Chapters 1-3: International Business and Trade PDF

**CHAPTERS 1-3** **International Business and Trade** Members: Tangaro, Jelian E. Arranguez, Daniel Paul Gabuya, Cristine O. Batarilan, Krisha Mae Ducay, Maricel E. Despi, Abegail Ducay, Juvy Villaceran, James A. Garcia, Teres Necolle Dela Pena, Leizl M. Alcansare, Jesrel BSBA -- 3B I...

**CHAPTERS 1-3** **International Business and Trade** Members: Tangaro, Jelian E. Arranguez, Daniel Paul Gabuya, Cristine O. Batarilan, Krisha Mae Ducay, Maricel E. Despi, Abegail Ducay, Juvy Villaceran, James A. Garcia, Teres Necolle Dela Pena, Leizl M. Alcansare, Jesrel BSBA -- 3B Instructor: [Mr. Julius Oflas, MBA] **CHAPTER 1: THE SCOPE AND CHALLENGE OF INTERNATIONAL MARKETING** This chapter digs into the complexities and challenges of international marketing, highlighting its importance in the modern globalized world. The learning objectives aim to equip you with the knowledge and understanding necessary to navigate the intricacies of international business. *Learning Objectives:* 1. Understand how international trade fosters peace and prosperity. 2. Explore why U.S. companies are increasingly global. 3. Distinguish international from domestic marketing. 4. Identify controllable and uncontrollable factors. 5. Appreciate the need to adapt marketing strategies to different cultures. 6. Recognize the SRC as a barrier to international success. 7. Develop tolerance for cultural differences and knowledge of global trends. 8. Understand the stages of internationalization. 9. Compare domestic, international, and global marketing perspectives. 1.10 Appreciate the challenges of adapting to foreign environments. **1.1 Global Perspective Global Commerce Causes Peace** Global commerce thrives during peacetime. The economic boom in North America during the late 1990s was in large part due to the end of the Cold War and the opening of the formerly communist countries to the world trading system. However, we should also understand the important role that trade and international marketing play in actually producing peace. In times of peace, international trade flourishes as relationships between countries improve. This has a ripple effect and a positive impact on the economies of all countries involved. The long-held belief that global commerce causes peace is facing a significant challenge in the current geopolitical climate. While many scholars and policymakers have traditionally argued that economic interdependence fosters cooperation and reduces the likelihood of conflict, recent events, particularly the Russian invasion of Ukraine, have cast doubt on this assumption. *The Shifting Landscape of Global Trade and Peace* The war in Ukraine has exposed the vulnerabilities of the global economy to disruptions in trade and supply chains. The conflict has also highlighted the potential for asymmetric economic interdependence to create tension and instability. For example, the European Union's reliance on Russian energy has been a source of significant leverage for Moscow. This dependence has fueled concerns that Russia could use its energy exports as a weapon to achieve its political objectives. The sanctions imposed on Russia by the West have also demonstrated the potential for economic measures to be used as a tool of coercion. While these sanctions have had a significant impact on the Russian economy, they have also created economic hardship for many European countries. *Events and Trends affecting Global Business* 1. Natural Disasters 2. Wars and National Conflict 3. Advancement in technology and the rise of the internet Of all the trends affecting global business today, three stand out as the most dynamic, the ones that will influence the shape of international business in the future: \(1) the rapid growth of the World Trade Organization and regional free trade areas such as the North American Free Trade Area and the European Union; \(2) the trend toward the acceptance of the free market system among developing countries in Latin America, Asia, and Eastern Europe; and \(3) the burgeoning impact of the Internet and other global media on the dissolution of national borders. **1.2 The Internationalization of U.S. Business** Current interest in international marketing can be explained by changing competitive structures coupled with shifts in demand characteristics in markets throughout the world. With the increasing globalization of markets, companies find they are unavoidably enmeshed with foreign customers, competitors, and suppliers, even within their own borders. They face competition on all fronts-from domestic firms and from foreign firms. Many familiar U.S. companies are now foreign controlled. When you drop in at a 7-Eleven convenience store or buy Firestone tires, you are buying directly from a Japanese company. Some well-known brands no longer owned by U.S. companies are Carnation (Swiss), Chrysler (German), and the all-American Smith and Wesson handgun that won the U.S. West, which is owned by a British firm. The last U.S.-owned company to manufacture TV sets was Zenith, but even it was acquired by South Korea\'s LG Electronics, Inc., which manufactures Goldstar TVs and other products. Pearle Vision, Universal Studios, and many more are currently owned or controlled by foreign multinational businesses. Foreign investment in the United States is in excess of \$1.5 trillion. Companies from the United Kingdom lead the group of investors, with companies from the Netherlands, Japan, Germany, and Switzerland following in that order. Table 1. Shows the table of the foreign acquisition of US Companies. **COMPANY** **COUNTRY** **COMPANY** **COUNTRY** ---------------------------- ------------- ------------------------------- ------------------ 7-Eleven Japan Gerber Switzerland Ben & Jerry's U.K. Holiday Inn U.K. Budweiser Belgium Huffy Corp. (bicycles) China Chrysler Italy Oroweat (breads) Mexico Chrysler Building (NYC) Abu Dhabi Radio Shack Mexico Church's Chicken Bahrain RANDOM House (publishing) Germany CITGO Venezuela RCA (television) France and China Columbia Pictures (movies) Japan Smith & Wesson (guns) U.K. French's Mustard U.K. Swift & Company (meatpacking) Brazil Firestone (tires) Japan The Wall Street Journal Australia Frigidaire Sweden T-Mobile Germany Genentech Switzerland Waldorf Astoria Hotel China Companies that never ventured abroad until recently are now seeking foreign markets. Companies with existing foreign operations realize they must be more competitive to succeed against foreign multinationals. They have found it necessary to spend more money and time improving their marketing positions abroad because competition for these growing markets is intensifying. For the firm venturing into international marketing for the first time and for those already experienced, the requirement is generally the same: a thorough and complete commitment to foreign markets and, for many, new ways of operating. **1.3 International Marketing Defined** International marketing is the performance of business activities designed to plan, price, promote, and direct the flow of a company\'s goods and services to consumers or usersin more than one nation for a profit. The only difference between the definitions of domestic marketing and international marketing is that in the latter case marketing activities take place in more than one country. This apparently minor difference, - in more than one country,\" accounts for the complexity and diversity found in international marketing operations. Marketing concepts, processes, and principles are universally applicable, and the marketer\'s task is the same whether doing business in Dimebox, Texas, or Dar es Salaam, Tanzania. Business\'s goal is to make a profit by promoting, pricing, and distributing products for which there is a market. If this is the case, what is the difference between domestic and international marketing? The answer lies not with different concepts of marketing but with the environment within which marketing plans must be implemented. The uniqueness of foreign marketing comes from the range of unfamiliar problems and the variety of strategies necessary to cope with different levels of uncertainty encountered in foreign markets, Competition, legal restraints, government controls, weather, fickle consumers, and any number of other uncontrollable elements can, and frequently do, affect the profitable outcome of good, sound marketing plans. Generally speaking, the marketer cannot control or influence these uncontrollable elements, but instead must adjust or adapt to them in a manner consistent with a successful outcome. What makes marketing interesting is the challenge of molding the controllable elements of marketing decisions (product, price, promotion, and distribution) within the framework of the uncontrollable elements of the marketplace (competition, politics, laws, consumer behavior, level of technology, and so forth) in such a way that marketing objectives are achieved. Even though marketing principles and concepts are universally applicable, the environment within which the marketer must implement marketing plans can change dramatically from country to country or region to region. The difficulties created by different environments are the international marketer\'s primary concern. **1.4 The International Marketing Task** The international marketer\'s job is harder than the domestic marketer\'s job because they have to deal with more uncertainty. This is because they have to consider two levels of uncontrollable factors: **Home country factors**: These are things like the economy, laws, and competition in their own country that can affect their business in other countries. **Foreign country factors:** These are things like the culture, laws, and economy of the countries they want to sell in. Exhibit 1.3 shows this:  1. The inner circle represents what the marketer can control, like their product, price, promotion, and distribution. 2. The second circle represents the home country factors. 3. The outer circles represent the foreign country factors. The more countries a company sells in, the more different these foreign country factors can be. So, a solution that works in one country might not work in another. *Marketing Decision Factors* The marketing manager\'s job is to create a marketing plan that works well in a changing business environment. This plan involves using these four. Product: What you\'re selling. Price: How much you charge. Promotion: How you advertise. Distribution: How you get your products to customers. *Aspect of the domestic environment* The domestic environment is the situation in a company\'s home country. It can affect how well the company does in other countries. **Political and legal forces:** These are the laws and regulations in the home country. They can affect how easy it is for companies to do business internationally. (For example, the U.S. government can ban trade with other countries.) **Economic climate**: This is the state of the economy in the home country. A strong economy can help companies invest in foreign markets, while a weak economy can make it harder. **Competition:** This is the number and strength of other companies in the same industry in the home country. If there is strong competition at home, companies may need to focus on international markets to grow. *Aspect of the foreign environment* The foreign environment is the situation in the countries where a company wants to sell its products or services. It can be very different from the home country, and it can be difficult to understand and predict. **Political and legal forces**: These are the laws and regulations in the foreign country. They can affect how easy it is for companies to do business there. (For example, some countries may have strict regulations on foreign investment.) **Economic forces:** These are the economic conditions in the foreign country, such as the strength of the economy, inflation, and interest rates. (These factors can affect consumer spending and business profitability.) **Competitive forces**: These are the other companies that are already selling in the foreign market. (A company must compete with these other companies to win customers.) **Level of technology**: This is the level of technological development in a foreign country. (A company may need to adapt its products or services to meet the needs of customers in a country with a different level of technology.) **Structure of distribution**: This is the system of channels through which products and services are distributed in the foreign country. (A company may need to work with different distributors or retailers in different countries.) **Geography and infrastructure**: This is the physical location of the foreign country and its infrastructure, such as transportation and communication systems. (These factors can affect the cost and efficiency of doing business in a foreign country.) **Cultural forces**: These are the cultural values, beliefs, and customs of the people in the foreign country. (A company must understand these cultural factors to be successful in the market. **1.5 Environmental Adaptation Needed** *Cultural Adaptation in International Marketing* Understanding the Importance of Culture When doing business in a foreign country, it\'s essential to understand and adapt to the local culture. This means recognizing how cultural differences can affect your marketing strategies. *The Challenge of Cultural Awareness* **Unconscious Bias:** We often make decisions based on our own cultural experiences and values without even realizing it. (This can lead to misunderstandings and mistakes when doing business in a different culture.) **Cultural Differences**: Even simple things like gestures, colors, or time perception can have vastly different meanings in different cultures. (For example, the color white is associated with purity in Western cultures but mourning in some Asian cultures.) *Examples of Cultural Misunderstandings* **Advertising Blunders**: Companies have made mistakes in foreign markets due to cultural insensitivity. (For instance, a Western company might use a slogan that has an unintended meaning in another language.) **Business Etiquette**: Different cultures have different customs for greetings, negotiations, and gift-giving. (Failing to follow these customs can create negative impressions.) **Time Perception**: Attitudes towards time can vary significantly. (While Americans tend to be very time-conscious, in some cultures, flexibility and spontaneity are valued more.) *Overcoming Cultural Challenges* To avoid these pitfalls, international marketers must: **Research the Culture**: Learn about the target country\'s customs, values, and beliefs. **Adapt Marketing Strategies**: Tailor products, messaging, and business practices to fit the local culture. **Hire Local Experts**: Collaborate with people who understand the local culture to provide guidance and insights. **Be Open-Minded**: Avoid making assumptions based on your own cultural experiences. **1.6 THE SELF-REFERENCE CRITERION AND ETHNOCENTRISM: MAJOR OBSTACLES** The primary obstacles to success in international marketing are a person's self-reference criterion (SRC) and an associated ethnocentrism. SRC is an unconscious reference to one's own cultural values, experiences, and knowledge as a basis for decisions. Closely connected is ethnocentrism, that is, the notion that one\'s own culture or company knows best how to do things. Ethnocentrism is particularly a problem for American managers at the beginning of the 21^st^ century because of America's dominance in the world economy during the late 1990s, Ethnocentrism is generally a problem when managers from affluent countries work with managers and markets in less affluent countries. Both the SRC and ethnocentrism impede the ability to assess a foreign market in its true light. Example:  To avoid errors in business decisions, it is necessary to conduct a cross-cultural analysis that isolates the SRC influences and to maintain a vigilance regarding ethnocentrism. The following steps are suggested as a framework for such an analysis. 1.Define the business problem or goal in home-country cultural traits, habits, or norms. 2.Define the business problem or goal in foreign-country cultural traits, habits, or norms through consultation with natives of the target country. Make no value judgments. 3.Isolate the SRC influence in the problem and examine it carefully to see how it complicates the problem. 4.Redefine the problem without the SRC influence and solve for the optimum business goal situation. **1.7 Developing a Global Awareness** To be globally aware is to have - Objectivity - Tolerance of cultural differences - Knowledge of cultures, history, world market potential, and global economic, Social, and political trends. To be globally aware is to be objective. Objectivity is important in assessing opportunities, evaluating potential, and responding to problems. Millions of dollars have beenlost by companies that blindly entered the Chinese market in the belief that there were untold opportunities, when, in reality, opportunities were only in select areas and generally for those with the resources to sustain a long-term commitment. Many were caught up in the euphoria of envisioning one billion consumers and did not see the realities of low income and low purchasing power, poor distribution and logistics, inadequate media infrastructure, and differences in tastes and preferences between Chinese and Western consumers. Thus, uninformed and not very objective decisions were made. To be globally aware is to have tolerance for cultural differences. Tolerance is under- standing cultural differences and accepting and working with others whose behaviors may be different from yours. You do not have to accept as your own the cultural ways of another, but you must allow others to be different and equal. A globally aware person is knowledgeable about cultures and history. Knowledge of cultures is important in understanding behavior in the marketplace or in the boardroom. Knowledge of history is important because the way people think and act is influenced by their history. Some Latin Americans' reluctance about foreign investment or Chinese reluctance to open completely to outsiders can be understood better if you have a historical perspective Global awareness also involves knowledge of world market potentials and global eco nomic, social, and political trends. Over the next few decades there will be enormous changes in market potentials in almost every region of the world, all of which a glob- ally aware person must continuously monitor. Finally, a globally aware person will keep abreast of the global economic, social, and political trends because a country's prospects can change as these trends shift direction or accelerate. The former republics of the Soviet Union, along with Russia, Eastern Europe, China, India, Africa, and Latin America, are undergoing economic, social, and political changes that have already altered the course of trade and defined new economic powers. The knowledgeable marketer will identify opportunity long before it becomes evident to others. It is the authors' goal in this text to guide the reader toward acquiring a global awareness. **1.8 Stages of International Marketing Involvement** Once a company has decided to go international, it has to decide the degree of marketing involvement and commitment it is prepared to make. These decisions should reflect considerable study and analysis of market potential and company capabilities-a process not always followed. Many companies begin tentatively in international marketing, growing as they gain experience and gradually changing strategy and tactics as they become more committed. *No Direct Foreign Marketing* A company in this stage does not actively cultivate customers outside national boundaries; however, this company's products may reach foreign markets. Sales may be made to trading companies as well as foreign customers who come directly to the firm. Or products may reach foreign markets via domestic wholesalers or distributors who sell abroad without explicit encouragement or even knowledge of the producer. As companies develop websites on the Internet, many receive orders from international Web surfers. Often an unsolicited order from a foreign buyer is what piques the interest of a company to seek additional international sales. *Infrequent Foreign Marketing* Temporary surpluses caused by variations in production levels or demand may result in infrequent marketing overseas. The surpluses are characterized by their temporary nature; therefore, sales to foreign markets are made as goods are available, with little or no intention of maintaining continuous market representation. As domestic demand increases and absorbs surpluses, foreign sales activity is withdrawn. In this stage, there is little or no change in company organization or product lines. However, few companies today fit this model because customers around the world increasingly seek long-term commercial relationships. *Regular Foreign Marketing* Term commercial relationships. At this level, the firm has permanent productive capacity devoted to the production of goods to be marketed in foreign markets. A firm may employ foreign or domestic overseas middlemen or it may have its own sales force or sales subsidiaries in important foreign markets. The primary focus of operations and production is to service domes- tic market needs. However, as overseas demand grows, production is allocated for foreign markets, and products may be adapted to meet the needs of individual foreign markets. Profit expectations from foreign markets move from being seen as a bonus to regular domestic profits to a position in which the company becomes dependent on foreign sales and profits to meet its goals. *International Marketing* Companies in this stage are fully committed and involved in international marketing activities. Such companies seek markets all over the world and sell products that are a result of planned production for markets in various countries. This generally entails not only the marketing but also the production of goods outside the home market. At this point a company becomes an international or multinational marketing firm. *Global Marketing* At the global marketing level, the most profound change is the orientation of the company toward markets and associated planning activities. At this stage, companies treat the world, including their home market, as one market. Market segmentation decisions are no longer focused on national borders. Instead, market segments are defined by income levels, usage patterns, or other factors that often span countries and regions. Often this transition from international marketing to global marketing is catalyzed by a company's crossing the threshold of more than half its sales revenues coming from abroad. The best people in the company begin to seek international assignments, and the entire operation-organizational structure, sources of finance, production, marketing, and so forth begins to take on a global perspective. **1.9 Strategic Orientation** The stages of international marketing involvement described above do not necessarily coincide with managers\' thinking and strategic orientations. Often companies are led into international and even global markets by burgeoning consumer or customer demands, and strategic thinking is secondary to \"filling the next order.\" But putting strategic thinking on the back burner has resulted in marketing failures for even the largest companies. The consensus of the researchers and authors in the area27 reveals three relatively distinctive approaches that seem to dominate strategic thinking in firms involved in international markets; *Domestic Market Extension Orientation* The domestic company seeking sales extension of its domestic products into foreign markets illustrates this orientation to international marketing. It views its international operations as secondary to and an extension of its domestic operations; the primary motive is to market excess domestic production. Domestic business is its priority, and foreign sales are seen as a profitable extension of domestic operations. Even though foreign markets may be vigorously pursued, the firm\'s orientation remains basically domestic. Its attitude toward international sales is typified by the belief that if it sells in St. Louis it will sell anywhere else in the world. Minimal, if any, efforts are made to adapt the marketing mix to foreign markets, the firm\'s orientation is to market to foreign customers in the same manner in which the company markets to domestic customers. It seeks markets where demand is similar to the home market and its domestic product will be acceptable. This domestic market extension strategy can be very profitable; large and small exporting companies approach international marketing from this perspective. Firms with this marketing approach are classified as ethnocentric in the EPRG schema. Meter-Man, discussed earlier, could be said to follow this orientation. *Multidomestic Market Orientation* Once a company recognizes the importance of differences in overseas markets and the importance of offshore business to the organization, its orientation toward international business may shift to a multidomestic market strategy. A company guided by this concept has a strong sense that country markets are vastly different (and they may be, depending on the product) and that market success requires an almost independent pro- gram for each country. Firms with this orientation market on a country-by-country basis. with separate marketing strategies for each country. Subsidiaries operate independently of one another in establishing marketing objectives and plans, and the domestic market and each of the country markets have separate marketing mixes with little interaction among them. Products are adapted for each market with little coordination with other country markets; advertising campaigns are localized, as are the pricing and distribution decisions. A company with this concept does not look for similarity among elements of the marketing mix that might respond to standardization; rather, it aims for adaptation to local country markets. Control is typically decentralized to reflect the belief that the uniqueness of each market requires local marketing input and control. Firms with this orientation would be classified in the EPRG schema as polycentric. Fedders, as it progresses in its plans, fits this orientation. *Global Market Orientation* A company guided by the global marketing orientation or philosophy is generally referred to as a global company; its marketing activity is global, and its market coverage is the world. A company employing a global marketing strategy strives for efficiencies of scale by developing a standardized marketing mix applicable across national boundaries. Markets are still segmented, but country or region are considered side by side with a variety of other segmentation variables, such as consumer characteristics (age, income, language group), usage patterns, legal constraints, and so on. The world as a whole is viewed as the market, and the firm develops a global marketing strategy. The global marketing company would fit the regiocentric or geocentric classifications of the EPRG schema. Coca-Cola Company, Ford Motor Company and Intel are among the companies that can be described as global companies. The global marketing concept views an entire set of country markets (whether the home market and only 1 other country, or the home market and 100 other countries) as a unit, identifying groups of prospective buyers with similar needs as a global market segment and developing a marketing plan that strives for standardization wherever it is cost and culturally effective. This might mean a company\'s global marketing plan has a standardized product but country-specific advertising, or has a standardized theme in all countries with country- or cultural-specific appeals to a unique market characteristic. **1.10 The Orientation of International Marketing** The four (4) types of orientation towards International of business: REGIOCENTRIC: In regiocentric approach, the firm accepts a regional marketing policy covering a group of countries which have comparable market characteristics such as economic, cultural or political similarities and formulates operational strategies based on region instead of countries. For example, countries like Pakistan, India and Bangladesh are very similar. They possess a strong regional identity. GEOCENTRIC: In geocentric orientation, the firms accept a worldwide approach to marketing and target \"global consumers\" with similar tastes. There are similarities between geocentric and regiocentric approaches in the international market except that the geocentric approach calls for a much greater scale of operation. For example, Nokia offers products to a similar kind of consumer worldwide. ETHNOCENTRIC: The ethnocentric orientation of a firm considers that the products, marketing strategies and techniques applicable in the home market are similar to that in the overseas market. In such a firm, all foreign marketing operations are planned and carried out with little or no difference in product formulation and specifications, pricing strategy, distribution and promotion measures. POLYCENTRIC: When a firm adopts polycentric approach to overseas markets, it attempts to organize its international marketing activities on a country to country basis. Polycentric approach works better among countries which have significant economic, political and cultural differences. For example, McDonald\'s tailoring its offerings to the country of operation such as Maharaja Mac in India, Mcltaly in Italy, McLobster in Canada. **CHAPTER 2: THE DYNAMIC ENVIRONMENT OF INTERNATIONAL TRADE** This chapter explores the complex landscape of international trade barriers, examining their historical evolution, economic implications, and impact on global business. *Learning Objectives :* 2.1 Understand the challenges and opportunities that trade barriers present for international marketers. 2.2 Trace how trade barriers have evolved over time, from the 20th century to the present. 2.3 Explain what the balance of payments is and how it influences trade policies. 2.4 Identify the different types of protectionist measures and understand their motivations and impacts. 2.5 Explore initiatives and agreements aimed at reducing trade barriers and promoting free trade. 2.6 Learn about the roles of the IMF and World Bank in global finance and development, and understand the criticisms they face. 2.7 Examine the reasons behind protests against global institutions and their impact on international trade. 2.8 Analyze how the internet has transformed international business, creating new opportunities and challenges for marketers. **2.1 Trade Barriers\-\-- An International Marketer\'s Minefield** We all know the story about our trade disputes with Japan. Japan has so many trade barriers and high tariffs that U.S. manufacturers are unable to sell in Japan as much as Japanese companies sell in the United States. For example, the Japanese claim that \"unique\" Japanese snow requires skis made in Japan, and that U.S. baseballs are not good enough for Japanese baseball. Even when Japan opened their rice market, the popular California rice had to be mixed and sold with inferior grades of Japanese rice. However, the Japanese are not alone; it seems every country takes advantage of the open U.S. market while put- ting barriers in the way of U.S. exports. The French, for ex- ample, protect their film and broadcast industry from foreign competition by limiting the number of American shows that can appear on television, the percentage of American songs broadcast on radio, and the proportion of U.S. movies that can be shown in French theaters. The French also protect small retailers by disallowing any re- tailers (Amazon or Carretown) to advertise on TV. Not only do these barriers and high tariffs limit how much U.S. companies can sell, but they also raise prices for imported products much higher than they sell for in the United States. Consider the fiscal hazards facing international marketing managers at a company like Neutrogena¹ that is contemplating exporting its products to Russia. Upon arrival there the firm\'s products might be classified by Russian customs officers into any one of three separate categories for the purposes of assigning tariffs: pharmaceuticals at a 5 percent duty, soap at 15 percent, or cosmetics at 20 percent. Of course, Neutrogena managers would argue for the lowest tariff by pointing out that their hypoallergenic soaps are recommended by dermatologists. And, as long as shipments remain relatively small, the customs officers might not argue. However, as exports to Russia grow from cartons to container loads, the product classification receives more scrutiny. Simple statements on packaging, such as \"Pure Neutrogena skin and hair care products are available at drug stores and cosmetic counters,\" would give the Russians reason to claim the highest duty of 20 percent. Barriers to trade, both tariff and nontariff, are one of the major issues confronting international marketers. Fortunately, tariffs generally have been reduced to record lows and substantial progress has been made on eliminating non-tariff barriers. However, nations continue to use trade barriers for a variety of reasons, some rational and some not so rational. **2.2 THE 20^TH^ CENTURY** FIRST HALF OF 20TH CENTURY: TWO WORLD WARS AND RECESSIONThe first half of the 20th century was marred by a major worldwide economic depression that occurred between two world wars and that all but destroyed most of the industrialized world. SECOND HALF OF THE 20TH CENTURY: WORLD DIVIDES INTO SOCIALISM AND CAPITALISM The latter half of the century, free of a word war, was marred by struggles between countries espousing the socialistic Marxist approach and those following a democratic capitalist approach to economic development. US INFUSED CAPITALISM TO THE REST OF THE WORLD After World War II, as a means to dampen the spread of communism, the United States set out to infuse the ideal of capitalism throughout as much as the world as possible. The dissolution of colonial powers created scores of new countries in Asia and Africa. With the striving of these countries to gain economic independence and the financial assistance offered by the United States, most of the noncommunist world's economies grew and new markets were created. BENEFITS FROM THE FOREIGN ECONOMIC ASSISTANCE BY THE US WAS TREMENDOUS For every dollar the United States invested in the economic development and rebuilding of other countries after World War II, hundred of dollars more returned in the form of purchases od Us agricultural products, manufactured goods and services. GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) In addition to US economic assistance, a move toward international cooperation among trading nations was manifest in the negotiation of the General Agreement Tariffs and Trade (GATT). International trade had ground to a halt following World War I when nations followed the example set by the US enactment of the Smoot - Hawley Act (1930), which raised average US, tariffs on more than 20000 imported *WORLD TRADE AND US MULTINATIONALS* RAPID GROWTH OF WAR-TORN ECONOMIES AND PREVIOUSLY UNDERDEVELOPED COUNTIES LED TO NEW GLOBAL MARKETING OPPORTUNITIES The rapid growth of war-torn economies and previously underdeveloped countries, coupled with large-scale economic cooperation and assistance, led to new global marketing opportunities. Rising standards of living and broad-based consumer and industrial markets abroad created opportunities for American companies to expand exports and investment worldwide. DURING 1950's US COMPANIES BEGAN TO EXPORT During the 1950s, many US, companies that had never before marketed outside the United States began to export, and others made significant investments in marketing and production facilities overseas. BY 1960's US MNC WERE FACING TWO MAJOR CHALLENGES: Resistance to Direct Investment and Increasing Competition in Export Markets. At the close of the 1960s, US. Multinational Corporations (MNCs) were facing major challenges on two fronts: resistance to direct investment and increasing competition in export markets. Large investments by U.S. businesses in Europe and Latin America heightened the concern of these countries about the growing domination of U.S. multinationals. The reaction in Latin American countries was to expropriate direct U.S. investments or to force companies to sell controlling interests to nationals. In Europe, apprehension manifested itself in strong public demand to limit foreign investment. US SUPREMACY WAS CHALENGED The worldwide economic growth and rebuilding after World War II was beginning to surface in competition that challenged the supremacy of American industry. Competition arose on all fronts; Japan, Germany, most of the industrialized world, and many developing countries were competing for demand in their own countries and were looking for world markets as well. LESS DEVELOPED COUNTRIES WERE RECLASSIFIED AS NEWY INDUSTRIALIZED COUNTRIES e. g. Brazil, Mexico, China, South Korea, Taiwan, Singapore and Hongkong. Countries once classified as less developed were reclassified as newly industrialized countries (NIC), NICs such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong experienced rapid industrialization in selected industries and became aggressive world competitors in steel. Shipbuilding, consumer electronics, automobiles, light aircraft, shoes, textiles, apparel. And so forth. TRADE FRICTION BETWEEN JAPAN AND UNITED STATES AND THE ESTABLISHMENT OF WTO. Among the more important questions raised were those concerning the ability of US. Firms to compete in foreign markets and the fairness of the international trade policies of some countries. Trade friction revolved around Japan's sales of autos and electronics in the United States and Japan's restrictive trade practices. The United States, a strong advocate of free trade, was confronted with the dilemma of how to encourage trading partners to reciprocate with open access to their markets without provoking increased protectionism. Besides successfully pressuring Japan to open its markets for some types of trade and investment, the United States was a driving force behind the establishment of the WTO. PROFOUND CHANGES IN LAST DECADE OF 20^th^ CENTURY By the last decade of the 20^th^ century profound changes in the way the world would trade were already under way. The final integration of the countries of the European Union (EU), the creation of the North American Free Trade Area (NAFTA) and the ASEAN Free Trade Area (AFTA), and the rapid evolution of the Asia-Pacific Economic Cooperation (APEC) are the beginnings of global trading blocs that many experts expect to dominate trade patterns in the future. *THE FIRST DECADE OF 21^st^ CENTURY AND BEYOND* COMPANIES ARE LOOKING FOR WAYS TO BECOME MORE EFFICIENT, IMPROVE PRODUCTIVITY AND EXPAND THEIR GLOBAL REACH Companies are looking for ways to become more efficient, improve productivity and expand their global reach while maintaining an ability to respond quickly to deliver a product that the market demands. For example, large multinational companies such as Matsushita of Japan continue to expand their global mach. Nestlé is consolidating its dominance in global consumer markets by acquiring and vigorously marketing local country major brands. Samsung of South Korea has invested \$500 million in Mexico to secure access to markets in the North American Free Trade Area. FINANCIAL CRISIS IN 1997 In 1997 South Korea and several Southeast Asian economies faltered, and shortly thereafter, the US. Stock market reacted with its largest daily drop in several years. The fear was the potential negative impact on U.S. technology industries if the economies of Asian customers slowed. Four years later most of the world's emerging markets were on a somewhat slower, but nevertheless positive, growth path than before the financial crisis of 1997. 21^st^ CENTURY HAS SEEN A TRANSFORMATION IN HOW COUNTRIES EXCHANGE GOODS AND SERVICES. The rise of digital technology, e-commerce, and global supply chains has made trade faster, more efficient, and more complex. Businesses now operate on a global stage, where a product can be designed in one country, manufactured in another, and sold worldwide. **2.3 BALANCE OF PAYMENTS** *Balance of Payments-* the system of accounts that records a nation's international financial transactions. A nation's balance of payments presents an overall view of its international economic position and is an important economic measure used by treasuries, central banks and other government agencies whose responsibility is to maintain external and internal economic stability. *A balance-of-payments statement includes three accounts:* **CURRENT ACCOUNT-** a record of all merchandise exports, imports and services plus unilateral transfer of funds. **CAPITAL ACCOUNT-** a record of direct investment, portfolio investment, and short-term capital movements to and from countries. **OFFICIAL RESERVES ACCOUNT-** a record of exports and imports of gold, increases or decreases in foreign exchange, and increases or decreases in liabilities to foreign central banks. *Balance of Trade-* the relationship between merchandise exports and imports. If a country exports more goods than it imports, it has a favorable balance of trade; if it imports more goods than it exports, it has an unfavorable balance of trade. Usually, a country that has a negative balance of trade, also has a negative balance of payments. **2.4 Protectionism** International business must face the reality that this is a world of tariffs, quotas, and non- tariff barriers designed to protect a country\'s markets from intrusion by foreign companies. Although the General Agreement on Tariffs and Trade has been effective in reducing tariffs, countries still resort to other measures of protectionism. Nations utilize legal barriers, exchange barriers, and psychological barriers to restrain entry of unwanted goods. Businesses work together to establish private market barriers, and the market structure itself may provide formidable barriers to imported goods. The complex distribution system in Japan is a good example of a market structure creating a barrier to trade. However, as effective as it is in keeping some products out of the market, in a legal sense it cannot be viewed as a trade barrier. The chapter discusses the reasons behind government-imposed trade restrictions, which are often supported by protectionists. These reasons include the protection of infant industries, national defense, conservation of natural resources, and maintaining employment. Economists, however, generally only recognize the validity of arguments related to infant industries, national defense, and the industrialization of underdeveloped nations. While protectionist measures like tariffs are often justified on these grounds, they typically result in higher costs for consumers without achieving their intended economic benefits. For example, U.S. consumers pay about \$70 billion more annually due to tariffs, and the cost of saving jobs in protected industries is exorbitantly high, often far exceeding the average pay for workers in those industries. Despite their popularity, such protectionist policies rarely revive declining industries and instead act as a hidden tax on consumers. Absurdity of protectionist measures like tariffs by referencing a satirical letter written by Frédéric Bastiat to the French Chamber of Deputies. In the letter, Bastiat humorously petitions for a law to block out sunlight to protect domestic candle manufacturers from the "unfair" competition of the sun, illustrating the folly of restricting trade to protect local industries. The passage then explains that governments often establish various trade barriers-such as tariffs, quotas, and boycotts-to protect domestic industries. While these barriers may be driven by economic or political motives and are often supported by local industries, their economic logic is frequently questionable. Nonetheless, these barriers persist in practice. A **tariff** Is a government-imposed tax on goods entering a country, often used to generate revenue or discourage imports. Tariffs can lead to several negative effects, including inflation, special interest privileges, increased government control, and the potential for trade wars. They also distort supply-and-demand patterns, restrict manufacturers' supply sources, limit consumer choices, and reduce competition. Tariffs are often arbitrary and discriminatory, requiring ongoing administration. They are sometimes used as retaliatory measures in trade disputes, such as the "pasta war" between the U.S. and the European Union, where escalating tariffs were imposed on various products until a resolution was reached. Besides tariffs, other import restrictions include quality standards, quotas, embargoes, boycotts, and antidumping penalties. A **quota** Is a limit set by a government on the quantity or value of a specific good that can be imported. Quotas are used by various countries to restrict imports, such as British limits on imported television sets and U.S. quotas on sugar, textiles, and peanuts. Quotas impose an absolute restriction on the amount of a specific item that can be imported. They often lead to higher prices, as seen in the U.S., where textile quotas have increased clothing prices by an estimated 50% at the wholesale level. Over time, some quotas have been replaced by tariffs, as seen in Japan's approach to rice imports. In certain cases, like the ongoing "banana war" between the U.S. and the European Union, a mixed system of quotas and tariffs may be implemented. **Voluntary Export Restraints.** Similar to quotas are voluntary export restraints (VERS) and orderly marketing agreements (OMAs). Common in textiles, clothing, steel, agriculture, and automobiles, the VER is an agreement between the importing country and the exporting country for a restriction on the volume of exports. Japan has a VER on automobiles exported to the United States; that is, Japan has agreed to export a fixed Specific Limitations on Imports Quotas (on products and services) Import licensing requirements Proportional restrictions of foreign to domestic goods (local-content requirements) Minimum import price limits Embargoes Customs and Administrative Entry Processes Valuation systems Antidumping practices Tariff classifications Documentation requirements Fees Standards disparities Intergovernmental acceptances of testing methods and standards. Packaging, labeling, marking, and safety standards Governmental Participation in Trade Government procurement policies Export subsidies Countervailing duties Domestic assistance programs Charges on Imports Prior import deposit requirements Administrative fees Special supplementary duties Import credit discriminations Variable levies Border taxes Others Voluntary export restraints Orderly marketing agreements When televisions were still manufactured in the United States. Japan signed an OMA limiting Japanese color television exports to the United States to 1.56 million units per year. However, because of the OMA, Japanese companies began investing in television manufacturing in the United States and Mexico. As a result, they regained the entire market share that had been lost through the OMA, eventually dominating the entire market. A VER is called \"voluntary\" because the exporting country sets the limits; however, it is generally imposed under the threat of stiffer quotas and tariffs being set by the importing country if a VER is not established. 9A **boycott** is an absolute prohibition on purchasing or importing certain goods, often imposed by governments or supported by civic groups. Government boycotts, like those the U.S. has imposed on Cuba, Iran, and Iraq, aim to address disputes but can harm both the imposing and targeted countries without achieving the desired outcomes. Public boycotts, such as the one against Nestlé for misleading promotion of baby formula, can also be either formal or informal. Monetary barriers are another way governments control international trade. These include blocked currency, differential exchange rates, and government approval requirements for foreign exchange. Blocked currency cuts off imports by preventing importers from exchanging domestic currency for foreign currency. Differential exchange rates manipulate the cost of foreign currency depending on the desirability of the imported goods. Government approval for foreign exchange is often required in countries with severe currency shortages, adding significant barriers to trade. Such policies can create cash flow problems for importers and significantly increase import costs, serving as a major deterrent to international trade. **Antidumping Penalties**. Antidumping laws were designed to prevent foreign producers from using predatory pricing, a practice whereby a producer intentionally sells its products for less than the cost of production in order to undermine the competition and take control of the market. Antidumping laws were intended as a kind of antitrust law for international trade. Violators are assessed antidumping duties for selling below cost or are assessed countervailing duties to prevent the use of foreign government subsidies to undermine American industry. Many countries have similar laws, which are allowed under WTO rules. **2.5 EASING TRADE RESTRICTIONS** Lowering the trade deficit has been a priority of the US government for a number of years. Many believe that too many countries are allowed to trade freely in the United States without granting equal access to U.S. products in their countries, Japan was the trading partner with which we have the largest deficit and with which there is the mou concern about fairness. *The Omnibus Trade and Competitiveness Act of 1988* Designed to deal with trade deficits, protectionism, and overall fairness of our trading partners Covers three critical areas in improving U.S. trade Market access Export expansion Import relief Four ongoing activities to support the growth of international trade GATT The associated World Trade Organization (WTO) International Monetary Fund (IMF) The World Bank Group (WBG) *GENERAL AGREEMENT ON TARIFFS AND TRADE* Historically, trade treaties were negotiated on a bilateral (between two nations) basis. with little attention given to relationships with other countries. Further, there was a tendency to raise barriers rather than extend markets and restore world trade. The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its preamble, its purpose was the \"substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.\" In addition to market access, there were issues of trade in services, agriculture, and textiles; intellectual property rights; and investment and capital flows. The market access segment (tariff and nontariff measures) was initially considered to be of secondary importance in the negotiations, but the final outcome went well beyond the initial Uruguay Round goal of a one-third reduction in tariffs. Instead, virtually all tariffs in ten vital industrial sectors were eliminated with key trading partners. This resulted in deep cuts (ranging from 50 to 100 percent) on electronic items and scientific equipment, and the harmonization of tariffs in the chemical sector at very low rates (5.5 to 0 percent). *Skirting the Spirit of GATT and WTO* **GATT**: The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its preamble, its purpose was the \"substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis. **WTO**: The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world\'s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. **2.6 INTERNATIONAL MONETARY FUND AND WORLD BANK GROUP** *International Monetary Fund (IMF)* *Special Drawing Rights (SDRs)* *World Bank Group* **2.7 PROTEST AGAINST GLOBAL INSTITUTION** *Major Protest* 1\. WTO in Seattle,. Washington, USA, November 1999 2\. World Bank and IMF meeting in Washington,.DC, April 2000 3\. World Economic Forum in Melbourne,. Australia,. September 2000 4\. IMF/World Bank meeting in Prague, September 2000 *Policy Impact* **2.8 THE INTERNET AND GLOBAL BUSINESS** *The Internet\'s Impact on Business* *Nestle* *Nestle\'s plans to leverage the internet* **CHAPTER 3: HISTORY AND GEOGRAPHY: THE FOUNDATION OF CULTURAL UNDERSTANDING** Understand how history and geography shape cultural understanding and influence global business. *Learning Objectives:* 3.1. Learn about the unique story of Panama\'s independence and how it was shaped by global forces and economic interests. 3.2 Explore how geographical factors influence global markets and trade patterns, impacting the development of nations and regions. 3.3 Understand the historical context of global business, including key events and trends that have shaped international trade and commerce. **3.1 GLOBAL PERSPECTIVE: BIRTH OF A NATION - PANAMA IN 67 HOURS** *The Stage is Set* - June 1902 - U.S offer to buy Panama Canal Zone from Columbia for 10 million dollar. - August 1903 - The Columbian Senate refuses the offer. Theodore Roosevelt, angered by the refusal, alleged to have referred to the Columbian Senate as \"those compatible little creature in Bogota\". Roosevelt agrees to a plot, led by secessionist, Dr. Manuel Amador, to assist a group planning to secede from Columbia. - October 17 - Panamanian dissidents travel to Washington and agree U.S backed revolution. The date of revolution is set from Nov. 3 at 6 p.m. - October 18 - Flag, constitution and declaration of independence are created over the weekend. Panama\'s first flag was design and sewn by hand in Highland fallS, New York using fabric bought at Macy\'s. *A Country is Born* - Tuesday, Nov. 3 - Precisely at 6 p.m. bribes are paid to the Columbian garrison to lay down their arms. The revolution begins, the U.S.S. Nashville steams in Colon harbor, and the junt a proclaims Panama\'s independence. - Friday, Nov. 6 - By 1:00 P.M. the United States recognizes the sovereign state of Panama. - Saturday, Nov. 7 - The new government sends an official delegation from Panama to the United States to instruct the Panamanian ambassador to the United States on provisions of the Panama Canal Treaty. - Wednesday, Nov. 18 - 6:40 P.M. the Panamanian ambassador signs the Panama Canal Treaty. At 11:30 P.M. the official Panamanian delegation arrives at a Washington, D.C. railroad station and is met by their ambassador, who informs them that the treaty was signs hours earlier. *The Present* - 1997 - United States agrees to relinquish control of Panama Canal Zone on Dec. 31, 1999. - 1997 - Autoridad del Canal de Panama, the canal authority that will assume control from the U.S. Panama Canal Commission, is created. - 1998 - Panama gives a Chinese company the right to build new port facilities on both the Pacific and Atlantic sides, to control anchorages, to hire new pilots , to guide ships through the canal , and to block all passage that interferes with company\'s business. - Jan. 1 2000 - \"The Canal Is Ours\" is jubilant cry in Panama - Jan. 17, 2000 - Pentagon sees potential Chinese treat to Panama Canal *Culture* **3.2 GEOGRAPHY AND GLOBAL MARKETS** **Geography --** the study of earth's surface, climate, continents, countries, peoples, industries, and resources. **Topography --** is the study of earth's surface, shape and features or those planets. - Climate conditions, such as altitude, humidity, and temperature, can have an effect on products. - Within even a single national market, climate can be sufficiently diverse to require major adjustments. - Topographical issues and geographic hurdles can have a deep effect on the distribution channels of the product and a country's economy. *Geography, Nature, and Economic Growth* - Less-privileged (developing) countries suffer disproportionately from natural disasters over more economically stable countries. - In more prosperous countries, the ability to prepare, plan, and overcome natural disasters is much greater. *Environmental issues:* - Disruption of ecosystems - Relocation of people - Inadequate hazardous waste management - Industrial pollution *Social Responsibility and Environment Management* The marketer must consider what are the environmental consequences of their product - This is especially true if the company is producing the product in the country that the product is being marketed. - Pollution is on the verge of getting completely out of control - China has 16 of the world's 20 most polluted cities - Critical issue: the disposal of hazardous waste - Organizations that have formed to address this problem include: The Organization for Cooperation & Development The United Nations The European Union Other international activist groups - Many organizations and governmental agencies are governed by a concept called "sustainable development" A joint approach among governmental agencies, organizations and environmentalists who seek economic growth with "wise resource management, equitable distribution of benefits and reduction of negative effects on people and environment from the process of economic growth" *Resources* - The availability of minerals and the availability to generate energy are the foundations of modern technology. - The principal supplements to human energy are: Animals Wood Fossil fuel Nuclear power Ocean tides Geothermal power The sun - The availability of natural resources has an impact on economic growth - Most countries are not self-sufficient, this becomes one of the most important imports and has a major impact on a country's trade deficit or surplus. - Global interdependence of energy resources is increasingly important and has incredible political power. *WORLD POPULATION TRENDS* *A Growing World* \- Current population: Over 6 billion \- Projected population by 2050: 9 billion \- Majority of growth in less-developed regions \- By 2050, 88% of the population will be in these regions *The Challenge of Population Control* Managing Growth \- Need for 1.2 billion new jobs by 2025 \- Challenges in reducing population growth in less-developed regions \- Social, cultural, and political factors at play *Population Control Strategies* \- Importance of economic development, education, healthcare, and family planning \- The need for cultural shifts in beliefs about large families *Rural to Urban Migration* \- People moving from rural areas to cities for better opportunities \- Over 40% of the world\'s population now lives in cities \- Urbanization is expected to continue *Challenges of Urban Growth* \- Rapid urban growth can lead to slums, strain on infrastructure, and environmental issues \- Examples: Mexico City\'s challenges with pollution, water shortage, and garbage. *Population Decline and Aging* \- Declining birth rates in developed countries (Western Europe, Japan) \- Aging populations: By 2030, over 25% of the population in some countries will be over 65 *Challenges of Aging Populations* \- Strain on social services and the workforce \- Fewer workers to support retirees \- Potential economic and social problems *Worker Shortage and Immigration* \- Immigration can help address worker shortages in developed countries \- Can also help manage population growth in developing countries *Challenges of Work Shortage and Immigration* -Developed countries face worker shortages due to aging populations. \- Immigration is often seen as a solution but faces political and social resistance. *World Trade Routes* \- Trade routes facilitate the exchange of goods and services \- Evolution from overland to sea, air, and now the internet \- Promote global interconnectedness and economic growth *Challenges of World Trade Routes* \- Trade routes facilitate global commerce but have environmental and social costs. \- Increased transportation leads to pollution and greenhouse gas emissions. *Communication Links* \- Effective communication is essential for global business \- Advancements in electronic communication have driven trade expansion \- The internet revolution continues to shape international business and culture *Challenges* \- Advancements in communication technology have revolutionized business and culture. \- But, unequal access to technology creates a digital divide. **3.3 HISTORICAL PERSPECTIVE IN GLOBAL BUSINESS** History helps define a nation\'s \"mission,\" how it perceives its neighbors, how it sees its place in the world, and how it sees itself. Insights into the history of a country are particularly effective for understanding attitudes about the role of government and business, the relations between managers and the managed, the sources of management authority. and attitudes toward foreign multinational corporations. *HISTORY OF SUBJECTIVE* the importance of cooperation for the collective good. Japanese achieve consensus by agreeing that all will unite against outside pressures that threaten the collective good. A historical perspective gives the foreigner in Japan a basis on which to begin developing cultural sensitivity and a better understanding of contemporary Japanese behavior. \- A German depiction of US troops as they Capture Mexico City in 1847, during the Mexican American War-a war almost for- gotten in the United States but one that looms large in Mexican history. (Christel Gerstenberg/ CORBIS) \- American Forces landing in Guantanamo Bay, Cuba, in 1898 during the Spanish-American War. Mani fest Destiny and the Monroe doc trine were accepted as the basis for US involvement in Latin America, which reflected the desire of expansionists in the 1840s to ex tend US boundaries from the Atlantic to the Pacific. (Archivo Iconografico, S.A/CORBIS) \- Theodore \"Teddy Roosevelt leading the Rough Riders to victory at the Battle of San Juan Hill in Cuba during the Spanish American War. This marked the beginning of Teddy\'s lifetime of involvement in Latin America. (CORRIS) \- A protester holds an altered, handmade US. flag in front of the Defense Ministry in Seoul Korea as anti-US slogans are shouted during a rally to oppose the visit of US Defense Secretary William Cohen. Secretary Cohen was in Korea to discuss North Korea\'s military situation and the Nogunri massacre of South Korean civilians by US. soldiers during the Korean War (AP Photo/Ahn Young-joon)