chapt 2 Flashcards
Free trade
a trade policy that does not restrict imports or exports.
Comparative Advantage Theory
Supports the idea of free economic exchange.
Specializing and trading creates a mutually beneficial
exchange.
comparative advantage
an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners.
The U.S. has a comparative advantage in producing goods and
services
absolute advantage
the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time,
Other countries have an absolute advantage in things like
growing coffee and making shoes.
Balance of trade
Difference between money coming in and money leaving country
Trade surplus
the amount by which the value of a country’s exports exceeds the cost of its imports.
Trade deficit
the country is importing more goods and services than it is exporting
Balance of payments.
Goal is to have more money flowing into the country than out
Dumping
Used to reduce surplus products in foreign markets or to gain a
foothold in a new market
Strategies for Reaching Global Markets
from Least Amount of commitment, control, risk and profit potential to Most
Licensing
Exporting
Franchising
Contract Manufacturing
international joint ventures and strategic alliances
Foreign direct investment
Licensing
Getting help with distribution, promotion, and consulting.
* Gaining revenue it wouldn’t have otherwise generated.
* Spending little or no money to produce or market its products.
Drawbacks.
* If a product experiences remarkable growth in the foreign market,
the bulk of the revenues belong to the licensee.
* The licensing firm is selling its expertise and trade secrets.
Exporting
Export Assistance Centers help small and medium
companies with exporting.
* Indirect exporting is working with export-trading companies for help with negotiating and trading relationships.
Franchising
- Franchisors need to be careful to adapt their product to
the countries they serve. - Domino’s Pizza has learned that preferred toppings for its product vary widely—from curry in India to squid and sweet mayonnaise in Japan.
Contract Manufacturing
- A form of outsourcing.
- Contract manufacturing can be used to:
- Allow a company to experiment in a new market without incurring
heavy start-up costs such as building a manufacturing plant. - Temporarily meet an unexpected increase in orders.
International Joint Ventures and Strategic Alliances
- Often mandated by countries as a condition of doing
business (China). - Can increase a company’s footprint and global growth.
- Can be used to join forces.
Benefits of joint ventures.
* Shared technology and risk.
* Shared marketing and management expertise.
* Entry into markets where foreign companies are often not allowed
unless goods are produced locally.
Drawbacks of joint ventures.
* Stolen or obsolete technology.
* Becoming too large to be flexible.
Strategic alliances.
- Companies don’t share costs, risks, management, or even profits.
- Provides broad access to markets, capital, and technical expertise.
Foreign Direct Investment (FDI)
an ownership stake in a foreign company or project made by an investor, company, or government from another country.
Most common form is a foreign subsidiary.
- Primary advantage: Parent company maintains complete control
over its technology or expertise. - Primary disadvantage: Must commit funds and technology within
foreign boundaries.
Multinational corporations.
Includes firms that have manufacturing capacity or some other physical presence in different nations.
Sociocultural Forces
- Culture may include social structures, religion, manners
and customs, values and attitudes, language, and
personal communication. - It’s important to understand cultural differences and think
globally. - U.S. businesspeople sometimes accused of ethnocentricity.
- Many foreign countries good at adapting to U.S. culture.
Exchange rate.
a relative price of one currency expressed in terms of another currency
- Affects global markets.
- A high value of the dollar means a dollar is trading for more foreign currency than previously.
Devaluation
lowers the value of a nation’s currency
relative to others.
* Bartering may be an alternative if a nation’s currency is weak.
Countertrading
a situation when goods or services are traded for other goods or services rather than real currency
accounts for over 20 percent of all global
exchanges, especially with developing countries.
Trade Protectionism
Advocates of protectionism believe it allows
domestic producers to survive, grow and produce
jobs.
Some countries use it because they are wary of
foreign competition.
Tariffs:
* Protective tariffs.
* Revenue tariffs.
Import Quotas
*government-imposed limits on the quantity of a certain good that can be imported into a country.
- Used to protect domestic companies and preserve jobs.
- Nations also prohibit the import of certain products.
- Embargo.
- Nontariff barriers.
- Import licensing, product testing requirements, lengthy customs
procedures, local content requirements
The World Trade Organization
- General Agreement on Tariffs and Trade (GATT)
- Government leaders from 23 nations (1948).
- Global forum for reducing trade restrictions on goods, services,
ideas, and cultural programs. - Uruguay Round (1986) establishes World Trade
Organization. - Independent entity of 164 member nations whose purpose is to
oversee cross-border trade issues and global business practices. - Has not solved all global trade issues.
Common Markets
A common market is a formal agreement where a group is formed amongst several countries that adopt a common external tariff.
- A regional trade alliance.
- The European Union (EU), Mercosur, the ASEAN and the
COMESA are common markets. - African Continental Free Trade Area (AfCFTA) is largest
free-trade area in the world in terms of member nations
