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

3-1 International Business Basics After finishing this section, you will be able to: Describe importing and exporting activities Compare balance of trade and balance of payments List factors that affect global currencies

TRADING AMONG NATIONS Absolute Advantage- exists when a country can produce a good or service at a lower cost than any other country Comparative Advantage- a situation in which a country specializes in the production of a good or service at which it is relatively more efficient

Imports- items bought from other countries Account for the total supply of: bananas, coffee, cocoa, spices, tea, silk, and crude rubber in the US Without foreign trade, many things we buy would cost more or would not be available Other countries can produce goods at a lower cost because they have the raw materials or lower labor costs See Figure 3-1 Page 55

Exports- goods and services sold to other countries Just as imports benefit you, exports benefit consumers in other countries One in every six jobs in the US depends on international business

Checkpoint>> How does importing differ from exporting?

MEASURING TRADE RELATIONS A major reason people work is to earn money to buy things. First they sell their labor for wages Second they spend the major part of those wages for goods and services People usually try to keep their income and spending in balance When people buy more than their income allows, they go into debt

The same thing can happen to a country, this is called foreign debt Foreign debt- the amount of money a country owes to other countries

Balance of Trade Balance of Trade- difference between a country’s imports and exports Trade surplus- when a country exports (sells) more than it imports (buys) Trade deficit- when a country imports (buys) more than it exports (sells) A country can have a trade surplus with one country and a trade deficit with another country The United States has had a trade deficit in recent years

Balance of Payments Money goes from one country to another through investments and tourism. A citizen in one country might invest in a corporation in another country. A business may invest in a factory in another country. One government may give financial or military aid to another nation. Some countries limit the money their citizens can take out of the country when traveling

Balance of payments- difference between the amount of money that comes into a country and the amount that goes out of it

Positive / favorable balance of payments- when a nation receives more money in a year than it puts out Negative / unfavorable balance of payments- the result of a country sending out more money out than it brings in

Checkpoint>> How does balance of trade differ from balance of payments?

INTERNATIONAL CURRENCY Foreign Exchange Rages Exchange rate- the value of a currency in one country compared with the value in another Supply and demand affect the value of currency

Travelers and business people must deal with currency exchanges as they go from one country to another Currency exchange windows are available where you can buy any amount of local currency you want The amount of local currency you receive is based on the value of the two currencies at the time Exchange stations are found in airports, train stations, hotels, and local banks Operators charge a fee for the service

Factors Affecting Currency Values Three main factors affect currency exchange rates: balance of payments economic conditions political stability

Balance of Payments When a country has a favorable balance of payments, the value of its currency is constant or rising An increased demand for both the nation’s products and currency causes this situation. When a country has an unfavorable balance of payments, its currency usually declines in value.

Economic Conditions Inflation reduces the buying power of a currency. Interest rates- the cost of using someone else’s money Higher interest rates create lower consumer demand. This results in a reduced demand for a nation’s currency causing a decline in its value.

Political Stability Companies and individuals want to avoid risk when doing business in other countries. Political instability may occur when new laws are put into place. These laws may not allow businesses to operate freely as they did under the old laws Uncertainty in a country reduces the confidence business people have in the currency

Checkpoint>> What factors affect the value of a country’s currency? (List at least two not already given in the notes.)

3-1 ASSESSMENT Complete the 4 questions

3-2 The Global Marketplace After finishing this section, you will be able to: Describe the components of the international business environment Identify examples of formal trade barriers Explain actions to encourage international trade

3-2 The Global Marketplace INTERNATIONAL BUSINESS ENVIRONMENT Businesses must consider four main factors when dealing with other countries: geography cultural influences economic development political and legal concerns

Geography The location, climate, terrain, seaports and natural resources of a country influence business activity Very hot weather can limit the types of crops that can be grown Countries with many seaports can easily ship products for foreign trade Countries with few natural resources must rely on imports

Cultural Influences Culture- accepted behaviors, customs, and values of a society The main cultural and social factors that affect international business are language, religion, values, customs, and social relationships These relationships include interactions among families, labor unions, and other organizations

Economic Development Every country and every individual faces the problem of limited resources to satisfy wants and needs You continually make decisions about the use of your time, money, and energy In a similar way, every country plans the use of its land, natural resources, workers, and wealth to best serve the needs of its people

Key factors that affect a country’s level of economic development are: Literacy level Technology Agricultural dependency

Literacy Level Countries with better education systems usually provide more and better goods and services for citizens

Technology Automated production, distribution, and communications systems allow companies to create and deliver goods, services, and ideas quickly

Agricultural Dependency An economy that is largely involved in agriculture does not have the manufacturing base to provide citizens with great quantity and high quality of a product Infrastructure- a nation’s transportation, communication, and utility systems

Political and Legal Concerns The most common political and legal factors that affect international business activities include: Type of government Stability of government Government policies toward business

Checkpoint>> List the four main elements of international business and give one example for each.

INTERNATIONAL TRADE BARRIERS Trade barriers- restrictions to free trade Formal trade barriers- political actions Informal trade barriers- culture, traditions, and religion of a country

Quotas Quota- limit on the quantity of a product that may be imported or exported within a given time Quotas can be set for many reasons including: To express displeasure at policies of that country To protect one of its industries from too much foreign competition

Tariffs Tariff- tax a government places on certain imported products Some tariffs are a set amount by pound, gallon, or other unit Other tariffs are calculated by the value of a good

Example: You buy an imported bike that costs $170 The government imposes a tariff of 25% Calculation: $170 * .25 = $42.50 Final price you pay for the bike: $170 + $42.50 = $212.50

Embargoes Embargo- the government stoppage of the importing or exporting of a product completely Governments may impose embargoes for various reasons including: To protect their own industries from international competition To prevent sensitive products, especially those vital to the nation’s defense from falling into the wrong hands

Checkpoint>> What are three formal trade barriers and when could they be used?

ENCOURAGING INTERNATIONAL TRADE Specific actions by governments can promote international business activity Common efforts include: Free-trade zones Free-trade agreements Common markets

Free-Trade Zones Free-trade zone- selected area where products can be imported duty free and then stored, assembled, or used in manufacturing Usually located around a seaport or airport The importer pays duty only when the product leaves the zone

Free-Trade Agreements Free-trade agreement- member countries agree to remove duties (import taxes) This results in increased trade between the members North American Free Trade Agreement (NAFTA)- 1994, no tariffs when trading between the U.S., Canada, and Mexico

Common Markets Common markets- members do away with duties and other trade barriers They allow companies to invest freely in each member’s country They allow workers to move freely across borders Common external duties on products being imported from nonmember countries Examples: European Union (EU), Latin American Integration Association (LAIA)

Checkpoint>> What actions could be taken to encourage international trade? (List at least 2 ideas.)

3-2 ASSESSMENT Complete 6 questions.

3-3 International Business Organizations After finishing this section, you will be able to: Describe the components of the international business environment Identify examples of formal trade barriers Explain actions to encourage international trade

MULTINATIONAL COMPANIES Multinational company (MNC)- an organization that does business in several countries Usually consists of a parent company in the home country and divisions or separate companies in one or more host countries Host country- the country in which the business places business activities

MNC Strategies Global strategy- uses the same product and marketing strategy worldwide The same product is sold in the same manner around the world Example: Coca-Cola

Multinational strategy- treats each country market differently Firms develop products and marketing strategies that adapt to the customs, tastes, and buying habits of a distinct national market Example: restaurant chains

MNC Benefits Three groups benefit from international trade including: consumers businesses / employees nations

Consumers Consumers benefit from international trade with: Larger amounts of goods available Lower priced goods than those made domestically

Businesses / Employees Businesses and employees benefit from international trade with: Expanded career opportunities

Nations Nations benefit from international trade with: Better understanding, communication, and respect among various nations

Drawbacks of Multinational Companies The MNC can become a major economic power in the host country The workers of the host country may depend on the MNC for jobs Consumers become dependent upon it for goods and services The MNC may actually influence or control the political power of the country

Checkpoint>> What are two marketing strategies commonly used by multinational companies?

GLOBAL MARKET ENTRY MODES Licensing Some companies want to produce products in other countries without being actively involved Licensing- selling the right to use some intangible property for a fee or royalty

Intangible property- production process, trademark, or brand name Examples: Gerber began selling baby food in Japan by means of licensing. OR The use of television characters or sports teams on hats, shirts, jackets, notebooks, or other items Licensing has a low financial investment, so the potential for profit and the risk are also low

Franchise- the right to use a company name or business process in a specific way Organizations enter into contracts with people in other countries to set up a business that looks and runs like the parent company

The company obtaining the franchise will usually adapt a range of business elements including food products, packaging, and advertising messages to meet both cultural and legal requirements Examples: McDonald’s, Burger King, Wendy’s, KFC, and Pizza Hut

Licensing vs. Franchising Licensing involves a manufacturing process Franchising involves selling a good or service

Joint venture- an agreement between two or more companies to share a business project The main benefit of a joint venture is the sharing of raw materials, shipping facilities, management activities, or production facilities

Concerns about this type of partnership include sharing of profits, and less control This arrangement is very popular for manufacturing Example: Ford Motor Company entered a joint venture with Mazda Motor Corporation. Ford used Mazda-produced parts for several of its cars and Mazda set up assembly plants for Ford Motor cars.

Checkpoint>> How does licensing differ from a franchise?

INTERNATIONAL TRADE ORGANIZATIONS International trade activities can be very complex. As a result, several organizations have been created to help companies with global trade activities. Organizations include: World Trade Organization (WTO) International Monetary Fund (IMF) World Bank

World Trade Organization- created in 1995 to promote trade around the world More than 150 member countries Settles trade disputes and enforces free trade agreements among members

Other goals of the WTO include: Lowering tariffs Eliminating import quotas Reducing barriers for banks, insurance companies ,and other financial institutions Assisting poor countries with economic growth

International Monetary Fund- maintains an orderly system of trade and exchange rates and promotes economic cooperation among its more than 150 members Created in 1946 when economic interdependence was growing at a historical pace

Before the IMF was instituted, a country could change the value of its legal tender to attract more foreign customers As other countries lose business, they may impose trade restrictions or lower the value of their currency As one nation tries to outdo another, a trade war may result

World Bank- (the international bank for Reconstruction and Development)- created in 1944 to provide loans for rebuilding after World War II Today, the bank’s key function is to give economic aid to less developed countries paying for communications systems, transportation networks, and energy plants More than 180 member countries

There are two main divisions of the World Bank: The International Development Association(IDA) The International Finance Corporation(IFC)

International Development Association- makes loans to developing countries International Finance Corporation- provides capital and technical help to private businesses in nations with limited resources The IFC promotes joint ventures between foreign and local companies to further capital investment in developing nations

Checkpoint>> How does the International Monetary Fund assist countries?

3-3 ASSESSMENT Complete the 3 assessment questions from the last page of your note packet!