1. Business in the Global Economy
Chapter 3
Business in the Global Economy

2. 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.

3. International Business
Domestic business
Making, buying, and selling of goods and services within a country.
International business
Creating, shipping, and selling goods and services across national borders.
Also called foreign or world trade

4. International Business
The U.S. conducts trade with more than 180 countries.
The world is changing from economies defined by borders into a global economy.
Two economic principles define buying and selling among companies in different countries.
Absolute Advantage
Comparative Advantage

5. Absolute Advantage Absolute advantage
Country can produce a good or service at a lower cost than other countries
Can be gained from having an abundance of natural resources or raw materials.
Examples: South America: Coffee Production Saudi Arabia: Oil Production

6. Comparative Advantage
Country specializes in the production of a good or service
Lower opportunity cost than another country producing the same good.
Again, what’s the difference between an absolute and comparative advantage?

7. Importing
Imports
Items bought from other countries.
Bananas, coffee, cocoa, tea, silk, oil, toys, tin, copper, zinc, aluminum (Coke cans), Swiss watches, French designer clothing
Without our country’s ability to import goods, many of the things we buy would be more expensive or not even available to buy!

8. Exporting Exports: goods and services sold to other countries.
U.S. exports include:
agricultural products
medicines
plastics
movies
books
machinery

9. Balance of Trade
Balance of trade: the difference between a country’s total exports and total imports.
If a country exports (sells) more than it imports (buys), it has a trade surplus.
If a country imports (buys) more than it exports (sells), it has a trade deficit.
Generally speaking, the U.S. IMPORTS MORE than it EXPORTS
TRADE DEFICIT

10. Balance of Trade
A country can have a trade surplus with one country and a trade deficit with another.
A country needs to keep its trade in balance.
Exports
Imports

11. Balance of Payments
Balance of payments: the difference between the amount of money that comes into a country and the amount of money that goes out of it.
Positive (favorable) balance: occurs when a nation receives more money in a year than it pays out.
Negative (unfavorable) balance: the result of a country sending more money out than it brings in.

12. International Currency
A challenge in international business is variations in currency
Nations have their own banking system and money.
Japan: yen Venezuela: bolivar
Britain: pound European Union: euro

13. Currencies

14. Foreign Exchange Rates
Value of a currency in one country compared with the value in another3
Supply and demand affect value of currency
Must understand currency exchanges as products go from one country to another

15. Factors Affecting Currency Values
Three main factors affect currency exchange rates:
Balance of payments
Positive balance = high value of currency
Economic conditions
Inflation reduces the buying power of a currency
Political stability
How stable is the government and laws regulating business?

16. 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.

17. 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.

18. International Business Environment
Four main factors to consider when doing business in other countries:
1) Geography
2) Cultural Influences
3) Economic Development
4) Political and Legal Concerns

19. Influence Business Activity
1) Geography
Influence Business Activity
Location
Climate
Terrain
Seaports
Natural Resources

20. 2) Cultural Influences
Culture: accepted behaviors, customs, values of a society.
Language
Religion
Values
Customs
Social Relationships

22. 3) Economic Development
Differences in living and work environments reflect the level of economic development.
Key factors for economic development:
Literacy level
Technology
Agricultural dependency

23. 3) Economic Development
Infrastructure: a nation’s transportation, communication, and utility systems.

24. 4) Political and Legal Concerns
Trade barriers
Importing/Exporting restrictions
Inspection of Goods
Government system
Political stability
Business regulations

25. International Trade Barriers
Trade barriers: restrictions to free trade.
Formal trade barriers :
Quotas
Tariffs
Embargoes
The culture, traditions, and religion of a country can create informal trade barriers.

26. Trade Barriers
Quota:
A limit on the quantity of a product that may be imported or exported within a given time period

27. Trade Barriers
Tariff: a tax that a government places on certain imported products.
Example:
You want to buy a pair of French designer shoes. The producer of the shoes charges $140 a pair, but the government charges 20% tariff ($28) on the shoes when they are imported. So, the final price you will have to pay is $168.
Tariffs increase the price of imported products to protect domestic companies.

28. Trade Barriers Embargo:
A government will STOP the export or import of a product completely.
Reasons to impose an embargo:
Protect home industries from international competition
Prevent sensitive products from falling into the hands of unfriendly groups or nations
Express its disapproval of the actions or policies of another country

29. Encouraging International Trade
Efforts to encourage international trade include:
Free-trade zones
Free-trade agreements
Common markets

30. Free-Trade Free-trade zones: Free-trade agreements:
Selected area where products can be imported then stored, assembled, and/or used in manufacturing without import taxes.
Usually around a seaport or airport
Free-trade agreements:
Agreement between nations to remove import taxes and trade barriers between them.
North American Free-Trade Agreement (NAFTA)

31. NAFTA
Est. 1994

32. Opposite of Free-Trade is No-Trade
2010

33. Common Markets Common market
Members do away with duties and other trade barriers.
Companies can freely invest in each member’s country
Workers can freely move across borders
Examples: European Union (EU) & Latin American Integration Association

35. 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.

36. 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.

37. MULTINATIONAL COMPANIES (MNC)
Organizations that do business in several countries
Home country
Host country

38. MNC STRATEGIES
Global strategy
Multinational strategy

39. MNC BENEFITS Large amount of goods available Lower prices
Career opportunities
Foster understanding, communication, and respect
Friendly international relations

40. DRAWBACKS OF MULTINATIONAL COMPANIES
Economic power
Worker dependence on the MNC
Consumer dependence
Political power

41. Checkpoint 
What are two strategies commonly used by multinational companies?
Global strategy (offering the same product the same way everywhere)
Multinational strategy (approaching each country market differently).

42. GLOBAL MARKET ENTRY MODES
Licensing
Franchising
Joint venture

43. LICENSING
Allows companies to produce items in other countries without being actively involved
Low financial investment
Possibility of low financial return
Very low risk

44. FRANCHISING
Allows organizations to enter into contracts to set up a business that looks and runs like the parent company
Marketing elements must meet cultural sensitivity & legal requirements.
Food products
Packaging
Advertising
Commonly involves
selling a product or
service

45. JOINT VENTURE Multiple companies sharing business projects Concerns
Raw materials
Facilities
Management
Production
Concerns
Sharing profits
Lack of control

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

47. INTERNATIONAL TRADE ORGANIZATIONS
World Trade Organization
International Monetary Fund
World Bank

48. WORLD TRADE ORGANIZATION (WTO)
Created in 1995
Includes 150 member countries
Promotes trade around the world
Settles trade disputes
Enforces free-trade agreements

49. WORLD TRADE ORGANIZATION (WTO)
Other goals
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

50. INTERNATIONAL MONETARY FUND (IMF)
Helps to promote economic cooperation
Maintains an orderly system of world trade and exchange rates
Includes more than 150 member nations
Prior to IMF – Trade Wars
Changing value of currency to attract other companies.

51. WORLD BANK
Created in 1944 to provide loans for rebuilding after World War II
Today the World Bank has more than 180 member countries and two main divisions
International Development Association (IDA)
Makes loans to help developing countries
International Finance Corporation (IFC)
provides technical capital and technical help to private businesses in nations with limited resources

52. Checkpoint 
How does the International Monetary Fund assist countries?
The International Monetary Fund assists countries by promoting economic cooperation and maintaining an orderly system of world trade and exchange rates.
This cooperation makes harmful trade wars among IMF nations less likely.

53. 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.

54. Activity