Chapter Three
Exploring
Global Business
www.globaledge.msu.edu
www.doingbusiness.org/
The Basis for International Business
• International Business
– All business activities that involve exchanges across
national boundaries
• Some countries are better equipped than others to
produce particular goods or services
– Absolute advantage
• make one product more efficiently than any other
nation
– Comparative advantage
• make one product more efficiently than any other
product your country makes
The Basis for International Business
• Countries trade when they each have a surplus of
the product they specialize in and want a product
the other country specializes in
• Exporting
– Selling and shipping raw materials or products to other
nations
• Importing
– Purchasing raw materials or products in other nations
and bringing them into one’s own country
The Basis for International Business
• Goods and services are produced
more efficiently when each country
specializes in the products for which
it has a comparative advantage
The Basis for International Business
• Balance of trade
– total value of a nation’s exports minus total value
of its imports over a period of time
• Trade deficit
– A negative (unfavorable) balance of trade—
imports exceed exports in value
U.S. International Trade in Goods
1987
If a country
imports more
than it exports,
the balance of
trade is
negative, as it
was in the U.S.
in 2004
2004
Balance of Payments
– The total flow of money into the country minus the total
flow of money out of the country over some period of time
– A broader concept than balance of trade
• Includes imports, exports, investments, money spent by foreign
tourists, payments by foreign governments, aid to foreign
governments, all other receipts and payments
– A continual deficit in a nation’s balance of payments can
cause other nations to lose confidence in its economy
– A continual surplus may indicate a country limits imports
by using trade restrictions
Trade Restrictions
• The reasons for restricting trade range from internal political
and economic pressures to mistrust of other nations.
• Import duty (tariff)
– A tax levied on a particular foreign product
entering a country
• Revenue tariffs are imposed to generate income for
the government
• Protective tariffs are imposed to protect a domestic
industry by keeping the prices of imports at or above
the price of domestic products
Non-tariff Trade Restrictions
– Import quota—a limit on the amount of a particular good
that may be imported
– Embargo—a complete halt to trading with a particular
nation or in a particular product
– Foreign exchange control—a restriction on the amount of
a particular foreign currency that can be purchased or
sold
– Bureaucratic red tape—a subtle form of trade restriction
that imposes unnecessarily burdensome and complex
standards and requirements for imported goods
Trade partners
• In 2004, 44% of US exports and 42% of US imports were from
Canada, Mexico, China & Japan.
• OECD – Organization for Economic Cooperation and Development
International Economic Communities
• 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
Major International Economic Communities
European Union
Austria
Belgium
Bulgaria
Cyprus
Chech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Solvakia
Slovenia
Spain
Sweden
United Kingdom
Members of Major International Economic
Communities
North American Free
Trade Agreement
(NAFTA)
United States
Canada
Mexico
ASEAN Free Trade Area
(AFTA)
Myanmar
Brunei
Philippines
Cambodia
Singapore
Indonesia
Thailand
Laos
Vietnam
Malaysia
Organization of Petroleum Exporting
Countries
(OPEC)
Algeria
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
Other International Economic Communities
•
•
•
•
European Economic Area (EEA)
Commonwealth of Independent States (CIS)
Caribbean Basin Initiative (CBI)
Common Market of the Southern Cone
(MERCOSUR)
• Organization for Economic Cooperation and
Development (OECD) http://www.oecd.org
International Business Entry
Exporting
• The sale of goods and services
manufactured in the home country to nations
outside the home country’s borders
• -Allows for more quality control over the
product
• -Gain little direct foreign market experience
– Often done through export/import merchants who
assume risks of ownership, distribution, and sale
• (you sell it to them; they sell it abroad)
International Business Entry
Licensing
– A contractual agreement in which one firm sells
another the right to produce its product and use
its brand name
– Advantage
• It allows expansion into foreign markets with little or
no direct investment
– Disadvantages
• Product image damaged if quality is not upheld
• Original producer does not gain foreign marketing
experience
International Business Entry
Joint Ventures
– A partnership formed to achieve a specific goal
or to operate for a specific period of time
– Advantages
• Immediate market knowledge and access
• Reduced risk
• Control over the product attributes
– Disadvantages
• Complexity of establishing agreements across
national borders
• Have to share profits
Methods of Entering International Business
Direct Investment
Build production facilities in foreign nations
– Advantage
• provides complete control over operations-mfg, dist,
mktg, etc
– Disadvantage
• Risk is greater than that of a joint venture-political
instability
– Two forms
• Building new facilities in the foreign country
• Purchasing an existing firm in the foreign country
International Business
• Countertrade
– An international barter transaction
– Avoids restrictions on converting domestic currency to
foreign currency
– Avoids taxes
– A standard technical definition of dumping is the act of.
This is often referred to as selling at less than "fair value."
• Dumping
– Charging a less for a good in a foreign market than one
charges for the same good in a domestic market
– Hurts the domestic retailer, but can be socially responsible
Financing International Business
• The Export-Import Bank of the United States
(Eximbank)
– An independent agency of the U.S. government
whose function it is to assist in financing the
exports of American firms
• The International Monetary Fund (IMF)
– An international bank with more than 183
member nations that makes short-term loans to
developing countries experiencing balance-ofpayment deficits