{"id":199,"date":"2018-12-27T19:23:53","date_gmt":"2018-12-28T00:23:53","guid":{"rendered":"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/chapter\/chapter-3-business-in-a-global-environment-exploring-business\/"},"modified":"2020-01-06T09:58:42","modified_gmt":"2020-01-06T14:58:42","slug":"chapter-19-business-in-a-global-environment-exploring-business","status":"publish","type":"chapter","link":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/chapter\/chapter-19-business-in-a-global-environment-exploring-business\/","title":{"raw":"Chapter 19: Business in a Global Environment","rendered":"Chapter 19: Business in a Global Environment"},"content":{"raw":"
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It\u2019s a Small World<\/span><\/h2>\r\n<\/div>\r\n
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\r\n\r\n[caption id=\"attachment_1342\" align=\"alignleft\" width=\"342\"]\"A Kevin Gill \u2013 GEBCO_08 with Shaded Blue Marble Landmass \u2013 CC BY-SA 2.0.[\/caption]\r\n\r\n<\/div>\r\n<\/div>\r\n

Do you wear Nike shoes or Timberland boots? Buy groceries at Tops Friendly Markets, Giant Stores, or Stop & Shop? Listen to Beyonce, Pitbull, Britney Spears, Jennifer Lopez, the Dixie Chicks, Foster the People, or the Dave Matthews Band? If you answered yes to any of these questions, you\u2019re a global business customer. Both Nike and Timberland manufacture most of their products overseas. The Dutch firm Royal Ahold owns all three supermarket chains. Sony Music, the label that records Beyonce, J. Lo, the Dixie Chicks, and the other artists mentioned, belongs to a Japanese company.<\/p>\r\n

Take an imaginary walk down Orchard Road, the most fashionable shopping area in Singapore. You\u2019ll pass department stores such as Tokyo-based Takashimaya and London\u2019s very British Marks & Spencer, both filled with such well-known international labels as Ralph Lauren Polo, Burberry, Chanel, and Nokia. If you need a break, you can also stop for a latte at Seattle-based Starbucks.<\/p>\r\n

When you\u2019re in the Chinese capital of Beijing, don\u2019t miss Tiananmen Square. Parked in front of the Great Hall of the People, the seat of Chinese government, are fleets of black Buicks, cars made by General Motors in Flint, Michigan. If you\u2019re adventurous enough to find yourself in Faisalabad, a medium-size city in Pakistan, you\u2019ll see locals riding donkeys, camels pulling carts piled with agricultural produce, and Hamdard University, located in a refurbished hotel. Step inside its computer labs, and the sensation of being in a faraway place will likely disappear: on the computer screens, you\u2019ll recognize the familiar Microsoft flag\u2014the same one emblazoned on screens in Microsoft\u2019s hometown of Seattle and just about everywhere else on the planet.<\/p>\r\n\r\n

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The Globalization of Business<\/h1>\r\n<\/div>\r\n
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Learning Objectives<\/h3>\r\n
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  1. Explain why nations and companies participate in international trade.<\/li>\r\n \t
  2. Describe the concepts of absolute and comparative advantage.<\/li>\r\n \t
  3. Explain how trade between nations is measured.<\/li>\r\n<\/ol>\r\n<\/div>\r\n

    The globalization of business is bound to affect you. Not only will you buy products manufactured overseas, but it\u2019s highly likely that you\u2019ll meet and work with individuals from various countries and cultures as customers, suppliers, colleagues, employees, or employers. The bottom line is that the globalization of world commerce has an impact on all of us. Therefore, it makes sense to learn more about how globalization works.<\/p>\r\n\r\n

    \r\n\r\n[caption id=\"attachment_1345\" align=\"alignleft\" width=\"345\"]\"Horasis<\/a> Figure 19.1 World Commerce Meeting; Richter Frank-Jurgen \u2013 Horasis Global China Business Meeting 2013 \u2013 CC BY-SA 2.0.[\/caption]\r\n\r\n<\/div>\r\nWorld commerce has become increasingly international, so understanding how global business works is key to a successful career.\r\n

    Never before has business spanned the globe the way it does today. But why is international business important? Why do companies and nations engage in international trade? What strategies do they employ in the global marketplace? What challenges do companies face when they do business overseas? How do governments and international agencies promote and regulate international trade? Is the globalization of business a good thing? What career opportunities are there for you in global business? How should you prepare yourself to take advantage of them? These are the questions that we\u2019ll be addressing in this chapter. Let\u2019s start by looking at the more specific reasons why companies and nations engage in international trade.<\/p>\r\n\r\n

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    Why Do Nations Trade?<\/h2>\r\n

    Why does the United States import automobiles, steel, digital phones, and apparel from other countries? Why don\u2019t we just make them ourselves? Why do other countries buy wheat, chemicals, machinery, and consulting services from us? Because no national economy produces all the goods and services that its people need. Countries are importers<\/em> when they buy goods and services from other countries; when they sell products to other nations, they\u2019re exporters<\/em>. (We\u2019ll discuss importing and exporting in greater detail later in the chapter.) The monetary value of international trade is enormous. In 2010, the total value of worldwide trade in merchandise and commercial services was $18.5 trillion<\/em>.[footnote]World Trade Organization, press release, \u201cTrade growth to ease in 2011 but despite 2010 record surge, crisis hangover persists,\u201d Appendix Table 1 (World merchandise trade by region and selected economies, 2010) and Appendix Table 2 (World exports of commercial services by region and selected country, 2010), April 7, 2011, http:\/\/www.wto.org\/english\/news_e\/pres11_e\/pr628_e.htm<\/a>, (accessed August 20, 2011).[\/footnote]<\/p>\r\n\r\n<\/div>\r\n

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    Absolute and Comparative Advantage<\/h2>\r\n

    To understand why certain countries import or export certain products, you need to realize that every country (or region) can\u2019t produce the same products. The cost of labor, the availability of natural resources, and the level of know-how vary greatly around the world. Most economists use the concepts of absolute advantage<\/em> and comparative advantage<\/em> to explain why countries import some products and export others.<\/p>\r\n\r\n

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    Absolute Advantage<\/h2>\r\n

    A nation has an absolute advantage if (1) it\u2019s the only source of a particular product or (2) it can make more of a product using the same amount of or fewer resources than other countries. Because of climate and soil conditions, for example, France had an absolute advantage in wine making until its dominance of worldwide wine production was challenged by the growing wine industries in Italy, Spain, and the United States. Unless an absolute advantage is based on some limited natural resource, it seldom lasts. That\u2019s why there are few, if any, examples of absolute advantage in the world today.<\/p>\r\n\r\n<\/div>\r\n

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    Comparative Advantage<\/h2>\r\n

    How can we predict, for any given country, which products will be made and sold at home, which will be imported, and which will be exported? This question can be answered by looking at the concept of comparative advantage, which exists when a country can produce a product at a lower opportunity cost compared to another nation. But what\u2019s an opportunity cost<\/em>? Opportunity costs are the products that a country must decline to make in order to produce something else. When a country decides to specialize in a particular product, it must sacrifice the production of another product.<\/p>\r\n

    Let\u2019s simplify things by imagining a world with only two countries\u2014the Republic of High Tech and the Kingdom of Low Tech. We\u2019ll pretend that each country knows how to make two and only two products: wooden boats and telescopes. Each country spends half its resources (labor and capital) on each good. Figure 19.2 \u201cComparative Advantage in the Techs\u201d shows the daily output for both countries: High Tech makes three boats and nine telescopes while Low Tech makes two boats and one telescope (They\u2019re not highly productive, as we\u2019ve imagined two very<\/em> small countries).<\/p>\r\n\r\n\r\n[caption id=\"\" align=\"alignleft\" width=\"422\"]\"Comparative Figure 19.2 Comparative Advantage in the Techs[\/caption]\r\n\r\n

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    First, note that High Tech has an absolute<\/em> advantage (relative to Low Tech) in both boats and telescopes: it can make more boats (three versus two) and more telescopes (nine versus one) than Low Tech can with the same resources. So, why doesn\u2019t High Tech make all<\/em> the boats and all<\/em> the telescopes needed for both<\/em> countries? Because it lacks sufficient resources to make all the boats and all the telescopes, High Tech must, therefore, decide how much of its resources to devote to each of the two goods. Let\u2019s assume that each country could devote 100 percent of its resources on either<\/em> of the two goods. We\u2019ll pick boats as a start. If both countries spend all<\/em> their resources on boats (and make no telescopes), here\u2019s what happens:<\/p>\r\n\r\n