Exploring Global Business Chapter 3 Exploring Global Business

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 trade and identify the organizations working to foster it. 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.

International Business …all business activities that involve exchanges across national boundaries.

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.

…selling and shipping raw materials or products to other nations. 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.

Why This Chapter Matters Free trade—are you for or against it? Most economists support free-trade policies, but public support can be lukewarm, and certain groups are adamantly opposed, alleging that “trade harms large segments of U.S. workers,” “degrades the environment,” and “exploits poor countries.”

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

Figure 3.1: The Top Ten Merchandise Exporting States Source: http://www.ita.doc.gov/td/industry/otea/state/2005_year_end_dollar_value_05.html, accessed May 2, 2009.

Figure 3.2: U.S. International Trade in Goods and Services Source: U.S. Department of commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/action.cfm, accessed April 16, 2009.

Balance of Trade …the total value of a nation’s exports minus the total value of its imports over some period of time. Imports > Exports = (-) Balance of Trade Exports > Imports = (+) Balance of Trade

…negative balance of trade. Trade Deficit …negative balance of trade. Spotlight Source: U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov/international/index.htm#bop, accessed May 1, 2009.

Balance of Payments …the total flow of money into a country minus the total flow of money out of that country over some period of time. Includes Imports and exports Investments Money spent by foreign tourists Payments by foreign governments Aid to foreign governments All other receipts and payments

Trade Restrictions ─ Tariff Import duty tax levied on a particular foreign product entering a country Revenue imposed solely to generate income Protective imposed to protect domestic industry from competition

Trade Restrictions ─ Dumping …exportation of large quantities of a product at a price lower than that of the same product in the home market.

Trade Restrictions ─ Nontariff …a nontax measure imposed by a government to favor domestic over foreign suppliers. Import Quota Embargo Foreign-Exchange Control Currency Devaluation

Reasons for Trade Restrictions Equalize nation’s balance of payments Protect new/weak industries Protect national security Protect health of citizens Retaliate for another nation’s trade restrictions Protect domestic jobs

Reasons Against Trade Restrictions Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources Loss of jobs

World Economic Outlook for Trade Canada and Western Europe Mexico and South America Japan Developing Asia Central/Eastern Europe and Russia

Exports and U.S. Economy Opportunity for all countries Exports more important to U.S. economy Canada and Mexico best export partners Canada and China best import partners

Figure 3.3: U.S. Goods Export and Import Shares in 2008 Source: Federal Reserve Bank of St. Louis, National Economic Trends, May 2009, p. 18, http://research.stlouisfed.org/publications/net/page18.pdf , accessed May 1, 2009.

Table 3.1: Global Growth Remains Sluggish Growth has been led by developing countries and emerging markets. Source: International Monetary Fund: World Economic Outlook by International Monetary Fund. Copyright 2009 by International Monetary Fund. Reproduced with permission of International Monetary Fund via Copyright Clearance Center.

Table 3.2: Value of U.S. Merchandise Exports and Imports, 2008 Source: U.S. Department of Commerce, International Trade Administration, http://www.stumbleupon.com/s/#4Y3NJR/ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf/topic:UK , accessed May 1, 2009.

General Agreement on Tariffs and Trade (GATT) …an international organization of 132 nations dedicated to reducing or eliminating tariffs and other barriers to world trade.

GATT-Sponsored Negotiations Kennedy Round (1964–1967) Tokyo Round (1973–1979) Uruguay Round (1986–1993) Doha Round (2001+)

World Trade Organization …powerful successor to GATT that incorporates trade in goods, services, and ideas. Membership Obliges 149 members to observe GATT Has judicial powers to mediate among members disputing new rules Has more binding authority than GATT

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.

International Economic Communities European Union European Economic Area North American Free Trade Agreement (NAFTA) Central American Free Trade Agreement (CAFTA) Association of Southeast Asian Nations (ASEAN) Commonwealth of Independent States (CIS) (cont.)

International Economic Communities (cont.) Caribbean Basin Initiative (CBI) Common Market of the Southern Cone (Mercosur) Organization of Petroleum Exporting Countries (OPEC) Economic Community of West African States (ECOWAS) Organization of Economic Cooperation and Development (OECD)

Figure 3.4: The Evolving European Union Source: http://europa.eu/abc/european_countries/index_en.htm, accessed May 2, 2009.

Methods of Entering International Business

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.

Export-import merchant Documents Exporting Manufacture products in home country and export them to foreign markets Relative low risk Export-import merchant Documents Letter of credit Bill of lading Draft

Joint Ventures …a partnership formed to achieve a specific goal or to operate for a specific period of time.

Totally Owned Facilities …a firm’s own production and marketing facilities, developed in one or more foreign nations as a direct investment.

Forms of Direct Investment Builds/purchases manufacturing and other facilities in the foreign country, produces/markets own established products in foreign/neighboring countries Purchases existing firm in foreign country under arrangement allowing it to operate independently of parent company

Strategic Alliance …a partnership formed to create competitive advantage on a worldwide basis.

Trading Company …a company that provides a link between buyers and sellers in different countries and is not involved in manufacturing or owning assets related to manufacturing.

Countertrade …an international barter transaction in which goods and services are exchanged for different goods and services.

Multinational Enterprise …a firm that operates on a worldwide scale without ties to any specific nation or region, representing the highest level of involvement in international business.

Value of U.S. Merchandise Exports and Imports, 2008 Source: U.S. Department of Commerce, International Trade Administration, http://www.ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf, accessed May 1, 2009.

Ten Largest Foreign and U.S. Multinational Corporations Source: Fortune Global 500, July 1, 2008, p. 165. Copyright © 2006 Time, Inc., www.fortune.com . All rights reserved.

Steps in Entering International Markets Identify exportable products. Identify key foreign markets for the products. Analyze how to sell in each priority market (methods will be affected by product characteristics and unique features of country/ market). Set export prices and payment terms, methods, and techniques. Estimate resource requirements and returns. Establish overseas distribution network.

Sources of Export Assistance International Trade Administration U.S. and Foreign Commerical Services (US&FCS) Advocacy Center TRADESTATS Selected SBA Market Research–Related General Resources National Trade Data Bank

Export-Import Bank of the United States …an independent agency of the U.S. government whose function it is to assist in financing the exports of American firms.

Multilateral Development Bank …an internationally supported bank that provides loans to developing countries to help them grow.

Multilateral Development Banks World Bank Inter-American Development Bank (IDB) Asian Development Bank (ADB) African Development Bank (AFDB) European Bank for Reconstruction and Development (EBRD)

International Monetary Fund (IMF) …an international bank with 184 member nations that makes short-term loans to developing countries experiencing balance-of-payments deficits.

Sources of Export Assistance U.S. Export Assistance Centers (USEACs) www.sba.gov/oit/export/useac.html International Trade Administration (ITA) www.ita.doc.gov/ U.S. and Foreign Commercial Services (US&FCS) www.export.gov/ Advocacy Center www.ita.doc.gov/advocacy (cont.)

Sources of Export Assistance (cont.) Trade Information Center (TIC) ita.doc.gov/td/tic STAT-USA/Internet www.stat-usa.gov Small Business Administration www.sba.gov/oit National Trade Data Bank (NTDB) www.stat-usa.gov/tradtest.nsf

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.

Chapter Quiz (cont.) 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.

Chapter Quiz (cont.) 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.

Chapter Quiz (cont.) 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.

Chapter Quiz (cont.) XYZ Company is seeking a partner in China to manufacture its products. XYZ 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.