Foundations Chapter 3 - The World Marketplace

Embargo

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

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 Blocs

A group of countries that have reduced or 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 - also includes other financial flows such as foreign borrowing and lending, foreign aid payments and receipts, and foreign investments - typically corresponds to the balance of trade because trade is the largest component

Exchange Rates

A measurement of the value of one nation's currency relative to the currency of other nations - powerful influence on how global trade affects individual nations and their trading partners - expressed in terms of another currency

Partnership

A voluntary agreement under which 2 or more people act as co-owners of a business for profit (formal long-term agreement)

Strategic Alliance

An agreement between 2 or more firms to jointly pursue a specific opportunity without actually merging their businesses (less formal, less encompassing agreement)

World Bank

An international cooperative of 188 member countries, working together to reduce poverty in the developing world - est. in aftermath of WWII - influences global economy by providing financial and technical advice to the govts of developing countries for projects in a range of areas

International Monetary Fund (IMF)

An international organization of 188 member nations that promotes international economic cooperation and stable growth *best known as a lender of last resort to nations in financial trouble

General Agreement on Tariffs and Trade (GATT)

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

Foreign Licensing

Authority granted by a domestic firm to a foreign firm for the rights to produce and market its product or to use its trademark/patent rights in a defined geographical area

Even though U.S. consumers clearly have money...

China and India represent a much bigger opportunity in terms of both sheer size and economic growth

Best way to jump over sociocultural barriers -

Conduct thorough consumer research, cultivate firsthand knowledge, and practice extreme sensitivity

Foreign Outsourcing (Contract Manufacturing)

Contracting with foreign suppliers to produce products, usually at a fraction of the cost of domestic production

Sociocultural differences

Difference among cultures in language, attitudes, and values - nonverbal communication, forms of address, attitudes toward punctuality, religious celebrations and customs, business practices, and expectations regarding meals and gifts

One of the most dramatic change in the world economy has been the global move toward

FREE TRADE

_________ ____________ enable companies to gain a foothold quickly in new markets

Foreign acquisitions

Countertrade

International trade that involves the barter of products for products rather than for currency - barter opportunities tend to increase during economic downturns

Quotas

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

Voluntary Export Restraints (VERs)

Limitations on the amount of specific products that one nation will export to another nation *aren't as "voluntary" as the name suggests

Protectionism

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

To understand competitive advantage, you need to first understand how __________ relates to international trade.

Opportunity Cost

Balance of Payments Surplus

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

Trade Surplus

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

____________ and ____________ - which vary along with cost and control - also play a critical role in how firms approach international markets

Profit Opportunity and Risk

Since 2003, the World Bank has published the "Doing Business" report that shows us what?

Ranks the ease of doing business for small and medium sized companies in 183 different countries

Trade Deficit

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

NAFTA

The North American Free Trade Agreement is the treaty among the US, Mexico, and Canada that eliminated trade barriers and investment restrictions over a fifteen year period starting in 1994

Comparative Advantage

The benefit a country has in a given industry if it can make products at a lower opportunity cost than other countries; tend to turn out those goods that have the lowest opportunity cost compared to other countries

Why do countless small companies contract with foreign manufacturers?

The key benefit is dramatically lower wages, which drive down the cost of production

International businesses must comply with what legal standards ?

The laws of their own country and the laws of their host countries *the key benefit of an effective legal system is that it reduces risk for both domestic and foreign businesses*

Exporting

The most basic level of international market development. It simply means producing products domestically and selling them abroad *represents an especially strong opportunity for small and mid-sized companies

Free Trade

The unrestricted movement of goods and services across international borders - Complete FT is not a reality, but the emergence of regional trading blocks, common markets, and the international trade agreements has moved the world economy much closer

Who has formed the largest trading bloc in the world and the larges common market?

US, Mexico, and Canada = trading bloc The 28 countries of the European Union = common market

Risk in dealing with licensees

Unethical licensees may become licensor's competitors using information they gained from the licensing agreement

Direct investment (foreign direct investment)

When firms either acquire foreign firms or develop new facilities from the ground up in foreign countries - reflects the deepest level of global involvement - cost is high, but with it companies have more control over how their business operates in a given country - strategic alliances or partnerships that allow multiple firms to share risks and resources for mutual benefit

The Uruguay Round also created the...

World Trade Organization (WTO) which is a permanent global institution to promote international trade and to settle international trade disputes

Balance of Trade

a basic measure of the difference in value between a nation's exports and imports, including both goods and services - includes the value of both goods and services, and it incorporates trade with all foreign nations

While international trade can offer new profit streams and lower costs, it also introduces

a higher level of risk and complexity to running a business

Foreign Franchising

a specialized type of foreign licensing in which a firm expands by offering businesses in other countries the right to produce and market its products according to specific operating requirements - franchisor = firm that expands through foreign franchising - franchisee = other business (must agree to the specific operating requirements/a complete how to do business) *pay both a startup fee and ongoing percentage of sales to the franchisor

Smaller firms tend to begin with....

exporting and move along the spectrum as the business develops

While larger firms may...

jump straight to strategies that give them more control over their operations; more likely to use a number of different approaches in different countries, depending on the goals of the firm and the structure of the foreign market

The company that offers the rights, the _______, receives a fee from the company that buys the rights or the ____________

licensor & licensee

Some of today's biggest opportunities are in countries with

low per capita income

What does the WTO do

monitors provisions of the GATT and mediates disputes among members - decisions are binding - meet every 2 years - meetings have shifted towards services rather than goods, just like the world economy - Controlling rampant piracy is a key concern for developed countries

Balance of Payments Deficit

more money flows out than in

Local economic conditions to consider when entering a foreign market

population, per capita income, economic growth rate, currency exchange rate, and stage of economic development *also political climate!!

Tariffs

taxes levied against imports

A surprisingly large chunk of international commerce - possible as much as 25% - involves ...

the barter of products for products rather than for currency

Absolute Advantage

the benefit a country has in a given industry when it can produce more of a product than other nations using the same amount of resources

Opportunity Cost

the opportunity of giving up the second-best choice when making a decision; when a country produces more of one good, it must produce less of another good

Bribery

the payment of money for favorable treatment

Corruption

the solicitation of money for favorable treatment

Comparative Advantage seldom remains...

static. As technology changes and the workforce evolves (through factors such as education and experience), nations may gain or lose comparative advantage in various industries

Infrastructure

*another key factor to consider when entering into a foreign market* A country's physical facilities that support economic activity - Transportation - Communication - Energy - Finance

Inflow of Innovation in International Trade

- Offer companies an invaluable source of new ideas - Companies with a presence in foreign markets experience budding trends like these firsthand, giving them a jump in other markets around the world

Most common trade restrictions

- Tariffs - Quotas - Voluntary export restraints - Embargoes

Critics of NAFTA state:

- exports to both nations have increased, but imports have grown far faster; both Mexico and Canada are among the top 10 contributors to the total US trade deficit, threatening the long-term health of the American economy - increased pollution and worker abuse

Tariffs are the most common, but are falling to new lows. Nations are seeking to control imports through non tariff barriers such as:

- red tape intensive import licenses for certain categories - nonstandard packaging requirements - 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 peeps *fairly effective bc complaints about them can be hard to prove and easy to counter

Reduced Risk in International Trade

- reduces dependence on one economy, lowering the economic risk for multinational firms - *Caution* as national economies continue to integrate, an economic meltdown in one part of the world can have far-reaching impact

Access to Factors of Production in International trade:

-allows individual firms to capitalize on factors of production that simply aren't present in the right amount for the right price in each individual country. -helps even out some of the resource imbalances among nations

GATT

-est. in 1948, by 23 nations - most significant changes happened after the 1986-1994 Uruguay Round of negotiations which took bold steps to slash average tariffs by about 30% and to reduce other trade barriers among the 125 nations that signed

Significant risks of foreign outsourcing

1. Quality control requires very detailed specifications to ensure that a company gets what it actually needs 2. Social responsibility - a firm that contracts with foreign products has an obligation to ensure that those factories adhere to ethical standards

How to move forward with international trade?

1. Seek foreign suppliers through outsourcing and importing 2. Seek foreign customers through exporting, licensing, franchising, and direct investment (low cost-low control to high cost-high control spectrum) *low cost/low risk/less control*Exporting->licensing->franchising->direct investment *high cost/high risk/more control*

IN order to achieve its goals, the IMF:

1. Supports stable exchange rates 2. Facilitates a smooth system of international payments 3. Encourages member nations to adopt sound economic policies 4. Promotes international trade 5. Lends money to member nations to address economic problems

Most barriers to trade fall into the following categories:

1. sociocultural differences 2. economic differences 3. legal/political differences *often companies with the highest barriers have the least competition

The U.S. had an overall trade deficit since

1976

European Union

28 nations and half a billion people, the EU is the world's largest common market - goal is to bolster Europe's trade position and to increase its international political and economic power - removed all trade restrictions among members - unified internal trade rules - introduced a single currency, the EURO, in 2002

Measuring the impact of international trade on individual nations requires a clear understanding of -

balance of trade balance of payments exchange rates

Benefits of engaging in global trade

better access to factors of production, reduced risk, and an inflow of new ideas

Most large companies' strategy for reaching global markets consists of

both outsourcing with foreign suppliers and sell their products to foreign markets

Importing

buying products domestically that have been produced or grown in foreign nations (buying products from overseas that have already been produced, rather than contracting with overseas manufacturers to produce special orders)

Offshoring

developing new facilities from scratch *most costly form of direct investment - benefits = complete control over how the facility develops and the potential high profits

One key difference between franchising and licensing

franchisees assume the identity of the franchisor

Joint ventures

when 2 or more companies join forces - sharing resources, risks, and profits, but not actually merging companies - to pursue specific opportunities