CHAPTER 3. Doing Business in Global Markets

What terms are important in understanding world trade?

Exporting is selling products to other countries. Importing is buying products from other countries. The balance of trade is the relationship of exports to imports. The balance of payments is the balance of trade plus other money flows such as tourism and foreign aid. Dumping is selling products for less in a foreign country than in your own country.

What kinds of products can be imported and exported?

Though it is not necessarily easy, just about any product can be imported or exported.

What is trade protectionism?

Trade protectionism is the use of government regulations to limit the import of goods and services. Advocates believe it allows domestic producers to grow, producing more jobs. The key tools of protectionism are tariffs, import quotas, and embargoes.

absolute advantage

he advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries.

trade surplus

A favorable balance of trade; occurs when the value of a country's exports exceeds that of its imports.

contract manufacturing

A foreign country's production of private-label goods to which a domestic company then attaches its brand name or trademark; part of the broad category of outsourcing

licensing

A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty).

Import quota

A limit on the number of products in certain categories that a nation can import.

strategic alliance

A long-term partnership between two or more companies established to help each company build competitive market advantages.

joint venture

A partnership in which two or more companies (often from different countries) join to undertake a major project.

common market

A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; also called a trading bloc.An example is the European Union.

tariff

A tax imposed on imports.

What is absolute advantage?

Absolute advantage exists if a country produces a specific product more efficiently than any other country. There are few examples of absolute advantage in the global market today.

North American Free Trade Agreement (NAFTA)

Agreement that created a free-trade area among the United States, Canada, and Mexico.

What is an embargo?

An embargo prohibits the importing or exporting of certain products.

multinational corporation

An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management.

trade deficit

An unfavorable balance of trade; occurs when the value of a country's imports exceeds that of its exports.

importing

Buying products from another country.

What is offshore outsourcing? Why is it a major concern for the future?

Outsourcing is the purchase of goods and services from outside a firm rather than providing them inside the company. Today, more businesses are outsourcing manufacturing and services offshore. Many fear that growing numbers of jobs in the United States will be lost due to offshore outsourcing and that the quality of products produced could be inferior.

countertrading

A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services.

Why should nations trade with other nations?

(1) No country is self-sufficient, (2) other countries need products that prosperous countries produce, and (3) natural resources and technological skills are not distributed evenly around the world.

General Agreement on Tariffs and Trade (GATT)

A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions.

foreign subsidiary

A company owned in a foreign country by another company, called the parent company.

embargo

A complete ban on the import or export of a certain product, or the stopping of all trade with a particular country.

sovereign wealth funds (SWFs)

Investment funds controlled by governments holding large stakes in foreign companies.

devaluation

Lowering the value of a nation's currency relative to other currencies.

What are some of the forces that can discourage participation in global business?

Potential stumbling blocks to global trade include sociocultural forces, economic and financial forces, legal and regulatory forces, and physical and environmental forces.

dumping

Selling products in a foreign country at lower prices than those charged in the producing country.

exporting

Selling products to another country.

What are tariffs?

Tariffs are taxes on foreign products. Protective tariffs raise the price of foreign products and protect domestic industries; revenue tariffs raise money for the government.

Is trade protectionism good for domestic producers?

That is debatable. Trade protectionism offers pluses and minuses.

foreign direct investment (FDI)

The buying of permanent property and businesses in foreign nations.

balance of payments

The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment.

World Trade Organization (WTO)

The international organization that replaced the General Agreement on Tariffs and Trade, and was assigned the duty to mediate trade disputes among nations.

free trade

The movement of goods and services among nations without political or economic barriers

What is the theory of comparative advantage?

The theory of comparative advantage contends that a country should make and then sell those products it produces most efficiently but buy those it cannot produce as efficiently.

Why do governments continue such practices?

The theory of mercantilism started the practice of trade protectionism and it has persisted, though in a weaker form, ever since.

balance of trade

The total value of a nation's exports compared to its imports over a particular period.

trade protectionism

The use of government regulations to limit the import of goods and services.

exchange rate

The value of one nation's currency relative to the currencies of other countries.

comparative advantage theory

Theory that states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently.

How do multinational corporations differ from other companies that participate in global business?

Unlike companies that only export or import, multinational corporations also have manufacturing facilities or other physical presence abroad.

What are some ways in which a company can engage in global business?

Ways of entering world trade include licensing, exporting, franchising, contract manufacturing, joint ventures and strategic alliances, and direct foreign investment.