Rationale for International Expansion: As domestic markets mature and sales growth slows, companies seek international markets to sustain growth. Companies leverage large populations, substantial resources, and rising standards of living abroad.
Definitions of Trade Flows:
Exports: Domestically produced goods and services sold in other countries.
Imports: Foreign-made products purchased by domestic consumers.
Economic Impact Examples:
Boeing: Historically, more than 70% of commercial airplane revenues come from customers outside the United States. Boeing signed a deal worth 37 billion to sell 300 planes to China.
Apple: Sales in China exceeded 11 billion before COVID-19 interruptions. Apple is currently eyeing expansion in India as growth in China has fallen by 50% in recent years.
U.S. Market Appeal: The United States has the world’s greatest purchasing power. In a recent year, the U.S. imported over 540 billion in goods from China, led by 186 billion in computers and electronics.
Benefits of International Trade:
Economic Growth: Provides markets for products and access to necessary resources.
Efficiency: Companies expand production and distribution, making systems more efficient.
Risk Spreading: Diversification across nations at different business cycle stages reduces dependence on a single home economy.
Factors of Production: Decisions to operate globally depend on the availability, price, and quality of basic factors: labor, natural resources, capital, and entrepreneurship.
Example: Many U.S. software and hardware companies set up operations in India and China to utilize the thousands of highly qualified computer scientists and engineers produced there annually.
Projected Growth of the Global Marketplace:
Only 1 in 6 of the world’s 7.6 billion people lives in a well-developed country.
Population estimates: 8.6 billion by mid-2030, 9.8 billion by mid-2050, and 11.2 billion by year 2100.
Purchasing Power vs. Population: A large population does not guarantee economic prosperity.
China: 1,412 million people.
India: 1,408 million people.
United States: 336 million people.
Indonesia: 273 million people.
Pakistan: 231 million people.
Per-Capita GDP (Current International Dollars):
Luxembourg: 143,320
Ireland: 137,640
Singapore: 133,110
Qatar: 114,210
Macao SAR: 98,160
GDP Growth Averages: Over the past five years, U.S. GDP averaged 2%. In contrast, India's GDP growth averaged 7.2% over the last decade, and China sustained double-digit growth for most of the last decade.
Absolute and Comparative Advantage
Specialization: Countries focus on producing what they do best to export surplus and buy what they lack or cannot produce efficiently.
Absolute Advantage: Exists when a country can maintain a monopoly or produce a product at a lower cost than any competitor.
Historical Example: China once held an absolute advantage in silk, leading to the 5,000-mile Silk Road between Rome and Xi’an.
Modern Approximations: These are rare now, but Iran produces over 80% of the world’s saffron.
Comparative Advantage: A nation has this if it can supply products more efficiently and at a lower price than it can supply other goods, compared to other countries.
Examples: China has a comparative advantage in textiles. India has a comparative advantage in skilled, English-speaking tech workers available at lower wages.
Reshoring Trends: Some U.S. companies are bringing customer service call centers back from the Philippines and India due to demands for better service, rising foreign labor costs, and new technologies lowering domestic costs.
Measuring International Trade and Exchange Rates
Balance of Trade: The difference between exports and imports.
Trade Surplus: Exports > Imports.
Trade Deficit: Imports > Exports. The U.S. has run a trade deficit every year since 1976.
Balance of Payments: The overall flow of money into or out of a country, including loans, borrowing, investments, profits, and foreign aid.
Calculation: Monetary Inflows−Monetary Outflows=Balance of Payments
U.S. Trade Profile:
Total trade in goods and services: Approximately 5.2 trillion.
Services: The U.S. maintains a surplus in services, exporting over 778 billion annually (e.g., travel, tourism, engineering, financial services, entertainment).
Key Service Exporters: Berkshire Hathaway, The Walt Disney Company, State Farm, American Express, Walmart.
Exchange Rates: The value of one nation’s currency relative to others.
Examples: Approximately 18 Mexican pesos=1 U.S. Dollar; 1 Canadian dollar≈78 U.S. cents.
Factors Influencing Rates: Economic conditions, political stability, central bank intervention, and speculation.
Floating Exchange Rates: Rates vary according to market supply and demand, though governments often intervene.
Devaluation: A deliberate drop in a currency's value relative to others to boost exports and stimulate investment. China has repeatedly devalued the yuan.
Impact on Business (Strong vs. Weak Dollar):
Strong Dollar: Buys more foreign goods (benefits importers/travelers). However, for firms like Walmart, a strong dollar reduces the reported value of foreign sales when converted back to USD.
Weak Dollar: Buys less foreign goods (increases costs of imports and overseas travel).
Currency Types:
Hard Currencies: Easily convertible (e.g., Euro, USD, Japanese Yen).
Soft Currencies: Not readily converted (e.g., Russian Ruble). Often leads to bartering.
FOREX (Foreign Exchange Market): Global market for currency trading; most traded are USD, EUR, JPY, Pound Sterling, and Australian Dollar.
Barriers to International Business
Social and Cultural Barriers: Includes language, customs, education, and religion.
Language: Mandarin Chinese is the most widely spoken, followed by English, Spanish, Hindi, Arabic, and Bengali.
Cultural Blunders: In China, the number four and the word for "clock" are phonetically similar to "death"; white is the color for funerals. Giving four clocks wrapped in white paper would be highly offensive.
Gestures: High-five in Greece, circle with index/thumb in Brazil, thumbs-up in Egypt, and outward-facing peace sign in Great Britain can all be insulting.
Gift-Giving: In Latin America, knives/scissors represent severing friendship. Yellow flowers in Mexico can be associated with death.
Holiday Observance: In Saudi Arabia, the workweek is Saturday-Thursday; work ends at noon during Ramadan.
Economic Barriers: Infrastructure (communications, transportation, energy), inflation, and per-capita income.
Legal and Political Barriers:
Political Climate: Stability varies (e.g., U.S. stability vs. changing structures in Indonesia or Congo).
Foreign Corrupt Practices Act (FCPA): Forbids U.S. companies from bribing foreign officials.
GDPR (General Data Protection Regulation): Implemented by the EU in 2018; requires unambiguous consent for data collection.
Trade Restrictions:
Tariffs: Taxes on imports.
Revenue Tariffs: Generate government income (e.g., import taxes on cars).
Protective Tariffs: Raise prices of imports to level the field for local goods (e.g., aluminum and steel tariffs imposed in 2018).
Quotas: Limits on the quantity or value of a product that can be imported.
Dumping: Selling products abroad at prices below production costs or below home-market prices.
Embargo: A total ban on importing a product or trading with a country (e.g., long-standing U.S. embargo with Cuba).
Exchange Control: Central banks allocate or restrict foreign exchange to regulate trade.
Case Studies in Technology and Sustainability
Delta Airlines Digital ID: A facial recognition pilot in partnership with the TSA.
Reduces bag drop time to 30 seconds (saving 1.5 minutes).
Piloted in Atlanta (ATL) and Detroit (DTW); expanding to LAX, LGA, and JFK in 2024.
Netflix in South Korea: Investing 2.5 billion in Korean content over four years. Revenue in Korea rose to 600 million in 2022 with 1.17 million subscribers.
Campbell Soup Company (Food Waste): Goal to cut food waste in half by 2030.
Estimated 40% of all global food produced is never consumed.
Food waste in landfills emits 3.3 billion metric tons of methane annually.
Typical U.S. families lose 1,600 to 2,000 annually on uneaten food.
Organizations and Economic Communities
World Trade Organization (WTO): Monitors GATT agreements and mediates binding disputes among 159 member countries. Succeeds the GATT (General Agreement on Tariffs and Trade).
World Bank: Lends money to developing nations for infrastructure (transportation, education, medical).
International Monetary Fund (IMF): Lender of last resort for troubled nations; promotes trade through financial cooperation.
USMCA (formerly NAFTA): Free-trade zone between U.S., Canada, and Mexico. Total GDP > 23 trillion.
U.S. GDP is approximately 19 trillion (25% of world output).
Mexico's per-capita GDP is 19,500; over half its population lives below the poverty line.
European Union (EU): A common market aiming for a borderless Europe.
Brexit: The United Kingdom formally withdrew on January 31, 2020.
The Euro: Adopted by 19 member states to eliminate exchange costs.
Levels of International Business Operations
Exporting/Importing: Basic level, least risk/control.
Indirect Exporting: Components become part of another exported product.
Direct Exporting: Seeking overseas markets directly.
Offset Agreement: Smaller firm acts as a subcontractor to a larger firm.
Contractual Agreements:
Franchising: Franchisee pays for the right to use a brand/operating system. Domino’s has 20,000+ stores in 90+ markets.
Top Franchisors: KFC, McDonald’s, Taco Bell, Dunkin’, Pizza Hut (Investments up to 4.5 million for Burger King).
Foreign Licensing: Company allows another to produce/sell its product for a royalty.
Subcontracting: Hiring local firms to produce/distribute goods. Nike uses this in China, Indonesia, and Vietnam.
Direct Investment:
Acquisitions: Purchasing an existing firm in the host country.
Joint Ventures: Sharing risks/costs (e.g., Toyota and Mazda automotive plant in Huntsville, Alabama, costing 1.6 billion).
Strategic Frameworks
Global Strategy (Standardization): Selling the same product the same way worldwide (e.g., Coca-Cola's packaging and logo).
Multidomestic Strategy (Adaptation): Treating each market differently (e.g., McDonald’s serving McSpaghetti in the Philippines and halal menus in Arab countries).
Guanxi: Chinese term for "connections." It involves building trust over time, often through social dinners where business is not discussed. U.S. firms must navigate this while complying with the Foreign Corrupt Practices Act.