Understanding Business in the Global Marketplace: Domestic vs. Foreign Trade Dynamics

1. POB 1.03 Part 1 Understand business in the global marketplace.

2. Domestic Vs. Foreign Business • Domestic Business • The making, buying, and selling of goods and services within a country. • Foreign Business • Business activities needed for creating, shipping, and selling goods and services across international borders • Also called international business or world trade

3. Absolute Vs. Comparative Advantage • Absolute Advantage • Exists when a country can produce a good or service at a lower cost than other countries (ex. Saudi Arabia and oil) • Comparative Advantage • Exists when a country specializes in the production of goods and services at which it is relatively more efficient

4. Imports Vs. Exports • Imports – items brought into the US from other countries • Common imports: bananas, coffee, cocoa, spices, tea, silk • Exports – goods and services sold to other countries • Common exports: agricultural products & machinery, medicines, movies, music

5. Measuring Trade Relations • People work to buy things …. • We sell our labor for wages • We spend wages on goods and services • We try to keep spending and income in balance • Countries want to keep a balance too

6. Balance of Trade • Balance of Trade – difference between a country’s total exports and total imports • Trade surplus is favorable • exports > imports • Trade deficit is unfavorable • Imports > exports • Can have a surplus with one country and deficit with another • Don’t want to be dependent on other countries

7. Balance of Payments • Balance of Payments – difference between the amount of money that comes into the country and the amount that goes out of it • Favorable: $ in > $ out • Unfavorable: $ out > $ in • How does money go in and out? • Investments in companies • Financial and military aid • Tourism • Banks depositing in foreign banks

8. Foreign Debt • Foreign Debt is the amount of money a country owes other countries • We want to have a balance of trade and a balance of payments

9. Foreign Exchange Market • Foreign Exchange Market – banks that buy and sell different currencies • Exchange Rate – the value of a currency in one country compared with the value in another

10. What factors affect the exchange rate? • Balance of Payments – rate rises when there is a favorable balance • Economic Conditions – inflation and high interest rates reduce buying power • Political Stability – avoid risk! • Changes in govt. party • New laws put into place

11. POB 1.03 Part 2 Understand business in the global marketplace.

12. What Factors Impact the International Business Environment? • Geography • Culture • Economy • Political & legal Concerns

13. Geographic Factors • Location • Climate • Terrain • Seaports • Natural Resources

14. Cultural Factors • Culture – accepted behaviors, customs and values of a society • Factors include … • Language • Religion • Values • Customs • Social relationships

15. Economic Factors • What are the differences in the living and work environments? • 3 Key Effects: • Literacy Level – better ed = more & better products for citizens • Technology – automated production, distribution and communication = ability to create and deliver products quickly • Agricultural Dependency – usually either heavy ag focus or manufacturing • Infrastructure: nation’s transportation, communication, and utility systems

16. Political and Legal Factors • Regulations on advertising and the enforcement of contracts • Safety inspections • Type of government, stability of government and policies towards businesses

17. What are trade barriers? • Trade barrier – a restriction to free trade • Formal barriers • Embargo • Quota • Tariff • Informal barriers • Culture • Tradition • Religion

18. Embargo • Embargo – an action imposed by a government to stop the export or import of a product completely • Why? • To protect its own industries from international competition • Prevent products from getting to other countries (ex: defense weapons) • Express disapproval of actions/policies

19. Quota • Quota – limit on the quantity of a product that may be imported or exported within a given time period • Why? • To keep prices stable (high) • Express displeasure toward a country • Protect its own country’s industry

20. Tariff • Tariff – tax the government places on certain imported goods and services • Why? • Increase the price of a good • High tariff lowers demand and reduces the amount imported

21. Encouraging International Trade • A few things that encourage international trade • Common Markets • Free-Trade Agreements • Free-Trade Zones

22. Common Markets • In a common market, the member countries do away with the duties and other trade barriers • AKA “economic community” • Examples: European Union (EU), Latin American Integration Association (LAIA)

23. Free-Trade Agreements • In a Free-Trade Agreement, member countries agree to remove the duties and trade barriers on products traded among them • Example: North American Free Trade Agreement (NAFTA) 1993

24. Free Trade Zone • A Free Trade Zone is a selected are where products can be imported duty free and then stored, assembled, and/or used in manufacturing • Usually near a seaport or airport • Importer pays duties when items leave the zone

25. POB 1.03 Part 3 Understand business in the global marketplace.

26. What is a Multinational Company? • Multinational Company (MNC) is an organization that does business in several countries • The parent company is in the home country and does business activities in the host country. • Pros: cheaper goods and career opportunities • Cons: may become an economic power; host may depend on the MNC for jobs & products

27. International Business Strategies • Global Strategy: selling the same product and using the same marketing strategy worldwide • Multinational Strategy: treats each country market differently

28. Entry Modes into the Global Marketplace • Franchising • Licensing • Joint Venture

29. Franchising • Franchising is the right to use a company name or business process in a specific way. • Usually involves selling a product or service. • Example: McDonalds, KFC

30. Licensing • Licensing is selling the right to use some intangible property for a fee or royalty • Production process, trade mark or brand name

31. Joint Venture • A Joint Venture is an agreement between 2 or more companies to share a business project • Popular in manufacturing

32. Major International Trade Organizations • International Monetary Fund • 150 member nations; helps to promote economic cooperation; keeps orderly system of trade and exchange rates • World Bank • Formed in 1944; gives economic aid to less developed countries • World Trade Organization (WTO) • Formed in 1995 to promote trade; over 150 countries; settles disputes and enforces free trade agreements