Chapter 3 - Global Business - Brief Overview

Theoretically, international trade is as logical and worthwhile as, say, trade between California and Washington. Yet, nations tend to restrict the import of certain goods for a variety of reasons. In spite of such restrictions, international trade has increased almost steadily since World War II.

THE BASIS FOR INTERNATIONAL BUSINESS. International business encompasses all business activities that involve exchanges across national boundaries.

Absolute and Comparative Advantage

An absolute advantage is the ability to produce a specific product more efficiently than any other nation. Saudi Arabia has an absolute advantage in the production of crude oil and petroleum products, South Africa in diamonds, and Australia in wool.

A comparative advantage is the ability to produce a specific product more efficiently than any other product. Goods and services are produced more efficiently when each country specializes in the products for which it has a comparative advantage.

Exporting and Importing

Exporting is selling and shipping raw materials or products to other nations.

The top 10 merchandise-exporting states are shown in Figure 3-1.

Importing is purchasing raw materials or products in other nations and bringing them into one’s own country.

A nation’s balance of trade is the total value of its exports minus the total value of its imports, over some period of time. If a country imports more than it exports, its balance of trade is negative and is said to be unfavorable.

A trade deficit is an unfavorable (or negative) balance of trade. (See Figure 3-2.)

A nation’s balance of payments is the total flow of money into the country minus the total flow of money out of the country over some period of time. Balance of payments is thus a much broader concept than balance of trade.

METHODS OF ENTERING INTERNATIONAL BUSINESS. A firm that has decided to enter international markets can do so in several ways. Typically, a firm begins its international operations at the simplest level.

Licensing. Licensing is a contractual agreement in which one firm permits another to produce and market its product and use its brand name in return for a royalty or other compensation. The advantage of licensing is that it provides a simple method of expanding into a foreign market with virtually no investment.
Exporting. A firm may also manufacture its products in its home country and export them for sale in foreign markets. Like licensing, exporting can be a relatively low-risk method of entering foreign markets. However, it opens up several levels of involvement to the exporting firm. At the most basic level, the exporting firm may sell its products to an export-import merchant, which is essentially a merchant wholesaler.
Exporting to International Markets. Some American companies make products in the United States and export them to foreign markets. A letter of credit is issued by a bank upon request of an importer stating that the bank will pay an amount of money to a stated beneficiary (exporter). A bill of lading is issued by the transport carrier to the exporter to prove that merchandise has been shipped. A draft is issued by the exporter’s bank, ordering the importer’s bank to pay for the merchandise thus guaranteeing payment once it is accepted by the importer’s bank. The exporting firm may ship its products to an export-import agent, which arranges for the sale of the products to foreign intermediaries for a commission or fee. An exporting firm may establish sales offices or branches in foreign countries. These installations are international extensions of the firm’s distribution system.
Joint Ventures. A joint venture is a partnership formed to achieve a specific goal or to operate for a specific period of time. A joint venture may be used to produce and market an existing product in a foreign country or to develop an entirely new product.
Totally Owned Facilities. A firm may develop its own production and marketing facilities in one or more foreign nations. This direct investment provides complete control over operations, but it carries a greater risk than the joint venture. The firm is really establishing a subsidiary in a foreign country. Direct investment may take either of two forms: the firm builds or purchases manufacturing and other facilities in the foreign country or the firm purchases an existing company under an arrangement that allows it to operate independently of the parent company.