Eli GlblExploring Global Business · Myanmar Malaysia Philippines Cambodia Indonesia Singapore...

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


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


The Basis for International Business (cont’d)( )

• Balance of trade

• Trade deficit

• Balance of payments


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


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


p g

Types of Trade Restrictions (cont’d)

• Nontariff barriers

– Import quota p q

– Embargo

– Foreign exchange control


Types of Trade Restrictions (cont’d)

• Nontariff barriers (cont’d)C d l ti– Currency devaluation

– Bureaucratic red tape

Cultural attitudes– Cultural attitudes


Reasons for and Against Trade RestrictionsTrade Restrictions

FOR AGAINST


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


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)


International Economic Organizations Working to Foster Tradeo g to oste ade

• Economic community


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



Central American Free Trade AgreementCentral American Free Trade Agreement(CAFTA)

El SalvadorGuatemalaHondurasNicaragua



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)


Methods of Entering International BusinessInternational Business

• Licensing

– AdvantageAdvantage

– Disadvantages


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


Methods of Entering International Business (cont’d)Business (cont d)

• Joint ventures

– Advantages

– Disadvantages



• Totally owned facilities

– Advantage

Di d t– Disadvantage

T f– Two forms



• Strategic alliances

• Trading companies



• Countertrade

M l i i l i• Multinational enterprise


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

3768X_03_ch03_p029-042.indd 293768X_03_ch03_p029-042.indd 29 3/6/09 6:34:56 PM3/6/09 6:34:56 PM

30


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.


31


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


32


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


33


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


34


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


35


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


36


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


37


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.


38


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.


39


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


40


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


41


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


42


Pride/Hughes/Kapoor, BUSINESS, 10th editionFigure 3.H Organizing for International Business

Organizing for International

Business


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