Global Business
Nature and Trends: -growth of the global economy and changes in markets (financial/capital, labour, consumer)
Globalisation is the movement across nations of trade, investment, technology, finance and labour. In the business world globalisation refers to the process of businesses becoming transnationals and locating and conducting their operations in many countries.
The process of globalisation, assisted by the technological revolution in communications and computers, is radically altering the shape of the world markets, as well as the nature of business and everyday life
Globalisation has two main components:
The globalisation of markets refers to the combining of once separate and distinct national markets into one huge global marketplace
Globalisation of production refers to the practice of many businesses to purchase their inputs from around the globe as well as the tendency to manufacture components in low cost locations
Growth of the global economy
As globalisation continues, flows of finance, labour and consumer products between countries will increase as these markets undergo structural changes
Many businesses must become global players just to survive. Australian companies are now forced to compete with foreign suppliers as well as attempting to sell their products overseas
Changes in markets
Finance is now more mobile and flows relatively easily between countries, especially since the 1970s when many countries phased out their controls on foreign exchange trading-as a result it has increased
In 2005 total world foreign exchange trading was estimated by the Bank of International Settlement to be 85 times the value of world trade and growing
Capital flows to countries where investment opportunities are greater, therefore developing economies do not have much capital inflow
Changes in labour markets
Due to political barriers, the flow of people between countries is now more restricted and has not been freed u to the same degree as other markets
The movement of large numbers of temporary migrant workers has been very important in EU and Asia
The growing D for highly trained employees means that those people are increasingly mobile
Changes in consumer markets
Countries are achieving cost savings by specialising in products they can produce efficiently (comparative advantage)
The results in cheaper prices on the world market and generates increased sales in existing markets
Improved tech. + comm. Allow businesses to reach much larger markets and take advantage of economies of scale-internet
Trends in Global Trade Since World War II
The last 50 years has seen growth in merchandise exports, which are domestically made products sold to consumers in another country
1945 to 1960-US domination of global trade
Europe and Japan suffered enormous damage and US businesses faced little competition
US corporations were the main suppliers of inputs for the rest of the world and US brand names and products became recognized around the world
1960 to 1980- Japan and Europe re-emerge
By the end of the 1950s Europe and Japan had largely rebuilt their industries and were ready to recommence selling to the rest of the world although US businesses still dominated the economy
During this period some Australian manufacturing businesses began to adopt more of an export-oriented business philosophy although they were still reluctant to undertake an export program apart from the traditional commodities such as wool and wheat
1980 to present- the global marketplace
The process of globalisation accelerated from he early 1980s and the integration of the worlds markets has dramatically altered the nature and pattern of global trade
Three geographic regions now dominate the world economy, producing and consuming the majority of the worlds production of goods and services. These regions are:
-The European Union
-The United States
-Japan
Drivers of Globalisation
Role of Transnational Corporations
Transnational corporation (TNC) is any business that has productive activities in two or more countries and which operate on a worldwide scale
A TNC attempts to combine the benefits of economies of scale with the benefits of responding to local conditions
TNCs conduct a large % of their business outside their home country
TNCs have their greatest impact on globalisation through the movement of goods and resources between nations accounting for over two-thirds of global trade
In a fully developed TNC, finance, assets, technology, information, employees, patents, goods and services all flow freely from one country and one subsidiary to another.
Global Consumers
Global consumers enjoy similar needs/wants as IT allows for the spread of world culture e.g. television commercials are shown across the globe promoting particular brands.
Impact of Technology
Due to improvements in transport and communications the world has become a smaller place and with each successive technological development, the globe shrinks in size
Information technology (IT) is at the heart of modern organisations and is a driving force for global change
Advances in IT allow an increased flow of ideas and information across borders, so customers learn about overseas-made goods
Global communications systems make it possible for businesses to coordinate design production and distribution worldwide
The cost of global communications is declining and the tools of IT are becoming easier to use
Role of Government
Govts. Have reduced barriers to trade and I
Australian governments have been active in trade liberalization talks, especially through regional negotiations.
Governments around the world support integration of the worlds markets as a way of delivering future economic growth.
CERTA, CAFTA
Deregulation of Financial Markets
Deregulation is the process of removing government regulation from industry in order to achieve efficiency through greater competition
FDI investments made for the purpose of actively controlling companies, assets or property outside a businesss home country
Deregulation has led to opportunities for increased FDI, supporting globalization
Financial flows are now more mobile b/w countries due to the globalization of equity markets and floating of exchange rates
Interaction between Global Business and Australian Domestic Business
As the process of globalisation continues, Australian businesses face increased competition as well as increased opportunities
Many TNCs which operate in Australia have done so since the 1960s and therefore networks and relationships are well established.
The multicultural makeup of the Australian workplace provides personnel with language skills and who understand and appreciate cultural differences.
Governments and numerous consultants provide advice, financial assistance and contacts to encourage export-oriented businesses.
Australian companies which have successfully gone global include those in the areas of building materials, recycling processes, banking, wine, tourism, education, bioengineering and a host of SMEs across a wide range of products and services.
Global Business Strategy
Methods of International Expansion
Export
Exporting occurs when a business manufactures its products in its home country and then sells them in foreign markets
Exporting is the first stage for most businesses in their expansion strategy because it widens their potential market, allows them to test the willingness of foreign consumers to buy their product and carries much less risk than other forms of expansions
There are 3 different methods of exporting:
Indirect exporting is when a business sells its products to a domestic customer, who then exports the product. The domestic customer then assumes all the risks of distribution, sales and transportation
Direct exporting is when the exporting business sells its products to an intermediary or customer in another country
Intracorporate exporting is the selling of a product by a firm in one country to a subsidiary firm in another.
The main advantages of exporting as a method of overseas entry are:
It is relatively inexpensive, especially compared to established production facilities overseas
t provides an opportunity to gain valuable experience, although this would depend upon the exporting method selected
The main disadvantages of exporting are:
Overseas countries may use a number of barriers to trade which could result in an increase in the prive of the exported products
High transport costs may make exporting uneconomical, especially if air transport is involved
Overseas agents or intermediaries may not do as good a job as the business itself
Foreign Direct Investment
There are 3 methods of FDI
Greenfield strategy: involves commencing a new business venture from scratch
Acquisition strategy: occurs when one business acquires, through a takeover or merger, an existing business already operating in the foreign region. This strategy is appropriate for any business that wishes to move quickly into an overseas market
Joint Venture means two or more businesses agree to work together and form a jointly owned but separate business.
The main advantages of FDI are:
It provides the parent business with direct control over foreign facilities
As the products are being produced in the overseas country there is a subsequent reduction in transport costs
Transfer of technology, people, products and intellectual property becomes easier
The parent business is in a better position to monitor and adapt to changes in the foreign countrys business environment
The main disadvantages are:
Increased financial risk is likely, especially when investing in a business which is located in a politically unstable country
The parent business is exposed to the economic uncertainties of the foreign country
Adverse currency fluctuations may wipe out any cost efficiencies
Legal, social, cultural and language barriers
Joint venture profits must be shared between all the parties involved
Relocation of Production
Occurs when the domestic production facility is closed down then set up in a foreign country. This is sometimes referred to as relocating offshore. Main aim is to reduce costs
Increased global competition is forcing businesses to increase efficiency and reduce costs of production
The main advantages of the relocation of production are:
Moving to a low-cost labour country should help decrease costs of production
Decreased production costs may result in increased profits
More modern, up-to-date facilities can be constructed, adding to other cost efficiencies
Some governments provide financial assistance to cover relocation expenses
The main disadvantages are:
The parent business may be faced with social, cultural and language barriers
The possibility of a consumer backlash if exploitative work practices are used
The business needs to recruit a local workforce and train it to meet the firms previous standards. This could be time consuming and expensive
The business may be perceived as foreign and no longer a local business, which may result in some consumers being reluctant to purchase the products
Management Contract
The management contract is an arrangement under which a global business provides managerial assistance and technical expertise to a second or host business for a fee
The method of entry allows the global business to operate in many foreign countries without the expense of production facilities
The main advantages of the management contract strategy is:
The global partner has greater control over production standards in a joint venture operation
The fees paid by the subsidiary are a business expense and therefore a tax benefit
The global business is able to earn extra revenue
The main disadvantages are:
The host business does not gain any managerial training
The global business may face political pressures from the host businesss government, especially with regard to foreign exchange restrictions
Licensing/Franchises
Licensing is an agreement in which one business (licensor) permits another (licensee) to produce and market its product, in return for a royalty fee
Franchising is a specialised form of licensing in which the franchisor grants the franchisee the right to use a companys trademark and distribute its product.
The franchisor will often assist the franchisee to establish and run the business but also insists that the franchisee agrees to abide by strict operating rules.
The main advantages of licensing and franchising are:
There is little financial risk for the licensor/franchisor
It is a useful option for firms lacking the capital to develop an overseas operation
The licensor/franchisor is able to develop a global presence relatively quickly
The main disadvantages are:
There is a risk of losing intellectual property rights to the licensee/franchisee
It is difficult to maintain quality control over a wide range of locations
International franchising is more complex than domestic franchising, often requiring the need for extensive legal advice
The profits are shared between the two parties
Reasons for Expansion
Increase sales/find new markets
Businesses are always under pressure to increase sales revenue and profits. This can be difficult if the domestic market
Becomes saturated
Has stopped expanding due to a low population growth rate
Is dominated by a competitor
Is experiencing an economic downturn
Is being flooded by foreign-made products
These conditions result in a search for markets outside of the domestic market as businesses see profit making opportunities overseas
Acquire resources and have access to technology
Few countries possess sufficient domestic raw materials or are technologically self sufficient
Many businesses are investing in a number of different countries raw material sources to spread the risk of supply depleting in one country
Businesses sometimes experience a shortage of technological or management expertise, and they may choose to either enter into a joint venture or operate under a license or management agreement
Diversification
Diversification is a process of spreading risks encountered by a business
Diversification can occur on a number of different levels, which include:
Geographic diversification- having a number of markets across the world helps to minimize the risk of business failure if one market suffers a decrease in sales
Product diversification- increase the range of products sold, if one fails there are still others making money
Supplier diversification-having a number of suppliers for raw materials instead of being reliant on one supplier
Minimise Competitive Risk
A domestic producer may view selling o/s as a way of minimizing competitive pressures from foreign importers and domestic producers
Selling o/s can provide a new market and another source of revenue that reduces the risks involved from these competitive pressures
Economies of Scale
Economies of scale refers to the reduction in costs of production caused by increasing the size or scale of the production facility and spreading fixed costs over a larger output
Increasing sales by exporting more also lowers research and development costs and reduces raw material purchases due to bulk buying
A business can further reduce the cost of each item produced by operating on long production runs and having one factory supply one product globally
Cushioning Economic Cycle
The level of economic activity fluctuates
Boom-increased sales and production :. Business may not be motivated to sell o/s although it is only temporary
When the economy contracts the business faces reduced sales and excess capacity
A business needs to be aware of international and domestic economic conditions
Expand into many global markets to cushion the overall effect of a reduction in sales due to an economic recession in one market
Regulatory Differences
Regulations are restrictions placed on the activities of either individuals or businesses by governments
Regulations covering environmental protection, minimum working and health standards for employees, improved labeling of products and more stringent taxation requirements have been the focus of various governments
Conforming to such regulations may add to the cost of production and encourage businesses from industrialised nations to relocate production facilities to developing nations
They may be attracted by a lack of business regulations, particularly laws protecting employees and the environment from exploitation-this raises ethical issues
Tax Minimisation
Industrialised countries tend to have higher rates of company tax compared to developing countries
The high tax rate could as a disincentive to a domestic producer, encouraging them to move to a location with lower tax rates
Some developing countries offer taxation incentives Tax holiday a scheme where no company or personal tax is paid for a certain period of time. Tax haven a country that imposes little or no taxes on business income
Specific Influences on Global Business
Financial Influences
Currency Fluctuations
The foreign exchange rate expresses on countrys currency in terms of another
A depreciation is a decrease in the value of a currency in terms of another
A depreciation improves IC for X although M are more expensive
Currency fluctuations will impact on profitability and production costs
Creates risks for businesses selling o/s
Interest Rates
Australian interest rates tend to be above those of other countries so borrowing money tends to be more expensive for businesses
They may decide to borrow from o/s although they then risk currency fluctuations
If the $A depreciated, interest repayments would become more expensive. This is known as the valuation effect
Overseas Borrowing
Businesses may borrow o/s because of lower interest rates although risk currency fluctuations (explain in detail)
There are two sources of international finance:
International equity market: involves selling shares of ownership to new or existing owners worldwide. Businesses will use this if there is a shortage of funds in domestic markets
International bond market: A bond is a load certificate indicating that the issuer has borrowed a sum of money from the bondholder. Borrower has to pay interest
Political Influences
A political risk is any political event which results in a drastic change to the countrys business environment and which ultimately has a negative impact upon business operations and profit
They tend to be greater in countries experiencing social and economic unrest, particularly terrorism, war or other violent conflict
Political influences could act as incentives, encouraging businesses to relocate
Tensions between protectionism and free trade
Protectionism is the practice of creating artificial barriers to free trade, in order to protect domestic industries and jobs
Arguments for protectionism (trade restrictions)
To protect weak domestic industries from foreign competitors
To protect domestic employment
To protect national security by restricting sale of certain technology
To protect the health of citizens by banning products which do not meet specified health and safety standards
To retaliate against another countrys trade restrictions
Arguments against protectionism
Causes higher prices for consumer and producer products
Restricts consumer choice (less variety)
Loss of jobs from export oriented businesses
Props up inefficient businesses, which is a waste of scarce resources
Leads to lower economic growth rates
International Organisations and Treaties (World Trade Organisation)
The actions and decisions of international organizations have a large impact on global businesses. They may provide finance, regulate procedures or initiate policies
The World Trade Organisation (WTO) has become the major international organisation responsible for managing world trade and investment activities, with special reference to international trade laws.
The role of the WTO is to implement and advance global trade agreements and resolve trade disputes between countries
The main aim of the WTO is to remove barriers to international trade
A country, which believes that it is suffering harm as a result of another countrys failure to comply with its WTO obligations, can lodge a complaint with the WTO. A process of dispute resolution is then commenced and if no agreement can be reached directly, a WTO panel will hear the complaint and then issue a decision
Trade Agreements
A trade agreement is a formal agreement between countries designed to break down protection barriers
A trading bloc occurs when a number of countries join together in a formal preferential trading arrangement to the exclusion of other countries
The EU was formed in 1957 and is the oldest trading bloc
North American Free Trade Agreement (NAFTA)-1994 Canada, USA, Mexico
Association of South-East Asian Nations (ASEAN)-1993 with the aim of creating a common market by the year 2008. 420 mill people live in ASEAN economies
Asia-Pacific Economic Cooperation (APEC) 1990-21 member states and accounts for 50 % of world GDP
Legal Influences
The legal system of a country refers to the laws that regulate behaviour and the procedures used to enforce the laws
Contracts
A contract is a legally enforceable agreement which outlines the details of the agreement and the rights and obligations of each of the parties involved
If one of the parties believes that an obligation in the contract has not been fulfilled they will normally result to contract law (laws that govern the enforcement of a contract)
There are two main legal systems in the world today:
common law (based on tradition, judges decisions and custom)-contracts very detailed
civil law is based on a detailed set of laws and is organised into codes that list what is permissible and what is not-contracts shorter and less specific b/c it is covered in civil code
Dispute Resolution
Many international businesses attempt to resolve disputes using less expensive methods such as negotiation , mediation or arbitration
If these three methods fail, the legal system is the only remaining alternative
Businesses must answer three questions which countrys legal system applies, in which country should the dispute be settled and how will the final decision be enforced?
Intellectual Property
Intellectual property refers to property, such as a brand name or computer program that is created by an individuals intellect
Establish ownership rights of intellectual property through:
Patents give the inventor exclusive right to make, use or sell, a newly invented product or process
Trademarks are brand names, or designs that are officially registered
Copyright is the exclusive right of an author, artist, musician or publisher to publish, perform, copy or sell an original work
Social/Cultural Influences
Languages
Not being able to understand a foreign language may prevent a person from fully understanding a countrys culture
English is becoming the language of international business
Most people prefer to speak in their own language, and being able to communicate in local languages helps to establish a better relationship for business deals
Non-verbal communication refers to the messages we convey through body movements, facial expressions and the physical distance between the individuals
Gestures can have different meanings in different cultures. For example making a circle with the thumb and the forefinger is a friendly gesture in Australia, but in France it means you are worth nothing
Tastes
Tastes refer to a particular liking for something, such a foods, clothes and music
Differences in tastes will have practical implications for product marketing, especially product design, packaging and advertising
International businesses need to be aware of how local tastes influence the demand for their products
Religion
Religious traditions may influence what a person can and cannot eat, as well as particular holy days and schedules which are very important to any devout follower
Being insensitive or unsympathetic to religious traditions could cause lasting damage to a business relationship
Varying business practices and ethics
International managers must research the acceptable business practices and ethics of the countries with which they wish to conduct business so as to avoid awkward situations, embarrassments and insults
The best way to minimise the chance of them occurring is to learn as much as possible about potential clients and their unique business practices
The Department of Foreign affairs and trade offers free advice for Aust. business managers who want to learn about local customs and standards of behaviours for countries with which they trade
Gift giving varies among cultures and a businessperson should understand the etiquette involved. Many Australians believe that bribery is corrupt. However, in many countries payments to government officials are a way of life
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