International business: All business activities that involve exchanges across national boundaries.
Absolute advantage: The ability to produce a specific product more efficiently than any other nation.
Comparative advantage: The ability to produce a specific product more efficiently than any other product.
Exporting: Selling and shipping raw materials or products to other nations.
Example: The Boeing Company exports its airplanes to a number of countries for use by their airlines.
Importing: Purchasing raw materials or products in other nations and bringing them into one’s own country.
Example: Buyers for Macy’s department stores purchase rugs in India and have them shipped back to the United States for resale.
Balance of trade: The total value of a nation’s exports minus the total value of its imports over a specified period.
Trade deficit: A negative balance of trade (imports > exports).
If a country imports more than it exports, its balance of trade is negative and is said to be unfavorable.
Balance of payments: The total flow of money into a country minus the total flow of money out of that country over a specified period.
Includes: Imports and exports, investment money spent by foreign tourists, payments by foreign governments, aid to foreign governments, and all other receipts and payments.
Key Economic Relationships
Canada and Western Europe: Strong economic ties due to stability, similar per capita incomes, and growing economies. In 2019, the U.S. and Canada generated 703.8 billion in bilateral trade.
Mexico and Latin America: Expected trade growth as trade barriers ease.
Asia: Japan and China are strong trading partners. India's market promises continued demand for goods and services. The U.S. shares more than half a trillion dollars in annual bilateral trade with China.
Africa: Growing economies with younger populations and rising disposable incomes are attracting increasing interest. U.S. trade to and from Africa has tripled over the past decade, with U.S. exports exceeding 22 billion.
Middle East/North Africa: Vast natural resources and growing per capita incomes make the region desirable, despite political instability.
3-2 Methods of Entering International Business
Steps in Entering International Markets
Identify exportable products
Identify key selling features and needs they satisfy.
Identify selling constraints.
Identify key foreign markets for the products
Determine who the customers are and what/when they will buy.
Do market research and establish priority countries.
Analyze how to sell in each priority market
Locate available government and private-sector resources.
Determine service and backup sales requirements.
Set export prices and payment terms, methods, and techniques
Establish methods of export pricing, sales terms, quotations, invoices, and conditions of sale.
Determine methods of international payments (secured and unsecured).
Estimate resource requirements and returns
Establish financial and human resources requirements.
Estimate plant production capacity and determine necessary product adaptations.
Establish overseas distribution network
Determine distribution agreement and other key marketing decisions (price, repair policies, returns, territory, performance, and termination).
Know your customer (use U.S. Department of Commerce international marketing services).
Determine shipping, traffic, and documentation procedures and requirements
Determine methods of shipment (air, ocean, truck, rail) and finalize containerization.
Obtain validated export license and follow export-administration documentation procedures.
Promote, sell, and be paid
Use international media, communications, advertising, trade shows, and exhibitions.
Determine the need for overseas travel (when, where, how often) and initiate customer follow-up procedures.
Continuously analyze current marketing, economic, and political situations
Recognize changing factors influencing marketing strategies and constantly re-evaluate.
Exporting
Firms manufacture products in their home country and export them.
Can sell outright to an export-import merchant or ship to an export-import agent (arranges sales for a fee).
Firms may also establish their own sales offices in foreign countries.
Advantage: Relatively low-risk method of entering foreign markets.
Disadvantage: Not a simple method.
Exporting to International Markets
Importer asks local bank to issue a letter of credit.
Transporter provides exporter with a bill of lading.
Exporter issues a draft from its bank, ordering the importer’s bank to pay.
Letter of credit: Issued by a bank on request of an importer, guaranteeing payment to a stated beneficiary.
Bill of lading: Document issued by a transport carrier to an exporter as proof of shipment.
Draft: Issued by the exporter’s bank, ordering the importer’s bank to pay for the merchandise.
Trading Company
Trading company: Links buyers and sellers in different countries but doesn't manufacture.
Buys products in one country at the lowest price and sells to buyers in another country.
Takes title to products and manages logistics.
Countertrade: International barter transaction.
Example: Philip Morris's sale of cigarettes to Russia in return for chemicals.
Licensing and Franchising
Licensing: Contractual agreement allowing one firm to produce and market another's product using their brand name for a royalty.
Advantage: Simple method for expanding into a foreign market with little investment.
Disadvantages: Potential damage to product image if licensee doesn't maintain standards; limited foreign marketing experience for the original producer.
Example: Yoplait yogurt, licensed for production in the United States.
Franchising: Contractual arrangement to operate facilities (typically stores) on behalf of another.
Example: Dunkin’ restaurants in 36 countries + the U.S..
Contract Manufacturing
Contract manufacturing: Firm contracts with another business (often in another country) to manufacture products to its specifications.
Can lower consumer prices.
Outsourcing: Contracting manufacturing or other activities to a firm in another country that specializes in those activities.
Controversial due to job losses and human rights concerns.
Example: H&M contracts with companies in 40 countries to produce clothing and identifies the factory producing each item.
Joint Ventures and Alliances
Joint venture: Partnership formed for a specific goal or period.
Advantage: Immediate market knowledge and access, reduced risk, and control over product attributes.
Disadvantages: Risky due to agreements across national borders; requires high-level commitment.
Strategic alliance: Partnership to create competitive advantage on a worldwide basis.
Example: NUMMI (Toyota and General Motors).
Direct Investment
Provides complete operational control but carries greater risk.
Forms:
Building or purchasing facilities in a foreign country to produce and market established products.
Purchasing an existing firm in a foreign country to operate independently.
Multinational corporation: Firm that operates worldwide without ties to any specific nation.
Examples: General Motors and Colgate-Palmolive (worldwide manufacturing), Sony Corporation purchasing Columbia Pictures.
3-3 International Business Challenges
Trade Restrictions
Tariff: Tax on a particular foreign product entering a country.
Revenue tariffs: Generate income for the government.
Protective tariffs: Protect a domestic industry from competition.
Dumping: Exporting a product at a price lower than in the home market.
Nontariff Barriers
Nontariff barrier: A nontax measure to favor domestic over foreign suppliers.
Import quota: Limit on the amount of a particular good that may be imported.
Embargo: Complete halt to trading with a particular nation or product.
Exchange control: Restriction on the amount of foreign currency that can be purchased or sold.
Currency devaluation: Reduction of the value of a nation’s currency relative to others.
Reasons For and Against Trade Restrictions
Reasons for: Equalize balance of payments, protect new industries, protect national security and health, retaliate against other nations, protect domestic jobs.
Reasons against: Higher prices for consumers, restricted choices, misallocation of resources, loss of jobs.
Economic Challenges
Differences in standards of living, income, resources, and infrastructure.
Currency value fluctuations can affect profits.
Developing countries may have less reliable infrastructure.
Legal and Political Climate
Laws, regulations, political systems, and special-interest groups impact international business.
Rules (e.g., privacy, bribery) may differ.
Social and Cultural Barriers
Differences in religion, values, customs, social systems, and language affect communications and perceptions.
Cultural barriers can impede product acceptance.
3-6 Financing International Business
Financial Assistance
Available from U.S. government and international sources.
U.S. Small Business Administration: Up to 5 million in short-term loans and up to 500,000 in export development financing for small businesses.
Other sources: Multilateral development banks, Export-Import Bank, and the International Monetary Fund.
Export-Import Bank of the United States: Independent agency assisting in financing American exports.
Created in 1934.
In 2019, nearly 90 percent of the Bank’s transactions supported small businesses.
The World Bank
Multilateral development bank (MDB): Internationally supported bank providing loans to developing countries.
Examples: World Bank, Inter-American Development Bank, Asian Development Bank, African Development Bank, European Bank for Reconstruction and Development.
World Bank: Cooperative banking institution with 189 member countries.
Loans and grants from MDBs:
supply safe drinking water
build schools and train teachers
increase agricultural productivity
expand citizens’ access to markets, jobs, and housing
improve healthcare and access to water and sanitation
manage forests and other natural resources
build and maintain roads, railways, and ports, and reduce air pollution and protect the environment
The International Monetary Fund
International Monetary Fund (IMF): International bank making short-term loans to developing countries with balance-of-payment deficits.
Main goals:
Promote international monetary cooperation
Facilitate the expansion and balanced growth of international trade
Promote exchange rate stability
Assist in establishing a multilateral system of payments
Make resources available to members experiencing balance-of-payment difficulties.