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Chapter Summaries Global Business Abi Semester 1 2011 Dan Mackay Chapter Summaries: Global Business Week One – Chapter 1 Summary: This chapter is mainly concerned with the history and definition of globalisation. It outlines the concept of global production and markets, and the standardization of global products. It also outlines the advantages, disadvantages, and possible risks of engaging in international trade. Notes: Globalisation is the shift towards a more integrated and independent world economy. Globalisation of markets is the merging of historically distinct and separate national markets into one global market. Falling barriers to trade have made this process easier. Without WTO, formerly GATT, globalisation of markets and production is unlikely to proceeded as far as it has today. Globalisation of production is the process of sourcing goods and services from locations with advantageous factors of production. Facts of production are the components of producing a product, such as energy labour, land, and capital. Advances in technology, namely logistics and telecommunications, have made this a viable possibility. Globalisation creates ‘global products’. Companies must be careful to not overlook other factors when attempting to create a global product. Advancements in technology and falling trade barriers are the drivers of globalisation. By continually researching and upgrading technology such as logistics, infrastructure, and transport while allowing trade barriers to fall; globalisation can continue to spread. International trade occurs when a firm exports goods or services to buyers in another country. An international business is any firm that engages in international trade. Foreign Direct Investment (FDI) occurs when a firm invests resources in business activities outside its home country. The flow of FDI is the amount of FDI undertaken over a given time. FDI stock is the total accumulated value of foreign owned assets at a given time. FDI outflow in the flow of FDI out of a country. Inflow is the opposite. FDI is seen as a way of circumventing future trade barriers. Outsourcing is when tasks that were previously performed in-house are now purchased from another firm. Off shoring is when those tasks are performed abroad. Moore’s law is the phenomenon that states mircroprossessing technology power doubles and its cost of production drops by half every 18 months. A Multinational Enterprise (MNE) is any business that has productive activities in two or more countries. 2 Dan Mackay Chapter Summaries: Global Business Week Two – Chapter 2 (p. 73-91) Summary: This chapter is mainly concerned with explaining the benefits of different international trade theories. It compares them to each other and explains why they are beneficial. Notes: New trade theory assumes that if a firm has an economy of scale they will find it easier to participate in international trade. Economies of scale are unit cost reductions that occur when there is a large scale of output. Simplified, this reads ‘the more of an item you make, the cheaper each item gets’. A large international market has an enormous amount of demand. This is why economies of scales are important when reducing costs and meeting high demand. New trade theory assumes that the there can only be a limited amount of economies of scale which would result in certain products being dominated by certain countries. In industries where economies of scale are important, the variety of goods a country can produce and the scale of production are limited by the size of the market. This is the reason why there can only be a limited amount of economies of scale. The problem with this is that there will only be a few leading firms in each industry, thus creating monopolies or oligopolies which will limit innovation and productivity. Economies of scale are usually attained by gaining first-mover advantage. First-mover advantage is the economic and strategic advantages that accrue to early entrants into a market. Porters Diamond suggests that competitive advantage is created due to four elements. Factor endowments are a nation’s position in factors of production such as skilled labour or infrastructure. Demand conditions are the nature of domestic demand for the industry’s product or service. Relating and supporting industries are the presence or absence of supplier industries and related industries that are internationally competitive. Firm strategy, structure, and rivalry are the conditions governing how companies are created, organised, and managed and the nature of domestic rivalry. Firms are most likely to succeed in an industry when the diamond is most favourable. There are two additional variables that can influence the diamond; chance and government. Exporting is the sale of products produced in one country to residents in another. Licensing is when a firm licenses the right to produce its product, including brand etc, to another firm. Many theories suggest that Foreign Direct Investment (FDI) is preferable to licensing and exporting because you still have control over your product unlike licensing, and you can skip many costs unlike exporting. FDI also creates location that makes certain countries or areas specialize in certain industries. 3 Dan Mackay Chapter Summaries: Global Business Week Three – Chapter 7 Summary: This chapter is mainly concerned with the different economic characteristics that need to be assessed when entering a country. Many of the most important factors are analysed thoroughly. Notes: General economic characteristics that enter into a firm’s preliminary assessment of a country either as a potential market for its products or as a preferred location or source of production include its size, its endowments (associated with its geography, people, and infrastructure) and its competitiveness. The size of an economy is a basic measure of the market potential for a firm’s product. The natural resources and features of a country affect the level and patterns of market demand and production. Population and income distribution are two important measures when assessing a country. However, the people have many other important features such as population density and education that need to be considered. The level of infrastructure and institutions need to be considered because it indicates the technological and social advancement of a country and economy. Productivity and competitiveness are important to keep on top of the business world because they inspire innovation in turn creating a competitive advantage. Rapidly developing countries of the world such as India would seem to offer the best opportunities for international business, but such business is accompanied by many risks. Macroeconomic occurs when an economy grows without major fluctuations in the level of economic activity, inflation rates, unemployment, and balance of payments imbalances. A business cycle is the tendency of economies to move through a sequence of expansion and contraction in a pattern. Inflation is the increase in the general price level that is measured by indexes such as the Consumer Price Index (CPI). The balance of payments is the national accounts that summarise both payments to and receipts from foreigners. Economic development is a multidimensional concept. The dimensions include providing life-necessities, raising living standards. Expanding economic opportunities, and attaining sustainable development. There are several measures to assist in recording economic development. Index’s such as Gross National Income (GNI) and Purchasing Power Parity (PPP) exist to accomplish this. There are also broader indexes that record development such as the Human Development Index (HDI) which attempts to assess the quality of human life in a country. There are several different types of economies. The main ones are market economy – all productive activities are privately owned, and is determined by the interaction of supply and demand, for this to work there must be no supply restrictions, command economy – the goods and services, their production, and their price are all determined by the state, mixed economy – lies somewhere in between the a command and market economy. Innovation and entrepreneurship are the engines of long-run economic growth. Deregulations and privatisation are becoming more common following the spread of market economies. For this to continue institutional development is important because legal system underpin the market economy to ensure fair practice. 4 Dan Mackay Chapter Summaries: Global Business Week Four – Chapter 5 Summary: This chapter is mainly concerned with the socio-cultural values of a country and how they affect business on an international level. Notes: Culture is the totality of the knowledge, belief, arts, morals, ethics, law, customs, and other aspects acquired by the inhabitant of a country or region. Values and norms are the central components that form what certain people think about certain things. For example, Jewish followers believe that eating pig bad, however, Christians don’t. Religion is another big factor which shapes the ideals of a nation because it is a driving force for the nature in which many people live. The social structure in hierarchy may also define the attitude of different groups. Wealthier people may believe that education is of paramount importance whilst the poor may think that merely surviving is enough. Some societies are individualistic and some believe that the individual is just part of a larger group. For example, the United States promotes the ‘American Dream’, the ideal that one should strive to be the best he can, as opposed to a country like Japan that believes a person to strive to benefit the larger organization as a whole, whether it be a firm or society in general. Language is a defining indication of culture; people that speak different languages usually have different values and norms than others. However, many norms are shared internationally, such as murder being bad. Geert Hofstede created an index to define how similar one’s country is to another. It uses five comparative categories to reach its overall evaluation. Society’s beliefs, at face value, are ever changing. However, a traditional undercurrent made by the aforementioned factors corrects any major deviations. It is important to understand different cultures when conducting international business because it is required in order to keep good relationships with your client’s and partners if you wish to conduct continuous profitable business. There are many examples of when cultural differences have been ignored which ultimately lead to the death of a product, see the Nova example. 5 Dan Mackay Chapter Summaries: Global Business Week Five – Chapter 3 (p. 96-124) Summary: This chapter is mainly concerned with the factors affect efficient use of foreign direct investment and different instruments of trade policy. Notes: Free trade refers to a situation in which a government does not attempt to restrict what its firms and citizens can buy or sell to another country. Trade policies instruments, including tariffs and non-tariffs such as subsidiaries, antidumping regulations, local content requirements, and administrative procedures tend to be pro producer and anti consumer. Gains accrue to those producers that are protected from foreign competitors, but consumers and other producers may lose because they must pay more for imports. Political arguments for the intervention are concerned with protecting the interests of certain groups, often at the expense of other groups, and with using trade to promote political goals such as foreign policy, human rights, and consumer protection. Economic arguments for intervention are about boosting the overall wealth of a nation. The infant industry argument and the strategic trade argument, if correct, give an economic rationale for government intervention in trade. The infant industry argument for government intervention contends that governments should temporarily support new industries. Strategic trade policy suggests that governments can help domestic firms gain first mover advantage in global industries where economies of scale are important. There are two main problems with protectionist trade policies. The first is that these policies may invite retaliation, and no one will benefit. The second is that the policy may be abused by certain groups. While host countries benefit from FDI in terms of resource transfer effects, employment effects, and balance of payment effects, there are also costs. Governments, particularly those in developing nations, insist on retaining autonomy over the regulation of FDI in order to maximise its development benefits. Host countries offer incentives to attract FDI to advance their development policies. A cost to a home country of FDI is the export of jobs; and while there are calls for restrictions on the outflow off FDI, most restrictions on FDI are imposed by host countries. Restrictions usually take the form of mandated ownership restraints and specific performance requirements. 6 Dan Mackay Chapter Summaries: Global Business Week Six – Chapter 6 Summary: This chapter is mainly concerned with the political, governmental and legal systems implemented in different countries. The different approaches that different countries take in relation to international business are discussed in minor detail. Notes: A political system is the system of a government in a country. It comprises the relationships, processes and institutions, formal and informal, by which those in power in the government play out the politics of the moment, decide policies in response to the demands or support of interest groups and the general public, and enforce their decisions on society as a whole. Governance refers ‘not to the structure of government but to the policies that are made and he effectiveness which they are carried out’. There are several different types of political systems such as collectivism (e.g. Japan), socialism (e.g. Soviet Russia), and individualism (e.g. United States). The retreat of collectivism is good news for international business because the pro-business and pro-free trade values of individualism create a favourable environment for foreign trade and investment. The radical view was the ideal that multinational enterprises are an instrument of imperialist domination. They believed that a country should not participate in free or international trade and be self sufficient. It was viewed that where MNE’s exist they should be nationalise (government gains control). The free market view is the opposite; they believe that where companies are controlled by the government they should be privatised. They believe that there should be no barriers to trade and that international business is paramount. They current reality as that true form of neither of these views can be used. Most countries use a mix of the two. There are several different types of government systems, there are: democratic, totalitarianism, representative democracies, communist totalitarianism, theocratic totalitarianism, tribal totalitarianism, and right wing totalitarianism. The main difference between totalitarianism systems and democratic systems is that the citizens of a country decide who their leader is and vote for what policies [s]he and the relevant party implements, where as totalitarianism is run more like a dictatorship. There are two main types of legal systems; common law systems (based upon precedent and have some legislation), and civil law systems (run by a strict set of rules). 7 Dan Mackay Chapter Summaries: Global Business Week Seven – Chapter 11 Summary: This chapter is mainly concerned with the disadvantages and advantages of different modes of entry. Countertrade is also discussed in minor detail. Notes: Exporting is the standard mode of entry for new firms. By expanding the size of the market exporters can achieve economies of scale. Many tax related barriers and regulations make exporting time consuming and sometimes expensive. Exporting avoids the heavy costs of setting up manufacturing operations in target market. Direct exporting is when you send an item directly to clients and indirect is when an agent is used as middleman to direct items to the host country. Importing is the process of bringing an item from a country to another country. Every import is the recipient of an export. Turnkey projects are a project in which a firm agrees to set up an operating plant for a foreign client and hand it over when the plant is fully operational. Useful when governments lack the necessary technology to improve their infrastructure, so they get a firm to do it for them and then they buy them out. This usually has no long-term profit trail. By selling your technology to that government you are creating a competitor and will not be able to conduct future business with them. Licensing is an agreement where the rights to produce a product or service is rented to a firm in exchange for royalty fees for a set period of time. The main advantage of licensing is that the licenser does not bear the costs and risks associated with investing in a foreign market. This is attractive when a firm is not willing to risk substantial financial resources. This is also attractive a firm that holds an intangible and technologically advanced service or product. However, royalty fees are usually low and firms lack tight control of their good. A cross licensing agreement is used to reduce risk by swapping valuable information with another firm. Franchising is a specialised form of l
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