international trade and international investments in both goods and services/different types of international/differences between domestic and international business
kind of business
international business is business conducted between two or more countries and it has been growing at a very fast rate, usually greater than the national economies of countries
major 2 forms on IB
International trade and International investment
Exports and imports, both of which take place in goods and services
Portfolio investment(in bonds, stocks [without management control], and taking advantage of higher interest rates in other countries), and Foreign direct investment(investing in other countries to produce goods and services) ex. Ford motor producing cars in brazil
-some degree of management control but the investing country(FDI)
companies doing business internationally operate in different environments (cultural, political, economic..) important to be aware of environmental differences and their impact on business practices in different countries
firms participating in IB
Large, small, medium…for many good reasons
business has become global and everyone will function in a truly global business environment
rate of growth
very fast, faster than the national economies of countries
Dollar value has increased from $60 billion in 1948 to about +15 trillion
many foreign countries are investing in the US to challenge US companies in their own market
ex. Toyota and Honda are challenging American automobile companies in the US
facilitates international/ globalization of IB
-improvements in communication, and transportation(both have become faster and more efficient) internet, efforts of international organizations (such as world trade), changes in trade and investment polices of governments, regional economic integration agreements (NAFTA and European countries), emerging markets
affects of globalization process
national economies of countries (more interdependent), companies, (more sales/profit opportunity but will have to face more competition from foreign companies), consumers(more choice in foreign and domestic products), countries, people (job creation/loss), and national cultures
2 company groups in IB
Companies, which undertake an international business activity (exporting, importing, FDI)-FOCAL FIRMS
Other firms, which offer focal firms various services
focal firm types
large multinational companies, small to medium size companies (SME), born globals
large multinational companies
private, public, or state owned operate in many countries and may derive a significant percentage of their revenues from their international operations
ex. 80% of coca colas revenues from their international operations
small to medium size companies (SME)
more companies are going international because of developments such as advances in trade/communication, reduction in trade restrictions
companies that go international soon after their founding because they identify a need for their goods or services in global markets
facilitators of focal firms
Export management companies (EMC),
foreign freight forwarders,
international trade lawyers
Export management companies (EMC)
help manufacturers export their products, find potential customers in other countries for your product..working on a commission basis.
company may use the services of an EMC is that the manufacturer may not be familiar with the exporting process
buy a product from a manufacturer and export it on their own account
foreign freight forwarders
specialist in international logistics/transportation, saving you time and money when shipping your products to other countries
facilitate international payments and issue letters of credit to make sure that exporters will ship the goods and importers will the money
clear imported goods through the customs on behalf of importers
international trade lawyers
offer legal advice, participate in international business negotiations, and prepare contracts
other countries buy products, on their own account, from an exporter and distribute them in their country
arrange a deal between exporters and importers on a commission basis
a country is participating in mercantilism when it exports its products to other countries as much as possible (by encouraging exports through its policies, undervalued currency) but tries to import (much) less from other countries by discouraging imports through various import restrictions
absolute trade (adam smith) and comparative advantage (david ricardo)
-both answer question why countries trade
a country should not attempt to make all products by restricting imports (it should not try to be self sufficient in all products it needs)
it SHOULD make the products which it can produce more efficiently than other countries and import other products which can be produced more efficiently by other countries
countries are better off
-specializing according to their absolute advantage
-trading with one another
extension of absolute advantage; if a country has absolute advantage in all products, countries can still benefit from I international trade if they specialize according to their comparative advantage
motivations for FDI
monopolistic advantages, internalization, market imperfections, competitive pressures
you believe your company had a better product/technology/management skills/etc. than your local competitors in other countries
not INTERNATIONALIZAION, you believe that by making your FDI in another country, instead of using licensing, you will have better control over your know-how/technology
take advantage of more favorable wage rates, tax rates, government incentives…in other countries
when your competitors expand internationally your company feels the pressure to go international
international product life cycle theory
international trade and FDI, it is about the relationship between the efficient location of production of a product and the stage in the life cycle of a product
stages in life cycle
-new product stage
(end of ch. 6)
unrestricted international trade
ex. being able to export and import products without facing trade restrictions
refers to government protection of domestic industries from foreign competition by restricting/blocking/making more expensive imports of a product coming into a country
ex. steel imports are restricted domestic steel manufactures increase their share of domestic product, thereby increasing their revenues and avoiding/reducing job losses
reasons for government restrictions
help domestic companies, saving jobs, infant industry argument, national defense argument, and health and safety concerns
tariffs, specific tariff, ad valorem tariff, compound tariff, countervailing duties, antidumping duties, nontariff restrictions, quotas, product standards, import license, currency controls
tax on imports paid by the importer
on a per unit basis
ad valorem tariff
value of imported product
combination of specific and ad valorem tariffs
imposed when foreign exporters receive subsidies (various types of assistance [financial and non financial]) from their governments
imposed when foreign exporters export their products at artificially low prices or below costs
trade restrictions which are not tariff based are nontariff restrictions such as quotas
obtaining license to import products
not making foreign exchange available for imports, etc.
world trade organization (WTO)
most important international organization. WTO mission is to liberalize international business activities (lower tariff rates, reduce nontariff restrictions, and barriers to FDI, increase the protection of intellectual property rights
more than 150 countries are apart of the WTO
General agreements on tariffs (GAAT)
now WTO, founded in 1940 and at the request by the United States replaced by GAAT in 1995
Regional economic integration (REI) refers to the integration of national economies of a group of countries by eliminating tariff and non-tariff restrictions on international trade among themselves
objective of REI
benefit from international trade by increasing the volume of international trade among member countries
ex. nafta in north America (us, mexico, Canada), European union, mercosur in south America (brazil, argentina, uruaguay, Paraguay, and Venezuela)
types of REIs
Free trade Area (FTA), Customs Union (CU), Common market
Free trade Area (FTA)
loosest form on integration, limited to free trade among member countries
Custom Union (CU)
member countries would harmonize their trade policies with non-member countries, such as applying the same tariff rates
increase the level of integration of national economies by allowing;
-free movement of citizens of the member countries within the REI(so they can travel and work in other countries)
-free flow of financial resources so that people and businesses can invest in other member countries
economic and political union
ultimate stage of REI, member countries harmonize more of their policies (competition policy, labor practices, same currency,…)
REI level examples
NAFTA-free trade are
europeon union-commons market + (it is more than a common market but less than a total economic and political union
signed in 1994 and only has 3 countries (us, Canada, mexico)
europeon union (eu)
started in 1957 with the treaty of Rome; its membership has gone from 6 in 1957 to 27 today. They have their own common agricultural policy (designed to support and protect their farmers)
Also have common currency-EURO which is used in 16/27 countries
effect of REI
a) government drop their protectionist policies and competition intensifies
b) market size becomes larger (because companies produce for the enlarged market they become more efficient producers)
c) the volume of international trade among member countries increase
d) the area attracts more FDI because foreign companies would like to produce and sell in the REI, in addition to exporting to it
pay attention to REI because
they create international business opportunities for companies from member and nonmember countries. Increase level of competition especially for companies that are no longer protected by protectionist polices of their government
company from non-member (REI) countries
international business refers to
performance of trade and investment activities by firms across national borders
which of the following is a term used
foreign direct Investment (FDI)
The tendency of companies to systematically increase the international dimension of their business activities is known as ________.
Which of the following is a strategy in which foreign securities, such as stocks and bonds, are purchased to generate financial returns?
international portfolio investment
Which of the following companies is engaged in importing?
A Guatemalan automobile dealership starts selling Volkswagens built in Mexico.
When a U.S. investment fund buys stock in a Latvian corporation, this is an example of ________.
international portfolio investment
Which of the following terms mean a situation or event where a misunderstanding puts some human value at stake?
Which of the following terms refers to a firm’s potential loss from poorly developed strategies or procedures?
When the tsunami hit Japan, the exchange rate value of the yen surprisingly went up, making Japanese exporters concerned about ________ risk.
Which of the following is an example of commercial risk?
A U.S. clothing retailer unknowingly opens a store in Moscow just before a period of political unrest begins.
A company with 500 or fewer employees, as defined in Canada and the U.S., is known as a ________.
small and medium sized enterprise (SME)
Which of the following is NOT an example of a nonprofit organization?
Imagine a ten-year-old Web-based app store that has 150 U.S.-based employees, sells most of its programs to U.S. customers, but does sell some to foreign customers. This company is an example of a ________
small or medium-sized enterprise (MSE)
Which of the following is an example of a born global firm?
Working from Melbourne, Australia, and Palo Alto, California, the nine employees of Lifx are designing a wireless light bulb and seeking venture capital.
Which of the following is a reason for internationalization?
to better serve key customers that have relocated abroad
In which of the following industries would a company internationalize to be closer to supply sources?
One of the motivations for international expansion is to gain access to lower-cost or better-value factors of production. Which of the following describes this motivation?
A shoe manufacturer in South Carolina moves its U.S. operation to Vietnam in order to lower its labor costs significantly.
A U.S. company expands into South American markets in order to increase its production runs and lower its per-unit manufacturing cost. This is an example of ________.
developing economies of scale in sourcing, production, marketing, and R&D
Which of the following factors has dramatically reduced the costs of conducting business with customers around the world?
rise of information and communications technologies
Which of the following is a factor fueling global economic integration?
Increased competitive pressures
At a career planning seminar, Nicholas Wong completed a survey designed to rank his motivations for studying international business. Nick’s highest ranked answers revolved around providing competitive advantages and operational efficiencies to his future employer. These answers exceeded answers related to interconnectedness, the U.S. economy, and personal advantages. Which one of the following reasons for studying international business was Nick’s highest ranked?
a competitive advantage for the firm
Upon her retirement as CEO of an import/export business, Christine Xavier looked back over her reasons for specializing in international business. Traveling around the world and meeting people from other lands was more important to her than increasing connectedness or helping the economy. Which of the following reasons for specializing in international business describes Christine’s career satisfaction?
a competitive advantage for you
Which phase of globalization was triggered by the rise of electricity and steel production?
Which of the following was a characteristic of the third phase of globalization?
A grocer in Niagara Falls, Ontario, regularly buys vegetables from farmers in New York State. The recent invention of the telephone makes it much easier for the grocer to call the farmers to ask about current prices. In what phase of globalization did this situation occur?
Brian Stevens was on his way to a meeting of representatives of 149 nations who would be discussing regulations that ensure fairness and efficiency in global trade and investment. Which of the following organizations is holding the meeting that Brian will be attending?
Which of the following is NOT a dimension of market globalization?
Which of the following is NOT an example of a driver of market globalization?
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