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Chapter 3

Chapter 3 - Global Dimensions of Management.docx

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Ryerson University
Global Management Studies
GMS 200
Shavin Malhotra

Chapter 3 – Global Dimensions of Management  We currently live in the age of the global economy, where resource supplies, product markets, and business competition are on a worldwide level as opposed to local or national. o It is heavily influenced by the forces of globalization, the process of growing interdependence among elements of the global economy  Global Management involves managing operations in more than one country. o Global Managers are increasingly sought after now. This is someone informed about international developments, transnational in outlook, competent in working with people from different cultures, and always aware of regional developments in a changing world  Why Companies Go Global: o Profits – global operations offer greater profit potential o Customers – new markets to sell products o Suppliers – Offer access to needed products and services, for cheaper o Capital – Offers access to financial resources (ex: foreign investors) o Labour – Access to lower labour costs  A global business conducts commercial transactions across national boundaries. There are 3 Market Entry strategies: Global sourcing, exporting and importing, licensing and franchising. There are also 2 direct investment strategies, Joint Ventures and Foreign Subsidiaries. Each of these has increased ownerships and involvement in foreign operations. In the list below it goes form least involvement to highest involvement. o Global Sourcing  The first step towards international business  Materials and services are purchased around the world for local use. This saves money by taking advantage of international wage gaps, by sourcing products in countries that can produce them at the lowest cost (ex: China) o Exporting and Importing  Exporting – local products are sold abroad to foreign customers  Growth of export industries creates LOCAL jobs  The opposite side is Importing – selling products acquired abroad in the local market  This causes local markets to LOSE jobs, because the money goes to foreign countries o Licensing and Franchising  In a licensing agreement, a foreign firm pays a fee for rights to make or sell another company’s products in a specified region. The license typically grants access to a unique manufacturing technology, special patent, or trademark. Example: New balance licensed a Chinese supplier to produce one of its brands  Franchising is a form of licensing in which the foreign firm buys the rights to use another’s name and operating methods in its home country. The international version operates similarly to the domestic franchise.  Example: McDonalds, Subway, Wendy’s are all franchises. They sell facility designs, equipment, product ingredients and recipes, and management systems to foreign investors while retaining certain products and operating controls  The 2 strategies below are Direct Investment Strategies, as opposed to the top 3 Market Entry Strategies o Joint Ventures and Strategic Alliances  Some firms decide to make big investments in foreign operations. This is called Foreign Direct Investment (FDI), which is building, buying all, or buying part ownership of a business in another country  The term insourcing is used to describe job creation through foreign direct investment. Basically the opposite of outsourcing, it involves bring people in to do work within the facility  A common way to start in a new country is with a joint venture. This is a co- ownership arrangement in which the foreign and local partners agree to pool resources, share risks, and jointly operate the new business. Can be the result of a buy-out of partial ownership, or an entirely new organization formed by the local and foreign partners.  International joint ventures are types of global strategic alliances, a partnership in which foreign and domestic firms share resources and knowledge for mutual gains. Each partners hopes to gain through cooperation things they couldn’t do or would have a hard time doing alone. o Foreign Subsidiaries  A foreign subsidiary is a local operation completely owned and controlled by a foreign firm.  They can be established by greenfield investments, in which an entirely new operation is built in a foreign country.  Can also be established by acquisition, such as when an outside firm purchases a local operation entirely. Global Business Environment  A major concern in global management is political risk – the potential loss in value of a foreign investment due to instability and political changes in the host country o Political-risk analysis tries to forecast political disruptions that can threaten the value of a foreign investment  Global firms must comply with local laws. In the US and Canada for example, executives of foreign-owned companies must comply with antitrust laws that prevent competitors from regularly talking to one another. Trade Agreements and Trade Barriers  When international businesses believe they are being mistreated in foreign countries, the WTO is contacted o The World Trade Organization (WTO) is a global organization whose member nations, currently 153 of them, agree to negotiate and resolve disputes about tariffs and trade restrictions.  WTO members are supposed to give each other most favored nation status – giving a trading partner most favorable treatment for imports and exports o Trade barriers still limit freedom of trade and are common.  These include tariffs, which are taxes imposed on imports. These trade barriers fuel protectionism, which is a call for tariffs and favorable treatments to protect domestic firms from foreign competition.  An example of this would be the US government put a 20% tax on all foreign imported cars (such as Hondas), to protect the sales of local cars (such as Ford)  NAFTA is the North American Free Trade Agreement, that links Canada, the US and Mexico in an economic alliance. This creates a trade zone with no barriers, which frees the flow of goods, services, workers and investments in these 3 countries  The European Union links 27 countries that agree to support mutual economic growth by removing these barriers, and is another economic alliance. o These 27 countries have a common currency, called the Euro Global Business  Global Corporations, also known as Multinational Corporations or MNCs, are business firms with extensive international operations in many foreign countries. The biggest ones are features on Fortune Global 500, and include many names such as Toyota, Nestle, etc. o Keep in mind that although MNC’s operate in many countries, its founding history and corporate headquarters give it a strong national identification. For example, is there any doubt that Sony and Honda are Japanese or that BMW is German? o More and more companies are trying to operate as transnational corporations, and MNC that operates worldwide on a borderless basis, and without ide
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