Chapter 3

Business In A Borderless BUSINESS POLICY

Instructor: Sumera Kazi
World
Why Nations Trade

• Trade between countries

• Absolute advantage
• Comparative advantage
• Outsourcing
• Balance of trade
• Trade surplus
• Trade deficit
• Balance of payment
• Flow in and flow out of money inside the country
Absolute Advantage Theory

Absolute = Virtual Monopoly

South Africa

Output per Unit

of Input
The Rest of the
World

Diamond Production
Comparative Advantage Theory

Comparative

U. S. China

China
U. S.
Output per
Unit of Input

Software Clothing
International Trade Barriers

• Economic barriers
• Economic development
• Exchange rates
• Ethical, legal and political barriers
• Laws & regulations
• Tariffs and trade restrictions
• Import tariff (fixed and ad valorem), exchange controls, quota, embargo,
dumping
• Political barriers
• cartel
International Trade Barriers

• Social and cultural barriers

• Go global while acting as Local
• Body language: non-verbal communication
• Personal space: distance at which one person feels
comfortable talking with another.
• Technological barriers
• Opportunities as well as challenges
Trade Agreements

• General Agreement on Tariffs & Trade (GATT )

• World Trade Organization (WTO)
• North American Free Trade Agreement (NAFTA)
• The European Union (EU)
• Asia-Pacific Economic Cooperation (APEC)
• Association Of Southeast Asian Nations (ASEAN)
Getting Involved In International Business
 Importing & Exporting
• Low-risk way to begin international expansion
• Countertrade agreements, which involve bartering products for
other products instead of for currency.
• Companies goes global to acquire growth opportunities.
• Export functions are handled by export manager or export
department or EMC
• EMC is export management company that deals with host-country
regulations
• Tariffs, duties, documentation, letters of credit, currency conversions
Trading Companies

• A trading company buys goods in one country and sells

them to buyers in another country.
• It involves consulting, marketing research, advertising,
insurance, product research and design, warehousing, and
foreign exchange services.
• Example: Sears World Trade, which specializes in consumer
goods, light industrial items, and processed foods.
Licensing

• Licensing is a trade arrangement in which one company—the licensor—allows

another company—the licensee—to use its company name, products, patents,
brands, trademarks, raw materials, and/or production processes in exchange
for a fee or royalty.
• Licensing is an attractive alternative to direct investment political unstability.
• Licensing is especially advantageous for small manufacturers wanting to
launch a well-known brand internationally.
• Disadvantage can be paying fees for like 20 years
• Example: Coca-Cola Company and PepsiCo
Franchising

• 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.
• Franchisor’s critical consideration is quality control
for different geographic locations.
• Example: Fast food chains, hotels.
Contract manufacturing

• 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.
• A common means of using cheaper labor overseas.
• Example: Reebok uses Korean contract manufacturers to manufacture
many of its athletic shoes.
• No problems of ownership
• Low capital investment
Outsourcing

• Outsourcing of white collar jobs to reduce their cost.

• They enter overseas markets by setting up local offices,
research labs, call centers to get highly skilled but
lower-wage Human Capital, such as India, China and
Philippines.
• Examples: GE – R&D for medical, IT support, aircrafts, lighting.
• India with high IT skills joining Microsoft to work globally.
• Controversial
Offshoring-relocating of a business.

• Offshoring is when a company moves one or all of its factories from

the “home” country to another country to avoid trade barriers and
get access to foreign markets.
• offshore office is an extension of the company.
• Happens due to shortage of skilled domestic employees.
• Have certain tax benefits as well as cheap labor market access.
• Retains control over the process of business.

• Examples: Ford Motors company, CISCO, offshores to India.

Joint Ventures and Alliances

• Partnership in which companies (often from different countries)

join to undertake a major project.
• Often a foreign company and a local partner
• Benefits of IJV are; shared ownershiphared technology, shared
marketing expertise, shared risks.
• Strategic Alliances: A partnership formed to create competitive
advantage on a worldwide basis
• Examples: Lenovo & Dell.
• Direct Investment:
• Companies that want more control and are willing to
invest considerable resources in international business
may consider direct investment, the ownership of
overseas facilities.
• Example: starbucks in Japan.
• Multinational corporation (MNC)
• a corporation that operates on a worldwide scale,
without significant ties to any one nation or region.
• Example: Shell, Toyota, Mitsubishi
International business strategies

• Multinational strategies- national differences

• Global strategies- single entity
The End