Business in the Global Economy C H A P T E R 3 Business in the Global Economy 3.1 International Business Basics 3.2 The Global Marketplace 3.3 International Business Organizations

3.1 International Business Basics Learning Outcomes 3.1.1 Describe importing and exporting activities. 3.1.2 Compare balance of trade and balance of payments. 3.1.3 List factors that affect the value of global currencies.

KEY TERMS imports exports balance of trade balance of payments exchange rate

TRADE AMONG NATIONS Absolute advantage Comparative advantage Importing Exporting

U.S. IMPORT RELIANCE FOR SELECTED RAW MATERIALS CHAPTER 3 6/26/2018 U.S. IMPORT RELIANCE FOR SELECTED RAW MATERIALS ITB

Checkpoint  How does importing differ from exporting? Importing is bringing items from other countries into a country. Exporting is selling goods and services to other countries.

MEASURING TRADE RELATIONS Balance of trade Balance of payments

Balance of Trade

Checkpoint  How does balance of trade differ from balance of payments? Balance of trade is the difference between a country’s total exports and total imports. Balance of payments is the difference between the amount of money that comes into a country and the amount that goes out of it.

Checkpoint  How does balance of trade differ from balance of payments? (continued) Trade is not the only thing influencing the balance of payments. For example, money can enter or leave a country through investments, tourism, financial aid, and bank deposits.

INTERNATIONAL CURRENCY Foreign exchange rates Factors affecting currency values: Balance of payments Economic conditions Political stability

Checkpoint  What factors affect the value of a country’s currency? The three main factors are: Balance of payments Economic conditions Political stability

3.2 The Global Marketplace Learning Outcomes 3.2.1 Describe the components of the international business environment. 3.2.2 Identify examples of formal trade barriers. 3.2.3 Explain actions to encourage international trade.

KEY TERMS infrastructure trade barriers quota tariff embargo

INTERNATIONAL BUSINESS ENVIRONMENT Geography Cultural influences Economic development Literacy level Technology Agricultural dependency Political and legal concerns

Elements of International Business Environment Geographic Factors Location Climate Terrain Waterways Natural resources

Elements of International Business Environment (continued) Cultural Factors Language Family Religion Customs Traditions Food

Elements of International Business Environment (continued) Economic Factors Technology Education Inflation Exchange rate Infrastructure

Elements of International Business Environment (continued) Political and Legal Factors Government system Political stability Trade barriers Business regulations

Checkpoint  List the four main elements of the international business environment. Geography Cultural influences Economic development Political and legal concerns

INTERNATIONAL TRADE BARRIERS Quotas Tariffs Embargoes

QUOTAS Reasons for quotas To keep supply low and prices at a certain level To express displeasure at the policies of the importing country To protect one of a country’s industries from too much competition from abroad

TARIFFS Some tariffs are A set amount per pound, gallon, or other unit Based on the value of a good A tariff increases the price of an imported product. A high tariff tends to lower the demand for the product and reduce the quantity of that import.

EMBARGOES Reasons for embargoes To offer more protection from international competition than the quota or tariff will provide To prevent sensitive products from falling into the hands of unfriendly groups or nations

Checkpoint  What are three formal trade barriers? Quotas Tariffs Embargoes

ENCOURAGING INTERNATIONAL TRADE Free-trade zones Free-trade agreements North American Free Trade Agreement (NAFTA) Common markets

FREE-TRADE ZONES Used to promote international business in a selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing Usually located around a seaport or airport

FREE-TRADE AGREEMENTS Member countries agree to remove duties and trade barriers on products traded among them Results in increased trade between members

COMMON MARKETS Allow companies to invest freely in each member’s country Allow workers to move freely across borders Examples of common markets: European Union (EU) Latin American Integration Association (LAIA)

Checkpoint  What actions could be taken to encourage international trade? Actions that could be taken to encourage international trade include free-trade zones, free-trade agreements, and common markets.

3.3 International Business Organizations Learning Outcomes 3.3.1 Discuss activities of multinational organizations. 3.3.2 Explain common international business entry modes. 3.3.3 Describe activities of international trade organizations and agencies.

KEY TERMS multinational company (MNC) joint venture

MULTINATIONAL COMPANIES (MNC) Organizations that do business in several countries Parent company in home country Divisions or separate companies in other countries

MNC STRATEGIES Global strategy Multinational strategy

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

DRAWBACKS OF MULTINATIONAL COMPANIES An MNC can become an economic power Worker dependence on the MNC for jobs Consumer dependence for goods and services Influence or control of political power

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’s market differently).

GLOBAL MARKET ENTRY MODES Licensing Franchising Joint venture

LICENSING Allows foreign companies to use a procedure. Has a low financial investment, so the potential financial return for the company is often low. The risk for the company is low.

FRANCHISING Organizations enter into contracts with people in other countries to set up a business that looks and runs like the parent company. Commonly involves selling a product or service

JOINT VENTURE Companies share raw materials, shipping facilities, management activities, or production facilities. Concerns include the sharing of profits and not as much control because several companies are involved.

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. Licensing usually involves a manufacturing process, while franchising involves selling a product or service.

INTERNATIONAL TRADE ORGANIZATIONS World Trade Organization International Monetary Fund World Bank

WORLD TRADE ORGANIZATION (WTO) 160 member countries Settles trade disputes Enforces free-trade agreements Other goals include: Lowering tariffs that discourage free trade Eliminating import quotas Reducing barriers for financial services Assisting poor countries with economic growth

INTERNATIONAL MONETARY FUND (IMF) 180 member nations Helps to promote economic cooperation Maintains an orderly system of world trade and exchange rates

WORLD BANK Created in 1944 to provide loans for rebuilding after World War II 190 member countries Key functions today: Give economic aid to developing countries Build communication systems, transportation networks, and energy plants

WORLD BANK (continued) World Bank’s two main divisions International Development Association (IDA), which makes loans to help developing countries International Finance Corporation (IFC), which provides technical capital and technical help to private businesses in nations with limited resources

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