Read the case scenario and use the text provided to support your answer and only used the text provided

Case Scenario

Dion is an engineer with Tesla Motors who helps to design electric motors. It has always been his dream to start his own business, but as he has gotten older, he has not gotten around to it. He is also an avid cyclist who rides near his home in Palo Alto, California. It is hilly terrain and as he has gotten older, he has found it more difficult to navigate the steep terrain.

He has thought about buying an electric bike that would give him an additional boost with an electric motor. However, he has not been satisfied with any of the many brands of electric bikes he can find. The ones that work well are astronomically expensive and the less expensive models are poorly constructed and have short battery life.

One day at Tesla headquarters, Dion is having lunch with three of his colleagues when he raises his frustration with his inability to find the right electric bike. The other three are also avid cyclists, so they launch into an intense discussion. Mark, who works in Tesla's marketing department, thinks that there is a demand for a high-quality electric bike at a reasonable cost. "There are social trends that could drive that demand," he says. "First, commuting by bicycle is becoming more popular, and many who are new to it need that extra assistance to make it a comfortable experience. Also, as the population ages, older cyclists are looking for ways to keep cycling as much as they did when they were younger. An electric bike could help them do that."

Dion responds that some of the new electric motor technologies he has been working on could be repurposed to make a high-quality electric bike at a reasonable cost. "I have been experimenting with some designs, and I think it is workable." Rosalinda, who manages production of the Tesla Model S interjects, "You know, I came across a defunct bicycle factory about 20 miles north of here when we were looking at potential sites for expansion. It would be perfect to manufacture the bike you are describing."

Dion can't hold back any longer and blurts out, "Let's start our own bicycle company and make this bike!" Sandra, who works in the finance department, scrunches up her face and says, "Whoa there, partner. Where is the money for this venture going to come from? While our salaries and stock options have made us comfortable, we don't have the resources to manufacture and market this bike."

The group agrees that they would love to start a new company, but they must figure out how to solve the finance problem that Sandra pointed out in order to do so. Later that day, Dion can't get the idea out of his mind. Then, a potential solution comes to him. He remembers Brenda Zhang, who rode with one of his cycling groups, Palo Altitude. She is a partner in a large venture capital firm that invests in promising start-ups. Dion isn't sure if she even remembers him, and she only knew him as a cyclist, not an engineer. But he thinks it's worth a try.

He sends the following email:

To: Brenda Zhang

From: Dion Morris

Re: Electric Bicycle Start-Up

Several of my colleagues at Tesla and I have come up with a new design for an electric bicycle that would be relatively inexpensive, very efficient, as well as durable. I know this is coming out of the blue, but I am hoping you will remember me from our rides with the Palo Altitude group. We are looking for start-up funding, and I thought a fellow cyclist like you would see the potential market for a high-quality, inexpensive electric bicycle. Please let me know what you think.

Later that day, he is surprised to find the following email in his inbox:

To: Dion Morris

From: Brenda Zhang

Re: Electric Bicycle Start-Up

Of course, I remember you, Dion. You were always at the head of the pack in our rides. I am intrigued by your idea and would like to set-up a meeting to discuss it. I need to start doing my homework on the venture to see whether I and my partners are willing to provide funding. In preparation for our meeting, I would like you to make a memo that addresses the following issues:

• Why do you think you can make successful start-up? What traits will you need to be an entrepreneur?
• What kind of leadership style would you use, and why?
• Describe your product and why you think there is a market for it.
• What legal form do you think best suits your start-up and why?
• What kind of financial document should you provide so that I can evaluate the viability of your start-up?
• What are the characteristics of your target market?
• Explain specific types of marketing the business should pursue.
• What other sources of funding might be available for you, whether or not we invest in your start-up?
• How would you organize your management team, and who in your group would lead each function in the organization?

What brand name do you propose for your electric bike, and why did you choose it?You are a good friend of Dion's. He respects you for your degree in Business and Management and your good business sense. Dion feels inadequate in the details of business and asks you to draft the requested memo for him.

Draft the requested memo under Dion's name.

Read through your memo to ensure all required elements are present and clear.

Business Details

• Why do you think you can make a successful start-up? What traits will you need to be an entrepreneur?
• What kind of leadership style would you use? Why?
• Describe your product and why you think there is a market for it.
• What legal form do you think best suits your start-up and why?
• What kind of financial document should you provide so that I can evaluate the viability of your start-up?
• What are the characteristics of your target customer?
• Explain specific types of marketing the business should pursue.
• What other sources of funding might be available for you?
• How would you organize your management team, and who in your group would lead each function in the organization?
• Refer to Dion's coworkers from his initial conversation.
• What brand name do you propose for your electric bike, and why did you choose it?

emphasizes the reasons Brenda's firm should invest in your venture

This is an example of what you have to do:

To: Brenda Zhang

From: Dion Morris

Subject: Electric Bicycle Start-up

As the world change, it presents a lot of opportunities that need to be grabbed. As we were with the colleagues, the idea came up about the need to have electric bicycles. We are strongly convinced that the start-up will be successful because the market presents a gap whereby cyclists have interest in electric cyclists to boost their riding experience. They have the desire to have a quality electric bicycle which is currently unavailable; we think that when we start-up this project, we will get a good number of buyers. For us to be effective entrepreneur, we have to exemplary display they following traits. First is having the clear vision about the project to ensure that we accomplish it, secondly is the existing passion to solve the problem that the customers desire to have quality electric bike. The passion to have the project accomplished is a key trait that ensures that we make it. Also, tenacity is a trait that we ought to have so that we overcome the ups and downs that we will undergo in the process of our project such as financial crisis. Moreover, we will have a trait of confidence since we don't know about the future but we will be determined that the project will be successful.

We shall apply democratic leadership style because it is an innovative project and we have to include the ideas of everyone so that we bring together our minds for the success of the project. Our product is an electric bike that boosts the enjoyment of cyclists in the state. We think that there is market for this product because majority of cyclists are elderly people who aspire to ride as if they were young, hence, providing electric bikes will ease their work. Also, majority of people are embracing cycling and thus we will attract the market if we advance the experience of bicycles.

The legal form of our business is partnership because we are a group of people who are more than two who have the interest to begin the business. Later it can be upgraded to corporation when the business proof to be good. We will provide the budget so that you can evaluate how our business is demanding, also, we shall attach the financial statements of the company for the last five years. For this project, the characteristics of target market is both genders (male/female), elderly people and youth. Also, we intent to target cycling groups within and without state.

When we make the electric bikes, we intent to use relationship marketing strategy where we bring the customers on board and encourage them to be part of production team where they give their feedbacks about the project. Also, we shall apply online marketing to reach a wider number of customers through social networks and our website. However, if we shall not be lucky to get funding from you, we shall approach financial banks to get funding, also, we shall sale the shares of Tesla company to get funding. Our business will be composed of three main departments; manager headed by Dion Morris, financial manager will be headed by Sandra, and marketing manager will be headed by Mark. We shall collectively be in operations function. Finally, we can use an acronym as the name of our business, that is, WEBLiH (With Electric Bike you Live Healthy. This is a motivation that the company is interested with promotion of health living in society.

A Global Environment This resource focuses on the global environment and factors that may influence how a company operates globally. The marketplace is ever-changing. It is critical for a business or an individual to develop and maintain a business mindset in order to leverage resources to create acompetitive advantage. Developing a business mindset means thinking beyond the present; knowing the purpose of the business; possessing a passion for success; having more than a "can do'I attitude; surrounding yourself with positive, like-minded individuals who share the same passion and commitment; and having thediscipline to continue creating and innovating. The goal is to create a competitive advantage over the competition and enter emerging markets. It helps to identify global forces that have the potential to positively or negatively affect trade, such as culture, the political environment, regulatory policies, and laws. Abusiness should have a strategic plan that addresses how it will address external factors that could affect trade like trade control policies and restrictions, the geopolitical environment, currency exchange rates, inflation, and the demand for a product or service. These global factors do not only affect trade but could also have an impact on economic growth and development, and significantly influence the competitive position of the business. While globalization has both positive and negative benets, globalization allows businesses to boost their growth potential and competition. Globalization offers opportunities to developing countries to boost their economieth provides iob creation in other countries, increases foreign direct investments, and enhances comparative advantage. Globalization and Business There was a time when consumers only had access to goods and services that were available locally. Their choices were limited by what they could access on foot, by horse, or by carriage. This is still the case for many people around the world, and in rural and remote parts of the United States, it's still necessary for families to make weekly trips to town to stock up on food, household items and other necessities. However, with the rise of internet-based business, there's been an explosion of international trade, and more and more consumers essentially have the world at theirdoor. Of course, international trade isn't just a twentieth-century phenomenon. Trade across borders and between cultures has been afeature of human civilization for centuriesthere's evidence of this dating back as far asthe nineteenth century BCE. The Silk Road, one of the best-known and most enduring "international" trade routes, began sometime around 200 BCE and for centuries was central to cultural interaction from China, through regions of the Asia, all the way to the Mediterranean Sea. So, if cultures and nations have been trading with one another for 4,000 years, what makes today's business landscape different? The answer lies in the distinction between international business and globalization. lntemational business refers to commerce in which goods, services, or resources cross the borders of two or more nations. This iswhat the Egyptians were doing when they sent goods across the Red Sea to Assyria. Globalization is broader than _I |_ |_ at: J international business and describes a shift toward a more integrated world economy in which culture, ideas, and beliefs are exchanged in addition to goods, services, and resources. Globalization implies that the world is "getting smaller"; as a result of new transportation and communication technologies, people around the world can more readily connect with one another, both virtually and geographically. Impact of Globalization on Global Business Let's take a look at an example to think through the implications of conducting business on a global scale. Consider McDonald's, which was started by two brothers in San Bernardino, California In 1955. I\" a result of globalization, nearly 69 million people in 118 different countries eat at McDonald's each day. The first McDonald's outside the United States and Canada was established in Qgsta mi\" 1970, and since the 1990s, most of the company's growth has taken place in foreign countries. The process of building a global presence, entering new markets, and capitalizing on growing international demand for American fast food has enabled McDonald's to expand from a single location to a global corporation with revenues in excess of $25.4 billion in 2015 ("McDonald's,\" n_d_)_ However, entering new marketswhether at home or abroadmeans contending with increased competition in those markets, including competition with other globally minded companies. In 2010, Subway surpassed McDonald's to become the largest single-brand restaurant chain and the largest restaurant operator globally. What is it like for companies that decide to take advantage of global opportunities as McDonald's and Subway have? Return to the discussion of external forces, but now consider them from a global business perspective. Globalization certainly means that businesses can reach consumers around the world more rapidly and efficientlythanks to airplanes and the internet, we are all so much more interconnected and accessible than we used to be. But globalization also means incredible complexity. The list below sketches out just a few of the complexities and challenges that an American fat-food company like McDonald's faces when it takes on the global business environment. - The global economic environment. McDonald's is a corporation based in the United States, where all business transactions are conducted using the US dollar, but there are 15? ofcial national currencies in the world, each with a different value and purchasing power. Imagine trying to balance the corporate checkbook at McDonald's when your deposits have been made in more than a hundred different currencies. . The global legal environment. In Greece, there is a $650 fine for eating ice cream at certain historic, artistic, and culturally important sites. If you are the operator of a McDonald's near the Parthenon, should you remove the ice cream cones and Wigsfrom your menu to protect your customers against being fined, or not?- The global competitive environment. How does McDonald's recapture the number-one position it lost to Subway in 2010? The company may need to make substantial changes to its operations, menu offerings, and/or marketing tactics. This is a steep, uphill climb in the United States alone, but i _| l J L marketswhere you are competing not only with other global US fast~food companies like Subway and KFC but with local ones, like McKebab, as well! ' The global technological environment. What does technology have to do with fast food or McDonald's? Consider the company'spresenoe in China, where there are nearly 1.3 billion mobile users, and say hello to "McDonald's Next," a "modern and progressive\" version of the restaurant that first opened in WKong, featuring mobile-phone-charging platforms, free M: and self-ordering kiosks. This generation of McDonald's is a response to increased expectations around speed, service, economy, and availability across established and developing economies, mostly fueled by consumers' growing access to affordable technology. As global businesses respond to demands created by technology, they must also leverage technology to move products, people, and supplies around the globe in acost-effective and efficient manner. - The global social environment. McDonald's ha had to adapt in countless ways to meet the demands of its customers around the world. While it prides itself on offering a consistent, internationally recognizable menu and brand, the company has also had to cater to local dining preferences and customs. In 1995, for example, the first kosher McDonald's opened in aJerusalem suburb. In Arab countries, the restaurant chain offers halal menus, which comply with Islamic laws governing the preparation of meat. In 1996, McDonald's entered lndiafor the first time, where it offered a Big Mac made with lamb called the Mahara'a Mac (\"History of McDonald's," n.d.). McDonald's is not a complex businessafter all, it sells inexpensive burgers and fries, not automobiles or airplanes or pharmaceuticals but clearly the global environment presents challenges even for them. Absolute and Comparative Advantage Example: Bananas and Trade Consider the humble banana. Even if you're not a big fan of this yellow fruit, you've surely seen them in the grocery store or in a market somewhere. If you walked through a US city with a banana and asked people to identify it, it would be easy for most. What if you did the same thing with a picture of a banana tree? How many people could identify it? Maybe sorrre, but not all. Why is that? In the United States, bananas are grown in Hawaii, and most of the bananas in the world are grown in Ecuador. If we love bananas and don't have regular access to places where they grow, without global trade, we're out of luck: no bananas. However, the state of Hawaii and nation of Ecuador choose to trade their bananas for things they lack, while considering the cost and protability of exporting their product. Ecuador and Hawaii offer an example of comparative advantage. Because bananas are not grown or readily available everywhere in the world, Ecuador and Hawaii can protably export theirs to places like Iowa and Canada. At the same time, Ecuador may need computer systems to keep track of all of those bananas they are selling. The United States has acomparative advantage in computers, so we sell our computers to Ecuador and let them concentrate on selling us bananas. The Concept of Advantage In order to understand why businesses are willing to _| l J L operate in a complex global environment, we must first understand two fundamental concepts that drive almost all business decisions: absolute and comparative advantage. Countries and companies are willing to assume the risk of engaging in global trade because they believe that they have an advantage over the competition that they can turn into prots. Not all countries have the same natural resources, infrastructure, labor force, or technology. These differences create advantages that can be exploited in global trade, to a country's (or company's) benet. Absolute Advantage An entity (country, region, company, or individual) is considered to have an absolute advantage if either of the following conditions exists: . It is the only source of a particular product, good, or service. This kind of absolute advantage is very rare and usually depends on a particular natural resource being available only within acertain region or country. An example might be the coveted edible red bird's nests found only in the caves of Thailand (and prized in Chinese cooking as the main ingredient in bird's nest soup). If Ecuador were the only place in the world where bananas could be grown, it would have an absolute advantage. However, if someone went to Ecuador and stole banana tree seedlings to begin growing and exporting bananas, Ecuador would no longer have an absolute advantage on the basis of the "only-source\" condition. - An entity is also considered to have an absolute advantage if it is able to produce more of something than another entity while using the same amount of resources (factors of production). When the banana thief started growing bananas in another country, she didn't actually take away Ecuador's absolute advantage, because Ecuador can produce more bananas using the same amount of resources (labor, land, water, equipment, etc.). Ecuador's direct cost of producing bananas is lower than the banana spy's. ksuming that the bananas can be grown in the new country, it will take that country a very long time to match Ecuador's skill, efficiency, and output level, and until it does, Ecuador will retain its absolute advantage. Comparative Advantage An entity (country, region, company, or individual) is considered to have a comparative advantage over another in producing a particular good or service if it can produce the good or service at a lower relative opportunity cost. You'll recall that opportunity cost is the value of the next best alternative. (T his video includes a refresher on this concept, as well as an excellent illustration of comparative and absolute advantage.) Since countries and businesses have limited resources, they are forced to make choices about how they allocate those resources. Ecuador has a comparative advantage in bananas over a long list of countries, including the United States. This comparative advantage is even better understood when you consider that their next best alternative product is oil. Countries in the Middle East have been pumping oil from the ground for as long as Ecuador has been growing bananas. It makes as much sense for Kuwait to attempt to export bananas as it does for Ecuador to export oil. lt'sthe reality of comparative advantage that encourages countries and businesses to do what they do best and leave the _| l J |_ production of other goods and services to other countries or companies, thus maximizing their opportunities in a global environment. Global Markets and Business Opportunitylncreasingly, nations and business use their comparative or absolute advantages to enter global markets driven by the same factor: the immense size of these markets. Let's return to the banana for a moment. In 2015, Ecuador exported 8.55 million metric tons of bananas. Without a large global demand for bananas, every person in Ecuadorwould have to eat 834 pounds of them per year to consume all of the production. Of course that wouldn't happen; instead, the country would simply cut back on the production of bananas, losing an export that accounts for more than 10 percent of its gross domestic product (GDP). Ecuador needs a large and vibrant global market to keep up with its tremendous supply of bananas, and it relies on the revenue from those bananas to purchase the other things it needs. We'll discuss how nations like Ecuador enter foreign markets, but for now let's look more closely at the size of the world's largest markets. The following table shows population and GDP data for the top five economies in the world as of 201 5 (Central Intelligence Agency, n.d.). You'll recall that GDP is a monetary measure of the market value of all final goods and services produced in a period, and the GDP growth rate isthe increase or decrease in GDP over a period of time, expressed as a percentage. Country GDP Population GDP Growth Rate China $19,390,000,000,000 1,367,485,388 6.90% European Union $19,180,000,000,000 513,949,445 2.20% United States $17,950,000,000,000 321,363,864 2.40% India $7,965,000,000,000 1,251,695,584 7.30% Japan $4,830,000,000,000 126,919,559 0.50% Looking at the figures in this table, it isn't hard to imagine that acountry or company would like to have a foothold in one or all of these markets. Taken together, these five economies represent a lot of people, a lot of purchasing power, and a lot of economic growth. However, the immensity of the global market offers more than just new target customers. Consider some of the following benets nations and firms realize by entering foreign markets. Access to Factors of Production The factors of production required for asuccessful business venture are natural resources, capital, human capital, and entrepreneurship. Access to global markets enables countries and companies to acquire these factors of production when they are nonexistent, scarce, or just too costly at home. For example, India is one of the largest providers of telephone-based customer service (labor) worldwide, which makes sense given that its population is second only to China and almost four times that of the United States. In addition, labor costs in India are significantly lowerthan in the US. Innovation and Ideas Many companies enter global markets and, once there, discover unmet needs or unique products and services. They are then able to use their discoveries to expand an existing product line or introduce new products in other markets or at home. For example, many people credit the United Kingdom with inspiring the development of the craft beer industry in the United States. Risk Reduction Given the complexity of operating a _| l J L business globally, it may seem like a contradiction that risk reduction is one of the benets of a large global market, but it's actually true. If a country or a company trades or does business with multiple foreign partners, they are less dependent on the success of any single partnership. Likewise, if a nation or business ha multiple global sources for factors of production, then if one source "dries up, " they will still have access to what they need. For example, China halted its export of rare earth minerals to Japan in 2010 after the two countries were unable to resolve a territory dispute. Japan used these mineralsin the production of everything from carsto computer chips, and to say that Japanese companies were in a state of distress is an understatement. As a result of this brief reduction in Chinese supply, Japan established a trade agreement with lndiafor the import of the needed materials. Japan will no longer be totally dependent on China for these important resources. In summary, globalization makes business on aglobal scale possible, and the size of the global market makes it attractive. By using their absolute and comparative advantages, countries and companies can leverage their resources to produce and trade the things that benet them the most. Measuring Global Trade Two Key Measurements: Balance of Trade and Balance of Payments Nations and businesses that trade back and forth, buy and sell companies, loan one another money, and invest in real estate around the globe need to have a way to evaluate the impact of these transactions on the economy. They need to make decisions about trade policies, regulations, and trade agreements, and until they can get asnapshot of what global trade isdoing to hurt or help its economy, they can't make these decisions. It's alot like your own finances, just on a much larger scale. At the end of the month, have you spent more than you earned? Do you have a large positive balance in your bank account? Did you need to borrow money to buy books or clothes? Until you really examine where your money is coming from and balance your checkbook, it's hard to make long-term financial plans like whether or not to buy a new car or home. This is very similar to what countries do when they measure the impact of trade on their economy. In this resource we'll look at two key measurements of trade: balance of trade and balance of payments. Balance of Trade One of the ways that a country measures global trade is by calculating its balance of trade. Balance of trade is the difference between the value of a country's imports and its exports, asfollcws: value of exports - value of imports = balance of trade It's important to use this formula just as it's presented, without altering the sequence of values. The calculation of the balance of tradeyields one of two outcomes: atrade decit or atrade surplus. Because the balance of trade is calculated using all imports and exports, it's possible for a country to run a surplus with some nations and a decit with others. A trade decit occurs when a nation imports more than it exports. Since 1976, the United States has consistently run tradedecits due to high imports of oil and consumer products. In recent years, the biggest trade decits were recorded with China, Japan, Germany, and Mexico. In contrast, _I l _| |_ a trade surplus occurs when a nation exports more than it imports. Although the US has run an overall trade decit since 1976, it records trade surpluses with Hong Kong, the Netherlands, the United Arab Emirates, and Australia. As with your checkbook, the balance reects the difference between total exports (\"deposits\") and total imports ("withdrawals"). Let's look at the balance of tradefor an imaginary country we'll call @ndyland. nd land is located in a region that lacks phosphate as a natural resource. However, it does have an abundance of sugarcane. As a result of its comparative advantages, Qandyland imports phosphate from Christmas Island (a real territory of Australia) to fertilize the sugarcane it grows, and it uses the sugarcane to manufacture saltwater tafly, which it exports to Christmas Island. The following table shows Qandyland's imaginary imports and exports with Christmas Island in 2014.1mports (phosphates) Exports (taffy) 2014 $45,000,000 $75,000,000 Using these figures, we can easily calculate @ndyland's balance of trade in 2014: $75,000,000 (exports) - $45,000,000 (imports) = $30,000,000. This means thatgaudylaud had a trade surplus of $30,000,00 with Christmas Island, since exports exceed imports. We can also say that vCandylmd was a net exporter, meaning they exported more than they imported. However, the picture changed in 2015 when the Australian government closed the phosphate mine on Christmas Island. Qandyland had to import phosphate from Morocco, instead, and was not able to get the same favorable pricing as before. Consequently, sugarcane farmers paid more for fertilizer, the price of sugarcane went up, and gndyland had to raise the price on its saltwater tafl'y. Sadly, the people of Morocco aren't big fans of saltwater tafly, so exports fell. The following table shows @ndyland's imaginary imports and exports with Morocco in 2015. Imports (phosphates) Exports (tafly) 2015 $65,000,000 $55,000,000 We can use the figures to calculate andyland's balance of trade: $55,000,000 (exports) $65,000,000 (imports) = -$10,000,000. The negative number indicates atrade decit of $10,000,000 because andyland imported more from Morocco than it exported. We would say that gandyland became a net importerimporting more than it was exporting. This is a simple illustration. A country's global business doesn't amount to just trading phosphate and taffy or cell phones and blue jeans. It includes all kinds of financial transactions: goods and services imported and exported, foreign investments, loans, transfers, and so on. Tracking all these payments provides another way to meaure the size of a country's international trade: the balance of payments. Balance of Payments The balance of payments is the difference between the total flow of money coming into a country and the total flow of money going out of a country during a period of time. The balance of payments is the record of all economic transactions between individuals, firms, and government, and the rest of the world in a particular period, not just imports and exports. It includes all external transactions of acountry, including payments for the country's exports and impolts of goods, services, foreign investments, loans _| ' _| |_ and foreign aid, financial capital, and financial transfers. . For instance, if a US company buys land or a factory in another country, that investment is included in the US balance of payments as an outow. Likewise, if a US company is sold to a foreign company, it's included in the balance of payments. nghuxing, the Chinese ride-hailing service, bought Qber's subsidiary in China in adeal valued at $35 billion. This sale created a cash inflow to the United States, but over the long term it will decrease the revenue flowing in from China through Ubgg . If a nation receives foreign aid or borrows money from another country, this amount is also reected in its balance of payments as acash inflow. For example, the bailout Greece received from the Eurozone and the lntemational Monetary Fund (IMF) in 2010 to help stabilize its failing economy affected the balance of payments for all of the nations involved. Greece recorded the 110 billion loan as an inflow in its balance of payments, whilethe Eurozone members recorded it as an outow in their balance of payments. A country's balance of payments is calculated asfollows: total money coming into a country (inflow) -total money going out (outow) = balance of payments It's important to use this formula just as it's presented, without altering the sequence of values. Let's examine @ndyland's balance of payments in 2015. The following table shows all of its external transactions during the year. Imports (phosphates) Exports (taffy) Foreign aid (loan) from Hoogerland Purchase of Wandaland assets 2015 $55,000,000 $25,000,000 $30,000,000 When we calculated Qandyland's balance of trade in 2015, we did not take into account the following two transactions: - g'ndyland received foreign aid in the form of a loan from the government of Hoogerland in the amount of $25,000,000. This inflow of funds will affect Qndyland's balance of payments. . Qandyland invested in afactory in Wandaland and purchased the factory from the government for $30,000,000. This outow of funds will affect andyland's balance of payments. When we calculate andyland's 2015 balance of payments by taking the inflows (revenue from exports and foreign aid) and subtracting the outows (payments for imports and purchase of foreign assets), the balance is negative, as shown below: ($55,000,000 + $25,000,000) (total inflow) ($55,000,000 + $30,000,000) (total outow) = -$15,000,000 What effect will this have on andyland? Well, when Vandylmd's leader is briefed by her council of international economic advisers, they will inform her that the country currently ha an unfavorable balance of payments. That is, less money is coming into the country than is going out. If, on the other hand, the balance of payments were a positive number (inflow exceeded outow), @ndyland could say that it has a favorable balance of payments. At this point, it's tempting to make judgments about these different types of trade measurements and conclude that trade surpluses and favorable balance of payments are always indicators of a strong economy, but unfortunately, it's not so cut and dried. Balance of trade and balance of payments are starting points, much in the way that an individual's credit rating might be a stating _I ' J I_ point for seeking a loan. How the numbers are interpreted and viewed by the country's leaders, other countries, and the world depends on many factors, such as where a country is in its economic development, the factors contributing to the balance of trade or payments, the health of the overall global economy, what the country is doing with its imports, and so on. Assessments of these factors can also be intensely political. You'll learn more about these considerations later, when we discuss how nations attempt to restrict or control trade. Wade So far we have discussed global trade meured in dollars, euros, or other traditional currency, which is how we assume business is conducted today. For example, in the United States, we express the size of the global market, or global world product (GWP), as US $107.5 trillion. In Japan, GWP is measured using Japanese currency, yen (). However, when we measure global trade only in terms of currency-based transactions, we omit a portion of the market known as countertrade. quntertrade is a system of exchange in which goods and services, rather than money, are used as payment. There are many types of countertrading, including the following: - Barter isthe exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment (e.g., one party trades salt for sugarfrom another party) - Switch trading is a practice in which one company sellsto another its obligationto make a purchase in agiven country. For example, if Party A and Patty B are countertrading salt for sugar, Party A may switch its obligationto pay Party B to a third party, known as the switch trader. The switch trader gets the sugar from Party B at adiscount and sells it for money. The money is used as Party A's payment to Party B. - @unter'gurchase is the sale of goods and services to one company in another country by a company that promises to make a future purchase of a specific product from the same company in that country. For example, Party A sells salt to Party B. Party A promises to make a future purchase of sugarfrom Party B. . Buyback This occurs when a firm builds a plant in another country or supplies technology, equipment, training, or other services to the country, agreeing to take a certain percentage of the plant's output as partial payment for the contract. For example, Party A builds a salt-processing plant in Country B, providing capital to this developing nation. In return, Country B pays Party A with salt from the plant. - Offset is an agreement that a company will balance a nonmonetary transaction WM hard-currency purchase of an unspecified product from that nation in the future. This is often an agreement by one nation to buy a product from another, as long as the seller purchases some or all of the components and raw materials from the buyer of the finished product, or the assembly occurs in the buyer nation. For example, Party A and Country B enter a contract where Party A agrees to buy sugar from Country B to manufacture candy. Country Bthen buys that candy. @untertrading is common among countries that lack sufficient hard currency (i.e., cash) or where other types of market trade are impossible. In developing countries, whose currency may be weak _I l J |_ or devalued relative to another country's currency, battering may be the only way to trade. For example, if the value of Venezuela's currency, the bolivar fuerte, falls relative to the US dollar, the exchange rate makes it unfavorable for Venezuela to sell its oil to the United States. quntertrade may be a much more financially benecial arrangement. Global Business Strategies Globalization introduces a number of challenges that are unique to operating simultaneously in different countries and global markets. What isthe best way to enter or take advantage of a global market? When should you adjust a product's features to customize it to consumer needs in a different global market? How do you manage the costs and complexities of producing and/or promoting products in different locations, with different languages, cultural sensitivities, and consumer expectations? While this next section doesn't attempt to answer all of these questions, it explains common strategies and approaches used by multinational corporations to take advantage of global business opportunities. In today's economy, once a nation or business has developed an advantageeither comparative or absoluteit's likely to look beyond its own borders or storefront to seek greater economic opportunity. But how do you enter a global market? Let's look at some of the common strategies companies and countries use to get their goods and services into global markets. Exporting and Importing Exporting isthe easiest and most straightfonrvard way to engage with the global market. Exporting is taking goods that were produced within a company's home country and shipping them to another country. The party sending the good is called an exporter. It is impossible to discuss exporting without mentioning its complement, importing. Importing is the process by which a good is brought into a iurisdiction, especially across a national border, from an external source. The party bringing in the good is called an importer. Simply put, one country's exports become another country's imports. Examples of US imports are everywhere: Take a look at the labels on your clothes. From our vantage point, US exports may be a little harder to see, but they exist all the same and are visible in other countries. According to World'sTop Exports (2015), the following export product groups represent the highest dollar value in American global shipments during 2015. In parentheses is the percentage share each export category represents in terms of overall US exports:- Machines, engines, pumps,US$205.S billion (13.7% of total exports) - Electronic equipment, $169.8 billion (11.3%) - Aircraft, spacecraft, $131.1 billion (8.7%) 'Vehicles, $127.1 billion (8.4%) -Oil, $106.1 billion (7.1 %)~ Medical, technical equipment, $33.4 billion (5.5%) , Plastics, $60.3 billion (4%) ~ Gems, precious metals, coins, $55.7 billion (3.9%)~ Pharmaceuticals,$47.3 billion (3.1 %)~ Organic chemicals, $38.3 billion (2.6%) Advantages and Disadvantages Since exporting doesn't require a company to manufacture its products in the target country, the company doesn't have to invest in factories, equipment, or other production facilities located halfway around the globe. Most of the costs involved in exporting are _| ' associated with finding a buyer or distributor in the destination market. For these reasons, exporting is often the quickest and leat expensive way to enter the global market. However, there are disadvantages, too. Once products arrive in the destination market, the business loses control of them, which can result in products being misrepresented, copied by other manufacturers, or even sold on a black market. In addition, because the business isn't active in the new market, it is difficult to gain insight into local consumer preferences and demand. This lack of information can create uncertainty and may cost the company opportunities down the road. Myou will learn later, businesses operating in other countries may find themselves subject to taxes, regulations, and/or restrictions that can substantially affect the profitability of the entire export venture. Garment Factory, Jiaxing, China Outsourcing and Qvshgiirlg Outsourcing and offshoring are two additional strategies that a business can use in order to take advantage of the global market. Outsourcing contracts out a business process to another party and may include foreign or domestic contracting, or both. Waring, on the other hand, isthe actual relocation of a business process from one country to another. Typically it's an operational process, such as manufacturing, or sometimes asupporting process, such as accounting. In the case of offshoring, the employees still work for the company that's offshoring its operations, but instead of working in a facility within the United States, they are located in another country. In general, outsourcing and offshoring are strategies that companies use to lower their costs. If a business chooses outsourcing as a way to engage with the global market, it might have a single component part manufactured in, say, Tibet and then shipped back to Iowa, where factory workers would use the outsourced part in the assembly of the final product. The business would have a contract with the company making the component part at an agreed-upon price, but it would not have an employer-employee relationship with the workers in Tibet. On the other hand, if the business wants to take advantage of offshoring, it would move the entire plant from Iowa to Tibet and hire workers in Tibet, who would work directly for the business. This video is an example of how asr'mill business is outsourcing its manufacturing to China. Especially for small start-up companies, using established manufacturing facilities located outside of the United States can make entering the global marketplace feasible. Cost, logistics, finances, and speed are just some of the factors that this type of arrangement can improve for businesses looking to take advantage of the growing global demand for US-branded products. Advantages and Disadvantages W and outsourcing are both the subject of ongoing heated public debate, both in the United States and in other countries. Those in favor assert that these strategies benet both sides of the arrangement: Free trade is enhanced, the destination country gains iobs, and the origin country gets cheaper goods and services. Some supporters go further and assert that outsourcing and offshoring raise the gross domestic product (GDP) and improve jobs 'I l _| domestically, too. This claim is based on the idea that workers who lose their jobs will move to higher-paying jobs in industries where the origin country has a comparative advantage. On the other hand, iob losses and wage erosion "at home" have sparked opposition to offshoring and outsourcing. Many argue that the jobs that are shipped overseas are not replaced by better, higher-paying ones. And it's not just low-skilled workers who are feeling the pain. Increasingly, critics say, even highly trained workers (such as software engineers) with high-paying jobs are finding themselves replaced by cheaper workers in India and China. Some firms, while realizing financial gains from lowering their production costs, find that offshoring and outsourcing are very costly in terms of lack of control over product quality, working conditions, and labor relations. For example, companies like Nike and Apple have come under fire by human rights organizations and consumers over reports of worker abuse, dangerous working conditions, and ridiculously low wages. It m reported that apparel workers in Bangladesh are sometimes paid as little as 21 cents per hour. Licensing and Franchising Increasingly, businesses are getting their products and services into global markets via licensing and franchise agreements. Under a licensing agreement, the licensor agrees to let someone else (the licensee) use the property of the licensor in exchange for a fee. License agreements usually cover property that is intangible, such as trademarks, images, patents, or production techniques. Since its debut in the late 1970s, Star Wars remains the most lucrative source of licensing in the entertainment business, generating more than $42 billion from the sale of licensed merchandise. A longer-term and more comprehensive way to access the global market is throughfranchising. Under the terms of a franchise agreement, aparty (franchisee) acquires access to the knowledge, processes, and trademarks of abusiness (the franchisor) in order to sell a product or service under the business's (franchisor's) name. In exchange for the franchise, the franchisee usually pays the franchisor both initial and annual fees. McDonald's, Holiday Inn, Hertz Car Rental, and Dunkin' Donuts have all expanded into foreign markets through franchising. Advantages and Disadvantages Licensing and franchising both offer advantages for the involved parties: The licensee and franchisee both gain a competitive advantage in the market. The licensee or franchisee gets immediate brand recognition and may quickly overtake the competition by offering a product or service for which there is existing unmet demand. For example, alocal sandwich shop may have a hard time competing when a Subway franchise opens because the brand is so well known. Also, because franchises are usually turnkey operations in which processes, supply chains, training, and products are already in place, the new business can quickly begin efficient and protable operations. For the franchisor, this arrangement enables them to gain inexpensive access to a new market, since the initial cost of the franchise is borne by the franchisee. Under a licensing agreement, all of the costs of production, sales, and distribution are the responsibility of the |_ _| |_ licensee. If financial capital is scarce, both approaches allow companies to have a global presence without heavy investments. These methods do contain some risks and disadvantages, however. They are typically the least protable way of entering aforeign market, since the prots go to the franchisee or licensee. Although the licensor or franchisor receives up-front money and/or a small percentage of future sales, the majority of the revenue remai ns in the destination country with the licensee or franchisee. Franchising also entails a long-term commitment on the part of the franchisor to provide ongoing support in the form of training, logistics, product development, and brand marketing. Once a business begins to establish a global franchise presence, the pressure to maintain brand integrity and fiscal responsibility becomes more intense; the failure of the franchise now has global consequences. For companies selling licensing lights, there is a risk that their intellectual property may be misrepresented or used in a manner that could tarnish the brand's image. Also, once a license to use an image or other intellectual property has been granted to a company in another country, the probability that knock-off products will enter the market goes up. For both franchisors and licensors, maintaining quality standards on aglobal scale is a massive undertaking, and for this reason many companies are choosing to exert a higher degree of control over their products, brands, and intellectual property than they have in the past. Joint Ventures and Strategic Alliances There are times when businesses have opportunities within the global market that are better undertaken with a partner. Sometimes these projects are extremely large and capita|intensive or so comprehensive that it makes sense to include multiple businesses or even governments. These large-scale, global projects usually take one of two forms: strategic alliances or joint ventures. A joint venture establishes a new business that isjointly owned by two or more otherwise independent businesses. The most common joint ventures involve two companies that are equal partners in the new firm, investing money and resources while sharing control of the newly formed firm. Often, a partner based in the destination country can provide expertise on the new market, business connections and networks, and access to other in-country aspects of business such as real estate and regulatory compliance. For example, Fiat Chrysler entered into a joint venture withLatma Motors of India in 2015 to expand the production of Jeeps in India. The company created in this joint venture is Fiat India Automobiles Private Limited. .Joint ventures require a greater commitment from firms than other global strategies, because they are riskier and less flexible. .Joint ventures may afford tax advantages in many countries, particularly where foreignowned businesses are taxed at higher rates than locally owned businesses. Some countries require all business ventures to be at least partially owned by domestic business partners. A less permanent but equally effective way to enter the global market is through a strategic alliance. A strategic alliance isformed between two or more corporations for a specified period of time. Unlike a joint _I l _| I venture, a new company is not formed. Generally, international strategic alliances are pursued when businesses find that they have gained all they can from exporting and want to expand into a new geographic market or a related business. This approach can be particularly useful when agovernment prohibits imports in order to protect domestic industry. The cost of a strategic alliance is usually shared equitably among the corporations involved, and it's generally the least expensive way for all concerned to form a partnership. An example of this isthe alliance between General Mills and Nestle: Honey Nut Cheerios are manufactured in bulk by General Mills in the United States and then shipped to Nestle Europe, where they are packaged and shipped to France, Spain, and Portugal. Advantages and Disadvantages The greatest advantage of joint ventures and strategic alliances across national border is the knowledge and experience of the market offered by the local partner on everything from consumer preferences to cultural differences, language, and political/economic systems. Another advantage is that the risk of entering the market with a new product is shared by more than one firm, thereby reducing each company's exposure to potential losses. However, these types of partnerships also have their drawbacks. When companies share their technology and industry knowhow, they run the risk that the partner firm will take that technology or innovation and use it to become a competitor in the future. This was a primary concern when Boeing collaborated with Mitsubishi; itwas ultimately resolved in the legal details of the partnership agreement, which both companies signed. Conicts over control of these partnerships can also arise if the owners of the partner firms do not agree on key business decisions. BMW US Manufacturing Company, South Carolina Foreign Direct Investment (FDI) Of all of the ways that a business can reach the global market, the most intensive approach is through foreign direct investment (FDI). Foreign direct investment is an investment in the form of a controlling ownership in a business enterprise in one country by an entity based in another country. FDI can take one of two forms: Greenfield ventures or mergers/acquisitions. In a Greenfield venture, the company enters a foreign market and establishes anew subsidiary as a start-up business. A good example of this isthe BMW US Manufacturing Company, a vehicle-assembly facility located in Greer, South Carolina, that is part of the BMW Group. Although it's BMW's only assembly plant in the United States, it represents a direct investment inside the United States by the German manufacturer, and it's one of the most successful Greenfield ventures in the US. Businesses that are not ready to take on the challenge of establishing a new facility or subsidiary in a foreign country will usually choose either a merger or acquisition as a means of expanding their global reach. Mergers and acquisitions represent the vast majority of FDI and range from 50 percent to 80 percent of all FDI in some industries. According to Forbes , US companies completed 116 emerging market acquisitions in the first half of 2013, up from 110 in the second half of 2012.... The most popular geographic targets for US _| ' J |_ companies in the first half of 201 3 were Brazil (25 deals), India (18 deals), South American countries excluding Brazil (15), South and East Asia (15), and Central America and Caribbean (14) (5399}; 2013). Mergers and acquisitions aren't just carried out by US companiesit's an incredibly pewive global business strategy, and ownership of many well-known products and brands has long been separated from the country of origin. For example, China's WH Group bought Smitheld Foods, Stolichnaya("tgvl'il") Russian vodka is owned by a company in the United Kingdom, Anheuser-Busch is owned by Belgian-Brazilian conglomerate mm, and T-Eleven is owned by the Japanese company Seven & i Holdings Co., Ltd. (Frohlich & auter, n.d.). Advantages and Disadvantages Because the level of commitment and investment associated with FBI is so high, companies expend a great deal of time and effort scrutinizing potential opportunities. With Greenfield ventures, the amount of time it takes to build a presence in the destination country is substantial. If a business is not already established in other global locations and lacks experience with FDI, it may be in for a series of unpleasant surprises in the form of regulations, licensing, taxes, and other red tapemuch of which we will look at later. On the other hand, mergers and acquisitions are faster to execute than Greenfield ventures, and by merging with or acquiring an existing company already in the market, outside companies can quickly take advantage of that presence. Another benet is that a merger or acquisition involves the purchase of assets such as property, plants, and equipment that are already producing a product with a known revenue stream. The key to a successful merger or acquisition is paying the right price for the company; no matter how successful the business wm before it was acquired (or merged), overpaying can turn aformerly protable operation into a money pit. Global Trade Forces In this resource, you'll learn about the range of forces that affect global trade. These forces include everything from culture and politics to the natural environment. Sgciocultural Differences Culture Culture refers to the influence of religious, family, educational, and social systems on people, how they live their lives, and the choices they make. Business always exists in an environment shaped by culture. Organizations that intend to sell products and services in different countries must be sensitive to the cultural factors at work in their target markets. Cultural differences between different countriesor between different regions in the same country can seem small, but businesses that ignore them risk failure in their ventures. Culture is complex and fully appreciating its influence takes significant time, effort, and expertise. Certain features of aculture can create an illusion of similarity, but businesses need to delve deeply to make sure theytruly understand the people and environments in which they work. Even a common language does not guarantee similarity of interpretation. For example, in the United States we purchase cans of various grocery products, but British people purchase tins. In India, where English is one of several ofcially recognized languages, matrimonial is used as a noun _' , J r in casual conversation, referring to personal ads in newspapers seeking marriage partners. Let's look at several dimensions of culture that require particular attention from global businesses. Language The importance of language differences can't be overemphasized, and there are nearly 3,000 languages in the wortd. Language differences can be a challenge for businesses designing international marketing campaigns, product labels, brand and product names, taglines, and so on. Finding a single brand name that works universally in terms of pronunciation, meaning, and "ownabil' " is amonumental challenge. Of course, correct and grammatical use of language in business communication is essential for a product, brand, or company to be viewed as credible, trustworthy, and of high quality. Thelanguage issue becomes more complicated when a country has more than one ofcially recognized language. In Canada, national law requires that labels include both English and French. In India and China, more than 200 different dialects are spoken. India has more than 20 officially recognized languages. Mainland China's ofcial spoken language is Standard Chinese, and several autonomous regions have designated other additional ofcial languages. Meanwhilein Hong Kong and Macau, Cantonese Chinese, English, and Portuguese are the ofcial languages. Clearly language can quickly become a very challenging issue for businesses. Finally, businesses should be attuned to what they communicate whenthey choose which languages to useor not to use. In Eastern Europe, for example, the long history of Soviet occupation during the Cold War has left many inhabitants with anegative perception of the Russian language. Products that carry Russian labeling may suffer accordingly. Customs and Taboos All cultures have their own unique sets of customs and taboos. It's important for businesses to learn about these customs and taboos so they'll know what is acceptable and unacceptable for theirforeign operations. For example, in Japan, the number four is considered unlucky, and many consumers will avoid product packages containing four items. In Middle Eastern countries where Islamic law is strime observed, images displaying women with uncovered arms or legs are considered offensive. In Egypt, where many women wear the headscarf orwalb, in public, an increasing number of younger women do not. Businesses struggle with whether to portray women with or without the mp, knowing that they risk offending or alienating some of their target audience with either choice. Businesses should seek guidance from native experts familiar with local culture and customers. Values The role of values in society is to dictate what is acceptable or unacceptable. Values are part of the societal fabric of a culture, and they can also be expressed individually, arising from the influence of family, education, moral, and religious beliefs. Values are also learned through experiences and can influence consumer perceptions and purchasing behavior. For example, consumers in some countries, such as the United States, tend to be individualistic and make many purchasing decisions based on their own personal preferences. In other countries, such as Japan, the _l I well-being of the group is more highly valued, and buying decisions are more influenced by the well-being of the group, such as the family. Based on these differences in values, it is not surprising that ads featuring individuals tend to do better in countries where individualism is an important value, and ads featuring groups do better in countries where the group's well-being is a higher value. Time and Punctuality Different cultures have different sensitivities around time and punctuality. In some countries, being slightly late to a meeting is acceptable, whereas in other countries it's very insulting. For cultures that highly value punctuality, being on time is a sign of good planning, organization, and respect. In cultures where precise punctuality is less important, there is often a greater emphasis on relationships. The fact that a meeting happens is more important than when it happens. While there are cultural stereotypes about time management, the best rule of thumb in business is to be punctual and meet deadlines as promised. You will not insult people by following this rule. Also, it's wise not to apply stereotypes to individual people. You should let a person's behavior speak for itself, and always treat others with the same level of courtesy you would expect from them. Business Norms Business norms vary from one country to the next and may present challenges to anyone who is not used to operating according to the norms of the host country. In business meetings in Japan, for example, it's expected that the most senior person representing an organization will lead the discussion, and morejunior-level colleagues may not speak at all. The role of alcohol in business meetings vari