Understanding Global Business
Businesses no longer operate only within the borders of their home countries. Products may be designed in one nation, manufactured in another, assembled somewhere else, and sold throughout the world. Chapter 3 introduces the basic ideas that help explain this international movement of goods, services, money, and business activity.
Importing and Exporting
Two of the most fundamental global-business activities are importing and exporting.
- Importing means purchasing goods from another country.
- Exporting means selling goods to other countries.
Imported products are common in stores throughout the United States, and products made in the United States are sold in markets around the world. A business may also participate in both activities—for example, importing components used to manufacture a product and then exporting the finished product.
Free Trade and Globalization
Free trade refers to the absence of political or economic barriers that allow goods and services to move between countries. Global trade can give consumers access to products from around the world and may allow them to purchase some products at lower prices.
The chapter also emphasizes that globalization can create both benefits and costs. Expanding international trade can contribute to economic development and improved living conditions, but economic change can also disrupt industries and jobs. For example, manufacturing activity may move between countries as businesses seek different costs, resources, skills, or market opportunities.
Comparative Advantage
Comparative advantage means countries should sell goods they can produce most efficiently and purchase goods they cannot produce as efficiently.
Suppose one country can produce wheat especially efficiently but is poorly suited to producing coffee. Rather than trying to produce everything domestically, that country can concentrate more resources on wheat and trade for coffee produced more efficiently elsewhere. Specialization and trade can therefore allow countries to concentrate on activities in which they have an advantage.
Absolute Advantage
Absolute advantage occurs when a country has a monopoly on producing a product or can produce that product more efficiently than any other country.
A unique natural resource provides a useful illustration. If a mineral needed for a particular product were available in only one country, that country could possess an absolute advantage in supplying that resource.
Measuring International Trade
Several measures help describe a country's international trade activity.
- Balance of trade compares the value of a country's exports with the value of its imports over a given period.
- Trade surplus occurs when the value of exports is greater than the value of imports.
- Trade deficit occurs when the value of exports is less than the value of imports.
- Balance of payments considers money flowing into a country and money flowing out through international transactions involving goods and services.
For example, if a nation exports more than it imports during a period, it has a trade surplus. If it imports more than it exports, it has a trade deficit.
Dumping
Dumping occurs when products are sold in another country for less than they are sold for in the home country. The Chapter 3 study notes identify dumping as a prohibited trade practice that can still occur.
The concern is that unusually low foreign prices can make it difficult for domestic producers to compete fairly in their own market.
Ways Businesses Enter Global Markets
Importing and exporting are not the only ways firms participate internationally. Businesses can form agreements and relationships that allow them to operate in foreign markets.
Licensing
Licensing occurs when one firm, the licensor, gives a foreign company, the licensee, the right to manufacture its product or use its trademark in exchange for a fee called a royalty.
Joint Ventures
A joint venture is a partnership in which two or more companies join together to undertake a major project. The firms can combine resources, expertise, technology, or access to markets while sharing the responsibilities of the venture.
Strategic Alliances
A strategic alliance is a long-term partnership between two or more companies established to help the participating firms build competitive market advantages.
Multinational Corporations
A multinational corporation manufactures and markets products in many different countries and has multinational ownership and management. Multinational companies operate across national boundaries rather than treating foreign markets simply as occasional customers.
Exchange Rates and Devaluation
An exchange rate is the value of one nation's currency relative to the currencies of other countries. Exchange rates matter because international buyers and sellers frequently must convert one currency into another.
Changes in exchange rates can change the effective price of imports and exports. A product that has not changed price in its home country can become more or less expensive to a foreign buyer simply because the relative values of the currencies changed.
Devaluation lowers the value of a nation's currency relative to other currencies. Changes in currency value can therefore influence trade, prices, and the competitiveness of businesses operating internationally.
Outsourcing
Outsourcing occurs when a firm contracts with other companies to perform some or all of its functions. Outsourcing may be domestic or international. A company might outsource manufacturing, customer service, technology support, accounting, or another business activity.
Businesses may outsource to gain specialized expertise, increase flexibility, or change operating costs. At the same time, outsourcing can raise concerns about control, quality, communication, employment, and dependence on outside suppliers.
Trade Protectionism
Although free trade reduces barriers among countries, governments sometimes use trade protectionism to limit imports or protect domestic industries. Chapter 3 introduces three important tools: tariffs, quotas, and embargoes.
Tariffs
A tariff is a tax on imported goods. By increasing the price of an imported product, a tariff can make domestically produced goods more competitive.
The study notes distinguish two purposes for tariffs:
- Protective tariffs raise the retail price of imports to help domestic goods compete.
- Revenue tariffs raise money for government.
Import Quotas
An import quota limits the number or quantity of products in certain categories that a nation can import. Unlike a tariff, which raises the cost of imports, a quota directly restricts the amount that can enter the country.
Embargoes
An embargo is a complete ban on the import or export of a particular product or a halt to trade with a particular country. It is therefore a much stronger restriction than a tariff or quota.
Putting It Together
Global business creates opportunities for companies to reach new customers, obtain products and resources, form international partnerships, and specialize in activities they perform efficiently. At the same time, international business introduces additional issues such as currency changes, foreign competition, trade balances, government restrictions, and the challenges of coordinating activities across national borders.
For business students, the important point is that even companies that do not consider themselves multinational may still be influenced by global markets. Their suppliers, competitors, customers, employees, or products may connect them to the international economy.
Common Mistakes to Avoid
- Reversing imports and exports: imports come into a country; exports are sold to other countries.
- Confusing comparative advantage with absolute advantage.
- Reversing a trade surplus and a trade deficit.
- Confusing the balance of trade with the broader concept of balance of payments.
- Confusing licensing, joint ventures, and strategic alliances.
- Assuming a tariff and a quota work the same way. A tariff taxes imports; a quota limits their quantity.
- Confusing a quota with an embargo. An embargo is a complete ban rather than merely a limit.