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Unit 3.01 International Business Basics. Unit 3 – Business in the global economy. Key terms. Imports Exports Balance of Trade Balance of Payments Exchange Rate. imports. items bought from other countries US #1 importer in the world In 2011, the US imported $2.314 Trillion

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Unit 3.01 International Business Basics

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unit 3 01 international business basics
Unit 3.01

International Business Basics

Unit 3 – Business in the global economy

key terms
Key terms
  • Imports
  • Exports
  • Balance of Trade
  • Balance of Payments
  • Exchange Rate

items bought from other countries

  • US #1 importer in the world
  • In 2011, the US imported $2.314 Trillion
  • Top US imports:
    • Crude oil
    • Passenger cars
    • Medicinal preparations
    • Automotive accessories
    • Other household goods

Note: US imports ALL our bananas, coffee, cocoa, spices, tea, silk, and crude rubber


goods and services made in the US that are sold to other countries

  • US 2nd largest exporter in the world (behind China)
  • In 2011, the US exported $1.511 Trillion
  • Top US Exports
    • Fuel
    • Aircraft
    • Motor vehicles
    • Vacuum tubes
    • Telecommunications equipment
balance of trade
Balance of trade

Difference between a country’s total exports and total imports

  • Trade Surplus
    • Export (sells) more than it imports (buys)
    • Favorable balance of trade
  • Trade Deficit
    • Imports (buys) more than it exports (sells)
    • Unfavorable balance of trade
us balance of trade
Us balance of trade

Current U.S. Trade Deficit - $42 Billion

trading among nations
  • Absolute Advantage – exists when a country can produce a good or service at a lower cost than other countries
    • Typically results from an abundance of natural resources or raw materials
    • i.e. coffee in South America or oil in Saudi Arabia
trading among nations1
  • Comparative Advantage – situation in which a country specializes in the production of a good or service at which it is relatively more efficient
    • i.e. a country produces both computers & clothing better than any other country; but the market for computers is stronger/more profitable; so country decides to invest in computer production and buy clothing elsewhere
international currency
  • Foreign exchange rates – the value of a currency in one country compared with the value in another
    • Effects imports/exports
    • Example:
      • If the Toyota Motor Company can produce a car for export in Japan at a cost of 2,000,000 Yen, how much does that car cost in U.S. dollars?
      • If the exchange rate for Yen/U.S. Dollar is 200.00 yen to the dollar, the car would have to cost $10,000 at the factory for the Toyota company to realize its costs.
      • Toyota cars typically sell for $20,000+ US dollars, making the car very profitable to export to the US (for Japan)
      • As Yen/US Dollar exchange rates change to 100.00, it now costs $20,000 at the factory to make, therefore reducing the Japanese profit and lowering the incentive to export to the US
international currency1
  • Factors affecting currency values
    • Balance of payments – when favorable, stronger currency
    • Economic conditions – when buying power of currency declines (i.e. high inflation), value of currency declines
    • Political disability – country instability weakens currency
recent values of currencies

Source: http://www.xe.com/

  • Calculate the cost of the following 5 items in local currency:
unit 3 02 the global marketplace
Unit 3.02

The Global Marketplace

Unit 3 – Business in the global economy

international business environment
  • Geography
  • Cultural influences
  • Economic development
  • Political and legal concerns
international business environment1
  • Geography
    • Location, climate, terrain, seaports, natural resources…
    • How does this influence international business?:
      • Very hot – limits the types of crops that can be grown
      • Many rivers/seaports – easily ship products for foreign trade
      • Limited natural resources – must depend on imports
international business environment2
  • Cultural influences
    • Culture – the accepted behaviors, customs, and values of a society
    • How does this influence international business?:
      • Language – communication
      • Religion – what is sacred to one may not be to another
      • Values – is bribery considered wrong in different cultures?
      • Customs – is it offensive to give a gift?
      • Social Relationships – how men and women interact in business
international business environment3
  • Economic development
    • Going to work on a high-speed bullet train to manage a computer network in a high-rise building versus riding an oxcart to a grass hut to operate a hand loom to make cloth for people in their village
  • How does this influence international business?:
    • Literacy Level – high levels literacy > better education > more and better goods & services
    • Technology – high automation > create and deliver goods quickly
    • Agricultural Dependency – highly dependent > weaker manufacturing base > fewer quantity/quality of products
  • Infrastructure – nations’ transportation, communication, and utility systems
    • Stronger infrastructure > better prepared for international business
international business environment4
  • Political and legal concerns
    • Type of government, stability of government, and the government’s policies toward business
  • How does this influence international business?:
    • Regulations on fair trade
    • Require safety inspections
    • Enforce contracts
international trade barriers
  • Trade Barriers – restriction to free trade
    • Quotas
    • Tariffs
    • Embargoes

A limit on the quantity of a product that may be imported or exported within a given period

  • Reasons for quotas
    • To keep supply low and prices the same
    • Protects domestic producers from international competition
    • To express displeasure at the policies of the importing country
    • To protect one of a country’s industries from too much competition from abroad
  • Critics of import quotas
    • Corruption (bribes to get a quota allocation)
    • Smuggling (circumventing a quota)

A tax that a government places on certain imported products

  • Reasons for tariffs
    • To set amount per pound, gallon, or other unit
    • To set the value of a good
  • In 2010, the US collected over $25 Trillion in import tariffs
    • Example of tariffed goods:
      • Chickens $0.90 each
      • Rice $0.018/kg

Government stops the export or import of a product completely

  • Reasons for embargoes
    • To protect a country’s industries from international competition more than the quota or tariff will achieve
    • Sanctions related to
      • Terrorism
      • Diamond Trading
      • Narcotics
      • Nuclear proliferation
      • Human rights violations
  • The US currently has trade embargos with approx. 30 countries
encouraging international trade
  • Free-trade zones
  • Free-trade agreements
  • Common markets
free trade zones

A selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing

  • Usually located around a seaport or airport
  • Importer pays duty only when the product leaves the zone
free trade agreements

Member countries agree to remove duties (import taxes) and trade barriers on products traded among them

    • US has 12 Free-Trade Agreements in place with 18 countries
  • Results in increased trade between members
    • NAFTA (North American Free Trade Agreement)
      • Began on January 1, 1994
      • Canada & Mexico are US #1 and #3 trading partners, respectively
common markets

Members do away with duties and other trade barriers

  • Allow companies to invest freely in each member’s country
  • Allow workers to move freely across borders
  • Examples
    • European Union (EU)
    • Latin American Integration Association (LAIA)
  • NAFTA Pros & Cons
unit 3 03 international business organizations
Unit 3.03

International Business Organizations

Unit 3 – Business in the global economy

international business organizations
International business organizations
  • Multinational Companies (MNCs)
  • Global Market Entry Modes
  • International Trade Organizations
multinational companies
Multinational companies

An organization that does business in several countries

  • Home country – the country where parent company is located
  • Host country – the country in which the MNC places business activities
    • There are over 889,000 MNCs around the globe
    • In 2008, the top 100 MNCs sales accounted for $8.5 Trillion
    • The Top 3 MNCs in 2009 (all financial institutions):
      • Citigroup Inc. (USA)
      • Allianz SE (Germany)
      • ABN AMRO (Netherlands)
multinational companies2
Multinational companies
  • Global Strategy – uses the same product and marketing strategy worldwide
    • Coca-Cola
      • 1886 Coca-Cola invented as fountain drink/tonic
      • 1899 began bottling
      • 1909 nearly 400 bottling plants in operation
      • 1920s bottled sales exceed fountain sales
      • 1930s global expansion begins
      • 1940s 64 bottling plants around world (supplying WWII soldiers)
      • 1950s packaging innovations
      • 1960s new brands introduced (Fanta, Tab, Sprite)
      • 1970-80s consolidation to serve customerstechnology leads  to a global economy international mega-chains
      • 1990s new & growing markets previously closed, now open (eastern Europe, Africa)
      • Today Coca-Cola is sold in more than 200 countries and is the most recognized brand in the world
coca cola

1971 Advertisement – I’d Like to Buy the World a Coke

coca cola1
  • “Open Happiness” campaign
    • Global integrated marketing
    • Launched in U.S. on "American Idol"
    • Worldwide advertising
multinational companies3
Multinational companies
  • Multinational strategy – treats each country market differently
    • i.e. McDonald’s
multinational companies4
Multinational companies
  • Benefits
    • Large amount of goods available
    • Lower prices
    • Career opportunities
    • Foster understanding, communication, and respect
    • Friendly international relations
  • Drawbacks
    • Economic power
    • Worker dependence on the MNC
    • Consumer dependence
    • Political power
global market entry modes
Global market entry modes
  • Licensing
  • Franchising
  • Joint Venture

Selling the right to use some intangible property (production process, trademark, or brand name) for a fee or royalty

  • Allows companies to produce items in other countries without being actively involved
  • Has a low financial investment, so the potential financial return for the company is often low
  • The risk for the company is low

Right to use a company name or business process in a specific way

  • Allows organizations to enter into contracts with people in other countries to set up a business that looks and runs like the parent company
  • Marketing elements, such as food products, packaging, and advertising, must meet both cultural sensitivities and legal requirements
  • Commonly involves selling a product or service
joint venture

An agreement between two or more companies to share a business project

  • Allows two or more companies to share raw materials, shipping facilities, management activities, or production activities
  • Concerns include the sharing of profits and not as much control because several companies are involved
  • Very popular for manufacturing, such as Japanese and U.S. automobile manufacturers
international trade organizations
  • World Trade Organization
  • International Monetary Fund
  • World Bank
world trade organization wto

Created in 1995 to promote trade around the world

  • 150 member countries
  • Settles trade disputes
  • Enforces free-trade agreements
  • Other goals
    • Lowering tariffs that discourage free trade
    • Eliminating import quotas
    • Reducing barriers for banks, insurance companies, and other financial services
    • Assisting poor countries with economic growth
international monetary fund imf

Established in 1946 to help promote economic cooperation

  • Maintains an orderly system of world trade and exchange rates
  • Includes more than 150 member nations
world bank

Created in 1944 to provide loans for rebuilding after WW II

  • AKA the International Bank for Reconstruction and Development
  • Today the World Bank has more than 180 member countries and two main divisions
    • International Development Association (IDA), which makes loans to help developing countries
    • International Finance Corporation (IFC), which provides technical capital and technical help to private businesses in nations with limited resources
  • MNCs Pros & Cons