3 Business in the Global Economy 3-1 International Business Basics C H A P T E R 3 Business in the Global Economy 3-1 International Business Basics 3-2 The Global Market Place 3-3 International Business Organizations

3-1 International Business Basics Goals Describe importing and exporting activities Compare balance of trade and balance of payments List factors that affect the value of global currencies

Trading Among Nations Most business activities occur within a country’s own boarders Domestic Business – the making, buying, and selling of goods and services within a country. International Business – refers to business activities needed for creating, shipping, and selling goods and services across national boarders. Foreign or World Trade

Absolute/Comparative Advantage Two economic principles define buying and selling among companies in different countries Absolute Advantage – exists when a country can produce a good or service at a lower cost than other countries Comparative Advantage – a situation in which a country specializes in the production of a good or service at which it is relatively more efficient

Importing / Exporting Imports – Items bought from other countries Without foreign trade, many things you buy would cost more or not be available. Exports – Goods and services sold to other countries The goods and services exported by the U.S. create many jobs. 1 out of 6 jobs in the U.S. depend on international business.

U.S Trade Balance With Top Trading Partners (In Billions) Country Goods Exported Goods Imported U.S Trade Balance All Countries 1056.9 1558.1 -501.2 1. Canada 204.7 224.9 -20.2 2. China 69.6 296.4 -226.8 3. Mexico 129.0 176.5 -47.5 4. Japan 51.2 95.9 -44.7 5. Germany 43.3 71.3 -28.0 6. United Kingdom 45.7 47.5 -1.8 7. South Korea 28.6 39.2 -10.6 8. France 26.5 34.0 -7.5 9. Netherlands 32.3 16.1 16.2

Checkpoint #1 How does importing differ from exporting ? Importing is bringing items from other countries into a country. Exporting is selling goods and services to other countries.

Measuring Trade Relations People usually try to keep their income and spending in a balance. Nations are also concerned about balancing income with expenditures. Foreign Debt – the amount the country owes to other countries

Balance of Trade The difference between a country’s total exports and total imports. Trade Surplus - If a country exports more than it imports (Trade favorable) Trade Deficit - Country imports more than its exports (Trade is unfavorable) U.S. has had a trade deficit in recent years

Balance of Payments Money goes from one country to another through investments and tourism Business Factory Financial or Military aid Bank deposit funds in foreign banks Balance of Payments – the difference between the amount of money that comes into a country and the amount that goes out.

Checkpoint #2 How does balance of trade differ from balance of payments? Trade is not the only thing influencing the balance of payments. Money can enter or leave a country through investments, tourism, financial aid, and bank deposits.

International Currency A challenge faced by many businesses are the various currencies used around the world. Foreign Exchange Market – exchanging one currency for another. Consists of banks that buy and sell different currencies Exchange Rate – the value of a currency in one country compared with the value of another. Supply and demand affect the value of currency

Factors Affecting Currency Values 3 main factors affect currency exchange rates: Balance of Payments – favorable balance of payments, the value of its currency is usually constant or rising. Economic Conditions – Buying power in decline, inflation, interest rates. Political Stability – Government change might create unfriendly setting got foreign business. New laws might be put in placed.

Checkpoint #3 What factors affect a countries currency ? Balance of payments Economic Conditions Political Stability

3-2 The Global Marketplace Goals: Describe the components of the international business environment Identify examples of formal trade barriers Explain actions to encourage international trade.

International Business Environment Businesses must consider 4 main factors when doing business in other countries: Geography Cultural Influence The accepted behaviors, customs, values of society Economic development Infrastructure (transportation, communication, utility systems) Political and Legal Concerns

Political/Legal Factors International Business Environment Geographic Factors Location Climate Terrain Waterways Natural Resources Economic Factors Technology Education Inflation Exchange Rate Infrastructure Cultural Factors Language Family Religion Customs Traditions Food Political/Legal Factors Government System Political Stability Trade Barriers Business Regulations

Checkpoint #4 List the four main elements of the international business environment? Geography Cultural Influences Economic Development Political and Legal Concerns

International Trade Barriers Government actions can create Trade Barriers Restrictions to free trade Formal Trade Barriers – political actions Quotas , Tariffs , Embargos Informal Trade Barriers – Culture, traditions, and religion Not based on government actions but they can restrict trade

Quotas Government sets a limit on a quantity of a product that may be imported or exported within a given period Quotas can be set for many reasons Crude oil (Supply remains low) Imports (Express displeasure at the politics) Competition abroad

Tariffs A tax that a government places on certain imported products Some tariffs are a set amount per pound, gallon, or other unit. High Tariff Lower Demand Quantity of that import

Embargoes Government stops the export or import of a product completely Wish to protect their own industries from international competition Prevent sensitive products Vital to a nations defense Express disapproval of the actions or politics of another country

Checkpoint #5 What are 3 formal trade barriers? Quotas Tariffs Embargos

Encouraging International Trade Specific actions by government can promote international business activities Exporting is an effective way to create jobs and foster economic prosperity Free trade zone Free-trade agreements Common Markets

Free-Trade Zones A selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing Located usually around a seaport or airport The importer only pays duty only when the product leaves the zone

Fair-Trade Agreements Member countries agree to remove duties (import taxes), and trade barriers on products traded among them Results in increase trade NAFTA (North American Free Trade Agreement) Eases the movement of goods

Common Markets Member do away with duties and other trade barriers Allow companies to invest freely in each member’s country Economic Community European Union (EU) Latin American Integration Association (LAIA) Goal is to expand trade among member nations and promote regional economic integration

Checkpoint #6 What actions can be taken to encourage international trade? Free-Zones Free-Trade Agreements Common Markets

3-3 International Business Organizations Goals Discuss activities of multinational organizations Explain common international business entry modes Describe activities of international trade organizations and agencies

Multinational Companies An organization that does business in several countries Usually consists of a parent company in a home country and divisions Separate companies in one or more host countries The country in which a MNC places business activities

MNC Strategies Global or Multinational Strategy Global Strategy – uses the same product and some marketing strategy worldwide Product is sold in the manner across the world (Coca-Cola) Multinational Strategy - treats each country market differently Firms develop products and marketing strategies that adapt to the customs, tastes, and buying habits of a market.

MNC Benefits Large amount of goods available Lower price than goods made domestically Career opportunities expand as a company does business Foster understanding, communication, and respect among people of different countries.

Drawbacks of MNC Workers of the host country may depend on the MNC for jobs Consumers become dependent upon it for goods and services Control or influence the political power of the country

Checkpoint #7 What are two strategies commonly used by MNC? Global strategy – offering the same product the same way everywhere Multinational Strategy – Approaching each countries market differently

Global Market Entry Modes Licensing – selling the right to use some intangible property (production process, trademark, brand name) for a fee or royalty Gerber company selling in Japan Licensing has a low financial investment, so return in low Franchising – the right to use a company name or business process in a specific way.

Global Market Entry Modes Marketing elements such as food product, packaging and advertising must meet cultural sensitivities and legal requirement Joint Venture – an agreement between two or more companies to share a business project Sharing of Raw materials, shipping facilities, management activities, or production facilities. Sharing of profits and not as much control

Checkpoint #8 How does licensing differ from a franchise? Licensing does not require as much financial investment or risk as a franchise Both involve royalty payments, but licensing involves manufacturing process, while franchising involves selling a product or service.

World Trade Organization Created in 1995 to create trade around the world Settles trade disputes and enforces free-trade agreements Lowering tariffs that discourage free trade Eliminating import quotas Reducing barriers for banks, insurance companies, and other financial services Assisting poor countries with economic growth

International Monetary Fund Helps promote economic cooperation Maintains an orderly system of world trade and exchange rates. Cooperation among IMF nations makes trade war less likely

World Bank Was created in 1944 to provide loans for rebuilding after WW II Today the bank function is to give economic aid to less developed countries Build communication systems, transportation networks, and energy plants.

Checkpoint #9 How does the International Monetary Find assist countries? By promoting economic cooperation and maintaining an orderly system of world trade and exchange rates.