Chapter 8 Global Management

© 2015 Cengage Learning

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What Is Global Business?

Global Business The buying and selling of goods and services by people from different countries.

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The Impact of Global Business

• Multinational corporations – A corporation that owns businesses in two or more countries.

• Direct foreign investment – A method of investment in which a company builds a new business or buys an existing business in a foreign country © 2015 Cengage Learning

Trade Barriers

• Tariff – direct tax on imported goods 8-1 • Nontariff barriers – quotas – voluntary export restraints – government import standards – subsidies – customs classification © 2015 Cengage Learning

Trade Agreements

• • • General Agreement on Tariffs and Trade (GATT) Existed from 1947 to 1995 Agreement to regulate trade among more than 120 countries “Substantial reduction of tariffs and other trade barriers and the elimination of tariffs.” © 2015 Cengage Learning 8-1

GATT

GATT made it easier and cheaper for consumers in all countries to buy foreign products.

– Tariffs were cut 40 percent on average worldwide by 2005 – Tariffs were eliminated in 10 specific industries – Stricter limits were put on government subsidies – GATT established protections for intellectual property – Trade disputes between countries now are fully settled by arbitration panels from the WTO 7

World Trade Organization

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Regional Trading Zones

• • • • • • Maastricht Treaty of Europe NAFTA CAFTA-DR UNASUR ASEAN APEC © 2015 Cengage Learning

Maastricht Treaty of Europe

• Formed in 1992 with 12 European countries • Total membership is now 25 countries • Transformed these countries into the European Union, forming one economic market and one common currency (the Euro) • Opened up and simplified trade among member nations

Web Link

http://europa.eu.int/

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NAFTA

• North American Free Trade Agreement between Canada, United States, & Mexico • Liberalizes trade among these three nations • Eliminates most tariffs and barriers

Web Link

http://www.mac.doc.gov/nafta/

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CAFTA and USAN

• Central American Free Trade Agreement • Union of South American Nations • Fastest-growing place for U.S. exports.

• Common infrastructure to support trade.

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ASEAN and APEC

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ASEAN

– Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam •

APEC

– Australia, Canada, Chile, China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, United States, and ASEAN members (except Cambodia, Laos, and Myanmar)

Web Link

http://www.aseansec.org

http://www.apecsec.org.sg

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Consumers, Trade Barriers, and Trade Agreements Increase: choices competition purchasing power Free Trade Agreements Decrease price of: food clothing necessities luxuries

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Consumers, Trade Barriers, and Trade Agreements

Why do trade barriers and free trade agreements matter to consumers?

– Trade agreements increase choices, competition, and purchase power…decrease prices. Why do trade barriers and free trade agreements matter to managers?

– Free trade agreements create new business opportunities … … but also intensify competition.

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Going Global

• Once a company has decided that it will go global, it must decide how to go global. – For example, if you decide to sell in Singapore, should you try to find a local business partner who speaks the language, knows the laws, and understands the customs and norms of Singapore’s culture? – – – Or should you simply export your products from your home country? What do you do if you are also entering Eastern Europe, perhaps starting in Hungary? Should you use the same approach in Hungary that you used in Singapore?

Consistency or Adaptation

• Global consistency – when a multinational company has offices, manufacturing plants, and distribution facilities in different countries and runs them all using the same rules, guidelines, policies, and procedures • Local adaptation – when a multinational company modifies its rules, guidelines, policies, and procedures to adapt to differences in foreign customers, governments, and regulatory agencies © 2015 Cengage Learning 8-2

Forms for Global Business Exporting Cooperative contracts Strategic alliances Wholly owned affiliates © 2015 Cengage Learning 8-3

Exporting

• Selling domestically made products to foreign markets 8-3 • • Advantages – – makes company less dependent on domestic sales gives company more control Disadvantages – – goods subject to trade barriers transportation costs © 2015 Cengage Learning

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Cooperative Contracts

• • • Licensing – a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce its product, sell its service, or use its brand name in a particular foreign market.

Advantages – – companies earn money without investing more money companies can avoid trade barriers Disadvantages – – licensor gives up control over product quality licensees can become competitors © 2015 Cengage Learning

Cooperative Contracts

8-3 • • • Franchise – a collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organization, the franchisee.

Advantages – – fast way to enter foreign markets gives franchisor additional cash flow Disadvantages – – loss of control culture bound © 2015 Cengage Learning

Strategic Alliances

When companies combine key resources, costs, risks, technology, and people. Most common form is joint ventures. • Advantages – – – companies avoid trade barriers companies only bear part of the costs partners can learn from each other • Disadvantages – – Profits have to be shared merging of cultures © 2015 Cengage Learning 8-3

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Wholly Owned Affiliates

Approximately one-third of multinational companies enter foreign markets through wholly owned affiliates. Foreign offices, facilities, and manufacturing plants that are 100 percent owned by the parent company • • Advantages – parent company receives all of the profits and has complete control Disadvantages – losses for parent company can be enormous © 2015 Cengage Learning

Global New Ventures

• • • Companies used to evolve slowly from small operations selling in their home markets to large businesses selling to foreign markets. As companies went global, they usually followed the phase model of globalization. Recently, however, three trends, as shown on this slide, have combined to allow companies to skip the phase model. – – – Quick, reliable air travel Low-cost communication technologies Critical mass of experienced businesspeople 25

Common Factors of Global New Ventures

The company founders successfully develop And communicate the company’s global vision.

Several foreign markets are entered at the same time

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Finding the Best Business Climate

Access to Growing Markets Location to Build Minimal Political Risk

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Growing Markets

• Two factors that help companies determine the growth potential of foreign markets – Purchasing power • comparison of a standard set of goods and services in – different countries • more means greater growth potential The degree of global competition • the number and quality of companies already in the market © 2015 Cengage Learning

How Consumption of Coca-Cola Varies with Purchasing Power around the World © 2015 Cengage Learning 8-4

Choosing a Location

• Qualitative factors – workforce quality – company strategy • Quantitative factors – – – – kind of facility being built trade barriers exchange rates transportation and labor costs © 2015 Cengage Learning 8-4

World’s Best Cities for Business

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Minimizing Political Risk

Political uncertainty – associated with the risk of major changes in political regimes that can result from war, revolution, death of political leaders, social unrest, or other influential events Policy uncertainty – refers to the risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business. – this is the most common form of political risk in global business and perhaps the most frustrating. © 2015 Cengage Learning 8-4

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Strategies for Dealing with Political Risk

Avoidance – divesting or selling business to avoid risk • Control – active strategy to prevent or reduce political risks • Cooperation – using joint ventures and collaborative contracts © 2015 Cengage Learning

Cultural Differences

• • • National culture is the set of shared values and beliefs that affects the perceptions, decisions, and behavior of the people from a particular country. The first step in dealing with culture is to recognize that there are meaningful differences Professor Geert Hofstede research shows that there are five consistent cultural dimensions across countries

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Becoming Aware of Cultural Differences

Five Dimensions of Culture Power distance – the extent to which people in a country accept that power is distributed unequally in society and organizations Individualism – the degree to which societies believe that individuals should be self-sufficient Masculinity/femininity – the difference between highly assertive and highly nurturing cultures © 2015 Cengage Learning 8-5

Becoming Aware of Cultural Differences

• • Uncertainty avoidance – the degree to which people in a country are uncomfortable with unstructured, ambiguous, unpredictable situations.

Short-term/long-term orientation – addresses whether cultures are oriented to the present and seek immediate gratification or to the future and defer gratification.

Hofstede’s Five Cultural Dimensions

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Language and Cross-Cultural Training

Documentary training • Cultural simulations • Field simulation training © 2015 Cengage Learning

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Spouse, Family, and Dual-Career Issues

Adaptability screening – assesses how well managers and families are likely to adjust to a foreign culture Language and cross-cultural training for the family is just as, if not more, important than training for employees.

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Holden Outerwear

1. Which stage of globalization characterizes Holden Outerwear’s international involvement? 2. Identify Holden’s primary approach to entering the international market. What are the benefits of this entry strategy? 3. What are the challenges of international management for leaders at Holden? © 2015 Cengage Learning