Discussion Topic 2
Competing in World Markets http://www.wileybusinessupdates.com
Chapter
4
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Explain why nations trade.
Describe how trade is measured between nations.
Identify the barriers to international trade.
Discuss reducing barriers to international trade.
Explain the decisions to go global.
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Learning Objectives
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3
5
4
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Boosts economic growth
Expands markets
More efficient production systems
Less reliance on the economies of home nations
Exports: Domestically produced goods and services sold in markets in other countries.
Imports: Foreign-made products and services purchased by domestic consumers.
Why Nations Trade
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Decisions to operate abroad depend upon availability, price, and quality of:
Labor
Natural resources
Capital
Entrepreneurship
Companies doing business overseas must make strategic decisions.
International Sources of Factors of Production
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As developing nations expand into the global marketplace, opportunities grow.
Many developing countries have posted high growth rates of annual GDP.
Size of the International Marketplace
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Population Size and Prosperity
Though developing nations generally have lower per capita income, many have strong GDP growth rates and their huge populations can be lucrative markets.
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Top 10 Trading Partners with U.S.
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Absolute advantage: Country can maintain a monopoly or produce at a lower cost than any competitor.
Example: China’s domination of silk production for centuries.
Comparative advantage: Country can supply a product more efficiently and at lower cost than it can supply other goods, compared with other countries.
Example: India’s combination of a highly educated workforce and low wage scale in software development.
Absolute and Comparative Advantage
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Balance of trade: Difference between a nation’s imports and exports.
Balance of payments: Overall flow of money into or out of a country.
Balance of payments surplus = more money into country than out
Balance of payments deficit = more money out of country than in
Measuring Trade Between Nations
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Major U.S. Exports and Imports
U.S. demand for imported goods is partly a reflection of the nation’s prosperity and diversity.
U.S. imports more goods than it exports but exports more services than it imports.
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Currency rates are influenced by:
Domestic economic and political conditions
Central bank intervention
Balance-of-payments position
Speculation over future currency values
Values fluctuate, or “float,” depending on supply and demand.
National governments can deliberately influence exchange rates.
Business transactions are usually conducted in currency of the region where they happen.
Rates can quickly create or wipe out competitive advantage.
Exchange Rates
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Barriers to International Trade
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Language: Potential problems include mistranslation, inappropriate messaging, lack of understanding of local customs, and differences in taste.
Values and Religious Attitudes: Differing values about business efficiency, employment levels, importance of regional differences, and religious practices, holidays, and values about issues such as interest-bearing loans.
Economics: A country’s size, per-capita income, and stage of economic development are factors to consider before embarking on an international business venture.
Social, Cultural, and Economic Differences
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Political Climate
Stability is a key consideration.
Legal Environment
U.S. law
International regulations
Country’s law
Climate of corruption. Foreign Corrupt Practices Act forbids U.S. companies from bribing foreign officials, candidates, or government representatives.
International Regulations
Treaties between U.S. and other nations.
Tariffs are taxes charged on imported goods.
Enforcement problems, as with piracy.
Political and Legal Differences
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Government Corruption
Transparency International produces an annual corruption index for businesspeople and the general public.
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Tariffs - taxes, surcharges, or duties on foreign products.
Tariffs generate income for the government.
Protective tariffs raise prices of imported goods to level the playing field for domestic competitors.
Nontariff Barriers - also called administrative trade barriers
Quotas limit the amount of a product that can be imported over a specified time period.
Dumping is the act of selling a product abroad at a very low price.
An embargo imposes a total ban on importing a specified product.
Types of Trade Restrictions
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The world is moving toward more free trade.
There are many communities and groups that monitor and promote trade
International Economic Communities reduce trade barriers and promote regional economic cooperation.
Free-trade area: Members trade freely among selves without tariffs or trade restrictions.
Customs union: Establishes a uniform tariff structure for members’ trade with nonmembers.
Common market: Members bring all trade rules into agreement.
Reducing Barriers to Trade
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General Agreement on Tariffs and Trade (GATT)
Most industrialized nations found organization in 1947 to reduce tariffs and relax quotas.
The World Trade Organization succeeded GATT
Representatives from 153 countries
Reduce tariffs and promote trade
Funds projects to build and expand infrastructure in developing countries
International Monetary Fund (IMF)
Operates as lender to troubled nations in an effort to promote trade
Organizations Promoting International Trade
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North American Free Trade Agreement (NAFTA)
World’s largest free-trade zone: United States, Canada, Mexico.
U.S. and Canada are each other’s biggest trading partners.
Central America-Dominican Republic Free Trade Agreement (CAFTA)
Free-trade zone among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
$40 billion traded annually between U.S. and these countries.
Best-known example of a common market.
Goals include promoting economic and social progress, introducing European citizenship as complement to national citizenship, and giving EU a significant role in international affairs.
International Economic Communities
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Determining which foreign market(s) to enter
Analyzing the expenditures required to enter a new market
Deciding the best way to organize the overseas operations
Going Global
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International Trade Research
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Risk increases with the level of involvement
Many companies employ multiple strategies
Exporting and importing are entry-level strategies
Importing is the process of bringing in goods produced abroad.
Exporting is the act of selling your goods overseas.
Levels of International Involvement
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Subcontracting involves hiring local firms to distribute, produce, or sell goods and services.
Contractual Agreements
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The ultimate level of global involvement is direct investment.
Directly operating production and marketing in foreign country
Acquisition
Joint ventures
Overseas division
Direct Investment
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Multinational corporation (MNC) - An organization with significant foreign operations and marketing activities outside its home country.
Multinational Corporations
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