Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Exploring Global Business

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives ① Explain the economic basis for international business. ② Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results. ③ Outline the extent of international trade and the world economic outlook for trade. ④ Discuss international trade agreements and international economic organizations working to foster trade. ⑤ Define the methods by which a firm can organize for and enter into international markets. ⑥ Describe the various sources of export assistance. ⑦ Identify the institutions that help firms and nations finance international business. 3 2

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Absolute Advantage Absolute Advantage is the ability to produce a specific product more efficiently than any other nation. 3 Saudi Arabia – Crude OilSouth Africa - DiamondsAustralia - Wool © ILDOGESTO/SHUTTERSTOCK © DVARG/SHUTTERSTOCK © AKAISER/SHUTTERSTOCK © ILEYSEN/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Comparative Advantage Comparative Advantage is the ability to produce a specific product more efficiently than any other product. 3 4 Country A Country B 30m45m Automobiles 6m18m Motorcycles Maximum Outputs Country B has absolute advantage in both products, but a comparative advantage in motorcycles because it is relatively better at producing them. Country B is 3 times better at motorcycles, but only 1.5 times better at cars.

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exporting and Importing U.S. Imports U.S. Exports Excess Corn Excess Wine 3 5 Countries trade when they each have a surplus of the product in which they specialize and want a product in which the other country specializes.

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exports by State 3 6

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance of Trade Balance of trade is the total value of a nation's exports minus the total value of its imports over some period of time. 3 7 ImportsExports

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. U.S. International Trade in Goods and Services 3 8

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trade Deficit Trade deficit is a negative (unfavorable) balance of trade where imports exceed exports in value. 3 9 Imports Exports

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. US International Trade Deficit 3 10 Source:

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reasons for Trade Restrictions What are some reasons a country would want to restrict trade? 3 11 © STUART MILES/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Restrictions to International Business Most trade restrictions are applied to imports from other countries Nations are generally eager to export their products to provide markets for their industries and develop a favorable balance of trade. © ALBO003/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exports $8.7 Billion Trade with China, July 2013 Imports $38.8 Billion 3 13 Balance -$30.1 Billion United States imports more goods from China than any other nation in the world. © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Trade Restrictions: Tariffs 3 14  An Import duty (tariff) is 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.

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Trade Restrictions: Dumping Dumping is the exportation of large quantities of a product at a price lower than that of the same product in the home market The U.S. Commerce Department has imposed anti-dumping tariffs and anti-subsidy tariffs on Chinese solar panels to combat dumping. © FILIP FUXA/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Trade Restrictions: Nontariff Barriers 3 16 ₤ € ¥ $  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. Embargoes may be imposed to accomplish foreign policy and national security goals.  Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Trade Restrictions: Nontariff Barriers (cont’d)  Currency devaluation is 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 © MILAN LJUBISAVIJEVIC/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Trade Restrictions: Cultural Attitudes How important is it to you that your goods are made in the U.S.A? 3 18 © MYPIXXX/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reasons for Trade Restrictions  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 nation’s trade restrictions  To protect domestic jobs 3 19 © FIKMIK/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reasons Against Trade Restrictions  Higher prices for consumers  Restriction of consumers’ choices  Misallocation of international resources  Loss of jobs 3 20 © FIKMIK/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Extent of International Business Although the worldwide recessions of 1991 and slowed the rate of growth, and global economic crisis caused the sharpest decline in more than 70 years, globalization is a reality of our time. 3 21

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Extent of International Business (cont’d)  Trade barriers are decreasing, new competitors are entering the global marketplace, creating more choices for consumers and new job opportunities.  International business will grow with the expansion of commercial use of the Internet. 3 22

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The World Economic Outlook for Trade 3 23

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 2010 and 2011, despite the high oil prices. 3 24

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The World Economic Outlook for Trade: Canada 3 25  Canada is the U.S.’s leading export partner.  Projected Growth 2013: 1.8% 2014: 2.3%  2012 U.S. goods Trade Deficit with Canada: -$32 Billion © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Euro Area Projected Growth 2013: -0.2% 2014: 1.0%  2011 Trade Deficit: -$99,88.0B 3 26  United Kingdom Projected Growth 2013: 1.0% 2014: 1.9%  2011 Trade Deficit: +$4,664.6B The World Economic Outlook for Trade: EU and UK FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The World Economic Outlook for Trade: Japan and China  Japan Projected Growth 2013: 1.2% 2014: 0.7%  2011 Trade Deficit: -$63,218.5B 3 27  China Projected Growth 2013: 8.2% 2014: 8.5%  Generates 25% of world GDP growth FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The World Economic Outlook: India and ASEAN-5 Countries  India Projected Growth 2013: 5.9% 2014: 6.4%  2011 Trade Deficit: -$14,651.5B 3 28  ASEAN-5 Projected Growth 2013: 5.5% 2014: 5.7%  2011 Trade Deficit: -$51,775.8B Indonesia, Malaysia, Philippines, Thailand, Vietnam FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The World Economic Outlook for Trade Commonwealth of Independent States  Commonwealth of Independent States Projected to show growth in 2013 and With the collapse of communism, trade between the U.S. and central and Eastern Europe expanded substantially. Countries that transitioned from communism to market economies are growing; those that have not transitioned continue to struggle Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Uzbekistan © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exports and the U.S. Economy  Exports as a percentage of GDP: Record high of 12.9% in : 12.7%; 2011: 13.8%  In 2011, exports were up 14.5% to $2.15 trillion while imports were up 13.8% to $2.66 trillion.  Largest merchandise export markets in 2012: Canada: $270.1B Mexico: $199.9B China: $100.2B 3 30

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Largest Trading Partners for U.S. 3 31

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. U.S. Goods Export and Import Shares in

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Trade Agreements WTO World Trade Organization (WTO)  Oversees GATT provisions  Has judicial powers to meditate trade disputes arising from GATT rules  Exerts more binding authority than GATT 3 33

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. WTO Members Share in World Merchandise Trade,

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. World Trade and the Global Economic Crisis “The multilateral trading system has been instrumental in maintaining trade openness during the [global financial] crisis, thereby avoiding even worse outcomes. Members must remain vigilant. This is the time to strengthen and preserve the global trading system so that it keeps performing this vital function in the future.” --WTO Director-General Pascal Lamy, © ANWEBER/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. World Trade and the Global Economic Crisis Do you think the interconnectedness of the global economy helped or exacerbated the global economic crisis? 3 36 © ROBOLAB/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Economic Organizations: The Evolving European Union 3 37 The European Union is now an economic force, with a collective economy larger than that of the United States or Japan.

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Economic Organizations: NAFTA North American Free Trade Agreement (NAFTA) 3 38 The United States Canada Mexico FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Economic Organizations: NAFTA Support  Contributes to significant increases in trade and investment  Benefits companies in all three countries  Results in increased sales, new partnerships, and new opportunities  Creates high-paying export-related jobs  Leads to better prices and selection in consumer goods 3 39 Criticism  Has not achieved its goals  Resulted in job losses  Erodes labor standards and lowers wages  Undermines national sovereignty and independence  Does nothing to help the environment  Hurts the agricultural sector

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Economic Organizations: CAFTA-DR Central American Free Trade Agreement – Dominican Republic (CAFTA-DR) Est El Salvador Guatemala Honduras Nicaragua Dominican Republic Costa Rica FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Association of Southeast Asian Nations (ASEAN) Est International Economic Organizations: ASEAN 3 41 Brunei Myanmar Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Economic Organizations: OPEC Organization of Petroleum Exporting Countries (OPEC), Est Algeria Indonesia Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Economic Organizations: Others  The Commonwealth of Independent States, Est  Trans-Pacific Partnership (TPP), Est  Commonwealth of Independent States (CIS), Est  Caribbean Basin Initiative (CBI)  Common Market of the Southern Cone (MERCOSUR), Est  Organization of Petroleum Exporting Countries (OPEC), Est

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Licensing  Licensing is 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. 3 44

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Exporting  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 3 45

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Exporting (cont’d) Exporting (cont’d) 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 3 46

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Internet “Our Mission: To Help U.S. Business Succeed, Globally.” The International Trade Administration of the U.S. Department of Commerce (ITA) website has links to statistics, industry analysis, trade laws, and answers to often-asked trade questions

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organizing for International Business Licensing Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firm Exporting Joint-Venture 3 48

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Joint Ventures  A joint venture is 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 3 49

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Totally Owned Facilities  Totally owned facilities refers to production and marketing facilities developed by a firm 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 3 50

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Strategic Alliances Strategic alliances are partnerships formed to create competitive advantage on a worldwide basis. 3 51

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Trading Companies  Trading companies are firms that provide a link between buyers and sellers in different countries. Buys products in one country at the lowest price consistent with quality and sells to buyers in another country Takes title to products and perform all the activities necessary to move the products from one country to another 3 52 © ROBOLAB/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Countertrade Countertrade is an international barter transaction.  Early 1990s: Many developing nations had major restrictions on converting domestic currency into foreign currency. Countertrade avoids restrictions on converting domestic currency to foreign currency Crude Oil Exchanged for Planes © DVARG/SHUTTERSTOCK © BOJANOVIC/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Multinational Enterprise Multinational enterprise refers to firms that operate on a worldwide scale without ties to any specific nation or region. 3 54

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Methods of Entering International Business: Steps in Entering International Markets 1.Identify exportable products. 2.Identify key foreign markets for the products. 3.Analyze how to sell in each priority market. 4.Set export prices and payment terms, methods, and techniques. 5.Estimate resource requirements and returns. 6.Establish overseas distribution network. 7.Determine shipping, traffic, and documentation procedures and requirements. 8.Promote, sell, and be paid. 9.Continuously analyze current marketing, economic, and political situations. 3 55

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Assistance: NEI National Export Initiative (NEI)  Announced August 2010 by President Obama  Goal: Revitalize U.S. exports  Means: Federal Agencies assist U.S. firms in developing export-promotion programs to compete in foreign markets and create jobs in the U.S. (some examples below) 3 56 Federal AgencyAssistance International Trade AdministrationDomestic and overseas commercial officers provide assistance and information. Advocacy CenterFacilitates advocacy to assist U.S. firms competing for major projects and procurements worldwide. National Trade Data BankProvides international economic and export- promotion information from more than 20 U.S. agencies.

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financing International Business  The Export-Import Bank of the United States (Ex-Im Bank) is an independent agency of the U.S. government whose function it is to assist in financing the exports of American firms.  Multilateral Development Bank (MDB) is 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) is an international bank with 186 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits. 3 57

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Challenges Ahead  Global economic recovery remains sluggish.  Financial challenges in euro-area economies slow economic growth.  WTO rules and principles have assisted governments in keeping markets open and provide a platform for which the trade can grow as the global economy improves “We see the light at the end of the tunnel and trade promises to be an important part of the recovery. But we must avoid derailing any economic revival through protectionism.” --WTO Director-General Pascal Lamy