International Business

We live in a global economy -- consumers around the world drink Coca-Cola, Pepsi, and eat at McDonalds. Products you consume today are just as likely to have been made in China, Korea or Germany as in the United States.

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International Business

International business – the buying, selling, and trading of goods and services across national boundaries.

e.g., Starbucks serves 20 million customers a week at 16,000 shops in 44 countries.

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Why Nations Trade

Absolute advantage – a monopoly that exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item.

International trade allows for the acquisition of raw materials and goods at favorable prices.

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Why Nations Trade

Comparative advantage – the basis of most international trade, when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items.

International trade allows for the acquisition of raw materials and goods at favorable prices.

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Why Nations Trade

Outsourcing – the transferring of manufacturing or other tasks—such as data processing—to countries where labor and supplies are less expensive.

International trade allows for the acquisition of raw materials and goods at favorable prices.

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Trade Between Countries

Exporting – the sale of goods and services to foreign markets. Importing – the purchase of goods and services from foreign sources.

Obtaining needed goods and services and the funds to pay for them, requires international trade through exporting and importing.

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Balance of TradeThe difference in the value between what a nation exports and imports is its balance of trade.

A trade deficit is also called a nation’s negative balance of trade.

U.S. Trade Deficit1980-2006

(in billions of dollars)

A trade deficit (shown in the table) shows that the U.S. has a trade deficit – it imports more than it exports.

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Imports and Exports in Cyprus (in Million $) Imports and Exports in Cyprus (in Million $)

Imports and Exports

0,0100,0200,0300,0400,0500,0600,0700,0800,0900,0

1.000,01.100,01.200,01.300,01.400,01.500,0

Years

Export (Million $)

Import (Million $)

Components of Our Exports2000 2001 2002 2003 2004 2005 2006 2007

1. Agricultural Products 16,0 12,3 18,9 20,9 21,1 24,6 24,1 30,7

1.1. Citrus 13,4 9,9 17,1 17,8 20,1 20,2 19,1 22,7

1.2. Potatoes 0,1 0,5 0,2 0,4 - 1,0 2,1 3,0

1.3. Live Animal 0,3 - - - - - - ..

1.4. Other 2,2 1,9 1,6 2,7 1,0 3,4 2,9 5,0

2. Industrial Products 34,2 21,9 26,1 29,2 39,4 41,1 39,1 44,9

2.1. Processed Agricultural Goods 12,2 8,1 12,2 16,6 24,9 27,8 26,0 31,4

2.2. Clothing1 19,3 11,1 10,9 10,2 11,7 10,0 7,8 6,8

2.3. Other 2,7 2,7 3,0 2,4 2,8 3,3 5,3 6,7

3. Minerals 0,2 0,4 0,4 0,7 1,5 2,4 4,9 8,1

Total 50,4 34,6 45,4 50,8 62,0 68,1 68,1 83,7

Source: North Cyprus State Planning Org

Balance of payments – the difference between the flow of money into and out of a country.

A nation’s balance of trade, foreign investments, foreign aid, loans, tourists dollars, and military expenditures comprise its balance of payments

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International Trade Barriers

Barriers to International Trade –•Economic•Ethical, Legal, and Political•Social and Cultural•Technological

Completely free trade seldom exists.

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ECONOMIC BARRIERS.

International Trade Barriers

•Economic development

•Infrastructure

•Exchange rates

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Economic Trade Barriers

Economic Development

LDC’s – less-developed countries•Low per-capita income•Less economically advanced•Potentially huge & profitable markets

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Infrastructure

Economic Trade Barriers

The physical facilities that support economic activities, including railroads, highways, ports, airfields, utilities, power plants, schools, hospitals, and commercial distribution systems.

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Exchange Rates

Economic Trade Barriers

The ratio at which one nation’s currency can be exchanged for another nation’s currency.

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Ethical, Legal, and Political Barriers.

•Complex relationships•Different laws•International laws•Trade restrictions•Changing political climates•Different ethical values

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Ethical, Legal, and Political Barriers

Part of a nation’s legal structure – may be established or removed for political reasons.

Import Tariff – a tax levied by a nation on goods imported into the country

Tariffs & Trade Restrictions

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Ethical, Legal, and Political Barriers

Exchange controls – regulations that restrict the amount of currency that can be bought or sold

Quota – a restriction on the number of units of a particular product that can be imported into a country

Tariffs & Trade Restrictions

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Ethical, Legal, and Political Barriers

Embargo– a prohibition on trade in a particular product

Dumping – the act of a country or business selling products at less than what it costs to produce them

Tariffs & Trade Restrictions

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Political Barriers

Ethical, Legal, and Political Barriers

•Seldom in writing & change rapidly•Relative stability of countries is a factor

Cartel – a group of firms or nations that agrees to act as a monopoly and not compete with each other, in order to generate a competitive advantage in world markets.

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Social and Cultural Barriers

International Trade Barriers

• language• physical characteristics (e.g., tall, short;

slim, fat)• age groups (young, old)• shopping and eating habits• religion

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Technological Barriers

International Trade Barriers

•Technological advances are creating global marketing opportunities

•10 nations outrank the U.S. in terms of subscribers to broadband Internet access. (e-commerce)

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Trade Agreements, Alliances, & Organizations

General Agreement on Tariffs and Trade (GATT) • Signed by 23 nations in 1947• Forum for tariff negotiations• Place for international trade issue discussion and

resolution

GATT

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WTO

Trade Agreements, Alliances, & Organizations

World Trade Organization (WTO) – International organization dealing with the rules of trade between nations.

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NAFTA

Trade Agreements, Alliances, & Organizations

North American Free Trade Agreement (NAFTA)– agreement that eliminates most tariffs and trade restriction on agricultural and manufactured products to encourage trade among Canada, the U.S., and Mexico.

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EU

Trade Agreements, Alliances, & Organizations

European Union (EU)– a union of European nations established in 1958 to promote trade among its members; one of the largest single markets today.

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APEC

Trade Agreements, Alliances, & Organizations

Asia-Pacific Economic Cooperation (APEC)– an international trade alliance that promotes open trade and economic and technical cooperation among member nations.

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Trade Agreements, Alliances, & Organizations

World Bank – (International Bank for Reconstruction and Development)

Organization established in 1946 by industrializednations to loan money to underdeveloped anddeveloping countries.

World Bank

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Trade Agreements, Alliances, & Organizations

International Monetary Fund (IMF)– Organization established in 1947 to promotetrade among member nations by eliminatingtrade barriers and fostering financialcooperation

IMF

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Getting Involved in International Business

Many companies’ involvement in international trade begins with importing goods for resale.

Exporting & importing, trading companies, licensing and franchising, contract manufacturing, joint ventures, direct investment, and multinational corporations.

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Getting Involved in International Business

Exporting can take place through countertrade agreements – foreign trade agreements that involve bartering products for other products instead of for currency.

Exporting & importing

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Getting Involved in International Business

A firm that buys goods in one country and sells them to buyers in another country is a trading company.

Trading Companies

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Getting Involved in International Business

A trade agreement in which one company (licensor) allows another company (licensee) to use its company name, products, patents, brands, trademarks, etc. in exchange for a fee or royalty.

Licensing & Franchising

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Getting Involved in International Business

Franchising is a form of licensing where a company (franchiser) agrees to provide a franchisee a name, logo, operational guidelines, products, etc, in return for a financial commitment and the agreement to conduct business in accord with the franchiser’s standard of operations.

Licensing & Franchising

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Getting Involved in International BusinessTop 10 Global Franchise Operations

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Getting Involved in International Business

Contract Manufacturing -- The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification; the final product carries the domestic firm’s name

Contract manufacturing

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Joint Ventures & Alliances

Joint venture – the sharing of the costs and operation of a business between a foreign company and a local partner

Strategic alliance – a partnership formed to create competitive advantage on a worldwide basis.

Direct investment – the ownership of overseas facilities

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The 10 Largest Global Corporations

MNC – multinational corporation such as IBM, General Motors, General Electric or ExxonMobil that operates on a worldwide scale, without significant ties to any one nation or region. 3-38

International Business Strategies

Multinational strategy– a plan used by international companies that involves customizing products, promotion, and distribution according to cultural technological, regional and national differences.

Global strategy (globalization)– a strategy that involves standardizing products (promotion and distribution) for the whole world as if it were a single entity.

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