Business In a Global Environment Exploring Business Chapter 3 9/27/11

Why Do Nations Trade?  Because no national economy can produce all the goods and services (it) need(s)  Because of an abundance of (cheaper) natural resources  Because of an abundance of (cheaper) natural resources  Because of an abundance of (cheaper) labor  Because of an imbalance in currency value in currency value Exploring Business © 2009 FlatWorld Knowledge

Absolute Advantage 1)Only source of particular product * Example – DeBeers Consolidated Mines 2)Can make more of product using same or fewer resources than other countries Exploring Business © 2009 FlatWorld Knowledge

3-4 Comparative Advantage 1) A country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items. * Example – US agricultural commodities like corn & wheat 2) Produce product at lower opportunity cost, i.e., the cost of purposely missing out on another production investment in exchange for an opportunity to make a much better return 3) When country specializes in particular product, it must sacrifice production of another product Exploring Business © 2009 FlatWorld Knowledge

3-5 Measuring Trade  Balance of Trade = difference in the value of a country ’ s exports from the value of a country ’ s exports from the value of its imports over time of its imports over time  Imports exceed exports = negative balance or  Imports exceed exports = negative balance or trade deficit trade deficit  exports exceed imports = trade surplus  Balance of Payments = an accounting record of all of a country’s transactions with other countries over time.

U.S. Exports/Imports & Balance of Trade ( ) Exploring Business © 2009 FlatWorld Knowledge

Top 10 Countries Maintaining Trade Deficits & Surpluses with the US

International Trade Barriers Economic Legal/political Social/cultural Technological

Economic Barriers The level of a country’s economic development –Industrialized nations – U.S., Japan, Great Britain, Canada –Less-developed countries – Africa, Asia, and South America The level of existing infrastructure Currency exchange rates

Political & Legal Barriers Laws and regulations Tariffs and trade restrictions –Import tariffs, exchange controls, quotas, embargos, anti-dumping regulations Political barriers –Political instability, cartels

Social & Cultural Barriers Understanding the differences among the cultures of countries can be important to a firm –Spoken and written language –Body language and personal space –Family roles –Perception of time –Religious holidays and local customs

Cultural Behavioral Differences

Technological Barriers Basic infrastructure –Power –Water, waste disposal –Telephones Information technology –Computers –Broadband networks

Trade Agreements, Alliances & Organizations GATT WTO NAFTA EU APEC World Bank IMF

Levels of Involvement in International Trade Import/Export Trading Companies Licensing & Franchising Contract Manufacturing Joint Ventures & Alliances Direct Investment The Multi-National Corporation

3-16 Licensing And Franchising  Licensing Agreement – Lets foreign company to sell products of producer/licensor or use intellectual property for royalty fee  International Franchise Agreement – Company/Franchisor grants foreign company right to use brand name and sell its products and sell its products Exploring Business © 2009 FlatWorld Knowledge

3-17 Contract Manufacturing Exploring Business © 2009 FlatWorld Knowledge Outsourcing – US company contracts with either (another US company) or foreign company to manufacturer one or more of its products. US Company generally retains control of product design, development, and branding. Potential Issues: Foreign-made products meeting US Company’s internal quality standards, as well as US standards for meeting codes, safety requirements, regulations, engineering specifications, etc.

3-18 Strategic Alliances and Joint Ventures Strategic Alliance – Agreement between two companies (or company and nation) to pool resources achieve business goals benefiting both partners Joint Venture – Alliance in which partners fund separate entity to manage joint operation Exploring Business © 2009 FlatWorld Knowledge

3-19 Foreign Direct Investments And Subsidiaries $ Foreign Direct Investment – Formal establishment of business operations on foreign soil $ Foreign Subsidiary – Independent company owned by a foreign firm (parent) Exploring Business © 2009 FlatWorld Knowledge

3-20 World’s Largest Multi National Corporations Exploring Business © 2009 FlatWorld Knowledge

3-21 Cultural Environment LanguageTime/Sociability High Context- interlocking personal/family connections hold people together High Context- interlocking personal/family connections hold people together Low Context- personal & work relationships more compartmentalized Low Context- personal & work relationships more compartmentalized Intercultural Communication Animation Animation Distance Distance Exploring Business © 2009 FlatWorld Knowledge

3-22 Economic Environment  Economic Development- Gross national income per capita Standard of living Standard of living Infrastructure Infrastructure  Currency Valuations & Exchange Rates  Universal Currency Converter Universal Currency Converter Universal Currency Converter Exploring Business © 2009 FlatWorld Knowledge

3-23 Legal & Regulatory Environment No established global legal system Foreign Corrupt Practices Act Exploring Business © 2009 FlatWorld Knowledge

3-24 Subsidies or Trade Controls?  Protectionism  Tariffs  Quotas/Embargo  Dumping Exploring Business © 2009 FlatWorld Knowledge

Pros * Protect specific industries * Protect new or struggling industries * Shield industries vital to national defense Cons * Restricts free trade; countries cannot compete freely * Doesn’t promote level playing field; gives special privileges to some *Cannot bring goods to fair/open market *Detrimental to world economy; nations cannot focus on what they do best Trade Control Debate

3-26 Reducing Trade Barriers  Trade Agreements/Organizations General Agreement on Tariffs & Trade (1947) General Agreement on Tariffs & Trade (1947) World Trade Organization (1995) World Trade Organization (1995)  Financial Support for Troubled Economies (1944) International Monetary Fund International Monetary Fund World Bank World Bank  Trading Blocs North American Free Trade Association (1994) North American Free Trade Association (1994) European Union European Union Other Other Exploring Business © 2009 FlatWorld Knowledge

27 Members of the EU