Business Essentials 4-1
Thirteenth Edition
Chapter 4
Understanding the
Global Context of
Business
Copyright © 2022, 2019, 2016 Pearson Education, Inc.
Component Weight
1. Attendance 20%
2. Homework Assignments (0 - 25 - 50 - 75 - 100) 30%
Seminar 1 (18th March) (5%)
Seminar 2 (11th April) (5%)
Assignment 2 Video Questions (5% )
Assignment 3 Niche Market Business Plan. (5% )
Video Upload (5% )
Peer to Peer (5% )
3. Mid-term Exams in class 20%
(10%)
Test A/B
Open Questions (10%)
4. Final Exam NO CLASS (Except 5th) 20%
Essay type ( Wednesday 5th –Saturday 15th )
5. Group WORK 10%
( Monday 27th – Wednesday 5th )
Total 100%
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4-2
Alibaba Flourishes in Free Market Economy
• Jack Ma founded [Link], a
business-to-business platform
that allowed even small
businesses access to a vast
network of sellers.
• Alibaba transformed the way
Chinese citizens shopped. In
2019, Alibaba accounted for 80
percent of China’s online
shopping, and total sales dwarfed
other e-commerce companies like
Amazon and eBay.
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Introduction
• This chapter explores the global context of
business with:
– major world marketplaces and trade agreements
– factors that help determine how countries and
businesses respond to international opportunities and
challenges
– decisions managers must make if they intend to
compete in international markets
– social, cultural, economic, legal, and political factors
that affect international business
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Learning Objectives (1 of 2)
4-1 Discuss the rise of international business and
describe the major world marketplaces, trade
agreements, and alliances.
4-2 Explain how differences in import-export
balances, exchange rates, and foreign
competition determine the ways in which
countries and businesses respond to the
international environment.
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4-5
Learning Objectives (2 of 2)
4-3 Discuss the factors involved in deciding to do
business internationally and in selecting the
appropriate levels of international involvement
and international organizational structure.
4-4 Explain the role and importance of the cultural
environment in international business.
4-5 Describe some of the ways in which economic,
legal, and political differences among nations
affect international business.
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4-6
The Contemporary Global Economy (1 of 2)
• Globalization
– process by which the world economy is becoming a
single interdependent system
• Import
– product made or grown abroad but sold domestically
• Export
– product made or grown domestically but shipped and
sold abroad
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4-7
The Contemporary Global Economy (2 of 2)
• Governments and businesses are more aware of
the benefits of globalization to businesses and
shareholders
• New technologies have made international travel,
communication, and commerce faster and
cheaper than ever
• Sometimes a firm must expand into foreign
markets simply to keep up with competitors
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4-8
Distinctions Based on Wealth
1. High-income countries
2. Upper-middle-income countries
3. Lower-middle-income countries
4. Low-income countries
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4-8
Distinctions Based on Wealth
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4-9
Global Clusters
• North America
• Europe
• Pacific Asia
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Trade Agreements and Alliances (1 of 3)
• North American Free Trade Agreement
(NAFTA)
– agreement to gradually eliminate tariffs and other trade
barriers among the United States, Canada, and Mexico
• European Union (EU)
– agreement among major European nations to eliminate
or make uniform most trade barriers affecting group
members
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4-11
European Union
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Trade Agreements and Alliances (2 of 3)
• Association of Southeast Asian Nations
(ASEAN)
– organization for economic, political, social, and cultural
cooperation among Southeast Asian nations
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Association of Southeast Asian Nations
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Trade Agreements and Alliances (3 of 3)
• General Agreement on Tariffs and Trade
(GATT)
– international trade agreement to encourage the
multilateral reduction or elimination of trade barriers
• World Trade Organization (WTO)
– organization through which member nations negotiate
trade agreements and resolve disputes about trade
policies and practices
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Goals of the WTO
1. Promote trade by encouraging members to adopt
fair trade practices
2. Reduce trade barriers by promoting multilateral
negotiations
3. Establish fair procedures for resolving disputes
among members
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International Trade
• Balance of Trade
– economic value of all products a country exports minus
the economic value of all products it imports
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4-17
Major Trading Partners of the U.S. (1 of 2)
Table 4.1 Major Trading Partners of the United States (In Millions)
Percent of
Rank Country Exports Imports Total Trade Total Trade
Total, Top 15 Countries 1,158.10 1,957.50 3,115.60 75.20%
1 Mexico 256.4 358.1 614.5 14.80%
2 Canada 292.7 319.7 612.4 14.80%
3 China 106.6 452.2 558.9 5.30%
4 Japan 74.7 143.6 218.3 5.30%
5 Germany 60.3 127.5 187.8 4.50%
6 Korea, South 56.9 77.5 134.4 3.20%
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Major Trading Partners of the U.S. (2 of 2)
Table 4.1 Continued
Total Percent of
Rank Country Exports Imports Trade Total Trade
7 United Kingdom 69.2 63.2 132.3 3.2%
8 France 37.8 57.4 95.2 2.30%
9 India 34.4 57.7 92.1 2.20%
10 Taiwan 31.2 54.3 85.5 2.10%
11 Netherlands 51.2 29.8 81 2.00%
12 Italy 23.8 57.2 80.9 2.00%
13 Vietnam 10.9 66.7 77.6 1.90%
14 Brazil 43.1 30.9 73.9 1.80%
15 Ireland 9 61.8 70.8 1.70%
Source: [Link]
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4-19
International Trade (1 of 3)
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International Trade (2 of 3)
• Trade Deficit
– situation in which a
country’s imports exceed
its exports, creating a
negative balance of
trade
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4-21
International Trade (3 of 3)
• Trade Surplus
– situation in which a country’s exports exceed its
imports, creating a positive balance of trade
• Balance of Payments
– flow of all money into or out of a country
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4-22
Exchange Rates
• Exchange Rate
– rate at which the currency of one nation can be
exchanged for the currency of another nation
• Euro
– a common currency shared among most of the
members of the European Union (excluding Denmark,
Sweden, and the United Kingdom)
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4-23
Forms of Competitive Advantage (1 of 2)
• Absolute Advantage
– the ability to produce something more efficiently than
any other country can
• Comparative Advantage
– the ability to produce some products more efficiently
than others
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4-24
Forms of Competitive Advantage (2 of 2)
• National Competitive Advantage
– international competitive advantage stemming from a
combination of factor conditions, demand conditions,
related and supporting industries, and firm strategies,
structures, and rivalries
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4-25
Going International
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Levels of International Involvement
• International Firm
– firm that conducts a significant portion of its business in
foreign countries
• Multinational Firm
– firm that designs, produces, and markets products in
many nations
• Independent Agent
– foreign individual or organization that agrees to
represent an exporter’s interests
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The World’s Largest Non-U.S. Companies 4-27
Table 4.2 The World’s Largest Non-U.S. Companies by Sales, Profits, and Number of
Employees (2019)
Sales Profits
Company ($ millions) ($ billions) Employees
Sinopec Group 414,650 blank ba
Royal Dutch Shell 396,556 blank blank
China Natural Petroleum 392,977
State Grid 387,056 blank blank
Saudi Aramco
355,905
Samsung Electronics 39.9 Blank
Toyota Motor 17.0
Volkswagen 14.3
Total 11.4
BP 9.4
33nk14
China National Petroleum blank B1,344,410la
China Post Group 927,171
State Grid 907,677
Hon Hai Precision Industry 757,404
Volkswagen 671,205
Sources: The Fortune 2016 Global 500 ([Link]); The World’s Most Profitable Companies ([Link])
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International Organization Structures (1 of 2)
• Licensing Arrangement
– arrangement in which firms choose foreign individuals
or organizations to manufacture or market their
products in another country
• Strategic Alliance
– arrangement in which a company finds a foreign
partner to contribute approximately half of the
resources needed to establish and operate a new
business in the partner’s country - also called joint
venture
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International Organization Structures (2 of 2)
• Branch Office
– foreign office set up by an international or multinational
firm
• Foreign Direct Investment (FDI)
– arrangement in which a firm buys or establishes
tangible assets in another country
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4-30
Barriers to International Trade
• Social and Cultural Differences
• Economic Differences
• Legal and Political Differences
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Hofstede’s Five Dimensions of National 4-32
Culture
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Understanding the Cultural Environment
(1 of 2)
• Social Orientation
– a person’s beliefs about the relative importance of the
individual versus groups to which that person belongs
• Power Orientation
– the beliefs that people in a culture hold about the
appropriateness of power and authority differences in
hierarchies such as business organizations
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Understanding the Cultural Environment
(2 of 2)
• Uncertainty Orientation
– the feeling individuals have regarding uncertain and
ambiguous situations
• Goal Orientation
– the manner in which people are motivated to work
toward different kinds of goals
• Time Orientation
– the extent to which members of a culture adopt a long-
term versus a short-term outlook on work, life, and
other elements of society
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Barriers to International Trade (1 of 2)
• Quota
– restriction on the number of products of a certain type
that can be imported into a country
• Embargo
– government order banning exportation and/or
importation of a particular product or all products from
a particular country
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Barriers to International Trade (2 of 2)
• Tariff
– tax levied on imported products
• Subsidy
– government payment to help a domestic business
compete with foreign firms
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The Protectionism Debate
• Protectionism
– the practice of protecting domestic business at the
expense of free market competition
– critics charge that protectionism drives up prices by
reducing competition
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4-37
Legal and Political Differences (1 of 2)
• Local Content Law
– law requiring that products sold in a particular country
be at least partly made there
• Business Practice Law
– law or regulation governing business practices in given
countries
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Legal and Political Differences (2 of 2)
• Cartel
– association of producers whose purpose is to control
supply and prices
• Dumping
– practice of selling a product abroad for less than the
cost of production
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