{"id":61,"date":"2020-11-02T13:35:16","date_gmt":"2020-11-02T18:35:16","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/fundamentalsbusiness\/chapter\/global\/"},"modified":"2024-12-07T00:43:18","modified_gmt":"2024-12-07T05:43:18","slug":"global","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/fundamentalsbusiness\/chapter\/global\/","title":{"raw":"Chapter 4 - Business in a Global Environment","rendered":"Chapter 4 – Business in a Global Environment"},"content":{"raw":"
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Learning Objectives<\/h1>\r\n<\/header>\r\n
\r\n\r\nBy the end of the chapter, you should be able to:\r\n
    \r\n \t
  1. explain why nations and companies participate in international trade and how they measure that trade;<\/li>\r\n \t
  2. describe the concepts of absolute and comparative advantage;<\/li>\r\n \t
  3. define importing and exporting;<\/li>\r\n \t
  4. explain how companies enter the international market through licensing agreements or franchises;<\/li>\r\n \t
  5. describe how companies reduce costs through contract manufacturing and outsourcing;<\/li>\r\n \t
  6. explain how cultural, economic, legal, and political differences between countries create challenges to successful business dealings;<\/li>\r\n \t
  7. discuss the various initiatives designed to reduce international trade barriers and promote free trade; and<\/li>\r\n \t
  8. explain [pb_glossary id=\"456\"]key terms[\/pb_glossary] in the chapter.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n\"\"\r\n

    \u00a0Show What You Know<\/h2>\r\n

    [h5p id=\"11\"]<\/p>\r\n\r\n

    <\/div>\r\n

    The Globalization of Business<\/h1>\r\n

    Do you wear Nike shoes or Timberland boots? Listen to Beyonc\u00e9, Pitbull, Twenty One Pilots, or The Neighborhood on Spotify? If you answered yes to either of these questions, you are a global business customer. Both Nike and Timberland manufacture most of their products overseas. Spotify is a Swedish enterprise.<\/span><\/p>\r\n\r\n\r\n[caption id=\"attachment_56\" align=\"alignright\" width=\"300\"]\"A Figure 4.1 Orchard Road by Michael Spencer licensed CC BY | flickr[\/caption]\r\n

    Take an imaginary walk down Orchard Road, the most fashionable shopping area in Singapore. You will pass department stores such as Tokyo-based Takashimaya and London\u2019s very British Marks & Spencer, both filled with such well-known international labels as Ralph Lauren Polo, Burberry, and Chanel. If you need a break, you can also stop for a latte at Seattle-based Starbucks.<\/span><\/p>\r\n

    When you are in the Chinese capital of Beijing, do not miss Tiananmen Square. Parked in front of the Great Hall of the People, the seat of Chinese government, are fleets of black Buicks, cars made by General Motors in Flint, Michigan. If you are adventurous enough to find yourself in Faisalabad, a medium-sized city in Pakistan, you will see Hamdard University, located in a refurbished hotel. Step inside its computer labs, and the sensation of being in a faraway place will likely disappear: on the computer screens, you\u2019ll recognize the familiar Microsoft flag \u2014 the same one emblazoned on screens in Microsoft\u2019s hometown of Seattle and just about everywhere else on the planet.<\/span><\/p>\r\n

    The globalization of business<\/span> is bound to affect you. Not only will you buy products manufactured overseas, but it\u2019s likely that you\u2019ll meet and work with individuals from various countries and cultures as customers, suppliers, colleagues, employees, or employers. The bottom line is that the globalization of world commerce has an impact on all of us \u2014 evidenced in the figure below, The Expanded Circular Flow Model. Therefore, it makes sense to learn more about how globalization works.<\/span><\/p>\r\nChart 4.1<\/strong> The Expanded Circular Flow Model<\/span>\r\n\r\n[caption id=\"attachment_57\" align=\"aligncenter\" width=\"1024\"]\"The Chart 4.1 The Expanded Circular Flow Model. It shows how money circulates through the economy from households, firms, financial institutions, government and the rest of the world.[\/caption]\r\n

    Never before has business spanned the globe the way it does today and will continue to do in the future. But why is international business important? Why do companies and nations engage in international trade? What strategies do they employ in the global marketplace? How do governments and international agencies promote and regulate international trade? These questions and others will be addressed in this chapter. Let\u2019s start by looking at the more specific reasons why companies and nations engage in international trade. <\/span><\/p>\r\n\r\n

    Why Do Nations Trade?<\/span><\/h1>\r\n

    Why does Canada import automobiles, steel, digital phones, and apparel from other countries? Why not make them ourselves? Why do other countries buy wheat, chemicals, machinery, and lumber products from us? Because no national economy produces all the goods and services that its people need. Countries are importers<\/span> when they buy goods and services from other countries; when they sell products to other nations, they are exporters<\/span>. (We will discuss importing and exporting in greater detail later in the chapter.) The monetary value of international trade is enormous. In 2016, the total value of worldwide trade in merchandise and commercial services was $20.208 trillion.[footnote]World Trade Organization. (2017). Merchandise trade and trade in commercial services. <\/em>https:\/\/www.wto.org\/english\/res_e\/statis_e\/wts2017_e\/WTO_Chapter_04_e.pdf[\/footnote]<\/p>\r\n\r\n

    Absolute and Comparative Advantage<\/span><\/h1>\r\n

    To understand why certain countries import or export certain products, you need to realize that every country (or region) can not produce the same products. The cost of labour, the availability of natural resources, and the level of know-how vary greatly around the world. Most economists use the concepts of [pb_glossary id=\"721\"]absolute advantage[\/pb_glossary] and [pb_glossary id=\"722\"]comparative advantage[\/pb_glossary] to explain why countries import some products and export others.<\/span><\/p>\r\n\r\n

    Absolute Advantage<\/span><\/h2>\r\n

    A nation has an absolute advantage<\/span> if that nation has the ability to produce something more efficiently than any other country. Absolute advantage implies that (1) the nation is the only source of a particular product or (2) it can make more of a product using fewer resources than other countries. For example, because of the climate and soil conditions, France had an absolute advantage in wine making until its dominance of worldwide wine production was challenged by the growing wine industries in Italy, Spain, the United States, and more recently Canada. Unless an absolute advantage is based on some limited natural resource, it seldom lasts. That is why there are few, if any, examples of absolute advantage in the world today. <\/span><\/p>\r\n\r\n

    Comparative Advantage<\/span><\/h2>\r\n

    Comparative advantage is the ability for a country to produce some products more efficiently than others. How can we predict, for any given country, which products will be made and sold at home, which will be imported, and which will be exported? This question can be answered by looking at the concept of comparative advantage<\/span>, which exists when a country can produce a product at a lower [pb_glossary id=\"708\"]opportunity cost[\/pb_glossary] compared to another nation. But what is an opportunity cost?<\/p>\r\n\r\n

    Opportunity Costs<\/h1>\r\nSince resources are limited, every time you make a choice about how to use them, you are also choosing to forego other options. Economists use the term [pb_glossary id=\"708\"]opportunity cost[\/pb_glossary] to indicate what must be given up to obtain something that is desired. A fundamental principle of economics is that every choice has an opportunity cost.\r\n