Chapter 2 Global Business. International International Trade International Trade balances, GATT, WTO balances, GATT, WTO International Business International

Chapter 2Chapter 2

Global BusinessGlobal Business

InternationalInternational

International Trade International Trade balances, GATT, WTObalances, GATT, WTO

International BusinessInternational Business International MarketingInternational Marketing International FinanceInternational Finance

Exchange rate, capital movementsExchange rate, capital movements International investment, FDI, MNCsInternational investment, FDI, MNCs

The Basis for The Basis for International BusinessInternational Business

International businessInternational business All business activities that involve exchanges across All business activities that involve exchanges across

national boundariesnational boundaries Some countries are better equipped than Some countries are better equipped than

others to produce particular goods or servicesothers to produce particular goods or services Absolute advantageAbsolute advantage

The ability to produce a specific product more efficiently The ability to produce a specific product more efficiently than any other than any other nationnation

Comparative advantageComparative advantage The ability to produce a specific product more efficiently The ability to produce a specific product more efficiently

than any other than any other productproduct Goods and services are produced more Goods and services are produced more

efficiently when each country specializes in the efficiently when each country specializes in the products for which it has a comparative products for which it has a comparative advantageadvantage

The Basis for The Basis for International Business International Business

(cont’d)(cont’d) Countries trade when they each have Countries trade when they each have

a surplus of the product they a surplus of the product they specialize in and want a product the specialize in and want a product the other country specializes inother country specializes in

ExportingExporting Selling and shipping raw materials or Selling and shipping raw materials or

products to other nationsproducts to other nations ImportingImporting

Purchasing raw materials or products Purchasing raw materials or products in other nations and bringing them in other nations and bringing them into one’s own countryinto one’s own country

Top Ten Merchandise-Top Ten Merchandise-Exporting StatesExporting States

Source: http://www.ita.doc.gov/td/industry/otea/state/2005_year_end_dollar_value_05.html

, accessed September 15, 2008.

The Basis for The Basis for International Business International Business

(cont’d)(cont’d) Balance of tradeBalance of trade

The total value of a nation’s exports The total value of a nation’s exports minus the total value of its imports over minus the total value of its imports over some period of timesome period of time

Trade deficitTrade deficit A negative (unfavorable) balance of tradeA negative (unfavorable) balance of trade

—imports exceed exports in value—imports exceed exports in value Balance of paymentsBalance of payments

The total flow of money into a country The total flow of money into a country minus the total flow of money out of that minus the total flow of money out of that country over a period of timecountry over a period of time

U.S. International Trade in U.S. International Trade in GoodsGoods

Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=78260&table_id=1&area_id=3, accessed September 1

8, 2008.

Restrictions to Restrictions to International BusinessInternational Business

The reasons for restricting trade range The reasons for restricting trade range from internal political and economic from internal political and economic pressures to mistrust of other nations.pressures to mistrust of other nations.

Nations are generally eager to export Nations are generally eager to export their products to provide markets for their products to provide markets for their industries and develop a their industries and develop a favorable balance of trade.favorable balance of trade.

Most trade restrictions are applied to Most trade restrictions are applied to imports from other nations.imports from other nations.

Types of Trade Types of Trade RestrictionsRestrictions

Import duty (tariff)Import duty (tariff) A tax levied on a particular foreign A tax levied on a particular foreign

product entering a countryproduct entering a country Revenue tariffsRevenue tariffs are imposed to generate income are imposed to generate income

for the governmentfor the government Protective tariffsProtective tariffs are imposed to protect a are imposed to protect a

domestic industry by keeping the prices of domestic industry by keeping the prices of imports at or above the price of domestic imports at or above the price of domestic productsproducts

DumpingDumping The exportation of large quantities of a The exportation of large quantities of a

product at a price lower than that of the product at a price lower than that of the same product in the home marketsame product in the home market

Types of Trade Types of Trade Restrictions Restrictions (cont’d)(cont’d) Nontariff barriersNontariff barriers

Non-tax measures imposed by a Non-tax measures imposed by a government to favor domestic over government to favor domestic over foreign suppliersforeign suppliers Import quotaImport quota——a limit on the amount of a a limit on the amount of a

particular good that may be imported particular good that may be imported during a given timeduring a given time

Embargo—Embargo—a complete halt to trading a complete halt to trading with a particular nation or in a with a particular nation or in a particular productparticular product

Foreign exchange control—Foreign exchange control—restriction on restriction on amount of foreign currency that can be amount of foreign currency that can be purchased or soldpurchased or sold

Types of Trade Types of Trade Restrictions Restrictions (cont’d)(cont’d)

Nontariff barriers (cont’d)Nontariff barriers (cont’d) Currency devaluation—Currency devaluation—the reduction of the reduction of

the value of a nation’s currency relative the value of a nation’s currency relative to the currencies of other nationsto the currencies of other nations

Bureaucratic red tape—Bureaucratic red tape—a subtle form of a subtle form of trade restriction that imposes trade restriction that imposes unnecessarily burdensome and complex unnecessarily burdensome and complex standards and requirements for standards and requirements for imported goodsimported goods

Cultural attitudes—Cultural attitudes—can impede can impede acceptance of products in foreign acceptance of products in foreign countriescountries

U.S. Trade Restrictions / U.S. Trade Restrictions / SanctionsSanctions

1)1) BalkansBalkans2)2) BelarusBelarus3)3) BurmaBurma4)4) Ivory CoastIvory Coast5)5) CubaCuba6)6) CongoCongo7)7) IranIran

8)8) IraqIraq9)9) LiberiaLiberia10)10)North KoreaNorth Korea11)11)SudanSudan12)12)SyriaSyria13)13)ZimbabweZimbabwe

For more information go to: http://www.treas.gov/offices/enforcement/ofac/programs/ maintained by the U.S.

Department of the Treasury

Reasons for and Against Reasons for and Against Trade RestrictionsTrade Restrictions

FORFOR To equalize a nation’s To equalize a nation’s

balance of paymentsbalance of payments To protect new or weak To protect new or weak

industriesindustries To protect national To protect national

securitysecurity To protect the health of To protect the health of

citizenscitizens To retaliate for another To retaliate for another

country’s trade country’s trade restrictionsrestrictions

To protect domestic jobsTo protect domestic jobs

AGAINST AGAINST Higher prices for Higher prices for

consumersconsumers Restriction of Restriction of

consumers’ choicesconsumers’ choices Misallocation of Misallocation of

international international resourcesresources

Loss of jobsLoss of jobs

The Extent of The Extent of International BusinessInternational Business

Although the worldwide recessions of 1991, Although the worldwide recessions of 1991, 2001-2002, and 2008 slowed the rate of 2001-2002, and 2008 slowed the rate of growth, globalization is a reality of our timegrowth, globalization is a reality of our time

In the U.S., international trade accounts for In the U.S., international trade accounts for over ¼ of GDPover ¼ of GDP

Trade barriers are decreasing, more Trade barriers are decreasing, more competitors are entering the global competitors are entering the global marketplace, creating more choices for marketplace, creating more choices for consumers and new job opportunitiesconsumers and new job opportunities

International business will grow with the International business will grow with the expansion of commercial use of the Internetexpansion of commercial use of the Internet

The World Economic The World Economic Outlook for TradeOutlook for Trade

Economic performance among Economic performance among nations is not equal; nations is not equal;

Growth in advanced countries has Growth in advanced countries has slowed, while emerging and slowed, while emerging and developing economies continue to developing economies continue to grow rapidly; grow rapidly;

At the current rate of global At the current rate of global economic growth, world production economic growth, world production of goods and services will double of goods and services will double by 2025.by 2025.

Global Growth Remains Global Growth Remains StrongStrong

Source: International Monetary Fund: World Economic Outlook by International Monetary Fund. Copyright 2008 by International Monetary Fund. Reproduced with permission of International

Monetary Fund via Copyright Clearance Center.

U.S. Goods Export and Import Shares U.S. Goods Export and Import Shares in 2007in 2007

Source: Federal Reserve Bank of St. Louis, National Economic Trends, September 2008, p. 18.

Value of U.S. Merchandise Exports and Value of U.S. Merchandise Exports and Imports, 2007Imports, 2007

Source: U.S. Department of Commerce, International Trade Administration, http://www.census.gov/foreign-trade/statistics/

highlights/top/top0712.html, accessed September 22, 2008.

Ten Largest Foreign and U.S. Ten Largest Foreign and U.S. Multinational CorporationsMultinational Corporations

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

Debate Issue: Should the Debate Issue: Should the United States fear Japan?United States fear Japan?

YESYESThe U.S. continues to carry an The U.S. continues to carry an extremely large trade imbalance extremely large trade imbalance with Japan, while Japanese direct with Japan, while Japanese direct investment in the U.S. economy investment in the U.S. economy continues to escalate. Many feel continues to escalate. Many feel that Japan unfairly restricts U.S. that Japan unfairly restricts U.S. imports and that the U.S. should imports and that the U.S. should retaliate by restricting Japanese retaliate by restricting Japanese imports. American consumers imports. American consumers are becoming increasingly are becoming increasingly dependent on Japanese products. dependent on Japanese products. Japanese firms are also Japanese firms are also increasing capacity, reducing increasing capacity, reducing costs, and developing new costs, and developing new technologies much faster than technologies much faster than their U.S. counterparts. The their U.S. counterparts. The result is a worldwide, consumer result is a worldwide, consumer market that is slowly becoming market that is slowly becoming dominated by the Japanese.dominated by the Japanese.

NONOThe total foreign investment in The total foreign investment in the U.S. economy is currently the U.S. economy is currently less than 4%. In fact, the less than 4%. In fact, the British and Canadians have British and Canadians have more investment in the U.S. more investment in the U.S. than the Japanese. With than the Japanese. With globalization becoming globalization becoming common, trade and foreign common, trade and foreign investment are usual practices investment are usual practices in today’s world. For example, in today’s world. For example, Chrysler now owns 11% of Chrysler now owns 11% of Mitsubishi, while Ford owns Mitsubishi, while Ford owns 24% of Mazda. Foreign 24% of Mazda. Foreign investment is good for the U.S. investment is good for the U.S. because it is being directed at because it is being directed at permanent assets like plants permanent assets like plants and equipment, thus and equipment, thus stimulating industry, providing stimulating industry, providing jobs, and stabilizing the jobs, and stabilizing the economy. economy.

The General Agreement on Tariffs The General Agreement on Tariffs and Trade and the World Trade and Trade and the World Trade

OrganizationOrganization General Agreement on Tariffs and Trade (GATT)General Agreement on Tariffs and Trade (GATT)

International organization of 153 nations dedicated to International organization of 153 nations dedicated to reducing or eliminating tariffs and other trade reducing or eliminating tariffs and other trade barriersbarriers

Most-favored-nation status (MFN)—Each member of Most-favored-nation status (MFN)—Each member of GATT was to be treated equally by all other membersGATT was to be treated equally by all other members

Kennedy Round, Tokyo Round, Uruguay Round, Doha Kennedy Round, Tokyo Round, Uruguay Round, Doha RoundRound

World Trade Organization (WTO)World Trade Organization (WTO) Created in the Uruguay Round of GATT negotiation as Created in the Uruguay Round of GATT negotiation as

a successor to GATTa successor to GATT WTO oversees GATT provisions, has judicial powers to WTO oversees GATT provisions, has judicial powers to

meditate trade disputes arising from GATT rules and meditate trade disputes arising from GATT rules and exerts more binding authority than GATTexerts more binding authority than GATT

International Economic International Economic Organizations Working to Organizations Working to

Foster TradeFoster Trade Economic communityEconomic community

An organization of nations formed An organization of nations formed to promote the free movement of to promote the free movement of resources and products among its resources and products among its members and to create common members and to create common economic policieseconomic policies

The Evolving European The Evolving European UnionUnion

Source: http://europa.eu/abc/european_countries/index_en.htm, accessed November 29, 2008.

International Economic Organizations International Economic Organizations Working to Foster Trade (cont’d)Working to Foster Trade (cont’d)

North American Free Trade Agreement (NAFTA)

United States

Canada

Mexico

Chile is expected

to become the 4th

member


Central American Free Trade Agreement (CAFTA)

El Salvador

Guatemala

Honduras

Nicaragua


Association of Southeast Asian Nations (ASEAN)

Brunei

Myanmar

Cambodia

Indonesia

Laos

Malaysia

Philippines

Singapore

Thailand

Vietnam

International Economic International Economic Organizations Working to Foster Organizations Working to Foster

Trade (cont’d)Trade (cont’d) European Economic Area (EEA)European Economic Area (EEA) Pacific RimPacific Rim Commonwealth of Independent States Commonwealth of Independent States

(CIS)(CIS) Caribbean Basin Initiative (CBI)Caribbean Basin Initiative (CBI) Common Market of the Southern Cone Common Market of the Southern Cone

(MERCOSUR)(MERCOSUR) Organization for Economic Cooperation Organization for Economic Cooperation

and Development (OECD)and Development (OECD)

OPEC NationsOPEC Nations

Organization of Petroleum Exporting Countries(OPEC)

Algeria

Indonesia

Iran

Iraq

Kuwait

Libya

Nigeria

Qatar

Saudi Arabia

United Arab Emirates

Venezuela

Organizing for Organizing for International BusinessInternational Business

Methods of Entering Methods of Entering International BusinessInternational Business

LicensingLicensing A contractual agreement in which one firm A contractual agreement in which one firm

permits another to produce and market its permits another to produce and market its product and use its brand name in return for product and use its brand name in return for a royalty or other compensationa royalty or other compensation

AdvantageAdvantage It allows expansion into foreign markets It allows expansion into foreign markets

with little or no direct investmentwith little or no direct investment DisadvantagesDisadvantages

The product image may be damaged if The product image may be damaged if standards are not upheldstandards are not upheld

The original producer does not gain foreign The original producer does not gain foreign marketing experiencemarketing experience

Methods of Entering Methods of Entering International Business International Business

(cont’d)(cont’d) ExportingExporting

May use an export/import merchant who May use an export/import merchant who assumes the risks of ownership, distribution, assumes the risks of ownership, distribution, and saleand sale

Letter of creditLetter of credit Issued by a bank on request of an importer stating that Issued by a bank on request of an importer stating that

the bank will pay an amount of money to a stated the bank will pay an amount of money to a stated beneficiarybeneficiary

Bill of ladingBill of lading Issued by a transport carrier to an exporter to prove Issued by a transport carrier to an exporter to prove

merchandise has been shippedmerchandise has been shipped DraftDraft

Issued by the exporter’s bank, ordering the importer’s Issued by the exporter’s bank, ordering the importer’s bank to pay for the merchandise, thus guaranteeing bank to pay for the merchandise, thus guaranteeing payment once accepted by the importer’s bankpayment once accepted by the importer’s bank


(cont’d)(cont’d) Exporting Exporting (cont’d)(cont’d)

May use an export/import agent who May use an export/import agent who arranges sale for a commission or arranges sale for a commission or fee; the exporter retains title to fee; the exporter retains title to products until they are soldproducts until they are sold

May establish own sales offices or May establish own sales offices or branches in foreign countriesbranches in foreign countries

Using the InternetUsing the Internet

““Our Mission: To Help U.S. Business Our Mission: To Help U.S. Business Succeed, Globally.” That’s the stated Succeed, Globally.” That’s the stated goal for the International Trade Admingoal for the International Trade Administration of the U.S. Department of Coistration of the U.S. Department of Commerce. The ITA website has links to mmerce. The ITA website has links to statistics, industry analysis, trade laws, statistics, industry analysis, trade laws, and answers to often-asked trade questand answers to often-asked trade questions.ions.

www.www.itaita.doc..doc.govgov


(cont’d)(cont’d) Joint venturesJoint ventures

A partnership formed to achieve a specific A partnership formed to achieve a specific goal or to operate for a specific period of timegoal or to operate for a specific period of time

AdvantagesAdvantages Immediate market knowledge and accessImmediate market knowledge and access Reduced riskReduced risk Control over the product attributesControl over the product attributes

DisadvantagesDisadvantages Complexity of establishing agreements across Complexity of establishing agreements across

national bordersnational borders High level of commitment required of all parties High level of commitment required of all parties

involvedinvolved


(cont’d)(cont’d) Totally owned facilitiesTotally owned facilities

Production and marketing facilities in one Production and marketing facilities in one or more foreign nationsor more foreign nations

AdvantageAdvantage Direct investment provides complete control over Direct investment provides complete control over

operationsoperations DisadvantageDisadvantage

Risk is greater than that of a joint ventureRisk is greater than that of a joint venture Two formsTwo forms

Building new facilities in the foreign countryBuilding new facilities in the foreign country Purchasing an existing firm in the foreign Purchasing an existing firm in the foreign

countrycountry

World’s Top Transnational World’s Top Transnational CorporationsCorporations

General ElectricGeneral Electric British Petroleum Company, PlcBritish Petroleum Company, Plc Toyota Motor CorporationToyota Motor Corporation Royal Dutch/Shell GroupRoyal Dutch/Shell Group ExxonMobil CorporationExxonMobil Corporation Ford Motor CompanyFord Motor Company Vodafone Group, PlcVodafone Group, Plc TotalTotal Electricite De FranceElectricite De France Wal-Mart StoresWal-Mart Stores


(cont’d)(cont’d) Strategic alliancesStrategic alliances

Partnerships formed to create Partnerships formed to create competitive advantage on a worldwide competitive advantage on a worldwide basisbasis

Trading companiesTrading companies Firm that provide a link between buyers Firm that provide a link between buyers

and sellers in different countriesand sellers in different countries Take title to products and perform all Take title to products and perform all

the activities necessary to move the the activities necessary to move the products from one country to anotherproducts from one country to another


(cont’d)(cont’d) CountertradeCountertrade

An international barter transactionAn international barter transaction Avoids restrictions on converting Avoids restrictions on converting

domestic currency to foreign domestic currency to foreign currencycurrency

Multinational enterpriseMultinational enterprise A firm that operates on a worldwide A firm that operates on a worldwide

scale without ties to any specific scale without ties to any specific nation or regionnation or region

Steps in Entering International Markets

Steps in Entering International Steps in Entering International Markets (cont’d)Markets (cont’d)

Steps in Entering Steps in Entering International Markets (cont’d)International Markets (cont’d)

Insert steps 7-9, from Table 3.4 , p. 96

Sources of Export Sources of Export AssistanceAssistance

U.S. Export Assistance Centers (USEACs)U.S. Export Assistance Centers (USEACs) www.www.sbasba..govgov//oitoit/export//export/useacuseac.html.html

International Trade Administration (ITA)International Trade Administration (ITA) www.www.itaita.doc..doc.govgov//

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

Advocacy CenterAdvocacy Center www.www.itaita.doc..doc.govgov/advocacy/advocacy

Sources of Export Sources of Export AssistanceAssistance

Trade Information Center (TIC)Trade Information Center (TIC) itaita.doc..doc.govgov/td/tic/td/tic

STAT-USA/InternetSTAT-USA/Internet www.stat-www.stat-usausa..govgov

Small Business AdministrationSmall Business Administration www.www.sbasba..govgov//oitoit

National Trade Data Bank (NTDB)National Trade Data Bank (NTDB) www.stat-www.stat-usausa..govgov//tradtesttradtest..nsfnsf

Financing International Financing International BusinessBusiness

The Export-Import Bank of the United States (EThe Export-Import Bank of the United States (Eximbank)ximbank) An independent agency of the U.S. government whose funAn independent agency of the U.S. government whose fun

ction it is to assist in financing the exports of American firction it is to assist in financing the exports of American firmsms

Multilateral Development Bank (MDB)Multilateral Development Bank (MDB) An internationally supported bank that provides loans to An internationally supported bank that provides loans to

developing countries to help them growdeveloping countries to help them grow World Bank, Inter-American Development Bank (IDB), AsiaWorld Bank, Inter-American Development Bank (IDB), Asia

n Development Bank (ADB), African Development Bank (AFn Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EDB), European Bank for Reconstruction and Development (EBRD)BRD)

The International Monetary Fund (IMF)The International Monetary Fund (IMF) An international bank with 185 member nations that makAn international bank with 185 member nations that mak

es short-term loans to developing countries experiencing es short-term loans to developing countries experiencing balance-of-payment deficitsbalance-of-payment deficits

Documents

Chapter 2 Global Business. International International Trade International Trade balances, GATT, WTO balances, GATT, WTO International Business International