Chapter 4 International Environment of Business

What is International Business?  International Business: refers to business activities that occur between two or more countries.  When dealing with other countries, we need to take into consideration different – Rules / Laws – Currency – Traditions – Cultures

Developed vs. Underdeveloped Countries  Developed Countries – (aka Industrialized Countries) are countreis with strong business activity that is usually a result of advanced technology and a highly educated population. – Canada, England, France, Germany, Italy, Japan, and the U.S.  Underdeveloped Countries – (aka Less Developed Countries, LCD’s) are countries with little economic wealth and an emphasis on agriculture and mining. Citizens often cannot afford adequate housing, food and health care. – Ecuador, Chad, Ethiopia, Hungary, Pakistan, Nigeria

How Trade Takes Place  Most of the world’s trade takes place among the developed countries of North America, Western Europe, and Japan.  The Pacific Rim – the countries on the western edge of the Pacific Ocean - have also emerged as an important trading nation.  More than 1/5 of the trading done internationally is represented by service industries. Such as tourism, banking, accounting, advertising, and computer services.

Exporting & Importing  Exporting – when a country sells its goods and services to a foreign country.  Importing – when a country purchases its goods and services from a foreign country.

Multinational Firms  Multinational Firms – refers to a business that owns or controls production or service facilities outside the country in which it is based. – Home Country (headquarters) – Parent Firm (firm that controls another company) – Host Country (the foreign country) – Subsidiary (Foreign operations that are branches or are separately registered as legal entities.

The Top Multinational Firms  Exxon - USA  Ford Motor - USA  Mitsubishi – Japan  Nestle – Swizerland  Daimler – Benz - Germany  Phillips Electronics – Holland  Volkswagen – Germany  Toyota – Japan  Royal Dutch Shell – Britain/Holland  Mobil – USA  IBM - USA

Government Policies  Free Trade – the elimination of most trade barriers.  Tariffs – a tax on foreign goods are imposed in order to: – protect the domestic economy and encourage consumers to “BUY AMERICAN” – Protect the domestic economy from DUMPING – the selling of goods in a foreign country below cost or below what it is sold for in the home country.

Government Policies (Continued)  Quotas – when governments restrict the availability of foreign goods. This limits the quantity of units permitted to enter a country.  Embargos – usually for political reasons, a government may bar companies from doing business with particular countries.  Sanctions – a milder form of an embargo where specific ties with a foreign country are banned (selling nuclear technology from U.S. to Pakistan)

Currency Values  The Exchange Rate – is the value of one currency to another.  If 1 American Dollar = 150 Japanese Yen then a camera made in Japan for 15,000 yen will sell in the U.S. for $100 (15,000/150)

Activity #1 – Currency Exchanges  Using Markets & Stocks/ Currencies:  Assume that you are traveling abroad and want to purchase the following items: – A camera in Europe for 150 euros would cost ___ in U.S. Dollars. – A watch in Brazil for 1000 real would cost _____ in U.S. dollars. – A painting in Mexico for 1200 pesos would cost _____ in U.S. dollars. – A radio in Japan for 14,000 yen would cost ____ in U.S. dollars. – An artifact in Argentina for 200 pesos would cost ____ in U.S. dollars. – A map of England for 15 pounds would cost ___ in U.S. dollars. – A hat in the Dominican Republic for 15 pesos would cost ____ in U.S. dollars.  Show all work. Record conversion numbers and calculations which show results.

Cultural Differences  Culture – refers to the customs, beliefs, values, and patterns of behavior of the people of a country or a group.

Reasons for Growth in International Business  Profit  New Market Opportunities  Overproduction

Helping firms take part in International Business  World Trade Organization – an international organization that creates and enforces the rules governing trade among countries.  Trading Blocs – is an agreement between two or more countries to remove all restrictions between them on the sales of goods and services. – European Union – North American Free Trade Agreement (NAFTA)

International Trade Agreements  Treaties – General Agreement on Tariffs and Trade (GATT). Most of the world’s nations have signed this treaty. Benefits are: Huge cut on Tariffs Framework for solving disputes

International Institutions  International Monetary Fund – Help countries with serious deficits and have no money to re-pay loans or for imports. – Provide low-cost loans and advice on how to manage these countries.  International Bank for Reconstruction & Development (World Bank) – Provide low-cost, long-term loans to poor countries to develop their basic industries & infrastructure.

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 that other countries. – France is better at producing wine than Canada, and Canada is better at growing wheat because of their climate and soil. – Therefore, France should make wine and Canada should produce wheat and then they should trade with each other.

Theories of International Trade  Product Life Cycle Theory - Introduction Growth Maturity Decline When sales start lagging in a country, then they begin selling that product in other countries.

Balance of Trade  Balance of Trade is the difference between how much money is coming into and going out of a country. – Imports – represent goods and services purchased from other countries. – Exports – represent goods and services sold to other countries.  A deficit exists when more money leaves a country than comes in.  A surplus exists when more money comes into a country than goes out.