Chapter 3
Exploring Global
Business
International Business
…all business activities that involve
exchanges across national boundaries.
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Chapter 3 | Slide 2
Absolute Advantage
…the ability to produce a specific product
more efficiently than any other nation.
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Chapter 3 | Slide 3
Comparative Advantage
…the ability to produce a specific product more
efficiently than any other product.
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Chapter 3 | Slide 4
Exporting
…selling and shipping raw materials or
products to other nations.
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Chapter 3 | Slide 5
Importing
…purchasing raw materials or
products in other nations and
bringing them into one’s own country.
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Chapter 3 | Slide 6
Why This Chapter Matters
Free trade—are you
for or against it?
Most economists
support free-trade
policies, but public
support can be
lukewarm, and
certain groups
are adamantly
opposed, alleging
that “trade harms
large segments
of U.S. workers,”
“degrades the
environment,” and
“exploits poor
countries.”
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Chapter 3 | Slide 7
Exporting and Importing
U.S. Exports
Excess
Corn
Excess
Wine
U.S. Imports
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Chapter 3 | Slide 8
Figure 3.1: The Top Ten Merchandise
Exporting States
Source: http://www.ita.doc.gov/td/industry/otea/state/2005_year_end_dollar_value_05.html,
accessed May 2, 2009.
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Chapter 3 | Slide 9
Figure 3.2: U.S. International Trade in
Goods and Services
Source: U.S. Department of commerce, International Trade Administration, U.S. Bureau of Economic Analysis,
http://bea.gov/international/bp_web/action.cfm, accessed April 16, 2009.
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Chapter 3 | Slide 10
Balance of Trade
…the total value of a nation’s exports
minus the total value of its imports over
some period of time.
Imports > Exports = (-) Balance of Trade
Exports > Imports = (+) Balance of Trade
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Chapter 3 | Slide 11
Trade Deficit
…negative balance of trade.
Spotlight
Source: U.S. Department of Commerce, Bureau of Economic Analysis,
http://www.bea.gov/international/index.htm#bop, accessed May 1, 2009.
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Chapter 3 | Slide 12
Balance of Payments
…the total flow of money into a country
minus the total flow of money out of that
country over some period of time.
Includes
•
•
•
•
•
•
Imports and exports
Investments
Money spent by foreign tourists
Payments by foreign governments
Aid to foreign governments
All other receipts and payments
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Chapter 3 | Slide 13
Trade Restrictions ─ Tariff
Import duty
 tax levied on a particular foreign product
entering a country
Revenue
 imposed solely to generate income
Protective
 imposed to protect domestic industry from
competition
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Chapter 3 | Slide 14
Trade Restrictions ─ Dumping
…exportation of large quantities of a
product at a price lower than that of the
same product in the home market.
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Chapter 3 | Slide 15
Trade Restrictions ─ Nontariff
…a nontax measure imposed
by a government to favor domestic
over foreign suppliers.




Import Quota
Embargo
Foreign-Exchange Control
Currency Devaluation
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Chapter 3 | Slide 16
Reasons for Trade Restrictions
 Equalize nation’s balance of payments
 Protect new/weak industries
 Protect national security
 Protect health of citizens
 Retaliate for another nation’s trade restrictions
 Protect domestic jobs
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Chapter 3 | Slide 17
Reasons Against Trade Restrictions
 Higher prices for
consumers
 Restriction of consumers’
choices
 Misallocation of
international resources
 Loss of jobs
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Chapter 3 | Slide 18
Exports and U.S. Economy
 Opportunity for all
countries
 Exports more important to
U.S. economy
 Canada and Mexico best
export partners
 Canada and China best
import partners
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Chapter 3 | Slide 19
Figure 3.3: U.S. Goods Export and Import
Shares in 2008
Source: Federal Reserve Bank of St. Louis, National Economic Trends, May 2009, p. 18,
http://research.stlouisfed.org/publications/net/page18.pdf , accessed May 1, 2009.
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Chapter 3 | Slide 20
Table 3.2: Value of U.S. Merchandise
Exports and Imports, 2008
Source: U.S. Department of Commerce, International Trade Administration,
http://www.stumbleupon.com/s/#4Y3NJR/ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf/topic:UK , accessed
May 1, 2009.
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Chapter 3 | Slide 21
General Agreement on
Tariffs and Trade (GATT)
…an international organization of 153
nations dedicated to reducing or eliminating
tariffs and other barriers to world trade.
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Chapter 3 | Slide 22
GATT-Sponsored Negotiations
 Kennedy Round
(1964–1967)
 Tokyo Round
(1973–1979)
 Uruguay Round
(1986–1993)
 Doha Round
(2001+)
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Chapter 3 | Slide 23
World Trade Organization
…powerful successor to GATT that
incorporates trade in goods, services, and
ideas.
Membership
 Obliges 153 members to observe GATT
 Has judicial powers to mediate among members
disputing new rules
 Has more binding authority than GATT
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Chapter 3 | Slide 24
Economic Community
…an organization of nations formed to
promote the free movement of resources and
products among its members and to create
common economic policies.
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Chapter 3 | Slide 25
International
Economic Communities
 European Union
 European Economic Area
 North American Free Trade Agreement
(NAFTA)
 Central American Free Trade Agreement
(CAFTA)
 Association of Southeast Asian Nations
(ASEAN)
 Commonwealth of Independent States (CIS)
(cont.)
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Chapter 3 | Slide 26
International
Economic Communities (cont.)
 Caribbean Basin Initiative (CBI)
 Common Market of the Southern Cone
(Mercosur)
 Organization of Petroleum Exporting Countries
(OPEC)
 Economic Community of West African States
(ECOWAS)
 Organization of Economic Cooperation and
Development (OECD)
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Chapter 3 | Slide 27
Figure 3.4: The Evolving European Union
Source: http://europa.eu/abc/european_countries/index_en.htm, accessed May 2, 2009.
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Chapter 3 | Slide 28
Methods of Entering International Business
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Chapter 3 | Slide 29
Licensing
…a contractual agreement in which one firm
permits another to produce and market its
product and use its brand name in return for a
royalty or other compensation.
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Chapter 3 | Slide 30
Exporting
Manufacture products in home country and export
them to foreign markets
 Relative low risk
 Export-import merchant
 Documents
• Letter of credit
• Bill of lading
• Draft
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Chapter 3 | Slide 31
Joint Ventures
…a partnership formed to achieve
a specific goal or to operate for a
specific period of time.
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Chapter 3 | Slide 32
Totally Owned Facilities
…a firm’s own production and marketing facilities,
developed in one or more foreign nations as a
direct investment.
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Chapter 3 | Slide 33
Forms of Direct Investment
$ Builds/purchases manufacturing and other
facilities in the foreign country, produces/markets
own established products in foreign/neighboring
countries
$ Purchases existing firm in foreign country
under arrangement allowing it to operate
independently of parent company
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Chapter 3 | Slide 34
Strategic Alliance
…a partnership formed to create competitive
advantage on a worldwide basis.
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Chapter 3 | Slide 35
Trading Company
…a company that provides a link between
buyers and sellers in different countries and
is not involved in manufacturing or owning
assets related to manufacturing.
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Chapter 3 | Slide 36
Countertrade
…an international barter transaction
in which goods and services are exchanged
for different goods and services.
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Chapter 3 | Slide 37
Multinational Enterprise
…a firm that operates on a worldwide scale
without ties to any specific nation or region,
representing the highest level of involvement in
international business.
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Chapter 3 | Slide 38
Value of U.S. Merchandise Exports and
Imports, 2008
Source: U.S. Department of Commerce, International Trade Administration,
http://www.ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf, accessed May 1, 2009.
Copyright © Cengage Learning. All rights reserved.
Chapter 3 | Slide 39
Ten Largest Foreign and U.S. Multinational
Corporations
Source: Fortune Global 500, July 1, 2008, p. 165. Copyright © 2006 Time, Inc.,
www.fortune.com . All rights reserved.
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Chapter 3 | Slide 40
Steps in Entering International Markets
1. Identify exportable products.
2. Identify key foreign markets for the products.
3. Analyze how to sell in each priority market
(methods will be affected by product characteristics and
unique features of country/ market).
4. Set export prices and payment terms,
methods, and techniques.
5. Estimate resource requirements and returns.
6. Establish overseas distribution network.
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Chapter 3 | Slide 41
Sources of Export Assistance
 International Trade Administration
 U.S. and Foreign Commerical Services (US&FCS)
 Advocacy Center
 TRADESTATS
 Selected SBA Market Research–Related General
Resources
 National Trade Data Bank
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Chapter 3 | Slide 42
Export-Import Bank
of the United States
…an independent agency of the U.S.
government whose function it is to assist in
financing the exports of American firms.
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Chapter 3 | Slide 43
Multilateral Development Bank
…an internationally supported bank that
provides loans to developing countries
to help them grow.
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Chapter 3 | Slide 44
Multilateral Development Banks
 World Bank
 Inter-American Development Bank (IDB)
 Asian Development Bank (ADB)
 African Development Bank (AFDB)
 European Bank for Reconstruction and
Development (EBRD)
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Chapter 3 | Slide 45
International Monetary Fund (IMF)
…an international bank with 184 member
nations that makes short-term loans to
developing countries experiencing
balance-of-payments deficits.
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Chapter 3 | Slide 46
Sources of Export Assistance
 U.S. Export Assistance Centers (USEACs)
www.sba.gov/oit/export/useac.html
 International Trade Administration (ITA)
www.ita.doc.gov/
 U.S. and Foreign Commercial Services (US&FCS)
www.export.gov/
 Advocacy Center
www.ita.doc.gov/advocacy
(cont.)
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Chapter 3 | Slide 47
Sources of Export Assistance (cont.)
 Trade Information Center (TIC)
ita.doc.gov/td/tic
 STAT-USA/Internet
www.stat-usa.gov
 Small Business Administration
www.sba.gov/oit
 National Trade Data Bank (NTDB)
www.stat-usa.gov/tradtest.nsf
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Chapter 3 | Slide 48
Chapter Quiz
1. A developing country found that to meet its needs the previous
year, it had imported far more goods than it exported. This
country experienced a(n)
a)
b)
c)
d)
e)
unfavorable balance of payments.
favorable balance of payments.
favorable balance of trade.
unfavorable balance of trade.
unfavorable supply of goods.
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Chapter 3 | Slide 49
Chapter Quiz (cont.)
2.
Due to political differences with North Korea, the U.S.
government has stopped trading with North Korea. This
practice is an example of imposing a(n)
a)
b)
c)
d)
e)
import duty.
import cut.
export control.
trade embargo.
export duty.
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Chapter 3 | Slide 50
Chapter Quiz (cont.)
3.
When the United States wants to reduce the cost of its
goods in foreign nations, it
a)
b)
c)
d)
e)
revalues its currency.
devalues its currency.
pays off its trade deficit.
borrows from the Eximbank.
sells more goods abroad.
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Chapter 3 | Slide 51
Chapter Quiz (cont.)
4.
A forum for the discussion of trade problems and a
reduction of trade barriers is provided by
a) the General Agreement on Tariffs and Trade (GATT) or
the World Trade Organization (WTO).
b) a free trade zone.
c) the World Bank.
d) the Eximbank.
e) All of these answers are correct.
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Chapter 3 | Slide 52
Chapter Quiz (cont.)
5.
XYZ Company is seeking a partner in China to manufacture its
products. XYZ wants to team up with an established Chinese
firm that will provide immediate market knowledge and access,
reduced risk, and control over product attributes. The best
choice for XYZ Company is
a)
b)
c)
d)
e)
licensing.
a bilateral agreement.
a joint venture.
an export-import merchant agreement.
an export-import agent agreement.
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Chapter 3 | Slide 53