1. Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Part 1 Business in a Global Environment

2. Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Competing in Global Markets Chapter 4

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-3 Chapter Objectives 1.Explain the importance of international business and the main reasons nations trade. 2.Discuss the relationship of absolute and comparative advantage to international trade. 3.Describe how nations measure international trade and the significance of exchange rates. 4.Identify the major barriers that confront global businesses. 5.Explain how international trade organizations and economic communities reduce barriers to international trade. 6.Compare the different levels of involvement used by businesses when entering global markets. 7.Distinguish between a global business strategy and a multidomestic business strategy.

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-4 Competing in Global Markets Exports—domestically produced goods and services sold in other countries. Imports—foreign goods and services purchased by domestic customers.

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-5 Why Nations Trade International trade is vital because: It expands markets for products Allows companies to seek out growth opportunities in other nations Makes production and distribution systems more efficient Reduces firms’ dependence on the economies of their home nations

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-6 Why Nations Trade International Sources of Factors of Production Business decisions to operate abroad depend on the availability, price, and quality of labor, natural resources, capital and entrepreneurship.

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-7 Why Nations Trade Size of the International Marketplace Firms are attracted to international business by the sheer size of the marketplace As developing nations expand, the potential for reaching new groups of customers increases Even though people in developing nations have relatively low per capita incomes, their huge populations often offer lucrative markets

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-8 The World’s Top 10 Nations Based on Population and Wealth

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-9 Why Nations Trade Major World Markets Major trading partners of U.S. firms include the country’s northern and southern neighbors Emerging Markets

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-10 Major Emerging Markets for the 21 st Century

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-11 Why Nations Trade Absolute and Comparative Advantage Absolute Advantage  Exists when a country makes a product for which it can maintain a monopoly or that it can produce at a lower cost than any competitor

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-12 Why Nations Trade Absolute and Comparative Advantage Comparative Advantage  Supplying a product more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries.

13. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-13 Measuring Trade Between Nations Balance of trade—difference between a nation’s exports and imports. Trade surplus Trade deficit

14. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-14 U.S. International Trade in Goods and Services

15. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-15 Measuring Trade Between Nations Balance or payments—difference in money flows into or out of a country. Balance of payments surplus Balance of payments deficit

16. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-16 Components of the Balance of Payments

17. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-17 Measuring Trade Between Nations Major U.S. Exports and Imports The U.S., with combined exports of over $2 trillion, leads the world in the international trade of goods and services.

18. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-18 Top 10 U.S. Exports and Imports

19. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-19 Measuring Trade Between Nations Exchange Rates—value of one nation's currency relative to the currencies of other nations. Devaluation—describes a fall in a currencies value relative to other currencies. Floating Exchange Rates Hard versus Soft Currencies

20. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-20 Barriers to International Trade All businesses encounter social and cultural, economic, legal and political barriers to both local and domestic trade

21. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-21 Barriers to International Trade Social and Cultural Differences Language Values and Religious Attitudes

22. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-22 Barriers to International Trade Economic Differences Infrastructure Currency Conversion and Shifts

23. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-23 AT&T Advertisement Offering a Solution to Language Differences

24. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-24 Barriers to International Trade Political and Legal Differences Political Climate Legal Environment International Regulations

25. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-25 Corruption in Business and Government

26. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-26 Barriers to International Trade Types of Trade Restrictions Tariffs—tax imposed on imported goods. Nontariff Barriers  Quotas  Dumping  Embargo  Exchange controls

27. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-27 Arguments for and against Trade Restrictions

28. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-28 Reducing Barriers to International Trade Organizations Promoting International Trade General Agreement on Tariffs and Trade World Trade Organization (WTO)— 135 member international institution that monitors GATT agreements and mediates international trade disputes.

29. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-29 Reducing Barriers to International Trade Organizations Promoting International Trade World Bank International Monetary Fund

30. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-30 Reducing Barriers to International Trade International Economic Communities North American Free Trade Agreement– (NAFTA) 1994 agreement among the U.S., Canada, and Mexico to break down tariffs and trade restrictions. MERCOSUR ASEAN European Union—25 nation European economic alliance.

31. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-31 NAFTA, MERCOSUR, and ASEAN Free-Trade Areas

32. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-32 The 25 Nations of the European Union

33. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-33 The introduction of the euro was an event of enormous cultural and financial significance.

34. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-34 Going Global While expanding into overseas markets can increase profits and marketing opportunities, it also introduces new complexities to operations. Key decisions before expanding overseas include Determining which foreign market(s) to enter Analyzing the expenditures required Deciding on the best way to organize overseas operations

35. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-35 International Trade Research Resources

36. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-36 Going Global Levels of Involvement in International Business

37. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-37 Going Global Importers and Exporters Importers: Firms that bring in goods produced abroad to sell domestically Exporters: Firms that produce or purchase goods at home to sell overseas Countertrade

38. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-38 Going Global Contractual Agreements Franchising. Foreign Licensing. Subcontracting. International Direct Investment Acquisitions Joint Ventures

39. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-39 Going Global From Multinational Corporation to Global Business Multinational Corporation—firm with significant operations and marketing activities outside its home country.

40. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-40 The World’s Top Ten Marketers

41. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-41 Going Global Sources of Export Assistance U.S. Department of Commerce Website 1-800-USA-TRADE Commerce Department’s 68 district offices

42. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-42 Destinations and Sources of Direct Investment Dollars

43. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 4-43 Developing a Strategy for International Business Global Business Strategies Offering a standardized, worldwide product and selling it in essentially the same manner throughout a firm’s domestic and foreign markets. Multidomestic Business Strategy Developing and marketing products to serve different needs and tastes of separate national markets.