©2009 The McGraw-Hill Companies, All Rights Reserved ©2009 The McGraw-Hill Companies, All Rights Reserved Chapter 6 International Business McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

6-2 Learning Objectives After studying this chapter, you will be able to: 1.Explain why countries trade with each other. 2.Explain why companies export and import. 3.Explain how and why countries restrict international trade. 4.Describe a global economy. 5.Explain e-commerce.

6-3 Learning Objectives (cont’d) After studying this chapter, you will be able to: 6.Describe a free trade area. 7.Describe the strategies organizations use to compete in the global economy. 8.Describe various ways used by companies to sell their products or services in the international market.

6-4 Foreign Business Practices

6-5 Applying Management Skills International trade The exchange of goods and services by different countries. Absolute advantage The ability to produce more of a good than another producer with the same quantity of inputs. Law of comparative advantage Producers should produce the goods they are most efficient at producing and purchase from others the goods they are less efficient at producing.

6-6 Exporting Goods and services that are sold abroad. Why do companies export? Increase sales. Diversification. How do companies identify export markets? Assess demand. Data: demographic, economic, consumer tastes, competition. Understand restrictions.

6-7 Importing Goods and services purchased abroad. Import of materials Increased quality or lack of availability. Reduce production costs. Import of consumer goods Response to consumer demand.

6-8 The Trade Balance Balance of trade Difference between the value of the goods a country exports and the value of the goods it imports. Trade surplus Country exports more than it imports. China has run a huge trade surplus. Trade deficit Country that imports more than it exports. United States has run a trade deficit for many years now.

6-9 Foreign Exchange The value of one currency in terms of another. Foreign currency is purchased by companies from banks, that convert each currency in dollars. Exchange rates can be quoted in dollars per unit of foreign currency or units of currency per dollar. Exchange rates fluctuate from day to day.

6-10 Protectionism Tariffs Government-imposed taxes charged on goods imported into a country. Purpose is to raise the price of foreign goods to allow domestic manufacturers to compete. Quota Establishes the maximum quantity of a product that can be imported or exported during a given period. Embargo Involves stopping the flow of exports to or imports from a foreign country. Usually imposed for political rather than economic reasons.

6-11 The Rise of the Global Economy Global economy Economy in which companies compete actively with businesses from around the world. Driving forces Improvements in telecommunications technology E-commerce. Political changes (especially due to rise in democracy). Free trade areas Regions within which trade restrictions are reduced or eliminated. North American Free Trade Agreement (NAFTA). The European Union (EU).

6-12 Significance of NAFTA Consumers in Canada, United States and Mexico benefit form lower prices on North American imports. Many producers also benefit by increasing their exports within North America. Some Americans have lost their jobs, since companies want to maximize on lower labor costs in the other countries, such as Mexico.

6-13 European Countries and Applicants Figure 6.1

6-14 Doing Business Globally - Forms of International Operations Working through a foreign intermediary. Wholesalers or agents marketing products for companies that want to do business internationally. Saves the company the expenses of setting up facilities in foreign country. Foreign intermediaries are liable to work with more than one company at a given time. Signing a licensing agreement with a foreign company. Right to sell another company’s products in exchange for a percentage of that the companies revenues. Facilitates market penetration.

6-15 Doing Business Globally - Forms of International Operations (cont’d) Forming a strategic alliance Pooling resources and skills to achieve common goals. Helps gain access to new markets, share research, broaden product lines, learn new skills and expand cross-cultural knowledge. Becoming a multinational corporation Significant financial commitment. Often involves establishing manufacturing and distribution facilities in foreign countries. Selling products or services in new markets, take advantage of lower labor costs.

6-16 Multinational Corporations Figure 6.2

6-17 Challenges of Working in an International Environment Managers must learn to deal with different: Customers Producers Suppliers Employees Local laws Local customs

6-18 Coalitions of Cooperating Countries European Union (EU) Reduce tariffs on goods sold among member countries. Attempt to eliminate fiscal, technical and border barriers that have increased costs of goods and services. Reasons for member participation: Democratic movement in Eastern Europe, reunification of Germany and the break-up of the Soviet Union. Organization of Petroleum Exporting Countries (OPEC) Control oil prices and production levels. OPEC’s effectiveness is limited because several member countries sell and produce at levels considerably different from official OPEC standards.

6-19 Trading Blocks European Union The North American Alliance of the United States, Canada and Mexico (NAFTA) Pacific Asia (Pacific Rim countries) Japan, China, Korea, Taiwan, Indonesia, Malaysia, the Philippines, Thailand, Hong Kong, and Singapore.

6-20 Political and Ethical Challenges Political challenges: Break-up of the Soviet Union and the fall of communism in Eastern Europe in the early 1990s. Human Rights and Ethics: Business ethics have not yet become global. Ethical behavior vary from region to region and country to country. Multinationals must strike a balance between values and ideals of the public they cater to.