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Chapter 3 Global Business

LEARNING OBJECTIVES

3-1 Explain the economic basis for international business.

3-2 Explore the methods by which a firm can organize for and enter into international markets.

3-3 Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results.

3-4 Outline the extent of international business and the economic outlook for trade.

3-5 Discuss international trade agreements and international economic organizations working to foster trade.

3-6 Describe the various sources of export assistance.

3-7 Identify the institutions that help firms and nations finance international business.

The Basis for International Business

International business – all business activities that involve exchanges across national boundaries

Absolute and Comparative Advantage

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 (slide 1 of 3)

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.

FIGURE 3-1 Selected Top Merchandise-Exporting States

Exporting and Importing (slide 2 of 3)

Balance of trade – the total value of a nation’s exports minus the total value of its imports over some period of time

If a country imports more than it exports, its balance of trade is negative and is said to be unfavorable.

Trade deficit – a negative balance of trade

FIGURE 3-2 U.S. International Trade in Goods and Services

Exporting and Importing (slide 3 of 3)

Balance of payments – the total flow of money into a country minus the total flow of money out of that country over some period of time

Includes:

Imports and exports

Investments

Money spent by foreign tourists

Payments by foreign governments

Aid to foreign governments

All other receipts and payments

Licensing

Licensing – a contractual agreement in which one firm permits another to produce and market its product and use its brand name in return for a royalty or other compensation

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.

Advantage:

It provides a simple method for expanding into a foreign market with virtually no investment.

Disadvantages:

If the licensee does not maintain the licensor’s product standards, the product’s image may be damaged.

A licensing arrangement may not provide the original producer with any foreign marketing experience.

Exporting (slide 1 of 3)

A firm may manufacture its products in its home country and export them for sale in foreign markets.

Advantage:

It can be a relatively low-risk method of entering foreign markets.

Disadvantage:

It is not a simple method.

Exporting (slide 2 of 3)

At the most basic level, the exporting firm may sell its products outright to an export-import merchant, which is essentially a merchant wholesaler.

Alternatively, the exporting firm may ship its products to an export-import agent, which arranges the sale of the products to foreign intermediaries for a commission or fee.

An exporting firm may also establish its own sales offices, or branches, in foreign countries.

Exporting (slide 3 of 3)

Exporting to International Markets

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

Joint Ventures

Joint venture – a partnership formed to achieve a specific goal or to operate for a specific period of time

A joint venture may be used to produce and market an existing product in a foreign nation or to develop an entirely new product.

Advantage:

A joint venture with an established firm in a foreign country provides immediate market knowledge and access, reduced risk, and control over product attributes.

Disadvantages:

Joint-venture agreements established across national borders can become extremely risky.

Joint-venture agreements generally require a very high level of commitment from all the parties involved.

Totally Owned Facilities (slide 1 of 2)

Totally owned facilities – a firm’s own production and marketing facilities in one or more foreign nations

Advantage:

The direct investment provides complete control over operations.

Disadvantage:

It carries a greater risk than a joint venture.

Totally Owned Facilities (slide 2 of 2)

Direct investment may take either one of two forms:

The firm builds or purchases manufacturing and other facilities in the foreign country and uses these facilities to produce its own established products and market them in that country.

Example: General Motors and Colgate-Palmolive have worldwide manufacturing facilities.

A firm purchases an existing firm in a foreign country under an arrangement that allows it to operate independently of the parent company.

Example: 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.

Strategic Alliances

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.

Trading Companies

Trading company – provides a link between buyers and sellers in different countries

A trading company is not involved in manufacturing or owning assets related to manufacturing; it 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

Countertrade – an international barter transaction

Example: Philip Morris’s sale of cigarettes to Russia in return for chemicals used to make fertilizers

Multinational Firms

Multinational enterprise – a firm that operates on a worldwide scale without ties to any specific nation or region

TABLE 3-1 The Ten Largest Foreign and U.S. Multinational Corporations

2016 Rank	Company	Business	Country	Revenue ($ millions)
1	Walmart Stores	General Merchandise	United States	482,130
2	State Grid	Power Grids	China	329,601
3	China National Petroleum	Energy	China	299,271
4	Sinopec	Energy	China	294,344
5	Royal Dutch Shell	Energy	Netherlands	272,156
6	ExxonMobil	Energy	United States	246,204
7	Volkswagen	Automobiles	Germany	236,600
8	Toyota	Automobiles	Japan	236,592
9	Apple	Computers/ Office Equipment	United States	233,715
10	BP	Energy	United Kingdom	225,982

TABLE 3-2 Steps in Entering International Markets (slide 1 of 3)

Step	Activity	Marketing Tasks
1	Identify exportable products	Identify key selling features Identify needs that they satisfy Identify the selling constraints that are imposed
2	Identify key foreign markets for the products	Determine who the customers are Pinpoint what and when they will buy Do market research Establish priority, or “target,” countries
3	Analyze how to sell in each priority market (methods will be affected by product characteristics and unique features of country/market)	Located available government and private-sector resources Determine service and backup sales requirements

TABLE 3-2 Steps in Entering International Markets (slide 2 of 3)

Step	Activity	Marketing Tasks
4	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
5	Estimate resources requirements and returns	Establish financial requirements Establish human resources requirements (full- or part-time export department or operation) Estimate plant production capacity 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)

TABLE 3-2 Steps in Entering International Markets (slide 3 of 3)

Step	Activity	Marketing Tasks
7	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
8	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
9	Continuously analyze current marketing, economic, and political situations	Recognize changing factors influencing marketing strategies Constantly re-evaluate

Types of Trade Restrictions (slide 1 of 3)

Tariffs

Import duty (tariff) – a tax levied on a particular foreign product entering a country

Two types of tariffs:

Revenue tariffs – imposed solely to generate income for the government

Protective tariffs – 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

Types of Trade Restrictions (slide 2 of 3)

Nontariff Barriers

Nontariff barrier – a nontax measure imposed by a government to favor domestic over foreign suppliers

Nontariff barriers include:

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 in a particular product

Foreign-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

Types of Trade Restrictions (slide 3 of 3)

Cultural Barriers

Cultural barriers can impede acceptance of products in foreign countries.

Examples: illustrations of feet are regarded as despicable in Thailand; black and white are the colors of mourning in Japan and, thus, should not be used in packaging

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

The Extent of International Business

Restrictions or not, international business is growing.

In the United States, international trade now accounts for over one-fourth of gross domestic product (GDP).

As trade barriers decrease, new competitors enter the global marketplace, creating more choices for consumers and new opportunities for job seekers.

International business will grow along with the expansion of commercial use of the Internet.

The Economic Outlook for Trade (slide 1 of 2)

Canada and Western Europe

The U.S.–Canada economic relationship is the most efficient, most integrated, and most dynamic in the world.

The two nations generated $669.4 billion in bilateral trade in 2015.

More than 96,000 American companies currently export to Canada, and 70 percent of Canada’s exports come to the United States.

The U.S. trade with the European Union (EU) is one of the largest and most complex in the world; generating an estimated goods flow of over $687 billion in 2016, and representing an estimated 30 percent of global trade.

Mexico and Latin America

Latin American exports are growing annually.

The Economic Outlook for Trade (slide 2 of 2)

Japan

Japan is the world’s third largest economy and the United States’ fourth largest trading partner.

Other Asian Countries

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—our largest trading relationship.

India’s vast market promises U.S. companies’ continued strong demand for goods and services.

Africa

U.S. trade to and from Africa has tripled over the past decade, and U.S. exports to this region exceed $22.3 billion.

TABLE 3-3 U.S. Exports and Imports for Selected World Areas in 2016 in Billions of Dollars

Selected World Area	Exports	Imports
North America	$498	$572
Europe	$318	$483
Euro Area	$200	$326
European Union	$270	$417
Pacific Rim	$362	$809
South/Central America	$137	$108
Africa	$22	$27
OPEC	$71	$78
Other Countries	$67	$159

TABLE 3-4 Top Trading Partners: Value of U.S. Merchandise Exports and Imports, December 2016

Rank	Country	Exports ($ billions)	Imports ($ billions)	Total Trade ($ billions)	Percent of Total Trade
1	China	115.8	462.8	578.6	15.9
2	Canada	266.8	278.1	544.9	15.0
3	Mexico	231.0	294.1	525.1	14.4
4	Japan	63.3	132.2	195.5	5.4
5	Germany	49.4	114.2	163.6	4.5
6	Korea, South	42.3	69.9	112.2	3.1
7	United Kingdom	55.4	54.3	109.7	3.0
8	France	30.9	46.8	77.7	2.1
9	India	21.7	46.0	67.7	1.9
10	Taiwan	26.1	39.3	65.4	1.8

The General Agreement on Tariffs and Trade and the World Trade Organization (slide 1 of 2)

General Agreement on Tariffs and Trade (GATT) – an international organization of nations dedicated to reducing or eliminating tariffs and other barriers to world trade

Most-favored-nation status (MFN) was the famous principle of GATT.

It meant that each GATT member nation was to be treated equally by all contracting nations.

From 1947, the body sponsored eight rounds of negotiations to reduce trade restrictions, including:

The Kennedy Round (1964–1967)

The Tokyo Round (1973–1979)

The Uruguay Round (1986–1993)

The General Agreement on Tariffs and Trade and the World Trade Organization (slide 2 of 2)

World Trade Organization (WTO) – powerful successor to GATT that incorporates trade in goods, services, and ideas

Created by the Uruguay Round

International Economic Organizations Working to Foster Trade

Economic community – an organization of nations formed to promote the free movement of resources and products among its members and to create common economic policies

A number of economic communities now exist, including:

The European Union

The North American Free Trade Agreement

The Central Free Trade Agreement

The Association of Southeast Asian Nations

The Commonwealth of Independent States

Trans-Pacific Partnership (TPP)

The Common Market of the Southern Cone (Mercosur)

The Organization of Petroleum Exporting Countries

FIGURE 3-3 The Evolving European Union

TABLE 3-5 U.S. Government Export Assistance Programs (slide 1 of 2)

1	U.S. Export Assistance Centers, https://www.sba.gov/managing-business/exporting/us-export-assistance-centers	Provides assistance in export marketing and trade finance
2	International Trade Administration, www.ita.doc.gov/	Offers assistance and information to exporters through its domestic and overseas commercial officers
3	U.S. and Foreign Commercial Services, www.export. gov/	Helps U.S. firms compete more effectively in the global marketplace and provides information on foreign markets
4	Advocacy Center, http://2016.export.gov/advocacy/	Facilitates advocacy to assist U.S. firms competing for major projects and procurements worldwide

TABLE 3-5 U.S. Government Export Assistance Programs (slide 2 of 2)

5	Trade Information Center, http://selectusa.commerce. gov/investment-incentives/trade-information-center-tic.html	Provides U.S. companies information on federal programs and activities that support U.S. exports
6	STAT-USA/Internet, https://www.usa.gov/statistics	Offers a comprehensive collection of business, economic, and trade information on the Web
7	Small Business Administration, www.sba.gov/oit/	Publishes many helpful guides to assist small- and medium-sized companies
8	National Trade Data Bank, http://grow.exim.gov/finance-guide?gclid=CK3H0p2KndlCFUi5wAodTiQH3g	Provides international economic and export-protection information supplied by more than 20 U.S. agencies

Financing International Business

Financial assistance is available from U.S. government and international sources.

One source is the U.S. Small Business Administration.

The U.S. Small Business Administration provides up to $5 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 the initial costs of entering an export market, with up to $500,000 in export development financing to buy, produce goods, or provide services for exports.

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

Multilateral Development Banks

Multilateral development bank (MDB) – an internationally supported bank that provides loans to developing countries to help them grow

Include:

The World Bank

The Inter-American Development Bank

The Asian Development Bank

The African Development Bank

European Bank for Reconstruction and Development

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