Chapter 4 Competing in World Markets Why Nations Trade exports domestically produced goods services sold in other countries imports foreign goods services purchased by domestic customers International Sources of Factors of Production business decisions to operate abroad depend on the availability of the factors of production abroad trading with other countries allows a company to spread risk b c different nations may be at different stages of the business cycle Size of the International Marketplace US is 3 in population and 8 in per capita GDP Absolute and Comparative Advantage absolute advantage country has absolute advantage in making a product for which it can maintain a monopoly comparative advantage nation can develop a comparative advantage in a product if it can supply it more efficiently and at a lower price than it can supply other goods Measuring Trade Between Nations balance of trade difference between a nation s exports and imports balance of payments overall money flows into and out of a country Major US Exports and Imports Imports Exports Exchange Rates o Crude oil motor vehicles machinery o Motor vehicles agriculture airplanes exchange rate value of one nation s currency relative to the currencies of other countries devaluation drop in currency s value relative to other currencies or to a fixed standard hard currencies currencies that owners can easily convert into other currencies Barriers to International Trade Social and cultural differences language values religions Economic barriers infrastructure comm transport energy currency Political and legal differences political climate legal environment internat l regulations Types of Trade Restrictions tariffs tax imposed on imported goods quotas limit amounts of particular products that countries can import dumping selling products abroad at prices below production costs exporting a large quantity at lower price driving down price of domestic products embargo total ban on importing trading with a specific country exchange controls when a bank agency restricts certain trade Reducing Barriers to International Trade Organizations Promoting International Trade General Agreements on Tariffs and Trade GATT internat l trade accord that reduced worldwide tariffs and other barriers disputes World Trade Organization WTO internat l institution that monitors GATT agreements and mediates internat l trade World Bank funds projects that expand nations infrastructures Internat l Monetary Fund promotes trade thru financial cooperation and eliminate barriers makes short term loans to nations who cannot meet their expenses North American Free Trade Agreement NAFTA agreement between US Mex CA to break down tariffs and trade Central America Dominican Republic Free Trade Agreement CAFTA DR agreement among US Costa Rica DR El Salvador Guatemala Honduras Nicaragua to reduce tariffs and trade restrictions European Union 27 Nation European economic alliance goal Borderless Europe International Economic Communities restrictions Going Global Levels of Involvement Importers and Exporters Indirect exporting firm manufactures a product that becomes part of another product sold in foreign markets o o Direct exporting firm seeks to sell its products in markets outside its own country o Exporting firm may turn to an export management company for advice o Offset agreement matches a small business with a major internat l firm Countertrade system of internat l bartering agreements Contractural agreements franchising foreign licensing subcontracting Franchising o Franchise contractual agreement in which frachisee gains the right to sell franchisor s products Foreign Licensing Agreement one firm allows another to produce sell its product in return firm gets compensation Subcontracting hiring local employees to sell goods services o Allows foreign firm to take advantage of subcontractor s expertise in local culture Offshoring relocation of business processes to a lower cost location overseas Internat l Direct Investment o Acquisition company purchases another firm in the host country o Joint venture allows companies to share risks costs profits and responsibilities o By setting up an overseas division a company can conduct a lot of its business overseas multinational corporation MNC firm with significant operations and marketing activities outside its home country From Multinational Corporation to Global Business Developing a Strategy for International Business global business strategy offering a standardized worldwide product and selling it in the same manner throughout a firm s domestic and foreign markets multidomestic business strategy developing and marketing products to serve different needs and tastes of separate national markets
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