Business in the Global Economy Chapter 3 Business in the Global Economy

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.

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

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

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

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?

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!

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

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

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

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.

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

Currencies

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

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?

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.

3-2 The Global Marketplace Goals Describe the components of the international business environment. Identify examples of formal trade barriers. Explain actions to encourage international trade.

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

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

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

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

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

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

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.

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

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.

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

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

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)

NAFTA Est. 1994

Opposite of Free-Trade is No-Trade 2010

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

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.

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.

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

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 Economic power Worker dependence on the MNC Consumer dependence 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 market differently).

GLOBAL MARKET ENTRY MODES Licensing Franchising Joint venture

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

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

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

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.

INTERNATIONAL TRADE ORGANIZATIONS World Trade Organization International Monetary Fund World Bank

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

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

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.

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

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.

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.

Activity