International Business Flashcards
Why do it
• Supply chains are now global
• Corporations are now international in scope
• Countries are part of larger regional trading blocs
• Small markets cannot support large industries
- Aerospace, automotive
- Need high volumes to support R&D effort
• Need to grow, because smaller companies get
amalgamated into larger ones
• Communication & transportation make it possible
We have globalization in markets and production
Markets: the consolidation of many national markets into one big world market
Production: global competition, global workplace, multinationals
International business
Any commercial transaction that crosses the borders of two or more nations.
Importing
Importing: when a company buys goods outside the country and resells them domestically.
Exporting
Exporting: when a company produces goods domestically and sells them outside the country
Globalization (impact on international business)
Globalization has made international business prevalent, and fewer and fewer products are made solely within one country’s borders
Globalization has been driven by technological change (internet, inexpensive and fast transportation and communications)
Globalization
Globalization, the trend whereby national economies are becoming integrated into the world economy, is reflected in three developments:
1. the rise of the global workplace and e-commerce
2. the trend of the world’s becoming one big market
3. the rise of both big firms and quick, Internet-enabled small firms worldwide
Globalisation rests on the free movement of:
- Goods, Money, and People Nationalism (Make America Great!) and the rejection of the free movement of people (Brexit) are counterbalances to the trend towards ever increasing Globalisation.
Conditions affecting international trade
Product design and characteristics, packaging, promotion and other have to take account of differences amongst business environments & markets, such as:
• Cultural
• Economic
• Political and legal
Culture
Culture: the shared set of beliefs, values, knowledge, and patterns of behavior common to a group of people
International business requires cultural literacy of
national cultures and subcultures
The main components of culture (6)
Education
Values
Customs
Social structure
Religion
Language
Infrastructure
Infrastructure: the physical facilities that form the basis for its level of economic development.
Developed countries
Developed countries: first-world countries, those with a high level of economic development and generally high average level of income among their citizens
Less-developed countries
Less-developed countries: or developing countries, are third-world countries, those nations with low economic development and low average incomes
Emerging markets
Emerging Markets: High growth markets
Political and legal systems
- Political systems may be stable or unstable
- Political instability makes it difficult to commit to long term investments as these could suffer from unforeseen events (Political Risk)
• Expropriation: defined as a government’s seizure of a domestic or foreign company’s assets.
• Conflict & violence -
Legal systems differ and may be permissive or
restrictive towards business practices
• Corruption & Enforcement
• Intellectual property protection
• Taxation
Strategies for reaching global markets
From lower risk and control to higher risk and control
- exporting, licensing, franchising, foreign direct investment
Strategies for reaching global markets: exporting
• The most basic level of international market development.
• It means producing products domestically and selling them abroad.
• Sales are made to other businesses that act as wholesalers or retailers for the firm’s product or sales can be made directly to consumers or businesses that use the product themselves.
Strategies for reaching global markets: licensing
• Involves a domestic firm granting a foreign firm the rights to produce and market its product or use its intellectual property rights in a defined geographical market.
• Firms grant licensing rights to others in foreign countries to produce and/or sell their products (e.g. Products with professional sports team logos, Pepsi bottling rights, etc.).
• Involves a licensor and a licensee, with royalties being paid.
Strategies for reaching global markets: franchising
• Is a specialized type of licensing
• A firm expands through foreign franchising by offering franchisees the right to duplicate a specific business in other countries (e.g. McDonalds).
• Involves a franchisor and a franchisee, with royalties being paid.
Strategies for reaching global markets: foreign direct investment
• This represents the deepest level of global involvement.
• It involves investing in foreign countries to set up
manufacturing, distribution systems and/or sales offices in foreign countries.
• Examples include Bombardier which has manufacturing, engineering, administration and customer service facilities in many countries and continents.
Foreign subsidiary
A foreign subsidiary is a company in a foreign country that is totally owned and controlled by the parent company. The advantages of having a foreign subsidiary are:
• No sharing
• More control
• More in-country incentives
Exporting advantages and disadvantages
Advantages
- for a nation: creation of wealth, local jobs
- for a corporation
• allows for more volume which covers fixed costs (lower prices, higher margins, more competitive)
Disadvantages
- for a nation: none
- for a corporation
• can be administratively complicated (export permits, import tariffs, after sales support)
• expensive (high transportation & insurance costs, currency variations)
Importing advantages and disadvantages
Advantages
- Internationally
• Efficient allocation of resources
- For an importing nation:
• Access to goods at a lower cost than domestically
- For a corporation
• Access to goods & services at a lower cost
• More competitive
• More productive
Disadvantages
- For a nation
• Perceived loss of jobs
• Cash outflow
- For a corporation
• Can be expensive (High transportation & insurance costs, currency variations)
Protectionism
- Seeks to protect local jobs from displacement to other national entities
- Seeks to protect local industries
• Agriculture is always the top priority - Seeks to promote a balance of trade or a favorable inflow of funds
- Seeks to ensure national autosufficiency
Barriers to trade: trade protectionism
Trade protectionism—the use of government regulations, tariffs, quotas, and embargoes to limit the import of goods and services.
Barriers to trade: tariffs
A fancy name for “taxes” on imports
A tariff is a trade barrier in the form of a customs duty, or tax, levied mainly on imports.
Barriers to trade: import quotas
(+ dumping definition)
An import quota is a trade barrier in the form of a limit on the quantity of a product that can be imported.
Dumping is the practice of a foreign company’s selling its products abroad for less—even less than the cost of manufacture—than the price of the domestic product in that market.
Barriers to trade: embargoes
An embargo is a complete ban on the import or export of certain products
Exchange rates
Currencies vary in value one to another according to economic factors
Currency Exchange Rate : the rate at which one country’s currency can be exchanged for the currencies of other countries
International business transactions have to account for these short term variations
Companies can protect themselves from currency losses with special insurance and through forward currency contracts
Trading blocs
From Free trade areas to Political union
- European Union
• Europe - USMCA (Before NAFTA)
• North America - Mercosur
• South America - ASEAN
• Asia (Pacific region)
Free trade
Free trade = different barriers against non members
Economic union
Economic Union = common trade policy against non members
Global trade: balance of trade
Balance of trade is the value of a country’s exports compared to the value of its imports as measured over a particular period of time.
Global trade: trade surplus
Trade Surplus or favorable balance of trade, exists when the value of a country’s total exports exceeds the value of its total imports.
Global trade: trade deficit
Trade Deficit or unfavorable balance of trade, exists when the value of a country’s total imports exceeds the value of its total exports.
Global trade: balance of payment surplus
Balance-of-Payments Surplus: or favorable balance of payments, exists when more money flows into a country than flows out.
Global trade: balance of payments deficit
Balance-of-Payments Deficit: or unfavorable balance of payments exists when more money flows out of a country than flows in.
Global supply chain: Outsourcing
A common practice of many companies, outsourcing, or contract manufacturing, is defined as using suppliers outside the company to provide goods and services.
Global supply chain: global outsourcing/offshoring
(+ 3 advantages)
Global outsourcing, sometimes called offshoring, is defined as using foreign suppliers to provide labor, goods, or services.
Three reasons to use offshoring are:
• Special resources
• Special expertise
• Labor costs
Global supply chain: joint venture
(+3 advantages)
A firm may form a joint venture, also known as a strategic alliance, with a foreign company to share the risks and rewards of starting a new enterprise together in a foreign county.
Three advantages are:
• Local expertise
• Local base
• Outside assistance
