Page 115 - Introduction to Business

CHAPTER 2 The Environment of Business 89

common defense and foreign policy institutions. The international that follow are ordered from less to more
North American Free Trade Agreement (NAFTA) is a business risk that they entail. First, export-import busi-
comprehensive trade agreement that deals with issues ness is a relatively low-risk operation given the fact that
ranging from the phased reduction (and finally capital is not tied up and it is relatively easy to enter
elimination) of trade barriers to the protection of into or exit out of this business. Furthermore, there are
workers’ rights and the environment among Canada, well-established techniques of trade finance that are
the United States, and Mexico. While the structure of aimed at facilitating trade on the one hand and mini-
NAFTA is relatively complex, its institutions are not as mizing financial risk on the other. Second, in licensing
far reaching as those of the European Union. With an and franchising, the relationship with the overseas
initial interest in addressing regional security issues, the partner is closer. The company that is providing the
Association of South East Asian Nations (ASEAN) has license or franchise will need to properly evaluate,
moved steadily toward greater economic cooperation understand, and trust the overseas partner, since such
with a goal of establishing a free trade area by 2007. relationships last for several years. Licensing and fran-
ASEAN’s current membership stands at ten. To prevent chising involve slightly more risk than international
loss of jobs (and loss of exports to China) and also to tap trade. In licensing, a company or individual provides
China’s growing domestic consumer market, members the foreign partner the technology to manufacture and
of ASEAN are hoping to develop a free trade agreement sell its products in return for an annual license fee.
with China by 2010. Regional integration in Latin Franchising, on the other hand, obligates the parent
America has seen a patchwork of constantly changing firm to provide specialized sales and service support,
regional trade and investment agreements. This is a and sometimes even some seed money, to the foreign
result of unrealistic integration goals, political paralysis, franchisee in return for an annual fee. As in the case of
and poor economic policies that have undermined the licensing, franchising essentially leads to the penetra-
implementation of most trade agreements, forcing tion of international markets without significant capital
participating countries to regularly change their investment abroad. Third, an international joint ven-
alliances, objectives, and approaches. The first step ture is a business that is jointly owned (implies shared
toward free trade in Latin America was taken with the equity) and operated by two or more firms (usually one
signing of the Treaty of Montevideo in 1960, creating the from the host country) that pool their resources to pen-
Latin American Free Trade Association (LAFTA). In etrate foreign markets, generate (and share) profits, and
1969, frustrated by the lack of progress in LAFTA, share the commercial risk. Fourth, strategic alliances
Bolivia, Chile, Colombia, Ecuador, and Peru joined in differ from joint ventures in one major characteristic:
creating the Andean Group, which aimed at economic they involve nonequity arrangements. Strategic
integration through reduced taxes, a common external alliances do not involve the creation of a separate entity
tariff, and investment in the poorer industrial areas of with joint ownership. They are a marriage of conven-
their countries. The Treaty of Asuncion in 1991 among ience between two or more firms that stand to gain
Argentina, Brazil, Paraguay, and Uruguay created the through cooperation with each other for specific rea-
Southern Cone Common Market, or Mercosur (Mercado sons and for a given period of time. Finally, multina-
Comun del Sur). That treaty called for progressive tariff tional enterprises (MNEs) play a dominant role in this
reduction, the adoption of sectoral agreements, a last, relatively high-risk (with corresponding high
common external tariff, and the creation of a common reward) area. Multinational enterprises are firms that
market by 2005. With the apparent success of NAFTA, have a home base in one country, but own and control
formal discussions to establish a Free Trade Area of the plants (factories) or other businesses overseas.
Americas (FTAA), an idea initiated by a 34-nation (all
countries of Latin America excluding Cuba) Summit of LEARNING OBJECTIVE 10
the Americas in 1994, begun during the Clinton Explain the major strategic reasons why multina-
administration. The United States hopes to meet the tional enterprises go abroad.
2005 deadline for the FTAA agreement that would
There are several reasons why MNEs go international,
encompass 800 million people and a $13 trillion
all of which are based on the urge to earn higher profits
regional economy.
by utilizing the MNE’s competitive advantage. Some of
the major reasons why MNEs invest abroad include
LEARNING OBJECTIVE 9
acquiring essential raw materials, maximizing produc-
Define and summarize the various methods of con- tion efficiency, expanding market share, minimizing
ducting business internationally.
compliance cost, and pursuing a politically safe busi-
There are several ways that businesses could partici- ness environment. Two major avenues by which MNEs
pate in and profit from international operations and enter overseas markets are mergers and acquisitions of
much will depend on the amount of risk that entrepre- existing operations, and the establishment of new sub-
neurs are willing to take. The approaches to going sidiaries.

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