Globalisation Nature and Trends of Globalisation - globalization = a trend towards a more integrated global economic system. - Globalization refers to the process of businesses becoming transnational and locating/conducting business in many different countries - Globablisation has been increased by the technological revolution in communications + computers - Last 20 years the world has experienced widespread + rapid globalization - Moved away from isolated national economies, towards a merging interdependent global economic system What is globalisation? - Growing economic interdependence between counties evident through cross-border flows of finance, production, sale and distribution of products and technology flows. - It involves aspects that impact on business operations externally as well as the opportunities it provides e.g. access to finance, materials, labour and costs - Global economy = flow of all trade, finance, technology, labour + investment (total economic activity between countries) - At a country level, globalization refers to the link between a country’s economy and the rest of the world. Including the ratio of exports + imports to GDP (gross domestic product = the value of all goods + services produced in an economy in a year) - At a country level, globalization is its expansion of sales + assets across countries etc. - Global influences have brought about revolutionary change in the Australian business environment including o Increasing globalization and a changing business environment Created vast opportunities for business expansion as well as increased competition Business practices have had to change to accommodate changes in the external environment o Changes in protection policies Since 80’s govt reforms and free trade agreements have exposed businesses to increased competition o Increasing trend by Aust businesses toward the establishment of overseas operations Will affect employment, economic growth + national income. Origins of Globalisation - Dates back to the colonial era when nations such as Britain, France, Spain and the Netherlands developed links with the “new world” (Mercantilist era) - New materials flowed from the “new world” to the “old world” and finished products flowed back - Fairly exploitative system as the wealth went to the merchants - Merchants wanted to protect their wealth so they encouraged govts to put taxes on imports and restrict quantities - Other countries retaliated + the merchants found that the products they exported faced the same restrictions - This continued until the 1970’s when thought changed to economic rationalism - aims to remove govt intervention in markets - Today nations are removing taxes and other forms of protection and joining trade blocs (e.g. Asia Pacific Economic Cooperation - APEC) + signing free trade agreements with individual countries (e.g. Aust w/ USA and Singapore) - This free trade and deregulation has allowed globalisation to proceed rapidly Globalisation of Markets and Production - Globalization of markets = combining once separate national markets into one huge global marketplace - Globalization of production = businesses buying inputs from around the world + making components in low-cost locations. Growth of the Global Economy - - Flows of finance, labour + consumer products between countries increases with globalization - Australian companies face greater competition with foreign suppliers but also opportunities to sell their products overseas - E.G. Paperlinx Limited has operations spanning 5 continents + 31 countries + gets approx 76% of its revenue from foreign transactions - Stage 1 – the era of the multinational economy o After WWII there was rapid expansion of international trade + a move from exporting to opening factories in foreign markets (becoming multinational companies) o This meant the parent company reproduced itself in each country, gibing operating freedom to local managers. o This meant all the subsidiaries were basically running separately + as a result, businesses began to change operations to become global + integrate operations to lower costs + maximize profits. - Stage 2 – the era of the global economy o Involves transnational corporations who integrate operations + resources in different countries to benefit from each’s strengths o E.g. a business could have its headquarters in US, its factory in a low-cost country like Indonesia, its research facilities in a high-tech country like Germany and its design sector in Italy. Changes in Markets - Changes in financial/capital markets o Finance now flows easily between countries (esp. since 1970’s when many countries got rid of controls on foreign exchange trading, which has resulted in rapidly expanding international financial flows) o Much easier for anyone to access overseas share markets + buy equity in foreign companies. - Changes in Labour Markets o If anything the flow of people between countries is now more restricted because of political barriers + restrictions placed on the movement of low/unskilled labour o Development of the European Union has allowed for greater movement across the continent o Globalization has also allowed companies to relocate in countries with labour conditions favourable to their needs e.g. General Motors US has facilities in Mexico where labour is cheaper. o Companies are also able to avoid skills shortages in countries by bringing in the skills they require o Growing demand for highly trained employees = greater movement for them. - Changes in consumer markets o Countries are saving money by specializing in products they can produce efficiently which equals cheaper prices and therefore generates increased sales o New consumer markets are also emerging, especially in developing countries o Better technology + communications also help change consumer markets, e.g. the Internet allows businesses to reach larger markets + therefore achieve economies of scale. Trends in Global Trade Since WWII - Last 50 years has seen dramatic growth in merchandise exports (domestically made goods sold to customers overseas) - 1945-60 (US domination of global trade) o After WWII only US had an economy able to product goods on a large scale as European + Japanese industries were virtually destroyed o US businesses faced little competition overseas or at home + became the main suppliers of inputs for the rest of the world’s manufacturers. o US brand names + products became recognized worldwide o US TNC’s dominated global business - 1960 – 1980 (Japan + Europe re-emerge) o Both had rebuild their industries o Their products began to appear on the world market o US still dominated until mid 1970s o Aust. Manufacturing businesses began to consider exporting more but still remained with the traditional products e.g. wool + wheat + Aust firms were reluctant to export other products - 1980 – now (the global marketplace) o Globalization accelerated in the 80’s o Integration of world markets has altered the nature + pattern of world trade (WTF???) o Europe, Japan + US now dominate the world economy + produce/ consume the majority of the worlds goods + services. Features of the New Global Economy - see sheet attached McDonald’s - has stores on every continent except Antarctica (109 countries) - almost half its franchises are overseas - adapts products to satisfy each country e.g. the Maharaja Mac in India is a Big Mac with 2 lamb patties instead of beef Drivers of Globalisation Global organisations o The World Bank o APEC o World Govts o Global business - Process accelerated by developments in technology + consumer demands for cheaper + better products Transnational + Multinational Corporations - Transnational o Any business with activities in 2 or more countries + that operates on a worldwide scale o Company with operations in different countries to form an interconnected global network of operations o Breaks up operations across national boundaries to exploit the greatest efficiencies in terms of resources e.g. IMB, Sony, Nike o Strategies include Looking for similarities + differences in markets develop a global strategy fully responsive to local needs + wants Large scale production and tailoring Very powerful large number of jobs + greater investment - Multinational - Businesses that operate in more than 2 countries o Increases its market through global operations o May include subsidiaries or licensing in different countries e.g. MacDonald’s or Coca-Cola o Strategy - to increase the potential market for the product but at the same time, paying attention to market segmentation Nestle - Has been operating outside its home country of Switzerland since 1868 - Has over 500 factories worldwide, but only 12 in Switzerland - Company is made up of different operating companies + each controls its local strategy - Input from head office is minimal Consumers - Global consumers are developing similar tastes + requirements as a result of improved communication technology - Global products have become more important, resulting in further similar consumption patterns e.g. KFC, Sony, Nike - As consumption patterns become more similar, so do the economies of different countries - Economic or international convergence Technology - Advances in technology (esp. in transport + communications) have impacted on the advance of globalisation - Advances in IT allow an increased flow of ideas and info across borders Governments - Reduce barriers to trade + investment which creates opportunities for global business expansion - Govts worldwide support integration of the world’s markets as a way of creating future economic growth - Promote trade between countries - Try to alter characteristics of their countries - World Govts have adopted policies + programs that have contributed to globalization + economic convergence - Changes through govt action include: o Taxation reform o Tariff reform o Labour market reform o Changes to competition policy o Deregulation of makers such as finance markets (which reduces barriers to foreign direct investment) o Deregulation of exchange rates - Reduced barriers to trade + investment = expanding opportunities for global business - All these measures impact upon the freedom of movement of goods, services and finance between countries +/or the degree of competitiveness in each country - Deregulation of exchange rates allows each currency to better reflect its true worth - makes trade between countries more efficient as goods/services are valued more correctly - Still issues concerning incomes + costs of living which impacts on the ability to afford another country’s exports or the sale ability of your own G+S Deregulation of Financial Markets - Removing govt regulation from industry to achieve efficiency through greater competition - Many of the world financial markets are now deregulated - Barriers to FDI are being removed - FDI – investment to actively control companies, assets or property outside the home country - Deregulation of financial markets provides more FDI opportunities + therefore supports globalization - Money now flows easier through countries because of the globalization of equity (share) markets. This has resulted from financial service companies (e.g. Deutsche Bank, Citibank) expanding into different countries in order to make financial deals + provide advice to customers worldwide. Interaction between global business + Australian Domestic Business - From early 1990’s people have realized the need for domestic businesses to increase interactions with global businesses - Australia has one of the highest levels of Direct Foreign Investment in the world, but most large businesses still prefer to remain Australian with few subsidiaries overseas - Exceptions include: News Corp, Lend Lease, Hoyts - High levels of FDI = many of Australia’s largest companies are foreign owned + part of the parent company’s global network. - Many Australians however have been in key positions in large companies overseas - Advantages in Australia re. Globalization: o TNC’s operating in Aust are well established o Multiculturalism provides us with language + cultural skills o Govts + consultants provide advice + assistance to encourage exportation - CASE STUDY – Foodco Group Pty Ltd o Owns Muffin Break + Jamaica Blue o Have expanded into NZ, USA, UK + Middle East o Success depends on their flexible market strategy, use of franchises + locations o Now have 190 stores in Aus + 40 in NZ o Reason for international expansion – local retail food market was too small + oversaturated. Global Business Strategies - Strategies a business can undertake to take advantage of global markets and/or global resources - Decision to expand globally is influenced by: o Business objectives o Resources o Competitive advantage o Environments in which it operates - Direct approaches o Export/import to or from other nations Allows business to exploit larger + more varied markets for its products Larger markets allow business to take advantage of the benefits of economies of scale e.g. By producing more it can enhance benefits such as increased specialisation of labour + machinery Cheaper inputs through bulk buying Greater access to finance Exporting can be Direct - selling to the overseas customer Indirect - the producer sells to a domestic buyer who exports it Intracorporate - selling to a subsidiary of the firm in another country e.g. Ford Australia selling engine bodies to Ford UK Imported products can be finished or intermediate goods Involves participation in the global economy Business itself may be an importer or it may resell products that have been imported Inputs in the production process can also be imported e.g. Cocoa beans to make chocolate Advantages Larger market for exporting Access to a greater range +/or cheaper products for importing Disadvantages Impact of external factors such as changes in global economic conditions which impact on demand + supply + changes in exchange rates o Foreign Investment A business can operate offshore through direct investment Setting up its own business (Greenfield strategy) Buying a controlling interest in an overseas firm (acquisition strategy) Advantages Parent company has control over operations Transfer of materials, products + info is easier within the same company Products made offshore can be sold to that market without high transport costs or import taxes Disadvantages Risk involved in a political unstable country (e.g. Nationalisation when a govt takes a business and declares it to be state property) Substantial language, legal, cultural or social barriers Significant changes in currency valuation can impact competitiveness, cost of production and the value of assets o Alliances Arrangements/agreements between 2 businesses that give each an advantage e.g. One World Alliance including QANTAS and British Airways An alliance including part ownership of another business operating offshore = a joint venture Joint venture involves 50% ownership by 2 parties + can result in a separate entity owned by both e.g. PBL has a joint venture with a Chinese company so it can get into gaming in Macau (China wont allow foreign investment without Chinese involvement) Advantages Partnership with a foreign business removes many political, cultural + social issues Local business should know about the local market Risk is shared Disadvantages Less control over operations Requires trust + cooperation One partner may have to cover debts /malpractice of the other - Less Direct Methods o Licenses or Franchises to offshore operators Coca-cola Amatil has the Aust license to manufacture + distribute under the Coca-cola banner Franchises allow business to operate globally without being involved in the operations of the business More common in service industries esp. hospitality + restaurants e.g. Hilton Hotels, Macdonald’s Management Contract - A deficiency in skilled management may require the organization to provide such personnel e.g. Hilton Hotels often place their own management teams into hotels offshore that have paid to use the Hilton name Main advantage - reduced risk for the franchisor as the franchisee bears the risk when they pay upfront to commence the franchise + the operating costs of running the business o Relocation of Production May involve production processes +/or functions to overseas countries E.g. Bonds make their products overseas but management is in Aust Main goal is to reduce production costs by accessing cheaper/more efficient inputs in the production process Advantages Reduced costs of production can lead to o Lower prices o More sales o Higher profits Permits greater specialization in the operations of the business In some circumstances govts can encourage foreign business through payments such as subsidies e.g. Mitsubishi Disadvantages Cultural, language, legal or social barriers Local labour may need to be trained Possible consumer backlash from perceptions of lower quality/exploitation e.g. Nike or Adidas Reasons for Expanding Globally - Increasing Sales/find new markets o Larger the market, greater potential for sales o Businesses are under pressure to increase revenue + profits but this can be difficult in domestic markets if it Becomes saturated Has stopped expanding due to low population growth rate Is dominated by a competitor Is experiencing an economic downturn Is flooded by foreign-made products o New markets can offer different demographic characteristics + therefore new opportunities for certain products - Acquiring Resources + Technology o Allows businesses to access resources that may not be available or are expensive in their home country o To guarantee a continuous supply of raw materials, many businesses invest directly in developing countries to spread the risk and have other sources to rely on o If resources can be obtain cheaper (including labour), cost of production decreases o Cost of developing new technology is expensive and has led to businesses forming alliances, operating under license/management contract or buy businesses outright to access this technology - Diversification o Process of spreading risks to make sales less vulnerable to economic/competitive threats in any one market o Supplier diversification: By having suppliers in many different countries, business can try to avoid the impact of price movements or the variations in availability of resources o Product diversification: businesses can enter foreign markets to increase the range of products sold. If sales decrease for one product, the business can fall back on its others o Geographic diversification: having markets across the world minimizes risk of failure should one market suffer a decrease in sales - Minimising Competitive Risk o Globalisation has allowed businesses to enter domestic markets and if they are more efficient producers, sell their product cheaper o By operating in many markets, a business will be less vulnerable to competitive threats as they have other markets and revenue to rely on - Gaining Economies of Scale o The costs savings a firm can gain through increasing the size of its production (usually 20-30% each time production is doubled) o May result from Spreading fixed costs over a larger output (Price per unit falls) Becoming more efficient through large-scale production Bulk buying materials + transportation o Can be generated by selling worldwide or establishing low cost production operations in low labour cost countries o By increasing the size of their markets, they reduce their costs by larger production runs - Cushioning the Economic Cycle o Level of economic activity fluctuates between boom + recession o When the domestic economy is booming, sales rise + production can reach its full capacity. In this situation a domestic business wont be motivated to sell overseas but boom periods only last so long o Overseas expansion reduces the reduction in sales + excess capacity caused by contraction of the market o Globalisation of world markets is creating worldwide booms + recessions so a business needs to be aware of the economic conditions of all countries it’s operating in. o In a downturn, on may require attempts to find new markets - Taking advantage of Regulatory Differences o Regulations restrict business/individual activities o Other countries will have different regulation e.g. the Aust govt controls the sale of cigarettes very heavily, while many Asian + Eastern European countries have very few regulations regarding the sale of cigarettes - this creates a potentially large + unrestricted market for tobacco companies o Other differences may be laws regarding wages + working hours which can be appealing to businesses but raise some ethical questions - Minimising Tax o International business can reduce the tax they pay by locating in countries with favourable tax laws o Industrialised countries tend to have higher rates of company tax than developing countries o Some countries may offer tax incentives to get businesses to invest in their country such as: Tax holidays - period of time where no company or personal tax is paid Tax haven - little or no taxes on business income Tax paradises - no corporate taxes (e.g. Bahamas + Vanuatu) Tax shelters - profits from foreign sources are not taxed or is so, very little (Hong Kong) Financial centres: special tax privileges to certain operations (Monaco) o By registering businesses in tax havens, they can reduce the amount of tax they pay around the world Specific Influences on Global Business More complex factors than domestic markets including: - Difficulty of assessment – in regards to the political + legal structures of a foreign country - Different value systems - Decision making is more complex – especially for those in the home country making decisions for subsidiaries as they must take into account the different influences in each country - Cultural differences – managers unfamiliarity is one of the biggest causes for added complexity when dealing with the global market. Sometimes managers try to transfer their own cultural preferences to the foreign country but this only makes things worse. Doing Business In China Difficulties - Regulations vary between regions - Quality of production isn’t always a high priority - Uncertain political environment based largely on personal contacts - Underdeveloped legal system - High degree of corruption - Rigid bureaucracy Advantages - Rapidly growing economy - Growing wealthy, urban population - Taxation is low - Relatively cheap labour Financial Influences Currency Fluctuations - In all global transactions, currency must be converted (through the foreign exchange market or FX) - Exchange rate is determined by foreign exchange dealers constantly buying and selling different currencies - Exchange rates o Ratio of one currency to another o Shows how much one is worth in terms of another e.g. A$1=US$70 - Effects of Currency Fluctuations o Exchange rates fluctuate due to variations in supply and demand o Creates further risks for global business o Impacts of fluctuation: Currency depreciation lowers the value of the Aus. $ which makes our exports cheaper but imports more expensive. This therefore improves international competitiveness for Australian exporting businesses Appreciation does the opposite which makes imports cheaper + exports more expensive. It therefore reduces international competitiveness o Clearly impact on revenue profitability and production costs. o Create risk for those selling to overseas markets Interest Rates - Those wishing to relocate offshore or expand domestic production to increase exporting will need to raise finance. - Australian interest rates have generally been higher than other countries, which makes overseas borrowing very tempting - This creates risk from exchange movements – fluctuations (Depreciation) could see cheaper overseas rates quickly rise and they may end up costing more - E.g. A loan of A$10 million or US$6 million could become A$12 million if the Aus $ depreciates from US$0.60 to US$0.50 Overseas Borrowing - Businesses can borrow money within the international capital market which consists of businesses, financial institutions, individuals + govts who borrow + lend worldwide - 2 main sources of international finance: o International equity (share) market Selling ownership to new/existing owners worldwide Generally used if there is a shortage of funds in the domestic market E.g. Rupert Murdoch’s News Corporation relocated from Aus to the US and listed on the US stock market to gain access to a larger pool of finance to draw from. o International Bond Market IOU from one business to another involving an agreed amount, plus interest by a certain date Similar to a loan certificate showing the issuer has borrowed money from the bondholder Allows access to lower interest rates or a larger poor of funds if issued internationally Political Influences - Any political event that results in a drastic change to the country’s business environment and that ultimately has a negative impact on business operations + profit - Greater in countries experiencing social and economic unrest (e.g. terrorism) - In these situations, business may have to influence politically powerful people in order to get permission to operate in the country - Some political influences could encourage business to locate, eg. Privatisation of previously govt owned business. This allows business to expand quickly into new markets Tension between Protectionism and Free Trade - 1766 Adam Smith argued Free Trade should be adopted by the whole world - Protectionism – creating artificial barriers to free trade in order to protect domestic industries and jobs - Free trade policies o One of the major driving forces behind globalisation o Many argue trade restrictions should be reintroduced and tightened o A free trade Policy affects business operation e.g. they could encourage domestic business to expand internationally as previously closed markets open o They could also lead to cheaper foreign made products which would be welcomed by consumers but not domestic business who would face increased competition - Protectionism o Safer for businesses in the domestic market o Restricts them from expanding overseas (similar barriers in other countries) International Organisations and Treaties (World Trade Organisation) - Since the end of WWII, many countries have joined international organisations - Businesses who plan to expand overseas need to be aware of these as their actions have a huge impact on global business - Main international organisations: o World Bank (WB) Businesses supply products to borrowers in bank-financed projects WB’s lending results in billions of $ being spent each year Acts as a centre for resolving difficulties experienced by businesses in overseas countries o International Monetary Fund (IMF) Fosters orderly foreign exchange arrangements + a workable international monetary system o Bank for International Settlement (BIS) One of the most discreet financial institutions in the world 10 times a year in Switzerland, central bankers of the main industrialised counties meet to discuss + monitor the global financial system, aiming to provide certainty + stability. o World Trade Organisation (WTO) Major international organisation Ensures world trade + investment activities stay within international trade laws Aims to eliminate tariffs and barriers to world trade Regularly reviews the trade policies of its 134 member nations Trade Agreements + Regionalism - Trade Agreements o Many nations join trade agreements which regulate trade between them o They then form economic communities or trading blocs which promotes free trade among members + to create common economic policies o Help develop regional economic integration (globalisation on a smaller scale) - Regionalism o Or regional economic integration o Focuses on securing trade agreements between countries in a certain geographic region o Main trade blocs European Union (EU) Formed in 1957 Oldest trading bloc Established its own parliament, commission, court + currency Has almost completely removed all trade barriers in Europe North American Free Trade Agreement (NAFTA) Mexico, Canada + USA Association of South-East Asian Nations (ASEAN) Approx 480 million people in the ASEAN economies Provides potential for future growth Asia-Pacific Economic Cooperation (APEC) 21 members Approx 50% worlds GDP + 47% of world trade Creates potential for new market opportunities for business in member nations War + Civil Unrest - Can devastate international business trading with countries involved - Staff safety must be monitored - Should war break out, production facilities could be destroyed or taken over by the military - All international businesses should monitor the level of political risk + instability in the countries they deal with. Legal Influences - Each country’s legal system varies which means global business is affected by many different laws - All businesses should know the laws of the countries they operate in, relying on the expertise of local lawyers Contracts - Legally enforceable agreement, outlining details, rights + each parties obligations - If one believes an obligation in the contract has not been fulfilled, they will resort to contract law - Contract law + the methods of enforcing contracts varies in each country - 2 main legal systems in the world today which influence the nature of contracts in countries with different systems o Common Law Contracts are very detailed will all possibilities covered because common law is less detailed than civil law o Civil Law Shorter, less specific contracts because many issues that could arise are already covered by a civil code - Country’s legal system must be considered in the context of its cultural traditions. E.g. a handshake could be more binding than a legal contract Dispute Resolutions - International businesses prefer to stay out of courts as they are very expensive, and so use cheaper methods like negotiation, mediation or arbitration - If these fail, the legal system in the only alternative - Court Solution o Businesses must ask 3 questions: Which country’s legal system applies In which country should the dispute be settled How will the final decision be enforced o Many businesses include the answers in contracts to reduce uncertainty + cost in the even of a dispute Intellectual Property - That created by a person’s intellect e.g. brand name, artistic works, a computer program, a formula - Establishes ownership rights through intellectual property rights including o Patents Gives the inventor exclusive rights to make, use or sell (as well as licence to others) a newly invented product or process o Copyrights Exclusive right of an author, artist, musician or publisher to release an original work. o Trademarks A brand name or design that is officially registered e.g. McDonalds, Levi’s, Sony - Weak protection of intellectual property can cost businesses e.g. Government owns many piracy companies in China as intellectual property rights protection in developing countries is weak. This costs the US around $3 billion each year - Another example – UGG boots was not patented and now a US country holds the rights, making it illegal for the Australian company to market their product under that name. - Many international treaties give some protection for intellectual property rights including: o Universal Copyright Convention o Paris Convention - Not all countries have signed these treaties and it is hard to enforce them due to lax attitudes by some. Social + Cultural Influences - International businesses results in people working in different societies and cultures to their own. - Almost every aspect of a business’s international dealings may be affected by differences in culture - Social + cultural characteristics are values, beliefs, customs etc. that are shared among a society’s people - International business people must understand + appreciate these characteristics as failing to do so may result in lost business opportunities or embarrassment. - Languages o Spoken Languages Not understanding a language can result in not understanding a culture English is becoming the language of business but people still prefer to talk in their native tongue + considering this allows for a better relationship which is essential for any business deal Translators can help, but misunderstandings can still occur E.g. Sunbeam released a product called a “mist-stick” onto the German market, only to later find out mist means “excrement” in German o Non-Verbal Language Messages conveyed through body language More difficult to understand Gestures can have different meanings in different countries so extreme care should be taken - Tastes o Certain likings of things e.g. foods, clothes + music o Different tastes in different countries mean product marketing will have to be tailored to each o International business needs to be aware of how tastes will impact on the demand for their product + adapt to suit local preferences o E.g. Australian Rice growers Cooperative Limited has developed a new “Opus” rice for Japanese customers to appeal to their tastes for softer rice - Religion o Awareness of a colleagues religious traditions helps build a lasting relationship o These traditions influence what people can/cannot eat, holy days + schedules o Being insensitive to these traditions could cause damage to business relationships o Religious holidays/rituals will affect times when business meetings can be arranged o When people from different religious groups work together there may be some tension o International business must respect religious beliefs + adapt practices to the religious constraints of cultures - Varying business practices and attitudes o International managers must understand acceptable practices + ethics of countries they wish to conduct business with + adapt to their host’s way of doing things to ensure business success. o Gifts Gift giving etiquette is different among cultures + should be understood Japan Gifts are always wrapped + presented in a humble manner Recipient should never open gift in front of the giver Should never contain 4 of anything o Bribes In many countries, bribes to govt officials are accepted and a way of life Often a small distinction between someone requesting a “gift” and a “bribe” Managing Global Business Austrade - Govt organisation to encourage international trade + investment - Provides info + advice re exporting + foreign investment - Provides specialised services to assist Aust exporters e.g. financial, marketing + operational management issues Financial Management - Global business means managers have to be aware of: o Currency fluctuations o Methods of payment o Credit risks o Insurance o Financing of their operations Method of Payment and Credit Risks - Payment is complicated as businesses deal with people they haven’t met, who speak different languages, use different currencies and legal systems etc. - Exporters have to be cautious that if products are shipped before payment, the importer will pay up. - Buyer also has a similar problem, as there is no guarantee the exporter will send products after payment - Using a trusted third party can solve this problem e.g. a bank who acts as an intermediary - FIG 22.2 - 5 methods of payment a business can select + will depend on their assessment of the importers ability to pay: o Payment in advance Low risk Allows exporter to receive payment and then send goods Often used when the importer isn’t very creditworthy High risk for importer – no guarantee they will receive what they ordered o Letter of Credit Commitment by the importers bank to pay the specified amount when the documents confirming shipment of the goods are presented Letter of credit is very popular for exporters as it relies on the bank rather than importer o Clean Payment (clean remittance) Easiest + quickest method Payment sent but not received until goods are transported Requires complete trust between parties Not favoured by importers o Bills of Exchange Document drawn up by exporter demanding payment by a specified time Most widely used Allows exporter to control goods until payment is made/guaranteed 2 types of Bills of Exchange Document Against Payment o Importer can only collect goods after paying for them o Exporter sends bill of exchange to importers bank with documents which allow them to collect the goods o Importers bank only hands over these documents after payment is made o Importers bank then transfers funds to exporters bank o Risk- importer might not collect documents or pay for goods Document against Acceptance o Importer may collect goods before paying for them o Same as above but importer just signs acceptance of goods + terms of the bill to receive the goods + make payment later o Risk – importer may delay payment or not pay at all Risk of non-payment is greater than a letter of credit Documents against acceptance are riskier than documents against payment o Open Credit (Account) Operates the same as a credit sale in the domestic market Allows the importer to access goods with the promise to pay later Greatest risk for exporter as they have to depend on the importers ability/willingness to pay Hedging - Spot exchange – when 2 parties agree to exchange currency + finalise a deal immediately - Exchange rates determining “on-the-spot” transactions are called spot exchange rates (value of one currency to another on a particular day) - Spot rate may not be the most favourable rate - Currency fluctuations can cause concern for exporters - Business can minimise fluctuation risks through hedging o Natural Hedging Examples adapted by Kohler BioGenetics Limited Offshore subsidiaries Import payments/export receipts in the same currency to offset currency fluctuations Development of marketing strategies to reduce the price sensitivity of exported products Both import + export contracts in Aust. Dollars to transfer risk to the importer o Financial instrument hedging Derivatives 3 main derivatives are: o Forward Exchange Contracts Agreement to exchange one currency to another at an agreed rate at a future time Bank guarantees the exporter a fixed rate for the money generated from the sale of exported goods o Options contract Gives the buyer the right but not obligation to buy or sell foreign currency at some time in the future Option holders are protected from fluctuations but still have the chance for gains if movements are favourable o Swap contract Agreement to exchange on the spot market and then reverse the transaction In the future E.g. swapping AU$50 million for US$ now with the agreement to reverse the swap in 3 months Also used when business needs finance from another country where they are unknown and therefore have to pay higher interest rates E.g. an Aus. Business may need Japanese yen so of it can find a Japanese business that wants AU$, they would each borrow from their home country, agree to swap and then repay each others loan. Insurance - EFIC (Export Finance and Insurance Company) – federal agency which uses its insurance + finance products to increase Aust exports - Provides Aust businesses with internationally competitive insurance + finance services - Other types of insurance o Marine Insurance – covers shipment by road, rail, air + sea o Product liability insurance – protects manufacturer + exporter from damaged caused by use of a product o Currency risk insurance – protects exporter from losses due to currency fluctuations (enters into a forward exchange contract with a bank) Obtaining Finance - Domestic Capital Market o Aust banks + non-bank financial institutions have facilities for organising finance - International Capital Market o Uses services of financial institutions in the international capital market who can access finance from a wide range of sources + are used to dealing with businesses who want to expand globally o International banks provide Finance for exporting/importing Working capital loans Cash management services Finance for mergers/joint ventures o Extensive global network means they can access + transfer large amounts of money whenever required o Banks include: Chase Manhattan, Bank of America, HSBC - Eurocurrency Market o US dollar, Japanese yen, Euro, British pound - Nominated currencies when undertaking a Eurocurrency exchange o Makes borrowing offshore easier because it allows businesses to access foreign currency from within their own country Marketing - Marketing plan must be modified + adapted to suit the overseas markets - Marketing environment + target markets differ from country to country - Many TNC’s develop a global marketing approach, using strategies as if the entire world were one large market e.g. Coca Cola - Others customise the marketing mix to take into account differences in culture, religion + tastes - Market research helps business understand the complexities of the international marketing environment before they design the marketing mix. Research of Market - Businesses need information to make specific marketing decisions eg. The price to change, type of packaging, distribution channel etc - Should also know about the country’s economic, political, social + cultural features - Secondary data – helps analyse a foreign market. Includes govt publications, international organisations e.g. the World Trade Organisation or UN, banks, private consulting firms - Primary data – more time consuming but can be modified to the needs of each country, therefore giving insight into the markets cultural + economic features Global Branding - Cost effective (ad can be reused) - Uniform image worldwide - Successful brand name can be linked to new products - Successful brand is one of the most valuable resources as global branding = global recognition, regardless of languages e.g. McDonalds - Businesses try to market its brand globally, even if it has to modify the product for different countries e.g. Ford moving their steering wheel from left to right, but they maintain the same name for their products. Standardisation and Differentiation - Standardised approach o Assumes the way the product is used + the needs it satisfies are the same in all markets – therefore the marketing mix will be the same too. o Cheaper: Production runs can be larger (= economies of scale) R+D costs are lower Spare parts + after-sales service is more simple Promotional strategies can be the same Evaluation + modification of the plan is easier - Differentiated Approach (Local Approach) o Assumes the way the product is used + needs it satisfies are different o Requires customising the marketing plan to each country’s characteristics - Possible to combine both o E.g. McDonald’s – standardised name, logo, production methods etc but has developed local menus e.g. beer in France + Germany, Sake in Japan… - Standardised approach more common Operations - As the number of businesses entering the global market increases, so does competition - To remain competitive, businesses must reduce costs + improve products Sourcing - Sourcing decision – whether they should make or buy the resources needed to make their products - Outsourcing o Buying components from either a domestic or overseas supplier in order to gain: Cheaper prices Higher quality components More advanced technology o If a business decides to make the products themselves, they have to decide what extent they need to vertically integrate production o Vertical integration Expansion of a business’ production in different but related areas e.g. computer assembly factory taking over a silicon chip plant Aims: To cut costs Gain economies of scale Raise profitability Global Web (components produced in different countries) - Popular strategy - Each site specialises in part of the production process that it can most efficiently perform - Results in a network of cost-effective locations all contributing to the final product Employment Relations - Employees are the most important asset in business - Success is determined by the abilities + performance levels of its employees - Quality, quantity + composition of the available labour force are important considerations for businesses expanding globally. Organisational Structure - Developed to achieve specific objectives - Structure chosen depends on a number of factors, including the extent of its global operations + whether it makes or buys components - As a business expands + modifies its objectives, it must adapt its structure to suit. - Global Structure o Board of directors controls the long-term decisions but decisions can be made at a local level as power is decentralised. Staffing - Recruiting + selecting qualified people to ensure business success - Management positions can be difficult to fill as they require people who are preferably bicultural, able to appreciate + understand business practices + customs of the host country + who can speak both languages. - It is important to consider the effect of the local culture when selecting employees e.g. in some countries, personal relationships are more important than technical qualifications when hiring a person. Shortage of Skilled Labour - Can normally be overcome by transferring people from the home country to manage operations until locals can be found + trained - Sometimes necessary to send a team to fix host problems Labour Law Variations - Each country has laws regulating working conditions + wages - Governments often restrict the use of foreign labour + require the employment of local people - E.g. Taiwan – hours of work: 7/day for hard work, 8/day for industrial or transport 9/day for commercial + other types Staffing Systems - The selection of people for certain jobs. - Ethnocentric approach o All key management positions at all locations are filled by parent company personnel o Used with companies employing a centralised decision-making process o Aligns with the belief that expatriates will be more effective at instilling the corporate culture into foreign subsidiaries o Used when skilled staff aren’t available locally o Costs a lot to relocate managers o Home country managers may create some problems in local countries as they don’t always integrate well + can fail to understand the culture + needs of customers + employees o Less popular among established TNC’s - Polycentric approach o Personnel from the host country manage the subsidiaries o Reduces the costs involved in relocating staff from home country o Local managers also know the market well regarding culture + business practices o Creates possibility of losing control of operations as it could become a collection of national businesses rather than a global operation o Can cause resentment among local employees in subsidiaries because it reduces the opportunities for host country management to work outside their own country (???) - Geocentric approach o Seeking best people for key jobs throughout the organisation, regardless of nationality o This policy is normally reserved for top-level management o Businesses adapt their recruitment + selection practices to different cultures while keeping their worldwide policies + identity o Training + developing managers from a wider pool of talent o Companies include IBM, Ford o Often bring managers from around the world together to teach them more about the global environment o Very expensive due to the high demand/shortage of global managers o Those with operations across many regions tend to use Geocentric strategies Evaluating strategies re: particular global markets - Involves comparison of planned performance with actual - Management must ask: o What are the business objectives? o Are they being achieved? - These help determine the success of a strategy - Complex due to impact of financial, political, legal + sociocultural influences Modification of strategies according to changes in global markets - Global markets constantly change - Therefore business should constantly look out for changes that will affect it - E.g. McDonald’s o 1980’s domestic sales slowed so McDonald’s rapidly increased overseas expansion o 2000’s saw them move to a geocentric approach to staffing o Menu is varied according to local tastes, as well as the distribution strategy (US stores are easy to access by car, while Japanese stores are easier to access by foot as they have a very dense population) o When they opened in Moscow, food supplies were under McDonald’s standards so they chose to vertically integrate + supply its own raw materials o 78 different advertising agencies customise McDonald’s promotions for local markets o McDonald’s has modified its packaging in response to changing attitudes about the environment Management Responsibility in a Global Environment - Global companies are becoming more numerous and influential + have a lot of power over national governments - Some have abused this power but can override local governments who try to regulate their unethical behaviour - Also, some large TNC’s have been criticized for their potentially dangerous actions in developing countries - Global businesses who take their social + ethical responsibilities seriously often benefit from improved business performance. Ethically Responsible Corporate Strategy - Businesses must understand why social + ethical issues arise before they can solve those in their companies - Managers can, however plan for those issues by designing a global corporate social strategy that matches the businesses economic strategy - The following questions must be asked when designing a social strategy: o Are we socially responsible in our actions? o Do we respect the values, customs + religions of each culture in our business? o Do we abide by host govts legislation? o Are we responsive to stakeholders in each country and the emerging social + ethical issues in these areas? o Are our employees aware of our social corporate strategy? - E.g. Billabong’s supplier policy and corporate social responsibility (CSR) o Suppliers must abide by all moral + legal obligations + are evaluated by Billabong’s quality control processes before Billabong will commence business with them o Re-evaluation occurs annually Tax Havens + Transfer Pricing - Global companies attempt to minimise their tax to maximise their after-tax profit - Perfectly legal but morally questionable because tax schemes save TNC’s millions of dollars which benefits shareholders, but decrease the tax revenue available to the TNC’s home country to solve problems such as unemployment + poverty - Tax Havens o Impose little or no company tax o Tax Paradise No relevant company income tax E.g. Vanuatu, Bahamas o Tax Shelter Tax may be levied on some internal transactions Low rates on tax on profits from internal sources E.g. Hong Kong, Panama o Tax Privilege No tax for some types of business E.g. Monaco, Luxembourg o Main role: provides businesses with the way to avoid taxes by allowing them to transfer income from subsidiaries in high-tax countries to the subsidiary operating in the tax haven. - Transfer Pricing o Special type of exporting called intracorporate sales or transfer pricing o Increasingly common o Tries to achieve economies of scale by having a subsidiary specialise in the manufacture of a product which is then exported to others o Transfer pricing comes in where one subsidiary charges another for the goods/services o Allows the business to gain as a whole while both the buying + selling subsidiaries “lose” because the subsidiaries receive a lower price for their product than if they sold on the open market, thereby hiding any profit o FIGURE 23.2 o TNC gets profit from the seller + buy and the profit is hidden and the manipulation of the transfer price reduces custom duties + import tariffs. Minimum Standards of Labour - Each country has specific labour laws and labour standards which affect a business’ employees, suppliers, subcontractors etc - There is an increasing pressure to ensure those who work for low wages in developing countries aren’t exploited by unethical businesses - E.g. Levi Strauss + Co. actively seeks a commitment to socially responsible employment from all its global suppliers – See BIZFACT P488 - Child labour in developing countries are sometimes involved in the manufacture of products for TNC’s so to counter this, some have adopted programs to eliminate child labour, such as Reebok International who targets the elimination of child labour in the manufacture of soccer balls. - Human Rights Codes of Conduct o One method of conducting business in a socially responsible way. o The organisation can insist all suppliers conform to their code o E.g. Reebok – SNAPSHOT P489 Reebok actively encourages other businesses to publicly promote human rights in countries in which they operate Dumping Illegal Products - As industrialised countries have developed strict health + safety laws to protect consumers from harmful products, such regulations in developing countries are often non-existent or very lax. - This tempts TNC’s to use these vulnerable markets as a way of getting rid of harmful or illegal goods that cant be sold in other markets - These can include harmful chemicals, poorly designed machinery, inappropriate foodstuffs, nuclear waste - Poorer countries are often coerced into taking such goods – they may receive financial incentives + this can then be used to repay huge foreign debts - The environmental laws of these countries are often very weak however so hazardous material isn’t properly disposed of which contaminates dumping sites - These actions aren’t technically illegal as there are few laws prohibiting the disposal of hazardous products in many developing countries, but it is highly unethical. Ecological Sustainability - Growing pressure for businesses to adopt ecologically sustainable practices in response to concerns about climate change and destruction of the natural environment. - E.g. Levi Strauss + Co has developed its own environmental philosophy + guidelines + will conduct business only with those who share the same commitment to the environment Arguments for and against corporate social + ethical responsibility - For o A better society means a better environment to do business in. – businesses can turn today’s problems into future profits. o Businesses have the resources to help fix social issues + can play a positive role in society - Against o Businesses are economic organisations without the ability to pursue social goals o Economic inefficiencies could result if managers are forced to take on another role o Maximising profits ensures society’s resources are used efficiently. Providing the best quality products at the lowest price should be the goal of all businesses as this benefits society. o Arguments against are based on the idea that businesses should stick to what they do best – pursuing profits by producing products that satisfy the needs + wants of consumers.