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Chapter 3

GMS 200 Chapter Notes - Chapter 3: North American Free Trade Agreement, Most Favoured Nation, Global Sourcing


Department
Global Management Studies
Course Code
GMS 200
Professor
Masoomeh Moharrer
Chapter
3

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Chapter 3-Global Dimensions of Management
Management and Globalization
In the global economy, resources, markets, and competition are worldwide in scope.
Globalization is the process of growing interdependence among elements of the global
economy.
Global Management
Global management involves managing operations in more than one country.
A global manager is culturally aware and informed on international affairs.
Why Companies go global
Profits-Global operations offer greater profit potential
Customers-global operations offer new markets to sell products
Suppliers-global operations offer access to needed products and services
Capital-Global operations offer access to financial resources
Labour-Global operations offer access to lower labour costs.
How Companies go global
A global business conducts commercial transactions across national boundaries.
When a business is just getting started internationally, global sourcing,
exporting/importing, and licensing and franchising are the usual ways to begin.
oMarket-entry strategies that involve the sale of goods or services to foreign
markets without expensive investments.
oStrategic alliances, joint ventures, and wholly owned subsidiaries are direct
investment strategies. They require major capital commitments, but they also
create rights of ownership and control over operations in the foreign country.
Global sourcing
In global sourcing, materials or services are purchased around the world for local use.
Global sourcing-the process of purchasing materials, manufacturing components, or
business services from around the world. It is an international division of labour in which
activities are performed in countries where they can be done well at the lowest cost.

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Exporting and Importing
In exporting, local products are sold abroad to foreign customers.
oThe goal of exporting is to find new customers and expanded markets by selling
one’s products and services in other countries. For governments concerned
about economic growth, expanding exports helps keep local business strong at a
time when the potential is high for job loss to lower-wage countries.
Importing involves the selling in domestic markets of products acquired abroad.
Licensing and Franchising
Licensing agreement, where foreign firms pay a fee for rights to make or sell another
company’s products in a specified region. The licence typically grants access to a
unique manufacturing technology, special patent, or trademark. In effect, the foreign firm
provides the local firm with the technology and knowledge to offer its products or
services for local sales.
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 domestic franchising agreements. Firms such as McDonald’s,
Wendy’s, Subway, and others sell facility designs, equipment, product ingredients and
recipes, and management systems to foreign investors, while retaining certain product
and operating controls.
Joint ventures and strategic alliances
Foreign direct investment is building, buying all, or buying part ownership of a business
in another country.
outsourcing is job creation through foreign direct investment.
When foreign firms do invest in a new country, a common way to start is with a joint
venture.
oThis is a co-ownership arrangement in which the foreign and local partners agree
to pool resources, share risks, and jointly operate the new business.
oSometimes the joint venture is formed when a foreign partner buys part
ownership in an existing local firm.
In other cases, it is formed as an entirely new operation that the foreign
and local partners jointly invest in and start up together.
A global strategic alliance is a partnership in which foreign and domestic firms share
resources and knowledge for mutual gains.

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oEach partner hopes to gain through cooperation things they couldn’t do or would
have a hard time doing alone.
oFor the local partner, an alliance may bring access to technology and
opportunities to learn new skills. For the outside partner, an alliance may bring
access to new markets and the expert assistance of locals that understand them.
Foreign Subsidiaries
A foreign subsidiary is a local operation completely owned and controlled by a foreign
firm.
These subsidiaries may be set up by Greenfield investments, in which the foreign
operation is built entirely new.
They can also be established by acquisition, in which the outside firm purchases a local
operation in its entirety.
Foreign subsidiary represents the highest level of involvement in international
operations.
Global Business Environments
Legal and political systems
Political risk is the potential loss in value of a foreign investment due to instability and
political changes in the host country.
Political-risk analysis tries to forecast political disruptions that can threaten the value of a
foreign investment.
Trade agreements and trade barriers
World trade organization-member nations agree to negotiate and resolve disputes about
tariffs and trade restrictions.
Most favoured nation status gives a trading partner most favourable treatment for
imports and exports.
Tariffs are taxes governments levy on imports from abroad.
Protectionism is a call for tariffs and favourable treatments to protect domestic firms from
foreign competition.
Regional Economic alliances
NAFTA is the North American Free Trade agreement linking Canada, the united States,
and Mexico in an economic alliance.
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