ESSENTIAL STANDARD1.00 Understand the role of business in the global economy.

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OBJECTIVE 1.03 Understand business in the global marketplace.

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TOPICS 1. Factors and regulations companies have to consider when doing business in the global market place

2. Main entry modes for companies to enter the global marketplace

3. Main international trade organizations

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DOMESTIC VS. INTERNATIONAL BUSINESSES

Domestic business is the making, buying, and selling of goods and service within a country. Most business activities occur within a country’s own border.

International business, also called foreign or world trade, refers to business activities needed for creating, shipping, and selling goods and services across national borders.

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FUN FACT!

The USA conducts trade with more than _____ countries.

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FUN FACT!

The USA conducts trade with more than 180 countries.

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FUN FACT!

The USA conducts trade with more than 180 countries.

International trade is expanding everyday. Countries are interdependent and so are their economies.

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BUSINESS ADVANTAGE FACTORS

Two economic principles define buying and selling among companies in different countries:

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BUSINESS ADVANTAGE FACTORS

Two economic principles define buying and selling among companies in different countries:

1. Absolute advantage exists when a country can produce a good or service at a lower cost than other countries. Examples?

2. Comparative advantage is a situation in which a country specializes in the production of a good or service at which it is relatively more efficient. Examples?

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BUSINESS ADVANTAGE FACTORS EXAMPLE

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BUSINESS ADVANTAGE FACTORS EXAMPLE

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•Lebron James is a great basketball player AND a great lawn mower•Lebron’s young neighbor, Scotty, is willing to mow Lebron’s lawn.•Lebron can mow his own lawn in 2 hours OR he could film a Nike commercial in 2 hours and earn $10,000. What is Lebron’s opportunity cost to mow his lawn?• Scotty can mow Lebron’s lawn in 4 hours OR he could work at McDonald’s for 4 hours and make $8/hr. What is Scotty’s opportunity cost of mowing the lawn?•Who has an absolute advantage in mowing the lawn? Who has the comparative advantage? Would Lebron benefit from the trade?

FUN FACT!

1 out of every 6 jobs in the US depends on international business

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INTERNATIONAL TRADE

Imports are items bought from other countries.

Exports are goods and services sold to other countries.

Can you list examples of each?

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IMPORTING ADVANTAGES & DISADVANTAGES

AdvantagesGoods available for purchase. Goods could have cost less since they were imported.

Goods may be a better quality since imported. Goods imported and owned may provide satisfaction.

Disadvantage(s)Possibly goods may be unavailable.

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EXPORTING ADVANTAGES & DISADVANTAGE(S)

AdvantagesExporting creates jobs.Exporting provides access to goods usually unavailable.

Disadvantage(s)Jobs may depend on global business.

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CHECK POINT Why is it better for a country to export more than it imports?

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CHECK POINT Why is it better for a country to export more than it imports?

•So that it will not be too dependent on other countries•A favorable balance of trade also means cash will be flowing into a country rather than out of it.

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MEASURING OF TRADE RELATIONS

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MEASURING OF TRADE RELATIONSNations are concerned with balancing income with expenditures. Foreign debt is the amount of money a country owes to other countries. What is a way to measure trade relations? Balance of trade Balance of payments

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MEASURING OF TRADE RELATIONS Balance of trade is the difference between a country’s total exports and total imports.

If a country exports more than it imports, it has a trade surplus. This is favorable.

If a country imports more than it exports, it has a trade deficit. This is unfavorable.

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MEASURING OF TRADE RELATIONS

Balance of payments is the difference between the amount of money that comes into a country and the amount that goes out of it.

If a country receives more money in a year than it pays out, it has favorable (or positive) balance.

If a country sends more money out than it brings in, it has an unfavorable (or negative) balance.

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REVIEW- ABSOLUTE ADVANTAGE•An absolute advantage exists when a country can produce a good or service at a lower cost than other countries. •This usually occurs as a result of the natural resources or raw materials of a country. •Examples of Absolute Advantage: •Lumber in Canada•Coffee in South America•Oil in the Middle East•Sand in the Virgin Islands

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REVIEW- COMPARATIVE ADVANTAGE•A country my have an Absolute Advantage in more than one area!Therefore, they must decide how to maximize economic wealth•For example, a country may be able to product both computers and clothing more efficiently than other countries. If the world market for computers were stronger than for clothing, the country would benefit by manufacturing computers and buying clothing made in other countries. This is COMPARATIVE ADVANTAGE.•Comparative advantage- A situation in which a country specializes in the production of a good or service for which it is relatively more efficient

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REVIEW Absolute and Comparative Advantage:•https://www.youtube.com/watch?v=ol4NexZ0iII

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INTERNATIONAL CURRENCY CHALLENGE: •There are various currencies around the world•Each nation has it’s own banking system and money

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FUN FACT! Can you name the currency these countries use? 1. Russia 2. European Union 3. Brazil 4. India 5. Saudi Arabia

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FUN FACT! Can you name the currency these countries use? 1. Russia- RUBLE 2. European Union- EURO 3. Brazil- REAL 4. India- RUPEE 5. Saudi Arabia- RIYAL

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INTERNATIONAL CURRENCY The foreign exchange market is where banks buy and sell different currencies.

The exchange rate is the value of a currency in one country when compared with the value in another.

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INTERNATIONAL CURRENCY*THE FIGURE BELOW IS FROM 2012

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FUN FACT! A country may adopt a “Dollarization” policy in an attempt to reduce economic troubles and enhance trade with other nations. The US Dollar is the official currency of _______, ________, and _________. The Dollar is also the unofficial monetary unit for tourist transactions in countries such as the Bahamas and Haiti.

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FUN FACT! A country may adopt a “Dollarization” policy in an attempt to reduce economic troubles and enhance trade with other nations. The US Dollar is the official currency of Ecuador, El Salvador, and Panama. The Dollar is also the unofficial monetary unit for tourist transactions in countries such as the Bahamas and Haiti.

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EXCHANGE RATE MAIN FACTORSMain factors affecting currency exchange rates are:

1. Balance of payment •Influenced by demand for a nations goods and services. •If the balance of payment is favorable, then usually currency is steady and rising in value. •If unfavorable, then usually the currency is declining in value.2. Economic Conditions Inflation decreases buying power of currency Interest rates that are high decreases demand to borrow money.

3. Political stability could be impacted by changes in government or laws.

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INTERNATIONAL BUSINESS-- ENVIRONMENT FACTORS Doing business in other countries requires knowledge of the differences that exist among people and places. There are 4 main factors: 1. Cultural Influences 2. Geography 3. Economic Development 4. Political/Legal Concerns

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1. CULTURAL INFLUENCES

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1. CULTURAL INFLUENCES•https://www.youtube.com/watch?v=UdCcbT23Qkk

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2. GEOGRAPHY• What is included in a country’s geography? Location, Climate, Terrain, Seaports, and Natural Resources

• How could this affect business? •The geography of a country could impact its natural resources AND exports and imports of resources.• Example: A country with few natural resources may have to rely on imports.

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3. ECONOMIC DEVELOPMENT

• What key effects of a country’s economics may influence conducting business in a global marketplace?

Education & Literacy levelTechnologyAgricultural DependencyInfrastructure- Transportation, communication, utilities systems

Others: Inflation and Exchange rate

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3. ECONOMIC DEVELOPMENT PART 2

•How could this affect business? •A country’s economic development impacts its citizens standard of living and business activities.• Example: A country may have limited transportation methods that may limit travel distances to purchase imported goods.

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4. POLITICAL/LEGAL CONCERNS•What political and legal concerns may influence business activities in a global marketplace?Type of GovernmentStability of governmentGovernment policies for businesses relevant to trade barriers

Example: A country’s government only collects about ¼ of his housing property taxes. This could be a sign of weak government that is ignored by the its citizens.

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MAIN INTERNATIONAL TRADE BARRIER FACTORS

• Governments can create TRADE BARRIERS, which are restrictions to free trade.

• Formal Trade Barriers: Quotas, tariffs, embargoes

• Informal Trade Barriers: Culture, traditions, religion

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MAIN INTERNATIONAL TRADE BARRIER FACTORS

Quotas A limit on the quantity of good that may

be imported or exported within a given period to regulate international trade.

Why would a company or country set a quota?

To regulate the supply and prices.To protect a good or service from too much competition in a global market place.

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MAIN INTERNATIONAL TRADE BARRIER FACTORS

Tariffs Taxes on certain imported

products which increases prices.

Why would a government use a tariff? To protect the supply of goods.

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MAIN INTERNATIONAL TRADE BARRIER FACTORS

Embargo Government bans the import or export of specified goods.

Why would a government place an embargo?To protect their own industries from international competition (more than a quota or tariff could achieve).To protect sensitive goods (especially those vital to the nation’s defense) from falling into the hands of unfriendly groups or nations

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ENCOURAGEMENT OF INTERNATIONAL TRADE

Governments can act to PROMOTE international business activities. How?1.Free-Trade Zones2.Free-Trade Agreements3.Common Markets

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ENCOURAGEMENT OF INTERNATIONAL TRADE

1. Free-trade zones: A selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing. Usually located around seaport or airportImporter pays duty only when product leaves the zone

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ENCOURAGEMENT OF INTERNATIONAL TRADE

2. Free-Trade Agreement: Member countries agree to remove duties, also called import taxes, and trade barriers on products traded among them. Results in increased trade between the membersExample: NAFTA (the North American Free Trade Agreement) between the United States, Canada, and Mexico

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ENCOURAGEMENT OF INTERNATIONAL TRADE

3. Common Market: Members do away with duties and other trade barriers. Allows companies to invest freely in each member’s country. Allow workers to move freely across borders.Examples:European Union (EU)Latin American Integration Association (LAIA)

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GLOBAL MARKET ENTRY MODES

As companies expand into other countries, several methods are available for their use. 1. Licensing 2. Franchising 3. Joint Venture

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GLOBAL MARKET ENTRY MODES

1. Licensing is selling the right to a company to use some intangible property (production process, trademark, or brand name) for a fee or royalty. What are some examples?

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GLOBAL MARKET ENTRY MODESLicensing example: Harley Davidson

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GLOBAL MARKET ENTRY MODES

2. Franchising is allowing a business the rights to use another company’s name or process in a specific way.What are some examples? McDonald’s, Burger King, Wendy’s, Pizza Hut, KFC have all used franchising to increase their presence in foreign markets

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FUN FACT

How much money does it cost to FRANCHISE a McDonald’s?

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FUN FACT How much money does it cost to FRANCHISE a McDonald’s? •You must have a minimum of $750,000 non-borrowed personal resources to be considered!! •Startup costs, which include construction and equipment expenses, average between $955,708 and $2.3 million•You must pay 40% of start up costs right away. The rest can be financed.

•In addition to those costs, McDonald's charges a $45,000 franchisee fee and an ongoing monthly service fee equal to 4% of gross sales. •The average McDonald’s generates $2.5 Million in sales annually

GLOBAL MARKET ENTRY MODES 3. Joint venture happens when two or more companies agree to share a business project.The main benefit is the sharing of raw materials, shipping, facilities, management activities, or production facilitiesWhat are some examples?

US and Japanese automobile manufacturers… Ford entered joint venture with Mazda!

Ford used Mazda produced parts for several cars. Mazda set up assembly plants for Ford vehicles.

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FUN FACT!

Cereal Partners Worldwide (CPW)•Joint Venture between General Mills and Nestle•Sell cereal in Latin America, Europe, Middle East, etc.•General Mills brought Cheerios, Lucky Charms, Trix into partnership•Nestle is well known worldwide. They have a broad distribution system and well known brand.

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JOINT VENTURE- CURRENT EVENT

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JOINT VENTURE- CURRENT EVENT

•Joint venture between Rolls Royce & American Airlines created in 1998 •Worked on certain Rolls Royce engines that were used on American Airlines jets•Work declined after American stopped using one of the engine types in 2004•Work on another type is falling as American retires its Boeing 757 jets•September 29, 2015: American Airlines accepted Rolls Royce offer to dissolve Joint Venture

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MAIN INTERNATIONAL TRADE ORGANIZATIONS

International business activities can be very complex. Several organizations have been created to help companies with global trade activities.

1. International Monetary Fund (IMF) 2. World Bank 3. World Trade Organization (WTO)

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MAIN INTERNATIONAL TRADE ORGANIZATIONS

1. International Monetary Fund (IMF)Helps promote economic cooperation and maintain an orderly system of world trade and exchange rates.

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FUN FACT!

IMF was conceived at a UN conference in New Hampshire, USA in July 1944The 44 countries at that conference sought to build a framework for economic cooperation to avoid factors that contributed to the Great Depression of the 1930s.

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MAIN INTERNATIONAL TRADE ORGANIZATIONS

2. World BankProvides economic aid to less-developed countries to fund building communications systems, transportation networks, and energy plants.Created in 1944 to provide loans for rebuilding after WWII.

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FUN FACT!

The World Bank currently has 2 goals they’d like to achieve by 2030: 1. End extreme poverty by decreasing the percentage of people living on less than $1.25 a day to no more than 3% 2. Promote shared prosperity by fostering the income growth of the bottom 40% for every country

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MAIN INTERNATIONAL TRADE ORGANIZATIONS

3. World Trade Organization (WTO)

The only global international organization dealing with the rules of trade between nationsSettles trade disputes and enforces free-trade agreements between its members

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FUN FACT!

The World Trade Organization (WTO) is headquarted in Geneva, Switzerland