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Chapter Three
E l i Gl b lExploring Global BusinessBusiness
Copyright © Cengage Learning. All rights reserved. 3| 1
Learning Objectives
1. Explain the economic basis for international businessbusiness.
2. Discuss the restrictions nations place on international trade, the objectives of these jrestrictions, and their results.
3. Outline the extent of international trade and identify the organizations working to foster itthe organizations working to foster it.
4. Define the methods by which a firm can organize for and enter into international markets.
5. Describe the various sources of export assistance.6. Identify the institutions that help firms and nations
Copyright © Cengage Learning. All rights reserved. 3 | 2
finance international business.
Chapter 3 Outline
– The Basis for International Business• Absolute and Comparative AdvantageAbsolute and Comparative Advantage• Exporting and Importing
– Restrictions to International BusinessT f T d R i i• Types of Trade Restrictions
• Reasons for Trade Restrictions• Reasons Against Trade Restrictions
– The Extent of International Business• The World Economic Outlook for Trade
International Trade Agreements– International Trade Agreements• The General Agreement on Tariffs and Trade and the
World Trade OrganizationI i l E i C i i• International Economic Communities
Chapter 3 Outline (cont.)
– Methods of Entering International Business• LicensingLicensing• Exporting• Joint Ventures
T t ll O d F iliti• Totally Owned Facilities• Strategic Alliances• Trading Companies• Countertrade• Multinational Firms
– Sources of Export AssistanceSources of Export Assistance– Financing International Business
• The Export-Import Bank of the United States• Multilateral Development Banks• The International Monetary Fund
The Basis for International Business
• International business
• Some countries are better equipped than others to produce particular goods or servicesp p g– Absolute advantage
C ti d t– Comparative advantage
• Goods and services are produced more efficiently• Goods and services are produced more efficiently when each country specializes in the products for which is has a comparative advantage
Copyright © Cengage Learning. All rights reserved. 3 | 5
The Basis for International Business (cont’d)( )
• Countries trade when they each have a surplus of the• Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in
• Exporting
I ti• Importing
Copyright © Cengage Learning. All rights reserved. 3 | 6
The Basis for International Business (cont’d)( )
• Balance of trade
• Trade deficit
• Balance of payments
Copyright © Cengage Learning. All rights reserved. 3 | 7
Restrictions to International Business
• The reasons for restricting trade range from g ginternal 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 th ti
Copyright © Cengage Learning. All rights reserved. 3 | 8
other nations.
Types of Trade Restrictions
• Import duty (tariff)
– A tax levied on a particular foreign product entering a countryentering a country
• Revenue tariffs• Revenue tariffs
• Protective tariffs
• Dumping
Copyright © Cengage Learning. All rights reserved. 3 | 9
p g
Types of Trade Restrictions (cont’d)
• Nontariff barriers
– Import quota p q
– Embargo
– Foreign exchange control
Copyright © Cengage Learning. All rights reserved. 3 | 10
Types of Trade Restrictions (cont’d)
• Nontariff barriers (cont’d)C d l ti– Currency devaluation
– Bureaucratic red tape
Cultural attitudes– Cultural attitudes
Copyright © Cengage Learning. All rights reserved. 3 | 11
Reasons for and Against Trade RestrictionsTrade Restrictions
FOR AGAINST
Copyright © Cengage Learning. All rights reserved. 3 | 12
The Extent of International Business
• Although the worldwide recessions of 1991, 2001-2002, and 2008 slowed the rate of growth, , g ,globalization is a reality of our time
• In the U S international trade accounts for over ¼ of• In the U.S., international trade accounts for over ¼ of GDP
• Trade barriers are decreasing, more competitors are entering the global marketplace, creating more choices for consumers and new job opportunitiesj pp
• International business will grow with the expansion of commercial use of the Internet
Copyright © Cengage Learning. All rights reserved. 3 | 13
commercial use of the Internet
The General Agreement on Tariffs and Trade and the World Trade OrganizationTrade and the World Trade Organization
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)
Copyright © Cengage Learning. All rights reserved. 3 | 14
International Economic Organizations Working to Foster Tradeo g to oste ade
• Economic community
Copyright © Cengage Learning. All rights reserved. 3 | 15
International Economic Organizations Working to Foster Trade (cont’d)g ( )
North American Free Trade AgreementNorth American Free Trade Agreement(NAFTA)
United StatesCanadaMexicoChile is expectedto become the 4th
member
Copyright © Cengage Learning. All rights reserved. 3 | 16
International Economic Organizations Working to Foster Trade (cont’d)g ( )
Central American Free Trade AgreementCentral American Free Trade Agreement(CAFTA)
El SalvadorGuatemalaHondurasNicaragua
Copyright © Cengage Learning. All rights reserved. 3 | 17
International Economic Organizations Working to Foster Trade (cont’d)g ( )
Association of Southeast Asian Nations (ASEAN)
BruneiMyanmar
MalaysiaPhilippines
CambodiaIndonesia
SingaporeThailand
Laos Vietnam
3 | 18Copyright © Cengage Learning. All rights reserved.
International Economic Organizations Working to Foster Trade (cont’d)Working to Foster Trade (cont d)
• European Economic Area (EEA)P ifi Ri• Pacific Rim
• Commonwealth of Independent States (CIS)• Caribbean Basin Initiative (CBI)• Common Market of the Southern Cone
(MERCOSUR)(MERCOSUR)• Organization for Economic Cooperation and
D l t (OECD)Development (OECD)
3 | 19Copyright © Cengage Learning. All rights reserved.
Methods of Entering International BusinessInternational Business
• Licensing
– AdvantageAdvantage
– Disadvantages
3 | 20Copyright © Cengage Learning. All rights reserved.
Methods of Entering International Business (cont’d)International Business (cont d)
• Exporting
– Letter of credit
Bill f l di– Bill of lading
D ft– Draft
3 | 21Copyright © Cengage Learning. All rights reserved.
Methods of Entering International Business (cont’d)Business (cont d)
• Joint ventures
– Advantages
– Disadvantages
3 | 22Copyright © Cengage Learning. All rights reserved.
Methods of Entering International Business (cont’d)Business (cont d)
• Totally owned facilities
– Advantage
Di d t– Disadvantage
T f– Two forms
3 | 23Copyright © Cengage Learning. All rights reserved.
Methods of Entering International Business (cont’d)Business (cont d)
• Strategic alliances
• Trading companies
3 | 24Copyright © Cengage Learning. All rights reserved.
Methods of Entering International Business (cont’d)Business (cont d)
• Countertrade
M l i i l i• Multinational enterprise
3 | 25Copyright © Cengage Learning. All rights reserved.
Financing International Business
• The Export-Import Bank of the United States (Eximbank)(Eximbank)
• Multilateral Development Bank (MDB)
• The International Monetary Fund (IMF)The International Monetary Fund (IMF)
Copyright © Cengage Learning. All rights reserved.3 | 26
29
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.1 The Top Ten Merchandise-Exporting States
Source: http://www.ita.doc.gov/td/industry/otea/state/2005_year_end_dollar_value_05.html, accessed September 15, 2008.
Th
e T
op
Ten
Merc
han
dis
e-E
xp
ortin
g
Sta
tes
Texas
Billions of dollars, 2
00
5 m
erchandise exportsTotal 20
05 U
.S. exports:
$9
04.4
billion
$1
28
.8
California
$1
16
.8
New
York$
50
.5
Michigan
$3
7.6
Washington
$3
8.0
Ohio
$3
5.0
Illinois$
36
.0
Florida$
33
.4
Pennsylvania$
22
.3
Massachusetts
$2
2.0
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30
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.2 U.S. International Trade in Goods and Services
800
1,0
00
1,2
00
1,4
00
1,6
00
1,8
00
2,0
00
2,2
00
2,4
00
600
400
Billions of dollars
Imports
Exports
Balance of Trade
2000
–200
–400
–600
–800
1987
’89
’91
’93
’95
’97
’99
200
1’0
5’0
7’0
3
U.S
. Inte
rna
tion
al T
rad
e in
Go
od
s a
nd
Serv
ices
Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=78260&table_id=1&area_id=3, accessed September 19, 2008.
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31
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.3 U.S. Goods Export and Import Shares in 2007
Source: Federal Reserve Bank of St. Louis, National Economic Trends, September 2008, p. 18.
U.S
. Go
od
s E
xp
ort a
nd
Imp
ort
Sh
are
s in
2007
U.K
.4
.37
%U
.K.
2.8
9%
Mexico
11
.85
%
Mexico
10
.71%
China
5.6
8%
China
16
.33
%
Japan7
.39%
Germ
any4
.79
%
Canada
16.1
1%
Other
OEC
D1
2.4
3%
Japan5
.46
%
Germ
any4
.32
%C
anada2
1.6
7%
Other
OEC
D1
7.5
0%
France2
.39
%France2
.11
%
All Other
26
.76
%All O
ther2
7.2
4%
Goods e
xport s
hare
s, 2
00
7G
oods im
port s
hare
s, 2
00
7
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32
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionTable 3.2 Value of U.S. Merchandise Exports and Imports, 2007
Source: U.S. Department of Commerce, International Trade Administration, http://www.census.gov/foreign-trade/statistics/highlights/top/top0712.html, accessed September 22, 2008.
Valu
e o
f U.S
. Merc
han
dis
e E
xp
orts
an
d Im
po
rts, 2
007
Rank/Tra
din
gP
artn
er
Exports
($ b
illions)
Rank/
Tra
din
g
Partn
er
Imports
($ b
illions)
4.1
23
anih
C 1
9.8
42
adan
aC
12 M
exico136.5
2 C
anada313.0
3 C
hina65.2
3 M
exico2
10.8
4 Japan
62.7
4 Japan
145.5
5 U
nited Kingdom
50.2
5 G
ermany
94.4
6 G
ermany
49.7
6 U
nited Kingdom
56.9
7 S
outh Korea
34.6
7 S
outh Korea
47.66.
14
ecna
rF
80.
33
sdna
lreh
teN
89 France
27.4
9 Venezuela
39.9
10 Taiw
an26.3
10
Taiwan
38.3
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33
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.4 The Evolving European Union
Source: http://europa.eu/abc/european_countries/index_en.htm, accessed November 29, 2008.
Th
e E
vo
lvin
g E
uro
pean
Un
ion
Mem
ber states
Candidate countries
Bla
ck Sea
Med
iterra
nea
n S
ea
AT
LA
NT
IC
OC
EA
N
SW
EDEN
NO
RW
AY
FINLAN
D
ESTO
NIA
LATVIA
LITHU
ANIA
RU
SS
IA
POLAN
D
DEN
MAR
K
GER
MAN
YB
ELGIU
M
LUXEM
BO
UR
G
FRAN
CE
ITALY
SW
ITZERLAN
DAU
STR
IA
SLO
VENIA
CR
OATIA
BO
SN
IA &H
ERZEG
OVIN
A
MO
NTEN
EGR
O
ALBAN
IAM
ACED
ON
IA
GR
EECE
TUR
KEY
CYPR
US
HU
NG
ARY
RO
MAN
IA
BU
LGAR
IA
MO
LDO
VA
UK
RAIN
E
BELAR
US
RU
SS
IA
SLO
VAKIA
CZEC
H R
EPUB
LIC
MALTA
SPAIN
MO
RO
CC
OALG
ERIA
TUN
ISIA
POR
TUG
AL
NETH
ERLAN
DS
IRELAN
DU
NITED
KIN
GD
OM
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34
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionTable 3.3 The Ten Largest Foreign and U.S. Multinational Corporations
Source: Fortune Global 500, July 1, 2008, p. 165. Copyright © 2006 Time, Inc., www.fortune.com. All rights reserved.
Th
e T
en
Larg
est F
ore
ign
an
d U
.S.
Mu
ltina
tion
al C
orp
ora
tion
s
2007
Rank
Com
pany
Busin
ess
Country
Revenue
($ m
illions)
1W
al-Mart S
toresG
eneral m
erchandiserU
nited States
378
,799
2ExxonM
obilEnergy
United S
tates372
,824
3R
oyal Dutch/
Shell G
roupEnergy
Netherlands/U
nited K
ingdom35
5,7
82
4B
PEnergy
United K
ingdom29
1,4
381
02,
03
2na
paJ
seli
bomo
tuA
roto
M at
oyoT
56C
hevronEnergy
United S
tates21
0,7
83
7IN
G G
roupFinancial services
Netherlands
20
1,5
16
8Total
EnergyFrance
18
7,2
80
9G
eneral Motors
Automobiles
United S
tates18
2,3
47
10
Conoco Phillips
EnergyU
nited States
17
8,5
58
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35
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.A Chapter Outline
Chapter 3 Outline
Exploring Global Business
The Basis for International Business
– Absolute and Comparative Advantage
– Exporting and Importing
Restrictions to International Business
– Types of Trade Restrictions
– Reasons for Trade Restrictions
– Reasons Against Trade Restrictions
The Extent of International Business
– The World Economic Outlook for Trade
International Trade Agreements
– The General Agreement on Tariffs and Trade and the World Trade Organization
– International Economic Communities
Methods of Entering International Business
–Licensing
– Exporting
– Joint Ventures
– Totally Owned Facilities
– Strategic Alliances
– Trading Companies
– Countertrade
– Multinational Firms
Sources of Export Assistance
Financing International Business
– The Export-Import Bank of the United States
– Multilateral Development Banks
– The International Monetary Fund
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36
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.B Class Exercise
Class Exercise
There are four environmental forces im-pacting international markets: cultural, social, economic, and political/legal. With which force is each of the following most closely associated?
1. Handshaking
2. Religion
3. Transportation networks
4. Computer literacy
5. Sporting events
6. Color preferences
7. Standard of living
8. The role of children in the family
9. Communications equipment
10. Touching
11. Import restrictions
12. Government stability
13. Climate
14. Language
15. Payoffs and bribes
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37
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.C Debate Issue
Debate Issue
Should the United States fear Japan?
YES
• The U.S. continues to
carry an extremely large
trade imbalance with
Japan, while Japanese
direct investment in the
U.S. economy continues to
escalate. Many feel that
Japan unfairly restricts
U.S. imports and that the
U.S. should retaliate by
restricting Japanese
imports. American
consumers are becoming
increasingly dependent on
Japanese products.
Japanese fi rms are also
increasing capacity,
reducing costs, and
developing new
technologies much faster
than their U.S.
counterparts. The result is
a world-wide, consumer
market that is slowly
becoming dominated by
the Japanese.
NO
• The total foreign
investment in the U.S.
economy is currently less
than 4%. In fact, the British
and Canadians have more
investment in the U.S. than
the Japanese. With
globalization becoming
common, trade and foreign
investment are usual
practices in today’s world.
For example, Chrysler now
owns 11% of Mitsubishi,
while Ford owns 24% of
Mazda. Foreign investment
is good for the U.S. because
it is being directed at
permanent assets like plants
and equipment, thus
stimulating industry,
providing jobs, and
stabilizing the economy.
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38
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.D Chapter Quiz
Chapter Quiz1. 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 trade.
c. favorable balance of payments.
d. unfavorable balance of trade.
e. unfavorable supply of goods.
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.
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 defi cit.
d. borrows from the Eximbank.
e. sells more goods abroad.
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.
5. XYZ Company is seeking a partner in China to manufacture its products. It
wants to team up with an established Chinese fi rm 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.
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39
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.E Trade Restrictions
Trade Restrictions
• Tariffs or Import Duties
• Quotas
– Quantity or value
•Embargoes
– Halts to trade
• Foreign-Exchange Controls
– Restrict the amount of a currency
that can be bought or sold
• Currency Devaluation
– Reduces value of a nation’s
currency relative to currencies of
other countries
• Cultural Barriers
• Bureaucratic Red Tape
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40
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.F Pros and Cons of International Trade Restrictions
Trade Restrictions
PRO
• Equalize nation’s balance of payments
• Protect new or weak industries
• Protect national security
• Protect citizens’ health
• Retaliate for another nation’s restrictions
CON
• Higher prices
for consumers
• Restrict
consumers’
choices
• Misallocation
of
international
resources
• Loss of jobs
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41
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.G Major International Trade Agreements
International Trade Agreements
General Agreement on Tariffs and Trade and
the World Trade Organization
– Kennedy Round
– Tokyo Round
– Uruguay Round
– Doha Round
International Economic Organizations
– European Union
– European Economic Area
– North American Free Trade Agreement
– The Central American Free Trade Agreement
– The Association of Southeast Asian Nations
– Pacifi c Rim
– Commonwealth of Independent States
– Caribbean Basin Initiative
– The Common Market of the Southern Cone
– Organization of Petroleum Exporting
Countries
– Organization for Economic Cooperation and
Development
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© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.H Organizing for International Business
Organizing for International
Business
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