BSB119 - Global Business Final Exam Summary Semester 1

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Text Book Notes- BSB119 Global Business Chapter 1 -Globalisation Globalisation- The merging of national economies into an interdependent, integrated global economic system. Advantages Disadvantages -firms can expand revenue by selling around the -Unemployment in developed countries world -Poverty in developing countries, -reduce costs by producing goods where -environmental problems resources are cheap Example – Ikea buying parts and furniture from all over the world in order to maintain the lowest price Offshoring- a form of outsourcing it is when a task previously performed in one country is now conducted in another country. Outsourcing- tasks that were previously conducted in-house are now purchased from another firm. Example- Indian accountants trained in US tax rules performing work for US firms. Globalisation has several facets including the globalisation of markets and production Globalisation of Markets- the merging of historically distinct and separate national markets into one huge global marketplace. In Australia 77% of the firms exporting are small firms. Example- Gekko systems- an innovator in mining technology. Globalisation of Production- Sourcing goods and services from locations around the world to take advantage of national differences in cost and various quality of factors of production. Advantages Disadvantages - national differences in cost/ quality of - formal and informal trade barriers between production countries - therefore can compete more effectively -barriers to foreign direct investment against rivals. -transportation costs -issues associated with economic and political risk Factors of production-Components of production such as labour, energy, land and capital. Example – Boeing 777 outsources a lot of production to foreign suppliers because the suppliers are the best in the world at their particular activity Institutions are needed to help manage, regulate and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system. General Agreement on tariffs and trade- an international treaty that committed signatories to lowering barriers to the free flow of good across national borders, a predeccesor to the WTO WTO- the organisation that succeeded the GATT and now acts as to police the world trading system. IMF- the international institution set up to maintain order in the international monetary system World Bank-the international organisation set up to promote economic development by primarily giving low interest loans to developing countries. United Nations – an international organisation made up of 191 countries charged with keeping the peace, developing cooperation between nations and promoting human rights Environmental factors facilitating globalisation: - Liberalization- reduction in the barriers to trade and foreign investment - Political environment- changing ideologies, privitisation and emerging market economies - Rising disposable incomes- demand for more products - Technological change-transportation, communication internet, information processing. - Virtual organisation- virtual workforce (global outsourcing) Two Drivers of Globalisation- Declining Trade and Investment Barriers and Technological Change Declining Trade and Investment Barriers International trade- when a firm exports goods or services to another country. FDI- when a firm invests resources in business activities outside its home country, giving it some control over those activities. The removal of tarrifs and restrictions on trade from many countries for international business, has driven the globalisation of markets and globalisation of production. Foreign Direct investment FDI flow- the amount of FDI undertaken over a given time FDI Stock- the total accumulated value of foreign-owned assets at a given time. FDI Outflow- the flow of FDI out of a country FDI In flow- the flow of FDI into a country Technological Change The lowering of trade barriers made globalisation of markets and production a theoretical possibility. Technological change made it a tangible reality. Most important innovation- development of microprocessor- high power, low cost, increasing amounts of information processed by individuals and firms. Moores Law- the premise that the power of the microprocessor technology doubles and its cost of production drops by half every 18 months. Global communications revolutionized- satellite, optical fire, wireless technologies, internet, WWW. Internet-  Growing number of cross border trade  Rolls back constraints of loacation, scale and time zones  Makes it easier for buyers and sellers to fine each other  Allows business, small and large to expand sales at a lower price than ever before Example – Dell computers – internet and aircrafts, outsource customer service operations- india Transportation Technology  Development of commercial jet aircraft  Super-freighters  Introduction to containerization Multinational Enterprise MNE-any business that has productive activities in two or more countries. The Globalisation Debate  Falling barriers to international trade destroys manufacturing jobs in wealthy advanced economies. Example- Blundstone boots- moved jobs from AUS to Asia  Free trade encourages firms from advanced countries to move manufacturing to less developed countries that lack adequate regulations to protect labour and the environment from unscrupulous business.  Globalisation shifts economic power away from national governments and towards supranational organisations such as the WTO. EU and UN.- national sovereignty  Over the past 100 years of globalisation, the gap between the rich and poor has gotten larger. International business- any firm that engages in international trade or investment  Does not have to be a MNE  Must export or import products from other countries Managing an international business is different from managing a purely domestic business because:  Countries are different  The range of problems confronted by a manager is wider and problems are more complex  International business must find ways to work within limits imposed by government intervention  International transactions involve converting money into different currencies. Chapter 2 Theories of Trade, Investment and Internationalisation New Trade Theory- -Suggests that because of economies of scale and increasing returns to specialization, in some industries there are likely to be only a few profitable firms - Firms with first mover advantages will develop economies of scale and create barriers of entry for other firms. Free Trade- the absence of barriers to the free flow of goods and services between countries Economies of Scale- cost advantages associated with large- scale production Three Main Implications for international Business – Location implications, first mover and policy implications Eclectic Paradigm- argument that combining location-specific assets or resource endowments and the firm’s own unique assets often requires FDI. Exporting- Sale of products produced in one country to the residents of another. Licensing- Occurs when a firm licenses the right to produce its product, use its production processes, brand name, trademark to another firm, in return for a royalty fee on every unit the licensee sells. Reasons for investing abroad  Find new markets and access resources  Improved efficiency due to cost related advantages, investment incentive or science and industrial parks  Invest abroad to seek strategic assets by investing in local firms to gain access to distribution net works, gain local knowledge and other ownership advantages. Internalisation theory – Marketing imperfection approach to foreign direct investment Limitations of Exporting  Transportation costs  Trade barriers- tariffs and import limitations Limitations of Licensing  May give away valuable technological know-how to a potential foreign competitor Example- RCA to Sony and Mistubishi- colour tv- may not be protected by a licensing contract.  Licensing does not give a firm tight control over manufacturing, marketing and strategy in a country that may be required to maximize its profitability.  Firms competitive advantage is based not on products but on management, marketing and manufacturing capabilities- firms skills and know-how are not amenable to licensing Oglipoly- An industry composed of a limited number of large firms. Multipoint competition- arises when two or more enterprises encounter each other in different regional markets, national markets or industries Ownership Advantages- Advantages that arise from the accumulation of intangible assets, technological capacities or innovations. Internalisation Advantages- Factors associated with a firm deciding to keep the production of a good or service within the firm rather than outsourcing it to other firms. Location-specific advantages- advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (know –how) Externalities- Knowledge Spillovers MNC- multinational corporations SMEs- small to medium sized enterprises The Uppsala Models Stage 1- no regular export activity Stage 2- export via independent representatives (agents) Stage 3- establishment of an overseas sales subsidiary Stage 4- overseas production/manufacturing units Born Global- a firm that internationalises rapidly, within a few years of inception. An OLI Synthesis (dunning) Choose FDI when 3 conditions exist: (O)- possesses ownership advantages – owns a valuable asst to provide an international competitive advantage eg. Technology, trademark, political connections (L)- Location Advantages- specific to the location where the O advantages can be complemented, created, acquired or exploited. (I)- internalization Advanteges- high transaction costs of control- internalize and control its O advantages Small firms target niche markets which are culturally and psychologically close eg. Aus and NZ Because of limited resources they need to tap into easy markets and hopefully avoid going head to heap with established players. Chapter 7 - Economic Environment Measures of the size of an economy:  Population  Gross National Income (GNI)- the total value of income accruing to a nation’s residents  GNI per capita – the average income of a nation derived by dividing GNI by the total population  GDP- Gross domestic Product- the value of production an dthe income earned from that production Population distribution- information on how a population is divided into various categories such as gender, age and location. Income distribution- information on what proportion of the population receives what proportion of the total income. Sufficient people with a sufficient income to spend are the foundations of a potentially viable market for a firm’s product. Population density- where people live within the country- influences market potential Infrastructure- The collection of the nation’s assets and institutions that facilitate and support economic activity. Key element of the commercial infrastructure is a well developed financial system Rule of Law- when behavior and processes are regulated by a system of laws that are consistently and transparently applied and enforced. Competitiveness- the quality possessed by a nation or a business that enables it to maintain an economic advantage in a market place External Economies- cost efficiencies in production and marketing that a firm enjoys as the result of the action of others external to the firm Productivity- the ratio of output to the factors of production Main obstacles for developing countries  Policy uncertainty  Macroeconomic instability  Tax rate  Corruption Macroeconomic stability- occurs when an economy grows without persistent and major fluctuations in the levels of economic activity, inflation rates, unemployment and balance of payments imbalances. Business cycle- the tendency of economies to move in sequence through phases of expansion and contraction of economic activity in a somewhat regular pattern. Generally Governments have 4 main stabilization goals:  Low inflation  Low level of unemployment  Positive economic growth  Balance of international payments and receipts. Instruments used by governments: Fiscal policy- a form of macroeconomic policy that uses changes in government expenditures and taxes to stabilize the economy. Monetary Policy- a form of macroeconomic policy that uses changes in interest rates and money supply to stabilize the economy. Economic Growth- an increase in the productive capacity and national output of a country, measured by the rate of increase of GDP. Real GDP- a measure of the dollar value of GDP after account has been taken of the changes in value due to price changes. Sources of economic growth are both quantitative and qualitative- increases in the quantity and quality of resources and increased productivity. Inflation- an increase in the general price level Measures of inflation:  Consumer Price index (CPI)- a measure of a change in the average price of a sample of consumer products  GDP Deflator- a measure of a change in average price based on the changing money value of GDP Balance of Payments (BOP)- The national accounts that summarise both payments to and receipts from foreigners International investment position (IIP)- records a nation’s stock of foreign assets and liabilities at a particular point in time. Current Account Deficit- the amount by which payments to foreigners exceed receipts from foreigners for current account items. Foreign Debt- the amount owing by both the private sector and government to foreigners. Economic development- the increasing capacity of an economy to improve and sustain the standards of living of the entire population. Purchasing Power Parity (PPP)-an adjustment in GNI per capita to reflect differences in the cost of living. Human Development index (HDI)- an attempt by the UN to assess the impact of a number of factors on the quality of human life in a country. Economic system- the set of arrangements and institutions by which the decisions are made on basic economic questions of what, how and for whom to produce. 3 Broad Types of Economic Systems: Market Economy-an economic system in which the interaction of individual decision makers on questions of supply and demand determines the quantity in which goods and services are produced. used by all major industrialized countries. However, large corporations, trade unions and governments limit the freedom of the market in entering a market a MNC needs to assess the impact of these factors. Emphasizes private ownership and free market activity. Example: Australia, America. Command Economy- an economic system where the allocation of resources, including determination of what goods and services should be produced , and in what quantity, is planned by the government. the assumption is that the government is a better judge of how resources should be allocated than is the market. China is the foremost example of a centrally planned economy, but has moved to introduce market forces to revitalize the economy. – Recently Australia recognized China as a market economy. Example: North Korea, Cuba. Mixed Economy – an economic system where certain sectors are left to private ownership and free market mechanisms, while other sectors have significant government ownership and government planning. in some cases, the degree of government intervention is difficult to quantify. For example in Japan the ratios of government revenues and expenditures to GDP are lower than in many other countries, but the government has a prominent role in national economic planning. Example: Japan and France. Privitisation- the process of selling state-owned enterprises to private investors. Emerging market economies- economies that are transforming their economic systems to market-based systems: also known as transition economies. Shift towards market-based economic system- number of steps:  Deregulation  Privitisation  creation of effective institutions including a legal system to safeguard property rights  a viable financial sector  a credible government Deregulation- the process of removing legal restrictions to the free play of markets, the establishment of private enterprises and the manner in which private enterprises operate. Institution development- the development of institutions such as the legal and financial systems that underpin a market-based economy. First Mover Advantages- advantages accruing to firms that enter markets early. Chapter 5– Differences in Culture Culture- a system of values and norms that are shared among a group of people and that when taken together constitute a design for living. Values- abstract ideas about what a group believes to be good, right and desirable. Norms- the social rules and guidelines that prescribe appropriate behavior in particular situations Society- A group of people who share a common set of values and norms. Values and norms of culture do not emerge fully formed; they are the evolutionary product of a number of factors:  the prevailing political and economic philosophies  the social structure of a society  the dominant religion  language  education Material Culture- economic (material), logistics , urbanisation and technology: why, what and how material things are made- products acceptable in one country are not acceptable in another because of different levels of development. Example- digital cameras in Russia Social Strata- the hierarchical categories within a society, defined on the basis of such elements as family background, income and occupation. Social Mobility- the extent to which individuals can move out of the strata into which they are born. Caste System- a closed system of stratification in which social position is determined by the family into which a person was born, and change out of that strata is usually not possible during a persons lifetime. Class System- a less rigid social stratification system, in which mobility is possible depending on a person’s achievements or even just luck. Culture and the Workplace High context culture- a culture in which the context of a discussion is as important as the actual words spoken. Example- Asia, Middle East, Latin America and Africa. Low context culture- a culture in which the speaker’s message is conveyed explicitly by the spoken words. Example-western cultures- Australia, US, NZ . Hofstede Theory Power Distance- Extent to how much a society allows inequalities of physical and intellectual capabilities between people to grow into inequalities of power and wealth. USA, Aus-low Asia - high Individualism vs collectivism- extent to which a society teaches individuals either to prize personal achievement or conversely to look after the interests of their collective first and foremost. Uncertainty avoidance- extent to which cultures socialize members to accept ambigiguous situations and to tolerate uncertainty. Japan-strong Masculinity vs femininity- extent to which a society differentiates and emphasizes traditional gender and work roles; a masculine characterization means there is more differentiation, whereas a feminine level means there is less. Japan, Australia, Germany -masc, fem- Sweden Long-term orientation-extent to which a society adheres to values about time, persistence, ordering by status, protection of face, respect for tradition and reciprocation of gifts. High- Hong Kong, low-US Culture Contexts High context – Japan, China, Arab Countries Communicate as much by the context as the content- non verbals, implicit roles. Preferences: interpersonal relations, long-lasting relationships, verbal agreements, face-saving criteria, distinguishable insider-outsider demarcations, ‘Who will be at the meeting?’. Low Context- Germany, Scandinavia, Australia- differences exist Communicate explicitly and more overtly via the content of the message Preferences: explicit communication, written agreements, cost-benefit criteria, porous insider-outsider boundaries, individualistic, “Whats the agenda for the meeting?’ 4 types of Culture Learned- acquired by learning and experience: culture is cumulative and passed from one generation to another. Shared- members of groups, organisations share culture, not specific to a single individual. Adaptive- based on the human capacity to change or adapt. Integrated- a change in one part brings changes in other parts. eg, technology, industrialization and culture, education and social status. Competitive advantage- the practical outcome of cultural understanding and competency. - Cost savings - Access to quality staff - Marketing advantage - Different problem solving approaches - Effective management control Individualistic society’s categorized in 2 ways Horizontally individualistic countries- Australia, Sweden, Denmark- emphasis is on independence of action and equality with others. Vertically individualistic countries- tend to be mainly wealthy western countries- USA, UK – independence of action and standing out from others in emphasized. Chapter 3- the political economy of trade and investment Political Economy- the political, economic and legal systems and forces that govern the economy and business activity. Free trade- the absence of barriers to the free flow of goods and services between countries. Advantages: -Static Benefits; IB and consumers can locate or source production in countries where products can be produced most efficiently- source from all over the world - Dynamic benefits- larger market access and competition stimulate best practice, investment and innovation.- flow form, bigger market. Disadvantages: - More competitors - Online is a digital free trade zone. Governments need to be seen as doing something. Instruments of trade Policy- Barriers to Trade: Tariffs- a tax levied by governments on imports or exports Specific tariff- levied as a fixed charge for each unit of good imported Ad Valorem Tariff- a tariff levied as a proportion of the value of the imported good. Who Gains:  Government- revenue  Domestic producers- those in industry- protection against competitors, lower cost Who Loses  Consumers- higher price  Producers using imported product lose due to increased costs THEREFORE  Tariffs are pro-producer and anti-consumer.  Import tariffs reduce the overall efficiency of the world economy Subsidies- Government financial assistance to a domestic producer May take the form of Cash grant, low interest loan, tax breaks, and government equity participation in domestic firms Subsidies help domestic producers by lowering costs in two ways  Allowing them to compete against foreign imports  Allowing them to gain export markets Import Quota- a direct restriction on the quantity of some goods that can be imported into a country Tariff rate quota- the process of applying a lower tariff rate to imports within the import quota than those over the quota Voluntary Export restraint (VER)- a quota on a trade imposed by the exporti
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