CHAPTER THREE: THE WORLD MARKETPLACE

WORLD BANK

-an international cooperative of 188 member countries, working together to reduce poverty in the developing world -influences the global economy by providing financial and technical advice to the governments of developing countries for projects in a range of areas, including infrastructure, communications, health, and education -the financial assistance usually comes in the form of low-interest loans

FOREIGN LICENSING

-authority granted by a domestic firm for the rights to produce and market its product or to use its trademark/patent rights in a defined geographical area -this approach allows firms to expand into foreign markets with little or no investment, and it also helps circumvent government restrictions on importing in closed markets

IMPORTING

-buying products domestically that have been produced or grown in foreign nations -imported products don't carry the brand of the importer, but they also don't carry as much risk

OFFSHORING

-developing new facilities from scratch -involves risk but the the benefits include complete control over how the facility develops and the potential for high profits

SOCIOCULTURAL DIFFERENCES

-differences among cultures in language, attitudes, and values -specific elements that affect business include: nonverbal communication, forms of address, attitudes toward punctuality, religious celebrations and customs, business practices, and expectations regarding meals and gifts -the best way to jump over sociocultural barriers is to conduct thorough consumer research, cultivate firsthand knowledge, and practice extreme sensitivity

STRATEGIES FOR REACHING GLOBAL MARKETS

-firms can enter global markets by developing foreign suppliers, foreign customers, or both -two strategies for acquiring foreign suppliers are outsourcing and importing -key strategies for developing foreign markets include exporting, licensing, franchising, and direct investment

POLITICAL AND LEGAL DIFFERENCES

-law and regulation -political climate -international trade restrictions

VOLUNTARY EXPORT RESTRAINS (VERs)

-limitations on the amount of specific products that one nation will export to another nation -not as "voluntary" as they seem because although the government of the exporting country typically imposes VERs, they usually do so out of dear that the importing country would impose even more onerous restrictions

DIRECT INVESTMENT

-or foreign direct investment, when firms either acquire foreign firms or develop new facilities from the ground up in foreign countries -represents the deepest level of global involvement -the cost is high, but companies have more control over how their business operates in a given country -the high-dollar commitment also represents significant risk if the business doesn't go well

SIGNIFICANT RISKS OF FOREIGN OUTSOURCING

-quality control typically requires very detailed specifications to ensure that a company gets what it actually needs -involves social responsibility --> a firm that contracts with foreign producers has an obligation to ensure that those factories adhere to ethical standards

AS TARIFFS DECREASE, SOME NATIONS ARE SEEKING TO CONTROL IMPORTS THROUGH NON-TARIFF BARRIERS SUCH AS:

-requiring red-tape-intensive import licenses for certain categories -establishing nonstandard packaging requirements for certain -offering less-favorable exchange rates to certain importers -establishing standards on how certain products are produced or grown -promoting a "buy national" consumer attitude among local people

EXPORTING

-selling products in foreign nations that have been produced or grown domestically -represents an especially strong opportunity for small and mid-sized companies -exporting is relatively low cost and low risk, but it offers little control over the way the business unfolds

BARRIERS TO INTERNATIONAL TRADE

-sociocultural differences -economic differences -political and legal differences -each country have a different mix of barriers -often countries with the highest barriers have the least competition, which can be a real opportunity for the first international firms to break through -the best way to surmount trade barriers is to cultivate a deep understanding of a country before beginning business --> and since conditions change rapidly in many nations, learning and responding are continual processes

TARIFFS

-taxes levied against imports -governments tend to use protective tariffs either to shelter fledging industries that couldn't compete without help, or to shelter industries that are crucial to the domestic economy

EUROPEAN UNION (EU)

-the world's largest common market, composed of 28 European nations -the goal of the EU is to bolster Europe's trade position and to increase its international political and economic power -has removed all trade restrictions among member nations and unified internal trade rules, allowing goods and people to move freely among EU countries -also created standardized policies for import and export between EU countries and the rest of the world, giving the member nations clout as a bloc than each would have had on its own

FREE TRADE

-the unrestricted movement of goods and services across international borders -even though complete free trade is not a reality, the emergence of regional trading blocks, common markets, and international trade agreements has moved the world economy much closer to that goal -the free trade movement has raised the global standard of living, lowered prices, and expanded choices for millions of people, but critics are troubled by the growing economic gap between the haves and the have-nots, worker abuse, large-scale pollution, and cultural homogenization

ORGANIZATIONS THAT ENCOURAGE AND PROMOTE INTERNATIONAL TRADE RELATIONSHIPS

-General Agreement on Tariffs and Trade (GATT) -World Trade Organization (WTO) -World Bank -International Monetary Fund (IMF) -Trading Bloc -Common Market -North American Free Trade Agreement (NAFTA) -European Union (EU)

EMBARGO

-a complete ban on international trade of a certain item, or a total halt in trade with a particular nation -the intention of most embargos is to pressure the targeted country to change political policies or to protect national security

WORLD TRADE ORGANIZATION (WTO)

-a permanent global institution to promote international trade and to settle international trade disputes -the WTO monitors provisions of the GATT agreements, promotes further reduction of trade barriers, and mediates disputes among members -the decisions of the WTO are binding, which means that all parties involved in disputes must comply to maintain good standing in the organization

KEY REASONS FOR INTERNATIONAL TRADE

-access to factors of production -reduced risk -inflow of innovation -industries tend to succeed on a global basis in countries that enjoy a competitive advantage -unless they face major trade barriers, the industries in any country tend to produce products for which they have competitive advantage

BUSINESS OPPORTUNITIES IN THE WORLD ECONOMY

-advancing technology and falling trade barriers have created unprecedented international business opportunities -high-population developing countries - such as Chine, India, Indonesia, and Brazil - continue to offer the most potential due to both their size and their relatively strong economic growth rates

FOREIGN OUTSOURCING

also contract manufacturing, contracting with foreign suppliers to produce products, usually at a fraction of the cost of domestic production

STRATEGIC ALLIANCE

an agreement between two or more firms to jointly pursue a specific opportunity without actually merging their businesses, strategic alliances typically involve less formal, less encompassing agreements than partnerships

INTERNATIONAL MONETARY FUND (IMF)

an international organization of 188 member nations that promotes international economic cooperation and stable growth to achieve these goals, the IMF: -supports stable exchange rates -facilitates a smooth system of internal payments -encourages member nations to adopt sound economic policies -promotes international trade -lends money to member nations to address economic problems

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

an international trade treaty designed to encourage worldwide trade among its members

COMPARATIVE ADVANTAGE

benefits a country has in a given industry if it can make products at a lower opportunity cost than other countries

KEY BENEFIT OF FOREIGN OUTSOURCING

dramatically lower wages, which drive down the cost of production

COUNTERTRADE

international trade that involves the barter of products for products rather than for currency, these agreements range from simple barter to a complex web of exchanges that end up meeting the needs of multiple parties

ECONOMIC DIFFERENCES

key factors to consider include: population, per capita income, economic growth rate, currency exchange rate, and stage of economic development

BALANCE OF TRADE

a basic measure of the difference in value between a nation's exports and imports, including both goods and services

INFRASTRUCTURE

a country's physical facilities that support economic activity includes basic systems in each of the following areas: -transportation --> roads, airports, railroads, ports -communication --> TV, radio, internet, cell phone coverage -energy --> utilities and power plants -finance --> banking, checking, credit

COMMON MARKET

a group of countries that have eliminated tariffs and harmonized trading rules to facilitate the free flow of goods among the member nations

TRADING BLOC

a group of countries that have reduced on even eliminated tariffs, allowing for the free flow of goods among the member nations

BALANCE OF PAYMENTS

a measure of the total flow of money into or out of a country

EXCHANGE RATE

a measurement of the value of one nation's currency relative to the currency of other nations, has a powerful influence on how global trade affects individual nations and their trading partners

FOREIGN FRANCHISING

a specialized type of foreign licensing in which a firm expands by offering businesses in other countries right to produce/market its products with specific operating requirements

PARTNERSHIP

a voluntary agreement under which two or more people act as co-owners of a business for profit

QUOTAS

limitations on the amount of specific products that may be imported from certain countries during a given time period

WHAT ARE THE TOOLS FOR MEASURING INTERNATIONAL TRADE?

measuring the impact of international trade on individual nations requires a clear understanding of balance of trade, balance of payments, and exchange rates

PROTECTIONISM

national policies designed to restrict international trade, usually with the goal of protecting domestic businesses

OPPORTUNITY COST

opportunity of giving up the second-best choice when making a decision

BALANCE OF PAYMENTS SURPLUS

overage that occurs when more money flows into a nation than out of a nation

TRADE SURPLUS

overage that occurs when the total value of a nation's exports is higher than the total value of its imports

BALANCE OF PAYMENTS DEFECIT

shortfall that occurs when more money flows out of nation than into a nation

TRADE DEFICIT

shortfall that occurs when the total value of a nation's imports is higher than the total value of its exports

NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

the treaty among the United States, Mexico, and Canada that eliminated trade barriers and investment restrictions starting in 1994

ABSOLUTE ADVANTAGE

when a country can produce more a good than other nations, using the same amount of resources

JOINT VENTURES

when two or more companies join forces - sharing resources, risks, and profits, but not actually merging companies - to pursue specific opportunities