Business in the Global Economy

1. CHAPTER 3 Business in the Global Economy 3-1 International Business Basics 3-2 The Global Marketplace 3-3 International Business Organizations

2. 3-1 International Business Basics Objectives Describe importing and exporting activities. Compare balance of trade and balance of payments. List factors that affect the value of global currencies.

3. Chapter 3 Key Terms • balance of payments • balance of trade • domestic business • exchange rate • exports • foreign (world) trade • imports • international business

4. Domestic Business • The making, buying, and selling of G&S within a country • International Business • aka: Foreign or World Trade • Business activities needed for creating, shipping, and selling G&S across national borders Chapter 3 20.TRADING AMONG NATIONS

5. Chapter 3 TRADING AMONG NATIONS • Absolute advantage • When a country can produce a GorS at a lower cost than other countries • Comparative advantage • When a country specializes in the production of a GorS at which it is relatively more efficient • EXAMPLE: http://www.unc.edu/depts/econ/byrns_web/Economicae/Essays/ABS_Comp_Adv.htm

6. Source: United States Geological Survey Minerals Information Chapter 3 Used in construction, shingles, joint work, etc. Processed into aluminum. Used in iron and steel production. U.S. Import Reliance for Selected Raw Materials

7. Imports • Items bought from other countries • Exports • G&S sold to other countries • Link to 2012 data chart Chapter 3 TRADING AMONG NATIONS

8. Checkpoint >> How does importing differ from exporting? Chapter 3 Answer • Importing is bringing items from other countries into a country. • Exporting is selling goods and services to other countries.

9. Chapter 3 Objective 21MEASURING TRADE RELATIONS • Balance of trade • Difference between a country’s total exports and total imports • Exports > Imports = TRADE SURPLUS • Imports > Exports = TRADE DEFICIT • Balance of payments • Difference between the amount of money that comes into a country and the amount that goes out of it. • Nation receives more $ than it puts out = Positive (Favorable) Balance • Nation sends more $ out than it brings in = Negative (Unfavorable) Balance • Graphof 2011

10. Chapter 3 Current U.S. Trade Balances

11. Balance of Trade Chapter 3

12. Checkpoint >> How does balance of trade differ from balance of payments? Chapter 3 Answer • Balance of trade is the difference between a country’s total exports and total imports. • Balance of payments is the difference between the amount of money that comes into a country and the amount that goes out of it.

13. Chapter 3 INTERNATIONAL CURRENCY • Foreign exchange rates • Value of currency in one country compared with the value in another • Factors affect currency values • Three main factors • Balance of payments • Economic conditions (including interest rates) • Political disability • http://www.slate.com/articles/business/cashless_society/2012/03/cashless_society_how_much_would_the_united_states_save_by_ditching_paper_money_.html

14. Recent Values of Currencies Chapter 3 * U.S. dollars

15. Factors that affect the value of a country’s currency: Chapter 3 • balance of payments • economic conditions • political stability 7 Currency Blunders You Could Cash In On. http://www.investopedia.com/slide-show/currency-blunders?partner=TOD10#axzz1b9hdoYxl

16. Page 59 • 1-3 (1 point each) • AND • 4 or 5 (3 points) Chapter 3 Reinforcement 3-1

17. 3-2 The Global Marketplace Objectives Describe the components of the international business environment. Identify examples of formal trade barriers. Explain actions to encourage international trade. Chinese Subsidies: http://americanmanufacturing.org/content/shedding-light-energy-subsidies-china-analysis-china%E2%80%99s-steel-industry-2000-2007

18. Chapter 3 Key Terms • infrastructure • trade barrier • quota • tariff • embargo

19. Chapter 3 23. INTERNATIONAL BUSINESS ENVIRONMENT • Geography • Cultural influences • Economic development • Literacy level • Technology • Agricultural dependency • Political and legal concerns

20. Chapter 3 • location • climate • terrain • waterways • natural resources • technology • education • literacy level • agricultural dependency • inflation • exchange rate • Infrastructure GEOGRAPHY ECONOMICS INTERNATIONAL BUSINESS ENVIRONMENT • language • family • religion • customs • traditions • food CULTURE • government system • political stability • trade barriers • business regulations POLITICAL–LEGAL FACTORS Elements of International Business Environment

21. Checkpoint >> List the four main elements of the international business environment. Chapter 3 Answer • geography • cultural influences • economic development • political and legal concerns

22. Chapter 3 24. INTERNATIONAL TRADE BARRIERS Why would countries want to limit international trade??? Three ways countries discourage international trade: • Quotas • Tariffs • Embargoes

23. Chapter 3 QUOTA – quantity limit on imports Reasons for quotas • To keep supply low and prices the same • To express displeasure at the policies of the importing country • To protect one of a country’s industries from too much competition from abroad

24. Chapter 3 TARIFF – tax on imports Reasons for tariffs • To set amount per pound, gallon, or other unit • To set the value of a good

25. Chapter 3 EMBARGO – complete block on trade Reasons for embargoes • For POLITICAL reasons • To prevent sensitive products from falling into the hands of unfriendly groups or nations

26. Checkpoint >> What are three formal trade barriers? Chapter 3 Answer • quotas • tariffs • embargoes

27. Chapter 3 25. ENCOURAGINGINTERNATIONAL TRADE Why would countries want to encourage international trade??? Three ways countries encourage international trade: • Free-trade zones • Free-trade agreements • Common markets

28. Chapter 3 FREE-TRADE ZONES • Used to promote international business in a selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing • Usually located around a seaport of airport

29. Most FTZs are located in developing countries: Brazil, China, the Philippines, Malaysia, Pakistan, Mexico, Costa Rica, Honduras, and Madagascar Corporations setting up in a zone may be given tax breaks as an incentive. Usually, these zones are set up in underdeveloped parts of the host country; the rationale is that the zones will attract employers and thus reduce poverty and unemployment, and stimulate the area's economy. These zones are often used by multinational corporations to set up factories to produce goods (such as clothing or shoes). Chapter 3 More on FTZ’s

30. Chapter 3 FREE-TRADE AGREEMENTS • Member countries agree to remove duties and trade barriers on products traded among them • Results in increased trade between members • http://www.trade.gov/fta/index.asp

31. Chapter 3 COMMON MARKETS • Allows companies to invest freely in each member’s country • Allows workers to move freely across borders • Examples • European Union (EU) ~ • The European Union (EU) is an economic and political union of 27 member states, located primarily in Europe. • The EU has developed a single market through a standardized system of laws which apply in all member states, ensuring the free movement of people, goods, services, and capital. • Latin American Integration Association (LAIA) ~ • Its main objective is the establishment of a common market, in pursuit of the economic and social development of the region.

32. Checkpoint >> What actions could be taken to encourage international trade? Chapter 3 Answer • Actions that could be taken to encourage international trade include free-trade zones, free-trade agreements, and common markets.

33. Page 64 • 1-4 (1 point each) • And • Choose ONE from 5-7 (6 points) Chapter 3 Reinforcement 3-2

34. 3-3 International Business Organizations Objectives Discuss activities of multinational organizations. Explain common international business entry modes. Describe activities of international trade organizations and agencies.

35. Chapter 3 Key Terms • Multinational company (MNC) • Joint venture • Global strategy • Multinational strategy • Licensing • Franchising

36. Chapter 3 MULTINATIONAL COMPANIES (MNC) • MNC strategies • MNC benefits • Drawbacks of multinational companies

37. Chapter 3 MNC STRATEGIES • Global strategy • offering the same product the same way everywhere • Multinational strategy • approaching each country market differently

38. Chapter 3 MNC BENEFITS • Large amount of goods available • Lower prices • Career opportunities • Foster understanding, communication, and respect • Friendly international relations

39. Chapter 3 DRAWBACKS OF MULTINATIONAL COMPANIES • Economic power • Worker dependence on the MNC • Consumer dependence • Political power

40. Checkpoint >> What are two strategies commonly used by multinational companies? Chapter 3 Answer • global strategy (offering the same product the same way everywhere) • multinational strategy (approaching each country market differently).

41. Chapter 3 GLOBAL MARKET ENTRY MODES • Licensing • Franchising • Joint venture

42. Chapter 3 LICENSING • Allows companies to produce items in other countries without being actively involved • Has a low financial investment, so the potential financial return for the company is often low • The risk for the company is low

43. Chapter 3 FRANCHISING • Allows organizations to enter into contracts with people in other countries to set up a business that looks and runs like the parent company • Marketing elements, such as food products, packaging, and advertising must meet both cultural sensitivities and legal requirements • Commonly involves selling a product or service

44. Chapter 3 JOINT VENTURE • Allows two or more companies to share raw materials, shipping facilities, management activities, or production activities • Concerns include the sharing of profits and not as much control since several companies are involved • Very popular for manufacturing, such as Japanese and U.S. automobile manufacturers

45. Checkpoint >> How does licensing differ from a franchise? Chapter 3 Answer • Licensing does not require as much financial investment or risk as franchising. • Both licensing and franchising involve royalty payments, but licensing usually involves a manufacturing process, while franchising commonly involves selling a product or service.

46. Chapter 3 INTERNATIONAL TRADE ORGANIZATIONS • World Trade Organization • International Monetary Fund • World Bank

47. Chapter 3 WORLD TRADE ORGANIZATION (WTO) WTO Goals • Lowering tariffs that discourage free trade • Eliminating import quotas • Reducing barriers for banks, insurance companies, and other financial services • Assisting poor countries with economic growth

48. Chapter 3 INTERNATIONAL MONETARY FUND (IMF) • Helps to promote economic cooperation • Maintains an orderly system of world trade and exchange rates • Includes over 150 member nations

49. Chapter 3 WORLD BANK • Created in 1944 to provide loans for rebuilding after World War II • Today the World Bank has over 180 member countries and two main divisions • International Development Association (IDA), which makes loans to help developing countries • International Finance Corporation (IFC), which provides technical capital and technical help to private businesses in nations with limited resources

50. Checkpoint >> How does the International Monetary Fund assist countries? Chapter 3 Answer • The International Monetary Fund assists countries by promoting economic cooperation and maintaining an orderly system of world trade and exchange rates. • This cooperation makes harmful trade wars among IMF nations less likely.