POB 1.03 Part 1

POB 1.03 Part 1
Understand business in the global marketplace.
Domestic Vs. Foreign Business
Domestic Business
◦ The making, buying, and selling of goods
and services within a country.
Foreign Business
◦ Business activities needed for creating,
shipping, and selling goods and services
across international borders
◦ Also called international business or world
Absolute Vs. Comparative Advantage
Absolute Advantage
◦ Exists when a country can produce a
good or service at a lower cost than other
countries (ex. Saudi Arabia and oil)
Comparative Advantage
◦ Exists when a country specializes in the
production of goods and services at which
it is relatively more efficient
Imports Vs. Exports
Imports – items brought into the US
from other countries
◦ Common imports: bananas, coffee,
cocoa, spices, tea, silk
Exports – goods and services sold to
other countries
◦ Common exports: agricultural products &
machinery, medicines, movies, music
Measuring Trade Relations
People work to buy things ….
◦ We sell our labor for wages
◦ We spend wages on goods and services
◦ We try to keep spending and income in
◦ Countries want to keep a balance too
Balance of Trade
Balance of Trade – difference between a
country’s total exports and total imports
◦ Trade surplus is favorable
 exports > imports
◦ Trade deficit is unfavorable
 Imports > exports
◦ Can have a surplus with one country and
deficit with another
◦ Don’t want to be dependent on other
Balance of Payments
Balance of Payments – difference
between the amount of money that
comes into the country and the amount
that goes out of it
◦ Favorable: $ in > $ out
◦ Unfavorable: $ out > $ in
How does money go in and out?
Investments in companies
Financial and military aid
Banks depositing in foreign banks
Foreign Debt
Foreign Debt is the amount of money
a country owes other countries
 We want to have a balance of trade
and a balance of payments
Foreign Exchange Market
Foreign Exchange Market – banks
that buy and sell different currencies
Exchange Rate – the value of a
currency in one country compared
with the value in another
What factors affect the exchange rate?
Balance of Payments – rate rises
when there is a favorable balance
 Economic Conditions – inflation and
high interest rates reduce buying
 Political Stability – avoid risk!
◦ Changes in govt. party
◦ New laws put into place
POB 1.03 Part 2
Understand business in the global marketplace.
What Factors Impact the
International Business Environment?
 Culture
 Economy
 Political & legal Concerns
Geographic Factors
 Climate
 Terrain
 Seaports
 Natural Resources
Cultural Factors
Culture – accepted behaviors,
customs and values of a society
 Factors include …
Social relationships
Economic Factors
What are the differences in the living and
work environments?
3 Key Effects:
◦ Literacy Level – better ed = more & better
products for citizens
◦ Technology – automated production,
distribution and communication = ability to
create and deliver products quickly
◦ Agricultural Dependency – usually either
heavy ag focus or manufacturing
Infrastructure: nation’s transportation,
communication, and utility systems
Political and Legal Factors
Regulations on advertising and the
enforcement of contracts
 Safety inspections
 Type of government, stability of
government and policies towards
What are trade barriers?
Trade barrier – a restriction to free
 Formal barriers
◦ Embargo
◦ Quota
◦ Tariff
Informal barriers
◦ Culture
◦ Tradition
◦ Religion
Embargo – an action imposed by a
government to stop the export or
import of a product completely
 Why?
◦ To protect its own industries from
international competition
◦ Prevent products from getting to other
countries (ex: defense weapons)
◦ Express disapproval of actions/policies
Quota – limit on the quantity of a
product that may be imported or
exported within a given time period
 Why?
◦ To keep prices stable (high)
◦ Express displeasure toward a country
◦ Protect its own country’s industry
Tariff – tax the government places on
certain imported goods and services
 Why?
◦ Increase the price of a good
◦ High tariff lowers demand and reduces
the amount imported
Encouraging International Trade
A few things that encourage
international trade
◦ Common Markets
◦ Free-Trade Agreements
◦ Free-Trade Zones
Common Markets
In a common market, the member
countries do away with the duties and
other trade barriers
 AKA “economic community”
 Examples: European Union (EU),
Latin American Integration Association
Free-Trade Agreements
In a Free-Trade Agreement, member
countries agree to remove the duties
and trade barriers on products traded
among them
 Example: North American Free Trade
Agreement (NAFTA) 1993
Free Trade Zone
A Free Trade Zone is a selected are
where products can be imported duty
free and then stored, assembled,
and/or used in manufacturing
 Usually near a seaport or airport
 Importer pays duties when items leave
the zone
POB 1.03 Part 3
Understand business in the global marketplace.
What is a Multinational Company?
Multinational Company (MNC) is an
organization that does business in
several countries
◦ The parent company is in the home
country and does business activities in the
host country.
◦ Pros: cheaper goods and career
◦ Cons: may become an economic power;
host may depend on the MNC for jobs &
International Business Strategies
Global Strategy: selling the same
product and using the same marketing
strategy worldwide
Multinational Strategy: treats each
country market differently
Entry Modes into the Global
 Licensing
 Joint Venture
Franchising is the right to use a
company name or business process in
a specific way.
◦ Usually involves selling a product or
◦ Example: McDonalds, KFC
Licensing is selling the right to use
some intangible property for a fee or
◦ Production process, trade mark or brand
Joint Venture
A Joint Venture is an agreement
between 2 or more companies to
share a business project
◦ Popular in manufacturing
Major International Trade
International Monetary Fund
◦ 150 member nations; helps to promote
economic cooperation; keeps orderly system
of trade and exchange rates
World Bank
◦ Formed in 1944; gives economic aid to less
developed countries
World Trade Organization (WTO)
◦ Formed in 1995 to promote trade; over 150
countries; settles disputes and enforces free
trade agreements