International Business We live in a global economy -- consumers around the world drink Coca-Cola, Pepsi, and eat at McDonalds. Products you consume today are just as likely to have been made in China, Korea or Germany as in the United States. 3-1

International Business International business – the buying, selling, and trading of goods and services across national boundaries. e.g., Starbucks serves 20 million customers a week at 16,000 shops in 44 countries. 3-2

Why Nations Trade International trade allows for the acquisition of raw materials and goods at favorable prices. 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. 3-3

Why Nations Trade International trade allows for the acquisition of raw materials and goods at favorable prices. Comparative advantage – the basis of 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. 3-4

Why Nations Trade International trade allows for the acquisition of raw materials and goods at favorable prices. Outsourcing – the transferring of manufacturing or other tasks—such as data processing—to countries where labor and supplies are less expensive. 3-5

Trade Between Countries Obtaining needed goods and services and the funds to pay for them, requires international trade through exporting and importing. Exporting – the sale of goods and services to foreign markets. Importing – the purchase of goods and services from foreign sources. 3-6

(in billions of dollars) Balance of Trade U.S. Trade Deficit 1980-2006 (in billions of dollars) The difference in the value between what a nation exports and imports is its balance of trade. A trade deficit is also called a nation’s negative balance of trade. A trade deficit (shown in the table) shows that the U.S. has a trade deficit – it imports more than it exports. 3-7

Imports and Exports in Cyprus (in Million $)

Components of Our Exports 2000 2001 2002 2003 2004 2005 2006 2007 1. Agricultural Products 16,0 12,3 18,9 20,9 21,1 24,6 24,1 30,7 1.1. Citrus 13,4 9,9 17,1 17,8 20,1 20,2 19,1 22,7 1.2. Potatoes 0,1 0,5 0,2 0,4 - 1,0 2,1 3,0 1.3. Live Animal 0,3 .. 1.4. Other 2,2 1,9 1,6 2,7 3,4 2,9 5,0 2. Industrial Products 34,2 21,9 26,1 29,2 39,4 41,1 39,1 44,9 2.1. Processed Agricultural Goods 12,2 8,1 16,6 24,9 27,8 26,0 31,4 2.2. Clothing1 19,3 11,1 10,9 10,2 11,7 10,0 7,8 6,8 2.3. Other 2,4 2,8 3,3 5,3 6,7 3. Minerals 0,7 1,5 4,9 Total 50,4 34,6 45,4 50,8 62,0 68,1 83,7 Source: North Cyprus State Planning Org

A nation’s balance of trade, foreign investments, foreign aid, loans, tourists dollars, and military expenditures comprise its balance of payments Balance of payments – the difference between the flow of money into and out of a country. 3-10

International Trade Barriers Completely free trade seldom exists. Barriers to International Trade – Economic Ethical, Legal, and Political Social and Cultural Technological 3-11

International Trade Barriers ECONOMIC BARRIERS. Economic development Infrastructure Exchange rates 3-12

Economic Trade Barriers Economic Development LDC’s – less-developed countries Low per-capita income Less economically advanced Potentially huge & profitable markets 3-13

Economic Trade Barriers Infrastructure The physical facilities that support economic activities, including railroads, highways, ports, airfields, utilities, power plants, schools, hospitals, and commercial distribution systems. 3-14

Economic Trade Barriers Exchange Rates The ratio at which one nation’s currency can be exchanged for another nation’s currency. 3-15

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

Ethical, Legal, and Political Barriers Tariffs & 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 3-17

Ethical, Legal, and Political Barriers Tariffs & Trade Restrictions Exchange controls – regulations that restrict the amount of currency that can be bought or sold Quota – a restriction on the number of units of a particular product that can be imported into a country 3-18

Ethical, Legal, and Political Barriers Tariffs & Trade Restrictions Embargo– a prohibition on trade in a particular product Dumping – the act of a country or business selling products at less than what it costs to produce them 3-19

Ethical, Legal, and Political Barriers 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. 3-20

International Trade Barriers Social and Cultural Barriers language physical characteristics (e.g., tall, short; slim, fat) age groups (young, old) shopping and eating habits religion 3-21

International Trade Barriers Technological Barriers Technological advances are creating global marketing opportunities 10 nations outrank the U.S. in terms of subscribers to broadband Internet access. (e-commerce) 3-22

Trade Agreements, Alliances, & Organizations GATT 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 3-23

Trade Agreements, Alliances, & Organizations WTO World Trade Organization (WTO) – International organization dealing with the rules of trade between nations. 3-24

Trade Agreements, Alliances, & Organizations NAFTA North American Free Trade Agreement (NAFTA)– agreement that eliminates most tariffs and trade restriction on agricultural and manufactured products to encourage trade among Canada, the U.S., and Mexico. 3-25

Trade Agreements, Alliances, & Organizations EU European Union (EU)– a union of European nations established in 1958 to promote trade among its members; one of the largest single markets today. 3-26

Trade Agreements, Alliances, & Organizations APEC Asia-Pacific Economic Cooperation (APEC)– an international trade alliance that promotes open trade and economic and technical cooperation among member nations. 3-27

Trade Agreements, Alliances, & Organizations World Bank World Bank – (International Bank for Reconstruction and Development) Organization established in 1946 by industrialized nations to loan money to underdeveloped and developing countries. 3-28

Trade Agreements, Alliances, & Organizations IMF International Monetary Fund (IMF)– Organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation 3-29

Getting Involved in International Business Exporting & importing, trading companies, licensing and franchising, contract manufacturing, joint ventures, direct investment, and multinational corporations. Many companies’ involvement in international trade begins with importing goods for resale. 3-30

Getting Involved in International Business Exporting & importing Exporting can take place through countertrade agreements – foreign trade agreements that involve bartering products for other products instead of for currency. 3-31

Getting Involved in International Business Trading Companies A firm that buys goods in one country and sells them to buyers in another country is a trading company. 3-32

Getting Involved in International Business Licensing & Franchising A trade agreement in which one company (licensor) allows another company (licensee) to use its company name, products, patents, brands, trademarks, etc. in exchange for a fee or royalty. 3-33

Getting Involved in International Business Licensing & Franchising Franchising is 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. 3-34

Getting Involved in International Business Top 10 Global Franchise Operations 3-35

Getting Involved in International Business Contract manufacturing Contract Manufacturing -- 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 3-36

Joint Ventures & Alliances Joint venture – the sharing of the costs and 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 3-37

The 10 Largest Global Corporations MNC – multinational corporation such as IBM, General Motors, General Electric or ExxonMobil that operates on a worldwide scale, without significant ties to any one nation or region. 3-38

International Business Strategies 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. 3-39