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The Importance of International Business Chapter 9 Section 9.1 The Importance of International Business The Scope of International Business International business is not new, just easier 1600 British East India Company: established to trade with countries in Asia As sea routes were discovered trade increased International Business: Business activities that occur between two or more countries Difficulties of International Trade Laws/rules, currency exchange, traditions International business became a dominate aspect of economic life after WWII Almost all individuals are affected directly or indirectly by international business (cheaper products is major reason) Extent of International Trade Some brands are easily recognized as foreign: Honda, Sony, Mercedes Some commonly used companies are not thought of as being foreign but are (pg. 223) Companies such as McDonalds, General Motors, IBM, Coke all count on foreign markets to increase their sales See pg. 223 “U.S. Trading Partners” Most of the worlds trade takes place between developed countries Seeing increased trade of services (tourism, banking, advertising, computer services) Trade, Investment, & the Economy Investments are being made into industrialized economies Exceeding $340 billion China is seeing more foreign investment than any other country (mostly from Taiwan, Japan, and US) Foreign investment: Firms of one country building new plants and facilities or buy existing businesses in another country Example: Fiat investing into Chrysler International Trade and Investment Growing part of American Economy America sold over $1.8 trillion of its goods and services to foreign customers 20% of all jobs depend on foreign trade 5% of workers are employed by foreign companies working in the US Foreign companies have invested almost $2.1 trillion in the US See pg. 224-225 Reasons for Growth in International Business Why do you think businesses open internationally? Reasons for Growth in International Business #1 Reason: Profit (sell more products, sell for more $) Less competition Lower cost of making goods, less in shipping Overproduction Location to other countries is a major factor Factors to International Business Treaties on trade and investments signed by different countries World Trade Organization (WTO): International organization that creates and enforces the rules governing trade among countries Countries could put in place: Tariffs, quotas, or embargos Deals negotiated under WTO authority greatly reduce tariffs, boosts trade. Trade Bloc Group of two or more countries that agree to remove all restrictions between them on the sales of goods and services, while imposing barriers on trade with countries not included in the bloc European Union (EU) Best example of a trade bloc 27 members (pg. 226) Trying to create free movement of capital and labor, common economic and monetary policy. Would call “United States of Europe” 1999, 11 EU members merged their national currencies into a single currency called Euro Easier to trade with because of exchange rate NAFTA North American Free Trade Agreement Worlds largest trading bloc, removed tariffs and other barriers to trade among the 3 North American nations. Caused many American firms to open in Mexico Unlike EU there is no universal monetary system or unrestricted movement of people among the countries EU IMF and World Bank International Monetary Fund (IMF): Help countries that are facing serious financial difficulties in paying for their imports or repaying loans World Bank: Provides low-cost, long-term loans to help less-developed countries to develop basic industries and facilities such as roads and electric power plants. Other International Business Factors Advances in communication and transportation improved (telephone, fax, internet) Cheaper and quicker to obtain information from around the world and conduct business 24 hours a day Internet and Television make advertising easier Faster transportation Forms of International Business Section 9.2 Forms of International Business Takes place in many forms Most start by simply selling their products to other countries (Exporting) Importing: Buying goods or services made in a foreign country. Balance of Trade: Difference between total exports and imports Trade Surplus: Exports > Imports Trade Deficit: Imports > Exports Forms of International Business Take place through Licensing International Licensing: Occurs when one company allows a company in another county to make and sell products according to certain specifications. Receive a royalty, similar to franchising (another method) Less risk with exporting (why?) Forms of International Business Joint Ventures: 2 of more firms share the costs of doing business and also share the profits Wholly Owned Subsidiary: Firms setting up a business abroad on its own without any partners. Wholly owned subsidiary are more expensive to setup and more risky if the business fails Forms of International Business Strategic Alliance: Firms agree to cooperate on certain aspects of the businesses while remaining competitors on other aspects SI have become more common in recent years Example: Pharmaceutical companies both agreeing to share cancer info but compete in other markets. Domestic example construction. Forms of International Business Expansion of foreign markets has led to multinational firms Multinational Firm: Firm that owns or controls production or service facilities in more than one country Home Country: Country in which the business has its headquarters Host Country: Foreign location where it has facilities Parent Firm: Company headquarters Subsidiaries: Foreign branches, if registered as independent legal entity Most large businesses are multinational Must take previous factors into account: Monetary difference, customs/cultures Government Policies Policies, rules, and laws vary because of taking place between multiple countries (affect trade and investment) Economists consider free trade to be desirable Governments will occasionally impose tariffs, especially when “dumping” occurs Dumping: Practice of selling goods in a foreign market at a price that is below cost or below what it charges in its home country Dump to get domestic products out of the market President George W. Bush took this stance with foreign steel. Government Policies Quota: Limit to amount of goods entering a country Designed to protect market share of domestic products Nontariff Barriers: Nontax methods of discouraging trade Nontariff barriers usually don’t target specific companies. Almost all countries have Ex: Steering wheels in cars, buy American campaigns Difficult to remove because built around culture and tradition Government Policies Embargo Usually politically driven Ex: US companies cant conduct business with Cuba Sanctions: Milder form of embargo that bans specific business ties with a foreign country. Ex: Cant sell nuclear technology to Pakistan Government wont allow foreign firms to have majority control of airlines or TV stations Currency Values Key different between doing business domestically and internationally is the different value of currency Exchange Rate: Value of one country’s currency expressed in the currency of another country. Ex: 1 US dollar = 0.7733 euros = 0.9942 Canadian Dollar = 12 Mexican Peso = 82 Yen Currency Values Can Change Every Minute (like stock market) Managers must watch closely to get best rate Cultural Differences Culture: Customs, beliefs, values, and patters of behavior of the people of a country or group. Also… Language, religion, attitudes towards work, authority, family, etiquette, joking, gestures, manners, traditions Cultural differences can exist within one population United states sees differences among racial and ethnic groups Must know the cultural differences of country you work in Cultures Play a role in communication Low-context Culture: People communicate directly and explicitly. (United States) “Don’t beat around the bush”, no reading between the lines High-Context Culture: Communication tends to occur through nonverbal signs and indirect suggestions. (Japan). Don’t just come out and say what you want English has become the language of international business English can vary from regions Theories of International Trade Investment Section 9.3 Theories of International Trade Business between countries has grown for 60 years Countries are realizing that international trade can benefit all Comparative Advantage Theory Countries should specialize in products or services that they can provide more efficiently than other countries Much is based on climate and soil Examples: Brazil = Coffee, Domestic Should compare between other countries as well Examples: United State=Computers, Saudi Arabia= Oil Product Life Cycle Theory 1. 2. 3. 4. During its life cycle, a product or service goes through 4 stages: Introduction Growth Maturity Decline Example: VCR’s….. What would be a product in the decline now? Product Life Cycle Theory: Companies look for new markets when products are in the maturity and decline stages of the product life cycle Different phases occur at different times throughout the world Some businesses will move overseas as sales slow, some eventually return Balance of Payments Money comes in from the sale of goods domestic and abroad National Governments, WTO, and United Nations track international transaction and use the information to develop economic policies All international transactions are recorded in a statement called balance of payments Balance of Payments Statement 2 parts to it: Current account and Capital account Current Account: Records the value of goods and services exported and those imported to foreigners as well as other income and payments Capital Account: Records investment funds coming into and going out of a country. (Bank loans, deposits, purchase and sale of businesses, investments in new business) United States Balance of Payments Deficit on current account for several decades See Figure 9-6 pg. 237 Deficit means Americans have been buying more goods and services made abroad than they are selling to foreigners Can’t continue to do this forever United States Advantages The US Dollar is valued everywhere because stable society, government pro-business and economy is largest and richest in the world, foreign banks are willing to lend Not all countries have this luxury Many nations rely on financial assistance from International Monetary Fund (IMO) China has a fixed exchange rate, allows to keep prices low Career Opportunities in International Business International Business has created new jobs in business Ex: exporting, importing, teaching languages, translating language, trade laws specialist, banking etc Demand to understand international business will grow Most workers that get sent abroad are more skilled, mature, experienced, and tend to make more money Many universities are offering degrees in International Business Employment of International Managers Managers need to be able to work successfully in other countries Adapt to culture, be competent, socially flexible, receptive to new ideas Know foreign language, self-confidence, motivation to live abroad Most managers will be from the country where business is opening Expensive to send a manager to run a business overseas Culture shock is a common problem Becoming harder to get managers to move because of spouse working (replaced with short trips, teleconferencing)