1. Foundations of Business 3e Pride, Hughes, & Kapoor

2. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 2 Exploring Global Business Chapter3

3. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 3 Learning Objectives 1.Explain the economic basis for international business. 2.Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results. 3.Outline the extent of international business and the world economic outlook for trade. 4.Discuss international trade agreements and international economic organizations working to foster trade. 5.Define the methods by which a firm can organize for and enter into international markets. 6.Describe the various sources of export assistance. 7.Identify the institutions that help firms and nations finance international business.

4. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 4  International business All business activities that involve exchanges across national boundaries  Some countries are better equipped than others to produce particular goods or services. Absolute advantage – The ability to produce a specific product more efficiently than any other nation Comparative advantage – The ability to produce a specific product more efficiently than any other product  Goods and services are produced more efficiently when each country specializes in the products for which it has a comparative advantage. The Basis for International Business

5. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 5  http://www.youtube.com/watch?v=Vvfzaq72wd0 http://www.youtube.com/watch?v=Vvfzaq72wd0Video

6. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 6 Saudi Arabia South Africa Australia Countries with an “Absolute Advantage” Oil Diamonds Wool

7. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 7 United States Germany Japan Countries and their Comparative Advantage Corn vs. Beets Corn vs. Cars Corn vs. Rice

8. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 8  Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in.  Exporting Selling and shipping raw materials or products to other nations  Importing Purchasing raw materials or products in other nations and bringing them into one’s own country Exports and Imports

9. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 9 Exporting and Importing U.S. Imports U.S. Exports Excess Corn Excess Wine

10. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 10 Biggest Import Items  Crude Oil  Passenger Cars  Medical Preparations (ingredients for drugs)  Automotive Accessories  Gems and precious medals Biggest Export Items  Refined Oils Products Telecom Equipment  Aircraft  Motor Vehicles  Electronic equipment  Pharmaceuticals US Imports and Exports 2014

11. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 11 Top Ten Merchandise-Exporting States 2012 192.5 164.4 77.5 75.6 70.0 63.1 58.0 47.2 43.5 42.5 2012

12. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 12  Balance of trade The total value of a nation’s exports minus the total value of its imports over some period of time  Trade deficit A negative (unfavorable) balance of trade —imports exceed exports in value  Balance of payments The total flow of money into a country minus the total flow of money out of that country over a period of time Is more money coming in or going out of our country? Important things for governments to consider when managing imports and exports

13. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 13 How do you feel when you see this sign? National Pride? Quality Craftsmanship Work ethic A cheap substitute Don’t buy a foreign product

14. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 14  https://www.youtube.com/watch?v=hKNeFHBPgRo https://www.youtube.com/watch?v=hKNeFHBPgRo  Many countries have caught up to or passed the US in production quality and efficiency Gung Ho - Video Clip

15. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 15  The reasons for restricting trade range from internal political and economic pressures to mistrust of other nations.  Nations are generally eager to export their products to provide markets for their industries and develop a favorable balance of trade.  Most trade restrictions are applied to imports from other nations. Restrictions to International Business

16. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 16 U.S. International Trade in Goods and Services

17. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 17  Import duty (tariff) A tax levied on a particular foreign product entering a country – Revenue tariffs are imposed to generate income for the government. – Protective tariffs are imposed to protect a domestic industry from competition by keeping the prices of imports at or above the price of domestic products. Types of Trade Restrictions

18. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 18  Nontariff barriers Nontax measures imposed by a government to favor domestic over foreign suppliers Import quota—a limit on the amount of a particular good that may be imported during a given time Embargo—a complete halt to trading with a particular nation or in a particular product Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold Types of Trade Restrictions (cont.)

19. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 19  Nontariff barriers (cont.) Currency devaluation—the reduction of the value of a nation’s currency relative to the currencies of other countries Bureaucratic red tape—subtly imposes unnecessarily burdensome and complex standards and requirements for imported goods Cultural attitudes—can impede acceptance of products in foreign countries Types of Trade Restrictions (cont.)

20. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 20 U.S. Trade Restrictions / Sanctions 1.Balkans 2.Belarus 3.Lebanon 4.Ivory Coast 5.Yemen 6.Congo 7.Iran 8.Iraq 9.Liberia 10.North Korea 11.Sudan 12.Syria 13.Zimbabwe For more information go to: http://www.treas.gov/offices/enforcement/ofac/programs/ maintained by the U.S. Department of the Treasury http://www.treas.gov/offices/enforcement/ofac/programs/

21. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 21 Reasons for and Against Trade Restrictions FOR To equalize a nation’s balance of payments To protect new or weak industries To protect national security To protect the health of citizens To retaliate for another country’s trade restrictions To protect domestic jobs AGAINST Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources Loss of jobs

22. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 22 Global Growth Is Picking Up

23. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 23 Value of U.S. Merchandise Exports and Imports, 2010

24. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 24 U.S. Goods Export and Import Shares in 2012

25. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 25 Bringing the World Together in Trade

26. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 26  The General Agreement on Tariffs and Trade and the World Trade Organization (19480 General Agreement of Tariffs and Trade (GATT) – International organization of 153 nations dedicated to reducing or eliminating tariffs and other trade barriers (POST WWII) – Goal: to attain “Most-favored-nation status (MFN)”— each member of GATT was to be treated equally by all other members – Kennedy Round, Tokyo Round, Uruguay Round, Doha Round International Trade Agreements

27. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 27  The General Agreement on Tariffs and Trade and the World Trade Organization (cont.) World Trade Organization (WTO) (1995) – Created in the Uruguay Round of GATT negotiation as a successor to GATT – WTO oversees GATT provisions, has: Judicial powers to mediate trade disputes arising from GATT rules Exerts more binding authority than GATT International Trade Agreements (cont.)

28. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 28 WTO Members’ Share in World Merchandise Trade, 2009 Updated 2011 stats in book

29. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 29  Economic community Regional organizations of nations formed to promote the free movement of resources and products among its members and to create common economic policies What are the most important economic communities? – The EU – NAFTA – CAFTA – ASEAN – OPEC International Economic Organizations Working to Foster Trade

30. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 30 The European Union (EU)

31. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 31  North American Free Trade Agreement (NAFTA) NAFTA United States Canada Mexico Chile is expected to become the 4 th member

32. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 32  Organization of Petroleum Exporting Countries (OPEC) OPEC Nations Algeria Indonesia Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela

33. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 33  Central American Free Trade Agreement – Dominican Republic (CAFTA-DR) CAFTA-DR El Salvador Guatemala Honduras Nicaragua Dominican Republic Costa Rica

34. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 34  Association of Southeast Asian Nations (ASEAN) ASEAN Brunei Myanmar Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam

35. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 35  European Economic Area (EEA)  Pacific Rim  Commonwealth of Independent States (CIS)  Caribbean Basin Initiative (CBI)  Common Market of the Southern Cone (MERCOSUR)  Organization for Economic Cooperation and Development (OECD) Other Trading Communities

36. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 36 What are ways American Companies can begin to do business in global markets? New Subject

37. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 37 What are common methods to Enter International Business Licensing Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firm Exporting Joint Venture

38. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 38  Licensing A contractual agreement in which one firm permits another to produce and market its product and use its brand name in return for a royalty or other compensation Advantage – It allows expansion into foreign markets with little or no direct investment Disadvantages – The product image may be damaged if standards are not upheld – The original producer does not gain foreign marketing experience Licensing

39. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 39  Exporting May use an export/import merchant who assumes the risks of ownership, distribution, and sale Letter of credit—issued by a bank on request of an importer stating that the bank will pay an amount of money to a stated beneficiary Bill of lading—issued by a transport carrier to an exporter to prove merchandise has been shipped Draft—issued by the exporter’s bank, ordering the importer’s bank to pay for the merchandise, thus guaranteeing payment once accepted by the importer’s bank Methods of Entering International Business (cont.)

40. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 40  Exporting (cont.) May use an export/import agent who arranges sale for a commission or fee; the exporter retains title to products until they are sold May establish own sales offices or branches in foreign countries Methods of Entering International Business (cont.)

41. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 41  Joint venture A partnership formed to achieve a specific goal or to operate for a specific period of time Advantages – Immediate market knowledge and access – Reduced risk – Control over the product attributes Disadvantages – Complexity of establishing agreements across national borders – High level of commitment required of all parties involved Methods of Entering International Business (cont.)

42. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 42  Totally owned facilities Production and marketing facilities in one or more foreign nations Advantage – Direct investment provides complete control over operations Disadvantage – Risk is greater than that of a joint venture Two forms – Building new facilities in the foreign country – Purchasing an existing firm in the foreign country Methods of Entering International Business (cont.)

43. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 43 World’s Top Transnational Corporations General Electric British Petroleum Company, Plc Toyota Motor Corporation Royal Dutch/Shell Group ExxonMobil Corporation Ford Motor Company Vodafone Group, Plc Total Electricite De France Walmart Stores Source: UNCTAD; World Investment Report: Transnational Corporation and the Infrastructure Challenge; http://www.unctad.org/Templates/webflyer.asp?docid=10509&intItemID=4697&lang=1http://www.unctad.org/Templates/webflyer.asp?docid=10509&intItemID=4697&lang=1; accessed February 17, 2009.

44. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 44  Strategic alliances Partnerships formed to create competitive advantage on a worldwide basis  Trading companies Firms that provide a link between buyers and sellers in different countries Takes title to products and performs all the activities necessary to move the products from one country to another Methods of Entering International Business (cont.)

45. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 45  Countertrade An international barter transaction Avoids restrictions on converting domestic currency to foreign currency  Multinational enterprise A firm that operates on a worldwide scale without ties to any specific nation or region Methods of Entering International Business (cont.)

46. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 46 Ten Largest Foreign and U.S. Multinational Corporations

47. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 47 Financing International Business  The Export-Import Bank of the United States (Eximbank) An independent agency of the U.S. government whose function is to assist in financing the exports of American firms  Multilateral Development Bank (MDB) An internationally supported bank that provides loans to developing countries to help them grow – World Bank, Inter-American Development Bank (IDB), Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD)  The International Monetary Fund (IMF) An international bank with 186 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits

48. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 48  National Export Strategy (NES) Trade Promotion Coordinating Committee (TPCC) – Assists U.S. firms in developing export-promotion programs – Helps American firms compete in foreign markets and create new jobs in the U.S. Finally, Sources of Export Assistance

49. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 49 U.S. Government Export Assistance Programs

50. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 50 Chapter Quiz 1. A developing country found that to meet its needs the previous year, it had imported far more goods than it exported. This country experienced a(n) A. unfavorable balance of payments. B. favorable balance of payments. C. favorable balance of trade. D. unfavorable balance of trade. E. unfavorable supply of goods.

51. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 51 Chapter Quiz 2. Due to political differences with North Korea, the U.S. government has stopped trading with North Korea. This practice is an example of imposing a(n) A. import duty. B. import cut. C. export control. D. trade embargo. E. export duty.

52. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 52 Chapter Quiz 3. When the United States wants to reduce the cost of its goods in foreign nations, it A. revalues its currency. B. devalues its currency. C. pays off its trade deficit. D. borrows from the Eximbank. E. sells more goods abroad.

53. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 53 Chapter Quiz 4. A forum for the discussion of trade problems and a reduction of trade barriers is provided by A. the General Agreement on Tariffs and Trade (GATT) or the World Trade Organization (WTO). B. a free trade zone. C. the World Bank. D. the Eximbank. E. All of these answers are correct.

54. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 3 | Slide 54 Chapter Quiz 5. XYZ Company is seeking a partner in China to manufacture its products. It wants to team up with an established Chinese firm that will provide immediate market knowledge and access, reduced risk, and control over product attributes. The best choice for XYZ Company is A. licensing. B. a bilateral agreement. C. a joint venture. D. an export/import merchant agreement. E. an export/import agent agreement.