The Global Business Environment Key Points Key Variables Population Economic Development Trade and Natural Resources Foreign Investment.
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The Global Business Environment
Key PointsKey VariablesPopulationEconomic DevelopmentTrade and Natural Resources Foreign Investment
Key Variables
Businesses operate in a complex environment,often full of uncertainty and turmoil Uncertainty makes it difficult to operate
efficiently Four main aspects of the global business
environment which differ and create uncertainty and complexity: Socio-cultural Political/Legal Economic Technological
The Business Environment
Cultural distance can make it difficult to operate the way you want – could lead to ethical issues. Cross-cultural problems are often the greatest barrier to gaining a competitive advantage operating in a different country: Language Religion Culture/Customs Demographic trends Health/Education Urbanisation Labour force availability and skills Wage levels/Working hours Unionisation Environmental concerns
King's University College 4
The Business Environment
Political and Legal Environment Government regulation
Restrictions Taxes Incentives
Legal Regime Employment law Health and safety law Environmental policy
Bureaucracy
King's University College 5
The Business Environment
Economic and financial conditions will affect a firm’s profits from a given country Inflation Interest rates Exchange rates Credit availability Financial stability Rates of return
The Business Environment
Weak or non-existent technological infrastructure can reduce or eliminate location advantages: Science and technology infrastructure Patent protection Road network/Public transport Telephony/Internet capacity Air transport Ports Power supply and reliability
Market Identification
Entails analysis of trends in demand arising from changes in population, income levels, and consumer preferences in potential export markets.
If there is a demand for the firm's products in a market, the supply capabilities of domestic firms and other exporters worldwide to meet this demand at lower prices or higher quality must be assessed.
Country Populations - 2014 (Source: CIA World Factbook)
1 China 1,355,692,576 11 Japan 127,103,3882 India 1,236,344,631 12 Mexico 120,286,6553 European Union 511,434,812 13 Philippines 107,668,2314 United States 318,892,103 14 Ethiopia 96,633,4585 Indonesia 253,609,643 15 Vietnam 93,421,8356 Brazil 202,656,788 16 Egypt 86,895,0997 Pakistan 196,174,380 17 Turkey 81,619,3928 Nigeria 177,155,754 18 Germany 80,996,6859 Bangladesh 166,280,712 19 Iran 80,840,713
10 Russia 142,470,272 20Congo, Democratic Republic of the
77,433,744
21 Thailand 67,741,401
38 Canada 34,834,841
Demographics
7 billion + in 2013 – estimated to grow to 8.5 billion by 2025
Half of world’s population is in Asia-Pacific region
30% of the world’s population is under the age of 15
Demographics
Implications exist for the types of products demanded
Rural – urban divides exist in population distribution within a country
Migration to other countries can have a major impact on overall trade and balance of payments of a country
Income inequality creates social problems
Economic Development
GDP growth*:
Rich world economic growth is much slower than that of the developing world
Region GNI/capita GNI (b) GDP growth rate
Population (m)
Low Income 1,780 1,510 5.8 849
Mid Income 9,517 47,298 4.8 4,970
High Income 40,324 52,668 1.3 1,306
*Source: http://wdi.worldbank.org/table/1.1
Trade and Natural Resources
Trends in the trade of manufactured products Volume of trade in manufactured products
has risen dramatically Number of source countries has risen Composition of the trade of many countries
has changed - trade in services has increased as a percentage of international trade (eg. Trade in tourism)
Trade and Natural Resources
Location of large amounts of natural resources has swung from developed (initial discoveries), to developing (exploration), to developed (new technologies “fracking”) – changes in geopolitical power
A combination of technology transfer and relatively low labor costs has led to increase in the number of countries exporting fresh and processed agricultural and fishery products.
Foreign Investment
FDI is highly concentrated among a relatively few countries. Three-fourths of FDI flows are among the
high-income countries in Europe, Japan, and North America.
Of the FDI flows to lower-income countries, about two-thirds is concentrated among 10 countries
The World of International Trade
Key PointsA Framework for Trade AnalysisAbsolute and Comparative AdvantageNew Theories of International TradeOther Factors affecting International Trade
International Trade – Current Issues Internationalization is the process and
mindset of looking at countries outside as markets for exports and sources of imports.
Trade and non-tarriff barriers to trade and government incentives promote or reduce trade.
Technology linking producers and buyers through trade intermediaries works around governments.
International Trade – Current Issues Rise of the BRICs (Brazil, Russia, India and
China) Lots of money for investment Rising domestic consumer class provides domestic
firms with resources to enter foreign markets with reduced risk
Focusing on other developing markets which are often either untapped by developed world firms or, due to liability of foreignness, have failed
Recent agreement to create $100 billion BRICs Development Bank outside of IMF – exerting power
International Trade – Current Issues Rise of China
Most of the largest firms are domestically oriented and state owned - lots of money for investment
Last year, combined total volume of merchandise handled by Taobao and Tmall surpassed 1 trillion yuan, or about $160 billion. Amazon’s was $86 billion and eBay’s 67.8 billion*
Alibaba’s revenue for ‘14 Q2, rose 61% to $1.74 billion, operating profit rose to $856 million. Amazon’s sales for 2014 Q2 rose 22% to $15.7 billion from $12.8 billion last year with a net loss of $7 million. Amazon’s operating profit margin is 0.5%, compared to Alibaba’s 49% operating profit margin.
EBay, revenue increased 14% to $3.88 billion in 2014 Q2 and net profit fell 7.5% to $640 million from $692 million.
*Source:http://blogs.wsj.com/digits/2013/10/16/alibaba-isnt-the-amazon-of-china/
Impediments to Trade
Government policies to restrict and to promote trade can have a decisive influence on Trade flows The competitive position of firms in export
markets The availability and price of imports The ability of firms to compete with imports
Impediments to Trade
Governments can also facilitate exports directly by such measures as: Concessional export financing Export subsidies Differential taxation of export earnings Financing for export market development
Trade Intermediaries
A competitive product and a receptive market are not enough; the product must be: Transported from the factory to the point of
shipment (port or airport) Transported to export market Be received in the export market Clear customs
Trade Intermediaries
A competitive product and a receptive market are not enough; the product must be: Move through distribution channels to the
point of sale Sold to the customer Be serviced after sale
Trade Intermediaries
International channels of distribution are often long, multilayered, complex, difficult to analyze and understand, and expensive to access or to develop.
Channel costs may represent three times the production cost of a product.
Aspects of Theories of International TradeThe theories also show that: Trade improves the relative welfare of the
factors of production that are used intensively in the exported product.
If labor and capital are immobile among sectors, then the returns to the factors of production (labor and capital) in the exporting industry will improve relative to those in the importing sector.
Aspects of Theories of International Trade The welfare of consumers of the export
products will decline relative to consumers of imported products.
Countries will tend to export products that use their relatively inexpensive and abundant factors of production intensively.
Trade brings about an equalization of the returns to factors of production; that is, trade tends to equalize capital costs and wage rates among countries over time.
New Theories of International Trade Intra-industry Trade Clusters of Interconnected Companies
Exchange of ideas among personnel. Building of support infrastructure.
Benefits of Trade Trade flows also influenced by:
Real Exchange Rates. Demand conditions over the business
cycle.
Real Exchange Rate
An increase in a country's real exchange rate has many of the same effects as a reduction in its tariff rate.
A fall in the real exchange rate has the opposite effect.
Real exchange rate is important to large and small countries and for high-income and developing countries alike.
Real Exchange Rate
Real exchanges rates may change due to: A gap between investment demand and
domestic savings. Short-term government macroeconomic
policy. Change in a country's terms of trade. Discovery of valuable natural resources.
Demand
Demand conditions over the business cycles in the domestic market and in export markets, and source countries for imports influence international trade.
If the domestic economy is expanding relative to the economies of other countries, exporters will tend to divert production to the domestic market.
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