INTRODUCTION TO BUSINESS

DR. TUĞBA KARABOĞA

Global Business Environment
 Course Plan
1. Trade and Nations
2. Foreign Trade
3. Stages of Global Business
a. Import, Export and Countertrading
b. Contractual Agreements: Franchising, Foreign Licencing and Subcontracting
c. International Investments: Overseas marketing, overseas production,
international joint ventures, international mergers and acquisitions
4. Barriers in Global Business
a. Natural barriers
b. Man-made/Artificial barriers
c. Economic restrictions
d. Political and Legal barriers
• Reducing Barriers in Global Trading
Globalization and Business
• International business refers to commerce in which goods,
services, or resources cross the borders of two or more
nations.

• Globalization is broader than international business.

Globalization describes a shift toward an integrated world
economy in which culture, ideas, and beliefs are exchanged
in addition to goods, services, and resources.
 Internationalization and Globalization
• International Business can be traced • Globalization means the existence of
back as far as 2000 B.C.; North African perfectly integrated world economies ….In
globalized economies, goods, services,
tribes traded clothing with Middle
capital, people, skills, ideas, knowledge
Eastern Babylonia and Assyria. move freely across national borders…
• Globalization is the spread of innovations,
• A firm becomes internationalized, information and ideas around the world…
when it decides to go beyond its and political, legal, cultural adjustments by
borders and involves in cross-border the countries that accompany this diffusion.
business transactions. • Globalism trends
– A borderless world; integrations and
interdependence of national economies
• In that regard International Business is – Convergence of lifestles and preferences
not a new phenomenon… it is as old as – Growth in foreign trade, global investments
human beings…. and financial flows and integration
– Increase in movement of people, labor and
capital.
• …..Always became more regulated but – Increase in human rights, attitudes, social
not much integrated as the trade considerations
between nations progressed – Intense global competition
throughout the ages.. – Rise and dominance of trading blocs
5
• DELIVERING GOODS AND SERVICES
•
•
MEDIUM TO EARN MONEY
INCLUDES MANAGING RESOURCES BUSINESS
• DONE FOR BASIC PURPOSE;
* FOR PROFIT
* NOT-FOR-PROFIT/TO SERVE PUBLIC
International Area of Study
Mergers and Acquisitions

Balance of Payment
Franchising

International Management
International
Incentives for
Foreign Trading International Finance Bartering

International Marketing Export

Barriers for
Foreign Trade
Import
Customs International
Free Trade Areas Institutions
Customs Union
Common Markets
International Environment of the Business
 World Economies
• Advanced economies: Post-industrial countries with high per capita income,
competitive industries, and developed commercial infrastructure; typically the
richest countries, including Australia, Canada, Japan, the United States, and
nations of Western Europe
• Developing economies: Low-income countries characterized by limited
industrialization and stagnant economies; e.g., Bangladesh, Bolivia, and Zaire
• Emerging market economies: Former developing economies that achieved
substantial industrialization, modernization, and remarkable economic growth;
e.g., Indonesia, Mexico, Poland, and Turkey
Key Differences
Key Differences
Advanced Economies Developing Economies
•Well-developed economic systems •Consumers have low incomes

•Have largely evolved from manufacturing to •About 17% live on less than $1/day and 40% live

service based on < $2/day

•Only 14% of the world’s population, but •Often have rich historical and cultural
accounts for over ½ of world GDP, ½ of world backgrounds, but also have short life expectancy,
trade in products, and ¾ of world trade in significant malnutrition, and poor educational
services systems
•Characterized by democratic, multiparty systems •Common for debt levels to approach or exceed

that are capitalistic annual GDP and tough to initiate new business
 Emerging Market Economies
Rising-Star Countries
• Countries with rising economic aspirations that enjoy rapidly growing
standards of living
• Evolving toward wealthy nation status; rapidly improving living standards &
growing middle class
• Importance in the world economy is increasing as attractive destinations for
exports, FDI, and sourcing
• Prosperity varies within countries - often seen as wealthy urban & less
developed, poorer rural
• Some have evolved from centrally planned economies to liberalized markets
– transition economies (e.g., China, Russia).
• Privatization – the process of transferring state-owned enterprises to private
concerns; common within emerging market economies
Transition Economies
• Special category of Emerging Market Economies
• Long characterized by excessive regulation and entrenched government
bureaucracy
• Undertook large-scale privatization of state-owned enterprises
• Have made great strides in political and economic restructuring
• Introducing legal frameworks to protect business and consumer interests
and ensure intellectual property rights
• Initially, western companies had a hard time recruiting managers who
understand modern management practices International Business:
Strategy, Management, and the New Realities
 What Makes Emerging Markets Attractive?
• Growing middle class
• The largest emerging markets have doubled their share of world imports in the last few
years
• Emerging markets are excellent targets for manufactured products, technology, and
sophisticated technology
• Textile machinery industry in India is huge
• Oil and gas exploration are big in Russia
• Agriculture is a major sector in China
• Home to low-wage, high-quality labor for manufacturing and assembly operations
• Large reserves of raw materials and natural resources. E.g., South Africa and diamonds.
• Thailand is an important manufacturing location for Japanese MNEs.
• Malaysia and Taiwan are semiconductor manufacturing sites for Intel and Philips
• MNEs have established call centers in Eastern Europe, India, and the Philippines
• Dell and IBM outsource certain technological functions to knowledge workers in India
• Intel and Microsoft have much of their programming done in India
Challenges of Emerging Markets
• Political stability
• Absence of reliable government authorities increases business costs and risks, and
reduces ability to forecast business conditions
• Corruption and weak legal frameworks
• E.g., Argentina, Indonesia, Russia, and Venezuela experience substantial
corruption.
• Weak intellectual property protection
• Even if they exist, laws that safeguard intellectual property rights may not be
enforced, or the judicial process may be painfully slow.
• In India, weak patent laws discourage investment by foreign firms.
• Bureaucracy and lack of transparency. Lack of transparency implies that legal and
political systems are not open and accountable. Lack of transparency is associated
with corruption.
• Partner availability and qualifications
• Alliances with local partners helps gain access to local markets, supplier and
distributor networks, and key government contacts. May be critical in complex
markets. But qualified business partners are not readily available.
 ABSOLUTE ADVANTAGE
* ULTIMATE EFFICIENCY IN PRODUCTION OF A SPECIFIC PRODUCT

* BEING SOLE PRODUCER OF A SPECIFIC PRODUCT

COMPARATIVE ADVANTAGE
* HAVING LOWER COSTS IN THE PRODUCTION OF A SPECIFIC PRODUCT IN RELATION TO
OTHER PRODUCER COUNTRIES
Global Markets and Business
Opportunity
Benefits nations and firms realize by entering foreign markets
•Access to factors of production: Access to global markets enables countries
to acquire natural resources, capital, human capital and entrepreneurship
when they are nonexistent, scarce, or too expensive in their home country.

•Innovation and ideas: Many companies discover unmet needs or unique

products and services in the global market. These discoveries can help
expand existing product lines or introduce new products.

•Risk reduction: If a country or company trades or does business with

multiple foreign partners, they are less dependent on the success of any
single partnership.
Measuring Global Trade
Balance of Trade
The balance of trade is the
difference between the
value of a country’s
imports and its exports.

value of exports – value of

imports = balance of trade
Trade Surplus and Deficit
• A trade deficit occurs when a
nation imports more than it
exports.
• A trade surplus occurs when a
nation exports more than it
imports.
• Because the balance of trade
is calculated using ALL imports
and exports, it’s possible to
run a surplus with some
nations and a deficit with
others.
Balance of Payments
Balance of Payments is the difference Examples
between the total flow of money •payments, exports and imports
coming into a country and the total flow
of money going out of a country during •services
a period of time. •foreign investments
•loans and foreign aid
total money coming into a country •financial capital
(inflow) – total money going out of a
country (outflow) =
•financial transfers
balance of payments

Includes all external transactions

 Import & Export
• Import: Occurs when local businesses buy foreign goods and
services from other countries to be sold in the local market.
• Export: Occurs when the local businesses sell domestically
produced goods and services to foreign countries.
• Balance of Trade: The relationship between a country’s
export and import signifies the said country’s balance of
trade.
• Trade surplus: Occurs when a country’s export exceed its
import.
• Trade deficit: Occurs when a country’s import exceed its
export.
• Exhange rate: is the value of a nation’s local currency in
relation to the currencies of the other countries.
Global Business Strategies
Imports and Exports
Exporting: Taking goods that were produced within a
company’s home country and shipping them to another
country. The party sending the good is called an exporter.
Importing: A good is brought into a jurisdiction, especially
across a national border, from an external source. The party
bringing in the good is called an importer.
Imports and Exports: Advantages
and Disadvantages
Advantages Disadvantages
• Exporting doesn’t require a • Exporting goods can mean losing
company to manufacture control of products once they are
its products in the target country exported, which can lead to
• Exporting is the quickest and products being misrepresented,
least expensive means to enter copied by other manufacturers,
the global market or sold on the black market
• Unable to gain insight into or
experience with local consumer
preferences and demand related
to exported goods
• Exporting may incur taxes,
regulations, and/or restrictions
Countertrade
Countertrade is a system of
exchange in which goods and
services are used as payment
rather than money.
Countertrade is common:
• among countries that lack sufficient
hard currency (cash)
• where other types of market trade
are impossible
• in developing countries, whose
currency may be weak or devalued
relative to another country’s currency
Outsourcing and Offshoring

Outsourcing contracts out a

business process to another
party and may include either or
both foreign and domestic
contracting.
Offshoring is the relocation of a
business process from one
country to another.

Both outsourcing and

offshoring are strategies
companies use to lower their
costs.
Outsourcing and Offshoring:
Advantages and Disadvantages
Advantages Disadvantages
• The destination country gains • Lack of control over product
jobs quality, working conditions, and
• The origin country gets cheaper labor relations
goods and services • Some argue that jobs that are
• Some say that the low skilled jobs shipped overseas are not
in origin country will be replaced replaced by better, higher-paying
with better jobs ones
Licensing
In a licensing agreement the
licensor agrees to let someone else
(the licensee) use the property of
the licensor in exchange for a fee.
License agreements usually cover
property that is intangible, such as
trademarks, images, patents, or
production techniques.
Franchising
In a franchising agreement, a party
(franchisee) acquires access to the
knowledge, processes, and
trademarks of a business (the
franchisor) in order to sell a
product or service under the
business’s (franchise’s) name.
In exchange for the franchise, the
franchisee usually pays the
franchisor both initial and annual
fees.
Licensing and Franchising: Advantages and
Disadvantages

Advantages Disadvantages
• Allows companies to have a • Least profitable way for a
global presence without heavy company to enter a market
investments • Loss of control – tough to
• Immediate competitive maintain brand
advantages for • Majority of the revenue remains
licensee/franchisee in the destination country with
• Quickly begin efficient and the licensee/franchise
profitable operations
• Inexpensive access to a new
market
Foreign Direct Investment
Foreign direct investment (FDI) is an investment in the form
of controlling ownership in a business enterprise in one
country by an entity based in another country.
• Most intensive approach to reach a global market

FDI can take one of two forms:

1. Greenfield ventures
• The company enters a foreign market and establishes a new
subsidiary as a set-up business, e.g. BMW manufacturing plant
in South Carolina
2. Mergers/acquisitions
• Represents the vast majority of FDI. A merger is a combination
of two companies to form a new company, while an acquisition
is the purchase of one company by another company in which a
new company is formed.
Foreign Direct Investment:
Advantages and Disadvantages
Advantages Disadvantages
• A merger or acquisition • Big investment and time
involves the purchase of assets commitment
such as property, plants, and • Greenfield ventures take time
equipment that are already
producing a product with a • Companies can overpay in
known revenue stream. mergers
• Key to a successful merger or
acquisition is paying the right
price for the company
Joint Ventures
A joint venture establishes a new business that is owned by two or more
otherwise independent businesses.

The most common joint ventures involve two companies that are equal
partners in the new firm, investing money and resources while sharing
control of the newly formed firm.

Often, the foreign partner provides expertise on the new market, business
connections and networks, and access to other in-country aspects of
business such as real estate and regulatory compliance.
Strategic Alliance
A strategic alliance is formed between two or more corporations, each
based in their home country, for a specified period of time.

Unlike a joint venture, a new company is not formed.

Generally, strategic alliances are pursued when businesses find that they
have gained all they can from exporting and want to expand into a new
geographic market or a related business.
Joint Ventures and Strategic Alliances:
Advantages and Disadvantages
Advantages Disadvantages
• Knowledge and experience • Conflicts over control if the
of the market offered by partner firms do not agree
the local partner on business decisions.
• Reduces each company’s • Risk that the partner firm
exposure to losses will take technology or
innovation and use it to
become a competitor
 The Four Risks of International Business

Source:Cavusgil,Knight,Riesenberger
Barriers in International Trade

Economical Economical
Country Political Political Country
A And Physical And B
Legal Social and Legal
Restrictions Cultural Restrictions
Barriers

ECONOMICAL ECONOMICAL
RESTRICTIONS RESTRICTIONS
Tariffs Tariffs
•Revenue Tariffs •Revenue Tariffs
•Protective Tariffs •Protective Tariffs
Trade Restrictions Trade Restrictions
•Quotas •Quotas
•Embargo •Embargo
•Custom Administrative •Custom Administrative
Regulations Regulations
•Exchange Control •Exchange Control

POLITICAL AND LEGAL POLITICAL AND LEGAL

RESTRICTIONS RESTRICTIONS
 REDUCING BARRIERS IN GLOBAL TRADING

INT’L ORGANIZATIONS TO FREE TRADE AREAS AND

DEVELOP FREE TRADE ECONOMIC
• GENERAL AGREEMENT ON TARIFFS INTEGRATIONS
AND TRADE (GATT) • FREE TRADE AREAS

• WORLD TRADE ORGANIZATION • CUSTOMS UNION

(WTO)

• COMMON MARKET
• WORLD BANK GROUP

• ECONOMICAL/POLITICAL
• INT’L MONETARY FUND (IMF)
UNION

2013 Copyright S.K.Mirze

Global Trade Agreements and
Organizations
The World Trade Organization
(WTO)
• Developed from the General Agreement on Tariffs and Trade (GATT).
• Monitors the trade liberalization agreements reached by GATT.
• Oversees implementation and administration of the agreements between
member nations.
• Provides a forum for negotiations and settling disputes among nations.
• Most-favored-nation status (MFN) requires that a country must apply the
same terms and conditions of trade with any and all other WTO members.
• Transparency: WTO members are required to publish their trade
regulations. When a WTO nation changes its trade policies, that change
must be reported to the WTO.
The World Bank
• Promotes economic and social progress in developing countries
• Provides low-interest loans and grants for capital programs to
developing countries
The World Bank has set two goals to achieve by 2030
• End extreme poverty by decreasing percentage of U.S. population that lives
on less than $1.90 (USD) per day to no more than 3 percent
• Promote shared prosperity by fostering income growth of the bottom 40
percent in every country
International Monetary Fund (IMF)

• Comprised of 189 countries

• Fosters global growth and economic
stability by providing policy, advice,
and financing to its members
• Works with developing nations to
reduce poverty and achieve
macroeconomic stability
• IMF member countries contribute to
a fund that they can borrow from if
they are experiencing balance-of-
payment problems
Trade Agreements in Global
Business
Trade agreements vary in the amount of free trade they allow
among members and with nonmembers; each has a unique level
of economic integration

•Regional trade agreements

•Customs unions
•Common markets
•Economic union
Regional Trade Agreements
Regional trade agreements are reciprocal
trade agreements between two or more
nations.

Almost all countries are members of RTAs.

Countries “huddle together”, forming an
international community that facilitates
the movement of goods and services
between them

Examples: United States- Mexico-Canada

Agreement (USMCA) and Association of
Southeast Asian Nations(ASEAN)
Customs Unions and Common
Markets
Custom Unions Common Markets
• Arrangements among countries
• Similar to customs unions but
whereby the parties agree to also allows free movement of
allow free trade on resources (e.g., labor) among
products within the customs member countries.
union, and a common external
tariff (CET) on imports from the
rest of the world.
• The CET distinguishes the
Customs Union from a Regional
Trade Agreement
• While trade is unrestricted, it
does not allow free flow of
capital and labor among
member countries
Economic Unions
• Eliminate internal barriers
• Adopt common external
barriers
• Permit free movement of
resources such as labor
• Adopt a common set of
economic policies
• Example: the European
Union (EU)