Business in the Global Economy CHAPTER 3 4/20/2017 3 Business in the Global Economy 3-1 International Business Basics 3-2 The Global Marketplace 3-3 International Business Organizations ITB

TRADING AMONG NATIONS Domestic Business is the making, buying, and selling of goods and services within a country. International Business refers to business activities needed for creating, shipping, and selling goods and services across national borders. Also known as: foreign or world trade. United States conducts trade with over 180 countries Chapter 3

TRADING AMONG NATIONS Absolute advantage – a country can produce a good or service at a lower cost than other countries. Ex – country has many natural resources or raw materials South America – coffee production Saudi Arabia – oil production Chapter 3

TRADING AMONG NATIONS Comparative advantage - country specializes in the production of a good or service at which it is relatively efficient Importing – items brought from other countries. Examples – bananas, coffee, cocoa, spices, tea, silk, fish, carpets, sugar, dishes, tin, chrome, nickel, copper Without foreign trade, many things you buy would cost more or not be available. Chapter 3

TRADING AMONG NATIONS Exporting – goods and services sold to other countries. Workers throughout the world use factory and farm machinery made in the U.S. More examples: chemicals, fertilizers, medicines, and plastics. Chapter 3

IMPORTING Chapter 3

MEASURING TRADE RELATIONS 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. Its trade position is favorable. If it imports more than it exports, it has a trade deficit. Its trade position is unfavorable. A country can have a trade surplus with one country and a trade deficit with another. Balance of payments – the difference between the amount of money that comes into a country and the amount that goes out of it. Chapter 3

U.S. TRADE BALANCES Chapter 3

BALANCE OF TRADE Chapter 3

INTERNATIONAL CURRENCY – foreign exchange market Foreign exchange rates – the value of currency in one country compared with the value in another. Factors affecting currency values Three main factors affect currency Balance of payments – value of currency is usually constant or rising Economic conditions Political disability Chapter 3

RECENT VALUES OF CURRENCIES Chapter 3

THE INTERNATIONAL BUSINESS ENVIRONMENT Geography – climate, location, seaports, etc. Cultural influences – language, religion, values, customs, and social relationships Economic development Literacy level Technology Agricultural dependency Political and legal concerns Chapter 3

THE INTERNATIONAL BUSINESS ENVIRONMENT GEOGRAPHY location climate terrain waterways natural resources ECONOMICS technology education inflation exchange rate infrastructure THE INTERNATIONAL BUSINESS ENVIRONMENT CULTURE language family religion customs traditions food POLITICAL–LEGAL FACTORS government system political stability trade barriers Chapter 3

INTERNATIONAL TRADE BARRIERS – restrictions to free trade. Quotas – set a limit on the quantity of a product that may be imported or exports within a given period. U.S. has imposed quotas on sugar, cattle, dairy products and textiles. Tariffs – a tax that government places on certain imported products. Many people believe that tariffs should be used to protect U.S. jobs from foreign competition. Embargoes – stop the export or import of a product completely. Protect industries from international competition. A government sometimes imposes an embargo to express its disapproval of the actions or policies of another country. Chapter 3

QUOTAS Reasons for quotas To keep supply low and prices the same To express displeasure at the policies of the importing country To protect one of a country’s industries from too much competition form abroad Chapter 3

TARIFFS Reasons for tariffs To set amount per pound, gallon, or other unit To set the value of a good Chapter 3

EMBARGOES Reasons for embargoes To protect a country’s industries from international competition more than the quota or tariff will achieve To prevent sensitive products from falling into the hands of unfriendly groups or nations Chapter 3

ENCOURAGING INTERNATIONAL TRADE Free-trade zones Free-trade agreements Common markets Chapter 3

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 of airport Chapter 3

FREE-TRADE AGREEMENTS Member countries agree to remove duties and trade barriers on products traded among them Results in increased trade between members Chapter 3

COMMON MARKETS Allows companies to invest freely in each member’s country Allows workers to move freely across borders Examples European Union (EU) Latin American Integration Association (LAIA) Chapter 3

MULTINATIONAL COMPANIES (MNC) MNC strategies MNC benefits Drawbacks of multinational companies Chapter 3

Multinational strategy- treats each country market differently. MNC STRATEGIES (MNC-Multinational Company) does business in several countries. MNC’s usually consist of a parent company in a home country and divisions in host countries. Global strategy- uses the same product and marketing strategy worldwide. Example: Coca-Cola Multinational strategy- treats each country market differently. Example: Restaurant Chains- modify menus to local tastes Chapter 3

MNC BENEFITS Large amount of goods available Lower prices Career opportunities Foster understanding, communication, and respect Friendly international relations Chapter 3

DRAWBACKS OF MULTINATIONAL COMPANIES Economic power Worker dependence on the MNC Consumer dependence Political power Chapter 3

GLOBAL MARKET ENTRY MODES Licensing Franchising Joint venture Chapter 3

LICENSING Allows companies to produce items in other countries without being actively involved Has a low financial investment, so the potential financial return for the company is often low The risk for the company is low Chapter 3

FRANCHISING Allows organizations to enter into contracts with people in other countries to set up a business that looks and runs like the parent company Marketing elements, such as food products, packaging, and advertising must meet both cultural sensitivities and legal requirements Commonly involves selling a product or service Chapter 3

JOINT VENTURE Allows two or more companies to share raw materials, shipping facilities, management activities, or production activities Concerns include the sharing of profits and not as much control since several companies are involved Very popular for manufacturing, such as Japanese and U.S. automobile manufacturers Chapter 3

INTERNATIONAL TRADE ORGANIZATIONS World Trade Organization International Monetary Fund World Bank Chapter 3

WORLD TRADE ORGANIZATION (WTO) WTO 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 Chapter 3

INTERNATIONAL MONETARY FUND (IMF) Helps to promote economic cooperation Maintains an orderly system of world trade and exchange rates Includes over 150 member nations Chapter 3

WORLD BANK Created in 1944 to provide loans for rebuilding after World War II Today the World Bank has over 180 member countries and 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 Chapter 3