MODULE 3

MRKT 204 International Business and Trade 100

1st Semester AY2020_2021
Sharing:

Name a factor or a
reason contributed
to the creation and
expansion of
Mitsubishi?

ENGAGE: Trace the roots of some Multi

National Companies
 Forms of Business Organization
SOLE PROPRIETORSHIP
is a business owned by one person. Many of the stores, companies, and other businesses you see each day
have a single owner, even though they employ many people.
• For a person to start a sole proprietorship, three major elements are needed. First, the new business owner
must have a product or service to sell.
• Second, money for a building, equipment, and other start-up expenses will be required. Third, the owner must
know how to manage the business activities of the company or hire someone else who knows how.

Advantages Disadvantages
• Ease of starting • Limited Sources of Funds
• Freedom to make business decisions • Long hours and requires hard work
• Owner keeps all profits • Unlimited risks
• Pride of Ownership • Limited life of the business
Forms of Business Organization
CORPORATION
• While sole proprietorships are the most common type of business in the United States,
corporations account for nearly 90 percent of the sales.
• A corporation raises money for business activities through the sale of stock to individuals and
organizations that wish to be part owners of the corporation. A stock certificate is a document
that represents ownership in a corporation. The owners of a corporation are called
stockholders, or shareholders. Stockholders usually have two main rights. The first is to earn
dividends and the second is to vote on company policies. Many people buy stock in
corporations to earn dividends, which are a share of company profits.
• Stockholders also indirectly control the management of the company. A stockholder typically
has one vote for each share of stock owned. The stockholders vote to elect the board of
directors of the company.
• The board of directors hires managers to run the company.
• Unlike sole proprietorships and partnerships, in which individual owners are responsible for any
actions of the business, corporations act as a legal “entity” on behalf of the owners.
Forms of Business Organization
CORPORATION
Advantages Disadvantages
• More Sources of Funds • Difficult Creation Process
• Fixed Financial Liability of owners • Owners have limited control
• Specialized Management • Double taxation
• Unlimited life of the company
OTHER FORMS OF ORGANIZATION FOR INTERNATIONALIZATION
• MUNICIPAL CORPORATION - is an incorporated town or city organized to provide services for citizens rather than
to make a profit. You might think that a city would only engage in local activities. However, many cities have
partnerships with cities in other countries, import goods and services, and engage in cultural exchanges.
• NONPROFIT CORPORATIONS - are created to provide a service and are not concerned with making a profit.
Included in this category are churches, synagogues, and mosques, some hospitals, private colleges and
universities, many charities
• COOPERATIVE is a business owned by its members and operated for their benefit. Consumer cooperatives
may be formed by a group of people in a community or at a place of worship.
 MULTI NATIONAL COMPANIES (MNCs)
many firms today operate in several countries. A multinational
company or corporation (MNC) is an organization that conducts business
in several countries. MNCs are also called global companies, transnational
companies, and worldwide companies.

MNCs usually consist of a parent

company in a home country and
divisions or separate companies
in one or more host countries.
MULTI NATIONAL COMPANIES (MNCs) IN OPERATIONS
CHARACTERISTICS OF MULTINATIONAL COMPANIES
Multinational companies commonly have the following characteristics.
• Worldwide Market View They view the entire world as their potential market.
Companies seek product ideas through foreign subsidiaries and obtain raw
materials on a worldwide basis.
• Standardized Product Companies look for similarities among markets to offer a
standardized product whenever possible.
• Culturally-Sensitive Hiring They use consistent hiring policies throughout the
world but are also culturally sensitive to host countries. The companies recruit
managers internationally rather than just from the organization’s countries of
operation.
• International and Local Perspective These businesses distribute, product, price,
and promote with both an international outlook and a local perspective.
Methods of International Business Involvement
• Companies use eight main ways to get involved in international business, as shown in Figure 5-5. As you
move up the steps, the firm has more control over its foreign business activities as well as more risk. For
example, indirect exporting has less risk associated with it than a joint venture.
• However, a company has more direct control over its business dealings with a joint venture than with
indirect exporting.
Methods of International Business Involvement
INDIRECT EXPORTING
• At first, a business organization may get involved with international business by finding a demand
for its service or product without really trying. Indirect exporting occurs when a company sells
its products in a foreign market without any special activity for that purpose.
• Since the company was not looking for foreign business opportunities, indirect exporting is
sometimes called casual or accidental exporting. Indirect exporting makes use of agents and
brokers who bring together sellers and buyers of products in different countries. This method of
international business has minimum costs and risks. Many companies have started their foreign
business activities using this method.
DIRECT EXPORTING
• After sales increase and a company decides to get more involved in international business, the
organization will probably create its own exporting department. Direct exporting occurs when a
company actively seeks and conducts exporting. The company may still use agents or brokers
from outside of the organization. However, a manager within the company plans, implements,
and controls the exporting activities.
• While direct exporting requires higher costs than indirect exporting, the company has more
control over its foreign business activities.
Methods of International Business Involvement

MANAGEMENT CONTRACTING
• Knowledge is a powerful tool in business. An ability to find business opportunities, coordinate
resources, solve problems, and make productive decisions is a skill that will be in demand
throughout your life. The abilities of managers to assist companies in developing countries are
important exports for industrialized countries.

• A management contract is a situation in which a company sells only its management skills.
This has a fairly low risk for a company since managers can usually leave a country quickly if
the business environment becomes too risky. An example of management contracting may
involve a hotel company that agrees to help hotel owners in other countries.

• A variation of this type of agreement is contract manufacturing.

Methods of International Business Involvement

LICENSING

To produce items in other countries without being actively involved, a company can allow a foreign
company to use a procedure it owns.
• Licensing is selling the right to use some intangible property (production process, trademark, or
brand name) for a fee or royalty. The Gerber Company started selling its baby food products in
Japan using licensing. The use of television and movie characters or sports team emblems on
hats, shirts, jackets, notebooks, luggage, and other products is also the result of licensing
agreements.
• A licensing agreement provides a fee or royalty to the company granting the license. This
payment is in return for the right to use the process, brand name, or trademark. The Disney
Company, for example, receives a royalty from the amusement park it licensed in Japan.
• Licensing has a low monetary investment, so the potential financial return is frequently low.
• However, the risk for the company is also low.
Methods of International Business Involvement
FRANCHISING
• Another method commonly used to expand into other countries is the franchise,
which is the right to use a company name or business process in a specific way.
Organizations contract with people in other countries to set up a business that looks
and operates like the parent company. The company obtaining the franchise will
usually adapt various business elements.
• Marketing elements such as the taste of food products, packaging, and advertising
messages must meet cultural sensitivities and meet legal requirements.
• Franchising and licensing are similar. Both involve a royalty payment for the right to
use a process or famous company name. Licensing, however, usually involves a
manufacturing process, while franchising involves selling a product or service.
• Franchise agreements are popular with fast-food companies. McDonald’s, Burger King,
Wendy’s, KFC, Domino’s Pizza, and Pizza Hut all have used franchising to expand into
foreign markets.
HIGH RISK METHOD OF INTERNATIONAL BUSINESS INVOLVEMENT
It is often true that business activities with higher risks also return greater profits to justify taking those risks.
Joint ventures and foreign direct investments also give companies more direct control over its business operations
than most of the less risky methods.
JOINT VENTURES
A partnership can provide benefits to all owners. One type
of international partnership is the joint venture, an agreement
between two or more companies from different countries to share
a business project. A joint venture is illustrated in Figure 5-6.
The main benefits of a joint venture are sharing raw
materials, shipping facilities, management activities, and
production facilities. Some drawbacks are sharing profits and
having less control.
Joint venture arrangements can share costs, risks, and
profits in any combination. One company may have only 10
percent ownership and the other 90 percent. It depends on the
joint venture agreement.
HIGH RISK METHOD OF INTERNATIONAL BUSINESS INVOLVEMENT
It is often true that business activities with higher risks also return greater profits to justify taking those risks.
Joint ventures and foreign direct investments also give companies more direct control over its business operations
than most of the less risky methods.
FOREIGN DIRECT INVESTMENT
As a company gets more involved in international business, it may make a direct investment in a foreign
country. A foreign direct investment (FDI) occurs when a company buys land or other resources in another
country. Real estate and existing companies are common purchases under this method. Many British, Japanese,
and German companies own office buildings, hotels, and shopping malls in the United States.

Another type of FDI is the wholly-owned subsidiary, which is an independent company owned by a parent
company. Multinational companies frequently have wholly-owned subsidiaries in various countries that are the result
of foreign direct investment. In the past, foreign companies have owned U.S.-based businesses such as Burger King,
Pillsbury, and Green Giant.
To prevent economic control of one country by another, a nation may restrict how much of its land or factories
may be sold to foreign owners. For example, some countries allow a foreign investor to own only 49 percent of
companies in those countries.
HIGH RISK METHOD OF INTERNATIONAL BUSINESS INVOLVEMENT
It is often true that business activities with higher risks also return greater profits to justify taking those risks.
Joint ventures and foreign direct investments also give companies more direct control over its business operations
than most of the less risky methods.
FOREIGN DIRECT INVESTMENT
As a company gets more involved in international business, it may make a direct investment in a foreign
country. A foreign direct investment (FDI) occurs when a company buys land or other resources in another
country. Real estate and existing companies are common purchases under this method. Many British, Japanese,
and German companies own office buildings, hotels, and shopping malls in the United States.

Another type of FDI is the wholly-owned subsidiary, which is an independent company owned by a parent
company. Multinational companies frequently have wholly-owned subsidiaries in various countries that are the result
of foreign direct investment. In the past, foreign companies have owned U.S.-based businesses such as Burger King,
Pillsbury, and Green Giant.
To prevent economic control of one country by another, a nation may restrict how much of its land or factories
may be sold to foreign owners. For example, some countries allow a foreign investor to own only 49 percent of
companies in those countries.
IMPORTANCE OF IMPORTING
Imports are services or products bought by a company or government from businesses
in other countries. Businesses can get involved in international trade by importing goods
and services and selling them in their own country.
The importing business can create new sales or expand sales with existing customers. A
company usually gets involved in importing for one of three reasons.
• consumer demand for products unique to foreign countries
• lower costs of foreign-made products
• foreign-made parts used in domestic manufacturing.
IMPORTANCE OF IMPORTING
Imports are services or products bought by a company or IMPORT ASSISTANCE
government from businesses in other countries. Businesses can Several U.S. government agencies are available
get involved in international trade by importing goods and services to assist companies and individuals interested in
and selling them in their own country. importing. The Customs Department of the U.S.
Treasury (www.customs.gov) provides current
The importing business can create new sales or expand sales
information on import regulations.
with existing customers. A company usually gets involved in
importing for one of three reasons.
• consumer demand for products unique to foreign countries
• lower costs of foreign-made products
• foreign-made parts used in domestic
manufacturing.
EXPORTING
Companies commonly export goods or services to companies in other countries. Indirect
exporting occurs when a company sells its products in a foreign market without actively seeking out
those opportunities. More often, however, a business will conduct direct exporting by actively seeking
export opportunities.
Exporting activities are the other side of the importing transaction. As exporters, however,
businesses face different decisions. The process of exporting involves five steps, as shown in Figure 6-2.
 PROCESS OF EXPORTING
Before you sell anything,
you have to find buyers.
trade leads—lists for companies
planning to do business overseas.
Every business transaction
involves shipping and payment terms.
Free on board (FOB) means the selling price of the
product includes the cost of loading the exported goods
onto transport vessels at the specified place.
FOB is just one way that buyers and sellers may agree to pay
shipping costs. Cost, insurance, and freight (CIF) means that
the cost of the goods, insurance, and freight are included in
the price quoted. Cost and freight (C&F) indicates that the
price includes the cost of the goods and freight, but the
buyer must pay for insurance separately.
determine if people in other countries
can use your product or service.
Some products are standardized
or sold the same around the world.
After agreement is reached on selling terms, the finished goods
are shipped.
A freight forwarder is a company that arranges to ship goods to
customers in other countries.
Companies must prepare many export documents for shipping
merchan- dise to other countries. A bill of lading is a document
stating the agreement between the exporter and the transportation
company. This document serves as a receipt for the exported items. A
certificate of origin is a document that states the name of the country
in which the shipped goods were produced.
Financial institutions convert currency and are usually
involved in the payment step. Payment proves the
completion of the transaction
THE ECONOMIC EFFECT OF FOREIGN TRADE
Every importing and exporting transaction has economic effects. The difference
between a country’s exports and imports is called its balance of trade. However,
balance of trade does not include all international business transactions, just imports
and exports. Another economic measure is needed to summarize the total economic
effect of foreign trade.
• Balance of payments, measures the total flow of money coming into a country
minus the total flow going out. Included in this economic measurement are exports,
imports, investments, tourist spending, and financial assistance. For example, in recent
years, tourism has helped the U.S. balance of payments because it has increased the flow of money
entering the United States.
• A country’s balance of payments can either be positive or negative. A positive,or
favorable, balance of payments occurs when a nation receives more money in a
year than it pays out. A negative balance of payments is unfavorable. It is the result
when a country sends more money out than it brings in.
THE ECONOMIC EFFECT OF FOREIGN TRADE
Every importing and exporting transaction has economic effects. The difference
between a country’s exports and imports is called its balance of trade. However,
balance of trade does not include all international business transactions, just imports
and exports. Another economic measure is needed to summarize the total economic
effect of foreign trade.
• Balance of payments, measures the total flow of money coming into a country
minus the total flow going out. Included in this economic measurement are exports,
imports, investments, tourist spending, and financial assistance. For example, in recent
years, tourism has helped the U.S. balance of payments because it has increased the flow of money
entering the United States.
• A country’s balance of payments can either be positive or negative. A positive,or
favorable, balance of payments occurs when a nation receives more money in a
year than it pays out. A negative balance of payments is unfavorable. It is the result
when a country sends more money out than it brings in.
How can a country improve its international trade
situation?
TRADE AGREEMENTS
One answer to competiveness is by negotiating trade agreements. Trade agreements can occur between
countries to promote economic development on a worldwide basis or in a geographic region. Or individual nations and
companies may reach agreements that encourage international business activities.
THE WORLD TRADE ORGANIZATION
• After World War II, world leaders who wanted to promote peaceful international trade developed a set of ground
rules to guide the conduct of international trade. The General Agreement on Tariffs and Trade (GATT) was
negotiated in 1947 and began operating in January 1948 when 23 countries signed the treaty agreement.
• This multi-country agreement intended to reduce trade barriers and to pro- mote trade. The goals of GATT were to
promote world trade through negotiation and to make world trade secure. Working toward these goals helped
increase global economic growth and development.
• In 1995, GATT was replaced by a new organization—the World Trade Organization (WTO). With over 140 member
countries, WTO has many of the same goals as GATT. But in addition, WTO has the power to settle trade disputes
and enforce the free-trade agreements between its members.
• Based in Geneva, Switzerland, the WTO has several main goals.
• Lowering tariffs that discourage free trade
• Eliminating import quotas, subsidies, and unfair technical standards that reduce competition in the world
market
• Recognizing protection for patents, copyrights, trademarks, and other intellectual properties, such as software
• Reducing barriers for banks, insurance companies, and other financial services
• Assisting poor countries with trade policies and economic growth
ECONOMIC COMMUNITIES
An economic community is an organization of countries that bond together to allow
a free flow of products. The group acts as a single country for business activities with other
regions of the world. An economic community is also called a common market.
Examples of this type of regional economic cooperation between countries include the European Union (EU), Latin
American Free Trade Association (LAFTA), the Association of Southeast Asian Nations (ASEAN), the Economic
Community of West African States (ECOWAS), and the North American Free Trade Agreement (NAFTA).

FREE-TRADE ZONES

A free-trade zone is an area designated by a government for duty-free entry of non-prohibited

goods. Free-trade zones are commonly located at a point of entry into a nation, such as a harbor or
an airport. Merchandise may be stored, displayed, or used without duties being paid. Duties (import
taxes) are imposed on the goods only when the items pass from the free-trade zone into an area of
the country subject to customs.
INTERNATIONAL BUSINESS COMPETITION
Companies compete in both domestic and international markets. The domestic
market is made up of all the companies that sell similar products within the same
country. In contrast, the international market is made up of companies that
compete against companies in several countries. For example, major soft drink
companies have competition in other countries with Crazy Cola in Russia and
Thums Up Cola in India.

FACTORS AFFECTING COMPETITION

• Number of Companies
• Business Costs
• Product Difference
Types of Competitive Situations
An industry refers to companies in the same type of business.
PURE COMPETITION
is a market situation with many sellers, each offering the same product.
MONOPOLISTIC COMPETITION
refers to a market situation with many sellers, each with a slightly different product. The
difference in products can be actual (such as ingredients) or implied (such as different advertisements,
a brand name, or a package design).
OLIGOPOLY
When a few large companies control an industry, an oligopoly exists. In this market situation, the
few sellers usually offer products that are slightly different. However, competition is mainly the result
of large companies being able to advertise and sell their goods in many geographic areas.
MONOPOLY
When one company controls the total supply of a product or service, there is no competition. A
monopoly is a situation in which one seller controls the entire market for a product or service. It is
very unusual for this to happen without actions by government or other businesses. Like pure
competition, few examples of true monopolies exist.