BUS 101 - Chapter 6: International Business Environment

What are exports?

Goods or services produced domestically and sold to another country.

What are imports?

Goods or services produced in another country and purchased domestically.

What is the balance of trade?

Exports − Imports

What is a trade surplus?

→ When exports > imports.

→ The country is a net exporter.

What is a trade deficit?

→ When imports > exports.

→ The country is a net importer.

What is trade in services?

International exchange of services rather than physical goods.

Examples of traded services?

Engineering, banking, consulting, telecommunications, and other professional services.

Why has international trade in services grown?

Improvements in telecommunications and technology make it easier to provide services across borders.

Is the U.S. a net exporter or importer of services?

The U.S. is a net exporter of services, even though it is a net importer overall.

What is comparative advantage?

The ability to produce something at a lower opportunity cost than another country or producer.

Comparative vs. absolute advantage?

Comparative advantage = producing a good at a lower opportunity cost (giving up less of another good) than a competitor; being better at a specific job than other jobs you could do.

Absolute advantage = producing a good using fewer resources or at a lower cost than a competitor; simply the absolute best at doing that job compared to everyone else.

Why is comparative advantage important?

Countries can specialize in what they produce at the lowest opportunity cost and trade for other goods/services.

Can a country benefit from trade even if it has no absolute advantage?

Yes. Comparative advantage is based on opportunity cost.

What are major benefits of international trade?

Larger markets

More specialization

Lower prices

More competition

More innovation

Access to technology and ideas

Economic growth

How does trade benefit consumers?

Greater variety, lower prices, and increased innovation.

How does globalization help businesses?

Gives them access to larger and growing international markets.

How can trade reduce poverty?

Trade can encourage economic growth, development, jobs, and higher incomes.

Does everyone benefit equally from international trade?

No. Trade can create winners and losers within a country.

How can trade affect workers?

Workers in expanding industries may benefit, while workers in industries facing foreign competition may lose jobs.

What is a pollution haven?

A country where companies may locate pollution-intensive production because environmental standards or enforcement are less strict.

What are ethical concerns related to global trade?

Worker exploitation, low wages, child labor, unsafe working conditions, inequality, and environmental concerns.

What is exporting?

→ Producing domestically and selling products to foreign customers.

→ Generally lower risk and more flexible.

What is licensing?

A company allows a foreign company to use its product, brand, or trademark in exchange for a royalty fee.

Main disadvantage of licensing?

The original company has less control and profit potential.

What is international franchising?

A foreign business is allowed to use a company's brand and business model while following rules set by the franchisor.

Licensing vs. franchising?

Licensing = generally less control.

Franchising = more control, guidance, and restrictions.

What is contract manufacturing?

A company hires a foreign company to produce its products.

Why use contract manufacturing?

Avoids building factories and can reduce production/transportation costs.

What is an international joint venture?

Two or more companies from different countries share costs, risks, technology, and profits.

What is an international strategic alliance?

A less formal partnership between companies to gain mutual benefits, often for a specific project.

Joint venture vs. strategic alliance?

Joint venture = creates a brand-new, separate company owned by the partner businesses.

Strategic alliance = a flexible partnership where companies work together without forming a new company.

What is foreign direct investment (FDI)

Investing in permanent physical assets/business operations in another country.

Why is FDI considered the most committed and risky entry method?

It requires significant money, resources, and long-term commitment.

What is a foreign subsidiary?

A foreign company owned or controlled by a parent company from another country.

What is expropriation?

When a government forces a private property owner to give up their land or assets for the public good, usually with a fair payment.

What is a multinational corporation (MNC)?

A company that has a physical presence/operations in foreign countries.

Is a company automatically an MNC just because it exports?

No. It must have a physical presence in another country.

What is a tariff?

A tax on imported goods.

What is a quota?

A limit on the quantity of a good that can be imported.

What is an embargo?

A government prohibition on trade with a particular country.

What is a non-tariff barrier?

A trade restriction other than a tariff, such as certain regulations, standards, or requirements.

Why might governments use trade barriers?

To protect domestic industries and workers from foreign competition.

What is the downside of trade barriers?

They can reduce free trade, increase prices, and limit consumer choices.

What is the World Trade Organization (WTO)?

An organization that helps countries negotiate trade rules and settle international trade disputes.

What are physical barriers to trade?

Geographic or transportation obstacles that make international trade expensive or difficult.

What are non-tradable goods and services?

Products/services that are difficult or impossible to trade internationally because of their characteristics or location requirements.

Examples of non-tradable goods/services?

Heavy goods like cement, fresh/local services such as haircuts or lawn care.

How has technology reduced trade barriers?

Better transportation and telecommunications make it easier to move products and provide services internationally.