Chapter 3 Exploring Global Business. Copyright © Cengage Learning. All rights reserved. Chapter 3 | Slide 2 Learning Objectives 1.Explain the economic

Chapter 3

Exploring Global Business

Copyright © Cengage Learning. All rights reserved. Chapter 3 | Slide 2

Learning Objectives

1. Explain the economic basis for international business.

2. Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results.

3. Outline the extent of international trade and identify the organizations working to foster it.

4. Define the methods by which a firm can organize for and enter into international markets.

5. Describe the various sources of export assistance.

6. Identify the institutions that help firms and nations finance international business.


International Business

…all business activities that involve exchanges across national boundaries.


Absolute Advantage

…the ability to produce a specific product more efficiently than any other nation.


Comparative Advantage

…the ability to produce a specific product more efficiently than any other product.


Exporting

…selling and shipping raw materials or products to other nations.


Importing

…purchasing raw materials orproducts in other nations and

bringing them into one’s own country.


Why This Chapter Matters

Free trade—are you for or against it? Most economists support free-trade policies, but public support can be lukewarm, and certain groupsare adamantlyopposed, allegingthat “trade harmslarge segmentsof U.S. workers,”“degrades theenvironment,” and“exploits poorcountries.”


Exporting and Importing

U.S. Imports

U.S. Exports

Excess Excess CornCorn

Excess Excess WineWine


Figure 3.1: The Top Ten Merchandise Exporting States

Source: http://www.ita.doc.gov/td/industry/otea/state/2005_year_end_dollar_value_05.html, accessed May 2, 2009.


Figure 3.2: U.S. International Trade in Goods and Services

Source: U.S. Department of commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/action.cfm, accessed April 16, 2009.


Balance of Trade

…the total value of a nation’s exports minus the total value of its imports over

some period of time.

Imports > Exports = (-) Balance of Trade

Exports > Imports = (+) Balance of Trade


Trade Deficit

…negative balance of trade.

Spotlight

Source: U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov/international/index.htm#bop, accessed May 1, 2009.


Balance of Payments

…the total flow of money into a country minus the total flow of money out of that

country over some period of time.

Includes

• Imports and exports• Investments• Money spent by foreign tourists• Payments by foreign governments• Aid to foreign governments• All other receipts and payments


Trade Restrictions ─ Tariff

Import dutytax levied on a particular foreign product entering a country

Revenueimposed solely to generate income

Protectiveimposed to protect domestic industry from competition


Trade Restrictions ─ Dumping

…exportation of large quantities of a product at a price lower than that of the

same product in the home market.


Trade Restrictions ─ Nontariff

…a nontax measure imposedby a government to favor domestic

over foreign suppliers.

Import Quota Embargo Foreign-Exchange Control Currency Devaluation


Reasons for Trade Restrictions

Equalize nation’s balance of payments

Protect new/weak industries

Protect national security

Protect health of citizens

Retaliate for another nation’s trade restrictions

Protect domestic jobs


Reasons Against Trade Restrictions

Higher prices for consumers

Restriction of consumers’ choices

Misallocation of international resources

Loss of jobs


World Economic Outlook for Trade

Canada and Western Europe

Mexico and South America

Japan

Developing Asia

Central/Eastern Europe and Russia


Exports and U.S. Economy

Opportunity for all countries

Exports more important to U.S. economy

Canada and Mexico best export partners

Canada and China best import partners


Figure 3.3: U.S. Goods Export and Import Shares in 2008

Source: Federal Reserve Bank of St. Louis, National Economic Trends, May 2009, p. 18, http://research.stlouisfed.org/publications/net/page18.pdf , accessed May 1, 2009.


Source: International Monetary Fund: World Economic Outlook by International Monetary Fund. Copyright 2009 by International Monetary Fund. Reproduced with permission of International Monetary Fund via Copyright Clearance Center.

Table 3.1: Global Growth Remains Sluggish

Growth has been led by developing countries and emerging markets.


Source: U.S. Department of Commerce, International Trade Administration, http://www.stumbleupon.com/s/#4Y3NJR/ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf/topic:UK , accessed May 1, 2009.

Table 3.2: Value of U.S. Merchandise Exports and Imports, 2008


General Agreement onTariffs and Trade (GATT)

…an international organization of 132 nations dedicated to reducing or eliminating

tariffs and other barriers to world trade.


GATT-Sponsored Negotiations

Kennedy Round (1964–1967)

Tokyo Round (1973–1979)

Uruguay Round (1986–1993)

Doha Round (2001+)


World Trade Organization

…powerful successor to GATT that incorporates trade in goods, services, and

ideas.

Membership Obliges 149 members to observe GATT Has judicial powers to mediate among members

disputing new rules Has more binding authority than GATT


Economic Community

…an organization of nations formed to promote the free movement of resources and products among its members and to create

common economic policies.


InternationalEconomic Communities

European Union

European Economic Area North American Free Trade Agreement

(NAFTA)

Central American Free Trade Agreement (CAFTA)

Association of Southeast Asian Nations(ASEAN)

Commonwealth of Independent States (CIS)

(cont.)


InternationalEconomic Communities (cont.)

Caribbean Basin Initiative (CBI)

Common Market of the Southern Cone (Mercosur)

Organization of Petroleum Exporting Countries (OPEC)

Economic Community of West African States (ECOWAS)

Organization of Economic Cooperation and Development (OECD)


Figure 3.4: The Evolving European Union

Source: http://europa.eu/abc/european_countries/index_en.htm, accessed May 2, 2009.


Methods of Entering International Business


Licensing

…a contractual agreement in which one firm permits another to produce and market its

product and use its brand name in return for a royalty or other compensation.


Exporting

Manufacture products in home country and export them to foreign markets

Relative low risk Export-import merchant Documents

• Letter of credit• Bill of lading• Draft


Joint Ventures

…a partnership formed to achievea specific goal or to operate for a

specific period of time.


Totally Owned Facilities

…a firm’s own production and marketing facilities, developed in one or more foreign nations as a

direct investment.


Forms of Direct Investment

$ Builds/purchases manufacturing and other facilities in the foreign country, produces/markets own established products in foreign/neighboring countries

$ Purchases existing firm in foreign country under arrangement allowing it to operate independently of parent company


Strategic Alliance

…a partnership formed to create competitiveadvantage on a worldwide basis.


Trading Company

…a company that provides a link between buyers and sellers in different countries and is not involved in manufacturing or owning

assets related to manufacturing.


Countertrade

…an international barter transaction in which goods and services are exchanged

for different goods and services.


Multinational Enterprise

…a firm that operates on a worldwide scale without ties to any specific nation or region,

representing the highest level of involvement in international business.


Value of U.S. Merchandise Exports and Imports, 2008

Source: U.S. Department of Commerce, International Trade Administration, http://www.ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf, accessed May 1, 2009.


Ten Largest Foreign and U.S. Multinational Corporations

Source: Fortune Global 500, July 1, 2008, p. 165. Copyright © 2006 Time, Inc., www.fortune.com . All rights reserved.


1. Identify exportable products.

2. Identify key foreign markets for the products.

3. Analyze how to sell in each priority market (methods will be affected by product characteristics and unique features of country/ market).

4. Set export prices and payment terms, methods, and techniques.

5. Estimate resource requirements and returns.

6. Establish overseas distribution network.

Steps in Entering International Markets


Sources of Export Assistance

International Trade Administration

U.S. and Foreign Commerical Services (US&FCS)

Advocacy Center

TRADESTATS

Selected SBA Market Research–Related General Resources

National Trade Data Bank


Export-Import Bankof the United States

…an independent agency of the U.S. government whose function it is to assist in

financing the exports of American firms.


Multilateral Development Bank

…an internationally supported bank that provides loans to developing countries

to help them grow.


Multilateral Development Banks

World Bank

Inter-American Development Bank (IDB)

Asian Development Bank (ADB)

African Development Bank (AFDB)

European Bank for Reconstruction and Development (EBRD)


International Monetary Fund (IMF)

…an international bank with 184 member nations that makes short-term loans to

developing countries experiencing balance-of-payments deficits.


U.S. Export Assistance Centers (USEACs)www.sba.gov/oit/export/useac.html

International Trade Administration (ITA)www.ita.doc.gov/

U.S. and Foreign Commercial Services (US&FCS)www.export.gov/

Advocacy Centerwww.ita.doc.gov/advocacy

(cont.)

Sources of Export Assistance


Trade Information Center (TIC)ita.doc.gov/td/tic

STAT-USA/Internetwww.stat-usa.gov

Small Business Administrationwww.sba.gov/oit

National Trade Data Bank (NTDB)www.stat-usa.gov/tradtest.nsf

Sources of Export Assistance (cont.)


1. A developing country found that to meet its needs the previous year, it had imported far more goods than it exported. This country experienced a(n)

a) unfavorable balance of payments.b) favorable balance of payments.c) favorable balance of trade.d) unfavorable balance of trade.e) unfavorable supply of goods.

Chapter Quiz


2. Due to political differences with North Korea, the U.S. government has stopped trading with North Korea. This practice is an example of imposing a(n)

a) import duty.b) import cut.c) export control.d) trade embargo.e) export duty.

Chapter Quiz (cont.)


3. When the United States wants to reduce the cost of its goods in foreign nations, it

a) revalues its currency.b) devalues its currency.c) pays off its trade deficit.d) borrows from the Eximbank.e) sells more goods abroad.



4. A forum for the discussion of trade problems and a reduction of trade barriers is provided by

a) the General Agreement on Tariffs and Trade (GATT) or the World Trade Organization (WTO).

b) a free trade zone.c) the World Bank.d) the Eximbank.e) All of these answers are correct.



5. XYZ Company is seeking a partner in China to manufacture its products. XYZ wants to team up with an established Chinese firm that will provide immediate market knowledge and access, reduced risk, and control over product attributes. The best choice for XYZ Company is

a) licensing.b) a bilateral agreement.c) a joint venture.d) an export-import merchant agreement.e) an export-import agent agreement.
