Chapter 3: Business Ethics and Social
3.1 The Globalization of Business
How can globalizations of business affect you?
Buy manufactured products from overseas
Meet and work with people from various countries and cultures
Why do nations trade?
Nations trade because no national economy produces all the goods and services that it’s
Importers: Buy G&S from other countries
Exporters: Sell products to other nations
Monetary value of international trade is enormous!
Absolute and Comparative Advantage
Every country cannot produce the same products.
Cost of labor, availability of resources, level of knowhow (vary around the world)
Absolute Advantage: Nation had an AA if:
If they are the only source of a particular product
It can make more of a product using the same amount of or fewer resources than other
Comparative Advantage: When a country can produce a product at a lower opportunity
cost compared to another nation, they will specialize in making it most efficiently
Opportunity cost: products that a country must decline to make in order to produce
something else, if a country decides to specialize in a particular product then they must
sacrifice the production of another product
Nations specialize and focus on what they do the best, and trade to exploit their
advantages. How do we measure trade between nations?
Balance of trade: Subtract the value of its imports from the value of its exports
If a country sells more than it buys = Trade Surplus (favorable)
If a country Buys more than it sells=Trade Deficit (unfavorable)
e.g. U.S had a trade deficit, with high income levels not only do we consume our own
domestically produced goods but also buy goods enthusiastically.
Managing the National Credit Card
Trade deficit can be good if the economy is strong enough to keep growing and
generating jobs that give enough to buy what the world has to offer.
Balance of Payment: difference over a period of time between the total amount of money
coming in and going out of the country. Balance of payments comes from:
Import and Exports (mainly)
Cash inflows and outflows (loans, foreign investment, tourism, foreign aid) 3.2 Opportunities in International Business
Importing: buying products overseas and reselling in one’s own country, “primary link to
the global market”
Exporting: selling domestic products to foreign customers
Licensing and Franchising
A company that wants to get into the international market quick while taking limited
financial and legal risks might consider licensing agreements with foreign companies.
International licensing agreement: Allows a foreign company (the license) to sell the
products of a producer (the licensor) or to use its intellectual property (such as patents,
trademarks, copyrights) in exchange for royalty fees.
International franchise agreement: a company (the franchiser) grants a foreign company
(the franchisee) the right to use its brand name and to sell its products or services. The
franchisee is responsible for all operations but agrees to operate according to a business
model established by the franchiser. In turn, the franchiser usually provides advertising,
training, and newproduct assistance.
Contract Manufacturing or Outsourcing: high domestic labor costs can cause
companies to manufacture their products in countries where the costs are low
Strategic Alliances and Joint Ventures: an agreement between two companies or a
company and a nation to pool resources to achieve business goals that benefit both
An alliance can serve a number of purposes:
• Enhancing marketing efforts
• Building sales and market share
• Improving products
• Reducing production and distribution costs
• Sharing technology
Joint ventures—alliances in which the partners fund individually (perhaps a partnership
or a corporation) to manage their joint operation.
Foreign Direct Investment and Subsidies: Most of the global expansion methods so far
have no included investing in foreign plans and facilities but as markets expand a firm
may decide to enhance its competitive advantage by making a direct investment in
operations conducted in another country.
Foreign direct investment (FDI):refers to the formal establishment of business operations on foreign soil—the building of factories, sales offices, and distribution
networks to serve local markets in a nation other than the company’s home country.
FDI is generally the most expensive commitment that a firm can make to an overseas
market, and it’s typically driven by the size and attractiveness of the target market.
Common form of FDI ▯ foreign subsidiary: independent company owned by a foreign
firm(parent company) who gets access to local markets
Offshoring: occurs when the facilities set up in the foreign country replace U.S.
manufacturing facilities and are used to produce goods that will be sent back to the
United States for sale. Shifting production to lowwage countries is often criticized as it
results in the loss of jobs for U.S. workers. 7]
A common form of FDI is the foreign subsidiary: an independent company owned by a
foreign firm (called the parent). This approach to going international not only gives the
parent company full access to local markets but also exempts it from any laws or
regulations that may disturb their activities.
Multinational corporation (MNC): a company that operates in many countries, “
Think globally, and act locally” MNCs depend instead on local talent.
Destroy livelihoods of home country Huge corporations deliver better, cheaper
workers by moving jobs to developing products for customers everywhere; create
countries where workers are willing to jobs; and raise the standard of living in
labor under poor conditions and for less developing countries.
That traditional lifestyles and values are Globalization increases crosscultural
being weakened, and even destroyed understanding
3.3. The Global Business Environment
How cultural, economic, legal, and political differences between countries create
challenges to successful business dealings. Cultural Environment: two people from the same country communicate they may be
misunderstanding, the more the countries the more chances of this to happened, this can
also be cause my cultural differences which causes challenges in international business
Culture: the system of shared beliefs, values, customs, and behaviors that govern the
interactions of members of a society
Language: English is the international language of business. n many countries, only
members of the educated classes speak English. The larger population—which is usually
the market you want to tap—speaks the local tongue. Relying on translations puts the
international business person at a disadvantage.
Time and Sociability: Americans focus on issue and start and end on schedules.
High and Low Context Cultures:
In highcontext cultures, the numerous interlocking (and often unstated) personal and
family connections that hold people together have an effect on almost all interactions.
Because people’s personal lives overlap with their business lives (and vice versa), it’s
important to get to know your potential business partners as human beings and
By contrast, in lowcontext cultures, such as those of the United States, Germany,
Switzerland, and the Scandinavian countries, personal and work relationships are more
compartmentalized: you don’t necessarily need to know much about the personal context
of a person’s life to deal with him or her in the business arena.
In summary, learn about a country’s culture and use