FHF Ferrell Hirt Ferrell M: Business 2 nd Edition

3 Business in a Borderless World FHF Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

FHF The buying, selling and trading of goods and services across national boundaries Global marketing requires balancing global brands with the needs of local consumers ‣ IBM’s Service Corps IBM’s Service Corps To create culturally sensitive global leaders Corporate social responsibility Improved image International Business 3-3

[ ] FHF Why Nations Trade International trade allows for the acquisition of raw materials and goods at favorable prices 3-4

FHF Absolute advantage A monopoly that exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item. Comparative advantage The basis of the most international trade, when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items Absolute versus Comparative Advantages 3-5

FHF The transferring of manufacturing or other tasks -such as data processing- to countries where labor and supplies are less expensive Outsourcing 3-6

FHF Exporting The sale of goods and services to foreign markets The US exports over $1.6 trillion in goods and services annually The purchase of goods and services from foreign sources The US imports more than $2.3 trillion in goods and services Outsourcing 3-7

A Trade Deficit The US imports more than it exports. (shown in the table) Therefore, the U.S. has a trade deficit. FHF The difference in the value between what a nation exports and imports Balance of Trade The trade deficit is also called a nation’s negative balance of trade Source: “Foreign Trade Statistics, U.S. Census Bureau U.S. Trade Deficit (in billions of dollars) 3-8

FHF US Exports to China Have Increased 3-9

FHF Top 10 Countries Maintaining Trade Deficits/ Surpluses with the US 3-10

FHF The difference between the flow of money in and out of a country A nation’s balance of trade, foreign investments, foreign aid, loans, tourists dollars, and military expenditures comprise its balance of payments Balance of Payments 3-11

FHF Completely free trade seldom exists. Barriers to international trade: Barriers to International Trade ‣ Social ‣ Cultural ‣ Technological ‣ Economic ‣ Legal ‣ Political 3-12

FHF Economic development Infrastructure Exchange rates Less-Developed Countries (LCD’s) Low per-capita income Less economically advantaged Potentially huge & profitable markets Largely located in Africa, Asia and Latin America Economic Barriers to Trade 3-13

[ ] FHF The physical facilities that support economic activities, including railroads, highways, ports, airfields, utilities, power plants, schools, hospitals, and commercial distribution systems Infrastructure 3-14

[ ] FHF Exchange Rates The ratio at which one nation’s currency can be exchanged for another nation’s currency 3-15

FHF Complex relationships Different laws International laws Trade restrictions Changing political climates Different ethical values Ethical, Legal & Political Barriers in International Trade 3-16

FHF Tariff and trade restrictions Part of a nation’s legal structure May be established or removed for political reasons Import tariff A tax levied by a nation on goods imported into the country Exchange controls Regulations that restrict the amount of currency that can be bought or sold Legal Barriers to Trade (continued next page) 3-17

FHF Quota A restriction on the number of units of a particular product that can be imported into a country Embargo A prohibition on trade for a particular product Dumping The act of a country or business selling products at less than what it costs to produce them Legal Barriers to Trade (Continued) 3-18

FHF ‣ Seldom in writing & change rapidly ‣ Relative stability of countries is a factor Cartel A group of firms or nations that agrees to act as a monopoly and not compete with each other, in order to generate a competitive advantage in world markets Political Barriers to Trade 3-19

FHF Cultural Barriers 3-20

FHF Technological advances are creating global marketing opportunities 10 nations outrank the US in terms of subscribers to broadband internet access Technological Barriers 3-21

FHF General Agreement on Tariffs and Trade (GATT) Signed by 23 nations in 1947 Forum for tariff negotiations Place for international trade issue discussion and resolution Replaced by the World Trade Organization (WTO) in 1995 Trade Agreements, Alliances & Organizations (Continued next page) 3-22

FHF World Trade Organization (WTO) International organiation dealing with the rules of trade between nations Officially founded in 1995 Predecessor to GATT 153 members representing 95% of global trade Trade Agreements, Alliances & Organizations (Continued) 3-23

FHF North American Free Trade Agreement (NAFTA) Agreement that eliminates most tariffs and trade restrictions on agricultural and manufactured products to encourage trade among canada, the US, and Mexico Trade Agreements, Alliances & Organizations (Continued) 3-24

FHF European Union (EU) A union of European nations established in 1958 to promote trade among its members One of the largest single markets today Asia-Pacific Economic Cooperation (APEC) An international trade alliance that promotes open trade and economic and technical cooperation among member nations Trade Agreements, Alliances & Organizations (Continued) 3-25

FHF Trade Agreements, Alliances & Organizations (Continued) World Bank (International Bank for Reconstruction and Development) Organization established in 1946 by industrialized nations to loan money to underdeveloped and developing countries International Monetary Fund (IMF) Organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation 3-26

FHF Getting Involved in International Business Exporting & importing Trading companies Licensing and franchising Contract manufacturing Joint ventures Direct investment Multinational corporations Many companies’ involvement in international trade begins with importing goods for resale 3-27

FHF Countertrade agreements Bartering products for other products instead of for currency Trading company Buys goods in one country and sells them to buyers of another country Handles all activities required to move products from one country to another Getting Involved in International Trade 3-28

FHF Licensing A trade arrangement where one company allows another company to use its company name, products, patents, brands, trademarks, raw materials, and production processes in exchange for a fee or royalty Licensing is common in pharmaceuticals Sanofi-Aventis and Wellstat have licensing deal for R&D of diabetes drugs Licensing and Franchising 3-29

FHF Franchising A form of licensing where a company (franchiser) agrees to provide a franchisee a name, logo, operational guidelines, products, etc, in return for a financial commitment and the agreement to conduct business in accord with the franchiser’s standard of operations McDonald’s is the world’s largest franchise McDonald’s Includes restaurants in 118 countries Licensing and Franchising (continued) 3-30

FHF The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification The final product carries the domestic firm’s name Common in high-tech industries, automotive industry, and food manufacturing Contract Manufacturing 3-31

FHF Other Forms of Engaging in International Trade Joint venture The sharing of the costs of operation of a business between a foreign company and a local partner Strategic alliance A partnership formed to create competitive advantage on a worldwide basis Direct investment The ownership of overseas facilities 3-32

FHF 1. Wal-Mart Stores, Inc. 2. ExxonMobile 3. Royal Dutch Shell 4. BP 5. Toyota Motors 6. Chevron 7. ING Group 8. Total 9. General Motors 10. ConocoPhillips Ten Largest Global Corporations (Source: “The Global 500,” Fortune 2008) 3-33

FHF Multinational Strategy A plan used by international companies that involves customizing products, promotion, and distribution according to cultural technological, regional and national differences Global Strategy (Globalization) A strategy that involves standardizing products (promotion and distribution) for the whole world as if it were a single entity. International Business Strategies 3-34

FHF 3-35