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Pride/Hughes/Kapoor Business, 10th Edition
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Chapter 3 Exploring Global Business
1. Explain the economic basis for international business
Most companies today realize that their markets consist of more than local or
even domestic customers. Technology and communications have enabled companies to
consider virtually any place in the world as their market. Most countries trade their
surplus goods and services for those that they cannot produce efficiently enough
themselves. Sometimes countries put restrictions on the trading of certain products and
services. Sometimes this is an advantage; sometimes it is not. But global trade is here to
stay. Why? Because it provides the economic basis for international business.
International business includes all business activities that involve exchanges
across national boundaries. These exchanges can include buying activities, selling
activities, or both. Most of the time, countries find that they are better than other
countries at producing certain goods. This may be due to their natural resources, or labor
supply, or even customs. When a country has an absolute advantage, it has the ability to
produce a specific product more efficiently than any other nation. Not every country has
an absolute advantage, but every country does have a comparative advantage. A
comparative advantage means that a country can produce a specific product more
efficiently than any other product. Efficient production will generally produce a surplus.
That surplus can then be traded for goods that are in short supply. Countries that sell and
ship raw materials or products to other nations are involved in exporting. On the other
hand, countries that buy raw materials and products from other nations and bring them
into their own country are involved in importing. Some countries import more than they
export. This means that their balance of trade is unfavorable, because the total value of
their imports minus the total value of their exports over a period of time, is negative. This
is called a trade deficit.
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In contrast, when countries export more than they import, they enjoy a favorable
balance of trade. A balance of payments shows the total amount of money that flows into
the country, minus the total flow of money out of the country, over some period of time.
The balance of payments includes not only imports and exports, but also investments,
tourist dollars, and payments to and from foreign governments. (LO 1 ends)
2. Discuss the restrictions nations place on international trade, the objectives of
these restrictions, and their results
Sometimes, countries put up barriers to free trade. They may do this for several
reasons. These reasons may range from internal political pressures to a distrust of other
nations. Tariffs, or import duties, are taxes placed on a particular foreign product that
enters a country. Sometimes, tariffs are imposed simply to raise extra money for the
importing government. Other times, they are imposed to protect the domestic industry
from cheaper foreign competitors. Whatever the reason, it makes the imported good more
expensive. Some countries say that they impose tariffs to protect against dumping, which
happens when a country exports large quantities of a product at a price that is lower than
the price of the same product in the home market. This practice can drive domestic
manufacturers out of business.
Countries can also set up nontariff barriers, which are nontax measures imposed
by a government that favor domestic over foreign suppliers. There are five general types
of nontariff barriers. One, import quotas, which limit the amount of a particular good that
may be imported into a country during a given period of time. Two, embargoes, which
are a complete halt to trading with a particular nation or in a particular product. Three,
foreign-exchange control, which is a restriction on the amount of a particular foreign
currency that can be purchased or sold. Four, currency devaluation, which reduces the
value of a nation’s currency relative to the currencies of other countries. And five,
bureaucratic red tape, which is subtle, and can be very frustrating. Examples of
bureaucratic red tape include unnecessarily complex requirements related to product
testing, labeling, and certification. In addition, certain cultural attitudes and expectations,
such as use of colors or advertising strategies, can present an inadvertent barrier to trade.
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But why would a nation set up trade restrictions? In addition to political agendas,
there are six possible answers to this question. First, to equalize its balance of payments.
Second, to protect new or weak industries. Third, to protect national security. Fourth, to
protect the health of its citizens. Fifth, to retaliate for another nation’s trade restrictions.
And sixth, to protect domestic jobs. On the other hand, there are at least four reasons why
setting up trade barriers is not a good idea. One, it means higher prices for consumers.
Two, it restricts consumers’ choices. Three, it causes governments to misallocate
international resources since it tends to reward inefficiency. And four, it actually causes
higher unemployment. (LO 2 ends)
3. Outline the extent of international trade and identify the organizations working to
foster it
International business is growing steadily, despite trade restrictions and economic
slowdowns. Economists expect this growth to continue, due at least in part to the growing
economies in Eastern Europe and Asia. Canada, our biggest trading partner, is enjoying
enormous growth; Western European countries, however, are moving at a significantly
slower rate. Our other major trading partner, Mexico, suffered a serious recession in the
mid-nineties, but is bouncing back now. Growth has been sluggish in other South
American economies. The Japanese economy, however, is regaining momentum, and
other countries in Asia, notably China and India, are showing impressive growth trends.
China is emerging as a global economic power becoming the world’s sixth largest
economy. The economies in several central European countries and the Balkans are
expanding, as is the economy of Russia, which recently has performed better than
expected. The increase in exports and imports to and from countries all over the world
has contributed to a global rise in standard of living. The United States is exporting all
over the world, and especially to developing and newly industrialized countries.
Manufactured goods, agricultural products, and mineral fuels constitute our major exports
and imports.
Many worldwide organizations are involved with promoting trade. The General
Agreement on Tariffs and Trade, or GATT, was organized after WWII. Today it is an
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international organization of 132 nations dedicated to reducing or eliminating tariffs and
other barriers to world trade. Headquartered in Geneva, Switzerland, it provides a forum
for settling international trade disputes and problems. One important principle that was
developed was the most-favored nation status that was given to all member nations. It
meant that all nation members were to be treated equally with respect to trade issues.
GATT has sponsored several rounds of negotiations to reduce trade restrictions. The
three most productive were the Kennedy Round, which succeeded in reducing tariffs on
industrial and agricultural products; the Tokyo Round, which was able to remove or ease
import quotas, unrealistic quality standards, and customs red tape; and the Uruguay
Round, which lowered tariffs again, reformed trade in agricultural goods, wrote new rules
for intellectual properties and services, and strengthened the dispute-settlement process. It
also established the World Trade Organization, or WTO, to oversee the implementation
of the provisions of the Uruguay Round and to resolve disputes from trade in goods,
services, and ideas. The fourth round, known as the Doha Round is underway at present.
Whereas the WTO works on a global basis, smaller groups of organizations,
called economic communities, form to promote the free movement of resources and
products among their members and to create common economic policies. The European
Union, NAFTA, and OPEC are examples. (LO 3 ends)
4. Define the methods by which a firm can organize for and enter into international
markets
How can a firm get into international business? There are at least 8 ways to
approach it, with a range of degrees of involvement. The simplest way is licensing.
Licensing is a contractual agreement in which one firm permits another to produce and
market its product and use its brand name in return for a royalty or other compensation.
Another low-risk step is exporting, which is when a firm manufactures its product at
home, and then exports it, through an export/import merchant or agent, or by setting up a
sales office or branch in another country. The obvious problem, especially for newcomers
to exporting, is for the exporter to feel assured that he or she will be paid, and for the
importer to know that the goods have been sent. Often, an intermediary, in the form of a
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bank, is used. After signing the contracts detailing the merchandise and terms for
delivery, an importer asks his or her local bank to issue a letter of credit for the amount of
money needed to pay for the merchandise. The letter of credit states that the bank will
pay an amount of money to a stated beneficiary. The bank then notifies the exporter to go
ahead with the shipment, which is accompanied by a bill of lading. The bill of lading is
issued by the transport carrier to the exporter to prove that merchandise has been shipped.
The exporter then issues a draft from the bank, which orders the importer’s bank to pay
for the merchandise, which guarantees payment once it is accepted by the importer’s
bank. Of course, an exporter may instead establish its own sales office or branch in a
foreign country. A third way to enter the world of international business is through a joint
venture, which is a partnership set up to achieve a specific goal or operate for a specific
time. A fourth, and still-deeper level of involvement is a totally owned facility, where a
firm sets up its own production and marketing facilities in one or more countries. This is
a form of direct investment that provides complete control over operations. A fifth level
is a strategic alliance, which is a partnership, similar in some ways to a joint venture, that
is formed to create a competitive advantage on a worldwide basis. Strategic alliances are
growing steadily and are becoming very common in the automotive and computer
industries. A sixth way is to set up a trading company, which provides a link between
buyers and sellers in different countries. A more recent innovation is called countertrade.
Developed in response to currency restrictions, countertrade is essentially an international
barter transaction in which goods and services are exchanged for different goods and
services. Finally, the most radical foray into international business is the multinational
enterprise, a firm that operates on a worldwide scale without ties to any specific nation or
region. (LO 4 ends)
5. Describe the various sources of export assistance
So you have decided to enter the world of international business. Where can you
go for help if you need it? Several agencies and programs have been set up to facilitate
your business. One of the biggest is the Trade Promotion Coordinating Committee (or
TPCC), which includes 19 agencies designed to help American firms compete in foreign
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markets. These agencies help with a wide range of business activities, including finance,
distribution, trade barriers, legal assistance, and promotion. (LO 5 ends)
6. Identify the institutions that help firms and nations finance international business
In addition to the groups that work to help lay the groundwork in international
business, there are several institutions that help firms and nations finance international
business. Fortunately, as businesses have gone international, so have many banks. The
Export-Import Bank of the United States is an independent agency of the U.S.
government whose function is to assist in financing the exports of American firms. This
bank is commonly called the Eximbank. Outside the United States, a multilateral
development bank, or MDB, may help. This is an internationally supported bank that
provides loans to developing countries to help them grow. MDBs are located in Europe,
Asia, Africa, and Latin America. Finally, there is the International Monetary Fund or
IMF, an international bank with more than 183 member nations that makes short-term
loans to developing countries that are experiencing balance-of-payment deficits. (LO 6
ends)
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