Chapter Three. Copyright Cengage Learning. All rights reserved. 3 1

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1 Chapter Three Exploring Global l Business 3 1

2 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 identify the organizations working to foster it. 4. Define the methods by which a firm can organize for and enter into international markets. 5. Describe the various sources of export assistance. 6. Identify the institutions that help firms and nations finance international business. 3 2

3 Chapter 3 Outline The Basis for International Business Absolute and Comparative Advantage Exporting and Importing Restrictions to International Business Types of Trade Restrictions i Reasons for Trade Restrictions Reasons Against Trade Restrictions The Extent of International Business The World Economic Outlook for Trade International Trade Agreements The General Agreement on Tariffs and Trade and the World Trade Organization International Economic Communities i

4 Chapter 3 Outline (cont.) Methods of Entering International Business Licensing Exporting Joint Ventures Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firms Sources of Export Assistance Financing International Business The Export-Import Bank of the United States Multilateral Development Banks The International Monetary Fund

5 The Basis for International Business International business Some countries are better equipped than others to produce particular goods or services Absolute advantage Comparative advantage Goods and services are produced more efficiently when each country specializes in the products for which is has a comparative advantage 3 5

6 The Basis for International Business (cont d) Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in Exporting Importing 3 6

7 The Basis for International Business (cont d) Balance of trade Trade deficit Balance of payments 3 7

8 Restrictions to International Business The reasons for restricting trade range from internal political and economic pressures to mistrust of other nations. 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 nations. 3 8

9 Types of Trade Restrictions Import duty (tariff) A tax levied on a particular foreign product entering a country Revenue tariffs Protective tariffs Dumping 3 9

10 Types of Trade Restrictions (cont d) Nontariff barriers Import quota Embargo Foreign exchange control 3 10

11 Types of Trade Restrictions (cont d) Nontariff barriers (cont d) Currency devaluation Bureaucratic red tape Cultural attitudes 3 11

12 Reasons for and Against Trade Restrictions FOR AGAINST 3 12

13 The Extent of International Business Although the worldwide recessions of 1991, , and 2008 slowed the rate of growth, globalization is a reality of our time In the U.S., international trade accounts for over ¼ of GDP Trade barriers are decreasing, more 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 3 13

14 The General Agreement on Tariffs and Trade and the World Trade Organization General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) 3 14

15 International Economic Organizations Working to Foster Trade Economic community 3 15

16 International Economic Organizations Working to Foster Trade (cont d) North American Free Trade Agreement (NAFTA) United States Canada Mexico Chile is expected to become the 4 th member 3 16

17 International Economic Organizations Working to Foster Trade (cont d) Central American Free Trade Agreement (CAFTA) El Salvador Guatemala Honduras Nicaragua 3 17

18 International Economic Organizations Working to Foster Trade (cont d) Association of Southeast Asian Nations (ASEAN) Brunei Myanmar Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam 3 18

19 International Economic Organizations Working to Foster Trade (cont d) European Economic Area (EEA) Pacific Rim Commonwealth of Independent States (CIS) Caribbean Basin Initiative (CBI) Common Market of the Southern Cone (MERCOSUR) Organization for Economic Cooperation and Development (OECD) 3 19

20 Licensing Methods of Entering International Business Advantage Disadvantages 3 20

21 Methods of Entering International Business (cont d) Exporting Letter of credit Bill of lading Draft 3 21

22 Methods of Entering International Joint ventures Business (cont d) Advantages Disadvantages 3 22

23 Methods of Entering International Business (cont d) Totally owned facilities Advantage Disadvantage Two forms 3 23

24 Methods of Entering International Strategic alliances Business (cont d) Trading companies 3 24

25 Methods of Entering International Countertrade Business (cont d) Multinational i l enterprise 3 25

26 Financing International Business The Export-Import Bank of the United States (Eximbank) Multilateral Development Bank (MDB) The International Monetary Fund (IMF) 3 26

27 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.1 The Top Ten Merchandise-Exporting States 29 The Top Ten Merchandise-Exporting States Billions of dollars, 2005 merchandise exports Texas $128.8 California $116.8 New York $50.5 Washington $38.0 Michigan $37.6 Illinois $36.0 Ohio $35.0 Florida $33.4 Pennsylvania $22.3 Total 2005 U.S. exports: $904.4 billion Massachusetts $22.0 Source: accessed September 15, Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 29 3/6/09 6:34:56 PM

28 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.2 U.S. International Trade in Goods and Services Balance of Trade Exports Billions of dollars Imports Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, 1&area_id=3, accessed September 19, ,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 U.S. International Trade in Goods and Services 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 30 3/6/09 6:35:01 PM

29 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.3 U.S. Goods Export and Import Shares in France 2.39% U.S. Goods Export and Import Shares in 2007 Goods export shares, 2007 Goods import shares, 2007 U.K. 4.37% U.K. 2.89% All Other 26.76% Mexico 11.85% China 5.68% Japan 5.46% All Other 27.24% Mexico 10.71% China 16.33% Other OECD 17.50% Canada 21.67% Germany 4.32% France 2.11% Other OECD 12.43% Canada 16.11% Japan 7.39% Germany 4.79% Source: Federal Reserve Bank of St. Louis, National Economic Trends, September 2008, p Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 31 3/6/09 6:35:01 PM

30 Pride/Hughes/Kapoor, BUSINESS, 10th edition Table 3.2 Value of U.S. Merchandise Exports and Imports, Value of U.S. Merchandise Exports and Imports, 2007 Rank/Trading Partner Exports ($ billions) Rank/Trading Partner Imports ($ billions) 1 Canada China Mexico Canada China Mexico Japan Japan United Kingdom Germany Germany United Kingdom South Korea South Korea Netherlands France France Venezuela Taiwan Taiwan 38.3 Source: U.S. Department of Commerce, International Trade Administration, gov/foreign-trade/statistics/highlights/top/top0712.html, accessed September 22, Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 32 3/6/09 6:35:01 PM

31 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.4 The Evolving European Union 33 The Evolving European Union Member states FINLAND Candidate countries NORWAY SWEDEN ESTONIA DENMARK LATVIA RUSSIA IRELAND UNITED KINGDOM NETHERLANDS LITHUANIA RUSSIA POLAND BELARUS BELGIUM LUXEMBOURG GERMANY CZECH REPUBLIC SLOVAKIA UKRAINE ATLANTIC OCEAN FRANCE SWITZERLAND ITALY AUSTRIA SLOVENIA HUNGARY CROATIA BOSNIA & HERZEGOVINA MONTENEGRO ROMANIA BULGARIA MOLDOVA Black Sea ALBANIA MACEDONIA PORTUGAL SPAIN Mediterranean Sea GREECE TURKEY MALTA ALGERIA TUNISIA MOROCCO CYPRUS Source: accessed November 29, Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 33 3/6/09 6:35:02 PM

32 Pride/Hughes/Kapoor, BUSINESS, 10th edition Table 3.3 The Ten Largest Foreign and U.S. Multinational Corporations 34 The Ten Largest Foreign and U.S. Multinational Corporations 2007 Rank Company Business Country Revenue ($ millions) 1 Wal-Mart Stores General merchandiser United States 378,799 2 ExxonMobil Energy United States 372,824 3 Royal Dutch/ Shell Group Energy Netherlands/United Kingdom 355,782 4 BP Energy United Kingdom 291,438 5 Toyota Motor Automobiles Japan 230,201 6 Chevron Energy United States 210,783 7 ING Group Financial services Netherlands 201,516 8 Total Energy France 187,280 9 General Motors Automobiles United States 182, Conoco Phillips Energy United States 178,558 Source: Fortune Global 500, July 1, 2008, p Copyright 2006 Time, Inc., All rights reserved Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 34 3/6/09 6:35:02 PM

33 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.A Chapter Outline 35 Chapter 3 Outline Exploring Global Business The Basis for International Business Absolute and Comparative Advantage Exporting and Importing Restrictions to International Business Types of Trade Restrictions Reasons for Trade Restrictions Reasons Against Trade Restrictions The Extent of International Business The World Economic Outlook for Trade International Trade Agreements The General Agreement on Tariffs and Trade and the World Trade Organization International Economic Communities Methods of Entering International Business Licensing Exporting Joint Ventures Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firms Sources of Export Assistance Financing International Business The Export-Import Bank of the United States Multilateral Development Banks The International Monetary Fund 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 35 3/6/09 6:35:02 PM

34 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.B Class Exercise 36 Class Exercise There are four environmental forces impacting international markets: cultural, social, economic, and political/legal. With which force is each of the following most closely associated? 1. Handshaking 2. Religion 3. Transportation networks 4. Computer literacy 5. Sporting events 6. Color preferences 7. Standard of living 8. The role of children in the family 9. Communications equipment 10. Touching 11. Import restrictions 12. Government stability 13. Climate 14. Language 15. Payoffs and bribes 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 36 3/6/09 6:35:02 PM

35 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.C Debate Issue Debate Issue Should the United States fear Japan? YES NO The U.S. continues to carry an extremely large trade imbalance with Japan, while Japanese direct investment in the U.S. economy continues to escalate. Many feel that Japan unfairly restricts U.S. imports and that the U.S. should retaliate by restricting Japanese imports. American consumers are becoming increasingly dependent on Japanese products. Japanese firms are also increasing capacity, reducing costs, and developing new technologies much faster than their U.S. counterparts. The result is a world-wide, consumer market that is slowly becoming dominated by the Japanese. 37 The total foreign investment in the U.S. economy is currently less than 4%. In fact, the British and Canadians have more investment in the U.S. than the Japanese. With globalization becoming common, trade and foreign investment are usual practices in today s world. For example, Chrysler now owns 11% of Mitsubishi, while Ford owns 24% of Mazda. Foreign investment is good for the U.S. because it is being directed at permanent assets like plants and equipment, thus stimulating industry, providing jobs, and stabilizing the economy Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 37 3/6/09 6:35:02 PM

36 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.D Chapter Quiz 38 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. unfavorable balance of payments. b. favorable balance of trade. c. favorable balance of payments. d. unfavorable balance of trade. e. unfavorable supply of goods. 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. import duty. b. import cut. c. export control. d. trade embargo. e. export duty. 3. When the United States wants to reduce the cost of its goods in foreign nations, it a. revalues its currency. b. devalues its currency. c. pays off its trade deficit. d. borrows from the Eximbank. e. sells more goods abroad. 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. 5. XYZ Company is seeking a partner in China to manufacture its products. It 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. licensing. b. a bilateral agreement. c. a joint venture. d. an export/import merchant agreement. e. an export/import agent agreement Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 38 3/6/09 6:35:02 PM

37 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.E Trade Restrictions Trade Restrictions Tariffs or Import Duties Quotas Quantity or value Embargoes Halts to trade Foreign-Exchange Controls Restrict the amount of a currency that can be bought or sold Currency Devaluation Reduces value of a nation s currency relative to currencies of other countries Cultural Barriers Bureaucratic Red Tape Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 39 3/6/09 6:35:02 PM

38 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.F Pros and Cons of International Trade Restrictions Trade Restrictions PRO Equalize nation s balance of payments Protect new or weak industries Protect national security Protect citizens health Retaliate for another nation s restrictions CON 40 Higher prices for consumers Restrict consumers choices Misallocation of international resources Loss of jobs 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 40 3/6/09 6:35:02 PM

39 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.G Major International Trade Agreements International Trade Agreements 41 General Agreement on Tariffs and Trade and the World Trade Organization Kennedy Round Tokyo Round Uruguay Round Doha Round International Economic Organizations European Union European Economic Area North American Free Trade Agreement The Central American Free Trade Agreement The Association of Southeast Asian Nations Pacific Rim Commonwealth of Independent States Caribbean Basin Initiative The Common Market of the Southern Cone Organization of Petroleum Exporting Countries Organization for Economic Cooperation and Development 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 41 3/6/09 6:35:02 PM

40 Pride/Hughes/Kapoor, BUSINESS, 10th edition Figure 3.H Organizing for International Business Organizing for International Business Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3768X_03_ch03_p indd 42 3/6/09 6:35:02 PM