1. Foundations of Business 3e
Pride, Hughes, & Kapoor

2. Exploring Global Business
Chapter 3

3. Learning Objectives
Explain the economic basis for international business.
Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results.
Outline the extent of international business and the world economic outlook for trade.
Discuss international trade agreements and international economic organizations working to foster trade.
Define the methods by which a firm can organize for and enter into international markets.
Describe the various sources of export assistance.
Identify the institutions that help firms and nations finance international business.

4. The Basis for International Business
All business activities that involve exchanges across national boundaries
Some countries are better equipped than others to produce particular goods or services.
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
Goods and services are produced more efficiently when each country specializes in the products for which it has a comparative advantage.

5. Video

6. Countries with an “Absolute Advantage”
Oil
Diamonds
Wool
Saudi Arabia South Africa Australia

7. Countries and their Comparative Advantage
Corn vs. Beets
Corn vs. Cars
Corn vs. Rice
United States Germany Japan

8. Exports and Imports
Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in.
Exporting
Selling and shipping raw materials or products to other nations
Importing
Purchasing raw materials or products in other nations and bringing them into one’s own country

9. Exporting and Importing
U.S. Exports
Excess Corn
Excess Wine
U.S. Imports

10. US Imports and Exports 2014 Biggest Import Items Crude Oil
Passenger Cars
Medical Preparations (ingredients for drugs)
Automotive Accessories
Gems and precious medals
Biggest Export Items
Refined Oils Products Telecom Equipment
Aircraft
Motor Vehicles
Electronic equipment
Pharmaceuticals

11. Top Ten Merchandise-Exporting States
2012
2012
192.5
164.4
77.5
75.6
70.0
63.1
58.0
47.2
43.5
42.5

12. Important things for governments to consider when managing imports and exports
Balance of trade
The total value of a nation’s exports minus the total value of its imports over some period of time
Trade deficit
A negative (unfavorable) balance of trade —imports exceed exports in value
Balance of payments
The total flow of money into a country minus the total flow of money out of that country over a period of time
Is more money coming in or going out of our country?

13. How do you feel when you see this sign?
National Pride?
Quality
Craftsmanship
Work ethic
A cheap substitute
Don’t buy a foreign product

14. Gung Ho - Video Clip
Many countries have caught up to or passed the US in production quality and efficiency

15. Restrictions to International Business
The reasons for restricting trade range from internal political and economic pressures to mistrust of other nations.
Nations are generally eager to export their products to provide markets for their industries and develop a favorable balance of trade.
Most trade restrictions are applied to imports from other nations.

16. U.S. International Trade in Goods and Services

17. Types of Trade Restrictions
Import duty (tariff)
A tax levied on a particular foreign product entering a country
Revenue tariffs are imposed to generate income for the government.
Protective tariffs are imposed to protect a domestic industry from competition by keeping the prices of imports at or above the price of domestic products.

18. Types of Trade Restrictions (cont.)
Nontariff barriers
Nontax measures imposed by a government to favor domestic over foreign suppliers
Import quota—a limit on the amount of a particular good that may be imported during a given time
Embargo—a complete halt to trading with a particular nation or in a particular product
Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold

19. Types of Trade Restrictions (cont.)
Nontariff barriers (cont.)
Currency devaluation—the reduction of the value of a nation’s currency relative to the currencies of other countries
Bureaucratic red tape—subtly imposes unnecessarily burdensome and complex standards and requirements for imported goods
Cultural attitudes—can impede acceptance of products in foreign countries

20. U.S. Trade Restrictions / Sanctions
Balkans
Belarus
Lebanon
Ivory Coast
Yemen
Congo
Iran
Iraq
Liberia
North Korea
Sudan
Syria
Zimbabwe
For more information go to: maintained by the U.S. Department of the Treasury

21. Reasons for and Against Trade Restrictions
Higher prices for consumers
Restriction of consumers’ choices
Misallocation of international resources
Loss of jobs
FOR
To equalize a nation’s balance of payments
To protect new or weak industries
To protect national security
To protect the health of citizens
To retaliate for another country’s trade restrictions
To protect domestic jobs

22. The World Economic Outlook for Trade
Economic performance among nations is not equal; growth in advanced countries slowed and then stopped in 2009, while emerging and developing economies continue to grow rapidly.
International experts expected global economic growth in 2014 and 2015, despite high oil prices.

23. The World Economic Outlook for Trade (cont.)
Canada and Western Europe
Canada is projected to show growth in 2013 and 2014.
The Euro area is expected to grow in 2014.
The U.K. and smaller European countries are expected to experience a recession.
Mexico and Latin America
Mexico is expected to show growth in 2014 and 2015.
Latin American and Caribbean economies are recovering at a robust pace.

24. The World Economic Outlook for Trade (cont.)
Japan
Projected to regain momentum after a crash.
Other Asian Countries
China’s economy is declining after being inflated for years by false numbers
Key emerging economies in Asia are leading the global recovery.
Emerging Europe
Growth has been faster than in western Europe and continued growth is expected in 2014 and 2015.

25. The World Economic Outlook for Trade (cont.)
Commonwealth of Independent States
Projected to show growth in 2014 and 2015.
With the collapse of communism, trade between the U.S. and Central and Eastern Europe expanded substantially.
Exports and the U.S. Economy
In 2008, exports as a percentage of GDP reached its highest level since 1916.
In the past 50 years, exports have become increasingly important to the U.S. economy.

26. Global Growth Is Picking Up

27. Value of U.S. Merchandise Exports and Imports, 2010

28. U.S. Goods Export and Import Shares in 2012

29. International Trade Agreements
The General Agreement on Tariffs and Trade and the World Trade Organization
General Agreement of Tariffs and Trade (GATT)
International organization of 153 nations dedicated to reducing or eliminating tariffs and other trade barriers
Most-favored-nation status (MFN)—each member of GATT was to be treated equally by all other members
Kennedy Round, Tokyo Round, Uruguay Round, Doha Round

30. International Trade Agreements (cont.)
The General Agreement on Tariffs and Trade and the World Trade Organization (cont.)
World Trade Organization (WTO)
Created in the Uruguay Round of GATT negotiation as a successor to GATT
WTO oversees GATT provisions, has judicial powers to mediate trade disputes arising from GATT rules, and exerts more binding authority than GATT

31. WTO Members’ Share in World Merchandise Trade, 2009
Updated 2011 stats in book

32. Americans Should Learn Foreign Languages Everyone Should Speak English
Debate Issue: Should U.S. Businesspeople Learn Foreign Languages or Should Everyone Speak English?
Americans Should Learn Foreign Languages
It is unrealistic to expect citizens of all nations that use our products and services to be fluent in English. For example, more people speak Mandarin Chinese than any other language, and China is one of the fastest growing economies in the world. The only way a company can hope to avoid blunders of language in sales, advertising, and other dealings with a foreign nation is to ensure that its managers are fluent in that nation’s language. Besides, foreign buyers respond differently and more favorably to a seller who is fluent in their native language.
Everyone Should Speak English
More people speak English globally than any language other than Mandarin Chinese or Spanish. There are less expensive and equally secure ways of avoiding language mistakes in dealing with a foreign nation—for example, by hiring an in-country representative or agency that is bilingual and offers the needed services. Furthermore, it is impossible for American businesspeople to learn every world language. It is more feasible for businesspeople in all the other countries to learn one language—English.

33. International Economic Organizations Working to Foster Trade
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
What are the most important economic communities?
The EU
NAFTA
CAFTA
ASEAN
OPEC

34. The Evolving European Union (EU)

35. International Economic Organizations Working to Foster Trade (cont.)
North American Free Trade Agreement (NAFTA)
United States
Canada
Mexico
Chile is expected to become the 4th member

36. OPEC Nations
Organization of Petroleum Exporting Countries (OPEC)
Algeria
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela

37. International Economic Organizations Working to Foster Trade (cont.)
Central American Free Trade Agreement – Dominican Republic (CAFTA-DR)
El Salvador
Guatemala
Honduras
Nicaragua
Dominican Republic
Costa Rica

38. International Economic Organizations Working to Foster Trade (cont.)
Association of Southeast Asian Nations (ASEAN)
Brunei
Myanmar
Cambodia
Indonesia
Laos
Malaysia
Philippines
Singapore
Thailand
Vietnam

39. Other International Economic Organizations Working to Foster Trade (cont.)
European Economic Area (EEA)
Pacific Rim
Commonwealth of Independent States (CIS)
Caribbean Basin Initiative (CBI)
Common Market of the Southern Cone (MERCOSUR)
Organization for Economic Cooperation and Development (OECD)

40. What are common methods to Enter International Business
Licensing
Exporting
Joint Venture
Totally Owned Facilities
Strategic Alliances
Trading Companies
Countertrade
Multinational Firm

41. Licensing
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
Advantage
It allows expansion into foreign markets with little or no direct investment
Disadvantages
The product image may be damaged if standards are not upheld
The original producer does not gain foreign marketing experience

42. Methods of Entering International Business (cont.)
Exporting
May use an export/import merchant who assumes the risks of ownership, distribution, and sale
Letter of credit—issued by a bank on request of an importer stating that the bank will pay an amount of money to a stated beneficiary
Bill of lading—issued by a transport carrier to an exporter to prove merchandise has been shipped
Draft—issued by the exporter’s bank, ordering the importer’s bank to pay for the merchandise, thus guaranteeing payment once accepted by the importer’s bank

43. Methods of Entering International Business (cont.)
Exporting (cont.)
May use an export/import agent who arranges sale for a commission or fee; the exporter retains title to products until they are sold
May establish own sales offices or branches in foreign countries

44. Methods of Entering International Business (cont.)
Joint venture
A partnership formed to achieve a specific goal or to operate for a specific period of time
Advantages
Immediate market knowledge and access
Reduced risk
Control over the product attributes
Disadvantages
Complexity of establishing agreements across national borders
High level of commitment required of all parties involved

45. Methods of Entering International Business (cont.)
Totally owned facilities
Production and marketing facilities in one or more foreign nations
Advantage
Direct investment provides complete control over operations
Disadvantage
Risk is greater than that of a joint venture
Two forms
Building new facilities in the foreign country
Purchasing an existing firm in the foreign country

46. World’s Top Transnational Corporations
General Electric
British Petroleum Company, Plc
Toyota Motor Corporation
Royal Dutch/Shell Group
ExxonMobil Corporation
Ford Motor Company
Vodafone Group, Plc
Total
Electricite De France
Walmart Stores
Source: UNCTAD; World Investment Report: Transnational Corporation and the Infrastructure Challenge;
accessed February 17, 2009.

47. Methods of Entering International Business (cont.)
Strategic alliances
Partnerships formed to create competitive advantage on a worldwide basis
Trading companies
Firms that provide a link between buyers and sellers in different countries
Takes title to products and performs all the activities necessary to move the products from one country to another

48. Methods of Entering International Business (cont.)
Countertrade
An international barter transaction
Avoids restrictions on converting domestic currency to foreign currency
Multinational enterprise
A firm that operates on a worldwide scale without ties to any specific nation or region

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

50. Financing International Business
The Export-Import Bank of the United States (Eximbank)
An independent agency of the U.S. government whose function is to assist in financing the exports of American firms
Multilateral Development Bank (MDB)
An internationally supported bank that provides loans to developing countries to help them grow
World Bank, Inter-American Development Bank (IDB), Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD)
The International Monetary Fund (IMF)
An international bank with 186 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits

51. Finally, Sources of Export Assistance
National Export Strategy (NES)
Trade Promotion Coordinating Committee (TPCC)
Assists U.S. firms in developing export-promotion programs
Helps American firms compete in foreign markets and create new jobs in the U.S.

52. Sources of Export Assistance (cont.)
U.S. Export Assistance Centers (USEACs)
International Trade Administration (ITA)
U.S. and Foreign Commercial Services (US&FCS)
Advocacy Center

53. Sources of Export Assistance (cont.)
Trade Information Center (TIC)
ita.doc.gov/td/tic
STAT-USA/Internet
Small Business Administration
National Trade Data Bank (NTDB)

54. U.S. Government Export Assistance Programs

55. Chapter Quiz
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)
unfavorable balance of payments.
favorable balance of payments.
favorable balance of trade.
unfavorable balance of trade.
unfavorable supply of goods.

56. Chapter Quiz
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)
import duty.
import cut.
export control.
trade embargo.
export duty.

57. Chapter Quiz
When the United States wants to reduce the cost of its goods in foreign nations, it
revalues its currency.
devalues its currency.
pays off its trade deficit.
borrows from the Eximbank.
sells more goods abroad.

58. Chapter Quiz
A forum for the discussion of trade problems and a reduction of trade barriers is provided by
the General Agreement on Tariffs and Trade (GATT) or the World Trade Organization (WTO).
a free trade zone.
the World Bank.
the Eximbank.
All of these answers are correct.

59. Chapter Quiz
XYZ Company is seeking a partner in China to manufacture its products. It 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
licensing.
a bilateral agreement.
a joint venture.
an export/import merchant agreement.
an export/import agent agreement.