Chapter 4 – International Environment of Business International business – business activities between two or more countries

Trade, Investment, and the Economy International trade and investment are a large portion and a growing part of our American economy. Last year, America sold over $1.3 trillion of goods/services to customers in foreign countries. Almost 10% of our U.S. jobs depend on foreign trade. Today, total American investment abroad exceeds $860 billion.

Reasons for Growth in International Business Main reason for international business is profit. When the cost of making goods is lower in foreign countries than at home, it becomes more cost effective for companies to buy goods made abroad or set up their own factories abroad. Businesses want to see what others are doing or react to changes in the domestic market. Sales may be stagnant at home. If a company overproduces, the only way to dispose of their surplus goods profitably is to sell them abroad.

Reasons for Growth in International Business (cont’d) Treaties on trade and investment grow international business. The World Trade Organization (WTO) creates and enforces the rules governing trade among countries. The WTO cuts tariffs which will boost exports and imports. Trading blocs stimulate global trade and investment where two or more countries remove all restrictions between them on sales of goods/services. The European Union (EU) is the best example of a trading bloc. 11 members of the EU uses the currency known as the euro.

Reasons for Growth in International Business (cont’d) North American Free Trade Agreement (NAFTA) – three nations: United States, Canada, and Mexico (1992) The International Monetary Fund (IMF) helps countries facing serious financial difficulties in paying for imports or loans. The World Bank provides low-cost, long-term loans to less-developed countries to develop basic industries and facilities.

Forms of International Business Exporting – business sells goods/services to buyers in another country Importing – buying goods/services made in a foreign country International licensing – one company allows a company in another country to make and sell products according to certain specifications

Forms of International Business (cont’d) Joint ventures – two or more firms share costs and profits of doing business Wholly-owned subsidiaries – firms set up a business abroad on their own without any partners; more risky and expensive Strategic alliances – firms cooperate on certain aspects of business while remaining competitors on other aspects

Multinational firms – firm owns or controls production/services in more than one country Home country – country of headquarters Host country – foreign location of a firm Parent firm – company headquarters Subsidiary – foreign branches

Government Policies – Protecting Domestic Businesses Tariffs – taxes on foreign goods to protect domestic industries and to earn revenue; typically raises the prices of foreign products Dumping – selling goods in a foreign market at a price below cost or below the price charged in its home country in order to drive domestic producers out of the market; price of goods in a foreign market drops

Government Policies – Protecting Domestic Businesses (cont’d) Quotas – number in quantity limit or monetary value limit that may be sold or enter a country Non-tariff barriers – non-tax methods to discourage trade between countries because of a country’s culture or tradition; For Example: U.S producers must change the steering wheel to the right side of a vehicle before selling motor vehicles in Ireland.

Government Policies – Protecting Domestic Businesses (cont’d) Embargo – government may bar companies from doing business with certain countries do to political reasons Sanctions – milder form of embargo banning business on certain aspects but allowing business on other aspects; For Example: It is illegal for an American company to sell nuclear technology to Pakistan after they tested atomic bombs in 1998.

Currency Values Exchange rates – the value of one country’s currency represented in the currency of another country

Cultural Differences Culture – customs, beliefs, values, and patterns of behavior of the people of the country; includes language, religion, attitudes of work, authority, family, and traditions

Culture affects how people communicate in a country. Low-context culture – people communicate directly and explicitly High-context culture – communication through non-verbal signs and indirect suggestions

Theories of International Trade and Investment Comparative advantage theory – a country should specialize in products/services that it can provide more efficiently than can other countries Product life cycle theory – 4 stages: introduction, growth, maturity, decline

Product Life Cycle Stages: Introduction – Product is first introduced for consumers to buy Growth – Sales grow as more customers continue buying. Maturity – Everyone owns product and sales remain stable Decline – New product causes sales of original product to decline

Product Life Cycle (cont’d) Many American companies move to foreign countries when sales at home start to lag.

Balance of Trade Balance of payments – an accounting statement recording all international transactions. 2 parts: current account, capital account current account – records the value of goods/services exported and imported by foreigners capital account – records investment funds coming into and going out of the country

Balance of Trade (cont’d) When more money leaves a country then comes in, a balance of payment declines A country is in a stronger position when it sells more in foreign nations that it buys from them. A country with a prolonged trade deficit has a difficult time paying bills. When demand for foreign currency increases, the value of the U.S. dollar decreases in relation to that foreign currency. When the value of the U.S. dollar declines in relation to foreign currency, prices will drop abroad in foreign countries for American products.