Chapter-3

The

movement of good & services among nations without any political or economic barriers Why do we need to trade with other nations? Increased Production & Efficiency: A country should
produce what it is most capable of producing & by doing so it can become more efficient.

Consumers are Benefited from the Competition: Consumers purchases products for less.
Free trade brings competition in the global market & hence Comparative Advantage . This can lead to increase innovation that improves the products.

Employment & Economic growth: When productivity increases in importing or exporting sectors, wages also tend to rise & also expandable income. Access to Foreign Investment & Foreign Currencies: Direct Foreign Investment increases. Also, it brings foreign currencies to the exporting countries & later it can use these currencies in order to make payments for its import items.

 Comparative

Advantage theory: A country should sell to other countries those products that it produces more effectively & efficiently; and purchase from other countries those products that it cannot produce as effectively & efficiently Absolute Advantage theory: The advantage that exists when a country has a monopoly on producing a specific product

 Destroy

competition damage the domestic industry which lead to higher unemployment & lower growth opportunities for the economy.

the Uncompetitive Industries: Higher

Labor

may attract labor intensive industries. Like- Textile Industry more dependent on global imports. Also can encourage pollution & several environmental problems.

Competition: Countries with cheap labor Instability: Local markets become

Domestic

Global trade can be measured by two key indicators:

1.

transactions which are conducted between one specific country and all other countries during a particular period of time. Negative BOP occurs when more money is flowing out of the country than coming in. Positive BOP : Significant foreign investment within the country, more export opportunities, foreign currency reserve

Balance of Payments: A documentation of all

Current Account
Trade Balance (Exports less Imports) Net Services (Shipping costs, tourism) Net Income ( Interest, rent, dividends) Net Transfer ( Foreign aid, gifts)

Capital Account
Investment and lending activities by public & private sectors

Official Reserve Account

Changes in Gold or Foreign Currency Reserves

2. Balance of Trade: The total value of a nations

exports compared to its imports measured over a particular period. Balance of trade is a component of a countrys Balance of Payment. Trade Surplus : A favorable balance of trade occurs when the value of a countrys exports exceeds that of its imports. Example Trade Deficit: An unfavorable balance of trade occurs when the value of a countrys imports exceeds that of its exports. Example-

 Dumping:

Selling products in a foreign country at lower prices than those charged in the producing country. Why do many countries use Dumping? To reduce excess products in foreign markets or to enter into a new market. Disadvantages:
1.

2.

Users or consumers are likely to enjoy short term benefits but it can be less favorable in the long run May cause serious injury to the domestic industry & economy

 Licensing:

A global strategy in which a firm(the licensor) allows a foreign company(the licensee) to use its technology in exchange for a fee. Example- IGA Inc Advantages of Licensing Agreement: 1. Revenue Recognition: Licensor can gain

revenue in form of consultancy fees or providing start up supplies, materials 2. Cost effective: Licensor provides little or no money to transport or market their products.

3. Brand Recognition: Provide brand recognition or

credibility benefits for the licensing company

Disadvantages of Licensing Agreement:

1.

2.

Creates Competition & Expose Confidential Data: The licensee has the right to use the same production procedure. The more people who know the process, the higher the risk of breaching the confidentiality. Revenue may belong to the licensee: If a product experiences growth in the foreign market , the bulk of the revenue belongs to the licensee.

 Advantages

to the Licensee Company: Reduce Uncertainty or Risk: Dont need to

spend an unpredictable amount of money to develop a product which may not be salable.

Disadvantages : Less Opportunity to improve or innovate the products: This can create an adversarial relationship which can far exceed the financial benefits of licensing agreement

 Exporting:

Export Management Companies assist the countries to negotiate or to build trading relationships. Also deals with foreign customer offices and documentation Franchising: A contractual agreement where a parent company allows others to use the companys strategies & trademarks (support assistance/initial investment) in return of an initial fee & royalties. Example- McDonalds, Subway, KFC, Holiday Inn many more

 Advantages: 1.

2.

3.

Revenues for the franchisor: Payment of franchise fees, royalty provides a cash flow, higher profits & return on investment. Also reduce various operating costs. Uniform procedure: Requires uniformity in procedures which can enhance consistency, productivity & superior quality. Diversifying risk: Franchising diversify the risks through network expansion & also by changing market needs.

 Disadvantages: 1. 2. 3.
1. 2. 3. 4.

Trade name can be misused May need to implement new policies & procedures Disclose the confidential information Advantages from a Franchisees point of view:

Lower financial risk Be a part of a successful Brand Name Access to business experience & technology know-how Learn the latest developments & focus on sales revenue

 Disadvantages: 1.

2. 3.

Franchisor may exaggerate the franchisee fees or royalty which can reduce the profit margin of the franchisee Transfer the goodwill build in the local market at the termination of the contract Sometimes need to strictly follow the operating systems, standards or procedures of the franchisor

 Contract

Manufacturing : A foreign company produces private label goods to which a domestic company then attaches its own brand name or trade mark. Example- Nike Advantages: 1. Experiment a new market with lower capital, or initial investment cost. 2. Penetrate the new market with low risk 3. Can access to low labor cost or raw materials Disadvantages: make sure to involve with the right company

 Joint

venture : A partnership in which two or more companies join to undertake a major project. Example- Xerox Corp. & Fuji Co., BHPBilliton Advantages: Share technology and risk, marketing & management expertise, enter into a new market Disadvantages: Can learn others technology or expertise, or the shared technology may become obsolete.

 Strategic

between two or more companies established to help each company to obtain competitive market advantage. Example HP & Samsung Difference between Joint Ventures & Strategic Alliance Foreign Direct Investment: Purchasing of permanent property & businesses in foreign Countries. Foreign subsidiary: A company owns in a foreign country
by another company ( parent company)

Alliance: A long term partnership


1. 2.

Advantages:
Host country has complete control over the technology or expertise it may possess Allow the host nation to employ its own assets through cheap labor, access to raw materials or employment opportunities. Can raise standards of efficiency for domestic firms

3.

1.

2.

Disadvantages: Subsidiary may divert the employment of national asset activities that may be beneficial to the economy The home countrys assets can be taken over by the host country

 Be

Select

investments independently and jointly as some projects are more profitable in a group .

aware of profitable investments: Evaluate

entry: Mode may differ between investment

projects (exports, licensing, merger)

& review more effective more of

Use

Estimate

account projects expected returns and impact on future cash flows and risk

appropriate evaluation criteria: Take into

longevity of competitive advantage: Create new barriers to entry like- unique

sources of raw materials, economies of scale, patented technology

Socio cultural Forces: In order to involve in global trade, one must realize the cultural differences among nations such as social structures, religion, attitudes , language and values. Many countries are good at understanding other cultures, such as-China, Germany Never Assume What Works in One country will

Work in Another

 Changes

in Exchange Rate which implies that the changes in the value of one countrys currency relative to the currencies of other countries. High value of Dollar means foreign products become cheaper because it takes fewer dollars to purchase them. Low value of dollar means foreign goods are expensive as it requires more dollars to buy them.

 Labor

cost or cost of raw materials may vary significantly because of shifting of currency value. Currency valuation problems can be harsh on developing countries. Government sometimes intervene in order to adjust the exchange rate to increase the export of its products. Devaluation may lead to Battering The exchange of merchandise for merchandise or
service for service with no money involved

 Countertrading:

It is more complex than Battering as it may involve several countries, each trading goods or services . Example--

 Federal,

state or local laws makes the global business extremely difficult. Legal restrictions may differ among nations such as antitrust rules, labor relations, patens, taxes, child labor and many other issues which can heavily impact global business practices In order to be successful, Home country should take assistance regarding local rules & regulations from the Host country

 Technological

Constraints: Primitive transportation or storage system in developing countries may hamper the international distribution, specially for perishable food items. E-commerce or existence of Identity theft

The use of government regulations to limit the import of goods & services. 1. Tariff : The duties or customs or tax imposed by a government on import or export goods. Two kinds of Tariff: Protective ( Import Tax): A tariff levied on imported goods in order to protect the domestic industries specially infant industries. Revenue Tariff: A tariff for the purpose of producing revenue for the public or the government.

 Import

products that a nation can import through import licenses. Example- South Africa imposed import quotas against import of textiles from China.

quota: A restriction on the quantity of

Embargo:

A prohibition by a government on certain or all trade with a particular country, likeU.S embargo against Cuba. Nontariff barriers can create difficulty in Free Trade. Example- China Practice Mercantilism ( A strategy of maximizing exports & minimizing imports)

 General

Agreement of Tariffs & Trade (GATT) World Trade Organization (WTO) European Union North American Free Trade Agreement(NAFTA) Central American Free Trade Agreement (CAFTA)