©2013 Cengage Learning. All Rights Reserved. Business Management, 13e International Environment of Business Importance of International Business Forms of International Business Theories of International Trade and Investment CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Importance of International Business GOALS ● Describe the nature, growth, and importance of international trade and investment. ● Explain the reasons for the growth of international business. 2 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e The Scope of International Business ● International business-means business activities that occur between two or more countries ● Since the end of World War II in 1945, this has become a dominant aspect of economic life 3 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e The Scope of International Business ● Extent of international trade ● Mexico, Canada, and China are U.S.’s major trade partners ● Mexico and Canada shares a border ● China has low labor costs, so its products are cheaper 4 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e The Scope of International Business ● Trade, investment, and the economy ● Foreign investments occurs when firms of one country build new plants & facilities or buy existing businesses in another country ● Americans sold over $1.8 trillion of its goods and services to foreign customers ● Almost 20% of all jobs depend on foreign trade ● Nearly 5% of workers are employed by foreign companies operating in the U.S. 5 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Reasons for Growth in International Business ● Profit ● When the cost of making goods is lower in foreign countries than at home, it’s cost effective for companies to buy goods abroad or set up factories abroad ● Potential for sales ● Sales at home are small, stagnant, or declining, whereas opportunities to sell abroad may be abundant 6 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Factors that Help Firms Engage in International Business ● World Trade Organization (WTO)—is an international organization that creates & enforces the rules governing trade among countries ● WTO has cut tariffs and boosted exports & imports among almost 150 member countries 7 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Factors that Help Firms Engage in International Business ● Trading bloc—is a group of two or more countries that agree to remove all restrictions between them on the sales of goods and services, while imposing barriers on trade with and investments from countries that are not part of the bloc ● Stimulated global trade and investments 8 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Factors that Help Firms Engage in International Business ● European Union (EU)—advanced form of a trading bloc ● January 1, 1999, 11 EU members merged national currencies in a single currency called the euro 9 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Factors that Help Firms Engage in International Business ● North American Free Trade Agreement (NAFTA)—created the world’s largest trading bloc by removing tariffs and other barriers to trade among the three nations ● In 1989, U.S. signed a free-trade agreement with Canada ● In 1992, Canada and the U.S. signed a similar agreement with Mexico 10 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Factors that Help Firms Engage in International Business ● International Monetary Fund (IMF)—main purpose is to help countries that are facing serious financial difficulties in paying for their imports or repaying loans ● World Bank—provides low-cost, long-term loans to less developed countries to develop basic industries and facilities, such as roads and electric power plants 11 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Forms of International Business GOALS ● Distinguish between the different forms through which international business is conducted. ● Describe the policies, rules, and laws that governments use to affect international trade and investment. 12 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Forms of International Business ● Exporting—selling products and services to buyers in another country ● Example: Boeing airplanes made in US and sell to Qantas (Australian airline) ● Importing—buying goods and services made in a foreign country ● Example: Americans buy Darjeeling tea from India BOTH CAN BE DONE WITH LIMITED RESOURCES AND RELATIVELY RISK FREE 13 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Forms of International Business ● International licensing—one company allows a company in another country to make and sell products according to certain specifications ● Example: American pharmaceutical company allows a German firm to make and sell in Germany a medicine the American company invented, this is licensing— American company receives royalties MORE COSTLY AND RISKY THAN EXPORTING 14 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Forms of International Business ● Joint ventures—two or more firms share the costs of doing business and also share the profits ● Wholly owned subsidiary—the firm sets up a business abroad on its own without any partners ● These are more expensive to set up and risky should the business fail 15 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Forms of International Business ● Strategic alliances—firms agree to cooperate on certain aspects of business while remaining competitors on other aspects ● Example: two pharmaceutical companies agree to develop medicines to cure cancer, share research information and cost while competing on selling the medicine 16 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Forms of International Business ● Multinational firm—owns or controls production or service facilities in more than one country ● Home country—where the business has its headquarters ● Host country—the foreign locations where is has facilities ● Parent firm—company headquarters ● Subsidiaries—the foreign branches, if registered as independent legal entities 17 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Government Policies ● Trade barriers ● Tariffs—taxes on foreign goods to protect domestic industries to earn revenue ● Example: jeans made in Columbia cost $30, American custom department collects $3 tax so the price is $33 ● Dumping—selling goods in a foreign market at a price below cost or below what it charges in its home country ● When a company dumps, it is trying to win more customers by driving domestic products off the market ● Quota—limits the quantity or value of units permitted to enter a country ● Example: the U.S. only allows 10,000 pounds of salmon to enter the country annually from Chile 18 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Government Policies ● Trade barriers ● Nontariff barriers—nontax methods of discouraging trade ● Example: in the U.S. the steering wheels are on the left side of motor vehicles, in Ireland on the right side, so before an American company can sell a car in Ireland it has to make the change ● Example: public campaign to “Buy American” ● Nontariff barriers are difficult to remove since they are part of a country's culture and tradition 19 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Government Policies ● Trade barriers ● Embargo—a restriction when a government may bar companies from doing business with particular countries ● Example: the U.S. government bars U.S. companies from conducting business with Cuba ● Sanctions—bans specific business ties with a foreign country ● Example: it is illegal for an American company to sell nuclear technology to Pakistan, which tested the atomic bombs in CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Government Policies ● Currency values ● Exchange rate—the value of one country's currency expressed in the currency of another country ● Example: U.S. dollar is worth eleven Mexican pesos 21 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Government Policies ● Cultural differences ● Culture—the customs, beliefs, values, and patterns of behavior of the people of a country or a group ● Low-context culture—people communicate directly and explicitly ● High-context culture—communication tends to occur through nonverbal signs and indirect suggestions 22 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Theories of International Trade and Investment GOALS ● Explain two theories of international trade. ● Discuss the concepts of balance of payments and current accounts. ● Consider career opportunities in international business and understand the factors related to being sent abroad on assignment. 23 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Theories of International Trade ● Comparative advantage theory—to gain a trade advantage, a country should specialize in products or services that it can provide more efficiently than other countries ● Example: India is able to produce more tea, Brazil is able to produce more coffee, U.S. produces computers, Saudi Arabia extracts oil from the earth and Indonesia makes athletic shoes 24 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Theories of International Trade ● Product life cycle theory—companies look for new markets when products are in the maturity and decline stages of the product life cycle ● American companies move to foreign countries when sales at home start lagging 25 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Balance of Payments ● Balance of payments—an accounting statement in which all international transactions are recorded; consists of current account and capital account ● Current account—records the sale of goods and services exported and those imported from foreigners, as well as income and payments 26 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Balance of Payments ● Capital account—records investment funds coming into and going out of a country ● Countries value the U.S. dollar and willing to lend the U.S. money ● Countries with trade deficit not able to pay bills so have limit to international trade 27 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Career Opportunities in International Business ● Various aspects of international business ● Importing & exporting ● Teaching & translating languages ● Administering trade laws ● Managing offices & operations in foreign countries ● Banking and insurance firms 28 CHAPTER 9

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Career Opportunities in International Business ● Employment of international managers ● Benefit of knowing foreign language ● Managers are citizens of the host country of the business ● Foreign cultures do not encourage hiring women 29 CHAPTER 9