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Business 100: October 18th Study Guide 1

Chapter 3 International Business 1. Balance of Payments: “The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows coming into leaving a country from other factors such as tourism, foreign aid, military expenditures, and foreign investment.” ➔ Favorable Balance of Payments: the goal is to have more money flowing into the country than out ➔ Unfavorable Balance of Payments: when more money is flowing out of a country than coming in ➔ Before 1975 the USA was exporting more goods & services than it imported ◆ Now we have bought more good from other countries than we have sold and we are in a trade deficit ◆ Our highest trade deficit is with China 2. Balance of Trade: “The total value of a nation’s exports compared to its imparts measured over a particular period” ➔ Favorable Balance of Trade or Trade Surplus: occurs when the value of a country’s exports exceeds that of its imports ➔ Unfavorable Balance of Trade or Trade Deficit: occurs when the value of a country’s exports is less than its imports 3. Contract Manufacturing: “ A foreign company’s production of private-label goods to which a domestic company then attaches its brand name or trademark; apart of Outsourcing” ➔ Example: Nike has more than 700 contract factories around the world that manufacture all of its footwear and apparel 4. Countertrading: A complex form of bartering in which several countries each trade goods or services for other goods or services ➔ All parties benefit or avoid some of the financial problems and currency constraints in global markets 5. Devaluation: Lowers the value of a nation’s currency relative to other country's currencies 6. Dumping: Selling products in a foreign country at lower prices than those charged in the producing country ➔ Predatory pricing tactic is sometimes used to reduce surplus products in foreign markets or to gain a foothold in a new market 7. Embargo: A complete ban on the import or export of a certain product or the stopping of all trade with a particular country 8. Exchange Rate: The value of one nation’s currency relative to the currencies of other countries ➔ Changes in exchange rates have effects in the global market

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9. Importing: Buying products from another country 10. Exporting: Selling products to another country ➔ The United States is the largest importing nation in the world and the second largest is China 11. Foreign Direct Investment (FDI): The buying of permanent property and businesses in foreign nations ➔ You have to control the thing you are buying in another country ➔ Not shares or stocks 12. Foreign Subsidiary: A company owned in a foreign country by another company, called the parent company ➔ The most common form of FDI ➔ The primary advantage is that the company maintains complete control over any technology or expertise it may possess ➔ Major shortcoming is the need to commit funds/ technology within foreign boundaries ➔ Subsidiary must observe legal requirements of both parent and foreign country 13. Free Trade: The movement of goods and services among nations without political or economic barriers ➔ Arguments for Free Trade/ against protectionist trade: Provides consumer choice, quality & low prices 14. Arguments for “Protectionist” Trade: Saves jobs at home, saves key industries , keeps capital at home, environmental and labor regulations are watched, and national security is maintained 15. Import Quota: Limits the number of products in certain categories a nation can import ➔ The US has import quotas on many products including sugar and shrimp to protect US companies and preserve jobs 16. Tariff: Tax imposed on imports ➔ Makes imported goods more expensive to buy 17. Joint Venture: A partnership in which two or more companies (often different countries) join to undertake a major project ➔ Shared technology and risk ➔ Shared marketing and management risk ➔ Entry into markets where foreign companies are often not allowed unless goods are produced locally 18. Licensing: A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product for a fee (a royalty)

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➔ Licensors spend little or no money to produce or market the product ➔ Ex- Warner brothers selling Harry Potter licenses to other companies that make Harry Potter products 19. I.M.F. or International Monetary Fund: A worldwide financial organization that provides money to countries who need help paying their bills ➔ Organization that assists the smooth flow of money among nations 20. NAFTA or North American Free Trade Agreement: A free trade agreement between the USA, Canada and Mexico ➔ Not a merger, just a trade agreement ➔ Unrestricted trade, no import taxes 21. SWFs or Sovereign Wealth Funds: Investment funds controlled by government holding large stakes in foreign companies ➔ One of the fastest growing forms of foreign investment 22. Multinational Corporation: An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management ➔ Only firms that have manufacturing capacity or some other physical presence in different nations can be called multinational corporation 23. W.T.O or World Trade Organization: Where trade disputes are settled between countries ➔ Sponsors global trade negotiations 24. Strong vs. Weak currency and effect on Exports & Imports: ➔ Dollar down ↓ , exports up ↑, imports down ↓ ➔ Dollar up ↑ , exports down ↓ , imports up ↑ ➔ U.S. exports are less expensive for foreign customers , so U.S. exports increase when the dollar weakens ➔ Some countries can control their currency (China) so they can export more 25. 4 Dimensions of Globalization: ➔ Free Trade - unrestricted trade with other countries ➔ Culture Convergence - becoming one large culture, social media, the internet, “Americanization”, influences of major languages ➔ Declining Influence of Individual Government - Brexit ➔ Worldwide Environmental Crisis - not just a local problem

26. Brexit: Britain voted to leave the European Union ➔ The first country to leave the EU, they have not yet left, but they will soon

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27. European Union vs. Euro Zone: European Union ●

● ●

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All countries in EU eliminated trade barriers ○ No import taxes ○ Free trade ○ Free movement of people Europe’s countries coming together 28 countries ○ Britain is the first country to vote to leave Germany has the largest economy

Euro Zone ● ● ●

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Apart of the EU Use the euro as currency Every country that uses the euro is in the EU but not every country uses the Euro Britain does not euro (they use the pound) ○ Not in the Euro Zone

28. TPP or Trans Pacific Partnership: Proposed trade agreement, not official yet ➔ All heads of government signed, but has not been signed into US law ◆ Obama wants this to pass congress before he leaves office ● Clinton & Trump do not like this agreement, if Obama doesn’t get it passed it might never be law ➔ Most Important: USA and Japan ➔ Most Important (not in TPP): China 29. Mercosur: Free trade area for some South American countries ➔ No free movement of people (like the EU) ➔ No import taxes ➔ Most Important: Brazil and Argentina 30. ASEAN: Free trade in South East Asia

Appendix A: Business Law 1. Judiciary: The branch of government chosen to oversee the legal system through a system of courts

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2. Statutory Law: State & Federal constitutions ➔ Laws passed by congress & state legislatures ➔ Written law ➔ Most common way to think of the law ➔ EX- ObamaCare 3. Common Law: The body of law that comes from decisions handed down by courts ➔ Unwritten law ➔ Basis of law in English speaking countries ➔ EX - Supreme Court decisions 4. Precedent: Decisions judges have made in earlier cases that guide the handling of new cases ➔ Common law evolves through decisions made in trial courts ➔ Lower courts must abide by precedents set by higher courts 5. Civil Law: the system of law concerned with private relations between members of a community rather than criminal, military, or religious affairs 6. Administrative Agencies: Federal or state institutions and other government organizations created by Congress or state with delegated power to create rules & regulations within given are of authority ➔ Some agencies are allowed to pass rules & regulations within its area of authority 7. Five Administrative Agencies: ➔ S.E.C - Securities & Exchange Commission - regulates publicly traded companies / stock exchanges ➔ F.D.A - Food & Drug Admin. - regulates prescriptions and medical devices ➔ E.P.A - Environmental Protection Agency ➔ F.C.C - Federal Communications Commission - regulates television, radio & telecommunications ➔ F.A.A - Federal Aviation Admin. - Regulating civil aviation to promote safety 8. Tort: A wrongful act that causes injury to another person’s body, property or injury ➔ Remedy is money damages ➔ Under civil law (non-criminal manner) ➔ Large part of our economy 9. Negligence: In tort law, behavior that causes unintended harm or injury ➔ EX- Old lady getting burned by her hot coffee at McDonald’s. Jury felt that McDonald’s did not provide adequate warning on the cup. 10. Product Liability: Part of tort law, holds businesses liable for harm that results from the production design or use of products they market

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11. Intellectual Property Rights: Patents, Copyrights, Trademarks 12. Patents: A document that gives inventors exclusive rights to their inventions for 20 years ➔ After 20 years, goes into public domain and then anyone can use it ➔ An incentive to invent ➔ Not to be fair 13. Copyrights: Protects content & creators rights to materials ➔ EX - Movies, music, games, pictures, artwork ➔ Filed with Library of Congress 14. Trademarks: Protects brand name or logo ➔ Legally protects name, symbol, or design (or combination of these) that identifies the goods or services of one seller ➔ Belongs to owner forever, as long as they are properly renewed every 10 years 15. Deregulation: Government withdrawal of certain laws & regulations that seem to hinder competition ➔ At one time the US had so many rules and regulations that covered every aspect of business, cost too much money so they moved for deregulation 16. Contract: A legally enforceable agreement between two or more parties 17. Elements that must be present for a contract to be held up by a court: ➔ An offer is made ➔ There is a voluntary acceptance of the offer ➔ Both parties give consideration ➔ Both parties are competent ➔ The contract covers a legal act ➔ The contract is in proper form 18. Consideration: Something of value ➔ One of the requirements of a legal contract ➔ EX- If I agree to sing at your wedding and you do not give me anything in return (consideration) there is no contract 19. Breach of Contract: When one party fails to follow the terms of a contract 20. Damages: The monetary (money) settlement awarded to a person who is injured by a breach of contract ➔ EX - If we had a legally binding contract for me to come sing at your wedding, and I failed to come, you could sue me the cost of having to hire a new singer

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21. Bankruptcy: Chapter 7 - The legal process by which a person, business or government entity, unable to meet financial obligations, is relieved of those debts by a court ➔ The courts divide any of the debtor’s assets among creditors, allowing creditors to get at least part of their money and freeing the debtor to begin anew ➔ Over 90% of bankruptcy filings each year are by individuals Chapter 11 - Time to reorganize ➔ Debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11 22. Excise Taxes: Something specific is being charged ➔ EX - Cigarettes or alcohol 23. Significant Supreme Court Cases: ➔ Citizens United V. Federal Election Commission (2010) ◆ Precedent: Corporations & Unions can spend unlimited amounts in election s ➔ National Federation of Independent Business V. Sebelius (2012) ◆ Precedent: ObamaCare, Mandate most Americans have health insurance ➔ Shelby County V. Holder (2013) ◆ Precedent: States & Cities do not need federal approval to change voting laws ➔ Roe V. Wade ◆ Abortion case, abortion is constitutional up to an extent ➔ Plessy V. Ferguson ◆ Separate but equal ➔ Brown V. Board ◆ Reversed Plessy V. Ferguson 24. U.S. Government Checks & Balances ➔ 3 branches of the government ➔ Executive, Legislative, Judiciary ➔ Each have checks & balances so one branch doesn’t have too much power 25. Regulatory Capture: is a form of government failure that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating ➔ Consolidating debts and selling them as AAA rated bonds 26. Dodd - Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act ➔ a United States federal law that places regulation of the financial industry in the hands of the government ➔ Passed by Obama 27. Affordable Care Act (ACA): Obama Care ➔ Key provisions are intended to extend coverage to millions of uninsured Americans, to implement measures that will lower health care costs and improve system efficiency, and

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to eliminate industry practices that include rescission and denial of coverage due to preexisting conditions 28. Executive Orders: a rule or order issued by the president to an executive branch of the government and having the force of law

Chapter 5: How to Form a Business 1. Conglomerate Merger: The joining of firms in completely unrelated industries ➔ EX - Soft Drink Company Buys Snack Food Company = Conglomerate Merger 2. Vertical Merger: The joining of two companies involved in different stages of related business ➔ Soft Drink Company Buys Artificial Sweetener Company = Vertical Merger

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3. Horizontal Merger: The joining of two firms in the same industry ➔ Soft Drink Company Buys Mineral Water Company = Horizontal Merger 4. Corporation: Conventional (C ) Corporation ➔ State-chartered legal entity with authority to act & have liability separate from its owners ➔ Stockholders - are not liable for the debts or other problems of the corporation beyond the money invest ➔ Corporations may choose to remain privately held or offer ownership to outside investors 4.B. Advantages of Corporations: ➔ Limited Liability - Limited liability to the owners. Owners are only responsible for its losses only up to the amount that they invested ➔ Ability to raise more money for investment - Corporations can sell shares of its stock to raise money. Corporations can borrow money by obtaining loans, or issuing bonds ➔ Size ➔ Perpetual Life - death of one or more owners does not terminate the corporation ➔ Ease of Ownership Change ➔ Ease of attracting talented employees ➔ Separation of ownership from management 4.C. Disadvantages of Corporations: ➔ Initial Cost ➔ Extensive Paperwork ➔ Double Taxation - Corporations pay tax on income before it can distribute dividends to stockholders. Then shareholders get taxed on their dividends ➔ Two Tax Returns ➔ Difficulty of termination ➔ Possible conflict with stockholders and board of directors 5. S Corporations: unique government creation that looks like a corporation but is taxed like a sole proprietorship and partnerships ➔ Avoids double taxation ➔ Can have no more than 100 shareholders ➔ Derive no more than 25 percent of income from passive sources 6. Limited Liability Companies (LLC) : Similar to S corporations but without the special eligibility requirements 6.B. Limited Liability Advantages: ➔ Limited Liability ➔ Choice of Taxation - Can choose to be taxed as partnerships or as a corporation ➔ Flexible Ownership Rules - Do not have to comply with as S corporations do. Can be a person, partnership, or corporation ➔ Flexible Distribution of Profits and Losses

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➔ Operating Flexibility 6.C. Limited Liability Disadvantages: ➔ No Stock ➔ Limited Life Span ➔ Fewer incentives ➔ Taxes ➔ Paperwork 7. Sole Proprietorship: A business that is owned, and usually managed by one person 7.B. Sole Proprietorship Advantages: ➔ Ease of starting & ending business ➔ Being your own boss ➔ Pride of ownership ➔ Leaving a legacy ➔ Retention of companies profits ➔ No special taxes 7.C. Sole Proprietorship Disadvantages: ➔ Unlimited liability - High risk for personal loss ➔ Limited financial resources ➔ Management Difficulties ➔ Overwhelming time commitment ➔ Few fringe benefits ➔ Limited growth ➔ Limited life span 8. Partnerships: A partnership is a form of business with two or more owners ➔ Limited Partner - an owner who invests money but does not have any management responsibility or liability of losses beyond the investment ➔ General Partner - an owner who has unlimited liability & is actively managing the firm ➔ General Partnership - all owners share in operating the business & assume liability for debts ➔ Limited Partnership - one or more general partners and one or more limited partners ➔ Limited Liability - the responsibility of a business's owner for losses only up to the amount invested ◆ Limited partners & stockholders ➔ Master Limited Partnership (MLP) - partnership that looks like a corporation (acts like a corporation & is traded on the stock exchange) but is taxed like a partnership and thus avoids the corporate income tax ➔ Limited liability Partnership (LLP) - Partnership that limits partner’s risk of losing their personal assets

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8.B. Partnership Advantages ➔ More financial resources ➔ Shared management & pooled / complementary skills and knowledge ➔ Longer survival ➔ No special taxes 8.C. Partnership Disadvantages ➔ Unlimited Liability ➔ Division of profits ➔ Disagreements between partners ➔ Difficulty of termination 9. Unlimited Liability: The responsibility of the business owners for all the debts of the business 10. Limited Liability: The responsibility of a business owners for losses only up to the amount that they invest 11. Cooperative (Co-op): A business owned & controlled by the people who use it, producers, consumers or workers with similar needs who pool their resources for mutual gain 12. Leverage Buyout (LBO): An attempt by employees, management or a group of investors to purchase an organization (buyout stockholders) primarily through borrowing 13. Franchises: An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory ➔ Franchisor - A company that develops a product concept & sells the rights to make and sell the product ➔ Franchisee - A person who buys a franchise

Chapter 6: Entrepreneurship and Starting a Small Business 1. Why people start their own business: ➔ Opportunity, Creating something, Independence, Profit 2. Why small business often fail: ➔ Under Capitalization, Management Incompetence, Not enough knowledge of the business or business cycle 3. Business Plans: A detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to the competition and the resources and qualification of the owner(s)

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➔ ➔ ➔ ➔

Forces owners to be specific A detailed written statement that describes the nature of the business Mandatory for investment Includes: ◆ Cover letter ◆ *Executive Summary* ◆ Company background ◆ Management team ◆ Financial plan ◆ Capital required ◆ Marketing plan ...