Competing in World Markets Chapter 4. LO 4.1 Explain the importance of international business and...
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Transcript of Competing in World Markets Chapter 4. LO 4.1 Explain the importance of international business and...
LO 4.1 Explain the importance of international business and the primary reasons nations trade, and discuss the concepts of absolute and comparative advantage in international trade.
LO 4.2 Describe how nations measure international trade and the significance of exchange rates.
LO 4.3 Identify the major barriers that confront global businesses.
Learning Objectives
LO 4.4 Explain how international trade organizations and economic communities reduce barriers to international trade.
LO 4.5 Compare the different levels of involvement used by businesses when entering global markets.
LO 4.6 Distinguish between a global business strategy and a multidomestic business strategy.
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 other countries
Imports: Foreign goods and services purchased by domestic customers
Why Nations Trade
Decisions to operate abroad depend upon availability, price, and quality of:– Labour– Natural resources– Capital– Entrepreneurship
Companies doing business overseas must make strategic decisions.
International Sources of Factors of Production
New social and cultural practices Economic and political environments Legal restrictions
Companies can expand their markets, seek growth opportunities in other nations, make their production and distribution systems more efficient, and reduce their dependence on the economies of their home nations.
Additional Environmental Factors to which Companies are Exposed
As developing nations expand into the global marketplace, opportunities grow.
Many developing countries have posted high growth rates of annual GDP. Until the 2008-10 economic slowdown, U.S. and Canadian GDP rates grew at an annual rate of about 4 percent.
In less developed countries, GDP growth rates were greater; China averaged 10.1% and India averaged 7.5%.
Current GDP data
Size of the International Marketplace
The World’s Top 10 Nations
Though developing nations generally have lower per capita income,
many have strong GDP growth rates, and their huge populations
can be lucrative markets.
A country has an absolute advantage in making a product when it has a monopoly on making that product or when it can produce the product at a lower cost than any other country.
Example: China’s domination of silk production for centuries
A nation can develop a comparative advantage when it can supply its products more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries.
Example: India’s combination of a highly educated workforce and low wage scale in software development
Absolute and Comparative Advantage
Test Your Knowledge
Why does Spain have an near absolute advantage in growing
saffron?
a. Spain has some of the lowest labour rates in the world so the
time-consuming harvesting process is less expensive.
b. Treaties limit which country can produce saffron.
c. The spice is relatively inexpensive, so other countries are not
interested in growing it.
d. Saffron thrives in Spain’s climate, and soil but does not do as
well elsewhere.
Test Your Knowledge
Why does Spain have an near absolute advantage in growing
saffron?
a. Spain has some of the lowest labour rates in the world so the
time-consuming harvesting process is less expensive.
b. Treaties limit which country can produce saffron.
c. The spice is relatively inexpensive, so other countries are not
interested in growing it.
d. Saffron thrives in Spain’s climate, and soil but does not do as
well elsewhere.
Answer: D
Balance of trade: The difference between a nation’s exports and imports
Balance of payments: The overall money flows into or out of a country
Balance-of-payments surplus = more money into a country than out of it
Balance-of-payments deficit = more money out of a country than into it
Measuring Trade Between Nations
The difference between a nation’s imports and its exports is called the
a. balance of tradeb. exchange ratec. balance of payments d. budget deficit
Test Your Knowledge
The difference between a nation’s imports and its exports is called the
a. balance of tradeb. exchange ratec. balance of payments d. budget deficit
Answer: A
Test Your Knowledge
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 the currency of the region where they happen.
Rates can quickly create or wipe out competitive advantages.
Exchange Rates
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.
Social and Cultural Differences
Infrastructure: The basic systems of a country’s communication, transportation, and energy facilities
Currency Conversion and Shifts: Fluctuating values can make pricing in local currencies difficult, and affect decisions about market desirability and investment opportunities.
Economic Differences
Political Climate Stability is a key consideration
Legal Environment Canadian law International regulations Country’s law in which trade is planned Climate of corruption (see Canada Takes Aim At
Foreign Corruption)
International Regulations Treaties between Canada and other nations Tariffs: Taxes imposed on imported goods Enforcement issues
Political and Legal Differences
Test Your Knowledge
Trade restrictions create what kind of barrier to
international trade?
a. Legal and political
b. Economic
c. Social
d. Cultural
Test Your Knowledge
Trade restrictions create what kind of barrier to
international trade?
a. Legal and political
b. Economic
c. Social
d. Cultural
Answer: A
Corruption in Business and Government
Transparency International produces an annual corruption index for businesspeople
and the general public.
Tariffs: taxes, surcharges, or duties on foreign products Revenue 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 Quota: A limit set on the amounts of particular products
that can be imported Dumping: Selling products in other countries at prices
below production costs or below typical prices in the home market
Embargo: A total ban on importing specific products or a total stop to trading with a particular country
Exchange control: a restriction on important certain products or a restriction against certain companies to reduce trade and the spending of foreign currency
In accordance with national policy, through central banks or government
Types of Trade Restrictions
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 (or economic union): Members bring all trade rules into agreement.
Reducing Barriers to Trade
General Agreement on Tariffs and Trade (GATT) Major industrialized nations found this multinational
organization in 1947 to reduce tariffs and relax import quotas.
The World Trade Organization succeeded GATT Representatives from 157 countries Monitors GATT agreements and mediates
international trade disputes World Bank
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 Trade
North American Free Trade Agreement (NAFTA) World’s largest free-trade zone: Canada, United States,
Mexico U.S. and Canada are each other’s biggest trading partners.
Central America-Dominican Republic Free Trade Agreement (CAFTA-DR)
Free-trade area among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
European Union Best-known example of a common market; 27 member
countries. 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
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
CIA World Factbook
Going Global
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 home goods
overseas
Levels of Involvement
Countertrade: A barter agreement whereby trade between two or more nations involves payment made in the form of local products instead of currency
Franchising: A contract-based agreement in which a franchisee can produce and/or sell the franchisor’s products under that company’s brand name if the franchisee agrees to the operating terms and requirements
Countertrade and Franchising
Foreign licensing agreement: An international agreement in which one firm allows another firm to produce or sell its product, or use its trademark, patent, or manufacturing processes, in a specific geographical area, in return for royalties or other compensation
Subcontracting: An agreement that involves hiring other companies to produce, distribute, or sell goods and services
Countertrade and Franchising
The relocation of business processes to lower-cost overseas locations
Not initiating business but gaining cost savings to stay competitive
Extremely controversial
The ultimate level of global involvement is direct investment
Directly operating production and marketing in a foreign country
Acquisition (purchase firm from host country) Joint venture (partnership between companies) Overseas division (set up offices overseas)
Offshoring and International Direct Investment
Global business (standardization) strategies Firm sells same product in essentially the same
manner throughout the world. Works well for products with nearly universal
appeal.
Multidomestic (adaptation) strategies Firm develops products and marketing strategies
that appeal to customs, tastes, and buying habits of particular national markets.
Developing a Strategy for International Business