Unit 3.01 International Business Basics

1. Unit 3.01 International Business Basics Unit 3 – Business in the global economy

2. Key terms • Imports • Exports • Balance of Trade • Balance of Payments • Exchange Rate

3. imports items bought from other countries • US #1 importer in the world • In 2011, the US imported $2.314 Trillion • Top US imports: • Crude oil • Passenger cars • Medicinal preparations • Automotive accessories • Other household goods Note: US imports ALL our bananas, coffee, cocoa, spices, tea, silk, and crude rubber

4. EXPORTS goods and services made in the US that are sold to other countries • US 2nd largest exporter in the world (behind China) • In 2011, the US exported $1.511 Trillion • Top US Exports • Fuel • Aircraft • Motor vehicles • Vacuum tubes • Telecommunications equipment

5. Balance of trade Difference between a country’s total exports and total imports • Trade Surplus • Export (sells) more than it imports (buys) • Favorable balance of trade • Trade Deficit • Imports (buys) more than it exports (sells) • Unfavorable balance of trade

6. Us balance of trade Current U.S. Trade Deficit - $42 Billion

7. U.S. Top trading partners(year-to-date July 2012)

8. TRADING AMONG NATIONS • Absolute Advantage – exists when a country can produce a good or service at a lower cost than other countries • Typically results from an abundance of natural resources or raw materials • i.e. coffee in South America or oil in Saudi Arabia

9. TRADING AMONG NATIONS • Comparative Advantage – situation in which a country specializes in the production of a good or service at which it is relatively more efficient • i.e. a country produces both computers & clothing better than any other country; but the market for computers is stronger/more profitable; so country decides to invest in computer production and buy clothing elsewhere

10. INTERNATIONAL CURRENCY • Foreign exchange rates – the value of a currency in one country compared with the value in another • Effects imports/exports • Example: • If the Toyota Motor Company can produce a car for export in Japan at a cost of 2,000,000 Yen, how much does that car cost in U.S. dollars? • If the exchange rate for Yen/U.S. Dollar is 200.00 yen to the dollar, the car would have to cost $10,000 at the factory for the Toyota company to realize its costs. • Toyota cars typically sell for $20,000+ US dollars, making the car very profitable to export to the US (for Japan) • As Yen/US Dollar exchange rates change to 100.00, it now costs $20,000 at the factory to make, therefore reducing the Japanese profit and lowering the incentive to export to the US

11. INTERNATIONAL CURRENCY • Factors affecting currency values • Balance of payments – when favorable, stronger currency • Economic conditions – when buying power of currency declines (i.e. high inflation), value of currency declines • Political disability – country instability weakens currency

12. RECENT VALUES OF CURRENCIES Source: http://www.xe.com/

13. assignment • Calculate the cost of the following 5 items in local currency:

14. Unit 3.02 The Global Marketplace Unit 3 – Business in the global economy

15. INTERNATIONAL BUSINESS ENVIRONMENT • Geography • Cultural influences • Economic development • Political and legal concerns

16. INTERNATIONAL BUSINESS ENVIRONMENT • Geography • Location, climate, terrain, seaports, natural resources… • How does this influence international business?: • Very hot – limits the types of crops that can be grown • Many rivers/seaports – easily ship products for foreign trade • Limited natural resources – must depend on imports

17. INTERNATIONAL BUSINESS ENVIRONMENT • Cultural influences • Culture – the accepted behaviors, customs, and values of a society • How does this influence international business?: • Language – communication • Religion – what is sacred to one may not be to another • Values – is bribery considered wrong in different cultures? • Customs – is it offensive to give a gift? • Social Relationships – how men and women interact in business

18. INTERNATIONAL BUSINESS ENVIRONMENT • Economic development • Going to work on a high-speed bullet train to manage a computer network in a high-rise building versus riding an oxcart to a grass hut to operate a hand loom to make cloth for people in their village • How does this influence international business?: • Literacy Level – high levels literacy > better education > more and better goods & services • Technology – high automation > create and deliver goods quickly • Agricultural Dependency – highly dependent > weaker manufacturing base > fewer quantity/quality of products • Infrastructure – nations’ transportation, communication, and utility systems • Stronger infrastructure > better prepared for international business

19. INTERNATIONAL BUSINESS ENVIRONMENT • Political and legal concerns • Type of government, stability of government, and the government’s policies toward business • How does this influence international business?: • Regulations on fair trade • Require safety inspections • Enforce contracts

20. ELEMENTS OF INTERNATIONAL BUSINESS ENVIRONMENT

21. INTERNATIONAL TRADE BARRIERS • Trade Barriers – restriction to free trade • Quotas • Tariffs • Embargoes

22. QUOTAS A limit on the quantity of a product that may be imported or exported within a given period • Reasons for quotas • To keep supply low and prices the same • Protects domestic producers from international competition • To express displeasure at the policies of the importing country • To protect one of a country’s industries from too much competition from abroad • Critics of import quotas • Corruption (bribes to get a quota allocation) • Smuggling (circumventing a quota)

23. TARIFFS A tax that a government places on certain imported products • Reasons for tariffs • To set amount per pound, gallon, or other unit • To set the value of a good • In 2010, the US collected over $25 Trillion in import tariffs • Example of tariffed goods: • Chickens $0.90 each • Rice $0.018/kg

24. EMBARGOES Government stops the export or import of a product completely • Reasons for embargoes • To protect a country’s industries from international competition more than the quota or tariff will achieve • Sanctions related to • Terrorism • Diamond Trading • Narcotics • Nuclear proliferation • Human rights violations • The US currently has trade embargos with approx. 30 countries

25. ENCOURAGING INTERNATIONAL TRADE • Free-trade zones • Free-trade agreements • Common markets

26. FREE-TRADE ZONES A selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing • Usually located around a seaport or airport • Importer pays duty only when the product leaves the zone

27. FREE-TRADE AGREEMENTS Member countries agree to remove duties (import taxes) and trade barriers on products traded among them • US has 12 Free-Trade Agreements in place with 18 countries • Results in increased trade between members • NAFTA (North American Free Trade Agreement) • Began on January 1, 1994 • Canada & Mexico are US #1 and #3 trading partners, respectively

28. COMMON MARKETS Members do away with duties and other trade barriers • Allow companies to invest freely in each member’s country • Allow workers to move freely across borders • Examples • European Union (EU) • Latin American Integration Association (LAIA)

29. assignment • NAFTA Pros & Cons

30. Unit 3.03 International Business Organizations Unit 3 – Business in the global economy

31. International business organizations • Multinational Companies (MNCs) • Global Market Entry Modes • International Trade Organizations

32. Multinational companies An organization that does business in several countries • Home country – the country where parent company is located • Host country – the country in which the MNC places business activities • There are over 889,000 MNCs around the globe • In 2008, the top 100 MNCs sales accounted for $8.5 Trillion • The Top 3 MNCs in 2009 (all financial institutions): • Citigroup Inc. (USA) • Allianz SE (Germany) • ABN AMRO (Netherlands)

33. Multinational companies Coca-Cola

34. Multinational companies • Global Strategy – uses the same product and marketing strategy worldwide • Coca-Cola • 1886 Coca-Cola invented as fountain drink/tonic • 1899 began bottling • 1909 nearly 400 bottling plants in operation • 1920s bottled sales exceed fountain sales • 1930s global expansion begins • 1940s 64 bottling plants around world (supplying WWII soldiers) • 1950s packaging innovations • 1960s new brands introduced (Fanta, Tab, Sprite) • 1970-80s consolidation to serve customerstechnology leads  to a global economy international mega-chains • 1990s new & growing markets previously closed, now open (eastern Europe, Africa) • Today Coca-Cola is sold in more than 200 countries and is the most recognized brand in the world

35. Coca-cola 1971 Advertisement – I’d Like to Buy the World a Coke

36. Coca-cola • “Open Happiness” campaign • Global integrated marketing • Launched in U.S. on "American Idol" • Worldwide advertising

37. Multinational companies • Multinational strategy – treats each country market differently • i.e. McDonald’s

38. Multinational companies • Benefits • Large amount of goods available • Lower prices • Career opportunities • Foster understanding, communication, and respect • Friendly international relations • Drawbacks • Economic power • Worker dependence on the MNC • Consumer dependence • Political power

39. Global market entry modes • Licensing • Franchising • Joint Venture

40. LICENSING Selling the right to use some intangible property (production process, trademark, or brand name) for a fee or royalty • 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

41. FRANCHISING Right to use a company name or business process in a specific way • 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

42. JOINT VENTURE An agreement between two or more companies to share a business project • 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 because several companies are involved • Very popular for manufacturing, such as Japanese and U.S. automobile manufacturers

43. INTERNATIONAL TRADE ORGANIZATIONS • World Trade Organization • International Monetary Fund • World Bank

44. WORLD TRADE ORGANIZATION (WTO) Created in 1995 to promote trade around the world • 150 member countries • Settles trade disputes • Enforces free-trade agreements • Other 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

45. INTERNATIONAL MONETARY FUND (IMF) Established in 1946 to help promote economic cooperation • Maintains an orderly system of world trade and exchange rates • Includes more than 150 member nations

46. WORLD BANK Created in 1944 to provide loans for rebuilding after WW II • AKA the International Bank for Reconstruction and Development • Today the World Bank has more than 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

47. assignment • MNCs Pros & Cons