Introduction Part One.

Introduction Part One

Introduction International Trade Growth International Trade Milestones
Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment Here are some of the topics we’ll be talking about in this chapter.

Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment First is in the area of the growth of international trade

International Trade Growth
Year Exports Imports 1980 364.30 400.40 1985 381.80 399.30 1990 783.20 817.90 1995 2000 2004

International Trade Growth
Year Exports Imports 1980 364.30 400.40 1985 381.80 399.30 1990 783.20 817.90 1995 2000 2004 5

From Wikipedia Commons and http://www.freeworldmaps.net/

Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

International Trade Milestones
The Bretton-Woods Conference (July 1944): created the International Monetary Fund in 1945. --Provided for an international payment system. --Provided for stable currency exchange rates. Bretton-Woods Conference, July 1944, created International Monetary Fund (1945). International payment system Stable currency exchange rates

General Agreement on Tariffs and Trade (GATT), 1949–94 Bretton-Woods Conference, July 1944, created International Monetary Fund (1945). International payment system Stable currency exchange rates

Tariffs Country A Country B

Tariffs $50 Country A Country B

Tariffs $75 $50 Country A Country B

Tariffs $75 $50 + 30 Country A Country B

Tariffs $75 Protectionism $80 Country A Country B .

Tariffs $75 Country A Country B

Tariffs Country C Country A Country B

General Agreement on Tariffs and Trade (GATT), 1949–94, resulted in gradual reduction of average tariff from over 40% in 1947 to about 4% in 2002. Bretton-Woods Conference, July 1944, created International Monetary Fund (1945). International payment system Stable currency exchange rates

Tariffs Country C Country A Country B

Tariffs Advantages A small country, which will
will have little effect on world trade, can help its domestic or home industries grow by keeping out foreign imports Labor unions like tariffs or protectionism because it allows them to negotiate high-wage jobs which are protected from foreign products made in countries with lower labor costs and lower prices. Country A Governments get revenue from tariffs Country B

Tariffs Disadvantages Consumers in the home country pay higher prices.
B

Tariffs $75 Country A Country B .

Tariffs $75 $50 + 30 Country A Country B

Tariffs $75 $45 $50 + 30 Country A Country B

Tariffs $75 $70 $75 Country A Country B .

General Agreement on Tariffs and Trade (GATT), 1949–94, resulted in gradual reduction of average tariff from over 40% in 1947 to about 4% in 2002. 37

The World Trade Organization (January 1995) The Treaty of Rome (March 1957)

The Creation of the euro Common currency of twelve of the twenty-five countries of the European Union. Developed in the early 1990s. Placed in circulation on January 1, 2002. Replaced eleven strong legacy currencies. One of the strongest currencies of the world.

End of Part One of Introduction

The World’s Largest Exporters of Merchandise in 2004 (in US $ billions)

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The World’s Largest Importers of Merchandise in 2004 (in US $ billions)

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International Trade Drivers
Cost Drivers Competitive Drivers Market Drivers Technology Drivers

Cost Drivers

Cost Drivers Export 53

Export: Cost Drivers Some companies require large capital investments in plants and machinery 54

Export: Cost Drivers Some companies require large capital investments in plants and machinery Strong incentive to spread the costs of these fixed costs over a large number of units. Export Mass manufacturing is dependent upon economies of scale. Overall, the more you produce, the more savings you have. If we have a warehouse, we can gain the economies of scale of production by product large amounts of the product and storing them in the warehouse. Assembly line

Cost Drivers Export Some companies require large capital investments in plants and machinery. Strong incentive to spread the costs of these fixed costs over a large number of units. Import / Outsourcing Some companies, in response to consumer demands, attempt to offer goods at the lowest possible price. Strong incentive to lower production costs. Several business processes are outsourced abroad. routingbyrumor.wordpress.com 56

Competitive Drivers Companies follow their domestic competitors abroad to maintain their world-wide market share. Companies retaliate against foreign competitors entering their home market by going to these competitors’ home markets. Companies counter a competitor’s new product entry by offering a similar product, often produced abroad. 57

Market Drivers Consumers’ tastes and preferences have become increasingly uniform worldwide. recipes.howstuffworks.com

Market Drivers Consumers’ tastes and preferences have become increasingly uniform worldwide. Consumers have become increasingly knowledgeable about products and willing to try new foreign alternatives. 59

Technology Drivers Diffusion of information seems universal. Competition for products is worldwide: the Internet allows people to trade with one another. Jet travel allows people to do business worldwide. 60

Scottish moral philosopher and father of modern economics
Adam Smith

into the Nature and Causes of the Wealth of Nations.
In 1776 wrote An Inquiry into the Nature and Causes of the Wealth of Nations. Adam Smith Smith is often described as a prototypical absent-minded professor.[45] He is reported to have had books and papers stacked up in his study, with a habit he developed during childhood of speaking to himself and smiling in rapt conversation with invisible companions.[45] Various anecdotes have discussed his absentminded nature. In one story, Smith reportedly took Charles Townshend on a tour of a tanning factory and while discussing free trade, Smith walked into a huge tanning pit from which he had to be removed.[46] Another episode records that he put bread and butter into a teapot, drank the concoction, and declared it to be the worst cup of tea he ever had. In another example, Smith went out walking and daydreaming in his nightgown and ended up 15 miles (24 km) outside town before nearby church bells brought him back to reality.[45][46] Portrait of Adam Smith by John Kay, 1790 Smith is reported to have been an odd-looking fellow. One author stated that Smith "had a large nose, bulging eyes, a protruding lower lip, a nervous twitch, and a speech impediment".[47] Smith is reported to have acknowledged his looks at one point saying, "I am a beau in nothing but my books."[47] Smith "never" sat for portraits,[48] so depictions of him created during his lifetime were drawn from memory, with rare exceptions. The most famous examples were a profile by James Tassie and two etchings by John Kay.[49] The line engravings produced for the covers of 19th century reprints of The Wealth of Nations were based largely off of Tassie's medallion.[50] The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand".[67] The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". Smith believed that while human motives were often driven by self-interest, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies. An often-quoted passage from The Wealth of Nations is:[68] It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. The first page of the Wealth of Nations, 1776 London edition Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[69] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium. Smith also believed that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can.

International Trade Theories
Adam Smith's Theory of Absolute Advantage The Wealth of Nations (1776) When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can.

Absolute Advantage Illustration France can produce 20,000 liters of wine or 2 units of machinery for each year of labor. Germany can produce 15,000 liters of wine or 3 units of machinery for the same amount of labor. France sells wine to Germany, and Germany sells machinery to France. Both countries benefit from the trade.

Ricardo's Theory of Comparative Advantage Political Economy and Taxation (1815) Nations trade with one another when they can produce certain goods relatively more efficiently than one another. Most international trade today is explained by the Theory of Comparative Advantage.

Theory of Comparative Advantage Illustration The UK can make 25 tons of wheat or 5 units of machinery using one year of labor. Brazil can make 21 tons of wheat or 3 units of machinery using the same amount of labor. The UK has an absolute advantage in machinery and wheat. However, in the UK, the “relative price” of a unit of machinery is 5 tons of wheat. In Brazil, the “relative price” of that same unit is 7 tons of wheat. If the UK decides to grow wheat, it has to “give up” 1/5 of a piece of machinery. If it can find wheat at a lower price than 1/5 of a piece of machinery, it finds it advantageous.

Theory of Comparative Advantage Illustration If Brazil decides to make machinery, it has to “give up” 7 units of wheat. If it can find machinery at a lower price than 7 tons of wheat, it finds it advantageous. The UK will sell its machinery to Brazil at the price of 6 tons of wheat. The UK gets wheat at a lower price than it can produce it (1/6 of a unit of machinery) and Brazil gets machinery at a lower price than it can make it (6 tons of wheat). Both nations gain from this trade.

Factor Endowment Theory Developed by Hecksher and Ohlin (1933) A country will enjoy a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital or entrepreneurship. Explains why certain countries specialize in the production of certain products.

Factor Endowment Theory Countries with an abundance of land will specialize in the production of items that require a lot of land (for example, Argentina and beef, Brazil and soybeans). Countries with an abundance of educated labor will specialize in the production of items that require a lot of educated labor (for example, India and computer programming). Countries with an abundance of capital will specialize in services tied to capital lending (for example, Switzerland and banking, London and insurance). Countries with an abundance of entrepreneurship will specialize in “products” tied to entrepreneurship (for example, United States and intellectual property).

International Product Life Cycle Developed by Raymond Vernon (1966) Over its life cycle, a product will be manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries.

International Product Life Cycle First Stage A new product is launched in a country, called the country of innovation, to satisfy market need. Second Stage Markets emerge in developed countries, and additional manufacturing facilities are created there. Third Stage The manufacturing process has become routine, and manufacturing shifts to developing countries.

Porter's Cluster Theory A firm can develop a substantial competitive advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity. The area attracts the most talented employees and the extraordinary competition between the firms generates a greater need to innovate and become efficient. Such a grouping of companies is called a cluster.

Porter's Cluster Theory Examples Silicon Valley, California, is a cluster for information technology. Sassuolo, Italy, is a cluster for ceramic tiles. Limoges, France, is a cluster for porcelain. Genève, Switzerland, is a cluster for watches. Yiwu, China, is a cluster for socks and hosiery.

The International Business Environment
Culture Demographics Economics Regulations and Laws Infrastructure Communications .....much of the international business environment is different from the domestic environment.

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Introduction Part One.

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