THE ENVIRONMENT OF BUSINESS

Business in a Global Setting

MAN 101 – Introduction to Business

23.10.2025
 The Basis for International Business
• International business encompasses all business activities
that involve exchanges across national boundaries.
McDonald’s in China

American companies
such as McDonald’s have
become widely popular
in China.

This restaurant in Beijing

features elements from
the Chinese culture as
well as from American
culture.
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 The Basis for International Business
• An absolute advantage is the ability to produce a specific
product more efficiently than any other nation.
–Saudi Arabia: production of crude oil and petroleum products
–South Africa: diamonds

• A comparative advantage is the ability to produce a

specific product more efficiently than any other product.
• Outsourcing
–The transferring of manufacturing or other tasks – such as
data processing – to countries where labour and supplies
are less expensive
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 Outsourcing

Many companies choose to outsource manufacturing to factories

in Asia due to lower costs of labor.

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©Roberto Westbrook/Blend Images
 The Basis for International Business
• Importing and exporting are the principal activities in
international trade:
–Exporting is selling and shipping raw materials or products to
other nations.
–Importing is purchasing raw materials or products in other
nations and bringing them into one’s own country.
• A nation’s balance of trade is the total value of its exports
minus the total value of its imports over some period of time.
–A trade deficit is a negative balance of trade.
(Unfavorable Situation: Unfavorable Balance of Trade)
–A trade surplus is a positive balance of trade.
(Favorable Situation: Favorable Balance of Trade)
• A nation’s balance of payments is the total flow of money into
a country minus the total flow of money out of that country
over some period of time. 5
 Restrictions to International Business
Types of Trade Restrictions –Tariffs
• An import duty (also called a tariff) is a tax levied on a
particular foreign product entering a country.
–Revenue Tariffs are imposed solely to generate income for the
government.
–Protective Tariffs are imposed to protect a domestic industry
from competition by keeping the price of competing imports
level with or higher than the price of similar domestic products.

–Dumping is the exportation of large quantities of a product at a

price lower than that of the same product in the home market.

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 Restrictions to International Business
Types of Trade Restrictions –Non-Tariff Barriers
• A nontariff barrier is a nontax measure imposed by a
government to favor domestic over foreign supplies.
Nontariff barriers create obstacles to the marketing of foreign
goods in a country and increase costs for exporters.
• Economical Restrictions
– An import quota is a limit on the amount of a particular good that may be
imported into a country during a given period of time. The limit may be set in
terms of either quantity or value.
– An embargo is a complete halt to trading with a particular nation or of a
particular product. The embargo is used most often as a political weapon.
– A foreign-exchange control is a restriction on the amount of a particular
foreign currency that can be purchased or sold.
– Currency devaluation is the reduction of the value of a nation’s currency
relative to the currencies of other countries. Devaluation increases the cost of
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foreign goods.
Restrictions to International Business

Due to the U.S. embargo

against Cuba, many Cubans
drive older automobiles.
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 Restrictions to International Business
Types of Trade Restrictions –Non-Tariff Barriers
• Social and Cultural Barriers
–Administrative Regulations
• Political and Legal Barriers

Political instability in many nations has led to an influx of refugees.

The potential for political turmoil is a substantial risk businesses face when
expanding overseas. 9
 Restrictions to International Business
Reasons for Trade Restrictions
–To equalize a nation’s balance of payments
–To protect new or weak industries
–To protect national security
–To protect the health of citizens
–To retaliate for another nation’s trade restrictions
–To protect domestic jobs

Reasons against Trade Restrictions

–Higher prices for consumers
–Restriction of customer’s choices
–Misallocation of international resources
–Loss of jobs 10
 International Trade Agreements
• General Agreements on Tariffs and Trade (GATT) was an
international organization of 153 nations dedicated to
reducing or eliminating tariffs and other barriers to world
trade.
–Most favored nation status was the famous principle of GATT.

• World Trade Organization (WTO) was established by GATT.

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 Reducing Barriers in Global Trading
• Free Trade Areas
– No internal tariffs between member countries
• Customs Union
– In addition to eliminating internal tariffs, member
countries levy a common external tariff on goods being
imported from non-members
• Common Market
– It has all the elements of a Customs Union but it also
allows free mobility of production factors such as labor
and capital
• Regional Economic Integration
– Countries create even greater social and economic
harmonization by adopting common economic policies,
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such as fiscal or monetary policies
 Trade Agreements, Alliance
and Organizations

North American Free Trade

Agreement (NAFTA)
Agreement that eliminates
most tariffs and trade
restrictions on agricultural and
manufactured products to
encourage trade among
Canada, the U.S. and Mexico
NAFTA, which went into effect on January 1,
1994, has increased trade among Mexico,
the United States, and Canada.

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 European Union &
Asia-Pacific Economic Cooperation
European Union (EU)
• A union of European nations established in 1958 to promote trade
among its members; one of the largest single markets today
• The EU has a GDP of more than $19 trillion
Asia-Pacific Economic Cooperation (APEC)
• An international trade alliance that promotes open trade, economic
and technical cooperation among member nations
• Holds 57% of world GDP
• Companies associated with APEC have become increasingly
competitive and sophisticated in global business in the past three
decades 14
 Stages of Global Business

LOW FIRM’S INVOLVEMENT LEVEL HIGH

Export / Import / Contractual International

CounterTrade Agreements Investments

•Overseas Marketing
•Exporting •Franchising •Overseas Production
•Importing •Licensing •Int’l Joint Ventures
•Countertrading •Subcontracting •Int’l Mergers & Acquisitions

LOW FIRM’S RISK LEVEL HIGH

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 Methods of Entering International Business
• Licensing is a contractual agreement in which one firm
permits another to produce and market its product and
use its brand name in return for a royalty or other
compensation.
• A firm may manufacture its products in its home country
and export them for sale in foreign markets.
• A joint venture is a partnership formed to achieve specific
goal or to operate for a specific period of time.
• At a deeper level of involvement in international business,
a firm may develop totally owned facilities, that is, its
own production and marketing facilities in one or more
foreign nations.
–This direct investment provide complete control over operations,
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but it carries a greater risk than the joint venture.
 Franchising
• A franchise is a license to operate an individually owned
business as if it were part of a chain of outlets or stores.
• Often, the business itself is also called a franchise.
• Franchising is the actual granting of a franchise.
• A franchisor is an individual or organization granting a
franchise.
–The franchisor supplies a known and advertised business name,
management skills, required training and materials, and a method
of doing business.
• A franchisee is a person or organization purchasing a
franchise.
–The franchisee supplies labor and capital, operates the franchised
business, and agrees to abide by the provisions of the franchise
agreement. 17
 Types of Franchising
• Franchising agreements fall into three general categories:
–A manufacturer authorizes a number of retail stores to sell a
certain brand-name item (prevalent in sales of passenger cars
and trucks, farm equipment, shoes, paint, petroleum).
–A producer licenses distributors to sell a given product to
retailers. This arrangement is common in the soft-drink industry
(eg. Coca-Cola, Pepsi).
–A franchisor supplies brand names, techniques or other services
instead of a complete product. Although the franchisor may
provide certain production and distribution services, its primary
role is the careful development and control of marketing
strategies (eg. Holiday-Inn, McDonald’s, KFC). 18
 Methods of Entering International Business
• A strategic alliance is a partnership formed to create

competitive advantage on a worldwide basis.

• A trading company provides a link between buyers and

sellers in different countries.

• Countertrade is essentially an international barter

transaction in which goods and services are exchanged for

different goods and services.

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 Methods of Entering International Business
• A Multinational Enterprise is a firm that operates on a
worldwide scale without ties to any specific nation or region.

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