Global Business Notes

3-1 The Basis for International Business

• 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

1. Identify exportable products
   • Identify key selling features and needs they satisfy.
   • Identify selling constraints.
2. 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.
3. Analyze how to sell in each priority market
   • Locate available government and private-sector resources.
   • Determine service and backup sales requirements.
4. 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).
5. Estimate resource requirements and returns
   • Establish financial and human resources requirements.
   • Estimate plant production capacity and determine necessary product adaptations.
6. 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).
7. 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.
8. 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.
9. 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.