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EXPLORING GLOBAL BUSINESSCHAPTER-03

Dr. Gehan Shanmuganathan, (DBA)

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SAMSUNG ELECTRONICS SHINES IN THE GLOBAL SPOTLIGHT

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SAMSUNG ELECTRONICS SHINES IN THE GLOBAL SPOTLIGHT Samsung started as a small firm specializing in exporting food

products to China Later ventured into insurance In 1970 produced black and white televisions Today, Samsung is an international corporation offering cameras,

computers, cellphones, disk drivers, and semiconductors Currently competes with global giants such as Apple, Hewlett-

Packard, Intel, and Motorola Samsung uses innovation through research and development

centers in the US, Europe, India, and China and partnership with international companies in terms of sourcing and manufacturing

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LEARNING OBJECTIVES

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LEARNING OBJECTIVES Explain the economic basis for international business Discuss the restrictions nations place on international trade, the

objectives of these restrictions, and their results Outline the extent of international business and world economic

outlook for trade Discuss international trade agreements and international economic

organizations working to foster trade Define the methods by which a firm can organize for and enter into

international markets Discuss the various sources of export assistance Identify the institutions that help firms and nations finance

international business

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INTERNATIONAL TRADE

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INTERNATIONAL TRADE When Coca Cola sells parts of its chain to other

countries, Pier 1 imports goods from around the world into the US

Trade is an important source of good jobs for our workers and a source of higher growth for our economy

Trade is an engine of economic growth Trade has helped millions of people to lift their

lives from poverty to prosperity

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INTERNATIONAL BUSINESS DEFINED

International business encompasses all business activities that involves exchanges across national boundaries- Pride, William M., Hughes, Robert J. and Kapoor, Jack R. (2012) Business.

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ADVANTAGES IN INTERNATIONAL TRADE Some countries are better equipped with

national resources compared to other countries. They trade the production surplus in an exchange of what they need. These national resources are based on, Specialization Natural resources Labor Technological advances

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BASIS FOR INTERNATIONAL BUSINESS

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THE BASIS FOR INTERNATIONAL BUSINESS

Absolute advantage- ability to produce a specific

product more efficiently than any other nation.

Comparative advantage - ability to produce a

specific product more efficiently than any other

product.

Business survival through international

opportunities

Globalization and global presence

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ABSOLUTE ADVANTAGE The ability to produce a specific product

more efficiently than any other nation Examples

Saudi Arabia- petroleum products South Africa- diamonds Australia – wool

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COMPARATIVE ADVANTAGE The ability to produce a specific product

more efficiently than any other product Examples are,

Research and development- USA High-technology industries – South Korea Identifying new markets - India

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EXPORTING AND IMPORTING

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EXPORTING AND IMPORTING Exporting is selling and shipping raw

materials or products to other nations Importing is purchasing raw materials or

products of other nations and brining them into one’s own country

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TOP 10 EXPORTS STATES IN THE US- 2005 IN $ BILLIONS

Texas

California

New York

Washington

Michigan

Illinois

Ohio

Florida

Pennsylvania

Massachusetts

$0.0 $20.0 $40.0 $60.0 $80.0 $100.0 $120.0 $140.0

$128.8

$116.8

$50.5

$38.0

$37.6

$36.0

$35.0

$33.4

$22.3

$22.0

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INTERNATIONAL TRADE CONCEPTS

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SOME INTERNATIONAL TRADE CONCEPTS Balance of Trade-The balance of trade indicates the

difference between nation’s imports and exports values over a period of time (nation’s export value minus imports value)

Trade Deficit- The trade deficit is a negative balance of trade (I > E) (discuss when E>I)

Balance of Payment- Balance of Payment is the total flow of money into a country (exports) minus total flow of money out of that country (imports) over a period of time (National Debt)

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BALANCE OF TRADE

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TRADE DEFICIT

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BALANCE OF PAYMENT

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RESTRICTIONS TO INTERNATIONAL BUSINESS

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TYPES OF TRADE RESTRICTIONS

Tariff Barriers

Non-Tariff Barriers

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TARIFF BARRIERS

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TARIFF BARRIERS Tariffs- The most commonly imposed custom

duty (import duty) Two types of tariffs – Protective Tariffs (fresh

tomato from Mexico)and Revenue Tariffs (Scotch Whiskey)

Both increase the cost price of the product Dumping - exportation of large quantities of a

product at a lower price than that of the same product in that home market (impose of antidumping duties to control)

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NON-TARIFF BARRIERS

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NON-TARIFF BARRIERS A non-tariff barrier is non-tax measure imposed by the

government to favor domestic over foreign suppliers. This creates obstacles to marketing of foreign goods in a country and increase costs for exporters Import quota- imposing a import limit on a particular

product in given period of time Embargos- a complete halt to trading with a particular

nation used mostly as a political weapon Foreign exchange control- This is the limitation on the

foreign currency that can be purchased or sold Currency devaluation- The decrease of nation’s own

currency in relation to the currency of other nations

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REASONS FOR TRADE RESTRICTIONS To equalize a nation’s balance of payment To protect new or weak industries- e.g- imposing

quotas on foreign textile in the US To protect national security- e.g- exporting

strategic defense related products to unfriendly

nations

To protect the health of citizens- e.g- farm products

contaminated with insecticides

To retaliate for another nation’s trade restrictions To protect domestic employments

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REASONS AGAINST TRADE RESTRICTIONS

Higher prices for consumers

Restrictions of consumers choice

Misallocation of international resources by trying to

protect already weak industries (protection of weak

industries is a waste of national resources)

Loss of jobs if the majority works in exports

oriented industries

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WORLD ECONOMIC OUTLOOK FOR TRADE

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WORLD ECONOMIC OUTLOOK In the United States, international trade now accounts for

over one-fourth of Gross Domestic Products (GDP) Growth in advanced economies slowed, while emerging

economies continued to grow. The BRIC countries United States economy in an economic depression Canada and Western Europe are projected to slow the

growth Mexico and Latin America are stagnant Japan indicates a slow growth Asia is making a tremendous growth currently

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UNITED STATES CONTINUE IN INTERNATIONAL TRADE US exports to Central and Eastern Europe

and Russia will increase US will increase investments in these

countries creating demand for capital goods and technology

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EXPORTS AND THE US ECONOMY

Globalization has opened opportunities for

US economy for international trading despite

economic recessions in 2001 and 2008

Canada and Mexico are best partners for US

exports, while China and Canada for imports

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US EXPORTS AND IMPORTS 2009

Rank/Trading Partner Exports ($ billion) Rank/Trading Partner Imports ($ billion)Canada 204.7 China 296.4Mexico 129 Canada 224.9China 69.6 Mexico 176.5Japan 51.2 Japan 95.9United Kingdom 45.7 Germany 71.3Germany 43.3 United Kingdom 47.5Netherlands 32.3 South Korea 39.2South Korea 28.6 France 34France 26.5 Taiwan 28.4Brazil 26.2 Venezuela 28.1TOTAL 657.1   1042.2

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INTERNATIONAL TRADE AGREEMENTS

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THE GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

An international organization of 153 nations

dedicated to reducing or eliminating tariffs

and other barriers to world trade

These 153 nations accounted for more than

97% of world’s merchandise trade

GATT headquartered in Geneva, Switzerland

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GATT NEGOTIATION ROUNDS The Kennedy Round (1964-1967) to reduce

US tariffs by 50% The Tokyo Round (1973-1979) to reduce

participating member country tariff by 35% The Uruguay Round (1986-1993) and also

created World Trade Organization (WTO) in order to guide GATT

The Doha Round (2001)

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INTERNATIONAL ECONOMIC ORGANIZATIONS WORKING TO FOSTER TRADE

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INTERNATIONAL ECONOMIC ORGANIZATIONS

Economic Community- an organization of

nations formed to promote the free

movement of resources and products among

its members and to create common

economic policies European Union an example

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INTERNATIONAL ECONOMIC ORGANIZATIONS European Union North American Free Trade Agreement (NAFTA) The Central American Free Trade Organization(CAFTA) The Association of Southeast Asian Nation (ASEAN) The Pacific Rim Commonwealth of Independent States (CIS) The Organization of Petroleum Exporting Countries

(OPEC)

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INTERNATIONAL BUSINESS ENTRY STRATEGIES

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INTERNATIONAL BUSINESS ENTRY STRATEGIES Licensing- A contractual agreement in which one

firm permits another to produce and market its products and use its brand name in return for royalty or other compensation. E.g- McDonald, KFC

Exporting- organization manufactures in the home country to export to other countries. E.g- ExxonMobil

Joint venture- a partnership between two entities for a business operation in a country (guest country). E.g- Samsung Research in US

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INTERNATIONAL BUSINESS ENTRY STRATEGIES Totally owned facility- with total ownership of the

business Strategic Alliance- partnership formed to create

competitive advantage on a worldwide business Trading company- These companies provide a link

between the international buyer and the seller Counter Trade- International barter transactions Multinational Firms- A firm that operates on a

worldwide scale without ties to any specific nation or region

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FINANCING INTERNATIONAL BUSINESS

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FINANCING INTERNATIONAL BUSINESS

The Export-Import Bank of the United States

Multilateral Development Banks

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QUESTIONS……..

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WEEKLY ASSIGNMENT-03 What effects might the devaluation of the

nation’s currency have on its export oriented business firms, its consumers, and the debts it owes to other nations? Discuss.