Global Business
Learning Objectives
Explain the economic bases for and importance of international business.
Explore the methods by which a firm can organize for and enter into international markets.
Discuss the challenges businesses face when entering international markets, especially the restrictions nations place on international trade.
Identify the facilitators of international trade, including international trade agreements and international economic organizations working to foster trade.
Describe sources of export assistance.
Identify institutions that can help businesses and nations finance international business.
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 and Importing
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
Balance of trade: The total value of a nation’s exports minus the total value of its imports over a specified period of time.
Trade deficit: A negative balance of trade.
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 of time.
Includes: Imports and exports, investment money spent by foreign tourists, payments by foreign governments, aid to foreign governments, all other receipts and payments.
Key Trading Regions
Canada and Western Europe: Strong economic relationships due to stability, similar per capita incomes, and growing economies; The U.S.–Canada economic relationship is the most efficient, most integrated, and most dynamic in the world, generating billion in bilateral trade in 2019. The European Union's nearly million residents make its member countries attractive trading partners, generating an estimated trade in goods of more than billion in 2020.
Mexico and Latin America: Trade expected to grow as trade barriers ease.
Asia: Japan and China remain strong trading partners, and India’s vast market promises continued strong demand for goods and services; Japan is the world’s third largest economy and the United States’ fourth largest trading partner. China has grown to be the world’s second largest economy, and the United States shares more than half a trillion dollars in annual bilateral trade.
Africa: Companies are increasingly looking for opportunities in these growing economies, whose residents are younger than average and have growing disposable incomes; U.S. trade to and from Africa has tripled over the past decade, and U.S. exports to this region exceed billion.
Middle East/ North Africa: Vast natural resources and growing per capita incomes make the region desirable to companies, despite political instability.
Methods of Entering International Business
Steps in Entering International Markets
Identify exportable products: Identify key selling features, needs they satisfy, and selling constraints.
Identify key foreign markets for the products: Determine who the customers are, what and 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 (methods will be affected by product characteristics and unique features of country/market).
Set export prices and payment terms, methods, and techniques: Establish methods of export pricing; establish 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 (full- or part-time export department or operation); estimate plant production capacity; 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 or ocean freight, truck, rail); finalize containerization; obtain validated export license; 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, and how often?); initiate customer follow-up procedures.
Continuously analyze current marketing, economic, and political situations: Recognize changing factors influencing marketing strategies; constantly re-evaluate.
Exporting
A firm manufactures products in its home country and exports them for sale in foreign markets.
The exporting firm may sell its products outright to an export-import merchant (merchant wholesaler).
The exporting firm may ship its products to an export-import agent, who arranges the sale of the products to foreign intermediaries for a commission or fee.
An exporting firm may also establish its own sales offices/branches in foreign countries.
Advantage: Relatively low-risk method of entering foreign markets.
Disadvantage: It is not a simple method.
Exporting Payment Process
The importer asks its local bank to issue a letter of credit for the funds needed to pay for the merchandise after signing contracts.
The transporter of the merchandise provides the exporter evidence of the shipment via a bill of lading.
The exporter signs over title to the merchandise and issues a draft from its bank, which orders the importer’s bank to pay for the merchandise.
Key Documents
Letter of credit: Issued by a bank on request of an importer stating that the bank will pay an amount of money to a stated beneficiary.
Bill of lading: Document issued by a transport carrier to an exporter to prove that merchandise has been shipped.
Draft: Issued by the exporter’s bank, ordering the importer’s bank to pay for the merchandise, thus guaranteeing payment once accepted by the importer’s bank.
Trading Company
Trading company: Provides a link between buyers and sellers in different countries.
A trading company buys products in one country at the lowest price consistent with quality and sells to buyers in another country.
It takes title to products and performs all the activities necessary to move the products from the domestic country to a foreign country.
Countertrade: An international barter transaction
Example: Philip Morris’s sale of cigarettes to Russia in return for chemicals used to make fertilizers.
Licensing and Franchising
Licensing: A contractual agreement in which one firm permits another to produce and market its product and to use its brand name in return for a royalty or other compensation.
Advantage: Simple method for expanding into a foreign market with virtually no investment.
Disadvantages: If licensee does not maintain licensor’s product standards, the product’s image may be damaged; A licensing arrangement may also not provide the original producer with any foreign marketing experience.
Example: Yoplait yogurt is a French yogurt licensed for production in the United States. The U.S. producer pays Yoplait a percentage of its income from sales of the product.
Franchising is similar in that it is a contractual arrangement for an individual or organization to operate facilities, typically stores, on behalf of another.
Example: Consumers around the world can get donuts, muffins, bagels, and coffee at 3,200 Dunkin’ restaurants in 36 countries, in addition to 8,500 restaurants in the United States.
Contract Manufacturing
Contract manufacturing: An arrangement in which one firm contracts with another business, often in another country, to manufacture products or product components to its specifications.
It can help lower prices of products to consumers.
Outsourcing: An arrangement in which one firm contracts manufacturing or other activities to a firm in another country that specializes in those activities and can offer them at a lower cost than domestic firms.
Controversial as a result of the loss of American jobs (and resulting higher unemployment), as well as to human rights violations that have occurred overseas.
Example: Swedish fast-fashion retailer H&M contracts with hundreds of different companies in 40 countries to produce its trendy clothing. Recently, the firm has begun identifying the company, country, and even factory producing each item of clothing for interested consumers and stakeholders.
Joint Ventures and Alliances
Joint venture: A partnership formed to achieve a specific goal or to operate for a specific period of time.
May be used to produce and market an existing product in a foreign nation or to develop an entirely new product.
Advantage: An established firm in a foreign country can provide immediate market knowledge and access, reduced risk, and control over product attributes.
Disadvantages: Agreements across national borders can be extremely risky; Joint-venture agreements also generally require high-level commitment from involved parties.
Strategic alliance: A partnership formed to create competitive advantage on a worldwide basis.
Example: New United Motor Manufacturing, Inc. (NUMMI), formed by Toyota and General Motors, combines the quality of engineering of Toyota with the marketing expertise and market access of General Motors.
Direct Investment
Provides complete operational control but carries greater risk than a joint venture.
The firm builds or purchases manufacturing and other facilities in a foreign country and uses these facilities to produce its own established products and market them in that country.
A firm purchases an existing firm in a foreign country under an arrangement that allows it to operate independently of the parent company.
Multinational corporation: A firm that operates on a worldwide scale without ties to any specific nation or region.
Example (Method 1): General Motors and Colgate-Palmolive have worldwide manufacturing facilities.
Example (Method 2): When Sony Corporation (a Japanese firm) decided to enter the motion picture business in the United States, it chose to purchase Columbia Pictures Entertainment, Inc., rather than start a new motion picture studio from scratch.
International Business Challenges
Trade Restrictions
TARIFFS
Tariff: A tax levied on a particular foreign product entering a country.
Revenue tariffs are imposed solely to generate income for the government.
Protective tariffs are imposed to protect a domestic industry from competition by keeping the price of competing imports level with or higher than the price of similar domestic products.
Dumping: Exportation of large quantities of a product at a price lower than that of the same product in the home market.
NONTARIFF BARRIERS
Nontariff barrier: A nontax measure imposed by a government to favor domestic over foreign suppliers.
Import quota: A limit on the amount of a particular good that may be imported into a country during a given period of time.
Embargo: A complete halt to trading with a particular nation or of a particular product.
Exchange control: A restriction on the amount of a particular foreign currency that can be purchased or sold.
Currency devaluation: The reduction of the value of a nation’s currency relative to the currencies of other countries.
Reasons For and Against Trade Restrictions
Reasons for Trade Restrictions
To equalize a nation’s balance of payments
To protect new or weak industries
To protect national security
To protect the health of citizens
To retaliate for another nation’s trade restrictions
To protect domestic jobs
Reasons against Trade Restrictions
Higher prices for consumers
Restriction of consumers’ choices
Misallocation of international resources
Loss of jobs
Economic Challenges
Differences in countries’ standards of living, individual income and buying power, national resources, and infrastructure.
Currency value changes can affect profit or loss on an international transaction.
Developing countries may have less reliable infrastructure systems.
Legal and Political Climate
The laws, regulatory agencies, political systems, and special-interest groups within a country all have a great impact on international business.
Rules that Americans take for granted (e.g., privacy, bribery) may differ in other nations.
Social and Cultural Barriers
Differences due to religious institutions, values, customs, social systems, and language can affect communications, negotiations, and perceptions of products and companies.
Cultural barriers can impede acceptance of products in foreign countries.
Financing International Business
Financial Assistance Sources
Financial assistance is available from U.S. government and international sources.
The U.S. Small Business Administration provides up to million in short-term loans to U.S. small business exporters.
The agency also provides small businesses that have exporting potential but need funds to cover initial costs, with up to in export development financing.
Other sources include multilateral development banks, the Export-Import Bank, and the International Monetary Fund.
The Export-Import Bank of the United States
Export-Import Bank of the United States: An independent agency of the U.S. government whose function is to assist in financing the exports of American firms.
The Export-Import Bank of the United States (Ex-Im Bank) was created in 1934.
In 2019, nearly 90 percent of the Bank’s transactions—nearly 2,100—directly supported American small businesses.
The World Bank
Multilateral development bank (MDB): An internationally supported bank that provides loans to developing countries to help them grow.
Includes: World Bank, The Inter-American Development Bank, The Asian Development Bank, The African Development Bank, European Bank for Reconstruction and Development.
World Bank: A cooperative banking institution with 189 member countries.
Loans and grants from MDBs help countries to:
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
reduce air pollution and protect the environment.
In addition to the World Bank, four other MDBs operate primarily in Center and South America, Asia, Africa, and Eastern and Central Europe.
The International Monetary Fund
International Monetary Fund (IMF): An international bank that makes short-term loans to developing countries experiencing 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