International Business and Marketing

Chapter 4

Explain the importance of international business and the primary reasons nations trade and discuss the concepts of absolute and comparative advantage in international trade.

Describe how nations measure international trade and the significance of exchange rates.

Identify the major barriers that confront global businesses.

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Learning Goals

Explain how international trade organizations and economic communities reduce barriers to international trade.

Compare the different levels of involvement used by businesses when entering global markets.

Distinguish between a global business strategy and a multidomestic business strategy.

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This chapter will discuss the globalization approach of large and small companies.

We will discuss the reasons nations trade, the importance and characteristics of the global marketplace and the ways nations measure the international trade

We will also examine the barriers to international trade that arise from cultural and environmental differences.

Finally we will look at the strategies firms implement for entering foreign markets

Introduction

Consider for a moment that how many products you used daily that come from outside the Pakistan.

Coca-Cola, Pepsi, Fuel for Car, Television sets, computers etc.

Foreign Companies recognize the importance of the International Trade to their future success

Today, foreign sales are essential as sources of new market and profit opportunities

Thousand of products cross national boarders every day.

International Business and Marketing

As domestic markets mature and sales growth slows, companies recognize the importance to develop business in other countries.

� Boosts economic growth (by providing a market for its products and access to needed resources)

� Expands markets, (seek growth opportunities in other nations)

� Companies can make more efficient production systems� Reduce their dependence on the economies of home nations� Exports: Domestically produced goods and services sold in

markets in other countries.� Imports: Foreign-made products and services purchased by

domestic consumers.

Why Nations Trade

� Decisions to operate abroad depend upon availability, price, and quality of:– Labor– Natural resources– Capital– Entrepreneurship

� Companies doing business overseas must make strategic decisions.

International Sources of Factors of Production

� New social and cultural factors� Economic and political environments� Legal restrictions

� Companies can expand their markets, seek growth opportunities in other nations, make their production and distribution systems more efficient, and reduce their dependence on the economies of their home nations.

Additional Environmental Factors to which Companies are Exposed

� As developing nations expand into the global marketplace, opportunities grow.

� Many developing countries have posted high growth rates of annual GDP.� United States 4.4%� China 11.1%� India 9.4%� Pakistan 3.6%

� The economy of Pakistan is the 27th largest in the world in terms of purchasing power parity (PPP), and 44th largest in terms of nominal GDP. However as Pakistan has a population of over 183 million (the world's 6th-largest), GDP per capita is low

Size of the International Marketplace

Population Size and ProsperityThough developing nations generally have lower per capita income, many have

strong GDP growth rates and their huge populations can be lucrative markets.

Country Exports Imports Total Trade Trade Balance

 Canada 292.9 324.2 616.7 -31.8

 China 110.6 425.6 536.2 -315

 Mexico 216.3 277.7 494 -61.4

 Japan 70 146.4 216.4 -76.4

 Germany 48.8 108.5 157.3 -59.7

 United Kingdom 54.8 54.9 109.8 -0.1

 South Korea 42.3 58.9 101.2 -16.6

 Brazil 43.7 32.1 75.8 11.6

 Saudi Arabia 13.8 55.7 73.8 -37.6

 France 30.8 41.6 72.4 -10.8

 Taiwan 24.4 38.9 63.2 -14.5

 Netherlands 40.7 22.3 63 18.4

 India 22.3 40.5 62.9 -18.2

 Venezuela 17.6 38.7 56.4 -21.1

 Italy 16 36.9 52.9 -20.9

The largest U.S. partners with their total trade (sum of imports and exports) in billions of US Dollars for calendar year 2012 are as follows:

Top 10 Trading Partners with U.S.

� Absolute advantage: Country can maintain a monopoly or produce at a lower cost than any competitor.

� Example: China’s domination of silk production for centuries.

� Comparative advantage: Country can supply a product more efficiently and at lower cost than it can supply other goods, compared with other countries.

� Example: India’s combination of a highly educated workforce and low wage scale in software development.

Absolute and Comparative Advantage

� Balance of trade: Difference between a nation’s imports and exports.

� Balance of payments: Overall flow of money into or out of a country.

� Balance of payments surplus = more money into country than out

� Balance of payments deficit = more money out of country than in

Measuring Trade Between Nations

Major U.S. Exports and Imports�

U.S. demand for imported goods is partly a reflection of the nation’s prosperity and diversity.

�U.S. imports more goods than it exports but exports more services than it imports.

� Currency rates are influenced by:� Domestic economic and political conditions� Central bank intervention� Balance-of-payments position� Speculation over future currency values

� Values fluctuate, depending on supply and demand. � National governments can deliberately influence

exchange rates.� Business transactions are usually conducted in

currency of the region where they happen.� Rates can quickly create or wipe out competitive

advantage.

Exchange Rates

Barriers to International Trade

� Language: Potential problems include mistranslation, inappropriate messaging, lack of understanding of local customs, and differences in taste.

� Values and Religious Attitudes: Differing values about business efficiency, employment levels, importance of regional differences, and religious practices, holidays, and values about issues such as interest-bearing loans.

Social and Cultural Differences

� Infrastructure: Along with other economic measures, business should consider country’s infrastructure (Basic systems of communication, transportation, energy facilities, and financial systems).

� Currency Conversion and Shifts: Foreign currency fluctuations may present problems for global businesses. Fluctuating values can make pricing in local currencies difficult and affect decisions about market desirability and investment opportunities.

Economic Differences

� Political Climate � Stability is a key consideration.

� Legal Environment � Law, International regulations, Country’s law� Climate of corruption. Foreign Corrupt Practices Act prohibits

companies from bribing foreign officials, candidates, or government representatives. 37 countries have signed the organization for cooperation and development Anti-Bribery Convention.

� International Regulations � Tariffs and taxes charged on imported goods. � A lack of International Regulation enforcement, with piracy. (About

82% of software packages in use in China are pirated, about 71% in India, and almost 90% in Vietnam, 21% in USA, 34% in Europe)

Political and Legal Differences

Government CorruptionTransparency International produces an annual corruption index for businesspeople and the general public.

� Tariffs - taxes, surcharges, or duties on foreign products. � Revenue Tariffs generate income for the government.� Protective tariffs- to raise the retail prices of imported goods to

match or exceed the prices of similar products of home country or home country competitor.

� Nontariff Barriers - also called administrative trade barriers� Quotas limit the amount of a product that can be imported over a

specified time period.� Dumping is the act of selling a product abroad at a very low price.� An embargo imposes a total ban on importing a specified

product.� Exchange controls through central banks or government

agencies regulate the buying and selling of currency to shape foreign exchange in accordance with national policy.

Types of Trade Restrictions

� The world is moving toward more free trade.

� There are many communities and groups that monitor and promote trade

� International Economic Communities reduce trade barriers and promote regional economic cooperation.

� Free-trade area: Members trade freely without tariffs or trade restrictions.

� Customs union: Establishes a uniform tariff structure� Common market: Members bring all trade rules into agreement.

Reducing Barriers to Trade

� General Agreement on Tariffs and Trade (GATT)� Most industrialized nations found organization in 1947 to

reduce tariffs and relax quotas.� The World Trade Organization succeeded GATT

� Representatives from 153 countries� Reduce tariffs and promote trade

� World Bank� Funds projects to build and expand infrastructure in

developing countries� International Monetary Fund (IMF)

� Operates as lender to troubled nations in an effort to promote trade

Organizations Promoting Trade

� North American Free Trade Agreement (NAFTA) � World’s largest free-trade zone: United States, Canada, Mexico.� U.S. and Canada are each other’s biggest trading partners.

� Central America-Dominican Republic Free Trade Agreement (CAFTA)

� Free-trade zone among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

� $33 billion traded annually between U.S. and these countries.

� European Union� Best-known example of a common market.� Goals include promoting economic and social progress, introducing

European citizenship as complement to national citizenship, and giving EU a significant role in international affairs.

� SAARC, ASEAN, AU etc

International Economic Communities

� Determining which foreign market(s) to enter

� Analyzing the expenditures required to enter a new market

� Deciding the best way to organize the overseas operations

� Good starting point for research: CIA World Factbook

Going Global

� Risk increases with the level of involvement � Many companies employ multiple strategies� Exporting and importing are entry-level strategies

� Importing is the process of bringing in goods produced abroad.

� Exporting is the act of selling your goods overseas.

Levels of Involvement

� Countertrade – international transactions that do not

involve currency payments but use bartering.

� Franchising – a contractual agreement in which a local

entity gains rights to sell the franchisor’s product in the

foreign market.

� A foreign licensing agreement allows a firm to produce

or sell its product.

� Subcontracting involves hiring local firms to distribute,

produce, or sell goods and services.

Countertrade and Franchising

� The relocation of business processes to a lower-cost overseas location is offshoring.

� The ultimate level of global involvement is direct investment.� Directly operating production and marketing in foreign

country� Acquisition� Joint ventures� Overseas division

Offshoring and Direct Investment

� Global Business (Standardization) Strategies� Firm sells same product in essentially the same manner

throughout the world.� Works well for products with nearly universal appeal.

� Multidomestic (Adaptation) Strategies� Firm develops products and marketing strategies that

appeal to customs, tastes, and buying habits of particular national markets.

Developing a Strategy for International Business