Bus201 Chapter 5.doc

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Chapter 5
The Global Context of Business
The Contemporary Global Economy
total volume of world trade today is around 8 trillion each year
globalization is a process by which the world economy is becoming a single interdependent
system
imports – product made or grown abroad but sold domestically
exports – product made or grow domestically but shipped and sold abroad
past many nations followed strict policies to protect domestic companies, today more and more
countries are aggressively encouraging international trade
governments and businesses have simply become more aware of the benefits of flobaliziation to
their countries and stock holders
new technologies have made international travel, communication, and commerce easier, faster,
and cheaper than ever before
conventional transatlantic travel takes less than a day
internet took down barriers
competitive pressures: sometimes a firm simply must enter foreign markets just to keep up with
its competitors
Globalization charge that it allows businesses to exploit workers in less developed countries and
bypass domestic environmental land tax regulations
globalization leads to the loss of cultural heritages and often benefits the rich than the poor
Globe and Mail article listed five key trends:
1) the economic centre of gravity will shift away from North America/ Europe/ Japan to Asia and Latin
America
2) the productivity imperative (improved productivity ) is essential to compete in the highly competitive
marketplace
3) the global grid (increasing complex global networks of people and capital)
4) Environmental sustainability will take on even more importance
5) there will be increased controls on businesses and markets are governments try to cope with financial
crisis.
The Major World Marketplaces
The World Bank, an agency of the UN, uses per-capita income (average income per person) to make
distinctions among countries.
1) High-income countries: have an annual per capita income greater than US $11906
Ex. Canada, US, Australia, Europe, New Zealand, Japan, South Korea, Kuwait,
2) Upper middle-income countries: have an annual per capita income between US $3856 and US
$11905
Ex. Peru, Lebanon, Hungary, Poland, Turkey
3) Low middle income countries: have an annual percapita income between US $976 and US
$3855
Ex. Cote D’Ivoire, Guatemala, Samoa, and Thailand
4) Low-income countries (developing countries) : have an annual per capita income of US $975 or
less.
ex. Benin, Ethiopia, Haiti, and Vietnam
Geographic Clusters
world economy revolves around: north America, Europe and Asia
include more of the upper middle and high income nations
most of the world’s largest economies, biggest corporations, most influential financial markets,
and highest-income consumers
North America
Canada and United States are each other’s largest trading partner
Mexico has become a major manufacturing centre, especially along the US border, where cheap
labour and low transportation costs have encouraged many firms from the US and other countries
to build factories
Europe
often seen as two regions- Western and Easter
Western Europe, dominated by Germany, the United Kingdom, France, Spain, and Italy has long
been a mature but fragmented marketplace
E-Commerce and technology have also become increasingly important
Ireland is now one of the world’s largest exporters of software
Eastern Europe, both as a marketplace and as a producer
governmental instability has hampered development in Bulgaria, Albania, Romania, and other
countries
Pacific Asia
consists of Japan, China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, the
Philippines, and Australia (which is technically not in Asia but is included because of proximity)
Fuelled by strong entries in the automobile, electronics, and banking industries, the economies of
these countries grew rapidly in the past three decades
Pacific Asia is a growing force in the world economy and a major source of competition for north
American companies
North America and Europe, technology is playing an increasingly important role in the future of
this region
The Rising Power of Emerging Markets: The Role of BRIC
Bric – a term used to describe four important and powerful emerging markets in the business
world: Brazil, Russia, India, and China
was first used by Goldman Sachs in 2001; since that time BRIC investment funds have become
an important group for money managers and international analysts
status for these four nations has risen in international trade for different reasons
Brazil is strong in commodities and agriculture, Russia is a powerful energy supplier, and China
is a major hub of manufacturing activity. India has become a leading service provider at various
levels ranging from basic customer service call centres to engineering solutions providers
Western companies used less developed markets to acquire natural resources supplies and to
carry out simple assembly tasks
Russia has encountered the most profound troubles in recent years
exclusion of Russia from this supergroup
corruption and excessive levels of bureaucratic red tape
Brazil is at the front pack in terms of optimism and opportunity
Forms of Competitive Advantage
countries tend to export products that they can produce better or less expensively than other
countries
the proceeds are then used to import products that they cannot produce effectively
decisions hinge partly on the kind of advantages a particular country may enjoy regarding its
abilities to create and/or sell various products and resources
1) Absolute Advantage
oThe ability to produce something more efficiently than any other country
oAbsolute advantages are always relative
Ex. Most experts say vineyards of France produce the finest wines in the world but
the growing wine businesses in California and Ontario attest to the fact that producers
there can also produce very good values in wine
2) Comparative Advantage
oThe ability to produce some products more efficiently than others
oEx. If businesses in a given country can make computers more fficiently than they
can make automobiles, that nation’s firm have a comparative advantage in computer
manufacturing
oNo country has a comparative advantage in all products
3) National Competitive Advantage
1) Factor conditions are the factors of productions that we identified in Chapter 1
2) Demand conditions reflect a large domestic consumer base that promotes strong
demand for innovative products
3) Related and supporting industries include strong local or regional suppliers and/or
industrial customers
4) Strategies, structures, and rivalries refer to firms and industries that stress cost
reduction, product quality, higher productivity, and innovative new products
oConditions exist in an industry, the companies in that industry are motivated to be
very innovative and to excel
oInternational competitiveness – competitive marketing of domestic products against
foreign products
oWorld Economic Forum publishes a global competitiveness ranking which is based
on both hard economic data and on a poll of business leaders in many countries
The Balance of Trade
The economic value of all the products that a country exports minus the economic value of all the
products it imports
A country that exports more than it imports has a favourable balance of trade or a surplus
A country that imports more than it exports has an unfavourable balance of trade or a deficit
United States is the largest trading partner Canada has
The Balance of Payments
Country has a favourable balance of trade, doesn’t have balance of payments (flow of all money
into or out of a country)
Unfavourable balance means more money is flowing out than in
Canada has had an unfavourable balance of payments for the last two decades
Exchange Rates
Rate at which the currency of one nation can be exchanged for the currency of another nation
Ex. Exchange rate b/ Canadian dollars and British pounds
Value of one country’s currency relative to that of another country varies with market conditions
It is strong when there is high demand for goods manufactured
Typically fluctuate by very small amounts on a daily basis