Ch5: The Global Context of Business
Chapter at a Glance
mindmap root((Ch5: Global Business)) Globalization North America — USMCA Europe — EU + Euro Asia-Pacific BRICS Emerging Markets Trade Theory Absolute Advantage Comparative Advantage Balance of Trade Exchange Rates Entry Methods Exporting lowest risk Branch Office Licensing Franchising Strategic Alliance JV FDI highest risk Trade Barriers Tariff — tax Quota — quantity limit Subsidy — govt payment Embargo — total ban Dumping — company tactic Free Trade Facilitators WTO USMCA replaced NAFTA EU GATT historical
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LO1 — Globalization and Major Marketplaces
Globalization = the process by which the world economy is becoming a single, interdependent system.
Why firms go global:
- Growth — tap new revenue after dominating the domestic market
- Risk diversification — a recession in one country doesn’t cripple the company
- Cost advantages — cheaper labour, raw materials, or production
Three major world marketplaces:
| Region | Key Details |
|---|---|
| North America | US, Canada, Mexico — governed by USMCA (replaced NAFTA) |
| Europe | EU — single market; most trade barriers eliminated; shared currency = Euro |
| Asia-Pacific | China, Japan, India; rapid growth; China = world’s #2 economy (behind the US) |
Exam gotcha: NAFTA no longer exists. Write USMCA.
LO2 — Emerging Markets and BRICS
BRICS = Brazil · Russia · India · China · South Africa
Key features: large populations (= large consumer markets), rapid economic growth, rising middle classes.
China is the most prominent — already the world’s second-largest economy, not just “emerging.”
Multinational firm = designs, produces, and markets products in many nations — deeper integration than just selling abroad.
LO3 — Competitive Advantage, Balance of Trade, and Exchange Rates
Absolute vs. Comparative Advantage
| Term | Definition | The Keyword |
|---|---|---|
| Absolute Advantage | Produces something more efficiently than any other country | vs. the world |
| Comparative Advantage | Produces some goods more efficiently than other goods it produces | vs. itself |
Exam trap: These are not the same thing. Absolute = you vs. everyone else at one product. Comparative = you choosing which of your own products to specialize in.
Comparative advantage → free trade argument: countries should specialize in what they produce best and trade for the rest. This maximizes world output and raises the average standard of living.
Balance of Trade
Formula: Exports − Imports = Balance of Trade
| Result | Label |
|---|---|
| Exports > Imports | Trade Surplus (positive) |
| Imports > Exports | Trade Deficit (negative) |
Balance of Payments = all money flows in/out of a country (broader than balance of trade — includes investment, tourism, transfers).
Canada case study: Canada typically runs a trade surplus with the US. In 2009 (US recession + oil price crash), Canada recorded its first trade deficit in 34 years.
Exchange Rates
Exchange rate = rate at which one currency trades for another. In a floating system, it’s driven by supply and demand.
A currency rises in value when demand for it increases. Demand is driven by:
- Economic health (strong GDP, low debt, trade surplus)
- Political stability (low risk)
- Political decisions (war, protectionism → weaker currency)
2008–2009 example: Global investors fled to the USD as the safest currency → USD demand rose → USD strengthened. As the world stabilized in late 2009, USD demand eased → USD weakened.
LO4 — International Business Operations and Entry Methods
Six methods, ordered from lowest to highest involvement, risk, and control:
graph LR A["1 · Exporting/Importing\nLowest risk + control"] --> B["2 · Branch Office"] --> C["3 · Licensing"] --> D["4 · Franchising"] --> E["5 · Strategic Alliance\n/ Joint Venture"] --> F["6 · FDI\nHighest risk + control"] style A fill:#ccffcc style F fill:#ffcccc
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| Method | Core Description | Key Tradeoff |
|---|---|---|
| Exporting/Importing | Sell abroad or buy from abroad; no foreign presence | Low risk, low control |
| Branch Office | Physical sales location in foreign country | More presence; moderate investment |
| Licensing | Foreign firm manufactures/markets your product | Low investment; low control; risk of copying |
| Franchising | Foreign operator runs your branded system | Local knowledge; less capital; less control |
| Strategic Alliance / JV | Partnership with foreign firm — shared risk, cost, expertise | Shared risk and shared control; partnership friction |
| FDI | Own physical assets (factories, offices) in foreign country | Maximum control; maximum risk/investment |
Scenario tip: A firm choosing franchising abroad does so because it requires less capital and the franchisee has local market knowledge — but the parent company gets less direct control.
LO5 — Barriers to International Trade
Economic Barriers (All Government-Imposed Except Dumping)
| Barrier | Who Does It | What It Does |
|---|---|---|
| Tariff | Government | Tax on imports → raises price of foreign goods |
| Quota | Government | Quantity limit on imports |
| Subsidy | Government | Payment to domestic firms → lowers their costs artificially |
| Dumping | A Company | Sells abroad below home-market price → predatory tactic |
Exam trap: Dumping is done by a company, not a government. It’s the only one in this list that isn’t a government policy.
Legal and Political Barriers
| Barrier | What It Does |
|---|---|
| Embargo | Total ban on export or import of a product — most severe restriction |
| Business Practice Laws | Local regulations that foreign firms must comply with |
| Local-Content Laws | Products sold locally must be at least partly made locally |
Embargo > Tariff in severity. Tariff taxes. Embargo bans.
Social and Cultural Barriers
- Language differences
- Differing ethical standards (what counts as acceptable business practice)
- Unfamiliar local traditions and consumer preferences
Social/cultural barriers cannot be addressed by trade agreements — they require local adaptation by the firm.
LO6 — Free Trade Agreements and Organizations
Protectionism = using trade barriers to protect domestic businesses from foreign competition. Popular during economic downturns. Historically linked to deepening the 1929–1939 Great Depression.
| Institution | Role |
|---|---|
| WTO | Global organization; member nations negotiate trade agreements and resolve trade disputes |
| USMCA | US–Canada–Mexico; replaced NAFTA; eliminates tariffs and reduces trade barriers |
| EU | European single market; eliminated most internal trade barriers; shared Euro currency |
| GATT | Historical multilateral agreement; predecessor to WTO |
NAFTA → USMCA: Same three countries, updated rules. Always write USMCA on the exam.
Key Terms Quick Reference
| Term | Definition |
|---|---|
| Globalization | World economy becoming a single interdependent system |
| BRICS | Brazil, Russia, India, China, South Africa — major emerging markets |
| Absolute Advantage | More efficient at X than any other country |
| Comparative Advantage | More efficient at X than at Y within your own portfolio → basis for specialization |
| Balance of Trade | Exports − Imports; surplus = positive, deficit = negative |
| Balance of Payments | All money flows in/out of a country |
| Exchange Rate | Rate at which one currency trades for another |
| Tariff | Tax on imports |
| Quota | Quantity limit on imports |
| Subsidy | Government payment to domestic firms |
| Embargo | Total ban on import/export of a product |
| Dumping | Company selling abroad below home-market price |
| Local-Content Laws | Products must be partly made in the country where sold |
| Protectionism | Using barriers to protect domestic firms from foreign competition |
| FDI | Buying/establishing tangible assets in a foreign country |
| WTO | Global trade negotiation and dispute resolution body |
| USMCA | Replaced NAFTA; US–Canada–Mexico trade agreement |
| Cartel | Association of producers controlling supply and price of a product |
Related Pages
GlobalBusiness, InternationalTradeTheory, InternationalEntryMethods, TradeBarriersAndAgreements, ClassificationSystems-EntryMethods