© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 1 Exploring Global Business Chapter3

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 2  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. The Basis for International Business

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 3  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 The Basis for International Business (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 4 Exporting and Importing U.S. Imports U.S. Exports Excess Corn Excess Wine

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 5  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 The Basis for International Business (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 6  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. Restrictions to International Business

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 7 U.S. International Trade in Goods and Services

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 8  Import duty (tariff) A tax levied on a particular foreign product entering a country  Dumping The exportation of large quantities of a product at a price lower than that of the same product in the home market Types of Trade Restrictions

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 9  Nontariff barriers (nontaxing) Set by a government to favor their own products over foreign products 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 Types of Trade Restrictions (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 10  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 – What is Business Like in Other Cultures Anyway? What is Business Like in Other Cultures Anyway? Types of Trade Restrictions (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 11 Reasons for and Against Trade Restrictions 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 AGAINST Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources Loss of jobs

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 12  Although the worldwide recessions of 1991 and slowed the rate of growth, and the global economic crisis caused the sharpest decline in more than 70 years, globalization is a reality of our time.  In the U.S., international trade accounts for over a quarter of GDP. The Extent of International Business

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 13  Trade barriers are decreasing and 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. The Extent of International Business (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 14  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. The World Economic Outlook for Trade

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 15 U.S. Goods Export and Import Shares in 2010

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 16  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

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 17  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 International Trade Agreements (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 18  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 Organizations Working to Foster Trade

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 19 The Evolving European Union

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 20  North American Free Trade Agreement (NAFTA) International Economic Organizations Working to Foster Trade (cont.) United States Canada Mexico Chile is expected to become the 4 th member

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 21  Central American Free Trade Agreement – Dominican Republic (CAFTA-DR) International Economic Organizations Working to Foster Trade (cont.) El Salvador Guatemala Honduras Nicaragua Dominican Republic Costa Rica

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 22  Association of Southeast Asian Nations (ASEAN) International Economic Organizations Working to Foster Trade (cont.) Brunei Myanmar Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 23  Organization of Petroleum Exporting Countries (OPEC) OPEC Nations Algeria Indonesia Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 24 Environmental Forces Impacting International Business Economic Political/LegalSociocultural

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 25  With which environmental force (political/legal, sociocultural, economic) is each of the following most closely associated? Handshaking Religion Transportation networks Computer literacy Sporting events Color preferences Standard of living The role of children in the family Class Exercise

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 26 Organizing for International Business Licensing Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firm Exporting Joint Venture

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 27  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

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 28  Exporting May use an export/import merchant who takes title of the product, does 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.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 29  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.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 30  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.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 31  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 Methods of Entering International Business (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 32  Strategic alliances Permanent partnerships formed to create competitive advantage on a worldwide basis  Trading companies Firms that provide a link between buyers and sellers in different countries-commonly used for sale of wheat, corn, etc. 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.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 33  Countertrade An international barter transaction Don’t have to convert currency  Multinational enterprise A firm that operates on a worldwide scale without ties to any specific nation or region Methods of Entering International Business (cont.)

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 34 Ten Largest Foreign and U.S. Multinational Corporations

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 35 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

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 36 Chapter Quiz 1. 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) A. unfavorable balance of payments. B. favorable balance of payments. C. favorable balance of trade. D. unfavorable balance of trade. E. unfavorable supply of goods.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 37 Chapter Quiz 2. 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) A. import duty. B. import cut. C. export control. D. trade embargo. E. export duty.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 38 Chapter Quiz 3. When the United States wants to reduce the cost of its goods in foreign nations, it A. revalues its currency. B. devalues its currency. C. pays off its trade deficit. D. borrows from the Eximbank. E. sells more goods abroad.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 39 Chapter Quiz 4. A forum for the discussion of trade problems and a reduction of trade barriers is provided by A. the General Agreement on Tariffs and Trade (GATT) or the World Trade Organization (WTO). B. a free trade zone. C. the World Bank. D. the Eximbank. E. All of these answers are correct.

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 40 Chapter Quiz 5. 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. It most likely will need this partnership for a specific amount of time, not on a permanent basis.The best choice for XYZ Company is A. licensing. B. a bilateral agreement. C. a joint venture. D. an export/import merchant agreement. E. an export/import agent agreement.