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INTERNATIONAL BUSINESS

ENVIRONMENT

TOPIC 1

International Business: Overview and

Macroeconomic Issues

Today's topics

1. International business: an introduction

2. Accounting for international business transactions: the balance of payments

3. International business and national income accounts

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International business: an academic field

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International economics is about how nations interact through trade of goods and services, through flows of

money and through investment.

International finance focuses on financial or monetary

transactions across nations

International business/trade focuses on transactions of goods

and services across nations

International business operations

Any business transaction crossing national borders at any stage of the transaction

Foreign direct investment

International trade

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Collaborative modes Alliances, licensing, franchising

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International business environment (1)

BUSINESS ORGANISATION

General / contextual / macro environment

Economic, legal, political, technological, cultural, …

Immediate / operational / micro environment

Suppliers, competitors, labour market, financial

institutions, …

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International business environment (2)

International environment

Foreign (host country) environment

Domestic (home country) environment

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International business, an old phenomenon (1)

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International business, an old phenomenon (2)

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http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/tradeflows14001800.html

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Current trends in international trade (WTO, World Bank data)

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http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/worldexports.html

International trade drivers

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Reduced transport, communication and organisation costs

Distance is less important

Technology drivers

Technological change in information-processing,

transport and telecommunications

Policy drivers

Declining barriers to the free flow of goods, services and

capital

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Declining obstacles to exchange: tariffs (CW Hill)

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Average Tariff Rates on Manufactured Products as % of Value

Main trading blocs (goods – 2009)

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Top 12 global exporters / importers (2009, WTO data)

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http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/leadingtraders.html

Current trends in international trade (2)

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Source: World Trade Organization

World trade in 2005

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Firm A

in country 1

Firm A

in country 2

Current trends in international trade (3)

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Within corporations (33%)

Firm A

in country 1

Firm B

in country 2 Between nations / corporations (66%)

Trends in foreign direct investment

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0

500000

1000000

1500000

2000000

2500000

OECD FDI flows (USD Mn, OECD sources)

Inflows, OECD total Outflows, OECD total

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Top 10 global FDI recipients (2007-2011)

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Recording transactions: the balance of payments

Current account

Trade in goods

Trade in services

Net investment

income

Unilateral transfers (gifts,

remittances)

Capital account

Capital transfers

Purchase of non-financial

assets (patents)

Financial account

Net foreign direct

investment

Short-term Portfolio

investment (in-out)

Long-term portfolio

investment (in-out)

Reserve assets

Gold

Convertible currencies

Special drawing

rights (SDRs)

Reserve position at

the IMF

Errors and omissions

Flight capital, illegal

activities, ...

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Current account + capital account + financial account + reserve assets + E&O = 0

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The US balance of payments in 2009-2010

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Examples of current account balances (USD, CIA data, 2011)

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-700

-600

-500

-400

-300

-200

-100

0

100

200

300

400

Ch

ina

Sa

ud

i A

rab

ia

Ge

rman

y

Jap

an

Russia

Sw

itze

rlan

d

Qa

tar

Neth

erl

an

ds

Norw

ay

Ku

wait

Au

str

alia

Ca

nad

a

Sp

ain

India

Bra

zil

Unite

d K

ing

do

m

Tu

rke

y

Fra

nce

Italy

Unite

d S

tate

s

Bn USD

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National income accounts: definitions

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Gross domestic product (GDP)

Value of all goods and services that are produced within a country in a given time period.

Gross national product (GNP)

Value of all final goods and services produced by a nation’s factors of production in a given time period.

GNP = GDP + (payments from foreign countries for factors of production – payments to foreign countries for factors of

production) (± net investment income)

National income accounts and international trade (1)

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Y = Cd + Id + Gd + EX

Y = (C – Cf) + (I – If) + (G – Gf) + EX

Y = C + I + G + EX – (Cf + If + Gf)

Y = C + I + G + (EX – IM)

Y = C + I + G + TB

C: Household consumption G: Government spending I: Business investment EX: Exports IM: Imports

Expenditure on domestic production

GDP

Expenditure by domestic

individuals and institutions

Trade balance: net

expenditure by foreign

individuals and institutions

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The gross domestic / national product concepts

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GDP = C + I + G + X – M

GNP = C + I + G + X – M + net investment income

Trade balance (TB)

Current account balance (CA)

National income accounts and international trade (2)

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Y = C + I + G + TB TB = Y – C – G – I

TB = (Y – (C+G)) – I

TB = S – I or I = S – TB or S = I + TB

C: Household consumption G: Government spending I: Business investment EX: Exports S: Savings IM: Imports

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National income accounts and international trade (3)

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Y = C + I + G + TB TB = Y – C – G – I + T – T

TB = Y – (C + T) – (G – T) – I

S = (Y – C – T) + (T- G) S = Sp + Sg

(private + government savings)

TB = Sp + Sg - I

C: Household consumption G: Government spending I: Business investment EX: Exports S: Savings IM: Imports T: Taxes

An application (OECD data)

Y C G I X M

Country A 2,570 1,475 501 459 ? ?

Country B 1,932 1,124 479 374 ? ?

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Bn €, 2010, current prices

TB C/Y G/Y S/Y I/Y

Country A

Country B

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An application: debriefing

Y C G I X M

Country A 2,570 1,475 501 459 1,288 1,155

Country B 1,932 1,124 479 374 492 537

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Bn €, 2010, current prices

TB C/Y G/Y S/Y I/Y X+M/2Y

Country A +133 0.57 0.19 0.20 0.18 0.48

Country B -45 0.58 0.25 0.14 0.19 0.26

The French-German comparison (Eurostat data)

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Trade balance in million ECU/EURO

Germany

France