Chapter 3: Doing Business in Global Markets

Importing

Buying products from another country

Exporting

Selling products to another country

Free Trade

Movement of goods & services among nations w/o political or economic barriers

Comparative Advantage (2)

• Country should sell what they produce the most efficiently to other countries

• Buy products that a the country cannot produce as efficiently (Opportunity cost)

Absolute Advantage

Advantage where country has monopoly over producing products or able to produce it more efficiently than others

Why do countries engage in international trade?

Buy what they need from others & specialize in certain products for mutually beneficial exchanges

Balance of Trade

Total value of a nation’s exports compared to it’s imports over a particular period

Trade Surplus (2)

• Favorable balance of trade

• Occurs when value of country’s exports EXCEEDS that of imports

Trade Deficit (2)

• Unfavorable balance of trade

• When value of country’s imports EXCEEDS that of exports

Balance of Payments

Diff. between money from imports & exports & money flows from factors like (tourism, foreign aid, foreign investment & military)

Dumping

Selling products in foreign country at lower prices than charged in the producing country

Licensing & example (2)

• Permission from parent company to produce it’s product in their market

• Ex: Disney allows clothing manufacturer to print Mickey Mouse on t-shirts

Licensing advantage

Extra incomes from royalties

Exporting

US physically produces a product & ships it to another country

Exporting advantage

Increased sales from reaching global consumers

Franchising & ex (2)

• Work with the franchise or establish a business

• Ex: New McDonalds location

Franchising advantage

More locations = more consumers from different regions

Contract Manufacturing (2)

• Foreign company produces products for the US company to attach it’s brand name or trademark (outsourcing)

• Ex: Made in China, US branding

Joint Venture / Strategic Alliance

Partnership which 2 or more companies join to undertake major project

Joint Venture / Strategic Alliance advantage

The companies can share risk and pool resources together

Foreign Direct Investment (FDI) & ex (2)

• The buying of permanent property & businesses in foreign nations

• Ex: Disney builds a Disneyland park in Thailand for the long run

Foreign Direct Investment Advantage

Job creation & more consumers in international markets

Foreign Subsidiary & ex (2)

• When the parent company owns a company in a foreign country

• The Toyota Motor Corporation in Japan owns the Toyota Motor North America in US

Foreign Subsidiary Advantage

Company maintains complete control over any tech or expertise it possesses

Multinational Corporation

An organiz. that manufactures & markets products in many diff countries & has multinational management

Forces Affecting Global Trade (3)

1. Sociocultural Forces

2. Economic & Financial Forces

3. Legal & Environmental Forces

Sociocultural Forces

The differing cultures of each country (work culture, religion, etc)

Exchange Rate

Value of one nation’s currency against currency of other countries (ex: US dollar vs peso)

Devaluation

Lowering the value of a nation’s currency relative to other currencies

Trade Protectionism

The use of gov regulations to limit the import of goods and services (Think local Californian wine vs Italian wine)

Tariffs

A tax imposed on imports

Import Quotas

Limit on the # of products in certain categories that a nation can import

Embargoes

Complete ban on import of a certain product, or the stopping of all trade with a country

GATT

1948 agreement that est. an international forum for negotiating mutual reductions in trade restrictions

WTO

Entity that solves problems on world trade issues

NAFTA/USMCA

Free trade agreement among US, Mexico & Canada (no tax on tariffs)

Common Markets & ex (2)

• Regional group of countries w no common external/internal tariffs & coordinated laws to facilitate exchange among members

• Ex: European Union

Offshore Outsourcing

Moving company operations to another country

Offshore Outsourcing Advantages (3)

• Consumers benefit from lower prices

• Allows companies to hire more workers

• Company now has time to focus on areas to excel & grow in

Offshore Outsourcing Disadvantages (3)

• Jobs could be lost permanently

• May reduce product quality

• Communication becomes more difficult

Revenue Tariff

Aims to raise gov funds

Protective Tariff

Aims to shield local businesses from foreign competition

Foreign Corrupt Practices Act ‘77

Federal law that stops businesses from bribing foreign government officials to get or keep their business