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Chapter Three

PRIDE HUGHES KAPOOR INTRODUCTION TO BUSINESS ELEVENTH EDITION. Chapter Three. Business in a Global Setting. 3 | 1. Learning Objectives. Explain the economic basis for international business.

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Chapter Three

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  1. PRIDE HUGHES KAPOOR INTRODUCTION TO BUSINESS ELEVENTH EDITION Chapter Three Business in a Global Setting 3 | 1

  2. Learning Objectives • Explain the economic basis for international business. • Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results. • Outline the extent of international trade and identify the organizations working to foster it. • Define the methods by which a firm can organize for and enter into international markets. • Describe the various sources of export assistance. • Identify the institutions that help firms and nations finance international business. 3 | 2

  3. 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 • The ability to produce a specific product more efficiently than any other nation • Comparative advantage • The ability to produce a specific product more efficiently than any other product • Goods and services are produced more efficiently when each country specializes in the products for which it has a comparative advantage 3 | 3

  4. 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 • 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 3 | 4

  5. Top Ten Merchandise-Exporting States Figure 3.1 Source: http://www.ita.doc.gov/td/industry/otea/state/2005_year_end_dollar_value_05.html, accessed May 23, 2010. 3 | 5

  6. The Basis for International Business (cont’d) • Balance of trade • The total value of a nation’s exports minus the total value of its imports over some period of time • Trade deficit • A negative (unfavorable) balance of trade—imports exceed exports in value • Balance of payments • The total flow of money into a country minus the total flow of money out of that country over a period of time 3 | 6

  7. 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 | 7

  8. U.S. International Trade inGoods and Services Figure 3.2 Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=90730&table_id=1&area_id=3, accessed April 19, 2010. 3 | 8

  9. Types of Trade Restrictions • 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 from competition by keeping the prices of imports at or above the price of domestic products • Dumping • The exportation of large quantities of a product at a price lower than that of the same product in the home market 3 | 9

  10. Types of Trade Restrictions (cont’d) • 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 • Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold 3 | 10

  11. Types of Trade Restrictions (cont’d) • Nontariff barriers (cont’d) • Currency devaluation—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 • Cultural attitudes—can impede acceptance of products in foreign countries 3 | 11

  12. AGAINST Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources Loss of jobs Reasons for and Against Trade Restrictions FOR • 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 country’s trade restrictions • To protect domestic jobs 3 | 12

  13. The Extent of International Business • Although the worldwide recessions of 1991 and 2001-2002 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 • In the U.S., international trade accounts for over ¼ of GDP 3 | 13

  14. 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 3 | 14

  15. 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 3 | 15

  16. The World Economic Outlook for Trade (cont’d) • Canada and Western Europe • Canada is projected to show growth in 2010 and 2011 • Euro area is expected to grow in 2011 • U.K. and smaller European countries are expected to experience a recession • Mexico and Latin America • Mexico is expected to show growth in 2010 and 2011 • Latin America and Caribbean economies are recovering at a robust pace 3 | 16

  17. The World Economic Outlook for Trade (cont’d) • Japan • Projected to show growth in 2010 and 2011 • Other Asian Countries • Lead by China emerging as a global economic power, growth is strong • Key emerging economies is Asia are leading the global recovery • Emerging Europe • Growth has been faster than in western Europe and continued growth is expected in 2010 and 2010 3 | 17

  18. The World Economic Outlook for Trade (cont’d) • Commonwealth of Independent States • Projected to show growth in 2010 and 2011 • With the collapse of communism, trade between the U.S. and central and Eastern Europe expanded substantially • Exports and the U.S. Economy • In 2008, exports as a percentage of GDP reached its highest level since 1916 • In the past 50 years, exports have become increasingly important to the U.S. economy 3 | 18

  19. Global Growth Remains Sluggish Table 3.1 3 | 19

  20. Value of U.S. Merchandise Exports and Imports, 2009 Table 3.2 3 | 20

  21. U.S. Goods Export and Import Shares in 2009 Figure 3.3 Source: Federal Reserve Bank of St. Louis, National Economic Trends, May 2010, p. 18. 3 | 21

  22. International Trade Agreements • The General Agreement on Tariffs and Trade and the World Trade Organization • General Agreement of Tariffs and Trade (GATT) • International organization of 153 nations dedicated to reducing or eliminating tariffs and other trade barriers • Most-favored-nation status (MFN)—Each member of GATT was to be treated equally by all other members • Kennedy Round, Tokyo Round, Uruguay Round, Doha Round 3 | 22

  23. International Trade Agreements(cont’d) • The General Agreement on Tariffs and Trade and the World Trade Organization (cont’d) • World Trade Organization (WTO) • Created in the Uruguay Round of GATT negotiation as a successor to GATT • WTO oversees GATT provisions, has judicial powers to meditate trade disputes arising from GATT rules and exerts more binding authority than GATT 3 | 23

  24. WTO Members Share in World Merchandise Trade Figure 3.4 Source: www.wto.org, accessed on May 25, 2010. 3 | 24

  25. International Economic Organizations Working to Foster Trade • 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 3 | 25

  26. The Evolving European Union Figure 3.5 Source:http://europa.eu/abc/european_countries/index_en.htm, accessed May 25, 2010. 3 | 26

  27. 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 4th member 3 | 27

  28. International Economic Organizations Working to Foster Trade (cont’d) Central American Free Trade Agreement – Dominican Republic(CAFTA-DR) • El Salvador • Guatemala • Honduras • Nicaragua • Dominican Republic • Costa Rica 3 | 28

  29. 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 | 29

  30. 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 of Petroleum Exporting Countries (OPEC) • Organization for Economic Cooperation and Development (OECD) 3 | 30

  31. Methods of Entering International Business • Licensing • 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 3 | 31

  32. Methods of Entering International Business (cont’d) • 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 3 | 32

  33. Methods of Entering International Business (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 3 | 33

  34. Methods of Entering International Business (cont’d) • 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 • High level of commitment required of all parties involved 3 | 34

  35. Methods of Entering International Business (cont’d) • Totally owned facilities • Production and marketing facilities 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 3 | 35

  36. Methods of Entering International Business (cont’d) • Strategic alliances • Partnerships formed to create competitive advantage on a worldwide basis • Trading companies • Firms that provide a link between buyers and sellers in different countries • Takes title to products and perform all the activities necessary to move the products from one country to another 3 | 36

  37. Methods of Entering International Business (cont’d) • Countertrade • An international barter transaction • Avoids restrictions on converting domestic currency to foreign currency • Multinational enterprise • A firm that operates on a worldwide scale without ties to any specific nation or region 3 | 37

  38. Ten Largest Foreign and U.S. Multinational Corporations Table 3.3 Source: http://money.cnn.com/magazines/fortune/global500/2009/snapshots/6752.html, accessed May 23, 2010. 3 | 38

  39. Steps in Entering International Markets Table 3.4 3 | 39

  40. Steps in Entering International Markets (cont’d) Table 3.4 3 | 40

  41. Steps in Entering International Markets (cont’d) Table 3.4 3 | 41

  42. Sources of Export Assistance • National Export Strategy (NES) • Trade Promotion Coordinating Committee (TPCC) • Assists U.S. firms in developing export-promotion programs • Help American firms compete in foreign markets and create new jobs in the U.S. 3 | 42

  43. U.S. Government Export Assistance Programs Table 3.5 3 | 43

  44. 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 • Multilateral Development Bank (MDB) • An internationally supported 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) • An international bank with 186 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits 3 | 44

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