Transcript The Importance of International Business

The Importance of
International Business
Chapter 9
Section 9.1
The Importance of International
Business
The Scope of International
Business
International business is not new, just
easier
 1600 British East India Company:
established to trade with countries in Asia
 As sea routes were discovered trade
increased
 International Business: Business activities
that occur between two or more countries
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Difficulties of International Trade
Laws/rules, currency exchange, traditions
 International business became a dominate
aspect of economic life after WWII
 Almost all individuals are affected directly
or indirectly by international business
(cheaper products is major reason)
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Extent of International Trade
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Some brands are easily recognized as foreign:
Honda, Sony, Mercedes
Some commonly used companies are not
thought of as being foreign but are (pg. 223)
Companies such as McDonalds, General Motors,
IBM, Coke all count on foreign markets to
increase their sales
See pg. 223 “U.S. Trading Partners”
Most of the worlds trade takes place between
developed countries
Seeing increased trade of services (tourism,
banking, advertising, computer services)
Trade, Investment, & the Economy
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Investments are being made into industrialized
economies
Exceeding $340 billion
China is seeing more foreign investment than
any other country (mostly from Taiwan, Japan,
and US)
Foreign investment: Firms of one country
building new plants and facilities or buy existing
businesses in another country
Example: Fiat investing into Chrysler
International Trade and Investment
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Growing part of American Economy
America sold over $1.8 trillion of its goods and
services to foreign customers
20% of all jobs depend on foreign trade
5% of workers are employed by foreign
companies working in the US
Foreign companies have invested almost $2.1
trillion in the US
See pg. 224-225
Reasons for Growth in International
Business
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Why do you think businesses open
internationally?
Reasons for Growth in International
Business
#1 Reason: Profit (sell more products, sell
for more $)
 Less competition
 Lower cost of making goods, less in
shipping
 Overproduction
 Location to other countries is a major
factor
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Factors to International Business
Treaties on trade and investments signed by
different countries
 World Trade Organization (WTO): International
organization that creates and enforces the rules
governing trade among countries
 Countries could put in place: Tariffs, quotas, or
embargos
 Deals negotiated under WTO authority greatly
reduce tariffs, boosts trade.
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Trade Bloc
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Group of two or more countries that agree
to remove all restrictions between them
on the sales of goods and services, while
imposing barriers on trade with countries
not included in the bloc
European Union (EU)
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Best example of a trade bloc
27 members (pg. 226)
Trying to create free movement of capital and
labor, common economic and monetary policy.
Would call “United States of Europe”
1999, 11 EU members merged their national
currencies into a single currency called Euro
Easier to trade with because of exchange rate
NAFTA
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North American Free Trade Agreement
Worlds largest trading bloc, removed tariffs and
other barriers to trade among the 3 North
American nations.
Caused many American firms to open in Mexico
Unlike EU there is no universal monetary system
or unrestricted movement of people among the
countries
EU
IMF and World Bank
International Monetary Fund (IMF): Help
countries that are facing serious financial
difficulties in paying for their imports or
repaying loans
 World Bank: Provides low-cost, long-term
loans to help less-developed countries to
develop basic industries and facilities such
as roads and electric power plants.
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Other International Business Factors
Advances in communication and
transportation improved (telephone, fax,
internet)
 Cheaper and quicker to obtain information
from around the world and conduct
business 24 hours a day
 Internet and Television make advertising
easier
 Faster transportation
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Forms of International Business
Section 9.2
Forms of International Business
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Takes place in many forms
Most start by simply selling their products to
other countries (Exporting)
Importing: Buying goods or services made in a
foreign country.
Balance of Trade: Difference between total
exports and imports
Trade Surplus: Exports > Imports
Trade Deficit: Imports > Exports
Forms of International Business
Take place through Licensing
 International Licensing: Occurs when one
company allows a company in another
county to make and sell products
according to certain specifications.
 Receive a royalty, similar to franchising
(another method)
 Less risk with exporting (why?)
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Forms of International Business
Joint Ventures: 2 of more firms share the
costs of doing business and also share the
profits
 Wholly Owned Subsidiary: Firms setting
up a business abroad on its own without
any partners.
 Wholly owned subsidiary are more
expensive to setup and more risky if the
business fails
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Forms of International Business
Strategic Alliance: Firms agree to
cooperate on certain aspects of the
businesses while remaining competitors on
other aspects
 SI have become more common in recent
years
 Example: Pharmaceutical companies both
agreeing to share cancer info but compete
in other markets. Domestic example
construction.
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Forms of International Business
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Expansion of foreign markets has led to multinational
firms
Multinational Firm: Firm that owns or controls production
or service facilities in more than one country
Home Country: Country in which the business has its
headquarters
Host Country: Foreign location where it has facilities
Parent Firm: Company headquarters
Subsidiaries: Foreign branches, if registered as
independent legal entity
Most large businesses are multinational
Must take previous factors into account: Monetary
difference, customs/cultures
Government Policies
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Policies, rules, and laws vary because of taking
place between multiple countries (affect trade
and investment)
Economists consider free trade to be desirable
Governments will occasionally impose tariffs,
especially when “dumping” occurs
Dumping: Practice of selling goods in a foreign
market at a price that is below cost or below
what it charges in its home country
Dump to get domestic products out of the
market
President George W. Bush took this stance with
foreign steel.
Government Policies
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Quota: Limit to amount of goods entering a
country
Designed to protect market share of domestic
products
Nontariff Barriers: Nontax methods of
discouraging trade
Nontariff barriers usually don’t target specific
companies. Almost all countries have
Ex: Steering wheels in cars, buy American
campaigns
Difficult to remove because built around culture
and tradition
Government Policies
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Embargo
Usually politically driven
Ex: US companies cant conduct business with
Cuba
Sanctions: Milder form of embargo that bans
specific business ties with a foreign country.
Ex: Cant sell nuclear technology to Pakistan
Government wont allow foreign firms to have
majority control of airlines or TV stations
Currency Values
Key different between doing business
domestically and internationally is the different
value of currency
 Exchange Rate: Value of one country’s currency
expressed in the currency of another country.
 Ex: 1 US dollar = 0.7733 euros
= 0.9942 Canadian Dollar
= 12 Mexican Peso
= 82 Yen
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Currency Values
Can Change Every Minute (like stock
market)
 Managers must watch closely to get best
rate
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Cultural Differences
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Culture: Customs, beliefs, values, and patters of
behavior of the people of a country or group.
Also… Language, religion, attitudes towards
work, authority, family, etiquette, joking,
gestures, manners, traditions
Cultural differences can exist within one
population
United states sees differences among racial and
ethnic groups
Must know the cultural differences of country
you work in
Cultures
Play a role in communication
Low-context Culture: People communicate
directly and explicitly. (United States) “Don’t
beat around the bush”, no reading between the
lines
 High-Context Culture: Communication tends to
occur through nonverbal signs and indirect
suggestions. (Japan). Don’t just come out and
say what you want
 English has become the language of
international business
 English can vary from regions
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Theories of International
Trade Investment
Section 9.3
Theories of International Trade
Business between countries has grown for
60 years
 Countries are realizing that international
trade can benefit all
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Comparative Advantage Theory
Countries should specialize in products or
services that they can provide more
efficiently than other countries
 Much is based on climate and soil
 Examples: Brazil = Coffee, Domestic
 Should compare between other countries
as well
 Examples: United State=Computers, Saudi
Arabia= Oil
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Product Life Cycle Theory
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During its life cycle, a product or service goes through
4 stages:
Introduction
Growth
Maturity
Decline
Example: VCR’s….. What would be a product in the
decline now?
Product Life Cycle Theory: Companies look for new
markets when products are in the maturity and decline
stages of the product life cycle
Different phases occur at different times throughout
the world
Some businesses will move overseas as sales slow,
some eventually return
Balance of Payments
Money comes in from the sale of goods
domestic and abroad
 National Governments, WTO, and United
Nations track international transaction and
use the information to develop economic
policies
 All international transactions are recorded
in a statement called balance of payments
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Balance of Payments Statement
2 parts to it: Current account and Capital
account
 Current Account: Records the value of goods
and services exported and those imported to
foreigners as well as other income and
payments
 Capital Account: Records investment funds
coming into and going out of a country. (Bank
loans, deposits, purchase and sale of
businesses, investments in new business)
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United States Balance of Payments
Deficit on current account for several
decades
 See Figure 9-6 pg. 237
 Deficit means Americans have been
buying more goods and services made
abroad than they are selling to foreigners
 Can’t continue to do this forever
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United States Advantages
The US Dollar is valued everywhere because
stable society, government pro-business and
economy is largest and richest in the world,
foreign banks are willing to lend
 Not all countries have this luxury
 Many nations rely on financial assistance from
International Monetary Fund (IMO)
 China has a fixed exchange rate, allows to keep
prices low
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Career Opportunities in
International Business
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International Business has created new jobs in
business
Ex: exporting, importing, teaching languages,
translating language, trade laws specialist,
banking etc
Demand to understand international business
will grow
Most workers that get sent abroad are more
skilled, mature, experienced, and tend to make
more money
Many universities are offering degrees in
International Business
Employment of International
Managers
Managers need to be able to work successfully in other
countries
 Adapt to culture, be competent, socially flexible,
receptive to new ideas
 Know foreign language, self-confidence, motivation to
live abroad
 Most managers will be from the country where business
is opening
 Expensive to send a manager to run a business overseas
 Culture shock is a common problem
 Becoming harder to get managers to move because of
spouse working (replaced with short trips,
teleconferencing)
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