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Business in a Borderless World

Chapter 3

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Learning Objectives

3-1 Explore some of the factors within the international trade environment that influence business.

3-2 Investigate some of the economic, legal, political, social, cultural, and technological barriers to international business.

3-3 Specify some of the agreements, alliances, and organizations that may encourage trade across international boundaries.

3-4 Summarize the different levels of organizational involvement in international trade.

3-5 Contrast two basic strategies used in international business.

3-6 Assess the opportunities and problems facing a small business that is considering expanding into international markets.

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The Role of International Business 1

International Business

Buying, selling, and trading of goods and services across national boundaries

Why Nations Trade

Absolute advantage

Comparative advantage

Outsourcing

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International business refers to the buying, selling, and trading of goods and services across national boundaries. Falling political barriers and new technology are making it possible for more and more companies to sell their products overseas as well as at home. And, as differences among nations continue to narrow, the trend toward the globalization of business is becoming increasingly important.

Some nations have a monopoly on the production of a particular resource or product. Such a monopoly, or absolute advantage, exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item.

Most international trade is based on comparative advantage, which occurs when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items.

Other countries, particularly India and Ireland, are also gaining a comparative advantage over the United States in the provision of some services, such as call-center operations, engineering, and software programming. As a result, U.S. companies are increasingly outsourcing, or transferring manufacturing and other tasks to countries where labor and supplies are less expensive. Outsourcing has become a controversial practice in the United States because many jobs have moved overseas where those tasks can be accomplished for lower costs.

Outsourcing

Many companies choose to outsource manufacturing to factories in Asia due to lower costs of labor.

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The Role of International Business 2

Trade between Countries

Exporting

Importing

Balance of Trade

Trade deficit

Balance of payments

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To obtain needed goods and services and the funds to pay for them, nations trade by exporting and importing. Exporting is the sale of goods and services to foreign markets. Importing is the purchase of goods and services from foreign sources. Many of the goods you buy in the United States are likely to be imports or to have some imported components.

A nation’s balance of trade is the difference in value between its exports and imports. Because the United States (and some other nations as well) imports more products than it exports, it has a negative balance of trade, or trade deficit. Of course, when a nation exports more goods than it imports, it has a favorable balance of trade, or trade surplus.

The difference between the flow of money into and out of a country is called its balance of payments. A country’s balance of trade, foreign investments, foreign aid, loans, military expenditures, and money spent by tourists comprise its balance of payments.

Table 3.1 U.S. Trade Deficit (in billions of dollars)

	1990	2000	2010	2011	2012	2013	2014	2015	2016	2017
Exports	535.2	1,075.3	1,853.6	2,127.0	2,219.0	2,279.9	2,343.2	2,230.3	2,212.1	2,427
Imports	616.1	1,447.8	2,348.3	2,675.6	2,755.8	2,758.3	2,851.5	2,712.6	2,712.6	2,900
Trade surplus/ deficit

Source: U.S. Bureau of the Census, Foreign Trade Division, “U.S. Trade in Goods and Services—Balance of Payments (BOP) Basis,” March 7, 2018 www.census.gov/foreigntrade/statistics/historical/gands.pdf (accessed April 1, 2018).

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Table 3.1 shows the overall trade deficit for the United States, which is currently around $502 million. The trade deficit fluctuates according to such factors as the health of the United States and other economies, productivity, perceived quality, and exchange rates. Trade deficits are harmful because they can mean the failure of businesses, the loss of jobs, and a lowered standard of living.

Figure 3.1 U.S. Exports to China (millions of U.S. dollars)

Source: U.S. Census Bureau, “Trade in Goods with China,” https://www.census.gov/foreign-trade/balance/c5700.html (accessed April 7, 2018).

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U.S. exports to China rapidly increased, as Figure 3.1 indicates, but not fast enough to offset the imports from China.

International Trade Barriers 1

Economic Barriers

Economic development

Industrialized nations

Less-developed countries

Infrastructure

Physical facilities that support that support activities such as:

Railroads, highways, ports, airfields, utilities, power plants, schools, hospitals, communication systems, and commercial distribution systems

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Completely free trade seldom exists. When a company decides to do business outside its own country, it will encounter a number of barriers to international trade.

When considering doing business abroad, U.S. businesspeople need to recognize that they cannot take for granted that other countries offer the same things as are found in industrialized nations—economically advanced countries such as the United States, Japan, Great Britain, and Canada. Many countries in Africa, Asia, and South America, for example, are in general poorer and less economically advanced than those in North America and Europe; they are often called less-developed countries (LDCs).

A country’s level of development is determined in part by its infrastructure, the physical facilities that support its economic activities, such as railroads, highways, ports, airfields, utilities and power plants, schools, hospitals, communication systems, and commercial distribution systems.

International Trade Barriers 2

Economic Barriers continued

Exchange rates

Vary daily and affect the cost of imports and exports

U.S. dollar is most frequently used in international trade, with 81% of all trade financed in U.S. dollars

Governments may intentionally alter the value of their currencies through fiscal policy

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The ratio at which one nation’s currency can be exchanged for another nation’s currency is the exchange rate. Exchange rates vary daily and can be found in newspapers and through many sites on the Internet. Familiarity with exchange rates is important because they affect the cost of imports and exports.

Occasionally, a government may intentionally alter the value of its currency through fiscal policy. Devaluation decreases the value of currency in relation to other currencies. If the U.S. government were to devalue the dollar, it would lower the cost of American goods abroad and make trips to the United States less expensive for foreign tourists.

Revaluation increases the value of a currency in relation to other currencies, but occurs rarely.

International Trade Barriers 3

Ethical, Legal, and Political Barriers

Laws and regulations

Differ in other countries

Restrictions on currency

Some countries fail to honor U.S. laws may be less strict than the U.S.

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The United States has a number of laws and regulations that govern the activities of U.S. firms engaged in international trade and has a variety of friendship, commerce, and navigation treaties with other nations. These treaties allow business to be transacted between U.S. companies and citizens of the specified countries. Some countries have strict laws limiting the amount of local currency that can be taken out of the country and the amount of currency that can be brought in; others limit how foreign companies can operate within the country. Some countries have copyright and patent laws that are less strict than those of the United States, and some countries fail to honor U.S. laws.

International Trade Barriers 4

Ethical, Legal, and Political Barriers continued

Tariffs and trade restrictions

Import tariffs

Exchange controls

Quota

Embargo

Dumping

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Tariffs and other trade restrictions are part of a country’s legal structure but may be established or removed for political reasons. An import tariff is a tax levied by a nation on goods imported into the country. A fixed tariff is a specific amount of money levied on each unit of a product brought into the country, while an ad valorem tariff is based on the value of the item. Countries sometimes levy tariffs for political reasons, as when they impose sanctions against other countries to protest their actions. However, import tariffs are more commonly imposed to protect domestic products by raising the price of imported ones.

Exchange controls restrict the amount of currency that can be bought or sold. Some countries control their foreign trade by forcing businesspeople to buy and sell foreign products through a central bank. When foreign currency is in short supply, as it is in many LDCs, the government uses foreign currency to purchase necessities and capital goods and produces other products locally, thus limiting its need for foreign imports.

A quota limits the number of units of a particular product that can be imported into a country. A quota may be established by voluntary agreement or by government decree.

An embargo prohibits trade in a particular product. Embargoes are generally directed at specific goods or countries and may be established for political, economic, health, or religious reasons.

One common reason for setting quotas or tariffs is to prohibit dumping, which occurs when a country or business sells products at less than what it costs to produce them. Dumping is relatively difficult to prove, but even the suspicion of dumping can lead to the imposition of quotas or tariffs.

POLLING QUESTION

A government may impose a(n) _____ on imported goods, thereby increasing their cost to the consumer and pressuring them to buy domestic products.

Embargo

Tariff

Quota

Exchange Limit

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Answer: B. Tariff

Tariffs are taxes imposed on imports. Consider the recent discussion of the tariffs that Canada charged American Dairy Farmers. Thus making dairy imported from the U.S. into Canada significantly more expensive than the dairy products produced in Canada.

International Trade Barriers 5

Ethical, Legal, and Political Barriers continued

Political barriers

Seldom in writing

Change rapidly

Cartels

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Unlike legal issues, political considerations are seldom written down and often change rapidly. Businesses engaged in international trade must consider the relative instability of countries such as Iraq, Ukraine, and Venezuela. Political unrest in countries such as Pakistan, Somalia, and the Democratic Republic of the Congo may create a hostile or even dangerous environment for foreign businesses.

Political concerns may lead a group of nations to form a cartel, a group of firms or nations that agrees to act as a monopoly and not compete with each other, to generate a competitive advantage in world markets. Probably the most famous cartel is OPEC, the Organization of Petroleum Exporting Countries, founded in the 1960s to increase the price of petroleum throughout the world and to maintain high prices.

Political Barriers

Political instability in many nations has led to an influx of refugees. The potential for political turmoil is a substantial risk businesses face when expanding overseas.

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International Trade Barriers 6

Social and Cultural Barriers

Differences in spoken and written language

Differences in body language and personal space

Family roles differ in different societies

Perceptions of time differ in other nations

National and religious holidays and customs must be respected

Most nations use the metric system

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Most businesspeople engaged in international trade underestimate the importance of social and cultural differences; but these differences can derail an important transaction. Cultural differences include differences in spoken and written language. Although it is certainly possible to translate words from one language to another, the true meaning is sometimes misinterpreted or lost.

Differences in body language and personal space also affect international trade. Body language is nonverbal, usually unconscious communication through gestures, posture, and facial expression. Personal space is the distance at which one person feels comfortable talking to another.

Family roles also influence marketing activities. Many countries do not allow children to be used in advertising, for example.

People of other nations often have a different perception of time. Americans value promptness but others may see nothing wrong with starting a meeting a half hour late.

Companies engaged in foreign trade must observe the national and religious holidays and local customs of the host country. In many Islamic countries, for example, workers expect to take a break at certain times of the day to observe religious rites.

With the exception of the United States, most nations use the metric system. This lack of uniformity creates problems for both buyers and sellers in the international marketplace.

Table 3.3 Cultural Behavioral Differences

Country	Gestures Viewed as Rude or Unacceptable
Japan, Hong Kong, Middle East	Summoning with the index finger
Middle and Far East	Pointing with index finger
Thailand, Japan, France	Sitting with soles of shoes showing
Brazil, Germany	Forming a circle with fingers (the “O.K.” sign in the United States)
Japan	Winking means “I love you”
Buddhist countries	Patting someone on the head

Source: Adapted from Judie Haynes, “Communicating with Gestures,” EverythingESL (n.d.), www.everythingesl.net/inservices/body_language.php (accessed April 7, 2017).

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International Trade Barriers 7

Technological Barriers

Lack of technological infrastructure can create opportunities for business

Technological advances also create global marketing opportunities

Changing technologies also create new challenges and competition

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Many countries lack the technological infrastructure found in the United States, and some marketers are viewing such barriers as opportunities. For instance, marketers are targeting many countries such as India and China and some African countries where there are few private phone lines. Citizens of these countries are turning instead to wireless communication through cell phones. Technological advances are creating additional global marketing opportunities. Along with opportunities, changing technologies also create new challenges and competition.

POLLING QUESTION

EverythingBaby is a producer of baby formula and has formed an advisory committee to determine the benefits of exporting to the Nigerian market. In your opinion, what is the most important factor they should take into consideration before taking action?

Cost

Place

Location

Culture

Government regulation

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Student answers will vary. Students will most likely discuss how all of these considerations are important when determining if a product should be exported abroad. They may also discuss the pros and cons of exporting to a country that may not be familiar with these types of products. For example, in the early 1980s, Gerber began selling their baby food in regions of southern Africa only to find out too late that many of the inhabitants were not able to read. Many products used pictures to help consumers understand what was inside a package. Gerber, not realizing this, had the picture of the baby on the outside of their baby food jars. Consumers were very disturbed that Gerber was selling “baby” in their food jars.

Students should consider the following points.

Cost: Is EverythingBaby able to produce, export, market, and sell its formula in the Nigerian marketplace yet still generate a healthy profit margin?

Location: Are there stores where the food can be stored at room temperature before it is purchased? Does Nigeria have the infrastructure to meet EverythingBaby’s needs? Such as well-maintained roads and transportation companies to provide the timely delivery of EverythingBaby’s goods?

Marketing: Will the people of Nigeria understand the benefits of prepackaged baby food?

Culture: Do the people of Nigeria traditionally make their own baby food? What are Nigerian’s perception of Western foods?

Government regulations: Is the Rule of Law thoroughly entrenched in Nigeria? Will EverythingBaby be forced to pay bribes to government officials to be allowed to sell in certain locales? Will government authorities provide redress in the advent of the theft of a truckload of EverythingBaby formula?

Trade Agreements, Alliances, and Organizations 1

General Agreement on Tariffs and Trade (GATT)

Signed by 23 nations in 1947

Provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved

The World Trade Organization (WTO)

Created in 1995 by the Uruguay Round

International organization dealing with rules of trade between nations

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Although these economic, political, legal, and sociocultural issues may seem like daunting barriers to international trade, there are also organizations and agreements— such as the General Agreement on Tariffs and Trade, the World Bank, and the International Monetary Fund—that foster international trade and can help companies get involved in and succeed in global markets.

The General Agreement on Tariffs and Trade (GATT), originally signed by 23 nations in 1947, provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved. More than 100 nations abided by its rules. GATT sponsored rounds of negotiations aimed at reducing trade restrictions. The most recent round, the Uruguay Round (1988–1994), further reduced trade barriers for most products and provided new rules to prevent dumping.

The World Trade Organization (WTO), an international organization dealing with the rules of trade between nations, was created in 1995 by the Uruguay Round. Key to the World Trade Organization are the WTO agreements, which are the legal ground rules for international commerce.

Trade Agreements, Alliances, and Organizations 2

The North American Free Trade Agreement (NAFTA)

Went into effect January 1, 1994

Virtually eliminated all tariffs on goods produced and traded among Canada, Mexico, and United States

Despite its benefits, NAFTA has been controversial

A positive factor for U.S. firm’s wanting to engage in international marketing

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The North American Free Trade Agreement (NAFTA), which went into effect on January 1, 1994, effectively merged Canada, the United States, and Mexico into one market of nearly 450 million consumers. NAFTA virtually eliminated all tariffs on goods produced and traded among Canada, Mexico, and the United States to create a free trade area.

Despite its benefits, NAFTA has been controversial, and disputes continue to arise over the implementation of the trade agreement. While many Americans feared the agreement would erase jobs in the United States, Mexicans have been disappointed that the agreement failed to create more jobs. More recently, NAFTA is being reviewed and new agreements are being renegotiated. The United States is concerned about protecting the U.S. border with Mexico and their concerns about benefits and fairness in the agreement.

Although NAFTA has been controversial, it has become a positive factor for U.S. firms wishing to engage in international marketing. Because licensing requirements have been relaxed under the pact, smaller businesses that previously could not afford to invest in Mexico and Canada will be able to do business in those markets without having to locate there.

POLLING QUESTION

A new trade agreement was recently formed between the United States, Canada, and Mexico, replacing NAFTA. What is the name of this new trade agreement?

MNAFTA-18 (Modified North American Free Trade Agreement-2018)

MDCC (Mira-Dulco-Colase Compromise)

TNT-FTA (Trump-Nieto-Trudeau Free Trade Agreement)

USMCA (United States-Mexico-Canada Agreement)

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Answer: D. USMCA

In October 2018, President Trump signed a new trade agreement with Mexico and Canada to replace NAFTA called the United States-Mexico-Canada Agreement.

Trade Agreements, Alliances, and Organizations 3

The European Union (EU)

A union of European nations established in 1958 to promote trade among its members

Working toward standardization of business regulations and requirements and the creation of a standardized currency for use by all members

Enactment of strict antitrust laws

Brexit

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The European Union (EU), also called the European Community or Common Market, was established in 1958 to promote trade among its members.

To facilitate free trade among members, the EU is working toward standardization of business regulations and requirements, import duties, and value-added taxes; the elimination of customs checks; and the creation of a standardized currency for use by all members. Although the common currency requires many marketers to modify their pricing strategies and will subject them to increased competition, the use of a single currency frees companies that sell goods among European countries from the nuisance of dealing with complex exchange rates.

The EU has also enacted some of the world’s strictest laws concerning antitrust issues, which have had unexpected consequences for some non-European firms. The European Parliament is also encouraging the breakup of Google’s search engine business from its other businesses.

In 2016, the United Kingdom voted to exit the European Union. This decision to exit, called “Brexit,” resulted in the value of the pound falling sharply. There remain many questions about the impact of the proposed exit on trade relationships with other countries.

Trade Agreements, Alliances, and Organizations 4

Asia-Pacific Economic Cooperation (APEC)

An alliance of 21 member countries, established in 1989, representing approximately 40% of the World’s population

Differs from other international trade alliances regarding the business and private sectors

APEC companies increasingly competitive

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The Asia-Pacific Economic Cooperation (APEC), established in 1989, promotes open trade and economic and technical cooperation among member economies. The 21-member alliance represents approximately 40 percent of the world’s population, 54 percent of the world’s GDP, and nearly 44 percent of global trade.56 APEC differs from other international trade alliances in its commitment to facilitating business and its practice of allowing the business/private sector to participate in a wide range of APEC activities.

Companies of the APEC have become increasingly competitive and sophisticated in global business in the past three decades. The Japanese and South Koreans, in particular, have made tremendous inroads on world markets for automobiles, cameras, and audio and video equipment.

The People’s Republic of China, a country of more than 1.3 billion people, has launched a program of economic reform to stimulate its economy by privatizing many industries, restructuring its banking system, and increasing public spending on infrastructure. China’s export market has consistently outpaced its import growth in recent years and its GDP represents the world’s second-largest economy, behind the United States. Increased industrialization has also caused China to become the world’s largest emitter of greenhouse gases. China has overtaken the United States to become the world’s largest oil importer. Another risk area for China is the fact that the government owns or has stakes in so many enterprises.

Trade Agreements, Alliances, and Organizations 5

Association of Southeast Asian Nations (ASEAN)

Established in 1967

Promotes trade and economic integration among member nations in Southeast Asia

Goals include the promotion of free trade, peace, and collaboration between members

ASEAN faces challenges in becoming a unified trade bloc

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The Association of Southeast Asian Nations (ASEAN), established in 1967, promotes trade and economic integration among member nations in Southeast Asia. The 10-member alliance represents 600 million people with a GDP of $2.4 trillion.67 ASEAN’s goals include the promotion of free trade, peace, and collaboration between its members.

However, ASEAN is facing challenges in becoming a unified trade bloc. Unlike members of the EU, the economic systems of ASEAN members are quite different, with political systems including democracies (Philippines and Malaysia), constitutional monarchies (Cambodia), and communism (Vietnam). Major conflicts have also occurred between member-nations.

Unlike the EU, ASEAN will not have a common currency or fully free labor flows between member-nations.

Trade Agreements, Alliances, and Organizations 6

World Bank

Established by industrialized nations in 1946 to loan money to underdeveloped and developing countries

International Monetary Fund (IMF)

Established in 1947 to promote trade among member-nations by eliminating trade barriers and fostering financial cooperation

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The World Bank, more formally known as the International Bank for Reconstruction and Development, was established by the industrialized nations, including the United States, in 1946 to loan money to underdeveloped and developing countries. The International Development Association and the International Finance Corporation are associated with the World Bank and provide loans to private businesses and member countries.

The International Monetary Fund (IMF) was established in 1947 to promote trade among member-nations by eliminating trade barriers and fostering financial cooperation. It also makes short-term loans to member countries that have balance-of-payment deficits and provides foreign currencies to member nations. The IMF is the closest thing the world has to an international central bank.

POLLING QUESTION

You recently come into a large inheritance and decided you want to own a restaurant in Milan, Italy. Several of your Italian family members live in the city, and they are willing to help navigate the unfamiliar terrain. You are decided whether you should buy into a franchise or partner with someone local to Milan. Which option would you choose and what is the most important factor in your decision?

A franchise, because it provides a pre-established business model and brand recognition.

A local partnership, because it allows you to retain more control of the business.

A franchise, because it provides less risk.

A local partnership, because it allows you to retain more business profits.

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Student answers will vary. This question will lead to a good discussion about the advantages and disadvantages of owning a franchise vs. a joint venture. Students should consider the following points.

A./C. Franchises

Benefits:

Less risky than a joint venture

Corporate marketing

Name recognition

Established supply chain for your food

Drawbacks:

Potentially significant startup cost to purchase into a franchise

Reoccurring franchisee fee

B./D. Local Partnership

Benefits:

No franchisee startup cost or reoccurring franchisee fee

Greater control of the company

No requirements other than those mandated by the government on location of your business

Drawbacks:

Must establish name recognition

Do not have a guideline for the permitting process

Getting Involved in International Business 1

Exporting and Importing

Countertrade agreements

Trading Companies

Buys goods in one country and sells them to buyers in another country

Licensing and Franchising

Enable a company to enter international marketplace without spending large sums of money or hiring or transferring personnel

Businesses may get involved in international trade at many levels. Many companies first get involved in international trade when they import goods from other countries for resale in their own businesses or may get involved in exporting when it is called upon to supply a foreign company with a particular product.

Exporting sometimes takes place through countertrade agreements, which involve bartering products for other products instead of for currency. Such arrangements are fairly common in international trade, especially between Western companies and eastern European nations. An estimated 40 percent or more of all international trade agreements contain countertrade provisions. Export agents are middlemen that help companies by handling their international transactions.

A trading company buys goods in one country and sells them to buyers in another country. Trading companies handle all activities required to move products from one country to another, including consulting, marketing research, advertising, insurance, product research and design, warehousing, and foreign exchange services to companies interested in selling their products in foreign markets.

Licensing is a trade arrangement in which one company—the licensor—allows another company—the licensee—to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee or royalty.

Franchising is a form of licensing in which a company—the franchiser—agrees to provide a franchisee the name, logo, methods of operation, advertising, products, and other elements associated with the franchiser’s business, in return for a financial commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations.

Figure 3.2 Top Exporting Countries (in billions of $)

Source: Central Intelligence Agency, “Country Comparison: Exports,” https://www.cia.gov/library/ publications/the-world-factbook/ rankorder/2078rank.html (accessed April 2, 2017).

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Table 3.4 Top 10 Global Franchises

Ranking	Franchise
1	McDonald’s
2	KFC
3	Burger King
4	Pizza Hut
5	7 Eleven
6	Marriott International
7	RE/MAX
8	Dunkin’ Donuts
9	InterContinental Hotels and Resorts
10	Subway

Source: “Top 100 Global Franchises – Rankings (2018),” Franchise Direct, https://www.franchisedirect.com/top100globalfranchises/rankings/ (accessed April 1, 2018).

Getting Involved in International Business 2

Contract Manufacturing

When a firm hires a foreign company to produce a specified volume of the firm’s product to specification

Final product carries the domestic firm’s name

Outsourcing

Transferring manufacturing or other tasks where labor and supplies are less expensive

Insourcing—foreign companies transfer tasks to U.S. companies

Contract manufacturing occurs when a company hires a foreign company to produce a specified volume of the firm’s product to specification; the final product carries the domestic firm’s name.

Earlier, we defined outsourcing as transferring manufacturing or other tasks (such as information technology operations) to companies in countries where labor and supplies are less expensive. Many U.S. firms have outsourced tasks to India, Ireland, Mexico, and the Philippines.

Although outsourcing has become politically controversial in recent years amid concerns over jobs lost to overseas workers, foreign companies transfer tasks and jobs to U.S. companies—sometimes called insourcing—far more often than U.S. companies outsource tasks and jobs abroad.

Getting Involved in International Business 3

Offshoring

Relocation of a business process by a company, or a subsidiary, to another country

Joint Ventures and Alliances

Joint venture: finding a local partner to share costs and operations of the business

Strategic alliance: partnerships formed to create a competitive advantage on a worldwide basis

Offshoring is the relocation of a business process by a company, or a subsidiary, to another country. Offshoring is different than outsourcing: the company retains control of the process because it is not subcontracting to a different company.

Many countries, particularly LDCs, do not permit direct investment by foreign companies or individuals. A company may also lack sufficient resources or expertise to operate in another country. In such cases, a company that wants to do business in another country may set up a joint venture by finding a local partner (occasionally, the host nation itself) to share the costs and operation of the business.

In some industries, such as automobiles and computers, strategic alliances are becoming the predominant means of competing. A strategic alliance is a partnership formed to create competitive advantage on a worldwide basis. In such industries, international competition is so fierce and the costs of competing on a global basis are so high that few firms have the resources to go it alone, so they collaborate with other companies.

Getting Involved in International Business 4

Direct Investment

Ownership of overseas facilities

Multinational corporation (MNC)

Operates on a worldwide scale without significant ties to any one nation or region

Companies that want more control and are willing to invest considerable resources in international business may consider direct investment, the ownership of overseas facilities. Direct investment may involve the development and operation of new facilities or the purchase of all or part of an existing operation in a foreign country.

The highest level of international business involvement is the multinational corporation (MNC), a corporation, such as IBM or ExxonMobil, that operates on a worldwide scale, without significant ties to any one nation or region.

International Business Strategies

Developing Strategies

Multinational strategy

Global strategy (globalization)

Managing the Challenges of Global Business

Managers must meet the challenges of creating and implementing effective and sensitive business strategies for the global marketplace

Companies doing business internationally have traditionally used a multinational strategy, customizing their products, promotion, and distribution according to cultural, technological, regional, and national differences.

More and more companies are moving from this customization strategy to a global strategy (globalization), which involves standardizing products (and, as much as possible, their promotion and distribution) for the whole world, as if it were a single entity.

Before moving outside their own borders, companies must conduct environmental analyses to evaluate the potential of and problems associated with various markets and to determine what strategy is best for doing business in those markets. Failure to do so may result in losses and even negative publicity.

As we’ve pointed out in this chapter, many past political barriers to trade have fallen or been minimized, expanding and opening new market opportunities. Managers who can meet the challenges of creating and implementing effective and sensitive business strategies for the global marketplace can help lead their companies to success.

Solve the Dilemma Global Expansion or Business as Usual? 1

Audiotech Electronics operates a 35,000-square-foot factory with 75 employees

Produces control consoles for TV and radio stations and recording studios

Products used by all major broadcast and cable networks

Newest products allow TV correspondents to simultaneously hear and communicate with their counterparts in different geographic locations

Very successful in meeting its customers needs efficiently

This Solve the Dilemma is taken from Chapter 3, Learning Objective 3-6.

Audiotech Electronics, founded in 1959 by a father and son, currently operates a 35,000-square-foot factory with 75 employees. The company produces control consoles for television and radio stations and recording studios. It is involved in every facet of production—designing the systems, installing the circuits in its computer boards, and even manufacturing and painting the metal cases housing the consoles. The company’s products are used by all the major broadcast and cable networks. The firm’s newest products allow television correspondents to simultaneously hear and communicate with their counterparts in different geographic locations. Audiotech has been very successful meeting its customers’ needs efficiently.

Solve the Dilemma Global Expansion or Business as Usual? 2

Global expansion?

Audiotech sales have historically been strong in the United States

Recently, growth is stagnating

Even though Audiotech is a small family-owned firm, it believes it should evaluate and consider global expansion

Audiotech sales have historically been strong in the United States, but recently, growth is stagnating. Even though Audiotech is a small, family-owned firm, it believes it should evaluate and consider global expansion.

Solve the Dilemma Global Expansion or Business as Usual? 3

Critical Thinking Questions

What are the key issues that need to be considered in determining global expansion?

What are some of the unique problems that a small business might face in global expansion that larger firms would not?

Should Audiotech consider a joint venture? Should it hire a sales force of people native to the countries it enters?

Answers:

1. Audiotech needs to assess whether there is a demand for its products in different countries. It also has to inquire about the existence of entry barriers. The infrastructure of the countries considered must be examined to determine whether it allows for the use of Audiotech’s products. For example, many countries do not have cable networks, and thus could not accommodate a product based on this technology. The level of economic development of the countries could also be an important barrier. For example, television remains essentially a luxury item in some countries.

Legal and political barriers may also exist in countries where television and radio activities are highly regulated. Tariffs and trade restrictions may exist in countries where a business offers the same product as Audiotech.

If the barriers to entry on foreign markets are not too high, then Audiotech has to consider the best way of entering these markets. Knowledge of foreign countries and costs should be factors considered in making this decision.

2. Smaller firms are more likely to find the costs of launching international operations prohibitive. They may find it difficult to finance the research needed to make the first investigations about international market conditions. Business trips abroad may also be too costly. Small businesses may encounter more difficulties in hiring sufficiently skilled personnel to make negotiations abroad. Personnel with foreign language proficiency and past experiences abroad are desirable. It may also be more difficult for small businesses to find local partners. Local companies are less likely to be interested in allying with a small venture than with an established corporation.

3. A joint venture would enable Audiotech to lower the cost of developing its operations abroad. However, it would have to share with its partner the specificities of its technology. Audiotech may be reluctant to have such a partnership for fear of having its knowledge stolen.

Audiotech could hire a sales force of people native to the countries it enters to become more knowledgeable about the local conditions and to overcome the language barrier. However, this solution may be very expensive, and it may be difficult to find the appropriate employees. A better solution may be to rely on export agents who would handle Audiotech’s international transactions.

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Figure 3.1 U.S. Exports to China (millions of U.S. dollars), Text Alternative

The vertical axis shows millions of dollars and the horizontal axis shows years from 2000 to 2017.

In 2000, the U S was exporting roughly 19,000 in exports to China, which rapidly increased to 120,000 by 2013. By 2016, the value of exports to China had decreased to about 118,000 and then grew to 130,000 in 2017. All figures are in millions of dollars.

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Figure 3.2 Top Exporting Countries (in billions of $), Text Alternative

Numbers for top exporting countries are approximate and are listed in billions of dollars. The top three exporting countries are China at 2,200; the United States at 1,600; and Germany at 1,400. Japan follows at 700. France, Hong Kong, the Netherlands, South Korea, the United Kingdom, and Italy all export a value of around 500 billion dollars.

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