Globalisation

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					Globalisation

Globalisation is the process of businesses becoming transnational and locating and conducting their
operations in many countries.
Nature and trends
Globalisation of markets refers to the combining of once separate and distinct national markets into
one huge global marketplace.     Globalisation of production refers to the way many businesses
purchase their inputs from around the globe and tend to manufacture components in low-cost
locations.
Growth of the global economy
     As globalisation continues, flows of finance, labour and consumer products between
         countries will increase as these markets undergo structural change.
     Many businesses must become global players just to survive, let alone prosper.
Changes in markets (financial/capital, labour, consumer)
     Changes in financial/capital markets: Finance (capital) is now more mobile and flows
         relatively easily between countries.   Therefore, the world capital market is now more
         integrated than ever before. Capital flows to those countries where the investment
         opportunities and returns are favorable. It is now much easier for individuals and
         businesses to access overseas share markets and purchase equity in foreign companies.
     Changes in labour markets: The labour market has not been “freed up” like other markets.
         It has become less global. This is because of the political barriers which restrict the flow
         of people between countries such as migration laws.
     Changes in consumer markets: Countries are achieving cost savings by specialising in
         products they can produce efficiently. This results in cheaper prices on the world market
         and in turn, generates increased sales in existing markets. New consumer markets also
         emerge, particularly in developing countries. Improved technologies and communications
         have also changed consumer markets. With the advent of the Internet, innovative, Aus.
         businesses may reach much larger markets and take advantage of economies of scale.


Trends in global trade since World War II
     Since the end of WW2, level of global trade in goods and services has grown dramatically.
     19475-1960: U.S domination of global trade. They were able to produce goods on a large
         scale. Industrial regions of Europe and Japan suffered enormous damage which thus, left
         little competition for the U.S.   U.S corporations were the main suppliers of inputs for the
         rest of the world‟s manufacturers.
     1960-1980: Japan and Europe re-emerge. By the end of the 1950‟s, Europe and Japan
         large rebuilt their industries and were now ready to recommence selling to the rest of the
         world. Products such as Nestle, Philips, Panasonic and Sony started to appear.
     1980-present: The global marketplace. The process of globalisation accelerated from the
         early 1980‟s.    Three geographic regions dominate the world economy; European Union,
         U.S and Japan.


Drivers of globalisation
     Deregulation of financial markets
     Role of government
     Impact of technology
     Role of transnational corporations
     Global Consumers


Role of transnational corporations
Transnational Corporation (TNC) is any business that has productive activities in two or more
countries and which operate on a worldwide scale. TNC attempts to combine the benefits of
economies of scale with the benefits of responding to local conditions. It represents the highest
level of involvement in global business where national borders do not represent barriers to trade but
are seen merely as lines drawn on a map. TNC‟s often conduct a large percentage of their business
outside their home country.     An example is Aus. Company CSR Ltd. which had 60% of sales
generated outside Australia.
Global consumers: Another driver of globalisation is the increasing uniformity of consumers
around the world.    For example, the same TV ads are shown across the globe. Today‟s
consumers have access to the Internet and pay TV and are more likely to want to purchase
foreign-made goods. Thus, the world‟s consumers have become global in their buying
behavior.
Impact of technology: Most recently, the computer and the microchip have revolutionized
information processing and communications. With each successive technological
development, the globe shrinks in size.    Information technology (IT) is at the heart of modern
organizations and is a driving force for global change. Advances in IT allow an increased flow
of ideas and information across borders, so customers learn about overseas-made goods.
Role of government: A tariff is a tax placed on imported goods.        Asia-pacific Economic
cooperation (APEC) is an agreement between 18 Asia-pacific countries to promote open trade
and practical economic cooperation.      Governments have progressively reduced the barriers to
trade and investment, expanding growth opportunities for global businesses. Governments
around the world support integration of the world‟s markets as a way of delivering future
economic wealth.
Deregulation of financial markets: Deregulation is the process of removing government
regulation from industry in order to achieve efficiency through greater competition.   This has
seen the barriers to foreign direct investment progressively eased. FDI is investment made
for the purpose of actively controlling companies, assets or property outside a business‟ home
country.


Interaction between global business and Australian domestic business
From the early 1990s, there was heightened sense of awareness of the need for domestic businesses
to increase their interactions with global businesses. Australian businesses and managers have
three specific advantages in the transition phase. They are:
     Many of the TNCs which operate in Aus. have done so since the 1960‟s thus networks and
           relationships are well established.
     The multicultural makeup of Aus. workplace provides personnel with language skills and
           who understand and appreciate cultural differences.
     Governments and numerus consultants provide advice, financial assistance and contacts to
           encourage export-oriented businesses.
Australian companies which have successfully gone global include those in the areas of building,
materials, banking, wine and tourism.


Global business strategy
There are many reasons for business‟ decisions to export:
     less regulated economies and free trade policies being adopted by many countries
     improved access to new foreign markets
     more opportunities to increase sales in existing foreign markets
     improved communications technology
     development of new methods of distribution, such as the Internet.


Methods of international expansion
Exporting: Occurs when a business manufactures its products in its home country and then sells
them in foreign markets.     Many benefits include:
     reliance on a broader market for sales
     improvements in the product as increased sales generate funds for research and
           development
     extended product life cycles
     increased production flows and better utilisation of existing equipment
     Opportunities for employee development, especially when different cultures are
        experienced.
     low-risk method of entering overseas markets
There are three main methods of exporting:
     Indirect exporting: is the most basic level of exporting where a business sells it products
        to a domestic customer, who then exports the product. The domestic customer assumes all
        risks of distribution, ownership, sales and transportation
     Direct exporting: happens when the exporting business sells its products to an agent,
        intermediary or final consumers in another country.      The intermediary is often a trading
        company, a business that buys and sells products in many countries.
     Intracorporate exporting (transfer): is the selling of a product by a firm in one country to
        a subsidiary firm in another.


Advantages
       inexpensive, compared to establishing production facilities overseas
       provides an opportunity to gain a valuable experience
Disadvantages
       overseas countries may use a number of barriers to trade which could result in an increase
        in the price of the exported products high transport costs.
       overseas agents or intermediaries may not do as good a job as the business itself


Foreign direct investment: occurs when a business from one country owns property, assets or
business interests in another country. There are three main methods:
     Greenfield strategy: involves commencing a new business venture from scratch. The
        business purchases land, constructs new facilities and commences production
     Acquisition strategy: is appropriate for any business that wishes to move quickly into an
        overseas market.    It involves a business acquiring, through a takeover or merger, an
        existing business already operating in the foreign country.
     Joint venture (strategic alliance): means two or more businesses agree to work together
        form a jointly owned but separate business. The two partners each hold 50% ownership.
        It is the most effective method of breaking into overseas markets as the established firm in
        foreign country provides immediate market knowledge, with access to networks and
        established markets.
Advantages
     provides parent business with direct control over the foreign facilities
     reduction in transportation costs as goods are produced in the overseas country transfer of
         technology, people, products and intellectual property becomes easier
Disadvantages
        increased financial risk especially when investing in a business which is located in a
         politically unstable country
        legal, social, cultural and language barriers
        adverse currency fluctuations may wipe out any cost efficiencies


Relocation of production: occurs when the domestic production facility is closed down and then set
up in a foreign country.     Main motivation behind this strategy is cost-reduction.
Advantages
     moving to a low-cost labour country should help decrease costs of production and thus,
         increased profits
     more modern, up to date facilities can be constructed, adding to other cost efficiencies
     some governments provide financial assistance to cover relocation expenses
Disadvantages
     parent business may be faced with social, cultural, language barriers in overseas nation‟
        possibility of customer backlash if exploitative work practices are used
        Business needs to recruit a local workforce and train it to meet firm‟s previous standards.
         This is time consuming and expensive.


Management contract: is an arrangement under which a global business provides managerial
assistance and technical expertise to a second or host business for a fee. This method allows the
global business to operate in many foreign countries without the expense of production facilities.
For example, Hilton Hotels provides management expertise for hotels that use the Hilton name but
that are not company-owned.
Advantages
     global partner has greater control over production standards in a joint venture operation
     Fees paid by the subsidiary are a business expense and therefore a tax benefit
     global business is able to earn extra revenue
Disadvantages
        host business doesn‟t gain any managerial training
        global business may face political pressures from the host business' government, especially
         with regard to foreign exchange restrictions.
Licensing/franchises: Licensing is an agreement in which one business (licensor) permits another
(licensee) to produce and market its product. This also includes, brand name, trademark, copyright
and technology and other intellectual properties in return for a royalty fee.   Franchising is a
specialized form of licensing in which the franchisor grants the franchisee the right to use a
company‟s trademark and distribute its product.      The franchisor will often assist the franchisee to
establish and run the business but also insists that the franchisee agree to abide by operating rules.
Advantages
      there is little financial risk for the licensor/franchisor
      useful option for firms lacking the capital to develop an overseas operation
      licensor/franchisor is able to develop a global presence quickly
Disadvantages
        risk of losing intellectual property rights to the licensee
        difficult to maintain quality control over a wide range of locations
        more complex than domestic franchising, often requiring the need for extensive legal
         advice
      profits are shared between the two parties


Reasons for expansion
      Acquisition resources and technology
      Diversification
      Minimization of competitive risk
      Exploiting economies of scale
      Cushioning economic cycles
      Tax minimization
      Responding to regulatory differences
      Increasing sales and finding new markets


Increase sales/find new markets: Businesses profits sometimes decline in the domestic market
because the market becomes too saturated, dominated by competitor or is experiencing an economic
downturn.
Acquire resources and have access to technology: To guarantee a continuous supply of raw
materials, many businesses are directly investing in developing countries. Developing a number of
raw material sources spreads the risk, so that if one source of supply is restricted, there is another to
rely on. No one country is technologically self-sufficient.
Diversification: Process of spreading the risks encountered by a business. There are three main
types of diversification:
      Geographic: operating in foreign locations. It is an effective way of maintaining sales
         and profits when the domestic economy or business experiences a downturn. Having a
         number of markets across the world minimises the risk of business failure should one
         market suffer a decrease in sales.
      Product: A way of increasing the range of products sold. For example, should sales
         decrease for one product, the business can fall back on its other products. Also, the wide
         array of goods establishes a wider market share.
      Supplier: Having a number of suppliers of raw materials make businesses less vulnerable
         to supply difficulties and reduces the impact of price rises.


Minimize competitive risk: Selling overseas can provide a new market and another source of
revenue which reduces the risks involved from these competitive pressures.


Economies of scale: refers to the reduction in costs of production that arise from increasing the size
or scale of the production facility and spreading overhead (fixed) costs over a larger output.
Increasing sales by exporting more lowers research and development costs and reduces raw material
purchases due to bulk buying.


Cushioning economic cycle: Booms and recessions tend to be worldwide, thus a business needs to
be aware of the economic conditions both domestically and internationally. A downturn in one
economy may require attempts to find new markets. Regardless of this difficulty, overseas
expansion could still be an attractive proposition, especially to cushion the overall effect of a
reduction in sales due to an economic recession.


Regulatory differences: are restrictions placed on the activities of either individuals or businesses
by governments. Businesses may be attracted by a lack of business regulations, particularly laws
protecting employees and the environment from exploitation. Sometimes governments of
developing countries offer incentives to attract foreign investment, including waiving some
regulations that increase a business‟ cost of production.


Tax minimization: Some developing countries offer taxation incentives such as tax holidays and tax
havens to businesses and their managers if they invest in their country. A tax holiday is a scheme
where no company or personal tax is paid for a certain period of time. Tax haven is a country that
imposes little or no taxes on business income.




Specific influences on global business


Financial
Currency fluctuations: Countries have their own currency for domestic purposes.
Thus, for global transactions, it is necessary to convert one currency into another. This is
performed through the foreign exchange market, commonly abbreviated to forex or FX, which
determines the price of one currency relative to another. Exchange rates fluctuate over time due to
variations in demand and supply which affect global businesses. The downward movement of the
Aussie dollar against the U.S or another currency is called depreciation. The impact of this
currency fluctuation is twofold:
      Currency depreciation lowers the value of the Aussie dollar in terms of foreign currencies.
         This means that each unit of foreign currency buys more Aussie dollars. It makes our
         exports cheaper but prices for imports will rise.
      Currency appreciation has the opposite impact. It reduces international competitiveness of
         Aus. exporting businesses. Therefore, currency fluctuations will impact on the revenue
         profitability and production costs.


Interest rates: The real risk is exchange rate movements. The Aus. interest rates are
determined by Australia‟s economic performance.


Overseas borrowing: Borrowing offshore due to relatively lower interest rates needs to be
considered carefully. This is because it exposes the business to the risks of fluctuating
exchange rates on the forex market.        For example, when repaying the borrowed sum and the
currency drops, the business will be paying more to the borrowed.          The depreciation could
easily destroy any advantage of a cheaper overseas interest rate.


Political: Political risk is any political event which results in a drastic change to the country‟s
business environment and which ultimately has a negative impact upon business operations and
profit. Political risks tend to be greater in countries experiencing social and economic unrest,
particularly terrorism, war or other violent conflict.   Some political influences could act as
incentives, encouraging businesses to relocate. For example, political stability generates an
economic environment conducive to business.
Tensions between protectionism and free trade: Protectionism is the practice of creating
artificial barriers to free trade, in order to protect domestic industries and jobs.


Protectionism (Trade restrictions)
Arguments for
     to protect weak domestic industries from foreign „attackers‟
     to protect domestic jobs
     to protect national security by restricting sale of certain technology
     to protect the health of citizens by banning products which do not meet specified health and
         safety standards
     to retaliate against another country‟s trade restrictions
Arguments against
     Causes higher prices for consumer and producer products
     Restricts consumer choice (less variety)
     Loss of jobs from export-oriented businesses
     Props up inefficient businesses which is a waste of scarce resources
     Leads to lower economic growth rates.


The policy on free trade adopted by a country‟s government affects business operations.         For
example, free trade policies could encourage domestic businesses to expand internationally as
previously closed markets open up. Free trade policies could also lead to cheaper foreign-
made products entering the domestic market. This would be welcomed by consumers but not
by domestic producers who would face increased competition.


International organizations and treaties (World Trade Organisation): These organisations
provide finance or regulate procedures.     The main organisations are:
     United Nations (UN): Plays a central role in world affairs, especially in its
         peacekeeping function.
        World Bank (WB): Businesses supply products to borrowers in bank-financed projects.
         The lending activities of the World Bank result in billion of dollars being spent each
         year. Another important function in terms of world trade is that it acts as a centre for
         resolving difficulties experienced by businesses in overseas countries.
        International Monetary Fund (IMF): Main role is to foster orderly foreign exchange
         arrangements and a workable international monetary system. The IMF plays a crucial
         role in bringing a degree of order and stability to the world‟s financial system.
        Bank for International Settlement (BIS): This is one of the most discreet financial
         institutions. Each year, the central bankers of the main industrialised countries meet
         to discuss and monitor the global financial system. Their main objective is to provide
         certainty and stability to the world‟s financial system.
        World Trade Organisation (WFO): Responsible for managing world trade and
         investment activities with special reference to internal trade laws. Main goal is to
         reduce or eliminate tariffs and other barriers to global trade. Promotes its policies of
         trade liberalisation.


Trade agreements and regionalism: is a negotiated relationship between countries that
regulates trade between them.     Countries that participate in a trade agreement form economic
communities. An economic community or trading bloc is an organization of nations formed
to promote free trade (free movement of resources and products) among its members and to
create common economic policies.        Regional economic integration or regionalism means
that there is a focus on securing trade agreements between groups of countries in a geographic
region. Various trading blocs and regional trade agreements exist:
     The European Union (EU): Formed in 1957, the EU is closer than ever to removing barriers
         to trade within Europe, having established its own parliament, commission, court and
         currency (the euro). The EU will be joined by other European countries to form a “United
         States of Europe” which will become a major world force. The movement of money,
         products and people would be as free as it is in U.S.A.
     North American Free Trade Agreement (NAFTA): The free trade zone incorporating
         Canada, U.S.A and Mexico was established in 1994.             The economies of these three
         countries will be integrated with successive reductions in tariffs.
     Association of South-East Asian Nations (ASEAN): Formed in 1993, ASEAN aim is to
         create a common market by the year 2008. Initially created in 1967 with the intention of
         promoting regional economic and political cooperation.
     Asia-Pacific Economic Cooperation (APEC): Was formed in 1990, in response to the
         growing interdependence between the economies of the Asia-Pacific region.


War and civil unrest: Social unrest which escalates into prolonged civil disturbances or war has
devastating consequences for any international business conducting trade with that country. Should
war break out, production facilities may be either destroyed or taken over by military.   A recent
example is the war against terror. This created strong resentment towards
U.S.A; it resulted in boycotts of American Companies and investors withdrawing their shares.
Legal: Legal system of a country refers to the laws, or rules that regulate behavior and procedures
used to enforce laws. For example, Aus. follows legal traditions of the U.K and countries such as
Iran follow religious laws. Bureaucratic law is a system where the country‟s bureaucracy
establishes the rules. Any global business must be aware of the legal system of the host countries
in which their business is conducted. International businesses should rely on the knowledge and
expertise of local lawyers in each country in which they operate. The three main are:


Contracts: Legally enforceable agreement. It outlines the details of the agreement and the rights
and obligations of each other parties involved. There are two main legal systems in the world today.


Common law is based on tradition, judge‟s decision and custom.        Civil law is the world‟s most
common legal system.     It is based on a very detailed set of laws and is organized into codes which
list what is permissible and what is not.   A country‟s legal system greatly influences the nature of a
contract. For example, under a common law system, contracts tend to be very detailed with all
possible eventualities covered.


Dispute resolution: Many businesses use inexpensive methods such as Negotiation, Mediation and
Arbitration. Mediation is the guiding of a discussion between parties in an effort to resolve their
dispute without resorting to legal action. Arbitration is a process which involves the settlement of
a dispute before an impartial umpire, such as a judge, who makes a binding decision.


Intellectual property: refers to property that is created by an individual‟s intellect such as logos
and brand names. It‟s possible to establish ownership rights over intellectual property through
intellectual property rights such as patents, trademarks and copyright.   Patent gives the inventor
exclusive right to make, use or sell as well as license others to make or sell, a newly invented
product or process. A trademark is a brand name or designs that are officially registered such
as McDonald‟s or stussy.    Copyright is the exclusive right of an author, artist, musician or
publisher to perform, copy or sell an original work.   There are several international treaties which
give protection:
     International convention for the protection of industrial property or Paris Convention
     Berne convention for the protection of literary and artistic works
     Universal copyright convention
Social/cultural: Social and cultural characteristics are a system of values, beliefs, rules, techniques
and customs that are shared among a society‟s people. Ethnocentricity is the belief in the
superiority of one‟s own ethnic group and cultural practices.


Languages
     Spoken languages: Not being able to understand a foreign language may prevent a person
         from fully understanding a country‟s culture.       Misunderstandings can occur and also
         business embarrassment which can mean a loss in opportunities.
     Non-verbal: refers to the messages we convey through body movements, facial
         expressions and the physical distance between the individuals.       Extreme care should be
         taken with non-verbal communication because gestures can have different meanings in
         different cultures. For example, making a circle with the forefinger and the thumb is a
         friendly gesture in Australia but in France, it means “you‟re worth nothing”.


Tastes: refer to a particular liking for something such as foods, clothes and music. Differences in
tastes will have practical implications for product marketing, especially product design, packaging
and advertising. International businesses need to be aware of how local tastes influence the
demand for their products, adapting the products to suit local preferences. For example, different
styles of „barbequing‟ in Australia and Korea.


Religion: Awareness of a business colleague‟s religious traditions is essential for building a lasting
relationship. Those traditions can influence what a person can and cannot eat. Being insensitive
or unsympathetic to religious traditions could cause lasting damage to a business relationship.
Religious holidays and rituals may affect the times at which business meetings can be arranged.
When members of different religious groups work together, there may be some tension within the
group.


Varying business practices and ethics: International managers must research the acceptable
business practices and ethics of the countries with which they wish to conduct business so as to
avoid awkward situations, embarrassments and insults. There are no rights or wrongs when it
comes to these practices, only cross-cultural differences. The best way to avoid such situations or
to minimize the chance of them occurring is to learn as much as possible about potential clients and
their unique business practices.


Gifts: The „language‟ or etiquette of gist giving varies among cultures and a businessperson should
understand the etiquette involved.   For example, in Japan gifts are always wrapped and presented in
a humble manner. The recipient is not expected to open the gift in front of the giver.


Bribes: This is one of the most sensitive ethical issues faced when conducting business in some
countries.   Many Australians believe that bribery is corrupt.          However, in many countries
payments to government officials are a way of life.




Managing global business


Financial: Global business brings extra concerns for financial managers, in particular currency
exchange fluctuations, methods of payment, credit risks and insurance.
Methods of payment and credit risks: Payment is complicated by the fact that the business may
be dealing with someone they have never seen. Neither party completely trusts the other. Thus,
to solve this problem, a method of payment using a third party whom both parties trust, is required.
This third party is usually a bank and acts in an intermediary role.


There are five methods of payment:
     Payment in advance: allows the exporter to receive payment and then arrange for the
         goods to be sent. There is virtually no risk for the exporter and if often used if the other
         party is a subsidiary.
     Letter of credit: commitment by the importer‟s bank which promises to pay the exporter a
         specified amount when the documents proving shipment of the goods are presented. Once
         the bank has made such a commitment, it cannot be withdrawn.         Only payment in advance
         offers less risk and for this reason, a letter of credit is very popular with exporters. This is
         because it relies on the overseas bank rather than the importer.
     Clean payment: This is the easiest and quickest method of settling an international
         transaction. Clean payment (remittance) occurs when the payment is sent to, but not
         received by the exporter before the goods are transported. This requires two-way trust
         between the businesses. The risk to the exporter is minimal but unfortunately it is not a
         method favored by importers.
     Bill of exchange: Document drawn up by the exporter demanding payment from the
         importer at a specified time.   This is one of the most widely used and allows the exporter
         to maintain control over the goods until payment is either made or guaranteed. There are
         two types:
             Document (bill) against payment:         The importer can collect the goods only after
              paying for them. The exporter draws up a bill of exchange with his or her Australian
              bank and sends it to the importer‟s bank along with a set of documents that will allow
              the importer to collect the goods. The importer‟s bank hands over the documents
              only after payment is made. The importer‟s bank then transfers the funds to the
              exporter‟s bank.
             Document (bill) against acceptance: The importer may collect the goods before
              paying for them. The importer must sign only acceptance of the goods and the terms
              of the bill of exchange to receive the documents that allow him or her to pay for the
              goods at a later date. This method exposes greater risk for the exporter such as the
              delay of payment or no payment at all.
     Open account (credit): Allows the importer access to the goods, with a promise to repay at
         a later date. This exposes the exporter to the greatest amount of risk as the exporter is
         totally reliant on the importer‟s ability and willingness to pay.


The option selected will largely depend on the business‟s assessment of the importer‟s ability to pay,
that is, the importer‟s creditworthiness.


Hedging: The spot exchange rate is the value of one currency in another currency on a particular
day. Exchange rates can change constantly with currency fluctuations causing a real concern for an
exporter. Hedging is the process of minimizing the risk of currency fluctuations. It reduces the
level of uncertainty involved with international financial transactions.
     Natural Hedging: A business may adopt a number of strategies to eliminate or minimize
         the risk of foreign exchange exposure. In this way, the business provides itself with a
         natural hedge. The range of natural hedges for Kohler Biogenetics Ltd include:
             establishing offshore subsidiaries
             Arranging for import payments and export receipts denominated in the same foreign
              currency. Therefore any losses from a movement in the exchange rate will be offset
              by gains from the other
             implementing marketing strategies which attempt to reduce the price sensitivity of the
              exported products
             Insisting on both import and export contracts denominated in Australian dollars.
              This transfers the risk to the buyer (importer).


     Financial instrument hedging: Apart from such natural hedges there are a growing
         number of financial products available, called derivative that can be used to minimize or
         spread the risk of exchange rate fluctuations.
Derivatives: To minimize the financial risks involved with exporting, financial institutions are
continually developing new types of products, collectively referred to as derivatives.   Derivatives
are simple financial instruments which may be used to lessen the exporting risks associated with
currency fluctuations. The three main derivatives available for exporters include:


     Forward exchange contract: is a contract to exchange one currency for another currency
         at an agreed exchange rate on a future date, usually after a period of 30, 90 or 180 days.
         This means that the bank guarantees the exporter, within the set time period, a fixed rate of
         exchange for the money generated from the sale of the exported goods.


     Options contract: Foreign currency options provide another strategy for risk management.
         An option gives the buyer (option holder) the right to buy or sell foreign currency at some
         time in the future.      Option holders are protected from unfavorable exchange rate
         fluctuations yet maintain the opportunity for gain should exchange rate movements be
         favorable.


     Swap contract: A currency swap is an agreement to exchange currency in the spot market
         with an agreement to reverse the transaction in the future. It involves a spot sale of one
         currency together with a forward repurchase of the currency at a specified date in the future.
         For example, swapping $50m Australian dollars for US dollars now and agreement to
         reverse the swap within three months.     Businesses use currency swaps when they need to
         raise finance in a currency issued by a country in which they are not well known and are
         therefore forced to pay a higher interest rate than would be available to a better-known
         borrower or a local business.   The main advantage of a swap contract is that it allows the
         business to alter its exposure to exchange fluctuations without discarding the original
         transaction.


Insurance: To minimize the risk of non-payment and to protect the business‟ cash flow,
Cooper‟s Brewery uses EFIC‟s Export Payment Protection which is insurance cover that can act
as a safety net in case an Australian Exporter does not get paid. Other types of insurance
available to exporters include:
     Marine insurance: covering shipment by road, rail and air as well as sea
     Product liability insurance: protecting the manufacturer and exporter from liability due to
         damage caused by the use of a product
     Currency risk insurance: protecting the exporter from losses due to currency fluctuations.
         To cover this risk a business enters into a forward exchange contract with a bank.
Obtaining finance: Finance may be arranged using the services of either domestic or international
financial institutions.
      Domestic capital market: The majority of Australian banks and non-bank financial
         institutions all have facilities for organizing finance. For example, the National Australia
         Bank has its own international business specialists who provide advice, arrange finance,
         draw up letters of credit and undertake forex arrangements.         If a business decides to
         borrow overseas rather than domestically, it will need to use the services of financial
         institutions which make up the international capital market.


      International capital market: International banks are important to the functioning of the
         forex markets. They also provide:
              finance for exporting and importing
              working capital loans
              cash management services
              finance for mergers and joint ventures between foreign and domestic businesses


Because of their extensive global network, these international banks can access and transfer large
amounts of money around the globe whenever required.
      Eurocurrency market: Eurocurrency is the currency of one country that is placed in a bank
         in another country.   The Eurocurrency makes offshore borrowing easier because it allows
         businesses to access foreign currency from within their own country.


Marketing: A business‟ marketing plan must be modified and adapted to suit overseas markets.


Research of market: Due to the differences between domestic and international markets, a degree
of uncertainty and increased risk is established in developing international marketing strategies.
Consequently, it is essential to analyze international markets in even greater depth than is necessary
for domestic markets. A business should know many things before it decides to engage in
international marketing such as information to make specific marketing decisions; price to charge,
type of packaging necessary, distribution channel to use and any product characteristics. Second,
the information about the country‟s economic, political, social and cultural features. The business
also needs primary data to gain valuable insights into a specific market‟s cultural economic features.


Global branding: is the worldwide use of a name, term, symbol or logo to identify products of one
seller and differentiate them from those of the competitor.   Businesses are increasingly using global
branding for these reasons:
      its cost effective because one advertisement can be used in a number of locations
      it provides a uniform worldwide image
      the successful brand name can be linked to new products being introduced


Standardization and differentiation: Standardized approach is an international marketing
strategy that assumes the way the product is used and the needs it satisfies are the same the world
over. Therefore, the marketing mix will be the same in all markets, that is, it is globalized, “one
marketing plan fits all”.   This strategy offers cost savings; production runs may be larger thereby
achieving economies of scale, research and development costs are reduced, spare parts and after
sales service are simplified.   Differentiated approach is an international marketing strategy that
assumes the way the product is used and the needs it satisfies are different between countries.
Adopting this philosophy requires customizing the marketing plan to fit the economic, political and
sociocultural characteristics of the target country.


Operations
Sourcing (vertical integration, make or buy): Sourcing decisions are decisions about
whether they should make or buy the resources that needed to create their products.        When
outsourcing production, a business will buy component parts from either a domestic or
overseas supplier in order to obtain:
      lower prices
      higher quality and better designed components
      more advanced technology


Vertical integration refers to the expansion of a business‟ production in different but related areas.
This happens, for example, when a computer assembly factory takes over a silicon chip
manufacturing plant a plastics factory.    The aim is to cut costs, gain economies of scale and raise
profitability.


Global web (components produced in different countries): A global web is a network of
production sites located around the world, each specializing in the part of the production process
which it can most efficiently perform.      The result is a network of cost-effective locations all
contributing to the final product. There are a couple of difficulties with adopting this strategy;
production problems due to miscommunication between sites and increased transportation costs.
Employment relations: The quality, quantity and composition of the available labor force are
important considerations for any business as it undergoes global expansion as well as establishing
and maintaining effective employment relations.


Organizational structure: The structure depends on a number of factors, including the extent of
its global operations and whether it makes or buys components. As the business expands globally
and modifies its objectives, it must also adapt its structure.


Global structure: The shift to a global structure means a change in the way decisions are made.
While the board of directors in the parent company may still have control over long-term decisions,
more decisions will be made at a local level as a power is decentralized. It may now develop a
structure which integrates the regional divisions.


Staffing: involves the recruiting and selecting of qualified people to ensure the success of the
business. In a global business, finding the right people can be extremely difficult, especially for
management positions. These positions require people who are preferably bicultural, able to
appreciate and understand the business practices and customs in the host country, and who can speak
the language of both home and host country.      Also, businesses should not disregard local culture
when selecting employees. Tribal and family relationships are more important than technical
qualifications when hiring employees, in some countries.


Shortage of skilled labor: Due to the difficulty in finding suitable employees, there is a shortage
of skilled labor. This can be overcome by the business transferring citizens of the home country,
expatriates to manage the operation until local people can be found and trained. Teams may be
sent to assist in the establishment of a production facility, staying until local personnel were trained
to run and maintain the new facilities.


Labor law variations/minimum standards of labor: Different governments place different laws
and restrictions on its labor force.
Examples.
Philippines: - voluntary labor-management committees negotiate productivity wage agreements
               -   employees who are paid on a piecework basis must not be paid less than the legal
                   8-hr minimum wage
Korea: - employers contribute to a wages claim fund which pays workers who lose wages due to a
business bankruptcy
- minimum terms and conditions of employment are set by law


Ethnocentric/polycentric/geocentric staffing system: Staffing system is concerned with the
selection of employees for particular jobs. When operating in another country, a business may
adopt one of three approaches to staffing.
     Ethnocentric: one in which all key management positions at all company locations are
         filled by parent company personnel. This approach is the least popular among established
         transnational corporations.


     Polycentric: One in which personnel from the host country manage the subsidiaries, while
         the parent company personnel fill the key roles at company headquarters. While host
         countries prefer this system compared to the ethnocentric approach, it may still cause a
         degree of resentment among local employees within the subsidiary. This is because the
         host country management has limited opportunities to work outside their own country, thus
         limiting their experience.


     Geocentric: Seeks the best people for key jobs throughout the entire organization,
         irrespective of nationality. These businesses adapt their recruitment and selection practices
         to different cultures while maintaining their worldwide policies and identity.


Evaluation — strategies with reference to a particular global market: Once the global
     business strategy is implemented, managers must evaluate the results. This involves the
     comparison of planned performance against actual performance. Evaluating global strategies
     is a complex process due to the impact of financial, political, legal and sociocultural influences.
     Generally though, businesses which have operated successfully in the global market have
     adopted specific strategies in response to changes in that market.


Modifications of strategies according to changes in global market: Global markets like
domestic ones constantly change. Thus, a business should be constantly scanning the environment
for changes that might affect it. With the combined information gathered from the environmental
scan and the evaluation process, a business is in a strong position to respond to the changes by
modifying its existing strategies.
Management responsibility in a global environment


Ethical practice: Global businesses which take seriously their social and ethical responsibilities are
often „rewarded‟ with improved business performance. For example, companies which implement
a policy of caring for the ‘triple bottom line’ – economic, environmental and social performance –
outperformed other companies in the stock market.


Tax havens and transfer pricing: Many businesses operating within Australia and global
companies attempt to minimize their taxation liability so as to maximize their after-tax profit. Such
businesses implement taxation strategies which allow them to reduce their taxation obligations.
Tax haven is a country that imposes little or no taxes on business income. There are three different
types of tax haven arrangements:
      Tax paradise: no relevant company income tax (eg. Bermuda, Bahamas, Vanuatu)
      Tax shelter: tax may be levied on some internal transactions. Low rates of tax on profits
         from internal sources (eg. Hong Kong, Panama)
      Tax privilege: no tax for some types of businesses (eg. Monaco, Luxembourg)


The main role of tax haven is obviously to provide a business with the means to avoid taxes. It
does this by allowing a business to transfer income from subsidiaries in high-tax countries to the
subsidiary operating in the tax haven.


Transfer pricing or intracorporate sales: In an effort to achieve economies of scale, a
transnational corporation may require a subsidiary to specialize in the manufacture of a particular
product which will then be exported to other subsidiaries within the group. For example, car
engines may be made in one country and transported to another to be mounted into car bodies.
Such actions involve transfer pricing where one subsidiary or company charges a second subsidiary
for goods and services.    Transfer pricing provides the opportunity for the business as a whole to
gain while both the buying and selling subsidiaries „lose‟. This is because the subsidiaries receive a
lower price for their product than if the transaction took place on the open market.              The
transnational corporation therefore obtains a profit from both the seller and the buyer. Not only is
any profit hidden, but the manipulation of the transfer price also reduces custom duties and
important tariffs.


Minimum standards of labor: Labor standards refer to those conditions that affect a business‟
employees, or those of its suppliers, subcontractors, others in the production chain.   In some
developing countries, sweatshop conditions exist in which women and children work long hours in
extreme heat for very low wages and with virtually no safety precautions. There is increasing
pressure to ensure employees who work for low wages in many developing countries are not
exploited by unscrupulous businesses. One areas of special concern is the use of child labor in
developing countries. Often children work and live in dangerous and filthy conditions for
extremely low wages or no payment at all. To counter such conditions, some global businesses
have adopted specific programs to eliminate child labor. An example is Reebok International, who
through its human rights program targets the elimination of child labor in the manufacture of soccer
balls. Human rights code of conduct is one method of attempting to conduct businesses in a
socially responsible way.     Once a code of conduct has been established, the organization may insist
that all its suppliers conform to it.


Dumping illegal products: Products such as harmful chemicals, poorly designed machinery and
inappropriate foodstuffs have been dumped onto the markets of developing countries in recent years.
Of particular concern is the dumping of hazardous materials, including nuclear waste, in developing
countries. Countries are often coerced into taking such materials; they may receive financial or
other incentives and extra revenue may be used to repay staggering foreign debts. Often the
environmental laws of the host country are so lax that this hazardous material is not properly treated
or stored. As a result, contamination of dumping sites may be extremely high. Since there are
few laws prohibiting the disposal of hazardous products in many developing countries, such actions
are not technically illegal but are highly unethical.


Ecological sustainability: There is growing pressure for businesses to adopt ecologically
sustainable operating practices. This is in response to concerns about climate change and the
destruction of the natural environment. Concern for our environment operates at both the local as
well as on the global scale. The main international codes of environmental protection are:
      International chamber of commerce (ICC): Developed the Business Charter for
         Sustainable development, which consists of sixteen principles that identify key elements of
         environmental leadership, it also urges businesses to recognize environmental management
         among their highest corporate priorities.


      International standards organization (ISO): Series of voluntary global environmental
         performance standards




      Keidanren: Japanese voluntary industry association which has developed a global
         environmental charter that sets out a code of environmental behavior.
Environmental issues have an impact on all aspects of a business‟ operations.                        Modern
environmental problems affect the management of a company‟s operations, marketing, human
resources and other activities.       Decisions regarding the location of production facilities, the
development of product lines and the type of raw material to be used in production are all affected
by environmental considerations.


Arguments for and against corporate social and ethical responsibility
For:
        A better society means a better environment for doing business. By adopting a philosophy
           of enlightened self-interest, a business can turn today‟s problems into future profits.
        Businesses are unavoidably involved in social issues. Therefore, they have certain social
           rights and responsibilities.
        Businesses have the resources to help solve complex social problems. With their base of
           financial, technical and human resources businesses can play a positive role.
        Corporate social action will prevent government regulation. It is better to self-regulate
           than have governments force companies to comply with certain standards.


Against:
        A business is essentially an economic organization which therefore lacks the ability to
           pursue social goals.      Economic inefficiencies could result if managers are forced to
           undertake an extra role
        Maximizing profits ensures that society‟s resources are used efficiently. Providing the
           best quality products at the lowest price should be the goal of all businesses because this
           benefits society.
        Business managers are appointed, not elected. Therefore, they are not accountable to
           society.

				
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