Contemporary Business

Nineteenth Edition
Louis E. Boone • David L. Kurtz • Brahm M. Canzer

Chapter 3
International Business and Competing in
World Markets
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Learning Objectives
1. Explain why nations trade.
2. Describe how trade is measured between nations.
3. Identify the barriers to international trade.
4. Discuss reducing barriers to international trade.
5. Explain the levels of international business operations.
6. Discuss developing a strategy for international business.

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Why Nations Trade
• As domestic markets mature, so does economic growth
• As sales slow, companies can expand their markets in
other nations
• Companies can seek growth opportunities in other nations
• More efficient production systems
• Less reliance on the economies of home nations
• Exports: Domestically produced goods and services sold in
other countries
• Imports: Foreign-made products and services purchased
by domestic consumers

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International Sources of Factors of
Production
• Decisions to operate globally depend upon:
o Land
o Labor
o Capital
o Entrepreneurship
• Doing business overseas spreads risk
• Different nations at various stages of business cycle or
development spreads risk
• If demand falls off in one country, it may enjoy strong
demand in another
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Size of International Marketplace
• As developing nations expand into the global marketplace,
opportunities grow
• Many developing countries have posted high growth rates
of annual GDP
o United States
o China
o India

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Population and Wealth
TABLE 3.1 The World’s Top Ten Nations Based on Population and
Wealth
Country Population (In Millions) Country Per-Capita GDP (In U.S. Dollars)
China 1,400 Qatar 132,886
India 1,380 Macao SAR 114,363
United States 331 Luxembourg 108,951
Indonesia 273 Singapore 103,181
Pakistan 220 Ireland 83,399
Brazil 212 Brunei Darussalam 80,384
Nigeria 206 Norway 76,684
Bangladesh 164 United Arab Emirates 69,435
Russia 145 Kuwait 66,387
Mexico 128 Switzerland 66,196

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Top 10 U.S. Trading Partners

Source: Data from U.S. Census Bureau, “Top Trading Partners 2020,”
https://www.census.gov/ foreign-trade/statistics/highlights/top/top2012yr.html
accessed April 12, 2021.

FIGURE 3.1 Top Ten Trading Partners with the United States

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Absolute and Comparative Advantage
• Absolute Advantage: country can maintain a monopoly or
produce at a lower cost than any competitor.
o Example: China’s domination of silk production for
centuries.
• Comparative Advantage: Country can supply a product
more efficiently and at lower cost than it can supply other
goods, compared with other countries
o Example: India’s combination of a highly educated
workforce and low wage scale in software development

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Comparative Advantage

FIGURE 3.2 A country can develop a comparative advantage if it supplies

its products more efficiently and at a lower price than it supplies other
goods. China enjoys a comparative advantage in producing textiles.

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Measuring International Business and
Trade Between Nations
• Balance of Trade: Difference between a nation’s imports and
exports
o Balance of Trade Surplus: When a country exports more than it
imports
o Balance of Trade Deficit: When a country imports more than it
exports
• Balance of payments: Overall flow of money into or out of a
country
o Balance of payments surplus: more money has moved into a
country than out of it
o Balance of payments deficit: more money has moved out of a
country than into it
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Major U.S. Imports and Exports
Table 3.2 Top 10 U.S. Merchandise Exports and Imports

Amount Amount
Exports (In Billions) Imports (In Billions)
Machinery including computers $201.7 Electrical machinery, equipment $356.8
Electrical machinery, equipment 174.2 Machinery including computers 349.1
Mineral fuels including oil 138 Vehicles 294.6
Aircraft, spacecraft 131.2 Mineral fuels including oil 204.2
Vehicles 130.1 Pharmaceuticals 96.4
Optical, technical, medical apparatus 83.6 Optical, technical, medical apparatus 86.2
Plastics, plastic articles 61.5 Furniture, bedding, lighting, signs, prefab buildings 67.2
Gems, precious metals 60.4 Gems, precious metals 60
Pharmaceuticals 45.1 Plastics, plastic articles 54.9
Organic chemicals 36.2 Organic chemicals 46.1

Source: United States International Trade Commission, “U.S. Trade by Industry, Sector,
and Selected Trading Partners (data),” www.usitc.gov, accessed March 1, 2018.
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Exchange Rates
• Currency Rates are influenced by
o Domestic economic and political conditions
o Central bank intervention
o Balance-of-payments position
o Speculation over future currency values
• Values fluctuate, or “float,” depending on supply and
demand
• National governments can deliberately influence exchange
rates

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Currency Devaluation

FIGURE 3.3 The Chinese government has repeatedly devalued the

country’s currency, the yuan, in an effort to boost exports and counter
slowing growth.

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Barriers to International Business and
Trade

Figure 3.4 Barriers to International Trade

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Social and Cultural Differences
Language
• Potential problems include mistranslation, inappropriate
messaging, lack of understanding of local customs, and
differences in taste.
Values and Religious Attitudes
• Differing values about business efficiency, employment
levels, importance of regional differences, and religious
practices, holidays, and values about issues such as
interest-bearing loans.

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Economic Differences
Infrastructure
• Basic systems of communication, transportation, energy
facilities, and financial systems.
Currency Conversion and Shifts
• Fluctuating values can make pricing in local currencies
difficult and affect decisions about market desirability and
investment opportunities.

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Political and Legal Differences
• Political Climate
• Legal Environment
• International Regulations
o Treaties between U.S. and other nations.
o Tariffs are taxes charged on imported goods.
o Enforcement problems, as with piracy.

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Types of Trade Restrictions
• Tariffs
o Taxes surcharges, or duties on foreign products
o Generate income for the government
o Protective tariffs raise prices of imported goods

• Nontariff Barriers
o Administrative trade barriers
o Quotas
o Dumping
o Embargo Exchange
o Exchange controls through central banks or government agencies

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U.S. Steel Industry Faces Challenges

FIGURE 3.5 The U.S. steel industry faces challenges from lower priced imports
from China, where production has surged. Tariffs on foreign shipments of steel
were recently imposed in what some see as a way to protect the U.S. steel
industry from less expensive imports.

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Reducing Barriers to International Trade
• The world has moved toward more free trade
• Many communities and groups monitor and promote
free trade
• Trade Sanctions
• International Economic Communities reduce trade
barriers and promote regional economic cooperation

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Organizations Promoting Trade
General Agreement on Tariffs and Trade (GATT)
• Most industrialized nations found organization in 19 47 to reduce
tariffs and relax quotas
The World Trade Organization succeeded GATT
• Representatives from 153 countries
• Reduce tariffs and promote trade
World Bank
• Funds projects to build and expand infrastructure in developing
countries
International Monetary Fund (IMF)
• Operates as lender to troubled nations in an effort to promote trade

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International Economic Communities
• United States-Mexico-Canada Agreement (USMCA),
formerly North American Free Trade Agreement (NAFTA)
• Central America-Dominican Republic Free Trade
Agreement (CAFTA)
• European Union

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USMCA/NAFTA

FIGURE 3.6 The United States-Mexico-Canada Agreement or USMCA (formerly

known as the North American Free-Trade Agreement or NAFTA) created the
world’s largest free-trade zone between Canada, the United States, and Mexico.

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European Union

FIGURE 3.7 Nations of the European Union

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Levels of International Business
Operations
• Determining the growth potential of each of the foreign
markets being considered
• Analyzing the expenditures required to enter new markets
• Understanding the operational complexities and deciding
the best way to organize overseas operations
• Understanding foreign regulations and standards
• Good starting point for research: CIA World Factbook

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Top Global Franchise Companies
TABLE 3.3 Top Ten Global Franchise Companies
Name Type Initial Investment
McDonald’s Hamburger Fast Food Restaurant Up to $2.5 MM
KFC Fried Chicken Up to $2.6 MM
Burger King Hamburger Fast Food Restaurant Up to $2.9 MM
Pizza Hut Pizza Restaurant Chain Up to $1.2 MM
7-Eleven Convenience Store Up to $1.2 MM
Marriott International Hotel Franchises Up to $96.5 MM
RE/MAX International Real Estate Company Up to $219K
Dunkin’ Donuts Donut and Coffee House Company Up to $1.7 MM
InterContinental Hotels and Hotels Up to $98 MM
Resorts
Subway® Submarine Sandwiches Up to $320K

Source: “New Top Ten List for 2021: McDonald’s, KFC, Burger King, 7-Eleven, Domino’s, Ace
Hardware Corporation, Century 21, Papa John’s, Taco Bell, and Pizza Hut,”
https://www.franchisedirect.com/ top100globalfranchises/rankings, accessed February 17, 2021.

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Levels of Involvement
• Risk increases with the level of involvement
• Many companies employ multiple strategies
• Exporting and important are entry-level strategies
o Importing is the process of bringing in goods produced
abroad
o Exporting is the act of selling your goods overseas

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Countertrade and Franchising
• Countertrade – international transactions that do not
involve currency payments but use bartering.
• Franchising - a contractual agreement in which a local
entity gains rights to sell the franchisor’s product in the
foreign market.
• Franchise 500 list from Entrepreneur magazine
• Foreign licensing agreement - allows a firm to produce or
sell its product, use its trademark, patent or
manufacturing process.
• Subcontracting - involves hiring local firms to distribute,
produce, or sell goods and services.
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Offshoring and Direct Investment
• The relocation of business processes to a lower-cost
overseas location is offshoring
o Not initiating business but gaining cost savings
o Extremely controversial
• The ultimate level of global involvement is international
direct investment
o Directly operating production and marketing in foreign
country
• Acquisition
• Joint Venture
• Overseas Division
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Multinational Corporations
TABLE 3.4 The World’s Top Ten Multinational Corporations by Sales

Rank Company Industry Country of Origin

1 ICBC China Banking China
2 China Construction Bank Banking China
3 Berkshire Hathaway Conglomerate United States
4 JPMorgan Chase Banking United States
5 Wells Fargo Banking United States
6 Agricultural Bank of China Banking China
7 Bank of America Banking United States
8 Bank of China Banking China
9 Apple Technology United States
10 Toyota Motor Automobile Japan

Source: “The World’s Biggest Public Companies,” Forbes, http://www.forbes.com,

accessed March 5, 2018.

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Developing a Strategy for International
Business
Global Business (Standardization) Strategies
• Firm sells same product in essentially the product in the
same manner throughout the world
• Works well for products with nearly universal appeal
Multidomestic (Adaptation) Strategies
• Firm develops products and marketing strategies that
appeal to customs, tastes, and buying habits of particular
national markets

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Copyright
Copyright © 2022 John Wiley & Sons, Inc.
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