Intro to Business: Chapter 3

Expropriate

Foreign company's assets, taking ownership and compensating the former owners.

The International Monetary Fund

Founded in 1945, one year after the creation of the World Bank, to promote trade through financial cooperation and eliminate trade barriers in the process. The IMF makes short-term loans to member nations that are unable to meet their budgetary expenses.

What is a form of licensing that has grown rapidly in recent years?

Franchising

Preferential Tariff

Gives advantages to one nation (or several nations) over others Example: When members of the British Commonwealth (countries that are former British territories) trade with Great Britain, they pay lower tariffs than do other nations.

What happens When a Country's Currency is Undervalued?

Gives its exports an unfair competitive advantage.

Exports

Goods and services made in one country and sold to others

Imports

Goods and services that are bought from other countries

Buy-National Regulations

Government rules that give special privileges to domestic manufacturers and retailers Example: The United States bans the use of foreign steel in constructing U.S. highways. Many state governments have buy-national rules for supplies and services. January 21 every year

G20

Informal group that brings together 19 countries and the European Union—the 20 leading economies in the world

World Trade Organization (WTO)

Replaces the old General Agreement on Tariffs and Trade (GATT), which was created in 1948 Has an effective dispute settlement procedure with strict time limits to resolve disputes. The WTO has emerged as the world's most powerful institution for reducing trade barriers and opening markets. The advantage of WTO membership is that member countries lower trade barriers among themselves. Countries that don't belong must negotiate trade agreements individually with all their trading partners.

Principle of Comparative Advantage

Says that each country should specialize in the products that it can produce most readily and cheaply and trade those products for goods that foreign countries can produce most readily and cheaply. This specialization ensures greater product availability and lower prices.

Exporting

Selling domestically produced products to buyers in another country.

Outsourcing

Sending work functions to another country, resulting in domestic workers losing their jobs

Global Vision

Recognizing and reacting to international business opportunities, being aware of threats from foreign competitors in all markets, and effectively using international distribution networks to obtain raw materials and move finished products to the customer. Enables a manager to understand that customer and distribution networks operate worldwide, blurring geographic and political barriers and making them increasingly irrelevant to business decisions.

What Does International Trade Improve?

Relationships with friends and allies; helps ease tensions among nations; and—economically speaking—bolsters economies, raises people's standard of living, provides jobs, and improves the quality of life

Nationalism

The sense of national consciousness that boosts the culture and interests of one country over those of all other countries.

European Union

Trade agreement among 28 European nations. One of the principal objectives of the European Union is to promote economic progress of all member countries. The EU has stimulated economic progress by eliminating trade barriers, differences in tax laws, and differences in product standards, and by establishing a common currency.

Regional Comprehensive Economic Partnership (RCEP).

Trade agreement includes fifteen (15) Asian States and signals to investors that the region is still committed to multilateral trade integration. One item that is most notable about this trade agreement is that the U.S. is not a member.

The Five Multinational Advantages

1. Can overcome trade problems 2. Ability to sidestep regulatory problem 3. Shift production from one plant to another as market conditions change 4. Can tap new technology from around the world. 5. Can often save a lot in labor costs, even in highly unionized countries.

The Two Natural Barriers

1. Distance 2. Language

Why do Companies Decide to go Global

1. Earn additional profits 2. Management may have exclusive market information about foreign customers, marketplaces, or market situations. 3. Saturated domestic markets, excess capacity, and potential for cost savings

The Impact of Terrorism on Global Trade

1. Globalization is slower and costlier 2. Pay more to provide security 3. Stock more inventory 4. Tighter immigration policies

Three Pros of NAFTA

1. Increased trade 2. Increased economic output 3. Created jobs

Three Cons of NAFTA

1. Job losses 2. Lower wages 3. Farmers out of business

What Three Current Underlying Trends are Propelling the Dramatic Growth in World Trade?

1. Market expansion: The need for businesses to expand their markets is perhaps the most fundamental reason for the growth in world trade. 2. Resource acquisition: More and more companies are going to the global marketplace to acquire the resources they need to operate efficiently. 3. Emergence of China and India: China's exports have boomed largely thanks to foreign investment. Indians are playing invaluable roles in the global innovation chain.

The Four Fears of Trade and Globalization

1. Millions of Americans have lost jobs due to imports or production shifting abroad. Most find new jobs, but often those jobs pay less. 2. Millions of others fear losing their jobs, especially at those companies operating under competitive pressure. 3. Employers often threaten to export jobs if workers do not accept pay cuts. 4. Service and white-collar jobs are increasingly vulnerable to operations moving offshore.

The Major Three Obstacles to International Trade

1. Natural barriers 2. Tariff barriers 3. Nontariff barriers

The Two Purposes of the World Bank

1. Offers low-interest loans to developing nations.: Original purpose of loans: Build roads, power plants, schools, drainage projects, and hospitals. New purpose: Offers loans to help developing nations relieve their debt burdens. 2. Major source of advice and information for developing nations.: The United States has granted the organization millions to create knowledge databases on nutrition, birth control, software engineering, creating quality products, and basic accounting systems.

What are three global marketplace threats and opportunities?

1. Politics 2. Cultural differences 3. Economic environment

The Five Benefits of Globalization

1. Productivity grows more quickly when countries produce goods and services in which they have a comparative advantage. Living standards can increase faster. 2. Global competition and cheap imports keep prices down, so inflation is less likely to stop economic growth. 3. An open economy spurs innovation with fresh ideas from abroad. 4. Through infusion of foreign capital and technology, global trade provides poor countries with the chance to develop economically by spreading prosperity. 5. More information is shared between two trading partners that may not have much in common initially, including insight into local cultures and customs, which may help the two nations expand their collective knowledge and learn ways to compete globally.

The Two Arguments Against Tariffs

1. Tariffs discourage free trade, and free trade lets the principle of competitive advantage work most efficiently. 2. Tariffs raise prices, thereby decreasing consumers' purchasing power.

The Three Arguments for Tariffs

1. Tariffs protect infant industries. 2. Tariffs protect US jobs 3. Tariffs aid in military preparedness

The Importance of Global Business to the United States

1. The United States does not rely on international business as much as France, Germany, and Great Britain. 2. Trade-dependent jobs have grown at a rate three times the growth of U.S.-dependent jobs. 3. Every U.S. state has realized a growth of jobs attributable to trade. 4. Trade has an effect on both service and manufacturing jobs.

What Aspects of Cultural Differences Impact the Global Marketplace?

1. Values 2. Language 3. Customs and Traditions

Embargo

A complete ban against importing or exporting a product Often set up for defense purposes 3. The United States does not allow various high-tech products, such as supercomputers and lasers, to be exported to countries that are not allies. Although this embargo costs U.S. firms billions of dollars each year in lost sales, it keeps enemies from using the latest technology in their military hardware.

Trade Surplus

A country that exports more than it imports is said to have a favorable balance of trade

Trade Deficit

A country that imports more than it exports is said to have an unfavorable balance of trade

Contract Manufacturing

A foreign firm manufactures private-label goods under a domestic firm's brand. Advantage: It lets a company test the water in a foreign country. By allowing the foreign firm to produce a certain volume of products to specification and put the domestic firm's brand name on the goods, the domestic firm can broaden its global marketing base without investing in overseas plants and equipment. After establishing a solid base, the domestic firm may switch to a joint venture or direct investment, explained below.

Protectionism

A nation protects its home industries from outside competition by establishing artificial barriers such as tariffs and quotas

Balance of Payments

A summary of a country's international financial transactions showing the difference between the country's total payments to and its total receipts from other countries. The balance of payments includes imports and exports (balance of trade), long-term investments in overseas plants and equipment, government loans to and from other countries, gifts and foreign aid, military expenditures made in other countries, and money transfers in and out of foreign banks.

Floating Exchange Rates

A system in which prices of currencies move up and down based upon the demand for and supply of the various currencies

Tariff

A tax on imported goods Charge per unit or percentage Benefit: Makes imported goods more costly, so they are less able to compete with domestic products.

Direct Foreign investment

Active ownership of a foreign company or of overseas manufacturing or marketing facilities

Biliteral Trade Agreement

An agreement between two countries to lower trade barriers

Urguguay Round

An agreement that dramatically lowers trade barriers worldwide Adopted in 1994 148 nations participate The most notable aspect of the agreement is its recognition of new global realities. For the first time, an agreement covers services, intellectual property rights, and trade-related investment measures such as exchange controls.

What major event happened in 2016 in relation to the EU?

Citizens of the United Kingdom voted to leave the European Union, a plan known as Brexit, which could take several years to occur.

What do U.S. firms do to ensure they are able to compete on an equal basis with foreign firms in international trade?

Congress has passed antidumping laws.

Multinational Corporations

Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located

North American Free Trade Agreement (NAFTA)

Created the world's largest free-trade zone It includes Canada, the United States, and Mexico.

Cultural Do's and Don'ts

Do's: 1. Always present your business card with both hands in Asian countries. 2. Use a "soft-sell" and subtle approach when promoting a product in Japan. Don'ts: 1. Begin your first business meeting in Asia talking business. 2. Fill a wine glass to the top if dining with a French businessperson.

What is the least complicated and least risky alternative available to enter the global marketplace?

Exporting

Free-Trade Zone

Few duties or rules restrict trade among the partners, but nations outside the zone must pay the tariffs set by the individual members.

Exchange Controls

Laws that require a company earning foreign exchange (foreign currency) from its exports to sell the foreign exchange to a control agency, usually a central bank. By controlling the amount of foreign exchange sold to companies, the government controls the number of products that can be imported. Limiting imports and encouraging exports helps a government to create a favorable balance of trade.

Import Quota

Limits on the quantity of a certain good that can be imported Protects domestic industries from foreign competition.

Devaluation

Lowering the value of a nation's currency relative to other currencies This makes that country's exports cheaper and should, in turn, help the balance of payments.

Protective Tariffs

Make imported products less attractive to buyers than domestic products

Countertrade

Part or all of the payment for goods or services is in the form of other goods or services

Predatory Dumping

The attempt to gain control of a foreign market by destroying competitors with impossibly low prices. Concerns industrialized countries

Infrastructure

The basic institutions and public facilities upon which an economy's development depends. Includes: Highways, railroads, airports, canals, telephones, internet sites, postal systems, television stations, schools, and banking systems.

European Integration

The delegation of limited sovereignty by European Union member states to the EU so that common laws and policies can be created at the European level.

Balance of Trade

The difference between the value of a country's exports and the value of its imports during a specific time

Joint Venture

The domestic firm buys part of a foreign company or joins with a foreign company to create a new entity. Advantages: A quick and relatively inexpensive way to enter the global market. It helps reduce risks by sharing costs and technology. Disadvantages: Can be very risky because one partner can buy out the other.

How Nations that Frequently Trade with Each Other Formalize their Relationship

The governments meet and work out agreements for a common economic policy. The result is an economic community or, in other cases, a bilateral trade agreement (an agreement between two countries to lower trade barriers).

Mercosur

The largest new trade agreement including Peru, Brazil, Argentina, Uruguay, and Paraguay

Licensing

The legal process whereby a firm (the licensor) agrees to let another firm (the licensee) use a manufacturing process, trademark, patent, trade secret, or other proprietary knowledge. The licensee, in turn, agrees to pay the licensor a royalty or fee agreed on by both parties. Largest category: Entertainment Second largest category: Trademarks

Central America Free Trade Agreement (CAFTA)

The newest free trade agreement that includes Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, the United States, and Nicaragua.

Free Trade

The policy of permitting the people and businesses of a country to buy and sell where they please without restrictions

Dumping

The practice of charging a lower price for a product (perhaps below cost) in foreign markets than in the firm's home market. The company might be trying to win foreign customers, or it might be seeking to get rid of surplus goods.

Exchange Rate

The price of one country's currency in terms of another country's currency. If a country's currency appreciates, less of that country's currency is needed to buy another country's currency. If a country's currency depreciates, more of that currency will be needed to buy another country's currency.

Absolute Advantage

When a country can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product. Example: The United States, has an absolute advantage in reusable spacecraft and other high-tech items.

How Do Appreciation and Depreciation Affect the Prices of a Country's Goods?

When a country has stronger value of currency or appreciation, they can import more goods and services from another country Currency depreciation leads to buying lesser in the same amount of money.

Confiscation

When the owner receives no compensation.