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Exploring Global
Business
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Absolute Advantage
Absolute Advantage is the ability to produce a
specific product more efficiently than any other
nation.
South Africa - Diamonds
Australia - Wool
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© AKAISER/SHUTTERSTOCK
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Saudi Arabia – Crude Oil
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Comparative Advantage
Comparative Advantage the ability to produce a
specific product more efficiently than any other.
http://www.youtube.com/watch?v=38hvvAzgXZY
Maximum
Outputs
Country
A
Country
B
Automobiles
30m
45m
Motorcycles
6m
18m
Country B has absolute
advantage in both products,
but a comparative advantage
in motorcycles because it is
relatively better at producing
them.
Country B is 3 times better at
motorcycles, but only 1.5
times better at cars.
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Exporting and Importing
U.S. Exports
Excess
Wine
Excess
Corn
U.S. Imports
Countries trade when they each have a surplus of
the product in which they specialize and want a
product in which the other country specializes.
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Balance of Trade
Balance of trade is the total value of a nation's
exports minus the total value of its imports over
some period of time.
Imports
Exports
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Trade Deficit
Trade deficit is a negative (unfavorable)
balance of trade where imports exceed exports
in value.
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Reasons for Trade Restrictions
What are some
reasons a country
would want to
restrict trade?
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Nations are generally eager to
export their products to provide
markets for their industries and
develop a favorable balance of
trade.
Most trade restrictions
are applied to imports
from other countries.
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Restrictions to International Business
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Trade with China, July 2013
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United States imports more goods from
China than any other nation in the world.
Exports
$8.7 Billion
Imports
$38.8 Billion
Balance -$30.1 Billion
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Types of Trade Restrictions: Tariffs
 An Import duty (tariff)
is a tax levied on a particular
foreign product entering
a country.
 Revenue tariffs are
imposed to generate
income for the government.
 Protective tariffs are imposed
to protect a domestic industry from competition
by keeping the prices of imports at or above
the price of domestic products.
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Types of Trade Restrictions: Dumping
Dumping is the exportation of large quantities of
a product at a price lower than that of the same
product in the home market.
The U.S. Commerce
Department has imposed
anti-dumping tariffs and
anti-subsidy tariffs on
Chinese solar panels to
combat dumping.
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Types of Trade Restrictions:
Nontariff Barriers
 Nontariff barriers—nontax measures imposed by a
government to favor domestic over foreign suppliers
 Import quota—a limit on the amount of a particular
good that may be imported during a given time
 Embargo—a complete halt to trading with a particular
nation or in a particular product. Embargoes may be
imposed to accomplish foreign policy and national
security goals.
 Foreign exchange control—restriction on amount of
foreign currency that can be purchased or sold
₤€¥$
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Types of Trade Restrictions:
Nontariff Barriers (cont’d)
 Currency devaluation is the
reduction of the value of a nation’s
currency relative to the currencies
of other countries.
 Bureaucratic red tape subtly
imposes unnecessarily
burdensome and complex
standards and requirements for
imported goods.
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 Cultural attitudes can impede
acceptance of products in foreign
countries.
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Reasons for Trade Restrictions
 To equalize a nation’s
balance of payments
 To protect new or
weak industries
 To protect
national security
 To protect the health
of citizens
 To retaliate for another nation’s trade restrictions
 To protect domestic jobs
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Largest Trading Partners for U.S.
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U.S. Goods Export and
Import Shares in 2012
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International Trade Agreements
WTO
 World Trade Organization (WTO)
 137 members, accounting for more than 90
percent of the world trade.
 Three fourths of these members are
developing or least developed countries.
 The organization has four principal functions:
administering trade agreements, settling trade
disputes, conducting trade policy reviews of its
members, and acting as a forum for trade
negotiations.
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WTO Members Share in
World Merchandise Trade, 2011
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International Economic Organizations:
The Evolving European Union
The European
Union is now an
economic force,
with a collective
economy larger
than that of the
United States or
Japan.
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FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK
MAPS: © ILDOGESTO/SHUTTERSTOCK
International Economic Organizations:
NAFTA
North American Free
Trade Agreement (NAFTA)
The United States
Canada
Mexico
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International Economic Organizations:
NAFTA
Support
Criticism
 Contributes to significant
increases in trade and
investment
 Benefits companies in all
three countries
 Results in increased
sales, new partnerships,
and new opportunities
 Creates high-paying
export-related jobs
 Leads to better prices and
selection in consumer
goods
 Has not achieved its goals
 Resulted in job losses
 Erodes labor standards
and lowers wages
 Undermines national
sovereignty and
independence
 Does nothing to help the
environment
 Hurts the agricultural
sector
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FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK
MAPS: © ILDOGESTO/SHUTTERSTOCK
International Economic Organizations:
CAFTA-DR
Central American Free Trade
Agreement – Dominican
Republic (CAFTA-DR) Est. 2003
El Salvador
Nicaragua
Guatemala
Dominican Republic
Honduras
Costa Rica
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FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK
MAPS: © ILDOGESTO/SHUTTERSTOCK
International Economic Organizations:
ASEAN
Association of Southeast Asian Nations
(ASEAN) Est. 1967
Brunei
Malaysia
Myanmar
Philippines
Cambodia
Singapore
Indonesia
Thailand
Laos
Vietnam
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FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK
MAPS: © ILDOGESTO/SHUTTERSTOCK
International Economic Organizations:
OPEC
Organization of Petroleum Exporting Countries
(OPEC), Est. 1960
Algeria
Indonesia
Qatar
United Arab Emirates
Saudi Arabia
Venezuela
Iran
Iraq
Kuwait
Libya
Nigeria
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International Economic Organizations:
Others
 The Commonwealth of Independent States,
Est. 1991
 Trans-Pacific Partnership (TPP), Est. 2011
 Commonwealth of Independent States
(CIS), Est. 1991
 Caribbean Basin Initiative (CBI)
 Common Market of the Southern Cone
(MERCOSUR), Est. 1991
 Organization of Petroleum Exporting
Countries (OPEC), Est. 1960
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Methods of Entering International
Business: Licensing
 Licensing is 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.
• Advantage
- It allows expansion into foreign markets with
little or no direct investment.
• Disadvantages
- The product image may be damaged if
standards are not upheld.
- The original producer does not gain foreign
marketing experience.
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Methods of Entering International
Business: Exporting
 Exporting
• May use an export/import merchant who assumes
the risks of ownership, distribution, and sale
• Letter of credit - Issued by a bank on request of an
importer stating that the bank will pay an amount of
money to a stated beneficiary
• Bill of lading - Issued by a transport carrier to an
exporter to prove merchandise has been shipped
• Draft - Issued by the exporter’s bank, ordering the
importer’s bank to pay for the merchandise, thus
guaranteeing payment once accepted by the
importer’s bank
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Methods of Entering International
Business: Exporting (cont’d)
Exporting (cont’d)
• May use an export/import
agent who arranges sale for
a commission or fee; the
exporter retains title to
products until they are sold
• May establish own sales
offices or branches in foreign
countries
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Organizing for
International Business
Licensing
Exporting
Joint-Venture
Totally Owned Facilities
Strategic Alliances
Trading Companies
Countertrade
Multinational Firm
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Methods of Entering International
Business: Joint Ventures
 A joint venture is 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
- High level of commitment required of all
parties involved
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Methods of Entering International
Business: Totally Owned Facilities
 Totally owned facilities refers to production and
marketing facilities developed by a firm in one or more
foreign nations.
• Advantage
- Direct investment provides complete control
over operations.
• Disadvantage
- Risk is greater than that of a joint venture.
• Two forms
- Building new facilities in the foreign country
- Purchasing an existing firm in the foreign country
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Methods of Entering International
Business: Strategic Alliances
Strategic alliances are partnerships
formed to create competitive advantage on
a worldwide basis.
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Methods of Entering International
Business: Trading Companies
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 Trading companies are firms that
provide a link between buyers and
sellers in different countries.
• Buys products in one
country at the lowest
price consistent with
quality and sells to
buyers in another country
• Takes title to products and
perform all the activities
necessary to move the products
from one country to another
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Methods of Entering International
Business: Countertrade
Countertrade is an international barter transaction.
 Early 1990s: Many developing nations had major
restrictions on converting domestic currency into foreign
currency. Countertrade avoids restrictions on converting
domestic currency to foreign currency.
© BOJANOVIC/SHUTTERSTOCK
© DVARG/SHUTTERSTOCK
Crude Oil Exchanged for Planes
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Methods of Entering International
Business: Multinational Enterprise
Multinational enterprise refers to firms that operate on a
worldwide scale without ties to any specific nation or region.
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Sources of Export Assistance:
NEI
National Export Initiative (NEI)
 Announced August 2010 by President Obama
 Goal: Revitalize U.S. exports
 Means: Federal Agencies assist U.S. firms in developing
export-promotion programs to compete in foreign markets
and create jobs in the U.S. (some examples below)
Federal Agency
Assistance
International Trade Administration
Domestic and overseas commercial officers
provide assistance and information.
Advocacy Center
Facilitates advocacy to assist U.S. firms
competing for major projects and procurements
worldwide.
National Trade Data Bank
Provides international economic and exportpromotion information from more than 20 U.S.
agencies.
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Financing International Business
 The Export-Import Bank of the United States (Ex-Im Bank) is
an independent agency of the U.S. government whose function it
is to assist in financing the exports of American firms.
 Multilateral Development Bank (MDB) is an internationallysupported bank that provides loans to developing countries to
help them grow.
• World Bank, Inter-American Development Bank (IDB), Asian
Development Bank (ADB), African Development Bank (AFDB),
European Bank for Reconstruction and Development (EBRD)
 The International Monetary Fund (IMF) is an international bank
with 186 member nations that makes short-term loans to
developing countries experiencing balance-of-payment deficits.
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