International Business class no 2

8/7/2019 International Business class no 2

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International business consists of

transactions that are devised and carried outacross national borders to satisfy the

objectives of individuals, companies, and

organizations.

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` IB Is the study of transactions taking place acrossnational borders for the purpose of satisfying theneeds of individuals and organizations.

` These economic transactions consist of trade, asin case of

` exporting and importing

` Foreign direct investment


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Export-import trade

Foreign directinvestment

Licensing

Franchising

Management contracts


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` How will an idea, good, or service fitinto the international market?

` Should trade or investment be used to

enter a foreign market?` Should supplies be obtained

domestically or abroad?

` What product adjustments are

necessary to be responsive to localconditions?

` What are the threats from globalcompetitors, and how can these threatsbe counteracted?

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` Exports are goods and services produced by a firm inone country and then sent to another country, for eg.Chinese companies produce textile products andexport them to US.

` Imports are goods and services produces in one

country and bought in by another country.` Goods = cloths , oil , cars

` Services= international airlines , reservation system,hotels,

`

One of the major US export is its entertainment andpop culture such as movies and television.

` In 2000 the worlds largest importers and exporterswere the US, Germany , Japan , UK and France


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` FDI is equity funds invested in other nations. The FDIis undertaken by MNEs who exercise control of theirforeign affiliates.

` Like imports exports FDI is the driver of IB and manycompanies use FDI to establish foot holds in the worldmarket place by setting up operations in foreignmarkets or by acquiring businesses there.

` Industrialized countries have invested very largeamounts of money in other industrialized nations aswell as smaller amounts in less developed countries,such as those in eastern Europe or newly

industrialized countries such as Koreas andSingapore. how ever most of the worlds FDI isinvested both by and with in three major groups . TheUS ,Western Europe and Japan.


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` Multinationals enterprises are companies havingheadquarters in one country but having operations in othercountries.

` Approx 80 % of all FDI is made by the 500 largest firms inthe world.

Exxon (US)Wal-Mart (US)Ford motors (US)Daimler Chrysler(Germany)Royal Dutch/Shell Group (B)General Electric (US)Mitsubishi JapanCitigroup US etc. etc.


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` More and more firms around the world are

going global, including:

Manufacturing firms Service companies (i.e. banks, insurance, consulting

firms)

Art, film, and music companies

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` International business: causes the flow of ideas, services, and

capital across the world

offers consumers new choices permits the acquisition of a wider

variety of products facilitates the mobility of labor,

capital, and technology provides challenging employment

opportunities reallocates resources, makes

preferential choices, and shiftsactivities to a global level

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` Globalization refers to more integrated and interdependent world economy,

` Globalization of Markets

` Globalization of Production.


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` International business has created a networkofglobal links that bind countries,

institutions, and individuals with trade,financial markets, technology, and livingstandards. For example, a reduction in coffee production in

Brazil would affect individuals and economiesworldwide.

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` Because ofglobalization, for the first time inhistory, the availability of international products

and services can be accessed by individuals inmany countries, from diverse economicbackgrounds.

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` The Globalization of markets refers to the mergingof historically distinct and separate nationalmarkets into one huge global market place.

` Consumer products such as Coca Cola, Sony,MacDonald's, these firms are not only thebenefactors but also the facilitators ofGlobalization.

`

By offering the same basic product worldwide,they help to create a global market.


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` The most global markets currently are not markets

for consumer products where national differencesin tastes and preferences are still often importantenough to act as a brake on Globalization.

` But markets for industrial goods and materials that

serve a universal need the world over, theseincludes the markets of commodities such asaluminum, Oil, wheat, the markets of industrialproducts such as microprocessors, DRAMs, comp

memory chips, commercial jet aircrafts,


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` The rivalry of Coca cola with PepsiCo is Global

` Ford and Toyota

` Boeing and Airbus

` One firm moves to the nation that is not currentlyserved by rivals , the rivals follows to prevent theircompetitor from gaining advantage.


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` The globalization of production refers to thesourcing of goods and services from locationsaround the globe to take advantage of nationaldifferences in the cost and quality of factors of

production (labor, energy, land and capital).` Boeing : Outsourcing so much production to

foreign suppliers ,these suppliers are the best inthe world at their particular activity.

` A global web of suppliers leads to a final betterproduct.


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Free trade means trade without barriers.Barriers are tariffs, non tariff barriers like quotas, technical,Administrative barriers and dumping.

Tariff: it is a tax on imports of the country by thegovernment. Tariff is historically the most important barrier totrade in the world.

Excise Tax or Duty: A tax (sometimes called duty) imposedon the production or sale of certain goods, normally luxuryitems or products such as alcohol and cigarettes whoseconsumption is discouraged by the government. Excise tax

or duty is not a tariff because it is a tax locally producedluxury products and alcohol and cigarettes.


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Custom duty: A customs duty is a tariff or tax onthe import of or export of goods. In England,

customs duties were traditionally part of thecustomary revenue of the king, and therefore didnot need parliamentary consent to be levied.Customs: Is an authority or agency in a country

responsible for collecting and safeguardingcustoms duties and for controlling the flow ofgoods including animals, hazardous items inand out of a country. Depending on locallegislation and regulations, the import or exportof some goods may be restricted or forbidden,and the customs agency enforces these rules.


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` The following are the non tariff barriers

1: Import Quotas2: Voluntary export restraints (VERs)3: Technical and administrative barriers4: dumping1: Import quota: import quota is a non-tariff barrier which

is also known as quantitative barrier. It is a directquantitative restriction on the amount of a commodityallowed to be imported or exported.

2: Voluntary export restraints (VERs): one of the mostimportant of the nontariff trade barriers, or NTBs, isvoluntary export restraints (VERs). These refer to thecase where an importing country induces another nationto reduce its exports of a commodity voluntary, underthe threat of higher all-round trade restrictions, whenthese exports threatens an entire domestic industry.


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3: Technical barriers: are the safety regulationsfor automobiles and electrical equipments.

Similarly administrative barriers are healthregulations for hygienic production andpackaging of imported food products andlabeling requirement, environmental regulations,

child labor are the different barriers to trade.4: Dumping: trade barriers may also result from

dumping. Dumping is the export of a commodityat below cost or at least the sale of a product ata lower price abroad than domestically.


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Protectionism` Protectionism is the economic policy of restraining

trade between states through methods such as tariffs onimported goods, restrictive quotas, and a variety of othergovernment regulations designed to discourage importsand prevent foreign take-over of domestic markets andcompanies.

` This policy contrasts with free trade, where governmentbarriers to trade and movement of capital are kept to aminimum. In recent years, it has become closely alignedwith anti-globalization. The term is mostly used in thecontext ofeconomics, where protectionism refers topolicies or doctrines which protect businesses and workers

within a country by restricting or regulating trade withforeign nations.


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` Economic integration means the commercial

policy of discriminatively reducing or eliminatingtrade barriers only among the nations joiningtogether. There different degrees in economicintegration like Preferential trade agreement, A

free trade area, A custom union, A commonmarket, An economic union.` All these various degrees lead to free trade and

resulting in common benefit among the membernations.


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Prefrential trade agreement: PTA provide lowerbarriers on trade among member nations than on

trade with non member nations. This is the loosestform of economics integration. Britishcommonwealth Preference Scheme established in1932 by UK with former British empire countries.

A free trade area:A free trade area is the form ofeconomics integration where in all barriers areremoved on trade among members, but each nationretain its own barriers to trade with nonmembers.For example EFTA formed in 1960 by UK, Austria,

Denmark, Norway, Portugal, Sweden andSwitzerland, NAFTA formed in 1993 by US, Mexicoand Canada.


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A custom union: In this form of integration there isno tariff or other barriers on trade among

members but in addition it harmonize tradepolicies towards the rest of the world. For exampleEuropean union orEuropean common marketformed in 1957.

Common market:A common market goes beyondcustom union by also allowing the free movementof labor and capital among member nation. TheEU achieved the status of a common market at

the beginning of 1993. The European Union is composed of 27 sovereignMember States:Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland,France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands,Poland, Portugal, Republic of Ireland, Romania, Slovakia, Slovenia, Spain, Sweden, and the UnitedKingdom.[


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An Economic Union: this is the most advance type ofeconomic integration in which member countries make auniform fiscal and monetary policy. For example Beneluxwhich is the economic union of Belgium, Netherlands andLuxembourg.

` fiscal policy is the use of government expenditure and revenue collection toinfluence the economy.[1]

` Fiscal policy can be contrasted with the other main type ofmacroeconomic

policy, monetary policy, which attempts to stabilize the economy by controllinginterest rates and the money supply

Trade creation: when a country import a product fromanther country at lower cost which it can produce withmaximum cost is known as creation. Trade creation leads

greater welfare of both nations.Trade Diversion: when a country switch its imports from a

nonmember country producing at low cost to a membercountry producing at higher cost is known as tradediversion.


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International Business: Strategy,Management, and the New Realities 26

` Governments intervene in trade and investmentto achieve political, social, or economicobjectives.

` Barriers benefit specific interest groups, such as

domestic firms, industries, and labor unions.` Jobs are created by protecting industries from

foreign competition.` Government intervention alters the competitive

landscape- by hindering or helping the ability ofits firms to compete internationally

` Government intervention is an importantdimension ofcountry risk .


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` Protectionism refers to national economic policiesdesigned to restrict free trade and protect domesticindustries from foreign competition.

` Government intervention arises typically in the form oftariffs (duty), nontariff trade barriers (e.g. quota),and

investment barriers (target FDI).` Tariffis a tax imposed on imports, effectively increasing

the cost to the buyer.` A nontariff trade barrierrefers to a government policy,

regulation, or procedure that impedes trade.

` Quota is a quantitative restriction placed on imports of aspecific product over a specified period of time.


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`Customs refer to checkpoints atports of entry in a country wheregovernment officials inspect importedproducts and levy tariffs.

Governments impose trade andinvestment barriers to achievepolitical, social, or economicobjectives


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U.S. tariffs on imported steel:` 2000s- The Bush administration imposed tariffs on the

import of foreign steel into the U.S. because competitionfrom foreign steel manufacturers had bankrupted several

U.S. steel firms, and this was to give the U.S. steelindustry time to restructure and revive itself.

` Higher material costs made these firms less competitive-increased the production costs for firms that use steel,such as Ford, Whirlpool, and General Electric- and

reduced prospects for selling their products in worldmarkets.` The steel tariffs were removed within two years.


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Japanese voluntary export restraints:` 1980s- The number of Japanese vehicle imports

were voluntarily controlled by Japan to helpinsulate the U.S. auto industry.

` In this protected environment, Detroitautomakers had less of an incentive to improvequality, design, and overall product appeal.

` Thus, government intervention motivated by

protectionism has weakened Detroits ability tocompete in the global auto industry.


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` Protectionist policies may lead to price inflation-when supply is restricted, domestic pricesincrease.

` By restricting variety, tariffs may also reduce the

choices available to buyers.` In a complex world, there are adverse unintended

consequences- thus due diligence- carefulplanning and implementation- is paramount when

considering government intervention.


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1. Tariffs and other forms of intervention cangenerate a substantial amount of revenue.

2. Intervention can ensure the safety, security,

and welfare of citizens.3. Intervention can help a government pursue

broad-based economic, political, or socialobjectives.

4. Intervention can help better serve theinterests of the nations firms and industries.


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` Trade dispute - the U.S. government imposed a $50per ton duty on the import of Mexican cement afterU.S. cement makers lobbied the U.S. Congress.

` Mexican imports can reach 10 percent of U.S.

domestic cement consumption.` The U.S. is one of the worlds largest cement

consumers and, suffers from shortages, which areirritated by import restrictions.

`

Mexico proposed substituting import quotas insteadof the high cement import tariffs.


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` Defensive: barriers safeguard industries,workers, special interest groups, protectinfant industries and to promote national

security (export controls).` Offensive :barriers pursue a strategic or

public policy objective, such as

increasing employment or generatingtaxes.


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` Proponents argue that firms in advanced economiescannot compete with those in developing countries thatemploy low-cost labor, thus governments should imposetrade barriers to block imports.

` Critics counter that protectionism is at odds with the

theory of comparative advantage, which argues formoreinternational trade, not less- trade barriers interfere withcountry-specific specialization of labor, which in turndelivers superior living standards.

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Blocking imports reduces the availability and increasesthe cost of products sold in the home market.


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` Emerging industry firms may lack experience,technological expertise and economies of scale.

` An infant industry may need protection from foreigncompetitors, e.g. temporary trade barriers onforeign imports.

` Infant industry protection has allowed somecountries to develop modern industrial sectors.

Drawbacks:` Difficult to remove - tend to persist indefinitely.

` Tend to remain dependent on governmentprotection.` Industry inefficiencies result in higher prices.


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Countries impose trade restrictions on productsviewed as critical to national defense and security,such as military technology and computers.

` Trade barriers can help retain domestic productionin security-related products- computers, weaponry,

and certain transportation equipment.` Export controls- governments manage orprevent the export of certain products or trade withspecific countries; e.g. many countries do notallow the export of plutonium to North Korea

because it can be used to make nuclear weapons.


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Governments seek to protect certain occupations,industries, and public assets central to national culture:

` Switzerland imposed trade barriers to preserve its long-established tradition in watch making.

` Japanese restrict the import of rice because it is central

to the nations diet and food culture.` U.S. opposed Japanese investors purchase of the

Pebble Beach golf course in California, New YorksRockefeller Center, and the Seattle Mariners baseballteam, all considered to be part of the national heritage.

` France does not allow significant foreign ownership of itsTV stations because of concerns that foreign influenceswill taint French culture.


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` Intervention encourages the development ofindustries that bolster the nations economy.

` Countries with many high-value-adding industries such as IT, pharma, automotive, or financialservices create better jobs and higher taxrevenues. Examples:

` Germany, Japan, Norway, South Koreadevisepolicies that promote the development of relativelydesirable industries.

` Deciding which industries to support is challenging;it is difficult to predict which industries will producecomparative advantages. May result in continuoussubsidization of underperforming industries.


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` Import barriers may be imposed to protectemployment in designated industries.

` By insulating domestic firms from foreigncompetition, national output is stimulated,leading to more jobs in the protected industries.

` Most effective- import-intensive industries thatemploy much labor to produce normallyimported products.

Example-A joint venture between ShanghaiAutomotive Industry Corporation (SAIC) andVolkswagen created jobs in China.


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` Primary types are tariffs and nontariff tradebarriers.

` Nontariff trade barriers such as quotas, local contentrequirements, and bureaucratic procedures, can be

more of a challenge for firms as they may beapplied is it discretionary form of market protection.

` The United Nations estimates that trade barriersalone cost developing countries over $100 billion inlost trading opportunities with developed countriesevery year.


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3. Take advantage of foreign trade zones.FTZs (orfree ports) create jobs and stimulate local economicdevelopment. FTZs are areas where imports receivepreferential tariff treatment.

Example-A successful experiment with FTZs has been

the maquiladorasexport-assembly plants in northernMexico. They produce components typically destined forthe U.S. Maquiladoras enable firms from the U.S., Asia,and Europe to tap low-cost labor, favorable taxes andduties, and government incentives, while serving the U.S.market.

4. Seek favorable customs classifications for exported products.Reduce exposure to trade barriers by appropriatelyclassifying products according to the harmonized productcode.


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5. Take advantage of investment incentives and othergovernment support programs. Government assistance in theform of subsidies and incentives helps reduce the impact ofprotectionism.

6. Lobby for freer trade and investment. Increasingly, nations

are liberalizing markets in order to create jobs and increasetax revenues: Mid-2000s -the Doha round of WTO negotiations sought to

make trade more equitable for developing countries. To increase the effectiveness of their lobbying efforts,

foreign firms may hire former government officials. In the long run, firms should take a seat with public-sector

decision makers who negotiate interventionist activities withforeign governments.

Documents

International Business class no 2