn the new technology of steam. 4. Running a small business part-time is another way of gaining experience. C. TAKE OVER A SUCCESSFUL FIRM 1. After many years in business, some small-business owners feel stuck in their businesses. 2. The text describes a method of becoming successful small-business managers. a. The first step is to find a businessperson running a successful small business. b. Ask to serve an APPRENTICESHIP, a one-year training program. c. For another year or so, work hard to learn all about the business and offer to become ASSISTANT MANAGER. d. At the end of two years, offer to manage the business when the owner retires. e. You can establish a profit-sharing with the owner and pay yourself a salary. 3. The OWNER BENEFITS by keeping ownership and earning profits without working. 4. If profit sharing doesn’t appeal to the owner, you may want to BUY THE BUSINESS OUTRIGHT, basing the price of the business on: a. What the business owns b. What it earns c. What makes it unique VI. MANAGING A SMALL BUSINESS A. According to the SBA, one of the major causes of small-business failure is “POOR MANAGEMENT.” 1. This may involve poor planning, poor record keeping, poor inventory control, poor promotion, or poor employee relations. 2. The most likely cause is poor capitalization.  Chapter 6 Notes 3. This section explores the MAJOR FUNCTIONS OF BUSINESS as they pertain to small business: a. PLANNING your business b. FINANCING your business c. KNOWING your customers (MARKETING) d. MANAGING your employees (HUMAN RESOURCE DEVELOPMENT) e. KEEPING RECORDS (ACCOUNTING) B. BEGIN WITH PLANNING 1. Small businesses start with an idea that can be developed. 2. A BUSINESS PLAN is a detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s). 3. A business plan forces potential small-business owners to be SPECIFIC about the products and services they intend to offer. 4. When talking with bankers or other investors, a business plan is mandatory. C. WRITING A BUSINESS PLAN 1. A good business plan takes a long time to write. 2. One of the most important parts of the business plan is the EXECUTIVE SUMMARY, which must catch the reader’s interest. 3. Software programs can help you get organized. 4. Getting the completed business plan in the right hands is almost as important as getting the right information in it. 5. The time and effort invested before starting a business will pay off later. D. FINANCING YOUR SMALL BUSINESS 1. New entrepreneurs have several SOURCES OF CAPITAL, but most start-ups receive money from friends and family. 2. SUPPLIERS may also be a funding source. 3. Smaller community banks may be more willing to grant loans. 4. COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS (CDFIs) may be a source of funding in lower-income communities. 5. INDIVIDUAL INVESTORS are a frequent source of capital for most entrepreneurs. 6. ANGEL INVESTORS are private individuals who invest their own money in new businesses with potential. 7. Websites such as GoFundMe and Kickstarter match people who want money with people willing to lend it (PEER-TO-PEER LENDING or CROWDFUNDING).  Chapter 6 Notes 8. JOBS Act of 2012 allows businesses to raise up to $1 million a year from private investors without making an initial public offering – making room for using crowdfunding sites. 9. VENTURE CAPITALISTS are individuals or companies that invest in new businesses in exchange for partial ownership of those businesses. a. Venture capitalists may demand a large share (as much as 60%) in your company in exchange for the start-up cash. b. Since the widespread failure of early Web start-ups, venture capitalists are willing to invest less and expect more. E. THE SMALL BUSINESS ADMINISTRATION (SBA) 1. The SMALL BUSINESS ADMINISTRATION (SBA) is a U.S. government agency that advises and assists small businesses by providing management training and financial advice and loans. 2. The SBA’s MICROLOAN PROGRAM awards loans based on the borrowers’ integrity and the soundness of their business idea. 3. Another source of funds is the SMALL BUSINESS INVESTMENT COMPANY (SBIC) PROGRAM. a. The SMALL BUSINESS INVESTMENT COMPANY PROGRAM is a program through which private investment companies licensed by the Small Business Administration lend money to small businesses. b. An SBIC loans to or invests in small businesses that meet its criteria. 4. SMALL BUSINESS DEVELOPMENT CENTERS (SBDCs), funded jointly by the federal government and individual states, can help evaluate the feasibility of your idea, develop your business plan, and complete your funding application. 5. For most small businesses, obtaining money from banks, venture capitalists, and government sources is very difficult. 6. Success depends on many factors, including: a. Knowing your customer b. Managing your employees c. Keeping good records F. KNOWING YOUR CUSTOMERS 1. A MARKET consists of people with unsatisfied wants and needs who have both the resources and the willingness to buy. 2. The first step in filling these needs is to identify the WANTS AND NEEDS of potential customers. 3. The goal of a businessperson is to FIND A NEED AND FILL IT. 4. Offer top quality at a fair price with great service. 5. After you have customers, you must keep them through excellent service.  Chapter 6 Notes G. MANAGING YOUR EMPLOYEES 1. It is not easy to FIND, HIRE, TRAIN, AND KEEP GOOD EMPLOYEES. a. Small businesses offer less money, fewer benefits, and less room for advancement than larger firms do. b. However, employees of small companies are often more satisfied with their jobs than their counterparts in large companies. c. They find their jobs are more challenging, their ideas are more accepted, and their bosses treat them with more respect. 2. As the business grows, the entrepreneur must DELEGATE AUTHORITY. a. In businesses with long-term employees, this is especially difficult. b. These long-term employees may not have the necessary managerial skills. 3. Family firms may be held back by attitudes such as “you can’t fire family” or you must promote someone because “they’re family.” 4. Entrepreneurs best serve the business if they recruit and groom employees for management positions. 5. Chapters 7 through 12 focus on managing employees. H. KEEPING RECORDS 1. A businessperson who sets up an ACCOUNTING SYSTEM early will save much grief later.. 2. A good ACCOUNTANT can help: a. Decide whether to buy or lease b. Provide tax planning and financial forecasting c. Choose sources of financing 3. Chapter 17 focuses on accounting. I. LOOKING FOR HELP 1. Small-business owners need help setting up their businesses early in the process. 2. A competent, experienced lawyer who knows and understands small businesses is valuable. a. A prepaid legal plan may be cost-effective. b. Online legal services are also available. 3. A MARKETING RESEARCH STUDY can help with key marketing decisions. 4. A COMMERCIAL LOAN OFFICER and an INSURANCE AGENT are also valuable experts. 5. The SERVICE CORPS OF RETIRED EXECUTIVES (SCORE) is an SBA resource with volunteers from industry, trade associations, and education who counsel small businesses at no cost (except for expenses).  Chapter 6 Notes 6. Local college business professors may also advise small-business owners for a fee. 7. Other sources: a. Other small-business owners b. Local chambers of commerce c. The Better Business Bureau d. National and local trade associations VII. GOING GLOBAL: SMALL-BUSINESS PROSPECTS A. The WORLD MARKET is more lucrative for small businesses than the U.S. market alone. 1. Small and medium-sized businesses account for 99% of the growth in exporting firms. 2. Small exporting firms account for 34% of all U.S. exporting value. B. Technology advances, such as PayPal, have helped increase small-business exporting. C. Many potential international businesspeople DO NOT enter the global market because: 1. Financing is often difficult to find. 2. They don’t know how to get started and don’t understand the cultural differences of potential markets. 3. The bureaucratic paperwork can be overwhelming. D. There are many good reasons for small-business owners to CONSIDER GOING INTERNATIONAL: 1. Most of the world’s market lies outside the U.S. 2. Exporting can absorb excess inventory. 3. It can soften downturns in the U.S. market. 4. It can extend the life of products. E. Small businesses have several ADVANTAGES OVER LARGE BUSINESSES: 1. Overseas buyers enjoy dealing with individuals rather than with large corporate bureaucracies. 2. Small companies can usually begin shipping much faster. 3. Small companies provide a wide variety of suppliers. 4. Small companies can give more personal service and more attention. F. SOURCES OF INFORMATION about international business. 1. Department of Commerce’s Bureau of Industry and Security (www.bis.doc.gov) 2. SBA’s international business resources (www.sba.gov)  Chapter 5 Notes I. BASIC FORMS OF BUSINESS OWNERSHIP A. About 400,000 new businesses are started in the U.S. each year. B. The form of business ownership can make a difference in the success of the business. C. The THREE MAJOR FORMS OF BUSINESS OWNERSHIP are: 1. A SOLE PROPRIETORSHIP is a business that is owned, and usually managed, by one person; it is the most common form. 2. A PARTNERSHIP is a legal form of business with two or more owners. 3. A CORPORATION is a legal entity with authority to act and have liability separate from its owners. II. SOLE PROPRIETORSHIPS A. ADVANTAGES OF SOLE PROPRIETORSHIPS 1. Ease of STARTING AND ENDING the business. a. After you rent or buy the equipment, all you need is a permit from the local government. b. To get out of business, you just quit. 2. BEING YOUR OWN BOSS. Working for yourself is exciting. 3. PRIDE OF OWNERSHIP. Sole proprietors take the risk and deserve the credit. 4. LEAVING A LEGACY behind for future generations. 5. RETENTION OF COMPANY PROFITS. You don’t have to share profits with anyone. 6. NO SPECIAL TAXES. Profits of the business are taxed as the personal income of the owner. B. DISADVANTAGES OF SOLE PROPRIETORSHIPS 1. Unlimited liability—the risk of personal losses a. You and the business are one. b. UNLIMITED LIABILITY is the responsibility of business owners for all of the debts of the business. 2. LIMITED FINANCIAL RESOURCES: Financing is limited to the funds that the sole owner can gather.  Chapter 5 Notes 3. MANAGEMENT DIFFICULTIES: Many owners are not skilled at management and with details such as accounting. 4. OVERWHELMING TIME COMMITMENT a. The owner has no one with whom to share the burden. b. A business owner may work 12 hours a day. 5. FEW FRINGE BENEFITS: a. You have no paid vacation or health insurance. b. Fringe benefits can add up to 30% of a worker’s compensation. 6. LIMITED GROWTH: Expansion is slow. 7. LIMITED LIFE SPAN. If the sole proprietor dies or leaves, the business ends. III. PARTNERSHIPS A. A PARTNERSHIP is a legal form of business with two or more owners. B. TYPES OF PARTNERSHIPS 1. A GENERAL PARTNERSHIP is a partnership in which all owners share in operating the business and in assuming liability for the business’s debts. 2. A LIMITED PARTNERSHIP is a partnership with one or more general partners and one or more limited partners. a. A GENERAL PARTNER is an owner (partner) who has unlimited liability and is active in managing the firm. b. A LIMITED PARTNER is an owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment. c. LIMITED LIABILITY is the responsibility of a business’s owners for losses only up to the amount they invest; limited partners and shareholders have limited liability. 3. MASTER LIMITED PARTNERSHIP (MLP) is a partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax. 4. A LIMITED LIABILITY PARTNERSHIP (LLP) is a partnership that limits partners’ risk of losing their personal assets to only their own acts and omissions and the acts and omissions of the people under their supervision. a. Your partner’s malpractice will not cost you your personal assets. b. In some states, personal protection does not extend to contract liabilities such as bank loans, leases, and business debt.  Chapter 5 Notes 5. UNIFORM PARTNERSHIP ACT (UPA) a. All states except Louisiana have adopted the Uniform Partnership Act to replace laws relating to partnerships. b. The UPA defines the THREE KEY ELEMENTS of any general partnership: i. Common ownership ii. Shared profits and losses iii. The right to participate in managing the operations of the business C. ADVANTAGES OF PARTNERSHIPS 1. MORE FINANCIAL RESOURCES: Two or more people can pool their money and credit. 2. SHARED MANAGEMENT AND POOLED/ COMPLEMENTARY SKILLS AND KNOWLEDGE: Partners give each other time off and provide different skills and perspectives. 3. LONGER SURVIVAL: Partners are four times as likely to succeed as sole proprietorships. 4. NO SPECIAL TAXES: All profits of partners are taxed as personal income of the owners. D. DISADVANTAGES OF PARTNERSHIPS 1. UNLIMITED LIABILITY a. Each GENERAL PARTNER is liable for the debts of the firm, no matter who was responsible for causing those debts. b. You are liable for your partners’ mistakes as well as your own. 2. DIVISION OF PROFITS: Sharing profits can cause conflicts. 3. DISAGREEMENTS AMONG PARTNERS a. Disagreements can arise over division of authority, purchasing decisions, and so on. b. Because of potential conflicts, all terms of partnership should be spelled out IN WRITING to protect all parties. 4. DIFFICULTY OF TERMINATION a. It is not easy to get out of a partnership. b. For example: Who gets what and what happens next? c. It is best to make these decisions at the beginning. E. Many ventures avoid the disadvantages of these forms of ownership by forming corporations. IV. CORPORATIONS  Chapter 5 Notes A. A CONVENTIONAL (C) CORPORATION is a state-chartered legal entity with authority to act and have liability separate from its owners. 1. Businesses do not have to be big to incorporate. 2. The corporation’s owners (STOCKHOLDERS) are not liable for the debts of the corporation beyond the money they invest. 3. Many people can share in the ownership of a business without working there. 4. Corporations can choose to offer ownership to outsiders or remain private. B. ADVANTAGES OF CORPORATIONS 1. LIMITED LIABILITY a. Limited liability is probably the MOST SIGNIFICANT ADVANTAGE of corporations. b. The owners of a business are responsible for losses only up to the amount they invest. 2. ABILITY TO RAISE MORE MONEY FOR INVESTMENT a. To raise money, a corporation can sell OWNERSHIP (STOCK) to anyone interested. b. Corporations may obtain loans from financial institutions. c. Corporations can also borrow money from investors by issuing BONDS. 3. SIZE a. Because corporations can raise large amounts of money, they can build modern facilities. b. They can also hire experts in all areas of operation. c. They can buy other corporations in different fields to diversify their risk. d. Corporations have the size and resources to take advantage of opportunities anywhere in the world. e. Corporations do not have to be large to have these benefits. 4. PERPETUAL LIFE: The death of one or more owners does not terminate the corporation. 5. EASE OF OWNERSHIP CHANGE: Selling stock to someone else changes ownership. 6. EASE OF ATTRACTING TALENTED EMPLOYEES: Corporations can offer benefits such as STOCK OPTIONS—the right to purchase shares of the corporation for a fixed price. 7. SEPARATION OF OWNERSHIP FROM MANAGEMENT: Corporations can raise money from investors without having them involved in management. C. DISADVANTAGES OF CORPORATIONS 1. INITIAL COST  Chapter 5 Notes a. Incorporation may cost thousands of dollars and involve lawyers and accountants. b. There are less expensive ways of incorporating in certain states. 2. EXTENSIVE PAPERWORK a. A corporation must keep detailed records. b. Many firms incorporate in Delaware and Nevada because favorable laws make the process easier. 3. DOUBLE TAXATION: Corporate income is taxed twice. a. The CORPORATION PAYS TAX on income before it can distribute any dividends to stockholders. b. The STOCKHOLDERS PAY TAX on the income they receive from the corporation. c. States often tax corporations more harshly than other enterprises. 4. TWO TAX RETURNS: A corporate owner must file both a corporate tax return and an individual tax return. 5. SIZE: Large corporations sometimes become inflexible and too tied down in red tape. 6. DIFFICULTY OF TERMINATION: A corporation is relatively difficult to end. 7. POSSIBLE CONFLICT WITH STOCKHOLDERS AND BOARD OF DIRECTORS. a. The board chooses the company’s officers. b. An entrepreneur can be forced out of the very company he or she founded. 8. Many people feel the hassles of incorporation outweigh the advantages. D. INDIVIDUALS CAN INCORPORATE 1. By incorporating, individuals such as doctors and lawyers can save on taxes and receive other benefits of incorporation. 2. Small corporations usually do not issue stock to outsiders, so they don’t have all the same advantages and disadvantages of large corporations. 3. It is wise to consult a lawyer when incorporating. 4. It takes, on average, about 30 days to incorporate. E. S CORPORATIONS 1. An S CORPORATION is a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships. a. S corporations have shareholders, directors, and employees. b. However, the profits are taxed as the personal income of the shareholders. c. They also have the benefit of limited liability.  Chapter 5 Notes 2. S CORPORATIONS MUST: a. Have no more than 100 shareholders b. Have shareholders who are individuals or estates and are citizens or permanent residents of the U.S. c. Have only one class of stock d. Not have more than 25% of income derived from passive sources (rents, royalties, interest, etc.) 3. The TAX STRUCTURE of an S corporation isn’t attractive to all businesses. 4. The benefits of S corporations change every time the tax rules change. F. LIMITED LIABILITY COMPANIES 1. A LIMITED LIABILITY COMPANY (LLC) is a company similar to an S corporation but without the special eligibility requirements. a. LLCs were introduced in Wyoming in 1977. b. An LLC can submit a form to the IRS if it chooses to be treated as a corporation. c. By 1996, all 50 states recognized LLCs. d. More than half of new business registrations in some states today are LLCs. 2. ADVANTAGES OF LLCs: a. LIMITED LIABILITY: Personal assets are protected. b. CHOICE OF TAXATION: LLCs can choose to be taxed as partnerships or as corporations. c. FLEXIBLE OWNERSHIP RULES: LLCs do not have to comply with ownership restrictions as S corporations do. d. FLEXIBLE DISTRIBUTION OF PROFITS AND LOSSES: Profit and losses don’t have to be distributed in proportion to the money each person invests. e. OPERATING FLEXIBILITY: Reporting requirements are less than for a corporation. 3. DISADVANTAGES OF LLCs: a. NO STOCK i. LLC ownership is nontransferable. ii. LLC members need the approval of the other members in order to sell their interest. b. FEWER INCENTIVES: LLCs can’t deduct the cost of fringe benefits or use stock options. c. TAXES: LLC members must pay self-employment taxes on profits. d. PAPERWORK: More paperwork is required than for sole proprietors.  Chapter 5 Notes 4. The start-up cost for an LLC varies. V. CORPORATION EXPANSION: MERGERS AND ACQUISITIONS A. The DIFFERENCE between a merger and an acquisition: 1. A MERGER is the result of two firms forming one company. 2. An ACQUISITION is one company’s purchase of the property and obligations of another company. B. THREE MAJOR TYPES OF CORPORATE MERGERS 1. VERTICAL MERGER is the joining of two companies involved in different stages of related businesses (example: merger of a soft drink company and a company producing artificial sweetener). 2. HORIZONTAL MERGER joins two firms in the same industry. a. It allows the firms to diversify or expand their products. b. Example: merger of a soft drink and a mineral water company. 3. CONGLOMERATE MERGER is the joining of firms in completely unrelated industries thereby diversifying business operations (example: merger of a soft drink company and a snack food producer). 4. Mergers between large competitors must prove to the Federal Trade Commission that the new company does not limit competition unfairly. C. Rather than merge, some corporations decide to MAINTAIN CONTROL of the firm internally, TAKING IT PRIVATE. 1. A LEVERAGED BUYOUT is an attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing. a. Borrowed funds are used to buy out the stockholders in the company. b. Employees, managers, or a group of investors then become the owners of the firm. 2. Mergers also involve foreign companies purchasing U.S. companies. VI. FRANCHISES A. A FRANCHISE AGREEMENT is an arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory. 1. DEFINITIONS: a. The FRANCHISOR is a company that develops a product concept and sells others the rights to make and sell the product. b. The FRANCHISE is the right to use a specific business’s name and sell its products or services in a given territory. c. The FRANCHISEE is the person who buys a franchise.  Chapter 5 Notes 2. Franchising may be an alternative for people who like to own their own businesses but want more assurance of success. 3. More than 733,000 franchised businesses operate in the U.S. 4. The most popular businesses for franchising are restaurants and gas stations with convenience stores. B. ADVANTAGES OF FRANCHISES 1. MANAGEMENT AND MARKETING ASSISTANCE, providing a greater chance of success through: a. An established product b. Help in choosing a location c. Assistance in all phases of operation d. Intensive training e. Local marketing efforts 2. PERSONAL OWNERSHIP: You are still your own boss, although you must follow the rules, regulations, and procedures of the franchise. 3. NATIONALLY RECOGNIZED NAME: You get instant recognition and support. 4. FINANCIAL ADVICE AND ASSISTANCE a. Franchisees get assistance arranging financing and learning to keep records. b. Some franchisors will even provide financing to potential franchisees. 5. LOWER FAILURE RATE a. Historically, the failure rate for franchises has been lower than that of other business ventures. b. However, because many weak franchises have entered the field, care is needed. C. DISADVANTAGES OF FRANCHISES 1. LARGE START-UP COSTS a. Most franchises charge a fee for the rights to the franchise. b. Start-up costs can be as high as $1.6 million (for a Dunkin’ Donuts franchise). 2. SHARED PROFIT: The franchisor often demands a large share of the profits, or ROYALTY, based on sales, not profit. 3. MANAGEMENT REGULATION a. Some franchisees find the company’s rules and regulations burdensome. b. In recent years, franchisees have banded together to resolve their grievances with franchisors.  Chapter 5 Notes c. In 2010, the KFC National Council & Advertising Cooperative sued KFC to gain control of advertising strategies. 4. COATTAIL EFFECTS a. The actions of other franchisees have an impact on the franchise’s future growth and level of profitability, a phenomenon known as a COATTAIL EFFECT. b. Franchisees must also watch for competition from fellow franchisees. 5. RESTRICTIONS ON SELLING a. Many franchisees face restrictions when reselling their franchises. b. Franchisors often insist on approving the new owner, who must meet their standards. 6. FRAUDULENT FRANCHISORS a. Most franchisors are not large systems; many are small, obscure companies. b. There has been an increase in complaints to the FTC about franchisors that delivered little or nothing that they promised. D. DIVERSITY IN FRANCHISING 1. WOMEN IN FRANCHISING a. Women’s ownership of franchises is about 35 percent, up from 24 percent a decade ago. b. Women are becoming FRANCHISORS as well. c. The text uses the examples of the franchises Auntie Anne’s, Decorating Den, and Build-a-Bear Workshop. 2. MINORITY FRANCHISE OWNERSHIP: Today more than 30 percent of franchises are owned by African Americans, Latinos, Asians, and Native Americans. 3. Franchisors are increasingly focusing on recruiting minority franchisees. E. HOME-BASED FRANCHISES 1. Home-based businesses offer advantages but may leave owners with a feeling of isolation. 2. Home-based FRANCHISES are another option. F. E-COMMERCE IN FRANCHISING 1. Today, Internet users worldwide can obtain franchises to open online retail stores. 2. Many franchisees with existing brick-and-mortar stores are expanding online. 3. Some franchisors prohibit franchisee-sponsored websites, however, because they can lead to conflicts between franchisors and franchisees. G. USING TECHNOLOGY IN FRANCHISING  Chapter 5 Notes 1. Franchisors are using technology, including social media, to meet the needs of customers and franchisees. 2. Franchise websites streamline communication with employees, customers, and vendors. 3. Using a website, every franchisee has immediate access to every subject that involves the franchise operation. H. FRANCHISING IN GLOBAL MARKETS 1. Canada is the most popular market because of proximity and language. 2. Franchisors are moving into China, South Africa, the Philippines, and the Middle East. 3. Newer, smaller franchises are also going international, such as Auntie Anne’s and Build-A-Bear Workshop. 4. Convenience and a predictable level of service and quality are what make international franchising successful. 5. Franchisors must be careful to adapt to the region. 6. Foreign franchises are also expanding to the U.S. VII. COOPERATIVES A. A COOPERATIVE is a business owned and controlled by the people who use it— producers, consumers, or workers with similar needs who pool their resources for mutual gain. 1. There are about one billion members of cooperatives worldwide. 2. Members democratically control these businesses by electing a board of directors that hires professional management. B. Some cooperatives are formed to give members MORE ECONOMIC POWER than they would have as individuals (e.g., farm cooperatives). 1. The FARM COOPERATIVE began with farmers joining together to get better prices for their food products. 2. Farm cooperatives now buy and sell other products needed on the farm. 3. Cooperatives are still a major force in agriculture today. VIII. WHICH FORM OF OWNERSHIP IS FOR YOU? A. There are RISKS TO EVERY FORM of business ownership. B. The freedom and incentives of capitalism make risks acceptable to many people.  Chapter 3 Notes I. THE DYNAMIC GLOBAL MARKET A. THE IMPORTANCE OF INTERNATIONAL MARKETS 1. There are over 328 million people in the U.S.; there are 7.7 billion potential customers in the world. 2. U.S. customers buy hundreds of billions of dollars in goods from Canada, Mexico, and China. 3. Companies such as UPS, Starbucks and sports teams in the NBA, MLB, and NFL operate extensively overseas. B. The U.S. is the SECOND LARGEST EXPORTING NATION in the world and is the world’s largest importer. 1. IMPORTING is buying products from another country. 2. EXPORTING is selling products to another country. 3. COMPETITION IS INTENSE: The U.S. must compete against aggressive global competitors. C. The purpose of this chapter is to discuss the potential and challenges of international business. II. WHY TRADE WITH OTHER NATIONS? A. Reasons FOR trading with other nations include: 1. No nation can produce all the products that its people need. 2. Nations seek trade with other countries to meet the needs of their people. 3. MUTUALLY BENEFICIAL EXCHANGE a. Some nations have abundant natural resources and lack technological know- how. b. Others have sophisticated technology but few natural resources. c. Global trade relations enable countries to produce what they can and buy the rest in a mutually beneficial exchange. 4. FREE TRADE is the movement of goods and services among nations without political or economic obstruction. B. THE THEORIES OF COMPARATIVE AND ABSOLUTE ADVANTAGE 1. Nations exchange goods and services, art, sports, and much more. 2. COMPARATIVE ADVANTAGE THEORY states that a country should sell to other countries those products that it produces most effectively and efficiently and should buy from other countries those products that it cannot produce as effectively or efficiently. a. The U.S. has a COMPARATIVE ADVANTAGE in producing goods and services.  Chapter 3 Notes b. It lacks a comparative advantage in growing coffee or making shoes. 3. ABSOLUTE ADVANTAGE is the advantage that exists when a country is able to produce a specific product more efficiently than all other countries. Today there are very few instances of absolute advantage. GETTING INVOLVED IN GLOBAL TRADE A. The real potential in global markets may be with SMALL BUSINESSES. 1. Small businesses generate about one-third of U.S. exports, yet only 1% of the 30 million small businesses take part. 2. Getting started in global trade can be through observation, determination, and risk. B. IMPORTING GOODS AND SERVICES 1. Students attending college abroad often notice some products widely available in their countries are not available elsewhere. 2. Importing these goods can be quite profitable. 3. Howard Schultz brought the idea of neighborhood coffee bars from Italy to the U.S. as Starbucks. C. EXPORTING GOODS AND SERVICES 1. WHAT CAN YOU SELL TO OTHER COUNTRIES? a. Just about anything that is used in the United States can be sold in other countries. b. Competition abroad is often not as intense for U.S. producers as it is at home. c. The text offers the example of snowplows to Saudi Arabia for sand removal on driveways. 2. Exporting creates GREAT OPPORTUNITIES and is a terrific boost to the U.S. economy. 3. Selling in global markets, however, involves many hurdles. 4. The text supplies several sources of information about exporting, including government websites. D. MEASURING GLOBAL TRADE 1. BALANCE OF TRADE is the total value of a nation’s exports compared to its imports measured over a particular period. a. A favorable balance of trade, or TRADE SURPLUS, exists when the value of a nation’s exports exceeds its imports measured over a particular period. b. TRADE DEFICIT is an unfavorable balance of trade; it occurs when the value of a country’s imports exceeds that of its exports. 2. BALANCE OF PAYMENTS is the difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment. a. A FAVORABLE BALANCE OF PAYMENTS means more money is flowing into than flowing out of the country.  Chapter 3 Notes b. Likewise, an UNFAVORABLE BALANCE OF PAYMENTS means more money is leaving than coming into the country. 3. Since 1975, the U.S. has run a trade DEFICIT. 4. The U.S. exports a much LOWER PERCENTAGE of its products than other countries do. 5. Like other nations, the U.S. tries to make sure global trade is conducted fairly. a. The U.S. has laws to prohibit unfair practices such as DUMPING, the practice of selling products in a foreign country at lower prices than those charged in the producing country. b. There is also evidence that some governments subsidize certain industries to sell goods in global markets for less. IV. STRATEGIES FOR REACHING GLOBAL MARKETS A. The following are some ways an organization can participate in global trade. B. LICENSING 1. LICENSING is a global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its products in exchange for a fee (a royalty). 2. The ADVANTAGES of licensing: a. A company can gain additional revenues from a product it would not have normally produced domestically. b. The firm can sell start-up supplies, component materials, and consulting services (examples: Coca-Cola and Tokyo Disneyland). c. The licensor spends little or no money to produce and market the product; licensees bear the costs. 3. The PROBLEMS of licensing: a. Often a firm must grant licensing rights to its product for an extended period. b. If a product experiences remarkable growth in the foreign market, the bulk of the revenues goes to the licensee. c. If the foreign licensee learns the technology, it may break the agreement and begin to produce a similar product on its own. C. EXPORTING 1. The Department of Commerce created EXPORT ASSISTANCE CENTERS (EACs) to provide hands-on exporting assistance and trade-finance support for small and medium-sized businesses. 2. To overcome small firms’ reluctance, EXPORT-TRADING COMPANIES can match buyers and sellers from different countries. 3. An export-trading company is a good place to get career training in global trade. D. FRANCHISING 1. FRANCHISING is a contractual arrangement whereby someone with a good idea for a business sells the rights to use the business name. 2. Franchising is popular both domestically and in global markets.  Chapter 3 Notes 3. Examples: Subway, Holiday Inn, and KFC. 4. Franchisers must adapt in the countries they serve. 5. Domino’s Pizza found that Japanese people prefer seafood on their pizzas. E. CONTRACT MANUFACTURING 1. CONTRACT MANUFACTURING involves a for foreign country’s production of private-label goods to which a domestic company then attaches its brand name or trademark; also called outsourcing (text examples: Dell, Apple, and IBM). 2. By using contract manufacturing, a company can often experiment in a new market WITHOUT HEAVY START-UP COSTS. 3. A firm can also use contract manufacturing temporarily to MEET AN UNEXPECTED INCREASE IN ORDERS. 4. Also, labor costs are often low. F. INTERNATIONAL JOINT VENTURES AND STRATEGIC ALLIANCES 1. A JOINT VENTURE is a partnership in which two or more companies (often from different countries) join to undertake a major project. 2. The text offers the example of the joint venture between Disney and Shanghai Shendi Group. 3. A unique joint venture is that between University of Pittsburgh and the Italian government to build a medical transplant center in Sicily. 4. The BENEFITS of joint venture: a. Shared technology and risk. b. Shared marketing and management expertise. c. Entry into markets where foreign companies are not allowed unless their goods are produced locally. 5. The DRAWBACKS: a. One partner can learn the technology and practices of the other and LEAVE TO BECOME A COMPETITOR. b. A shared technology may become OBSOLETE. c. The partnership may be TOO LARGE TO BE AS FLEXIBLE as needed. 6. A STRATEGIC ALLIANCE is a long-term partnership between two or more companies established to help each company build competitive market advantages. a. Alliances can provide access to markets, capital, and technical expertise. b. Strategic alliances are FLEXIBLE and can be effective between firms of different sizes. c. The text uses the example of Walmart and Rakuten. G. FOREIGN DIRECT INVESTMENT  Chapter 3 Notes 1. FOREIGN DIRECT INVESTMENT is buying permanent property and businesses in foreign nations. 2. A FOREIGN SUBSIDIARY is a company owned in a foreign country by another company (PARENT COMPANY). a. THE LEGAL REQUIREMENTS of both the PARENT (HOME) and the FOREIGN (HOST) COUNTRIES must be observed. b. The ADVANTAGE of foreign subsidiaries is that the COMPANY MAINTAINS COMPLETE CONTROL over any technology or expertise it may possess. c. The major SHORTCOMING is that the firm’s assets could be EXPROPRIATED, taken over by the foreign government, if relations with the host country fail. d. As an example of a company with many foreign subsidiaries, the text uses the example of consumer giant Nestlé. 3. MULTINATIONAL CORPORATIONS a. A MULTINATIONAL CORPORATION is an organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management. b. Only firms that have manufacturing capacity or other physical presence in different nations can truly be called multinational. 4. SOVEREIGN-WEALTH FUNDS (SWFs) a. One of the fastest-growing forms of foreign direct investment is the use of sovereign wealth funds (SWFs). b. SOVEREIGN-WEALTH FUNDS are investment funds controlled by governments holding large stakes in foreign companies. c. SWFs from the UAE, Singapore, and China have purchased significant portions of U.S. companies. d. There is concern that the size and government ownership of these funds could be used for achieving geopolitical objectives. 5. Different strategies reflect different levels of ownership, financial commitment, and risk. V. FORCES AFFECTING TRADING IN GLOBAL MARKETS A. Succeeding in any business takes work and effort with many challenges. B. SOCIOCULTURAL FORCES 1. The term CULTURE refers to the set of values, beliefs, rules, and institutions held by a specific group of people. 2. Culture can include social structures, religion, manners and customs, values and attitudes, language, and personal communication. 3. American businesspeople are notoriously bad at adapting to cultural differences among nations. a. Some have been accused of ETHNOCENTRICITY, an attitude that our culture is superior to all others.  Chapter 3 Notes b. In contrast, foreign businesspeople are very good at adapting to U.S. culture. c. Example: German, Japanese, and Korean carmakers have adapted to the U.S. market, but for years, U.S. carmakers didn’t adapt cars enough to be successful in other cultures. 4. RELIGION is an important part of any society’s culture and can have a significant impact on business operations (example: misunderstandings about Muslim culture). 5. SOCIOCULTURAL DIFFERENCES can also impact business decisions involving human resource management. 6. A sound global philosophy is: never assume what works in one country will work in another. C. ECONOMIC AND FINANCIAL FORCES 1. Due to economic conditions, global opportunities may not be viable opportunities at all. a. Global financial markets do not have a worldwide currency. b. The U.S. DOLLAR is a dominant and stable currency. 2. The EXCHANGE RATE is the value of one nation’s currency relative to the currencies of other countries. a. A HIGH VALUE OF THE DOLLAR means the products of foreign producers would be cheaper, but U.S.-produced goods would be more expensive. b. A LOW VALUE OF THE DOLLAR means foreign goods become more expensive because it takes more dollars to buy them. 3. Global financial markets operate under a system of FLOATING EXCHANGE RATES in which currencies “float” according to supply and demand in the global market for currency. a. Changes in currency values impact global commerce in numerous ways. b. Currency fluctuations can be especially tough for developing economies. c. These changes cause other problems; labor costs can vary as currency values shift. 4. DEVALUATION is lowering the value of a nation’s currency relative to other currencies. a. In many developing nations, the only trade possible is BARTERING, trading merchandise for merchandise with no money involved. b. COUNTERTRADING is a complex form of bartering in which several nations may be involved, each trading goods for goods or services for services. c. Approximately 20% of the global exchanges involve countertrading. d. The text uses the example of the Ford Motor Company trading vehicles to Jamaica for bauxite. D. LEGAL AND REGULATORY FORCES  Chapter 3 Notes 1. In global markets, several groups of laws and regulations may apply. a. Global markets are governed by a myriad of LAWS AND REGULATIONS that are often INCONSISTENT. b. Important legal questions are interpreted differently country to country. 2. American businesspeople are bound to follow U.S. LAWS AND REGULATIONS in conducting business globally. a. The FOREIGN CORRUPT PRACTICES ACT OF 1978 prohibits “questionable” or “dubious” payments to foreign officials to secure business contracts. b. This law runs contrary to beliefs and practices in many countries. c. The ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) and TRANSPARENCY INTERNATIONAL have led the effort to fight corruption and bribery in foreign markets. 3. To be successful in global markets it is often important to CONTACT LOCAL BUSINESSPEOPLE and gain their cooperation. E. PHYSICAL AND ENVIRONMENTAL FORCES 1. Some developing nations have PRIMITIVE TRANSPORTATION AND STORAGE SYSTEMS that make distribution ineffective. 2. Certain TECHNOLOGICAL DIFFERENCES affect exportable products (such as the difference between 110 and 220 voltage electricity). VI. TRADE PROTECTIONISM A. TRADE PROTECTIONISM is the use of government regulations to limit the import of goods and services. 1. ADVOCATES believe that trade protectionism allows domestic producers to survive and grow, producing more jobs. a. Countries often use trade protectionism measures to PROTECT THEIR INDUSTRIES against dumping and foreign competition. b. Some are wary of foreign competition in general. 2. Business, economics, and politics have always been closely linked. a. For centuries businesspeople advocated an economic principle called MERCANTILISM, selling more goods to other nations than you bought from them; that is, to have a favorable balance of trade. b. The expected result was a flow of money to the country that sold the most globally. c. Governments charged a TARIFF, a tax on imports, making imported goods more expensive. 3. There are two kinds of TARIFFS: a. PROTECTIVE TARIFFS are import taxes designed to raise the price of imported products so that domestic products can be more competitively priced.  Chapter 3 Notes b. Protective tariffs are intended to save jobs and protect the country’s infant industries. c. REVENUE TARIFFS are designed to raise money for the government. 4. QUOTAS are more restrictive. a. An IMPORT QUOTA is a limit on the number of products in certain categories that a nation can import. b. Nations also PROHIBIT the export of specific products. c. ANTITERRORISM LAWS and the U.S. EXPORT ADMINISTRATION ACT OF 1979 prohibit exporting goods like high-tech weapons. d. An EMBARGO is a complete ban on the import or export of a certain product or stopping all trade with a particular country (example: the U.S. embargo against trade with Cuba since 1962. Some restrictions were lifted in 2016 but it’s unclear what the future holds.) 5. NONTARIFF BARRIERS a. NONTARIFF BARRIERS are not as specific or formal as tariffs but can still be detrimental to free trade. b. India imposes a number of restrictive standards to inhibit the sale of imported products. c. China omits many American-made products from government catalogs. 6. Overcoming trade constraints creates business opportunities. B. THE WORLD TRADE ORGANIZATION (WTO) 1. Leaders from 23 countries formed the General Agreement on Tariffs and Trade (GATT). 2. The GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) is a 1948 agreement that established a forum for negotiating mutual reductions in trade restrictions. 3. The 1986 URUGUAY ROUND OF GATT TALKS were convened to renegotiate trade agreements. a. After eight years, 124 nations agreed to a new GATT agreement. b. The agreement LOWERS TARIFFS on average by 38% worldwide. 4. Created by the Uruguay Round, the WORLD TRADE ORGANIZATION (WTO) is the international organization that replaced the General Agreement on Tariffs and Trade and was assigned the duty of mediating trade disputes. 5. WTO acts as an independent player that oversees key cross-border issues and global business practices. 6. The formation of the WTO did not solve all global trade problems. a. The Doha Round ended in 2015 with no significant agreements. b. The U.S. blocked appointing new members to the WTO’s appellate body, which may cause the organization to cease to exist.  Chapter 3 Notes C. COMMON MARKETS 1. A COMMON MARKET is a regional group of countries that have a common external tariff, no internal tariffs, and the coordination of laws to facilitate exchange among member countries (also called a TRADING BLOC). 2. The EUROPEAN UNION (EU) is a group of 28 nations in Western Europe. a. When combined, the European Union nations have a population of over 513 million and GDP of $18.8 trillion. b. The United Kingdom is withdrawing from the EU. 3. The PATH TO UNIFICATION has been slow and difficult, yet significant progress has been made. a. In 1999, the EU officially launched its JOINT CURRENCY, the EURO. b. The adoption of the euro eliminated currency conversion problems and saved billions of dollars. c. Currently, the EU faces LOSS OF A MAJOR MEMBER, the UK. d. The EU is also confronting financial difficulties in GREECE, ITALY, PORTUGAL, and SPAIN. 4. Another common market is MERCOSUR, a group that includes Brazil, Argentina, Paraguay, Uruguay, Chile, Bolivia, Columbia, Ecuador, and Peru, and Suriname. a. The EU and Mercosur finalized a trade agreement in 2019 that, if ratified by the EU, would create the largest free-trade agreement in the world. 5. The ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN) was established in 1967. a. ASEAN creates economic cooperation among its five original members (Indonesia, Malaysia, Philippines, Singapore, and Thailand). b. ASEAN has expanded to include Brunei, Cambodia, Lao PDR, Myanmar, and Vietnam. 6. AFRICAN CONTINENTAL FREE TRADE AREA (AFCFTA) is the largest free-trade area in the world in terms of member nations. It has a combined GDP of $3.4 trillion. D. THE NORTH AMERICAN AND CENTRAL AMERICAN FREE TRADE AGREEMENTS 1. The NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) is the agreement that created a free-trade area among the United States, Canada, and Mexico, signed in 1994. 2. The combination of the United States, Canada, and Mexico created a MARKET OF OVER 475 MILLION PEOPLE with a gross domestic product of over $22 trillion. 3. NAFTA OPPONENTS believe the agreement caused loss of U.S. jobs and capital. 4. The OBJECTIVES OF NAFTA were to: a. Eliminate trade barriers b. Promote conditions of fair competition  Chapter 3 Notes c. Increase investment opportunities d. Provide effective protection of intellectual property rights e. Establish a framework for further regional trade cooperation f. Improve working conditions in North America 5. NAFTA remains a hotly debated issue. a. In 2018, leaders from the United States, Mexico, and Canada signed a new trade deal that remakes NAFTA known as the United States-Mexico-Canada Agreement or USMCA. b. The new agreement was ratified in 2020. 6. The CENTRAL AMERICAN FREE-TRADE AGREEMENT created a free-trade zone with the Central American nations of Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. VII. THE FUTURE OF GLOBAL TRADE A. New markets present new opportunities for trade and development. 1. ADVANCED COMMUNICATIONS have made distant markets instantly accessible, particularly China. a. China’s 1.4 billion population represents a tremendous business opportunity. b. The risk of foreign direct investment in China has been significantly reduced. c. 400 of the Fortune 500 companies have invested in China. d. China has been the largest motor vehicle market in the world since 2009. e. CONCERNS still remain about China’s one-party political system, human rights abuses, currency issues, increasing urban population growth, trade restrictions, and aging population. f. China has significant problems with product piracy and counterfeiting. g. China is becoming a key driver of the world economy. 2. OTHER POTENTIAL MARKETS a. INDIA’S 1.36 billion population with 50 PERCENT of its population under 25, is attracting attention. b. Russia and Brazil were projected to be wealthy global economies by 2025. But Russia’s economy has slowed, as has Brazil’s. c. OTHER POTENTIAL MARKETS include South Korea, Vietnam, and East Africa. B. THE CHALLENGE OF OFFSHORE OUTSOURCING 1. OUTSOURCING is the purchase of goods and services from sources outside a firm rather than providing them within the company. a. U.S. companies have outsourced functions such as payroll and manufacturing. b. OFFSHORE OUTSOURCING, shifting functions to markets outside the U.S., is more controversial.  Chapter 3 Notes 2. The first phase was outsourcing simplified manufacturing overseas. 3. The “second wave” of offshore outsourcing involves more skilled, well-educated workers in service-sector jobs. 4. The two major outsource markets are China and India. 5. Outsourcing will impact the future of many U.S. businesses. C. GLOBALIZATION AND YOUR FUTURE 1. Students are encouraged to study foreign languages, foreign cultures, and international businesses. 2. Small and medium-sized businesses are often better prepared to enter global markets.  Chapter 4 Notes I. ETHICS IS MORE THAN LEGALITY. A. HISTORY OF SCANDALS 1. In the early 2000s, scandals at Enron, WorldCom, Tyco, and Lehman Brothers focused attention on the subject of ETHICS. 2. Greedy borrowers and lenders helped precipitate a worldwide financial crisis in 2008. 3. What can be done to restore trust in the free-market system? a. Those who have broken the law need to be PUNISHED ACCORDINGLY. b. Also helpful are new laws making accounting records more transparent and laws making businesspeople more accountable. c. Laws alone don’t make people honest, reliable, or truthful. 4. Ethical behavior is not the same as following the law. a. Ethical behavior goes BEYOND the law. b. ETHICS deals with the proper relations with and responsibilities toward other people. c. LEGALITY deals with much narrower issues. d. It refers only to laws we have written to protect ourselves⎯many UNETHICAL ACTS FALL WITHIN OUR LAWS. B. ETHICAL STANDARDS ARE FUNDAMENTAL. 1. ETHICS are the standards of moral behavior; that is, behavior that is accepted by society as right versus wrong. 2. Many Americans have few moral absolutes and make DECISIONS SITUATIONALLY. 3. Even in today’s diverse culture, there are still COMMON MORAL VALUES. a. Integrity, respect for human life, self-control, honesty, courage, and self- sacrifice are RIGHT. b. Cheating, cowardice, and cruelty are WRONG. 4. All major religions support a version of the GOLDEN RULE: “Do unto others as you would have them do unto you.” C. ETHICS BEGINS WITH EACH OF US. 1. Americans in general are not always honest and honorable. a. A recent study identified low managerial ethics as a major factor in America’s competitive problems. b. Another survey revealed that 3/4 of the population NEVER GAVE TIME to their communities.  Chapter 4 Notes c. The most common form of cheating is plagiarizing material from the Internet. d. In a recent study, 51% of high school students admitted cheating on tests in the last year. e. Many schools now require a certain number of hours of community service to graduate. 2. It is important to KEEP ETHICS IN MIND when making a business decision. a. There is not always an easy choice. b. Sometimes the obvious solution from an ethical point of view has drawbacks from a personal or professional point of view. c. Sometimes there is no desirable alternative, a situation referred to as an ETHICAL DILEMMA. 3. Three questions can help individuals and organizations be sure their decisions are ethical: a. Is my proposed action LEGAL? b. Is it BALANCED? c. How will it make me FEEL ABOUT MYSELF? 4. Individuals and companies that develop a strong ethics code tend to behave more ethically than others. II. MANAGING BUSINESSES ETHICALLY AND RESPONSIBLY A. ORGANIZATIONAL ETHICS BEGINS AT THE TOP. 1. People learn their standards and values from observing what others do, not what they say. 2. Corporate values are instilled by the leadership and example of strong managers. 3. Any trust and cooperation between workers and managers must be based on FAIRNESS, HONESTY, OPENNESS, AND MORAL INTEGRITY. 4. Some managers think ethics is a personal matter⎯that they are not responsible for an individual’s misdeeds. a. Individuals do not usually act alone⎯they need the implied, if not the direct, cooperation of others to behave unethically in a corporation. b. The text uses the example of cell phone sales reps who unethically pressure customers. 5. In some corporations, corporate standards may ENCOURAGE DISHONESTY. B. SETTING CORPORATE ETHICAL STANDARDS 1. Most corporations have WRITTEN CODES OF ETHICS. 2. Although ethics codes vary greatly, they can be classified into TWO MAJOR CATEGORIES: compliance-based and integrity-based.  Chapter 4 Notes a. COMPLIANCE-BASED ETHICS CODES are ethical standards that emphasize preventing unlawful behavior by increasing control and by penalizing wrongdoers. b. INTEGRITY-BASED ETHICS CODES are ethical standards that define the organization’s guiding values, create an environment that supports ethically sound behavior, and stress a shared accountability among employees. 3. A 6-STEP PROCESS can help improve America’s business ethics. a. Step 1: TOP MANAGEMENT must adopt and unconditionally support an explicit code of conduct. b. Step 2: EMPLOYEES must understand that expectations for ethical behavior begin at the top and all employees are expected to act ethically. c. Step 3: MANAGERS and others must be trained to consider the ethical implications of all business decisions. d. Step 4: AN ETHICS OFFICE must be set up. i. WHISTLEBLOWERS (insiders who report illegal or unethical behavior) must feel protected from retaliation. ii. The Sarbanes-Oxley Act contains protections for corporate whistleblowers and the Dodd-Frank Act includes a “bounty” for whistleblowers if the information given results in a successful enforcement action. e. Step 5: OUTSIDERS such as suppliers, subcontractors, distributors, and customers must be told about the ethics program. f. Step 6: THE ETHICS CODE MUST BE ENFORCED. i. If rules are broken, CONSEQUENCES should follow quickly. ii. ENFORCEMENT shows that the code is serious and cannot be broken. 4. A company’s ethics code is worthless IF NOT ENFORCED. a. Enron’s management sent the message to employees that unethical behavior would be tolerated. b. Johnson & Johnson’s response to the cyanide poisoning crisis in the 1980s enhanced its bottom line. 5. An important factor to encourage ethical behavior is the selection of AN ETHICS OFFICER who: a. Sets a positive tone, communicates effectively, relates well with employees b. Serves as a counselor or as an investigator 6. EFFECTIVE ETHICS OFFICERS are people who:  Chapter 4 Notes a. Can be trusted to maintain confidentiality, conduct objective investigations, and ensure the process is fair b. Can demonstrate to stakeholders that ethics is important III. CORPORATE SOCIAL RESPONSIBILITY A. BASICS OF SOCIAL RESPONSIBILITY 1. CORPORATE SOCIAL RESPONSIBILITY (CSR) is a business’s concern for the welfare of society. a. It is based on a company’s concern for the welfare of all its stakeholders, not just the owners. b. Some CRITICS of CSR believe that a manager’s sole role is to compete and win. c. Milton Friedman stated that the only social responsibility of business is to make money for stockholders. d. DEFENDERS argue that CSR makes more money for investors in the long run. e. One study showed a positive correlation between corporate social performance and corporate financial performance. 2. SOCIAL PERFORMANCE of a company has several dimensions: a. CORPORATE PHILANTHROPY is the dimension of social responsibility that includes charitable donations. b. CORPORATE SOCIAL INITIATIVES are enhanced forms of corporate philanthropy directly related to the company’s competencies. c. CORPORATE RESPONSIBILITY is the dimension of social responsibility that includes everything from hiring minority workers to making safe products. d. CORPORATE POLICY is the dimension of social responsibility that refers to the position a firm takes on social and political issues. 3. IMPACT OF CORPORATIONS ON SOCIETY a. Many people get a one-sided view of the impact that companies have on society. b. Few people see the POSITIVE IMPACTS, such as the commitments of many companies to volunteerism, such as Google’s Fellowship program. c. The majority of Millennials surveyed said that they would take a lower salary to work for a socially responsible company. d. Social responsibility is seen differently through the eyes of various STAKEHOLDERS to whom businesses are responsible. B. RESPONSIBILITY TO CUSTOMERS  Chapter 4 Notes 1. President John F. Kennedy proposed four basic rights of consumers: a. The right to SAFETY. b. The right to BE INFORMED. c. The right to CHOOSE. d. The right to be HEARD. 2. Business is responsible to SATISFY CUSTOMERS with goods and services of real value, not an easy task. 3. Many new businesses fail⎯perhaps because their owners failed to please their customers. 4. Social media are a growing way companies communicate their social efforts. 5. The text uses the example of how Celestial Seasonings ignored its image of social responsibility when it poisoned prairie dogs and how Wells Fargo lost customer trust when opening millions of accounts in customers’ names. 6. Customers prefer to do business with companies they trust. C. RESPONSIBILITY TO INVESTORS 1. ETHICAL BEHAVIOR is good for shareholder wealth. 2. UNETHICAL BEHAVIOR does financial damage. 3. Many people believe that it makes FINANCIAL as well as MORAL sense to invest in socially responsible companies. 4. Another ethical concern is INSIDER TRADING. a. INSIDER TRADING is an unethical activity in which insiders use private company information to further their own fortunes or those of their family and friends. b. The text uses these examples: i. Raj Rajaratnam was accused of masterminding an insider trading ring that made his hedge fund $45 million richer. ii. An IBM secretary benefited from advance knowledge of the Lotus merger. c. A recent Supreme Court ruling made it easier to prosecute insider trading cases. d. In response to insider trading scandals, the SEC adopted REGULATION FD for “fair disclosure.” e. If companies tell something to ANYONE, they must tell EVERYONE⎯at the same time. f. Companies can MISUSE INFORMATION FOR THEIR OWN BENEFIT at investors’ expense, as in the case of WorldCom’s fraudulent accounting practices.  Chapter 4 Notes D. RESPONSIBILITY TO EMPLOYEES 1. RESPONSIBILITIES OF BUSINESSES: a. Businesses have a responsibility to CREATE JOBS. b. Businesses have an obligation to see that HARD WORK AND TALENT ARE FAIRLY REWARDED. 2. A company’s effectiveness and financial performance depends on human resource management. 3. If a company TREATS EMPLOYEES WITH RESPECT, they will respect the company. a. In their book Contented Cows Give Better Milk, Bill Catlette and Richard Hadden compared “contented cow” companies with “common cow” companies. b. The “CONTENTED COW” companies grew faster and earned more than “COMMON COW” companies. 4. Replacing employees can cost between 50 and 200 percent of their annual salary, so retaining workers is good for business. 5. By giving employees salaries and benefits that help them REACH THEIR PERSONAL GOALS, the employer shows commitment and caring. 6. When employees feel they’ve been TREATED UNFAIRLY, they strike back. a. Most DISSATISFIED WORKERS relieve their frustrations in subtle ways. b. EMPLOYEE FRAUD costs business about $7 billion annually. E. RESPONSIBILITY TO SOCIETY AND THE ENVIRONMENT 1. More than 10 percent of U.S. workers in the private sector receive salaries from nonprofit organizations that receive funding from others. 2. These companies invest in publicly held companies, helping them to increase their wealth. 3. Business also promote social justice by helping build communities and caring for others. 4. There is also a growing GREEN MOVEMENT. a. A product’s CARBON FOOTPRINT (the amount of carbon released during production, distribution, consumption, and disposal) defines how green it is. b. No specific guidelines define the carbon footprint of products and businesses, but many companies are making GREEN PRODUCTS available. 5. Business is responsible for contributing to making its OWN ENVIRONMENT a better place. 6. The text uses the example of Ciba Specialty Chemicals developing a low-salt textile dye that could be sold at a premium price.  Chapter 4 Notes 7. Not all environmental efforts are financially successful, such as StarKist’s failed “tuna-safe” initiative. 8. The green movement has had a positive impact on the U.S. labor force. 9. To publicize their commitment to society, many corporations PUBLISH REPORTS that document their net social contribution. F. SOCIAL AUDITING 1. How can you measure how well organizations are incorporating social responsiveness into top management’s decision making? 2. A SOCIAL AUDIT is a systematic evaluation of an organization’s progress toward implementing socially responsible and responsive programs. 3. Many SOCIAL AUDITS consider such things as: a. Workplace issues b. The environment c. Product safety d. Community relations e. Military weapons contracting f. International operations g. Human rights h. Respect for the rights of local people 4. Some suggest that positive actions be added up and negative effects subtracted to get a NET SOCIAL CONTRIBUTION. 5. FIVE GROUPS serve as “WATCHDOGS” monitoring how well companies enforce their ethical and social responsibility policies: a. SOCIALLY CONSCIOUS INVESTORS, who insist that companies extend the company’s own high standards to all their suppliers. b. SOCIALLY CONSCIOUS RESEARCH ORGANIZATIONS, that analyze and report on CSR efforts. c. ENVIRONMENTALISTS, who apply pressure by naming names of companies that don’t abide by the environmentalists’ standards. c. UNION OFFICIALS, who hunt down violations and force companies to comply to avoid negative publicity. d. CUSTOMERS, who take their business elsewhere if a company demonstrates socially irresponsible practices. 6. It isn’t enough for a company to be right when it comes to ethics and social responsibility—it also has to convince customers that it’s right. IV. INTERNATIONAL ETHICS AND SOCIAL RESPONSIBILITY A. ETHICAL PROBLEMS ARE NOT UNIQUE TO THE UNITED STATES.  Chapter 4 Notes 1. The text gives the examples of “influence peddling” in Japan, South Korea, Zaire, China, and others. 2. What is new is that leaders are being held to higher standards. B. Many American businesses, such as Calvin Klein and Tommy Hilfiger, are demanding socially responsible behavior from international suppliers. 1. They make sure their suppliers DO NOT VIOLATE U.S. HUMAN RIGHTS AND ENVIRONMENTAL STANDARDS. 2. In contrast, companies like Nike have been criticized for the low pay, long hours, and unsafe working conditions for factory workers in Asia. 3. Nike has been monitoring efforts to improve labor conditions since the 1990s and has released names and locations of factories to encourage transparency. 4. Should international suppliers be required to adhere to U.S. ethical standards? What about countries where child labor is accepted? What about multinational corporations that span different societies? a. None of these questions are easy to answer. b. They show how complex social responsibility issues are in international markets. 5. Many U.S. executives complain that the Foreign Corrupt Practices Act put their businesses at a competitive disadvantage. 6. STANDARDS ON SOCIAL RESPONSIBILITY: a. International organizations, such as the Organization of American States, have adopted the INTER-AMERICAN CONVENTION AGAINST CORRUPTION. b. The INTERNATIONAL ORGANIZATION FOR STANDARDIZATION (ISO) has developed a set of standards for social responsibility, but these are voluntary.  Chapter 2 Notes I. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES A. An economic system either promotes or hinders business activity. B. In the U.S., the economic and social climates allow businesses to operate freely. 1. Any change in the U.S. economic system, such as regulation, has a major influence on business success. 2. Also, GLOBAL ECONOMICS and WORLD POLITICS have a major influence on U.S. business. C. WHAT IS ECONOMICS? 1. ECONOMICS is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. 2. MACROECONOMICS is the part of economic study that looks at the operation of a nation’s economy as a whole. 3. MICROECONOMICS is the part of economic study that looks at the behavior of people and organizations in particular markets. 4. Economics is sometimes defined as the allocation of scarce resources. 5. RESOURCE DEVELOPMENT is the study of how to increase resources and to create the conditions that will make better use of those resources. 6. Businesses help economic systems by inventing products and services that expand available resources (example: mariculture, raising fish in ocean pens). D. THE SECRET TO CREATING A WEALTHY ECONOMY 1. The English economist Thomas Malthus believed that population growth would outstrip resources. a. WORLD POPULATION is currently growing more slowly than expected, particularly in industrial countries. b. But population in the DEVELOPING WORLD will continue to climb quickly. 2. Others believe that a large population can be a valuable resource, especially if people are educated. 3. The SECRET TO ECONOMIC DEVELOPMENT can be summed up in the saying “Give a man a fish and you feed him for a day, but teach a man to fish and you feed him for a lifetime.” 4. Business owners provide JOBS AND ECONOMIC GROWTH for their employees and communities as well as for themselves. 5. Economists examine what makes some countries relatively rich and other countries relatively poor, then develop policies that lead to INCREASED PROSPERITY for everyone. E. ADAM SMITH AND THE CREATION OF WEALTH  Chapter 2 Notes 1. ADAM SMITH believed freedom was vital to the survival of any economy, especially the freedom to own land or property and to keep the profits that result from working the land or running a business. 2. Also, he believed that people would work hard if they had INCENTIVES for doing so. 3. Smith is considered to be the FATHER OF MODERN ECONOMICS. F. HOW BUSINESSES BENEFIT THE COMMUNITY 1. The INVISIBLE HAND is a phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all. 2. Basically, this meant that a person working hard to make money for his or her own PERSONAL INTEREST would (like an invisible hand) also BENEFIT OTHERS. a. For example, a farmer trying to make money would grow as many crops as possible. This would provide jobs and needed food for others. b. If everyone worked hard in his or her own self-interest, Smith said, society as a whole would prosper. 3. Smith assumed that as people become wealthier, they would reach out to help the less fortunate, but that hasn’t always happened. a. An increasing economic disparity exists in the U.S. b. Many U.S. businesspeople are becoming concerned about social issues and their obligation to return to society some of what they’ve earned. II. UNDERSTANDING FREE MARKET CAPITALISM A. Following the ideas of Adam Smith, businesspeople in the U.S. created more wealth than ever before. 1. But GREAT DISPARITIES in wealth remained or even increased. 2. Although it is not easy, opportunities to start one’s own business have always been there, especially in a free market. 3. CAPITALISM is an economic system in which all or most of the factors of