Global Business Environment - PowerPoint

					The Global Business
   Environment




GEB 6365 - INTERNATIONAL BUSINESS
         Dr. Jaishankar Ganesh
            August 26, 20056
         The Global Business
            Environment


•   Economic
•   Political/Legal
•   Socio/Cultural
•   Financial
•   Competitive
        Economic Indicators
• Population
  – Population density
  – growth
  – population distribution (by age and sex)
  – # of households
  – Average size of households
  – Degree of urbanization
• Income
  – GNP/real GNP/GDP
  – GNP per capita
  – Income distribution
  – Purchasing power parity
  – Inflation rate
  – Unemployment rate
• Consumption Patterns
  – Spending by category
  – Saturation rates
  – Diffusion patterns
• Infrastructure
  – Transportation
  – Communication
  – Energy
  – Commercial infrastructure
   Regional Economic Integration or
                    Trading Blocs
• Agreement between groups of countries in a geographic
  region to reduce, and ultimately remove, tariff and
  nontariff barriers to the free flow of goods, services and
  factors of production between each other.

• Examples:
   – EU, NAFTA, MERCOSUR, ASEAN, CARICOM, etc.
Levels of Economic
    Integration
         Political union

         Economic union
   EC    Common market
  1992
       Customs union
            Free
            trade
    NAFTA area
  Levels of Economic
      Integration
• Free Trade Area
  – All barriers to trade among member
    countries are removed.
  – No discriminatory tariffs, quotas, subsidies
    or administrative impediments are allowed
    to distort trade between member countries.
  – But each member country determines its
    own trade policies with regard to non-
    members.

• Examples:
  – EFTA (established in 1960)
  – NAFTA (established in 1994)
• Customs Union
  – In addition to FTA policies, members of a
    custom union establish a common trade
    policy with respect to nonmembers.
  – Requires significant administrative
    machinery to oversee trade relations with
    nonmembers

• Examples:
  – Benelux (1921)
• Common Market
  – In addition to being a customs union, in a
    common market factors of production --
    labor, capital and technology -- are mobile
    among members.
  – Restrictions on immigration and cross-
    border investment are abolished.
  – Common market goals have proved to be
    elusive.

• Examples:
  – EC (in 1992)
  – MERCOSUR?? (MERCOSUR initially
    targeted FTAs, then customs unification
    and finally a common market).
Economic Integration in
    the Americas
• Economic Union
  – An economic union entails the
    members to integrate their economic
    policies in addition to being a common
    market.
  – It requires a common currency,
    harmonization of member countries tax
    rates, monetary and fiscal policies.
  – Requires member countries to surrender
    a large measure of national sovereignty
    to supranational authorities (such as the
    European Parliament).

• Example:
  – European Union (since 1994)
  – http://europa.eu.int/abc/governments/index_en
    .htm
• EU – 25

 Austria Belgium Cyprus Czech Republic
 Denmark Estonia Finland France
 Germany Greece Hungary Ireland Italy
 Latvia Lithuania Luxembourg Malta
 Poland Portugal Slovakia Slovenia
 Spain Sweden The Netherlands United
 Kingdom

2007 – Bulgaria and Romania
      EU - Chronology of Major
               Events
• May 9, 1950
  – French foreign minister Robert Schuman
    makes a proposal to place Europe‟s coal and
    steel economies under a common European
    authority
• April 18, 1951
  –   treaty creating ECSC signed in Paris among
      the Benelux countries, France, Germany and
      Italy
• March 25, 1957
  –   Treaties creating the EEC and Euratom
      are signed in Rome

• April 8, 1965
  –   The institutions of the 3 communities are
      merged

• Jan. 22, 1972
  –   Denmark, Ireland, Norway and UK sign
      accession treaties to join the community in
      January 1, 1973

• Sept. 26, 1972
  –   Norway backs out
• Jan. 1, 1973
  –   community size swells to 9, and free trade
      agreements with EFTA take effect (European
      economic area is formed)


• March 13, 1979
  –   European monetary system becomes
      operative
• June 7-10
  –   The first parliament election of the community
      is held


• Jan. 1, 1981
  –   Greece joins the community


• June 29, 1985
  –   “White Paper” for common market by 1992
      endorsed


• Jan. 1, 1986
  –   Spain and Portugal join the community
• July 1, 1987
  –   The “Single European Act” is passed - 1992
      became a reality


• Dec. 1992
  – Commitment to economic and monetary union
    (EMU) with ECU to become a common
    European currency
           What is EC ‘92?
• The Single European Act
  – By December 31, 1992 nearly 300 legislative
    measures needed to eliminate all physical,
    technical and fiscal barriers that hinder the
    E.C. economy were passed
  – EC „92 became a reality
• Jan 1, 1994
   – The Maastricht Treaty went into force with the goal
     that monetary union to be achieved by 1999.

• Jan 1, 1996
   – Austria, Finland and Sweden join the Union bringing
     its strength to 15 member countries.

• January 1, 2002
   – euro notes and coins came into circulation in 12 EU
     countries (the 'euro area').

• May 1, 2004
   – 10 more countries join to form EU – 25 (~ 450
     million)
   – the Czech Republic, Hungary, Poland, Slovakia,
     Estonia, Latvia, Lithuania, Slovenia, Cyprus and
     Malta.
   Business Implications of Regional
                      Trading Blocs
• Market Integration and Industry
  Consolidation
  – Mergers and acquisitions
  – Strategic alliances
• Consumer Behavior
  – Does economic unity mean cultural unity?
  – Disparity of income level
  – Don‟t rush to standardize
• Product Policy
  – Uniform technical standards paves way for
    standardized products
  – But standards can get tougher
  – More new products
  – Economies of scales
  – Flexible manufacturing system will be
    required
  – Pan-Regional Strategies
• Pricing
  – Intense competition will lead to decrease in
    price
  – efficient border controls and uniform
    standards will lead to a decrease in costs also
  – Price based competition will intensify
            The Case For Regional
             Economic Integration

• Stimulates Economic Growth
• Removes inefficiencies
• Improves standard of living of consumers
• Provides greater competitive clout over
  non-members
• Ensures political peace
• Makes it a positive-sum game, whereby
  all member countries stand to gain
           The Case Against Regional
                Economic Integration

• Trade Creation Vs. Trade Diversion

• The “Fortress Europe” Syndrome
Impediments to Integration

  • Economic disparities among
    member countries
  • Macro Advantages Vs. Micro
    Disadvantages
  • Technical Standards and Systems
  • Environmental Standards
  • National Sovereignty Issues
  • Strength of the Integration lies in its
    “Weakest Link”
     Political/Legal Environment
•   Home Country Environment
•   Host Country Environment
•   Laws Affecting Business
•   Bargaining Powers
 Home Country Environment
• Trade Sanctions and Embargoes
  –   Unilateral /Multilateral (UN)
  –   Example against Cuba
  –   Effect on businesses
  –   Effect on nontargeted individuals
• Export Controls
      (Based on the export administration act and the
      munitions control)
    Why control exports?
    –   National security
    –   Foreign policy
    –   Short supply
    –   Nuclear proliferation
         •   To a given country?
         •   For use by a given firm?
         •   Trade diversion


•   Problems
    –   Competitive disadvantage
    –   Develops competition and loss of business
• Import controls
  –   Tariffs
  –   Voluntary restraint agreements
  –   Quota systems
  –   Reciprocal controls by foreign goods
  –   Desirable sources of raw
      materials/components are cut off hence
      product became either expensive or low
      grade
  –   Leads to complacency of domestic
      industries that are being protected
  –   Consumer bears the brunt
• Regulation of International Business
  Behavior
  –   Boycott of countries
  –   Antitrust laws
  –   Antidumping laws
  –   Corruption
  –   Ethical and moral issues
  –   Competitive disadvantage
  –   Loss of business
      Host Country Environment


• Political Risk
  –   Nature and stability of government
  –   Ownership risk
  –   Operating risk
  –   Transfer risk
Indicators of Political
– Unstable government     Risk
–   Civil disturbances
–   Terrorism
–   Resentment towards home country and
    government policies
–   Expropriation counts
–   Government policy towards FDI
 Effects on
Business
   – Expropriation
   –   Confiscation
   –   Domestication
       •   partial transfer of ownership management
       •   local content laws
       •   restriction on transfer of funds
       •   transfer of technology
       •   restriction on imports
       •   exports requirements
       •   tax increases
       •   local nationals at management level
       •   price controls
       •   laws that can affect 4P strategies
      Laws Affecting the 4P’s
• Product
  –   Pricing
  –   Safety
  –   Performance
  –   Packaging
  –   Label information
  –   Warranty
  –   Trademarks and brand names
• Pricing
  –   Government price controls
• Distribution
  –   Laws against door-to-door selling
  –   Legality of exclusive distribution
  –   Gray markets
 Laws Affecting Promotions

– Most controversial element of international
  marketing, advertising and sales promotion
– Laws pertain to:
  •   message
  •   media
  •   truthfulness
  •   use of models
  •   ban on certain sensitive products
      Managing Government
          Intervention
• Governments Discriminate
  –   Laws do not affect all businesses equally. It
      depends on the characteristics of the
      subsidiary

  –   Firms have certain bargaining powers.
      Bargaining power refers to the control the
      MNE parent has over those resources
      necessary to operate the subsidiary
      successfully
• Counter Bargaining Power of Host Nation
  –   Nation‟s ability to replace the business
      resources normally supplied by the MNE
  –   Nation‟s stock of managerial, technical and
      similar resources
  –   Control over the subsidiary‟s access to the
      host nation's market, raw materials, labor and
      capital
If
     Subsidiary B.P. > Host nations B.P.

intervention is bound to be minimal

Model is more applicable to manufacturing
MNE’s than the service sector
Socio-Cultural Environment
• This is the most wonderful project we have
  ever done.
                         -- Michael Eisner, CEO
                          The Walt Disney Company


• A horror made of cardboard, plastic, and
  appalling colors; a construction of hardened
  chewing gum and idiotic folklore taken
  straight out of comic books written for obese
  Americans.
                                 -- Jean Cau, French Critic
        Socio-Cultural Environment
• Culture is learned, shared and transmitted form
  one generation to the next


• “Collective programming of the mind.” ---
  Hofstede


• Inherently conservative, resisting change and
  fostering continuity
             Culture is....


•   A Shared System of Meanings
•   Relative
•   Learned
•   About Groups
         Culture is Not....


• Right or Wrong
• Inherited
• About Individual Behavior
             Levels of Human Mental
                       Programming
• Human Nature
  –   Biological
  –   Universal


• Culture
  –   Learned
  –   Specific to Groups


• Personality
  –   Inherited and Learned
  –   Specific to Individuals
The Determinants of Culture

                 Religion


      Social                  Political
     Structure    Culture    philosophy
                   Norms
                 and value
                  systems    Economic
     Language                philosophy

                 Education
• Culture is multidimensional


• Hofstede‟s Clusters
  –   Power Distance
  –   Uncertainity Avoidance
  –   Individualism/Collectivism
  –   Masculinity/Femininity
                 Individualism and Power Distance
                                              Power Distance Index (PDI)
                                                                      EQA        GUA
                                                              COL            PAN
                                      COS             PAK         IDO VEN           Large power
               12    Small power                    TAL     PER SAL
                                                                   SIN                   distance
                     distance                        THA KOR
               18    Low individualism
                                                      CHL            WAF       Low individualism
                                                       PHL     HOK
               24                                       POR          YUG  MAL
                                                             EAF MEX
               30                                   GRE
                                                                           PHI
                                                    URU       TUR
               36                                 JAM            BRA ARA
                                                        ira
               42                                 ARG
                                                      JPN            IND
               48
                      AUT
               54       ISR                          SPA
               60                 FIN
               66                 GER              SAF
                               NOR      SWI
               72             IRE     SWE                  FRA
               79             DEN                         BEL
                                       CAN          ITA
               85               NZL
                                            NET                                         Large power
               91                                                                            distance
Small power                       GBR USA
                                                                                  High individualism
distance                             AUL
High individualism
                     11         28          44           61      77         94         111
              Uncertainty Avoidance and Masculinity
                                               Masculinity Index (MAS)

                           Weak uncertainty                                     Weak uncertainty
                     8     avoidance                    SIN                     avoidance
                           Feminine                                  JAM        Masculine
                     16

                     24               DEN
                                SWE                     HOK        GBR
                     32                                               IRE
                                                  MAL
                     40                                     IND
                                                         USA PHI
                                 NOR          IDO CAN           SAF
                     48              NET                 NZL AUL
                                           EAF       WAF
                     56             FIN            IRA              SWI
                                             THA       ARA        GER
                     64
                                                TAI                     AUT
                                                       PAK
                     72                          BRA          ITA    VEN
                                     COS CHL    FRA ISRCOL
                     80                      SPA      TUR
                                           KOR      PAN      ARG   MEX
                     88              YUG          PER
                                                 SAL       BEL
                                                URU                         JPN
                     96
                                       POR     GUA
Strong uncertainty                                                              Strong uncertainty
                     104                                 GRE
avoidance                                                                       avoidance
Feminine             110                                                        Masculine
                            5           23       41           59        77     95
• High context VS low context
  culture

• Self-Reference Criterion

• Ethnocentricism

• Stereotypes

• Acculturation
               Silent Languages
• Time:      Appointments, Deadlines, & Schedules

• Space:    Size of office, Location of office,
  Furnishings,             & Conversation distance

• Things:    Material possessions, Interest in latest
             technology, Material symbols of status,
  power            & respect.

• Friendship: Concept of friendship, Friends Vs. Self
                       as social insurance

• Agreements: Rules of negotiations based on laws,
  moral                 practices, or informal
  customs.
      Time -- A Many Cultured Thing

• “Time is money.” -- United States

• “Those who rush arrive first at the grave.” -- Spain

• “The clock did not invent man.” -- Nigeria

• “If you wait long enough, even an egg will walk.” --
  Ethiopia

• “Before the time, it is not yet the time; after the time it is
  too late.” -- France
Nonverbal Communication
 • Appearances
    – Physical attire and grooming


 • Chronemics
    – Timing of verbal exchanges


 • Haptics
    – Use of touch while conversing


 • Kinesics
    – Body movement to communicate


 • Oculesics
   – Use (or avoidance) of eye contact
• Olfaction
  – Action of smelling


• Orientations
  – Angles at which people position
     themselves in relation to each other

• Paralinguistics
   – Tones, actions and other nonverbal
     aspects of speech

• Postures
   – Body positions while standing, sitting etc..


• Proxemics
   – Use of space in communication
      Influence of Culture on
        Consumer Behavior
• Loyalty

• Perceived Risk

• Role of family members

• Attitude toward consumerism

• Buyer-Seller relationships
                Culture

• Language

• Brand Names

• Slogans
                     Culture

• Language & Subcultures
  – Case of India
    •   15 official languages
    •   33 (> 1MN)
    •   44 (others)
    •   1652 (dialects)
    •   24,629 (newspapers & magazines)
     Cultural & Legal Regulations for
           Sensitive Products
•   General Attitude toward ads
•   Cigarettes
•   Alcohol
•   Condoms
•   Female Hygiene Products
•   Undergarments
•   Sexual Diseases
•   Pharmaceutical Goods
       Evolution of the International
            Monetary System
• Pure Gold Standard

• Modified Gold Standard (1880 - 1914)
   – The practice of pegging currencies to gold and guaranteeing
     convertibility
   – Each country‟s currency was set in value per ounce of gold


• 3 Major Features of the Gold Standard
   – System of fixed exchange rates
   – Anti-Inflationary (money supply cannot increase faster than
     the                               supply of gold)
   – Creates automatic BOP Equilibria
        Evolution of the International
             Monetary System
• Demise of the Gold Standard (1914 - 1939)
   – World Wars and the period of competitive devaluation


• The Bretton Woods Agreement (1944)
   – IMF and World Bank were established
   – U.S. $ was the only currency convertible to gold (1oz = $35)
   – other currencies were fixed in value in terms of gold
     (adjustable peg)
   – currencies to maintain value within +/- 1% of par
   – up to 10% devaluation allowed under dire situations
   – > 10% needed IMF approval
        Evolution of the International
             Monetary System
• U.S. Economic and Political Situation and the
  Collapse of the Fixed Exchange Rate System (1965 -
  1971)
   –   Vietnam War
   –   Increase in Money Supply & hence Inflation
   –   Worsening U.S. Trade Deficit
   –   The Smithsonian Agreement
   –   The Jamaican Agreement


• Floating Exchange Rate System (1973 - present)
   – The Oil Crises of 1971 & 1979
   – Volatility & Lack of Certainty
     Exchange Rate Determination

• What is a Currency Worth?

• Law of One Price
  – in an efficient market identical products sold in
    different countries must sell for the same price
    when their price is expressed in terms of the
    same currency
• Based on the Theory of PPP
  -- given relatively efficient markets, the price
     of a “basket of goods” should be roughly
     equivalent
  – Identical in Quality & Content
  – Produced Entirely Domestically


• The Big Mac Index

• Assumptions and Drawbacks
     Exchange Rate Quotations &
            Terminology

• Spot Rate

• Forward Rate

• Direct Quote

• Indirect Quote

• Cross Rates
Direct Vs. Indirect Quotations
• FF 6.0750 per U.S. $
   – FF indirect
   – $ direct

• $ 0.1646 per FF
   – $ indirect
   – FF direct

• Currency priced directly:
      % change = ((Ending - Beginning)/Beginning)*100

• Currency priced indirectly:
       % change = ((Beginning - Ending)/Ending)*100
   Some Interesting Relationships

• Money Supply

• Inflation

• Interest Rates

• Exchange rates
  Foreign-Currency Exposures
• Transaction Exposure
  -- The risk associated with a contractual
     payment in a foreign currency payable in a
     future date


• Economic Exposure
  -- Risk to firm‟s long-term cash flows due to
     unexpected future exchange rate changes
• Translation Exposure
  -- Translation or accounting exposure results
     from the legal requirement that all firms
     consolidate their financial statements of all
     worldwide operations annually

  -- Should the translation be in current or
     historical exchange rates?
  Managing Foreign-Exchange
            Risks
• Risk Modifying Approach

• Self-Insuring or Natural Hedging

• Risk shifting or Contractual Hedging

  – protecting against adverse exchange rate
    movements
     How to Hedge?
• Spot & Forward rate
• Options
  -- gives the holder the right to buy or
     sell foreign currency at a pre-
     specified price on or up to a pre-
     specified date

  – Call vs Put Option

• Futures

• Currency Swaps
• Forfaiting
  -- selling the bill of exchange or
     promissory note at a discount from
     the face value for immediate cash.
     The sale is without recourse to the
     exporter


• Factoring
  -- selling accounts receivables at a
     discount

				
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