Chapter 3 Business in a Borderless World PDF

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Ch.3: Business in a Borderless World The Role of International Business International Business ● •Buying, selling, and trading ● •Most of the world’s population and two-thirds of its total purchasing power are outside of the U.S. ● •Global marketing requires balancing global brands with the needs of local consumers Why Nations Trade ● •Absolute advantage--monopoly ● •Comparative advantage--basis of most international trade ● •Expanding markets ● •Pursuing economies of scale ● •Acquiring materials, goods, and services ● •Keeping up with customers ● •Keeping up with competitors Trade Between Countries ● ● ● ● ●

Exporting ○ •the sale of goods and services to foreign markets Importing ○ •the purchase of goods and services from foreign markets Balance of trade ○ •difference between exports and imports Trade deficit ○ •negative balance of trade Balance of payments ○ •difference between flow of money into and out of a country

*U.S. Trade Deficit, 1990–2016 (in billions of dollars) Blank

1990

2000

2010

2011

2012

2013

Exports

535. 2

1,075. 3

1,853. 6

2,127

2,219

2,279. 9

2,343. 2

2,230. 3

2,212. 1

Imports

616. 1

1,447. 8

2,348. 3

2,675. 6

2,755. 8

2,758. 3

2,851. 5

2,761. 8

2,712. 6

Trade surplus/defic it

– 80.9

–372.5

–494.7

–548.6

–536.8

–478.4

–508.3

–531.5

–500.6

U.S. Export to China (millions of U.S. dollars)

2014

2015

2016

Ch.3: Business in a Borderless World

Free Trade Seldom Exists (International trade Barriers) 1. Economic barriers a. •Industrialized nations are economically advanced b. •Less-developed countries have low per-capita income i. First world (U.S., Canada, Japan) versus third world ii. Per capita 1. Money generated by commerce divided by population c. •Infrastructure i. the physical facilities that support a country’s economic activities, such as railroads, highways, ports, airfields, utilities and power plants, schools, hospitals, communication systems, and commercial distribution systems. d. •Exchange rates i. The ratio at which one nation’s currency can be exchanged for another nation’s currency

e. 2. Ethical, legal, and political barriers a. •Laws of its own nation, international laws, and laws of the nation with which it’s trading; laws of the host country b. •Political climates (Cartels) c. •Ethical values d. •Tariffs (fixed/ad valorem) e. •Trade restrictions

Ch.3: Business in a Borderless World i. •Exchange Controls ii. •Quota iii. •Embargo iv. •Dumping 3. Social and cultural barriers a. Political barriers: Political instability in many nations has led to an influx of refugees. The potential for political turmoil is a substantial risk businesses face when expanding overseas. b. •Differences in spoken and written language c. •Appropriate body language, posture, facial expressions, and personal space may vary d. •Family roles may differ e. •Different perception of time f. •National customs and holidays must be respected g. •Most nations use metric system 4. Technological barriers a. •Infrastructure b. •Technological advances i. •Create global marketing opportunities ii. •Create new challenges and competition 1. •New competitors challenging U.S. 2. •3 of the 6 top PC companies are from Asian countries The World’s Most Competitive Countries -

Compiled by IMD Business School in Switzerland. They have ranked country competitiveness for 30 years based on 4 factors: Business efficiency, Government efficiency, Economic performance, & Infrastructure

Trade Agreements, Alliances, and Organizations ●

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General Agreement on Tariffs and Trades (GATT) ○ •Provided forum for tariff negotiations ○ •More than 100 nations abided by rules ○ •World Trade Organization (WTO) evolved from GATT World Bank

Ch.3: Business in a Borderless World ●

○ •Loans money to underdeveloped and developing countries International Monetary Fund (IMF) ○ •Promotes trade by eliminating trade barriers

Trade Blocs or Common Markets ●

USMCA-United States-Mexico-Canada Agreement formerly North American Free Trade Agreement (NAFTA) ○ The North American Free Trade Agreement) is an agreement that

eliminates most tariffs and trade restrictions on agricultural and manufactured products to encourage trade among Canada, the U.S., and Mexico. Effective January 1, 1994; easier to invest in Mexico and Canada; protects intellectual property; expands trade by requiring equal treatment; simplifies country-of-origin rules. As of October 2018, named USMCA, United States-Mexico-Canada Agreement ●

European Union (EU) ○ also called the European Community or Common Market, was established

in 1958 to promote trade among its members and is one of the largest single markets today. Has GDP of more than 19 trillion dollars; working to standardize: business regulations, import duties, value-added taxes, currency ●

Asia-Pacific Economic Cooperation (APEC) ○ international trade alliance that promotes open trade and economic and

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Association of Southeast Asian Nations (ASEAN) ○ established in 1967, promotes trade and economic integration among

technical cooperation among member nations. member nations. Getting Involved in International Business - •Exporting and Importing - •Trading Companies - •Licensing - •Franchising - •Contract Manufacturing - •Outsourcing - Lose control - •Offshoring - •Joint Venture - •Strategic Alliance - •Direct Investment Getting Involved in International Business Exporting and Importing ● Countertrade agreement involves bartering ● Export agents -- middlemen that help companies by handling their international transactions ● Top Exporting countries (in billions of dollars)

Ch.3: Business in a Borderless World

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Trading Companies ○ •Handle all trade activities ○ •Similar to export agents, but role is broader ■ A trading company is a firm that buys goods in one country and sells them to buyers in another country. Licensing ○ •Exchange for fee or royalty ○ •Attractive alternative to direct investment when political stability is in doubt ■ Licensing is a trade arrangement in which one company—the licensor— allows another company—the licensee—to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee or royalty. Franchising ○ •In return for financial commitment and agreement to conduct business in accord with franchiser’s standard of operations ○ •Allows companies to enter international marketplace with less spend ■ Franchising is a form of licensing in which a company agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with a franchiser’s business in return for a financial commitment and the agreement to conduct business in accord with the franchiser’s standard of operation. Contract Manufacturing ○ •Final product carries domestic firm’s name ○ •For example, Foxconn is the largest iPhone assembler ■ Contract manufacturing occurs when a company hires 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. Outsourcing ○ •Transferring tasks to where costs are lower ○ •Insourcing, where foreign companies transfer tasks to U.S. companies, happens more often ■ Earlier, we defined outsourcing as transferring manufacturing or other tasks (such as information technology operations) to companies in countries where labor and supplies are less expensive. Offshoring ○ •Relocation of business processes by a company or subsidiary to another country ○ •Different from outsourcing: company retains control by not subcontracting to another company

Ch.3: Business in a Borderless World ●

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Joint venture ○ •Used in countries forbidding direct investment by foreign companies or when company lacks resources or expertise ■ A joint venture is a partnership established for a specific project or for a limited time. Strategic alliance ○ •Used when competition is fierce and costs are high ○ •Becoming predominant in the automobile and computer industries ■ A strategic alliance is a partnership formed to create competitive advantage on a worldwide basis. Direct Investment ○ Direct investment is the ownership of overseas facilities. ○ •Companies who want more control & willing to invest considerable resources-may involve new facilities or purchase of existing operation ○ •Multinational corporation (MNC)--often have greater assets than countries in which they operate

International Business Strategies ●

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Developing Strategies ○ •Multinational strategy ■ •Customizing according to cultural, technological, regional, and national differences ○ •Global strategy (globalization) ■ •Standardizing products for whole world ■ •Must conduct environmental analyses to determine what strategy is best Managing the Challenges of Global Business ○ •Commercial Service (U.S. Department of Commerce) ■ •Knowledge of international markets ■ •Global network ■ •Inventive use of information technology ○ •Centers for International Business Education and Research ■ •Benchmarking of best international practices...