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adms 1000

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Administrative Studies
ADMS 1000
Len Karakowsky

Sessions 7 & 8: The Global Context I and II Chapter 6: The Global Context Notes What is Globalization? • Globalization is a process that involves: o The integration of world economics  The presence of trade blocs reflects the accelerating pace with which nations are integrating their economies. For example, NAFTA, the NorthAmerican Free TradeAgreement, is a free-trade bloc consisting of Canada, the United States and Mexico. The EU (European Union) groups 25 countries, whileAPEC (Asian Pacific Economic Cooperation) consists of 21 nations forming a free-trade zone around the Pacific. o The integration of world markets  This reflects the notion that consumer preferences are converging around the world. Whether it is for products made by McDonald’s, Sony, GAP or Nike, organizations are increasingly marketing their goods and services worldwide. Though local modifications may be made to tailor the product to the local consumers, there is a push toward global products. On the other side, production is increasingly becoming a global affair. Businesses will set up operations wherever it is least costly to do so. • Therefore, globalization is a process that involves: o Expanding the degree and forms of cross-border transactions among people, assets, goods and services o Growth in direct foreign investment in regions across the world o The shift toward increasing economic interdependence: the process of generating one, single, world economic system or a global economy Sources Encouraging Global BusinessActivity • Pull Factors o Are the reasons a business would gain from entering the international context • Push Factors o These are forces that act upon all businesses to create an environment where competing successfully means competing globally Going Global Push Factors Pull Factors The force of competition Potential for sales growth Shift toward democracy Obtaining needed resources Reduction in trade barriers Improvements in technology Pull Factors Potential for Sales Growth • Afundamental reason for engaging in global operation is to help a business expand its markets • Increased sales are typically the central aim behind a company’s expansion into international business • Asignificant portion of sales among the world’s largest firms are generated from outside the home country • Offers almost a limitless potential beyond domestic consumers • Having access to foreign consumers also may lessen the negative effects of domestic downturns in demand for the businesses’product of service Obtaining Needed Resources • Businesses may choose to engage in global business activity in order to obtain resources that are either unavailable or too costly within the domestic borders. Acquiring foreign imports is a case of obtaining needed resources. It could be the case that a textile manufacturer imports its raw materials from a foreign supplier because these materials are not available locally. • The decision to locate businesses or plants in developing or underdeveloped nations may be a means to access inexpensive labour Push Factors The Force of Competition • Many domestic economies have become covered with competing products or services • Abusiness that seeks to grow needs to consider the markets beyond its domestic borders: this is where new, and potentially untapped, market opportunities still exist • Abusiness may find that it must compete against not merely domestic competitors, but foreign competitors as well • Therefore, a business may be pushed into becoming a global business by the simple fact that it is forced to compete with a foreign competitor • For some businesses it may seem reckless not to combat foreign competition by attempting to go after the competitor’s market overseas. In other words, the drive to “go global” may be a response to competitor’s actions. • Other domestic competitors may be expanding their markets overseas, which creates additional incentive for the business to follow suit • First mover advantage o Is a philosophy that underscores the benefits of being among the first to establish strong positions in important world markets. Businesses that enter the foreign market later may have more difficulty establishing themselves and may even by effectively blocked by competitors. Shift toward Democracy • The shift toward democracy in many societies that were formerly economically and politically repressed has contributed to the creation of new market opportunities Reduction in Trade Barriers • Global business activities have been growing at a faster rate than in previous years o This acceleration may be largely due to the general push toward freer trade • The most powerful source of influence encouraging increased international business is the reduction in trade and investment restrictions. For example, the NorthAmerican Free Trade Agreement (NAFTA) was established as an agreement to remove trade barriers between Canada, the United States and Mexico. This agreement essentially aimed to produce a common market among the members. Improvements in Technology • Advancements in technology have more efficiently facilitated cross-border transactions • Innovations in information technology, as well as advances in transportation, have made it increasingly easy to transfer information, products, services, capital and human resources around the world • Electronic commerce, or e-commerce, has been relatively free from government control, and this flexibility has contributed to the rate of globalization and the generation of virtual global organizations. Virtual organizations increasingly exist at the global level, where the geographic sources of the product or service and the location of the workforce are unimportant. Channels of Global Business Activity • Establishing Subsidiaries • Exporting and Importing • Outsourcing • Licensing and Franchising • Direct Investment in Foreign Operations • Joint Ventures and StrategicAlliances • Mergers andAcquisitions Exporting and Importing • Businesses that engage in international business are more likely to be involved in importing and exporting than in any other type of global business activity • Exporting o Selling abroad, either directly to target customers or indirectly by retaining foreign sales agents and distributors • Importing o Are goods brought into the country • Avoids the need to build factories in host country • It is a relatively quick way of going international Why is global trade important to the Canadian economy? • Global or international trade between countries around the world improves relationships with allies and has economic benefits such as: o Creating growth in the economy o Increasing profits o Providing jobs o Raising living standards that improve the quality of life • Offers 6 billion potential customers around the world • Canada exports nearly 45% of what it produces • 33% of all Canadian jobs are related to our exports Outsourcing/Offshoring • Involves hiring external organizations to conduct work in certain functions of the company • The organization typically will retain its core functions or competencies: that is, those areas that it is in business to conduct • Contracting services from foreign-based businesses • Avoids the need to build factories in host country e.g. Nike • Access to cheap labour – reduces cost of production versus using domestic labour in Canada or U.S. • Can be controversial – i.e. businesses in developed countries like Canada criticized for shutting down manufacturing operations here and contracting the cheaper services of underdeveloped countries Licensing and FranchisingArrangements • Licensing o The licensing agreement is an arrangement whereby the owner of a product or process is paid a fee or royalty from another company in return for granting permission to produce or distribute the product or process o Licensing is an agreement where the licensor or exporter grants a foreign firm the right to use intellectual property (i.e. patents, copyrights, manufacturing processes, trade names etc. for royalties – a percentage of total earnings) o Why might a business enter into licensing agreements? Essentially, companies that don’t wish to set up actual production or marketing operations overseas can let the foreign business conduct these activities and simply collect royalties. • Franchising o Franchising shares some of the advantages of licensing, in that both are relatively lower risk forms of global business o Franchising involves drafting a contract between a supplier (franchiser) and a dealer (franchisee) that stipulates how the supplier’s product or service will be sold. The franchisee is the dealer (usually the owner of a small business), who is permitted to sell the goods/services of the franchiser (the supplier) in exchange for some payment (e.g. flat fee, future royalties/commissions, future advertising fees). o Is the granting of a right by the parent company to a foreign firm to do business in a prescribed manner following strict guidelines proven to be profitable in return for royalties Direct Investment in Foreign Operations • Involves the purchase of physical assets or an amount of ownership in a company from another country in order to gain a measure of management control • Acquisition of local companies • Establishment of subsidiaries (branch plant) • I.e. operations in one country controlled by entities in a foreign country through some financial ownership in the company. E.g. Best Buy acquiring Future Shop • Typically the ability to attract Foreign Direct Investment reflects international opinion on the attractiveness of an economy Why would businesses wish to engage in foreign investment? • Access to markets • Greater responsiveness to local consumer needs • Avoidance of tariff and import barriers • Greater control of local operations Joint Ventures & Strategic Alliances • Involves an arrangement between two or more companies from different countries to produce a product or service together, or to collaborate in research, development, or marketing of this product or service • Quick entry into a foreign market • Away to obtain new knowledge and expertise in a foreign county • Away to achieve economies of scale (cost efficiencies through large scale production) • Sharing of costs & risks Mergers andAcquisitions • Anumber of factors typically generate the drive to merge, including the goal of obtaining new markets for the business and the effort to obtain new knowledge and expertise in an industry • Achieving economies of scale in production Establishment of Subsidiaries • Where possible, a business may choose to maintain control of its product or service by either establishing a wholly owned subsidiary or by purchasing an existing firm in the host country • Acquisitions of local companies have become increasingly popular. These types of acquisitions allow efficient entry into a market with already well-known products and distribut
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