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MGT 350: Chapter 8

Global Business
The buying and selling of goods and services by people from different cultures
Multinational Corporation
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
Trade Barriers
Government-imposed regulations that increase the cost and restrict the number of imported goods
Protectionism
A government’s use of trade barriers to shield domestic companies and their workers from foreign competition
Tariff
A direct tax on imported goods
Nontariff Barriers
Notax methods of increasing the cost or reducing the volume of imported goods

Five types: Quotas, voluntary export restraints, government import standards, government subsidies, and customs valuation/classification

Nontariff Barriers: Quota
A limit on the number or volume of imported products
Nontariff Barriers: Voluntary Export Restraints
Voluntary imposed limits on the number or volume or products exported to a particular country
Nontariff Barriers: Government Import Standard
A standard ostensibly established to protect the health and safety of citizens but in reality often used to restrict imports
Nontariff Barriers: Subsidies
Government loans, grants, and tax deferments given to domestic companies to protect them from foreign competition
Nontariff Barriers: Customs Classification
A classification assigned to imported products by government officials that affects the size of the tariff and the imposition of import quotas
General Agreement on Tariffs and Trade (GATT)
Worldwide trade agreement that reduced and eliminated tariffs, limited government subsidies, and established protection for intellectual property.
Existed from 1947-1995.
Regulate trade among 120 countries
World Trade Organization (WTO)
The successor of GATT. The only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
Geneva, Switzerland (1/1/1995)
Membership: 160 countries
Head: Roberto Azevedo
Functions:
Manage trade agreements
Forum for trade negotiations
Monitoring national trade policies
Technical assistance and training for developing countries
Regional Trading Zones
Areas in which tariff and nontariff barriers on trade between countries are reduced or eliminated
Maastricht Treaty of Europe
Regional trade agreement between most European countries
North American Free Trade Agreement (NAFTA)
Regional trade agreement between the US, Canada and Mexico
Dominican Republic-Central America Free Trade Agreement (CAFTA-DR)
Regional trade agreement between costa rica, dominican republic, el salvador, guatemala, honduras, nicaragua and the US
Trade Agreements
Increase choices, competition, and purchasing power, decrease prices. Create new business opportunities but also intensify competition
Global Consistency (Standardization)
When a multination company (MNC) has offices, manufacturing plants, and facilities in different countries and runs them all using the same rules, guidelines, polices and procedures
Local Adaptation
Modifying rules, guidelines, polices and procedures to adapt to differences in foreign countries, governments, and regulatory agencies
Phase Model of Globalization
A company makes transition from a domestic company to a global company using the following phases: exporting, cooperative contracts, strategic alliances, and wholly owned affiliates
Exporting
Selling domestically produced products to customers in foreign countries

Advantages: makes company less dependent on domestic sales and relative low risk
Disadvantages: goods subject to trade barriers and transportation costs (and risks)

Cooperative Contracts
An agreement in which a foreign business owner pays a company a fee for the right to conduct that business in his or her country
Cooperative Contracts: Licensing
A domestic company, the licensor, receives royalty payments for allowing this

Advantages: reduces need for investment (licensee responsible) and trade barriers don’t apply
Disadvantages: little control over product quality and
licensee can become competitor!

Cooperative Contracts: 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, with little investment and gives franchisor additional cash flow
Disadvantages: loss of control

Strategic Alliance
A agreement in which companies combine key resources, costs, risk, technology and people

Advantages: trade barriers don’t apply and companies share costs (and risks) and partners can learn from each other
Disadvantages: profits also have to be shared and difficult to manage: too many cultures involved

Joint Venture
A strategic alliance in which two existing companies collaborate to form a third, independent company
Wholly Owned Affiliates
Foreign offices, facilities and manufacturing plants that are 200 percent owned by the parent company

Advantages: parent company has complete control and no partner to share profits with
Disadvantages: risk- losses for parent company can be enormous

Global New Ventures (Global Start Ups)
New companies founded with an active global strategy and have sales, employees, and financing in different countries

Based on recent developments:
Reduction in costs of air travel
Easier and cheaper communications
Availability of global experience

What are the most important criteria for selecting foreign markets
Purchasing power and Growth potential
Purchasing Power
The relative cost of a standard set of goods and services in different countries
Growth Potential
Involves analyzing the degree of global competition, which is determined by the number and quality of companies that already compete in a foreign market
Choosing a Location
Qualitative factors:
workforce quality
company strategy

Quantitative factors:
kind of facility being built
trade barriers
exchange rates
transportation and labor costs

When conducting global business, companies should attempt to identify two types of political risk. What risk?
Political Uncertainty and Policy Uncertainty
Political Uncertainty
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
The risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business
Minimizing Political Risk
Avoidance: divesting or selling business

Control: preventing or reducing political risks (eg, lobbying)

Cooperation: using joint ventures and collaborative contracts

National Cultures
The set of shared values and beliefs that affects the perceptions, decisions, and behavior of the people from a particular country
Hofstede’s Five Dimensions of Culture
Power distance
Individualism
Masculinity/femininity
Uncertainty avoidance
Short-term/long-term orientation
Expatriate
Someone who lives and works outside his or her native country
Documentary Training
Focuses on identifying specific critical differences between cultures
Culture Stimulation
In which they practice adapting to cultural differences
Field Stimulation
A technique made popular by the US Peace Corps, places trainees in an ethnic neighborhood for three to four hours to talk to residence about cultural differences
A significant cost for MNCs?
Expatriate Failure
Adaptability Screening
Assesses how well managers and families are likely to adjust to a foreign culture

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