Transcript Balance of payments

Chapter
4
Competing in World Markets
Learning Objectives
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.
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.
Why Nations Trade
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
International Sources of Factors
of Production
Decisions to operate abroad depend upon
availability, price, and quality of:
– Labour
– Natural resources
– Capital
– Entrepreneurship
Companies doing business overseas must
make strategic decisions.
Additional Environmental Factors
to which Companies are Exposed
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.
Size of the International
Marketplace
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
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.
Absolute and Comparative
Advantage
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
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
Measuring Trade Between
Nations
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
Test Your Knowledge
The difference between a nation’s imports
and its exports is called the
a.
b.
c.
d.
balance of trade
exchange rate
balance of payments
budget deficit
Test Your Knowledge
The difference between a nation’s imports
and its exports is called the
a.
b.
c.
d.
balance of trade
exchange rate
balance of payments
budget deficit
Answer: A
Exchange Rates
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.
Barriers to International Trade
Social and Cultural Differences
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.
Economic 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.
Political and Legal 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
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.
Types of Trade Restrictions
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
Reducing Barriers to Trade
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.
Organizations Promoting 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
International Economic
Communities
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.
Going Global
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
International Trade Research
Resources on the Internet
Levels of Involvement
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
Countertrade and Franchising

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
Offshoring and International
Direct Investment
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)
Developing a Strategy for
International Business
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.
The World’s Top 10 Leading
Companies
Multinational corporation (MNC): A firm with many operations
and marketing activities outside its home country