Global Business Lecture 5 PDF

Global Business Lecture 5 Compiled by Srikaanth Global Business Key Terms Global Business International Business - all business activities Globalization of Markets refers to the that involve exchange across national merging of historically distinct and separate boundaries....

Global Business Lecture 5 Compiled by Srikaanth Global Business Key Terms Global Business International Business - all business activities Globalization of Markets refers to the that involve exchange across national merging of historically distinct and separate boundaries. national markets into one global marketplace. Globalization - The increasing Globalization of Production refers to the interdependence and integration of practice of multinational corporations economies, industries, markets, cultures, and locating factories and other production policy-making around the world. This facilities around the world to serve their increases cross-border trade, investment, global markets while optimizing operations migration, production, and the spread of and minimizing costs technology. Global Business Impact of globalization: Anti-globalization movements argue that Economic - Increased free trade, expanded globalization undermines domestic industries, consumer markets but also outsourcing and jobs and cultures while exploiting developing offshoring leading to domestic job losses in countries. Supporters believe it promotes innovation, efficiency and overall economic some industries. growth and prosperity. Social - Improved quality of life and access to products and services but also greater inequality, urbanization and loss of cultural diversity. Political - Political relations and cooperation improves between interdependent economies but also greater collective vulnerability to global crises.  Offshoring - Transferring business operations Global Business like manufacturing or services to overseas locations to take advantage of lower costs and operating expenses. Foreign Direct Investment (FDI) - Investment Onshoring refers to the practice of bringing made by a company or entity based in one manufacturing or services back to the company's country into a company or entity based in original country to conduct operations that had another country. It usually involves establishment been previously offshored or outsourced to of operations or acquisition of assets. another country. Multinational Corporations - Companies that Nearshoring - Relocating operations to a nearby own or control production, distribution or service foreign country to better serve a particular facilities in one or more countries other than region or benefit from cultural and time zone their home country. For example, Sony, Toyota, similarities. Nestle. Outsourcing - Contracting out business functions like IT services, customer support or manufacturing to third-party service providers in another country. Understanding Absolute and Malaysia: Leading producer of palm oil and natural rubber Thailand: Major producer of natural rubber Comparative Advantage Production Statistics Absolute Advantage: Malaysia can produce: 60 tons of palm oil OR 40 tons of natural rubber The ability of an individual, Thailand can produce: company, or country to 30 tons of palm oil OR 50 tons of natural rubber produce a good or service more efficiently than Absolute Advantage: Malaysia can produce MORE palm oil competitors using the same and MORE natural rubber than Thailand with the same amount of resources. resources.So Malaysia has an ABSOLUTE ADVANTAGE in producing both palm oil and natural rubber  Malaysia: Leading producer of palm oil and natural rubber Understanding Absolute and Thailand: Major producer of natural rubber Comparative Advantage Production Possibilities Malaysia can produce: Comparative advantage: 60 tons palm oil OR 40 tons natural rubber Thailand can produce: leads to trade benefits even 30 tons palm oil OR 50 tons natural rubber when one country has an Opportunity Costs absolute advantage in all Malaysia: 1 ton palm oil = 2/3 ton rubber Thailand: 1 ton palm oil = 5/3 tons rubber products. Comparative Advantage :Malaysia has lower opportunity cost of producing palm oil. Thailand has lower opportunity cost of producing natural rubber. So Malaysia has a comparative advantage in palm oil production. While Thailand has a comparative advantage in natural rubber production Absolute and Comparative Advantage Mode of Entry Mode Entry (Main) Exporting Licensing (and Franchising) Joint Venture Totally (Wholly) Owned Facilities (FDI) Strategic Alliance Management Contract Contract Manufacturing Turnkey Project Exporting Direct Exporting: This involves selling directly to the customer in the foreign market without any intermediaries. Companies using direct exporting typically handle every aspect of the exporting process themselves, from market Definition: Exporting refers to the process research to distribution, sales, and after-sales service. of selling goods and services produced in one country to another country (World This method offers greater control over the entire process but requires more resources and expertise in international Trade Organization, 2023). This involves business. the physical movement of goods across borders, accompanied by necessary Indirect Exporting: In this approach, a company sells its products to a third party, such as an export trading company customs documentation and logistical or an export management company, which then exports the arrangements. products to foreign markets. This method is less resource-intensive for the original manufacturer, as the intermediary handles various aspects of the export process, including market research, compliance with local regulations, and logistics. Advantages of Exporting: Disadvantages of Exporting: Extending to a Global Scale/Increasing Profits: Complex Logistics and Regulations: Exporting Exporting allows businesses to expand their market involves navigating complex logistics and adhering to beyond local boundaries, potentially increasing their various regulatory requirements of different countries. customer base and profits. By tapping into This includes customs, import duties, and local international markets, companies can access new standards, which can be challenging and costly. revenue streams. Currency Fluctuations: Dealing with multiple Economies of Scale: Exporting can lead to economies currencies can expose a business to financial risk. of scale, which occur when the cost per unit decreases Currency value fluctuations can affect pricing and as production scale increases. This is due to the profitability in international markets. spreading of fixed costs over a larger number of units. Cultural and Language Barriers: Operating in foreign Risk Mitigation via Market Diversification: Exporting markets often requires dealing with different to multiple countries helps in diversifying market risk. languages and cultural practices, which can be a If one market experiences a downturn, the impact on significant barrier. Misunderstandings and ineffective the business can be offset by its performance in other communication can hinder business dealings. markets. Product Adaptation: Products may need to be adapted Government Support: Many governments offer to meet the regulations, cultural preferences, or support to local businesses that export, including different consumer tastes in the export market, which financial incentives, information resources, and legal can incur additional costs and efforts. assistance, to encourage international trade.  Product Licensing: Licensing This involves granting permission to manufacture, sell, or distribute an already existing product under the licensor's brand name and specifications. Licensing generally refers to a legal Examples include: Coca-Cola licensing bottlers to produce and agreement where one party, the licensor, distribute its beverages in specific regions, or Disney licensing manufacturers to produce toys based on its characters. grants permission to another party, the licensee, to use their intellectual property Service Licensing (Franchise): (IP) in exchange for a fee or royalty This involves granting permission to operate a business based (Investopedia, 2023). on the licensor's established brand, system, and know-how. This IP can include various assets like: Franchisees typically pay an initial franchise fee and ongoing royalties in exchange for training, operating manuals, marketing Trademarks: Logos, brand names, and symbols support, and the established brand recognition. unique to a company. Patents: Exclusive rights to inventions and processes. Examples include McDonald's and KFC, where franchisees own Copyrights: Protection for creative works like music, and operate the restaurants under the licensor's brand and literature, and software. guidelines. Advantages of Licensing: Disadvantages of Licensing : Faster Market Entry: Licensing allows a company to enter Less Control: The licensor has limited control over how its foreign markets more quickly than if it had to establish its products or services are marketed and sold by the licensee. own operations from scratch. The licensee can leverage This can lead to issues with quality control, brand existing distribution networks and market knowledge, reputation, and consistency in the market. accelerating the market penetration process. Limited Earnings: Earnings from licensing are usually Reduce Cost and Risks: Since the licensee bears the primary confined to royalties or fees, which may be significantly less costs and risks associated with manufacturing and than the profits the licensor could earn from direct marketing the licensed product or service, the licensor's operations or other forms of market entry. financial and operational risks are significantly reduced. This Potential Competition: There is a risk that the licensee may is particularly advantageous in uncertain or volatile become a competitor in the future, especially if they acquire markets. significant market knowledge or expertise through the Shared Expertise and Resources: Through licensing, licensing arrangement. This is particularly concerning if the companies can benefit from the local expertise, resources, licensing deal does not include strict non-competition and market knowledge of the licensee. This collaborative clauses. approach can enhance product or service adaptation to Dependence on Licensee's Performance: The success of the local tastes and norms, increasing the likelihood of success. licensing arrangement heavily depends on the licensee's Focus on Core Business: Licensing allows the licensor to performance. If the licensee does not effectively market the concentrate on its core competencies, such as research and product or service, or fails to meet sales targets, the development or brand building, rather than on the licensor's expected benefits from the market can be complexities of managing operations in a foreign market. significantly undermined. This can lead to greater efficiency and innovation in the licensor's primary activities.  Home Country-Based Joint Venture: Companies from the Joint Venture same country partner to explore foreign markets or collaborate on projects. This joint venture often aims to leverage combined resources and expertise for market expansion or project development, such as two U.S. A Joint Venture (JV) is a strategic companies forming a joint venture to enter an Asian market. alliance where two or more parties, Host Country-Based Joint Venture: A company partners usually businesses, form a partnership to with a local firm in the host country where the joint venture share markets, intellectual property, operates. This approach is common when local market knowledge and regulatory compliance are key. An example is assets, knowledge, and profits. a German company forming a joint venture with a Chinese firm to operate in China, utilizing the local partner's market JVs are commonly used for specific insight. projects and are a popular method of business expansion, particularly in Third Country National Joint Venture: Companies from two different countries establish a joint venture in a third, international markets. unrelated country. This is typical in industries like energy or infrastructure, where diverse expertise is beneficial. For instance, a Japanese and Brazilian company might collaborate on a renewable energy project in Kenya. Advantages of Joint Venture : Disadvantages of Joint Venture : Access to New Markets: JVs can provide access to Cultural and Management Differences: new markets, especially in international ventures Differences in culture and management style can where local knowledge is crucial. lead to misunderstandings and conflict within a JV. Shared Resources and Expertise: Partners can Profit Sharing: Profits must be shared among the share costs, risks, expertise, and technology, partners, which might be less than if the making it easier to undertake large projects or companies operated independently. enter new markets. Management Complexity: Coordinating Risk Sharing: In a JV, the risks associated with the decision-making and resolving conflicts with business venture are shared among the partners, different priorities and cultures can be challenging. reducing the burden on a single entity. Limited Duration and Dependence: Joint ventures Increased Capacity: Joining forces can increase often focus on specific projects or timeframes, capacity and help companies to undertake larger creating dependence on a partner for sustained projects or enter new markets that were not success. feasible independently. Totally Owned Facilities Greenfield Investment: A Greenfield investment is when a company builds its operations from scratch in a foreign country. This involves purchasing land, constructing Totally (Wholly)-Owned Facilities facilities, and hiring new employees. The company has complete control over the creation and operation of (FDI):Definition:Wholly-owned facilities these new facilities. (WOFs), in the context of foreign direct investment (FDI), involve a company establishing and completely owning production or service facilities in a foreign country (UNCTAD, 2023). Brownfield Investment: A Brownfield investment involves a company purchasing or leasing existing This means the company has full control over facilities in a foreign country. This can include the operations, management, and profits generated acquisition of an existing company or the use of within the facility. previously developed land and structures. Brownfield investments are often faster to start up than Greenfield. investments as some infrastructure is already in place. Advantages of Totally Owned Facilities : Disadvantages of Totally Owned Facilities : Complete Control: The company has full control over High Risk and Investment: These ventures require its operations, including production, management, and significant capital investment and carry higher risks, marketing strategies, aligning them closely with particularly in volatile foreign markets. corporate goals. Regulatory Challenges: Navigating the regulatory Profit Retention: All profits generated by the facility environment of a foreign country can be complex and go back to the parent company, without the need to time-consuming. share with local partners or joint venture entities. Cultural and Market Adaptation: The company may Market Knowledge: Establishing a wholly-owned face challenges in understanding and adapting to local facility can provide deeper market insights and a better market conditions and cultural nuances. understanding of local customer preferences and Resource Intensive: Setting up and managing a practices. wholly-owned facility can be resource-intensive, Intellectual Property Protection: There’s greater requiring significant management attention and security for the company’s technology and intellectual resources. property, as there’s no need to share it with local Political and Economic Changes: Wholly-owned partners. facilities are vulnerable to political and economic Long-Term Presence: Establishing a wholly-owned changes in the host country, which can impact facility demonstrates a long-term commitment to the operations and profitability. local market, which can be advantageous in building brand and customer loyalty. Other Forms of Mode of Entry Strategic Alliance:A strategic alliance is a cooperative Turnkey Project:A turnkey project is one where a single arrangement between two or more companies that agree to share contractor is responsible for the complete design, construction, and resources to achieve a mutually beneficial goal, without forming a setup of a facility or project until it's ready for operation. Upon separate legal entity. These alliances often involve sharing completion, the contractor "turns the key" over to the project technology, resources, or market access. Strategic alliances are owner. This type of project is common in international construction, flexible and can vary in formality, ranging from informal where the contractor handles all aspects, including legal work, collaborations to structured joint ventures. architecture, construction, and training of personnel. Management Contract:A management contract is an Trading Companies:Trading companies are businesses that arrangement where one company takes on the responsibility of work with different kinds of products, which they sell to consumers, managing the day-to-day operations of another company for a fee. business customers, or governments. These companies typically This setup is common in industries like hospitality, where a hotel specialize in importing and exporting goods in large quantities. owner might contract a hotel management company to run the Trading companies are known for their expertise in securing the best establishment. The management company typically does not own the prices and navigating the logistics of international trade. property but brings expertise and efficiency to the operation. Countertrade:Countertrade refers to a form of international Contract Manufacturing:Contract manufacturing involves trade in which goods or services are exchanged partially or fully for a company hiring another company to produce parts or complete other goods or services, rather than for hard currency. This type of products on its behalf. This arrangement allows the hiring company to trade is often used when there's a lack of foreign currency or in focus on design and sales while outsourcing the manufacturing trading relationships between countries with trade barriers or process, often to companies in countries with lower labor costs. It's a sanctions. Forms of countertrade include barter, counter purchase, common practice in industries like electronics, clothing, and offset, switch trading, and buyback. automobiles. Trade Restriction Tariffs (Import Duty): Tariffs, also known as import duties, are taxes imposed by a government on goods imported into a country. They are a common tool used in international trade policy. Tariffs can increase the cost of foreign goods, making them less competitive compared to domestically produced goods. They are often used to protect local industries, generate revenue for the government, and sometimes to retaliate in trade disputes. Revenue Tariffs: Protective Tariffs: These are primarily designed to generate income for the Protective tariffs are intended to shield domestic government. They are usually placed on imports that are industries from foreign competition. By increasing the not produced domestically and thus do not compete with cost of imported goods, these tariffs make domestic local industries. For example, a country without a products more price-competitive. For example, a country might impose high tariffs on imported steel to protect its domestic oil industry might impose tariffs on imported oil own steel industry. to generate revenue. Dumping: Dumping occurs when a company exports a product at a price lower than the price it normally charges in its home market or lower than the cost of production. This practice can undermine local industries in the importing country. Example: Suppose a Chinese electronics company sells televisions in Europe at a price significantly lower than what it charges in China. This could be considered dumping, especially if it harms the European television manufacturing industry. Nontariff Barriers: Nontariff barriers are trade restrictions that a country applies, but they do not involve tariffs. Import Quota: This is a limit on the quantity of a certain good that can be imported. For instance, a country might only allow the importation of 10,000 cars per year from abroad. Embargo: This is a total ban on trade with a particular country or of a specific product. Embargoes are often imposed for political reasons. For example, many countries have trade embargoes against North Korea. Standards: These are regulations that foreign products must meet to be sold in a country. They can include safety, quality, and environmental standards. For example, the European Union has strict standards for food safety that all imported food products must meet. Cultural Barriers: These involve differences in language, customs, norms, and consumer preferences that can impede foreign products from being successful in a local market. Reasons for Trade Restrictions 1. Equalize Balance of Payments: Problem: Importing more than exporting leads to a trade deficit, weakening currency and potentially impacting the economy. Example: To counter a 2020 trade deficit, Malaysia raised tariffs on non-essential goods like alcohol and tobacco. This encouraged spending on local products, reducing imports and balancing the trade deficit. 2. Protect New Industries: Problem: Infant industries struggle against established foreign competition. Example: Indonesia imposed temporary quotas on motorcycle imports in the 1980s to give its budding motorcycle industry, like Viar and NexDrive, time to grow and compete. 3. Protect National Security: Problem: Certain imports, like weapons or sensitive technologies, pose national security risks. Example: China restricts exports of rare earth elements, crucial for military and technological use, to safeguard its own strategic interests. 4. Protect Public Health: Problem: Unsafe or unhealthy imports pose risks to public health and well-being. Example: Brazil bans pork imports from countries with African swine fever to protect its own pig farming industry and prevent potential outbreaks. 5. Retaliate for Trade Restrictions: Problem: A country responds to another's trade barriers with restrictions of its own. Example: The U.S.-China trade war saw both countries imposing tariffs on each other's goods, impacting industries and consumers on both sides. 6. Protect Domestic Jobs: Problem: Increased imports in certain sectors lead to job losses in competing domestic industries. Example: India raised tariffs on steel imports in 2019 to protect its steel industry and jobs from cheaper foreign steel. Reasons for Against Trade Restrictions 1. Higher Prices for Consumers: Problem: Trade restrictions, like tariffs, raise import costs, which businesses pass on to consumers, leading to higher prices for goods and services.Example: In 2018, the U.S. imposed tariffs on washing machines. As a result, the average price of washing machines in the U.S. increased by 10%, negatively impacting American consumers. 2. Restriction of Consumer Choice: Problem: Trade restrictions limit the variety and availability of goods for consumers, reducing their ability to choose products based on price, quality, and preference. Example: Malaysia's ban on certain non-halal food products restricts consumer choices for Malaysians who prefer specific food items not readily available domestically. 3. Misallocation of International Resources: Problem: Trade restrictions distort market forces, encouraging production in less efficient domestic industries instead of utilizing cheaper and more efficient international options. Example: India's protectionist policies for its solar panel industry led to higher production costs and slower growth compared to countries with open trade policies. 4. Loss of Jobs: Problem: Trade restrictions aimed at protecting specific industries can lead to job losses in other sectors dependent on imports or exports.Example: The U.S.-China trade war caused disruptions in supply chains and increased costs for American businesses, leading to job losses in industries like agriculture and manufacturing. Regional Economic Integration  Regional Economic Integration European Union (EU): North American Free Trade Association of Southeast Asian Agreement (NAFTA): Nations (ASEAN): Type: Deepest level of integration, Type: Free Trade Agreement (FTA) Type: Free Trade Area (FTA) with including a single market, common focus on regional cooperation and currency (Euro), and coordinated development Members: United States, Canada, economic policies. and Mexico Members: 10 Southeast Asian Members: 27 countries (as of countries Benefits: Eliminated tariffs and January 2024) quotas on most goods and services, Benefits: Reduced tariffs and trade enhanced cross-border trade and barriers, increased foreign Benefits: Increased trade, economic investment, collaboration on growth, free movement of goods, investment. infrastructure, education, and services, people, and capital. environmental issues. Challenges: Concerns about Challenges: Maintaining coherence income inequality and job losses in Challenges: Implementing trade among diverse economies, some sectors, dispute resolution agreements consistently across mechanisms. diverse economies, political managing migration, potential loss differences among member states. of national sovereignty. Other Regional Economic Integration Africa Americas: African Union (AU): Aims for continental economic Mercosur: Trade bloc between Argentina, Brazil, integration through various regional economic Paraguay, Uruguay, and Venezuela (suspended), communities (RECs) like the Common Market for promoting free trade and economic cooperation in Eastern and Southern Africa (COMESA), Economic South America. Community of West African States (ECOWAS), and Southern African Development Community (SADC). Pacific Alliance: Trade agreement between Chile, Colombia, Mexico, and Peru, focusing on free trade, East African Community (EAC): Established a single investment, and deeper economic integration. market for goods and services among its six member states, aiming for a common currency and political federation in the future.  Free Trade Area: This is the most basic form of economic integration. Countries in a free trade area agree to reduce or eliminate trade barriers, such as tariffs and import quotas, on goods and services traded between them. However, each country retains its own trade policies with non-member countries. A well-known example is the North American Free Trade Agreement (NAFTA), now replaced by the United States-Mexico-Canada Agreement (USMCA). Customs Union: In addition to the free trade area's benefits, member countries of a customs union adopt a common external tariff (CET) on imports from non-member countries. This means they agree on the tariffs to be imposed on imports from outside the union. A famous example is the Southern African Customs Union. Common Market: A common market enhances the customs union by allowing free movement of factors of production, like labor and capital, between member countries. This means not only goods but also services, people, and money can move freely across borders. The European Economic Area (EEA) is an example. Economic Union: This level involves even closer integration. In addition to the free movement of goods, services, and factors of production, member countries align their economic policies. This includes monetary policy, fiscal policy, and social policy. The European Union (EU) is the most prominent example of an economic union. Political Union: This is the highest level of economic integration. Countries in a political union not only have unified economic policies but also integrate politically. Member countries may have a common government, legal system, and possibly a shared currency. The United States can be considered a political union, although it formed by integrating previously independent states rather than sovereign countries coming together. General Agreement on Tariffs and Trade (GATT): World Trade Organization (WTO) Formed in 1947 as a multilateral trade treaty among 23 founding Formed in 1995 as successor to GATT and expanded scope and member countries institutions for global trade governance Aims: Members: Promote international trade Reduce trade barriers like tariffs, quotas, subsidies 164 member countries and represent >95% of world trade Create rules-based trading system via negotiations Key Functions: Rounds of talks: Oversee complex trade agreements 8 rounds of trade negotiations from 1947-1993 Administer and enforce agreed trade rules Progressive reduction of customs duties and import tariffs Settlement of trade disputes Established regulations: Trade negotiations forum Review national trade policies Treat trading partners equally Build trade capacity in developing countries Regardless of national ideologies Roles: Impact: Promoted freer, more transparent trade Uphold open, free and non-discriminatory trade Increased prosperity for cooperating nations post-WW2 Vital for economic growth and prosperity More comprehensive than GATT Overall, GATT provided an effective framework for promoting global trade by lowering trade barriers through sequential negotiations The WTO built on GATT’s mission while strengthening institutions among participating countries in the post-war period. and mechanisms to promote global trade as complexity increased in the modern era.