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Domestic Business. Making, buying, and selling goods and services within a country. International Business. Business activities needed for creating, shipping, and selling goods and services across international borders. Doing Business in a Foreign Country? Things to consider:.
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Domestic Business • Making, buying, and selling goods and services within a country
International Business • Business activities needed for creating, shipping, and selling goods and services across international borders
Doing Business in a Foreign Country? Things to consider: • 1. Geography- Location, climate, terrain, seaports, and resources • 2. Cultural Influences- Accepted behaviors, customs and values • 3. Economic Development- Literacy level, Technology, Infrastructure • 4. Political/Legal Concerns- Type of government and policies towards business
Absolute Advantage • Occurs when a country can produce a good or service at a lower cost than other countries (usually due to a large supply of natural resources) • Ex. Saudi Arabia producing oil • Ex. Columbia producing coffee
Comparative Advantage • Occurs when a country chooses to specialize in the production of a certain good or service • Ethanol, wind, solar
Imports vs. Exports • Import- Buying of goods and services produced from foreign countries • bananas, coffee, oil, etc. • Export- Selling of goods and services to foreign countries • McDonald’s, ESPN, Nike, Dell, etc.
Balance of Trade • The difference between a country’s total imports vs. total exports • Trade surplus- when a country exports more than it imports • Trade deficit- when a country imports more than it exports
Balance of Payments • The difference between the amount of money that comes into a country and the amount of money that goes out • Positive vs. Negative
Exchange Rates • The value of a currency in one country compared with the value in another.
Factors influencing exchange rates • Balance of payments • Economic conditions • Political stability
Trade Barriers • government imposed regulations that increase the cost and/or restrict the number of imported goods
Types of Trade Barriers: • Tariff- tax on imported goods • Ex. You are buying an imported couch for your tv room. The manufacturer charges $2,000, but the government imposes a 20% tariff, which brings the price up to $2,400 • Quota- limits on the volume of imported goods to protect domestic interests • Export Restraints- limits on the volume of exported goods to protect domestic interests
Types of Trade Barriers: • Embargo- prohibit the import or export of a product altogether • Ex. Cuba—United States relations dating back to 1960’s • Government Sanctions- government imposed restrictions on foreign trade due to inappropriate business practices • Ex. Burma has the highest rate of inhumane work conditions • Ex. Mexico breaking fishing laws while fishing for tuna
Multinational Companies(MNC) • A Global Strategy- uses the same product and marketing strategy worldwide. • Multinational Strategy- treats each country market differently to adapt to the customs, tastes, and buying habits of a distinct market.
Entering the Global Market • Licensing- agreement in which a domestic company, the licensor,receives royalties from the licensee, to produce its product, sell its service, or use its brand name in a foreign market. Ex. NFL Logos • Franchising-franchisor licenses the entire business to another person or organization known as the franchisee. Ex. Dunkin Donuts • Joint Venture- A strategic alliance in which two existing companies collaborate to form a new business venture. Ex. Autos and GPS systems
Why Invest Overseas? • Market Seeking • Saturated Sales at Home • Unique Advantage Over Competition • Resource Seeking • Foreign Country May Offer Cheaper Resources: • Capital • Natural • Human
Foreign Direct Investment: • Foreign direct investment (FDI) pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country.
Foreign Portfolio Investment: • Foreign portfolio investment (FPI), on the otherhand is a category of investment instruments that is more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments , such as, stocks or bonds of a foreign enterprise which does not necessarily represent a long-term interest.
Portfolio Investment vs. Direct Investment • Example of FPI: John Yamashita, a Japanese citizen, purchases one hundred shares of stock in General Motors (GM). John now owns part of a U.S. corporation, the shares of which are part of his personal investment portfolio. John is eligible to receive dividend payments from GM, participate in shareholder decisions, or sell the stock for a profit/loss. John’s share of GM is very minor, and his chief concern is not the long-term profitability of the company but the short-term value of his stock. He might therefore sell his share quickly if the share price goes up or down significantly.
Portfolio Investment vs. Direct Investment • Example of FDI: Hungry Dragon Toys, a Chinese company, is sitting on a lot of cash. The company’s board of directors decides to take some of that money and purchase Cooperative Chemical, a plastics company in New Jersey. Hungry Dragon, a foreign investor, now owns a U.S. subsidiary company. Unlike John Yamashita’s small investment in GM, Hungry Dragon’s ownership of Cooperative Chemical is substantial and more likely to be long term. Hungry Dragon is unlikely to sell if the U.S. economy faces a temporary downturn. A comparison of FPI and FDI is useful to illustrate why some kinds of foreign investment tend to be more volatile than others.
