Issues in Contemporary Business Chapter 4 International Business and Marketing

1. International Business and
Marketing
Chapter 4

2. Explain the importance of international
business and the primary reasons nations
trade and discuss the concepts of
absolute and comparative advantage in
international trade.
Describe how nations measure
international trade and the significance of
exchange rates.
Identify the major barriers that confront
global businesses.
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Learning Goals
Explain how international trade
organizations and economic
communities reduce barriers to
international trade.
Compare the different levels of
involvement used by businesses
when entering global markets.
Distinguish between a global
business strategy and a
multidomestic business strategy.
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3. This chapter will discuss the globalization approach of large and small companies.
We will discuss the reasons nations trade, the importance and characteristics of
the global marketplace and the ways nations measure the international trade
We will also examine the barriers to international trade that arise from cultural and
environmental differences.
Finally we will look at the strategies firms implement for entering foreign markets
Introduction

4. Consider for a moment that how many products you used daily that
come from outside the Pakistan.
Coca-Cola, Pepsi, Fuel for Car, Television sets, computers etc.
Foreign Companies recognize the importance of the International
Trade to their future success
Today, foreign sales are essential as sources of new market and
profit opportunities
Thousand of products cross national boarders every day.
International Business and Marketing

5. As domestic markets mature and sales growth slows,
companies recognize the importance to develop business in
other countries.
Boosts economic growth (by providing a market for its products and
access to needed resources)
Expands markets, (seek growth opportunities in other nations)
Companies can make more efficient production systems
Reduce their dependence on the economies of home nations
Exports: Domestically produced goods and services sold in
markets in other countries.
Imports: Foreign-made products and services purchased by
domestic consumers.
Why Nations Trade

6. Decisions to operate abroad depend upon availability,
price, and quality of:
– Labor
– Natural resources
– Capital
– Entrepreneurship
Companies doing business overseas must make
strategic decisions.
International Sources of Factors of
Production

7. New social and cultural factors
Economic and political environments
Legal restrictions
Companies can expand their markets, seek growth
opportunities in other nations, make their production
and distribution systems more efficient, and reduce
their dependence on the economies of their home
nations.
Additional Environmental Factors to
which Companies are Exposed

8. As developing nations expand into the global
marketplace, opportunities grow.
Many developing countries have posted high growth
rates of annual GDP.
United States 4.4%
China 11.1%
India 9.4%
Pakistan 3.6%
The economy of Pakistan is the 27th largest in the world in
terms of purchasing power parity (PPP), and 44th largest in
terms of nominal GDP. However as Pakistan has a population of
over 183 million (the world's 6th-largest), GDP per capita is low
Size of the International Marketplace

9. Population Size and Prosperity
Though developing nations generally have lower per capita income, many have
strong GDP growth rates and their huge populations can be lucrative markets.

10. Country Exports Imports Total Trade Trade Balance
Canada 292.9 324.2 616.7 -31.8
China 110.6 425.6 536.2 -315
Mexico 216.3 277.7 494 -61.4
Japan 70 146.4 216.4 -76.4
Germany 48.8 108.5 157.3 -59.7
United Kingdom 54.8 54.9 109.8 -0.1
South Korea 42.3 58.9 101.2 -16.6
Brazil 43.7 32.1 75.8 11.6
Saudi Arabia 13.8 55.7 73.8 -37.6
France 30.8 41.6 72.4 -10.8
Taiwan 24.4 38.9 63.2 -14.5
Netherlands 40.7 22.3 63 18.4
India 22.3 40.5 62.9 -18.2
Venezuela 17.6 38.7 56.4 -21.1
Italy 16 36.9 52.9 -20.9
The largest U.S. partners with their total trade (sum of imports and exports) in billions of US Dollars for calendar year 2012 are as follows:

11. Top 10 Trading Partners with U.S.

12. Absolute advantage: Country can maintain a
monopoly or produce at a lower cost than any
competitor.
Example: China’s domination of silk production for
centuries.
Comparative advantage: Country can supply a
product more efficiently and at lower cost than it can
supply other goods, compared with other countries.
Example: India’s combination of a highly educated
workforce and low wage scale in software development.
Absolute and Comparative
Advantage

13. Balance of trade: Difference between a nation’s
imports and exports.
Balance of payments: Overall flow of money into or
out of a country.
Balance of payments surplus = more money into
country than out
Balance of payments deficit = more money out of
country than in
Measuring Trade Between Nations

14. Major U.S. Exports and Imports
U.S. demand for imported goods is partly a reflection of the nation’s prosperity and diversity.
U.S. imports more goods than it exports but exports more services than it imports.

15. Currency rates are influenced by:
Domestic economic and political conditions
Central bank intervention
Balance-of-payments position
Speculation over future currency values
Values fluctuate, depending on supply and demand.
National governments can deliberately influence
exchange rates.
Business transactions are usually conducted in
currency of the region where they happen.
Rates can quickly create or wipe out competitive
advantage.
Exchange Rates

16. Barriers to International Trade

17. Language: Potential problems include mistranslation,
inappropriate messaging, lack of understanding of
local customs, and differences in taste.
Values and Religious Attitudes: Differing values
about business efficiency, employment levels,
importance of regional differences, and religious
practices, holidays, and values about issues such as
interest-bearing loans.
Social and Cultural Differences

18. Infrastructure: Along with other economic measures,
business should consider country’s infrastructure (Basic
systems of communication, transportation, energy
facilities, and financial systems).
Currency Conversion and Shifts: Foreign currency
fluctuations may present problems for global businesses.
Fluctuating values can make pricing in local currencies
difficult and affect decisions about market desirability and
investment opportunities.
Economic Differences

19. Political Climate
Stability is a key consideration.
Legal Environment
Law, International regulations, Country’s law
Climate of corruption. Foreign Corrupt Practices Act prohibits
companies from bribing foreign officials, candidates, or government
representatives. 37 countries have signed the organization for
cooperation and development Anti-Bribery Convention.
International Regulations
Tariffs and taxes charged on imported goods.
A lack of International Regulation enforcement, with piracy. (About
82% of software packages in use in China are pirated, about 71% in
India, and almost 90% in Vietnam, 21% in USA, 34% in Europe)
Political and Legal Differences

20. Government Corruption
Transparency International produces an annual corruption index for businesspeople and the general public.

21. Tariffs - taxes, surcharges, or duties on foreign products.
Revenue Tariffs generate income for the government.
Protective tariffs- to raise the retail prices of imported goods to
match or exceed the prices of similar products of home country or
home country competitor.
Nontariff Barriers - also called administrative trade barriers
Quotas limit the amount of a product that can be imported over a
specified time period.
Dumping is the act of selling a product abroad at a very low price.
An embargo imposes a total ban on importing a specified
product.
Exchange controls through central banks or government
agencies regulate the buying and selling of currency to shape
foreign exchange in accordance with national policy.
Types of Trade Restrictions

22. The world is moving toward more free trade.
There are many communities and groups that monitor and
promote trade
International Economic Communities reduce trade barriers
and promote regional economic cooperation.
Free-trade area: Members trade freely without tariffs or trade
restrictions.
Customs union: Establishes a uniform tariff structure
Common market: Members bring all trade rules into agreement.
Reducing Barriers to Trade

23. General Agreement on Tariffs and Trade
(GATT)
Most industrialized nations found organization in 1947 to
reduce tariffs and relax quotas.
The World Trade Organization succeeded GATT
Representatives from 153 countries
Reduce tariffs and promote trade
World Bank
Funds projects to build and expand infrastructure in
developing countries
International Monetary Fund (IMF)
Operates as lender to troubled nations in an effort to
promote trade
Organizations Promoting Trade

24. North American Free Trade Agreement (NAFTA)
World’s largest free-trade zone: United States, Canada, Mexico.
U.S. and Canada are each other’s biggest trading partners.
Central America-Dominican Republic Free Trade
Agreement (CAFTA)
Free-trade zone among United States, Costa Rica, the Dominican
Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
$33 billion traded annually between U.S. and these countries.
European Union
Best-known example of a common market.
Goals include promoting economic and social progress, introducing
European citizenship as complement to national citizenship, and
giving EU a significant role in international affairs.
SAARC, ASEAN, AU etc
International Economic
Communities

25. Determining which
foreign market(s) to
enter
Analyzing the
expenditures required to
enter a new market
Deciding the best way to
organize the overseas
operations
Good starting point for
research: CIA World
Factbook
Going Global

26. Risk increases with the level of involvement
Many companies employ multiple strategies
Exporting and importing are entry-level strategies
Importing is the process of bringing in goods
produced abroad.
Exporting is the act of selling your goods overseas.
Levels of Involvement

27. Countertrade – international transactions that do not
involve currency payments but use bartering.
Franchising – a contractual agreement in which a local
entity gains rights to sell the franchisor’s product in the
foreign market.
A foreign licensing agreement allows a firm to produce
or sell its product.
Subcontracting involves hiring local firms to distribute,
produce, or sell goods and services.
Countertrade and Franchising

28. The relocation of business processes to a lower-cost
overseas location is offshoring.
The ultimate level of global involvement is direct investment.
Directly operating production and marketing in foreign
country
Acquisition
Joint ventures
Overseas division
Offshoring and Direct Investment

29. Global Business (Standardization) Strategies
Firm sells same product in essentially the same manner
throughout the world.
Works well for products with nearly universal appeal.
Multidomestic (Adaptation) Strategies
Firm develops products and marketing strategies that
appeal to customs, tastes, and buying habits of particular
national markets.
Developing a Strategy for
International Business