CHAPTER
3
Business in the
Global Economy
3-1
International Business Basics
3-2
The Global Market Place
3-3
International Business Organizations
SLIDE 1
3-1 International Business Basics
Goals
1. Describe
importing and exporting
activities
2. Compare balance of trade and balance of
payments
3. List factors that affect the value of
global currencies
Trading Among Nations

Most business activities occur within a country’s
own boarders
 Domestic
Business – the making, buying, and selling of
goods and services within a country.
 International
Business – refers to business activities
needed for creating, shipping, and selling goods and
services across national boarders.
 Foreign
or World Trade
Absolute/Comparative
Advantage

Two economic principles define buying and selling
among companies in different countries
1.
Absolute Advantage – exists when a country can
produce a good or service at a lower cost than other
countries
2.
Comparative Advantage – a situation in which a
country specializes in the production of a good or
service at which it is relatively more efficient
Importing / Exporting
 Imports
– Items bought from other
countries

Without foreign trade, many things you buy would cost more or
not be available.

Exports – Goods and services sold to other
countries

The goods and services exported by the U.S. create many jobs.

1 out of 6 jobs in the U.S. depend on international business.
U.S Trade Balance With Top Trading Partners (In Billions)
Country
Goods Exported
Goods Imported
U.S Trade
Balance
All Countries
1056.9
1558.1
-501.2
1. Canada
204.7
224.9
-20.2
2. China
69.6
296.4
-226.8
3. Mexico
129.0
176.5
-47.5
4. Japan
51.2
95.9
-44.7
5. Germany
43.3
71.3
-28.0
6. United Kingdom
45.7
47.5
-1.8
7. South Korea
28.6
39.2
-10.6
8. France
26.5
34.0
-7.5
9. Netherlands
32.3
16.1
16.2
Checkpoint #1

How does importing differ from
exporting ?
 Importing is bringing items from other
countries into a country. Exporting is
selling goods and services to other
countries.
Measuring Trade Relations
 People
usually try to keep their
income and spending in a balance.
 Nations
are also concerned about balancing
income with expenditures.
 Foreign
Debt – the amount the country
owes to other countries
Balance of Trade
 The
difference between a country’s total
exports and total imports.
 Trade
Surplus - If a country exports more than it
imports (Trade favorable)
 Trade
Deficit - Country imports more than its exports
(Trade is unfavorable)
 U.S.
has had a trade deficit in recent years
Balance of Payments

Money goes from one country to another through
investments and tourism
 Business
Factory
 Financial
 Bank

or Military aid
deposit funds in foreign banks
Balance of Payments – the difference between
the amount of money that comes into a country
and the amount that goes out.
Checkpoint #2
 How
does balance of trade differ from
balance of payments?
 Trade
is not the only thing influencing the
balance of payments.
Money
can enter or leave a country through
investments, tourism, financial aid, and bank
deposits.
International Currency

A challenge faced by many businesses are the
various currencies used around the world.
 Foreign
Exchange Market – exchanging one currency
for another. Consists of banks that buy and sell
different currencies

Exchange Rate – the value of a currency in one
country compared with the value of another.
 Supply
and demand affect the value of currency
Factors Affecting Currency
Values

3 main factors affect currency exchange rates:
1.
2.
3.
Balance of Payments – favorable balance of
payments, the value of its currency is usually
constant or rising.
Economic Conditions – Buying power in decline,
inflation, interest rates.
Political Stability – Government change might
create unfriendly setting got foreign business.
New laws might be put in placed.
Checkpoint #3
 What
factors affect a countries
currency ?
1.
Balance of payments
2.
Economic Conditions
3.
Political Stability
3-2 The Global
Marketplace
Goals:
1.
2.
3.
Describe the components of the
international business environment
Identify examples of formal trade barriers
Explain actions to encourage international
trade.
International Business
Environment

Businesses must consider 4 main factors when doing
business in other countries:
1.
2.
Geography
Cultural Influence

3.
Economic development

4.
The accepted behaviors, customs, values of society
Infrastructure (transportation, communication, utility
systems)
Political and Legal Concerns
Geographic Factors
Economic Factors
Location
Climate
Terrain
Waterways
Natural Resources
Technology
Education
Inflation
Exchange Rate
Infrastructure
Cultural Factors
Language
Family
Religion
Customs
Traditions
Food
International
Business
Environment
Political/Legal Factors
Government System
Political Stability
Trade Barriers
Business Regulations
Checkpoint #4
 List
the four main elements of the
international business environment?
1.
Geography
2.
Cultural Influences
3.
Economic Development
4.
Political and Legal Concerns
International
Trade Barriers

Government actions can create Trade Barriers
 Restrictions
 Formal
to free trade
Trade Barriers – political actions
 Quotas
 Informal
, Tariffs , Embargos
Trade Barriers – Culture, traditions, and
religion
 Not
based on government actions but they can restrict
trade
Quotas

Government sets a limit on a quantity of a
product that may be imported or exported within
a given period

Quotas can be set for many reasons
 Crude
oil (Supply remains low)
 Imports
(Express displeasure at the politics)
 Competition
abroad
Tariffs

A tax that a government places on certain
imported products

Some tariffs are a set amount per pound, gallon,
or other unit.

High Tariff
 Lower
Demand
 Quantity
of that import
Embargoes

Government stops the export or import of a
product completely
 Wish
to protect their own industries from
international competition
 Prevent
 Vital
 Express
sensitive products
to a nations defense
disapproval of the actions or politics of
another country
Checkpoint #5
What
are 3 formal trade barriers?
Quotas
2. Tariffs
3. Embargos
1.
Encouraging
International Trade

Specific actions by government can promote
international business activities
 Exporting
is an effective way to create jobs and
foster economic prosperity
1.
Free trade zone
2.
Free-trade agreements
3.
Common Markets
Free-Trade Zones

A selected area where products can be imported
duty-free and then stored, assembled, and/or
used in manufacturing
 Located
 The
usually around a seaport or airport
importer only pays duty only when the product
leaves the zone
Fair-Trade Agreements

Member countries agree to remove duties (import
taxes), and trade barriers on products traded
among them
 Results
 NAFTA
in increase trade
(North American Free Trade Agreement)
 Eases
the movement of goods
Common Markets

Member do away with duties and other trade barriers

Allow companies to invest freely in each member’s
country
 Economic
Community
 European
Union (EU)
 Latin

American Integration Association (LAIA)
Goal is to expand trade among member nations and
promote regional economic integration
Checkpoint #6
 What
actions can be taken to
encourage international trade?
1. Free-Zones
2. Free-Trade Agreements
3. Common Markets
3-3 International Business
Organizations
Goals
1. Discuss
activities of multinational
organizations
2. Explain common international business
entry modes
3. Describe activities of international trade
organizations and agencies
Multinational Companies

An organization that does business in several
countries
 Usually
consists of a parent company in a home
country and divisions
 Separate
 The
companies in one or more host countries
country in which a MNC places business
activities
MNC Strategies

Global or Multinational Strategy

Global Strategy – uses the same product and some
marketing strategy worldwide


Product is sold in the manner across the world (Coca-Cola)
Multinational Strategy - treats each country
market differently

Firms develop products and marketing strategies that adapt
to the customs, tastes, and buying habits of a market.
MNC Benefits

Large amount of goods available
 Lower
price than goods made domestically

Career opportunities expand as a company does
business

Foster understanding, communication, and respect
among people of different countries.
Drawbacks of MNC

Workers of the host country may depend on the
MNC for jobs

Consumers become dependent upon it for goods
and services

Control or influence the political power of the
country
Checkpoint #7
 What
are two strategies commonly used by
MNC?
 Global
strategy – offering the same product the
same way everywhere
 Multinational
Strategy – Approaching each
countries market differently
Global Market Entry Modes
1.
Licensing – selling the right to use some intangible
property (production process, trademark, brand
name) for a fee or royalty
 Gerber
company selling in Japan
 Licensing
has a low financial investment, so return in
low
2.
Franchising – the right to use a company name or
business process in a specific way.
Global Market Entry Modes
 Marketing
elements such as food product, packaging
and advertising must meet cultural sensitivities and
legal requirement
3.
Joint Venture – an agreement between two or more
companies to share a business project

Sharing of Raw materials, shipping facilities,
management activities, or production facilities.

Sharing of profits and not as much control
Checkpoint #8
 How
does licensing differ from a franchise?
 Licensing
does not require as much financial
investment or risk as a franchise
 Both
involve royalty payments, but licensing
involves manufacturing process, while
franchising involves selling a product or
service.
World Trade Organization
Created in 1995 to create trade around the world
 Settles trade disputes and enforces free-trade
agreements

 Lowering
tariffs that discourage free trade
 Eliminating import quotas
 Reducing barriers for banks, insurance companies,
and other financial services
 Assisting poor countries with economic growth
International Monetary Fund

Helps promote economic cooperation
 Maintains
an orderly system of world trade and
exchange rates.
 Cooperation
likely
among IMF nations makes trade war less
World Bank

Was created in 1944 to provide loans for
rebuilding after WW II

Today the bank function is to give economic aid to
less developed countries
 Build
communication systems, transportation
networks, and energy plants.
Checkpoint #9
 How
does the International Monetary Find
assist countries?
 By
promoting economic cooperation and
maintaining an orderly system of world trade
and exchange rates.