Chapter# 3

Business in a
Borderless World
 The Role of International Business
• International business refers to the buying,
selling, and trading of goods and services
across national boundaries.
• Falling political barriers and new technology
are making it possible for more and more
companies to sell their products overseas as
well as at home.
 Why Nations Trade
• Nations and businesses engage in international
trade to obtain raw materials and goods that are
otherwise unavailable to them or are available
elsewhere at a lower price than that at which
they themselves can produce.
• absolute advantage
• Exists when a country is the only source of an
item, the only producer of an item, or the most
efficient producer of an item.
 comparative advantage
• Which occurs when a country specializes in
products that it can supply more efficiently or
at a lower cost than it can produce other items.
• The United States, having adopted new
technological methods in hydraulic fracturing,
has created a comparative advantage in the
mining and exporting of natural gas.
• outsourcing,
• transferring manufacturing and other tasks to
countries where labor and supplies are less
expensive.
• Trade between Countries
• To obtain needed goods and services and the
funds to pay for them, nations trade by
exporting and importing.
• Exporting the sale of goods and services to
foreign markets.
• Importing the purchase of goods and services
from foreign sources.
• Balance of Trade A nation’s balance of trade is
the difference in value between its exports and
imports.
• trade deficit a nation’s negative balance of trade,
which exists when that country imports more
products than it exports.
• Trade deficits are harmful because they can mean
the failure of businesses, the loss of jobs, and a
lowered standard of living.

• Balance of payments the difference between the

flow of money into and out of a country. A
country’s balance of trade, foreign investments,
foreign aid, loans, military expenditures, and
money spent by tourists comprise its balance of
payments.
 International Trade Barriers
• Economic Barriers When looking at doing business in another country,
managers must consider a number of basic economic factors, such as
economic development, infrastructure, and exchange rates.
• Economic Development. Many countries in Africa, Asia, and South
America, for example, are in general poorer and less economically
advanced than those in North America and Europe; they are often called
less-developed countries (LDCs). LDCs are characterized by low per-capita
income (income generated by the nation’s production of goods and
services divided by the population),which means that consumers are less
likely to purchase nonessential products.
• Infrastructure: is the basic facilities which directly benefit the process of
p ro d u c t i o n a n d d i st r i b u t i o n i n a n e co n o my. Ro a d s , ra i l ways ,
telecommunication systems, waterways, airways, financial institutions,
electricity, water supply etc, When doing business in LDCs, for example, a
b u s i n e s s m ay n e e d to co m p e n s ate fo r b a s i c d i st r i b u t i o n a n d
communication systems, or even a lack of technology.
 Exchange Rates
• The ratio at which one nation’s currency can
be exchanged for another nation’s currency is
the exchange rate.
• When the value of the U.S. dollar declines
relative to other currencies, such as the euro,
the price of imports becomes relatively
expensive for U.S. consumers.
Ethical, Legal, and Political Barriers
• A company that decides to enter the
international marketplace must contend with
potentially complex relationships among the
different laws of its own nation, international
laws, and the laws of the nation with which it will
be trading.
• For instance, India has strict limitations on foreign
retailers that want to operate within the country.
Until recently, foreign retailers were required to
partner with a domestic firm if they wanted to do
business within India.
 Tariffs and Trade Restrictions
• Tariffs and other trade restrictions are part of
a countr y ’s legal struc ture but may be
established or removed for political reasons.
• a tax levied by a nation on goods imported
into the country is called tariffs.
• A quota limits the number of units of a
particular product that can be imported into a
country
• The United States imposes quotas on certain
goods, such as garments produced in Vietnam
and China. Quotas are designed to protect the
industries and jobs of the country imposing the
quota.
• Embargo a prohibition on trade in a particular
product. Embargoes are generally directed at
specific goods or countries and may be
established for political, economic or religious
reasons.
• For example, Muslim nations forbid the
i mpo rtati o n o f al co h o l i c b eve ra ge s o n
religious grounds.
• Political Barriers Unlike legal issues, political
considerations are seldom written down and
often change rapidly. Nations that have been
subject to economic sanctions for political
reasons in recent years include Cuba, Iran,
Syria, and North Korea
• Businesses engaged in international trade
must consider the relative instability of
countries such as Iraq, Ukraine, and Venezuela.
• Political unrest in countries such as Pakistan,
Somalia, and the Democratic Republic of the
Congo may create a aggressive or even
dangerous environment for foreign businesses.
• Political concerns may lead a group of nations to
form a cartel, a group of firms or nations that
agrees to act as a monopoly and not compete
with each other, to generate a competitive
advantage in world markets.
• Probably the most famous cartel is , the
,
founded in the 1960s to increase the price of
petroleum throughout the world and to maintain
high prices.
 Social and Cultural Barriers
• Most business people engaged in international
trade underestimate the importance of social
and cultural differences; but these differences
can derail an important transaction.
• Technological Barriers Many countries lack
the technological infrastructure, and some
marketers are viewing such barriers as
opportunities.
• Along with opportunities, changing
technologies also create new challenges and
competition. The U.S. market share of the
personal computer market is dropping as new
competitors emerge that are challenging U.S.
 Trade Agreements, Alliances, and
Organizations
• Although these economic, political, legal, and
socio cultural issues may seem like daunting
barriers to international trade, there are also
organizations and agreements—such as the
General Agreement on Tariffs and Trade, the
World Bank, and the International Monetary
Fund—that foster international trade and can
help companies get involved in and succeed in
global markets.
• B y t h e e n d o f Wo r l d W a r I I , t h e r e w a s
considerable international momentum to
liberalize trade and minimize the effects of tariffs.
• The General Agreement on Tariffs and Trade
(GATT),originally signed by 23 nations, on
October 30, 1947 in Geneva, Switzerland,
provided a forum for tariff negotiations and a
place where international trade problems could
be discussed and resolved.
• World Trade Organization (WTO) international
organization dealing with the rules of trade
between nations.
• The goal is to help producers of goods and
services and exporters and importers conduct
their business.
North American Free Trade Agreement
(NAFTA)
• agreement that eliminates most tariffs and
t ra d e re st r i c t i o n s o n
to encourage trade
among Canada, the United States, and Mexico.
• The European Union a union of European
nations established in 1958 to promote trade
among its members; one of the largest single
markets today.
 World Bank
• The World Bank, more formally known as the
International Bank for Reconstruction and
D e v e l o p m e n t , w a s e sta b l i s h e d b y t h e
industrialized nations, including the United
States, in 1946 to loan money to
underdeveloped and developing countries.
 Getting Involved in International
Business
• Businesses may get involved in international
trade at many levels—from a small Kenyan
firm that occasionally exports African crafts to
a huge multinational corporation, such as
Shell Oil that sells products around the globe.
• Exporting and Importing Many companies
first get involved in international trade when
they import goods from other countries for
resale in their own businesses.
 Trading Companies
• A trading company buys goods in one country
and sells them to buyers in another country.
• Licensing is a trade arrangement in which one
company— —allows another
company— —to use its company
name, products, patents, brands, trademarks,
raw materials, and/or production processes in
exchange for a fee or royalty.
• Franchising is a form of licensing in which a
company—the franchiser—agrees to provide a
franchisee the name, logo, methods of
operation, advertising, products, and other
elements associated with the franchiser’s
business,
• in return for a financial commitment and the
agreement to conduct business in accordance
with the franchiser’s standard of operations.
 Contract Manufacturing
• occurs when a company hires a foreign company
to produce a specified volume of the firm’s
product to specification; the final product carries
the domestic firm’s name.
• Offshoring is the relocation of a business process
by a company, or a subsidiary, to another country.
• Joint Venture the sharing of the costs and
operation of a business between a foreign
company and a local partner.
 Direct Investment
• The ownership of overseas facilities. Direct
investment may involve the development and
operation of new facilities—such as when
Starbucks opens a new coffee shop in Japan.
• The highest level of international business
involvement is the multinational corporation
(MNC),a corporation, such as Apple, IBM or
ExxonMobil, that operates on a worldwide scale,
without significant ties to any one nation or
region.