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Chapter Three. Exploring Global Business. www.globaledge.msu.edu www.doingbusiness.org/. The Basis for International Business. International Business All business activities that involve exchanges across national boundaries - PowerPoint PPT Presentation
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Chapter Three
ExploringGlobal Business
www.globaledge.msu.eduwww.doingbusiness.org/
The Basis for International Business
• 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• make one product more efficiently than any other
nation– Comparative advantage
• make one product more efficiently than any other product your country makes
The Basis for International Business
• 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
The Basis for International Business
• 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
• Balance of trade– total value of a nation’s exports minus total value
of its imports over a period of time
• Trade deficit– A negative (unfavorable) balance of trade—
imports exceed exports in value
U.S. International Trade in Goods
If a country imports more than it exports, the balance of trade is negative, as it was in the U.S. in 2004
20041987
Balance of Payments
– The total flow of money into the country minus the total flow of money out of the country over some period of time
– A broader concept than balance of trade• Includes imports, exports, investments, money spent by foreign
tourists, payments by foreign governments, aid to foreign governments, all other receipts and payments
– A continual deficit in a nation’s balance of payments can cause other nations to lose confidence in its economy
– A continual surplus may indicate a country limits imports by using trade restrictions
Trade Restrictions
• The reasons for restricting trade range from internal political and economic pressures to mistrust of other nations.
• 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 by keeping the prices of imports at or above the price of domestic products
Non-tariff Trade Restrictions
– Import quota—a limit on the amount of a particular good that may be imported
– Embargo—a complete halt to trading with a particular nation or in a particular product
– Foreign exchange control—a restriction on the amount of a particular foreign currency that can be purchased or sold
– Bureaucratic red tape—a subtle form of trade restriction that imposes unnecessarily burdensome and complex standards and requirements for imported goods
Trade partners• In 2004, 44% of US exports and 42% of US imports were from
Canada, Mexico, China & Japan.
• OECD – Organization for Economic Cooperation and Development
International Economic Communities
• Economic community– An organization of nations formed to promote the
free movement of resources and products among its members and to create common economic policies
Major International Economic Communities
European Union
Austria
Belgium
Bulgaria
Cyprus
Chech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Solvakia
Slovenia
Spain
Sweden
United Kingdom
Members of Major International Economic Communities
ASEAN Free Trade Area(AFTA)
North American Free
Trade Agreement (NAFTA)
United States
Canada
Mexico
Brunei
Cambodia
Indonesia
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
Organization of Petroleum Exporting Countries
(OPEC)
Algeria
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
Other International Economic Communities
• European Economic Area (EEA)
• Commonwealth of Independent States (CIS)
• Caribbean Basin Initiative (CBI)
• Common Market of the Southern Cone (MERCOSUR)
• Organization for Economic Cooperation and Development (OECD) http://www.oecd.org
International Business Entry
Exporting
• The sale of goods and services manufactured in the home country to nations outside the home country’s borders
• -Allows for more quality control over the product• -Gain little direct foreign market experience
– Often done through export/import merchants who assume risks of ownership, distribution, and sale
• (you sell it to them; they sell it abroad)
International Business Entry
Licensing– A contractual agreement in which one firm sells
another the right to produce its product and use its brand name
– Advantage• It allows expansion into foreign markets with little or
no direct investment
– Disadvantages• Product image damaged if quality is not upheld• Original producer does not gain foreign marketing
experience
International Business Entry
Joint Ventures– 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• Have to share profits
Methods of Entering International Business
Direct Investment
Build production facilities in foreign nations– Advantage
• provides complete control over operations-mfg, dist, mktg, etc
– Disadvantage• Risk is greater than that of a joint venture-political
instability
– Two forms• Building new facilities in the foreign country• Purchasing an existing firm in the foreign country
International Business
• Countertrade– An international barter transaction– Avoids restrictions on converting domestic currency to
foreign currency– Avoids taxes– A standard technical definition of dumping is the act of.
This is often referred to as selling at less than "fair value."
• Dumping– Charging a less for a good in a foreign market than one
charges for the same good in a domestic market– Hurts the domestic retailer, but can be socially responsible
Financing International Business
• The Export-Import Bank of the United States (Eximbank)– An independent agency of the U.S. government
whose function it is to assist in financing the exports of American firms
• The International Monetary Fund (IMF)– An international bank with more than 183
member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits
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