2. The Global Marketplace
Chapter 3

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Learning Objectives
Explain why nations trade and describe how international trade is measured
Discuss the nature of conflicts in global business, including free trade and government interventions in international trade
Identify the major organizations that facilitate international trade and the major trading blocs around the world
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4. Learning Objectives (cont.)
Discuss the importance of understanding cultural and legal differences in the global business environment
Define the major forms of international business activity
Discuss the strategic choices that must be considered before entering international markets
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The World’s Most Competitive Countries
Exhibit 3.1
According to the World Economic Forum (WEF), these are the 10 most competitive economies in the world, based on their ability to sustain economic growth. (Hong Kong, a Special Administrative Region of the People’s Republic of China, is evaluated separately by the WEF).
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Why Nations Trade
Economic globalization
The increasing integration and interdependence of national economies around the world
Commerce across borders has been going on for thousands of years, but the volume of international business has roughly tripled in the past 30 years. One significant result is economic globalization, the increasing integration and interdependence of national economies around the world.
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7. Why Nations Trade (cont.)
Focusing on relative strengths
Expanding markets
Pursuing economies of scale
Acquiring materials, goods, and services
Keeping up with customers
Keeping up with competitors
Six reasons help explain why countries and companies trade internationally.
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8. How International Trade is Measured
Balance of trade
Total value of the products a nation exports minus the total value of the products it imports, calculated over a period of time
Trade surplus
A favorable trade balance created when a country exports more than it imports
Two key measurements of a nation’s level of international trade are the balance of trade and the balance of payments. The total value of a country’s exports minus the total value of its imports, over some period of time, determines its balance of trade. In years when the value of goods and services exported by a country exceeds the value of goods and services it imports, the country has a positive balance of trade, or a trade surplus. The opposite is a trade deficit, when a country imports more than it exports.
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9. How International Trade is Measured (cont.)
Trade deficit
An unfavorable trade balance is created when a country imports more than it exports
Balance of payments
The sum of all payments a country receives from other countries minus the sum of all payments it makes to the other countries, over some specified period of time
The balance of payments is the broadest indicator of international trade. It is the total flow of money into the country minus the total flow of money out of the country over a defined period of time. The balance of payments includes the balance of trade plus the net dollars received and spent on foreign investment, military expenditures, tourism, foreign aid, and other international transactions.
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10. Foreign Exchange Rates and Currency Valuations
The rate at which the money of one country is traded for the money of another
When companies buy and sell goods and services in the global marketplace, they complete the transaction by exchanging currencies. The process is called foreign exchange, the conversion of one currency into an equivalent amount of another currency. The number of units of one currency that must be exchanged for a unit of the second currency is known as the exchange rate between the currencies.
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Free Trade
Free trade
International trade unencumbered by restrictive measures
Supporters of free trade generally acknowledge that it produces winners and losers but that the winners gain more than the losers lose, so the net effect is positive
The benefits of the comparative advantage model are based on the assumption that nations don’t take artificial steps to minimize their own weaknesses or to blunt the natural advantages of other countries. Trade that takes place without these interferences is known as free trade. (Like free-market capitalism, no trade is completely free in the sense that it takes place without regulations of any kind. Instead, international trade should be viewed along a continuum from “more free” to “less free.”)
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12. Government Intervention in International Trade
Protectionism
Government policies aimed at shielding a country’s industries from foreign competition
Tariffs
Taxes charged on imports
When a government believes that free trade is not in the best interests of its national security, domestic industries, workforce, or consumers, it can intervene in a number of ways. Some of these methods are collectively known as protectionism because they seek to protect a specific industry or groups of workers. Taxes, surcharges, or duties levied against imported goods are known as tariffs. Tariffs can be levied to generate revenue, to restrict trade, or to punish other countries for disobeying international trade laws.
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13. Government Intervention in International Trade (cont.)
Import quotas
Limits placed on the quantity of imports a nation will allow for a specific product
Embargo
A total ban on trade with a particular nation (a sanction) or of a particular product.
Quotas. Import quotas limit the amount of particular goods that countries allow to be imported during a given year.
Embargoes. An embargo is a complete ban on the import or export of certain products or even all trade between certain countries - United States had a embargo with except for food and mediciane Cuba 1960’s
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14. Government Intervention in International Trade (cont.)
Export subsidies
A form of financial assistance, in which producers receive enough money from the government to allow them to lower their prices, in order to compete more effectively in the global market
Export subsidies. In addition to intervening on imported goods, countries can also intervene to help domestic industries export their products to other countries. Export subsidies are a form of financial assistance in which producers receive enough money from the government to allow them to lower their prices in order to compete more effectively in the world market.
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15. Government Intervention in International Trade (cont.)
Dumping
Charging less than the actual cost or less than the home-country price for goods sold in other countries
Sanctions
politically motivated embargoes that revoke a country’s normal trade relations status
often used as forceful alternatives short of war
The practice of selling large quantities of a product at a price lower than the cost of production or below what the company would charge in its home market is called dumping.
Sanctions are politically motivated embargoes that revoke a country’s normal trade relations status; they are often used as forceful alternatives short of war. Sanctions can include arms embargoes, foreign-assistance reductions and cutoffs, trade limitations, tariff increases, import-quota decreases, visa denials, air-link cancellations, and more.
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16. International Trade Organizations
World Trade Organization (WTO)
Permanent forum for negotiating, implementing, and monitoring international trade procedures and for mediating trade disputes among the150 member countries
The organization’s work is guided by five principles:
preventing discriminatory policies that favor some trading partners over others or a country’s own products over those of other countries,
reducing trade barriers between countries,
making trade policies more predictable and less arbitrary,
discouraging unfair practices, and
helping less-developed countries benefit from international trade.
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17. International Trade Organizations (cont.)
The International Monetary Fund (IMF)
The IMF was formed to monitor global financial developments, provide technical advice and training, provide short-term loans to countries that are unable to meet their financial obligations, and work to alleviate poverty in developing economies.
The International Monetary Fund (IMF), was established in 1945 to foster international financial cooperation and increase the stability of the international economy. Now with 188 member countries, the IMF’s primary functions are monitoring global financial developments, offering technical advice and training to help countries manage their economies more effectively, and providing short-term loans to member countries.
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18. International Trade Organizations (cont.)
The World Bank
Founded to finance reconstruction after World War II and is now involved in hundreds of projects around the world aimed at addressing poverty, health, education, and other concerns in developing countries
Is a United Nations agency owned by its 187 member nations
The World Bank ( is a group of five financial institutions whose primary goals are eradicating the most extreme levels of poverty around the world and raising the income of the poorest people in every country as a way to foster shared prosperity for everyone.
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Trading Blocs
Trading blocs
Organizations of nations that remove trade barriers among their member countries and establish uniform barriers to trade with non-member nations
Trading blocs, or common markets, are regional organizations that promote trade among member nations (see Exhibit 3.4). Although specific rules vary from group to group, their primary objective is to ensure the economic growth and benefit of members. As such, trading blocs generally promote trade inside the region while creating uniform barriers against goods and services entering the region from nonmember countries.
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Trading Blocs (cont.)
North American Free Trade Agreement (NAFTA)
Formed by the United States, Canada, and Mexico to pave the way for the free flow of goods, services, and capital within the bloc through the phased elimination of tariffs and quotas
In 1994, the United States, Canada, and Mexico formed the North American Free Trade Agreement (NAFTA), paving the way for the free flow of goods, services, and capital within the bloc through the phased elimination of tariffs and quotas. NAFTA was controversial when first implemented, and it has remained controversial ever since
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Trading Blocs (cont.)
The European Union (EU)
constitutes more than two dozen countries and a half billion people.
now accounts for the world’s largest economy
EU nations have eliminated hundreds of local regulations, variations in product standards, and protectionist measures that once limited trade among member countries
One of the largest trading blocs is the European Union (EU), whose membership now encompasses more than two dozen countries and a half billion people. Viewed as a whole, the EU now constitutes the world’s largest economy.
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Trading Blocs (cont.)
The Asia-Pacific Economic Cooperation (APEC)
an organization of 21 countries working to liberalize trade in the Pacific Rim
has a long-term goal of liberalizing and simplifying trade and investment among member countries and helping the region as a whole achieve sustainable economic growth.
The Asia-Pacific Economic Cooperation (APEC), is an organization of 21 countries working to liberalize trade in the Pacific Rim (the land areas that surround the Pacific Ocean). Member nations represent 40 percent of the world’s population and more than 50 percent of the world’s gross domestic product.
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23. The Global Business Environment (cont.)
Culture
A shared system of symbols, beliefs, attitudes, values, expectations, and norms for behavior
Ethnocentrism
Judging all other groups according to the standards, behaviors, and customs of one’s own group
Culture is a shared system of symbols, beliefs, attitudes, values, expectations, and norms for behavior. Your cultural background influences the way you prioritize what is important in life, helps define your attitude toward what is appropriate in a situation, and establishes rules of behavior.
Above all else, businesspeople dealing with other cultures must avoid the twin traps of stereotyping, assigning a wide range of generalized (and often superficial or even false) attributes to an individual on the basis of membership in a particular culture or social group, and ethnocentrism, the tendency to judge all other groups according to one’s own group’s standards, behaviors, and customs.
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24. The Global Business Environment (cont.)
Stereotyping
Assigning a wide range of generalized attributes, which are often superficial or even false, to an individual based on his or her membership to a particular culture or social group
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25. The Global Business Environment (cont.)
Successful global business leaders recognize and respect differences in language, social values, ideas of status, decision-making habits, attitudes toward time, use of space, body language, manners, religions, and ethical standards
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26. Improving Communication with a Person from Another Culture
Be alert to the other person’s customs
Deal with the individual
Clarify your intent and meaning
Adapt your style to that the other person’s
Show respect
• Be alert to the other person’s customs. Expect the other person to have values, beliefs, expectations, and mannerisms that may differ from yours.
• Deal with the individual. Don’t stereotype the other person or react with pre-conceived ideas. Regard the person as an individual first, not as a representative of another culture.
• Clarify your intent and meaning. The other person’s body language may not mean what you think, and the person may read unintentional meanings into your message. Clarify your true intent by repetition and examples. Ask questions and listen carefully.
• Adapt your style to the other person’s. If the other person appears to be direct and straightforward, follow suit. If not, adjust your behavior to match.
• Show respect. Learn how respect is communicated in various cultures—through gestures, eye contact, social customs, and other actions.
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27. Legal Differences in the Global Business Environment
Tax haven
A country whose favorable banking laws and low tax rates give companies the opportunity to shield some of their income from higher tax rates in their home countries or other countries where they do business.
A tax haven is a country whose favorable banking laws and low tax rates give companies the opportunity to shield some of their income from higher tax rates in their home countries or other countries where they do business.
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Forms of International Business
Exhibit 3.6
Depending on their goals and resources and the opportunities available, companies can choose from five different ways to conduct business internationally
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29. Forms of International Business Activity
Importing
Purchasing goods or services from another country and bringing them into one’s own country
Exporting
Selling and shipping goods or services to another country
Importing, the buying of goods or services from a supplier in another country, and exporting, the selling of products outside the country in which they are produced, have existed for centuries. Exporting is one of the least risky forms of international business activity. It allows a firm to enter a foreign market gradually, assess local conditions, and then fine-tune its product offerings to meet the needs of local markets.
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30. Forms of International Business Activity (cont.)
Licensing
Agreement to produce and market another company’s product in exchange for a royalty or fee
Licensing is another popular approach to international business. License agreements entitle one company to use some or all of another firm’s intellectual property (patents, trademarks, brand names, copyrights, or trade secrets) in return for a royalty payment.
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31. Forms of International Business Activity (cont.)
Foreign Direct Investment (FDI)
Investment of money by foreign companies in domestic business enterprises
Multinational Corporations (MNCs)
Companies with operations in more than one country
THE END
Many firms prefer to enter international markets through partial or whole ownership and control of assets in foreign countries, an approach known as foreign direct investment (FDI). Some facilities are set up through FDI to exploit the availability of raw materials; others take advantage of low wage rates, while still others minimize transportation costs by choosing locations that give them direct access to markets in other countries. Companies that establish a physical presence in multiple countries through FDI are called multinational corporations (MNCs).
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