3 Exploring Global Business Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives ① Explain the economic basis for international business. ② Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results. ③ Outline the extent of international trade and the world economic outlook for trade. ④ Discuss international trade agreements and international economic organizations working to foster trade. ⑤ Define the methods by which a firm can organize for and enter into international markets. ⑥ Describe the various sources of export assistance. ⑦ Identify the institutions that help firms and nations finance international business. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Absolute Advantage Absolute Advantage is the ability to produce a specific product more efficiently than any other nation. South Africa - Diamonds Australia - Wool © DVARG/SHUTTERSTOCK © AKAISER/SHUTTERSTOCK © ILDOGESTO/SHUTTERSTOCK Saudi Arabia – Crude Oil © ILEYSEN/SHUTTERSTOCK Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Comparative Advantage Comparative Advantage is the ability to produce a specific product more efficiently than any other product. 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. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 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. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 Exports by State Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 U.S. International Trade in Goods and Services Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Trade Deficit Trade deficit is a negative (unfavorable) balance of trade where imports exceed exports in value. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 US International Trade Deficit Source: http://www.bea.gov/newsreleases/international/trade/2012/pdf/trad0812.pdf Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Reasons for Trade Restrictions What are some reasons a country would want to restrict trade? © STUART MILES/SHUTTERSTOCK Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 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. © ALBO003/SHUTTERSTOCK © ALBO003/SHUTTERSTOCK Restrictions to International Business Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Trade with China, July 2013 © ILDOGESTO/SHUTTERSTOCK United States imports more goods from China than any other nation in the world. Exports $8.7 Billion Imports $38.8 Billion Balance -$30.1 Billion Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Types of Trade Restrictions: Tariffs An Import duty (tariff) is a tax levied on a particular foreign product entering a country. Revenue tariffs are imposed to generate income for the government. Protective tariffs are imposed to protect a domestic industry from competition by keeping the prices of imports at or above the price of domestic products. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Types of Trade Restrictions: Dumping Dumping is the exportation of large quantities of a product at a price lower than that of the same product in the home market. The U.S. Commerce Department has imposed anti-dumping tariffs and anti-subsidy tariffs on Chinese solar panels to combat dumping. © FILIP FUXA/SHUTTERSTOCK Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Types of Trade Restrictions: Nontariff Barriers Nontariff barriers—nontax measures imposed by a government to favor domestic over foreign suppliers Import quota—a limit on the amount of a particular good that may be imported during a given time Embargo—a complete halt to trading with a particular nation or in a particular product. Embargoes may be imposed to accomplish foreign policy and national security goals. Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold ₤€¥$ Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 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. © MILAN LJUBISAVIJEVIC/SHUTTERSTOCK Cultural attitudes can impede acceptance of products in foreign countries. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Types of Trade Restrictions: Cultural Attitudes How important is it to you that your goods are made in the U.S.A? © MYPIXXX/SHUTTERSTOCK Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 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 © FIKMIK/SHUTTERSTOCK Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Reasons Against Trade Restrictions Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources © FIKMIK/SHUTTERSTOCK Loss of jobs Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 The Extent of International Business Although the worldwide recessions of 1991 and 20012002 slowed the rate of growth, and 2008-2009 global economic crisis caused the sharpest decline in more than 70 years, globalization is a reality of our time. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 The Extent of International Business (cont’d) Trade barriers are decreasing, new competitors are entering the global marketplace, creating more choices for consumers and new job opportunities. International business will grow with the expansion of commercial use of the Internet. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 The World Economic Outlook for Trade Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 The World Economic Outlook for Trade Economic performance among nations is not equal; growth in advanced countries slowed and then stopped in 2009, while emerging and developing economies continue to grow rapidly. International experts expected global economic growth in 2010 and 2011, despite the high oil prices. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 The World Economic Outlook for Trade: Canada Canada is the U.S.’s leading export partner. © ILDOGESTO/SHUTTERSTOCK Projected Growth • 2013: 1.8% • 2014: 2.3% 2012 U.S. goods Trade Deficit with Canada: -$32 Billion Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK The World Economic Outlook for Trade: EU and UK Euro Area Projected Growth • 2013: -0.2% • 2014: 1.0% 2011 Trade Deficit: -$99,88.0B United Kingdom Projected Growth • 2013: 1.0% • 2014: 1.9% 2011 Trade Deficit: +$4,664.6B Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK The World Economic Outlook for Trade: Japan and China Japan Projected Growth • 2013: 1.2% • 2014: 0.7% 2011 Trade Deficit: -$63,218.5B China Projected Growth • 2013: 8.2% • 2014: 8.5% Generates 25% of world GDP growth Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK The World Economic Outlook: India and ASEAN-5 Countries India Projected Growth • 2013: 5.9% • 2014: 6.4% 2011 Trade Deficit: -$14,651.5B Indonesia, Malaysia, Philippines, Thailand, Vietnam ASEAN-5 Projected Growth • 2013: 5.5% • 2014: 5.7% 2011 Trade Deficit: -$51,775.8B Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 The World Economic Outlook for Trade Commonwealth of Independent States Commonwealth of Independent States • Projected to show growth in 2013 and 2014. • With the collapse of communism, trade between the U.S. and central and Eastern Europe expanded substantially. • Countries that transitioned from communism to market economies are growing; those that have not transitioned continue to struggle. Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Uzbekistan © ILDOGESTO/SHUTTERSTOCK Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Exports and the U.S. Economy Exports as a percentage of GDP: • Record high of 12.9% in 2008 • 2010: 12.7%; 2011: 13.8% In 2011, exports were up 14.5% to $2.15 trillion while imports were up 13.8% to $2.66 trillion. Largest merchandise export markets in 2012: • Canada: $270.1B • Mexico: $199.9B • China: $100.2B Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Largest Trading Partners for U.S. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 U.S. Goods Export and Import Shares in 2012 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 International Trade Agreements WTO World Trade Organization (WTO) Oversees GATT provisions Has judicial powers to meditate trade disputes arising from GATT rules Exerts more binding authority than GATT Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 WTO Members Share in World Merchandise Trade, 2011 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 World Trade and the Global Economic Crisis “The multilateral trading system has been instrumental in maintaining trade openness during the [global financial] crisis, thereby avoiding even worse outcomes. Members must remain vigilant. This is the time to strengthen and preserve the global trading system so that it keeps performing this vital function in the future.” © ANWEBER/SHUTTERSTOCK --WTO Director-General Pascal Lamy, 2012 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 World Trade and the Global Economic Crisis Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. © ROBOLAB/SHUTTERSTOCK Do you think the interconnectedness of the global economy helped or exacerbated the global economic crisis? 36 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. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK International Economic Organizations: NAFTA North American Free Trade Agreement (NAFTA) The United States Canada Mexico Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 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. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 Using the Internet “Our Mission: To Help U.S. Business Succeed, Globally.” The International Trade Administration of the U.S. Department of Commerce (ITA) website has links to statistics, industry analysis, trade laws, and answers to often-asked trade questions. www.ita.doc.gov Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 Organizing for International Business Licensing Exporting Joint-Venture Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firm Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 Methods of Entering International Business: Strategic Alliances Strategic alliances are partnerships formed to create competitive advantage on a worldwide basis. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51 Methods of Entering International Business: Trading Companies Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. © ROBOLAB/SHUTTERSTOCK 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 52 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 Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53 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. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54 Methods of Entering International Business: Steps in Entering International Markets 1. 2. 3. 4. 5. 6. 7. 8. 9. Identify exportable products. Identify key foreign markets for the products. Analyze how to sell in each priority market. Set export prices and payment terms, methods, and techniques. Estimate resource requirements and returns. Establish overseas distribution network. Determine shipping, traffic, and documentation procedures and requirements. Promote, sell, and be paid. Continuously analyze current marketing, economic, and political situations. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 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. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 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. Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57 The Challenges Ahead Global economic recovery remains sluggish. Financial challenges in euro-area economies slow economic growth. WTO rules and principles have assisted governments in keeping markets open and provide a platform for which the trade can grow as the global economy improves. “We see the light at the end of the tunnel and trade promises to be an important part of the recovery. But we must avoid derailing any economic revival through protectionism.” --WTO Director-General Pascal Lamy Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58