Foundations of Business 3e Pride, Hughes, & Kapoor

Exploring Global Business Chapter 3

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 business and the world economic outlook for trade. Discuss international trade agreements and international economic organizations working to foster trade. 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.

The Basis for International Business All business activities that involve exchanges across national boundaries Some countries are better equipped than others to produce particular goods or services. 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 Goods and services are produced more efficiently when each country specializes in the products for which it has a comparative advantage.

Video http://www.youtube.com/watch?v=Vvfzaq72wd0

Countries with an “Absolute Advantage” Oil Diamonds Wool Saudi Arabia South Africa Australia

Countries and their Comparative Advantage Corn vs. Beets Corn vs. Cars Corn vs. Rice United States Germany Japan

Exports and Imports Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in. 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

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

US Imports and Exports 2014 Biggest Import Items Crude Oil Passenger Cars Medical Preparations (ingredients for drugs) Automotive Accessories Gems and precious medals Biggest Export Items Refined Oils Products Telecom Equipment Aircraft Motor Vehicles Electronic equipment Pharmaceuticals

Top Ten Merchandise-Exporting States 2012 2012 192.5 164.4 77.5 75.6 70.0 63.1 58.0 47.2 43.5 42.5

Important things for governments to consider when managing imports and exports Balance of trade The total value of a nation’s exports minus the total value of its imports over some period of time Trade deficit A negative (unfavorable) balance of trade —imports exceed exports in value Balance of payments The total flow of money into a country minus the total flow of money out of that country over a period of time Is more money coming in or going out of our country?

How do you feel when you see this sign? National Pride? Quality Craftsmanship Work ethic A cheap substitute Don’t buy a foreign product

Gung Ho - Video Clip https://www.youtube.com/watch?v=hKNeFHBPgRo Many countries have caught up to or passed the US in production quality and efficiency

Restrictions to International Business The reasons for restricting trade range from internal political and economic pressures to mistrust of other nations. Nations are generally eager to export their products to provide markets for their industries and develop a favorable balance of trade. Most trade restrictions are applied to imports from other nations.

U.S. International Trade in Goods and Services

Types of Trade Restrictions Import duty (tariff) 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.

Types of Trade Restrictions (cont.) 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 Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold

Types of Trade Restrictions (cont.) Nontariff barriers (cont.) Currency devaluation—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

U.S. Trade Restrictions / Sanctions Balkans Belarus Lebanon Ivory Coast Yemen Congo Iran Iraq Liberia North Korea Sudan Syria Zimbabwe For more information go to: http://www.treas.gov/offices/enforcement/ofac/programs/ maintained by the U.S. Department of the Treasury

Reasons for and Against Trade Restrictions Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources Loss of jobs FOR 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 country’s trade restrictions To protect domestic jobs

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 2014 and 2015, despite high oil prices.

The World Economic Outlook for Trade (cont.) Canada and Western Europe Canada is projected to show growth in 2013 and 2014. The Euro area is expected to grow in 2014. The U.K. and smaller European countries are expected to experience a recession. Mexico and Latin America Mexico is expected to show growth in 2014 and 2015. Latin American and Caribbean economies are recovering at a robust pace.

The World Economic Outlook for Trade (cont.) Japan Projected to regain momentum after a crash. Other Asian Countries China’s economy is declining after being inflated for years by false numbers Key emerging economies in Asia are leading the global recovery. Emerging Europe Growth has been faster than in western Europe and continued growth is expected in 2014 and 2015.

The World Economic Outlook for Trade (cont.) Commonwealth of Independent States Projected to show growth in 2014 and 2015. With the collapse of communism, trade between the U.S. and Central and Eastern Europe expanded substantially. Exports and the U.S. Economy In 2008, exports as a percentage of GDP reached its highest level since 1916. In the past 50 years, exports have become increasingly important to the U.S. economy.

Global Growth Is Picking Up

Value of U.S. Merchandise Exports and Imports, 2010

U.S. Goods Export and Import Shares in 2012

International Trade Agreements The General Agreement on Tariffs and Trade and the World Trade Organization General Agreement of Tariffs and Trade (GATT) International organization of 153 nations dedicated to reducing or eliminating tariffs and other trade barriers Most-favored-nation status (MFN)—each member of GATT was to be treated equally by all other members Kennedy Round, Tokyo Round, Uruguay Round, Doha Round

International Trade Agreements (cont.) The General Agreement on Tariffs and Trade and the World Trade Organization (cont.) World Trade Organization (WTO) Created in the Uruguay Round of GATT negotiation as a successor to GATT WTO oversees GATT provisions, has judicial powers to mediate trade disputes arising from GATT rules, and exerts more binding authority than GATT

WTO Members’ Share in World Merchandise Trade, 2009 Updated 2011 stats in book

Americans Should Learn Foreign Languages Everyone Should Speak English Debate Issue: Should U.S. Businesspeople Learn Foreign Languages or Should Everyone Speak English? Americans Should Learn Foreign Languages It is unrealistic to expect citizens of all nations that use our products and services to be fluent in English. For example, more people speak Mandarin Chinese than any other language, and China is one of the fastest growing economies in the world. The only way a company can hope to avoid blunders of language in sales, advertising, and other dealings with a foreign nation is to ensure that its managers are fluent in that nation’s language. Besides, foreign buyers respond differently and more favorably to a seller who is fluent in their native language. Everyone Should Speak English More people speak English globally than any language other than Mandarin Chinese or Spanish. There are less expensive and equally secure ways of avoiding language mistakes in dealing with a foreign nation—for example, by hiring an in-country representative or agency that is bilingual and offers the needed services. Furthermore, it is impossible for American businesspeople to learn every world language. It is more feasible for businesspeople in all the other countries to learn one language—English.

International Economic Organizations Working to Foster Trade 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 What are the most important economic communities? The EU NAFTA CAFTA ASEAN OPEC

The Evolving European Union (EU)

International Economic Organizations Working to Foster Trade (cont.) North American Free Trade Agreement (NAFTA) United States Canada Mexico Chile is expected to become the 4th member

OPEC Nations Organization of Petroleum Exporting Countries (OPEC) Algeria Indonesia Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela

International Economic Organizations Working to Foster Trade (cont.) Central American Free Trade Agreement – Dominican Republic (CAFTA-DR) El Salvador Guatemala Honduras Nicaragua Dominican Republic Costa Rica

International Economic Organizations Working to Foster Trade (cont.) Association of Southeast Asian Nations (ASEAN) Brunei Myanmar Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam

Other International Economic Organizations Working to Foster Trade (cont.) European Economic Area (EEA) Pacific Rim Commonwealth of Independent States (CIS) Caribbean Basin Initiative (CBI) Common Market of the Southern Cone (MERCOSUR) Organization for Economic Cooperation and Development (OECD)

What are common methods to Enter International Business Licensing Exporting Joint Venture Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firm

Licensing 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 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

Methods of Entering International Business (cont.) 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

Methods of Entering International Business (cont.) Exporting (cont.) 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

Methods of Entering International Business (cont.) Joint venture 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

Methods of Entering International Business (cont.) Totally owned facilities Production and marketing facilities 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

World’s Top Transnational Corporations General Electric British Petroleum Company, Plc Toyota Motor Corporation Royal Dutch/Shell Group ExxonMobil Corporation Ford Motor Company Vodafone Group, Plc Total Electricite De France Walmart Stores Source: UNCTAD; World Investment Report: Transnational Corporation and the Infrastructure Challenge; http://www.unctad.org/Templates/webflyer.asp?docid=10509&intItemID=4697&lang=1; accessed February 17, 2009.

Methods of Entering International Business (cont.) Strategic alliances Partnerships formed to create competitive advantage on a worldwide basis Trading companies Firms that provide a link between buyers and sellers in different countries Takes title to products and performs all the activities necessary to move the products from one country to another

Methods of Entering International Business (cont.) Countertrade An international barter transaction Avoids restrictions on converting domestic currency to foreign currency Multinational enterprise A firm that operates on a worldwide scale without ties to any specific nation or region

Ten Largest Foreign and U.S. Multinational Corporations

Financing International Business The Export-Import Bank of the United States (Eximbank) An independent agency of the U.S. government whose function is to assist in financing the exports of American firms Multilateral Development Bank (MDB) 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) An international bank with 186 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits

Finally, Sources of Export Assistance National Export Strategy (NES) Trade Promotion Coordinating Committee (TPCC) Assists U.S. firms in developing export-promotion programs Helps American firms compete in foreign markets and create new jobs in the U.S.

Sources of Export Assistance (cont.) 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

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

U.S. Government Export Assistance Programs

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 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 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 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 XYZ Company is seeking a partner in China to manufacture its products. It 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.