Business Chapter 2

Why is the global market important to businesses?

It gives businesses access to a much larger market and allows countries to specialize and trade for products they cannot efficiently produce themselves.

How large is the U.S. market compared with the world market?

The U.S. has over 340 million people, while the world has about 8 billion.

Why do countries trade with one another?

No country can produce everything its people want and need.

How does global trade benefit countries?

Countries can specialize in what they produce best and trade for products they need from other countries.

What is importing?

Buying goods and services from another country.

What is exporting?

Selling goods and services to another country.

Why can exporting benefit the U.S. economy?

It creates economic activity and jobs and provides businesses with access to foreign markets.

Approximately what percentage of U.S. GDP do exports represent?

About 11%.

What is comparative advantage theory?

The idea that countries should specialize in producing goods and services they can produce relatively efficiently and trade with other countries.

What is absolute advantage?

The ability of a country to produce a particular good or service more efficiently than another country.

Why does specialization benefit countries?

Countries can focus on what they produce best and trade for other products, creating mutually beneficial exchanges.

What does comparative advantage support?

Free economic exchange/free trade.

What is a balance of trade?

The difference between the money coming into and leaving a country from its international trade.

What is a trade surplus?

When a country exports more than it imports

What is a trade deficit?

When a country imports more than it exports

What is the goal of the balance of payments?

To have more money flowing into the country than flowing out.

What is dumping?

Selling products in a foreign market at unusually low prices, often to reduce surplus products or gain a foothold in a new market.

Why might a company export to another country?

There may be less competition and access to additional customers.

What are the major strategies for reaching global markets?

Licensing, exporting, franchising, contract manufacturing, international joint ventures/strategic alliances, and foreign direct investment.

What is licensing?

Giving another company the right to manufacture your products or use your trademark for a fee or royalty.

What are advantages of licensing?

The company can receive revenue while spending little or no money on production or marketing and can get help with distribution and promotion.

What are disadvantages of licensing?

The licensee receives most of the revenue if the product becomes highly successful, and the licensing company gives away expertise/trade secrets.

What are Export Assistance Centers (EACs)?

Organizations that help small and medium-sized companies export.

What is indirect exporting?

Working with export-trading companies that help negotiate and establish trading relationships.

What does an export-trading company typically help with?

Matching buyers and sellers, negotiating relationships, dealing with foreign customs, and handling documentation.

What is an important consideration when franchising internationally?

The franchisor must adapt its products to the culture and preferences of the country.

What is contract manufacturing?

A form of outsourcing in which another company manufactures products for a business.

Why might a company use contract manufacturing?

To enter a new market without the large cost of building a manufacturing facility or to temporarily meet increased demand.

What is an international joint venture?

A partnership between companies where they join together and share resources, risks, and expertise.

What are advantages of joint ventures?

Shared technology and risk, shared marketing/management expertise, and easier entry into certain foreign markets.

What are disadvantages of joint ventures?

Technology can become stolen or obsolete, and the company may become too large to remain flexible.

What is a strategic alliance?

An arrangement where companies cooperate but do not share costs, risks, management, or profits.

What's the key difference between a joint venture and a strategic alliance?

A joint venture shares costs/risks and resources, while a strategic alliance does not necessarily share these things.

What is foreign direct investment (FDI)?

Investment in business operations in another country

What is the most common form of FDI?

A foreign subsidiary.

What is the main advantage of FDI?

The parent company maintains complete control over its technology or expertise.

What is the main disadvantage of FDI?

The company must commit funds and technology within the foreign country.

What is a multinational corporation?

A company that has manufacturing capacity or another physical presence in multiple countries.

What are the four major forces that affect global trade?

Sociocultural, economic/financial, legal/regulatory, and physical/environmental forces.

What can culture include?

Social structures, religion, manners/customs, values/attitudes, language, and communication styles.

What is ethnocentricity?

The belief that one's own culture is superior or the tendency to judge other cultures by one's own cultural standards.

Why can ethnocentricity hurt global business?

Businesses may fail to understand or adapt to foreign cultures and therefore struggle in international markets.

What is an exchange rate?

The value of one country's currency in relation to another country's currency

What is a floating exchange rate?

An exchange rate that changes according to supply and demand in the global market.

What does it mean when the dollar has a high value?

One U.S. dollar can be exchanged for more foreign currency than before.

What is devaluation?

A reduction in the value of a nation's currency relative to other currencies.

How does a weak dollar generally affect U.S. exports?

U.S. products become cheaper for foreign buyers, which can increase U.S. exports.

What is bartering?

Trading goods or services directly without using money.

What is countertrading?

International transactions where goods/services are exchanged rather than relying entirely on currency.

Why can laws create difficulties for global businesses?

There is no single global legal system, and laws can differ between countries.

What is the Foreign Corrupt Practices Act?

A U.S. law designed to prohibit bribery of foreign officials by U.S. businesses.

What physical/environmental factors can make global trade difficult?

Poor transportation/storage systems, unclean water, inadequate sewer systems, pollution, and limited technological capabilities.

What is trade protectionism?

Government actions designed to protect domestic businesses from foreign competition.

Why do governments use protectionism?

To help domestic producers survive, grow, and preserve jobs.

What are tariffs?

Taxes placed on imported goods.

What is a protective tariff?

A tariff designed to protect domestic producers from foreign competition.

What is a revenue tariff?

A tariff designed primarily to generate government revenue.

What is an import quota?

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

What is an embargo?

A government prohibition on the import or export of certain products or trade with a particular country

What are nontariff barriers?

Trade restrictions other than tariffs, such as import licensing, product testing requirements, lengthy customs procedures, and local-content requirements.

What is the WTO?

The World Trade Organization, an organization that oversees cross-border trade issues and works to reduce trade restrictions.

What was GATT?

The General Agreement on Tariffs and Trade, created in 1948 to reduce trade restrictions.

What replaced GATT?

The World Trade Organization (WTO), established through the Uruguay Round.

What is a common market?

A regional trade alliance or trading bloc.

What is the purpose of a common market?

To reduce trade barriers and increase economic cooperation among member countries.

What is the USMCA?

The United States–Mexico–Canada Agreement, which replaced NAFTA and governs free trade among the three countries

What is offshore outsourcing?

Outsourcing business activities to companies in other countries.

Why do companies use offshore outsourcing?

It can create efficiencies, reduce costs, and allow companies to focus on core activities.

What are major concerns about offshore outsourcing?

Job losses, lower wages, reduced product quality, supply-chain disruptions, and communication difficulties.

What is reshoring?

Moving business operations/manufacturing back to the company's home country.

What are some major challenges facing China as a global economic leader?

China faces economic, political, social, and other challenges as it continues its rapid growth.

What can students do to prepare for the global economy?

Study foreign languages, learn about foreign cultures, and take global business courses.