Chapter Three

ExploringGlobal Business

www.globaledge.msu.eduwww.doingbusiness.org/

The Basis for International Business

• 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• make one product more efficiently than any other

nation– Comparative advantage

• make one product more efficiently than any other product your country makes

The Basis for International Business

• 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

The Basis for International Business

• 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

• Balance of trade– total value of a nation’s exports minus total value

of its imports over a period of time

• Trade deficit– A negative (unfavorable) balance of trade—

imports exceed exports in value

U.S. International Trade in Goods

If a country imports more than it exports, the balance of trade is negative, as it was in the U.S. in 2004

20041987

Balance of Payments

– The total flow of money into the country minus the total flow of money out of the country over some period of time

– A broader concept than balance of trade• Includes imports, exports, investments, money spent by foreign

tourists, payments by foreign governments, aid to foreign governments, all other receipts and payments

– A continual deficit in a nation’s balance of payments can cause other nations to lose confidence in its economy

– A continual surplus may indicate a country limits imports by using trade restrictions

Trade Restrictions

• The reasons for restricting trade range from internal political and economic pressures to mistrust of other nations.

• 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 by keeping the prices of imports at or above the price of domestic products

Non-tariff Trade Restrictions

– Import quota—a limit on the amount of a particular good that may be imported

– Embargo—a complete halt to trading with a particular nation or in a particular product

– Foreign exchange control—a restriction on the amount of a particular foreign currency that can be purchased or sold

– Bureaucratic red tape—a subtle form of trade restriction that imposes unnecessarily burdensome and complex standards and requirements for imported goods

Trade partners• In 2004, 44% of US exports and 42% of US imports were from

Canada, Mexico, China & Japan.

• OECD – Organization for Economic Cooperation and Development

International Economic Communities

• 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

Major International Economic Communities

European Union

Austria

Belgium

Bulgaria

Cyprus

Chech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Malta

Netherlands

Poland

Portugal

Romania

Solvakia

Slovenia

Spain

Sweden

United Kingdom

Members of Major International Economic Communities

ASEAN Free Trade Area(AFTA)

North American Free

Trade Agreement (NAFTA)

United States

Canada

Mexico

Brunei

Cambodia

Indonesia

Laos

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

Organization of Petroleum Exporting Countries

(OPEC)

Algeria

Indonesia

Iran

Iraq

Kuwait

Libya

Nigeria

Qatar

Saudi Arabia

United Arab Emirates

Venezuela

Other International Economic Communities

• European Economic Area (EEA)

• Commonwealth of Independent States (CIS)

• Caribbean Basin Initiative (CBI)

• Common Market of the Southern Cone (MERCOSUR)

• Organization for Economic Cooperation and Development (OECD) http://www.oecd.org

International Business Entry

Exporting

• The sale of goods and services manufactured in the home country to nations outside the home country’s borders

• -Allows for more quality control over the product• -Gain little direct foreign market experience

– Often done through export/import merchants who assume risks of ownership, distribution, and sale

• (you sell it to them; they sell it abroad)

International Business Entry

Licensing– A contractual agreement in which one firm sells

another the right to produce its product and use its brand name

– Advantage• It allows expansion into foreign markets with little or

no direct investment

– Disadvantages• Product image damaged if quality is not upheld• Original producer does not gain foreign marketing

experience

International Business Entry

Joint Ventures– 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• Have to share profits

Methods of Entering International Business

Direct Investment

Build production facilities in foreign nations– Advantage

• provides complete control over operations-mfg, dist, mktg, etc

– Disadvantage• Risk is greater than that of a joint venture-political

instability

– Two forms• Building new facilities in the foreign country• Purchasing an existing firm in the foreign country

International Business

• Countertrade– An international barter transaction– Avoids restrictions on converting domestic currency to

foreign currency– Avoids taxes– A standard technical definition of dumping is the act of.

This is often referred to as selling at less than "fair value."

• Dumping– Charging a less for a good in a foreign market than one

charges for the same good in a domestic market– Hurts the domestic retailer, but can be socially responsible

Financing International Business

• The Export-Import Bank of the United States (Eximbank)– An independent agency of the U.S. government

whose function it is to assist in financing the exports of American firms

• The International Monetary Fund (IMF)– An international bank with more than 183

member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits