Chapter 3 - Lecture notes 3 PDF

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Business in a Global Environment ...

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Chapter 3: Business in a Global Environment - Learning Objectives Explain why nations and companies participate in international trade. 

Because no national economy produces all the goods and services that its people need

Describe the concepts of absolute and comparative advantage. 

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Absolute Advantage o A nation has this if (1) it’s the only source of a particular product or (2) it can make more of a product using the same amount of or fewer resources than other countries Comparative Advantage o Exists when a country can produce a product at a lower opportunity cost compared to another nation o Opportunity costs are the products that a country must decline to make in order to produce something else o When a country specializes in a particular product, it sacrifices production of other products

Explain how trade between nations is measured.  

1st measure is balance of trade by subtracting the value of its imports from the value of its exports. 2nd measure is balance of payments, which is the difference, over a period of time, between the total flow of money coming into a country and the total flow of money going out

Describe the two key indicators a nation looks at to evaluate the impact of its international trade: balance of trade and balance of payments. 

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(1) Balance of trade o If a country sells more products than it buys, it has a favorable balance called a trade surplus o If it buys more than it sells, it has an unfavorable balanced called a trade deficit  Can be positive if a country’s economy is strong enough both to keep growing and to generate the jobs and incomes that permit its citizen to buy the best the world has to offer (2) Balance of payments o The biggest factor in a country’s balance of payments is the money that comes in and goes out as a result of imports and exports o But balance of payments includes other cash inflows and outflows, such as cash received from or paid for foreign investment, loans, tourism, military expenditures, and foreign aid

Define importing and exporting and describe the various types of business arrangements used by companies in international trade.   

Importing = buying products overseas and reselling them in one’s own country Exporting = selling domestic products to foreign customers Various types of business arrangements used o (1) Licensing and Franchising  An International licensing agreement allows for a foreign company (the licensee) to sell the products of a produce (the licensor) or to use its intellectual property (such as patents, trademarks, copyrights) in exchange for royalty fees  An international franchise agreement is when a company *the franchiser) grants a foreign company (the franchisee) the right to use its brand name and to sell its products or services o (2) Contract Manufacturing and Outsourcing  U.S. company contracts with a local company in a foreign country to manufacture one of its products  U.S. company retains control of product design and development and puts its own label on product o (3) Strategic Alliances and Joint Ventures  A strategic alliance is an agreement between two companies (or a company and a nation) to pool resources in order to achieve business goals that benefit both partners  Joint Ventures are alliances in which the partners fund a separate entity to manage their joint operation o (4) Foreign Direct Investment and Subsidiaries  Foreign direct investment (FDI) refers to the formal establishment of business operations on foreign soil – the building of factories, sales offices, and distribution networks to serve local markets in a nation other than the company’s home country  On the other hand, offshoring occurs when the facilities set up in the foreign country replace U.S. manufacturing facilities and are used to produce goods that will be sent back to the U.S. for sale  Foreign subsidiary is an independent company owned by a foreign firm (called the parent) o (5) Multinational Corporations  A company that operates in many countries  “Think globally, act locally”; depends on local talent  Criticism:  Destroys jobs & lowers wages of home-country workers  Traditional lifestyles/values weakened or destroyed  Irreversible damage to environment  Defense:  Better, cheaper products; creates jobs  Raises standard of living in developing countries

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Increases cross-cultural understanding

Appreciate the business challenges in international trade with different countries; explain the importance of understanding the legal, political, and economic conditions in different countries.  

Culture is a system of shared beliefs, values, customs, and behaviors that govern the interactions of members of a society The Cultural Environment o Language o Time and Sociability  High-context cultures = interlocking personal/family connections hold people together  Low-context cultures = personal and work relationships are more compartmentalized (such as the U.S., Germany, Switzerland, Scandinavian) o Intercultural communication  Degrees of animation in expression; Distance o Economic Environment  To effectively do business in a foreign country, you need to know the country’s level of economic development  Currency Valuations and Exchange Rates  Exchange rate tells you how much one currency is worth relative to another currency  Universal Currency Converter o Legal and Regulatory Environment  No established goal set of laws  Foreign corrupt practices act  Prohibits the distribution of bribes and other favors in the conduct of Business

Describe the various types of trade barriers; describe the impacts of government intervention in the free flow of products between nations. 

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Trade Controls – Protectionism o Policies that restrict free trade o Because they protect domestic industries by reducing foreign competition the use of controls to restrict free trade is often called protectionism Trade Controls Subsidiaries o Subsidiaries = Government payments given to certain industries (such as farming) to help offset some of their costs of production… o These subsidies allow the farmers to lower the price of their goods to a point below that of imported competitors’ goods Trade Controls Dumping

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o Dumping is the practice of selling exported goods below the price that producers would normally charge in their home markets Trade Controls – Tariffs, Quotas, Embargos o Tariffs = Government taxes on imports that raise the price of imported goods and make than less competitive with domestic goods; also used to raise revenue for a government o Quota is a government restriction on the quantity of a good that can be imported o Embargo is an extreme form of quota which bans import of goods from a country for economic or political reasons Pros and Cons of Trade Controls o Pros: (1) Protect specific industries (2) Protect new or struggling industries (3) Shield industries vital to national defense o Cons: (1) Restricts free trade; countries cannot compete freely (2) Creates an un-level playing field; gives special privileges to some industries (3) Cannot bring goods to a fair/open world market (4) Detrimental to world economy; nations cannot focus on what they do best

Describe the roles of the various international organizations that have been established to facilitate international trade 

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Trade Agreements and Organizations o World Trade Organization monitors trade policies and encourages global commerce and lower trade barriers, enforces international rules of trade, and provides a forum for resolving disputes Financial support for Troubled Economies o International Monetary Fund loans money to countries with troubled economies o The World Bank is an important source of economic assistance for poor and developing countries Reducing Trade Barriers (2 most powerful trading blocs) o North American Free Trade Association (NAFTA) is an agreement among the U.S., Canada and Mexico to open their borders to unrestricted trade o European Union (EU) is an association of European countries that joined together to eliminate trade restrictions among themselves (27 countries)...