Lecture 06International Business:Competing in the Global MarketShafayet UllahSection A1, A2 and A6

Competing in Global MarketsDefinition: IB refers to the buying, selling, and trading of goods and services across national boundaries. Expansion of technology, liberalization of cross border movement. Exportsdomestically produced goods and services sold in other countries.Importsforeign goods and services purchased by domestic customers.

Why Nations TradeInternational trade is vital because:It expands markets for productsAllows companies to seek out growth opportunities in other nationsMakes production and distribution systems more efficientReduces firms dependence on the economies of their home nations

Why Nations Trade contdAbsolute AdvantageExists when a country makes a product for which it can maintain a monopoly or that it can produce at a lower cost than any competitorComparative AdvantageSupplying a product more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries.

Concepts of Intl BusinessBalance of Trade: the difference in value between a nations exports and its imports. Balance of Payments: the difference between the flow of money into and out of a country. A countrys balance of trade, foreign investments, foreign aid, loans etc. The difference can be trade surplus/trade deficitTrade Deficit: Negative balance of trade, I.e. import is more than export

Components of the Balance of Payments

Measuring Trade Between NationsExchange Ratesvalue of one nation's currency relative to the currencies of other nations.Fixed Exchange Rates Exchange rates are fixed. The central bank takes action to keep the exchange rates fixed.Devaluationdescribes a fall in a currencys value relative to other currencies (to increase exports i.e. to reduce trade deficit expansionary policy). Depreciation and appreciation- Similar to devaluation and revaluation but in this case, its automatic.Floating Exchange Rates Demand and supply of currency determine the exchange rateHard versus Soft Currencies- Currencies that owners can easily convert into other currencies are called hard currencies e.g. the Euro, the U.S. dollar, the Japanese yen. Currencies that can not be readily converted are soft currencies e.g. Russian ruble, Bangladeshi Taka etc.

Open and Closed EconomiesOpen Economy: Economy that engages in international trade

Closed economy: Economy that doesnt engage in international trade.

Barriers to International Trade

Social and Cultural Differences Language: Understanding a business colleagues primary language may prove to be the difference between closing an international business transaction and losing the sale to someone else. Company representatives operating in foreign markets must not only choose correct and appropriate words but also translate words correctly to convey the intended meanings. Firms also may need to rename products or rewrite slogans for foreign markets.Values and Religious Attitudes: People in different countries do not necessarily share the same values or religious attitudes. U.S. society places a higher value on business efficiency and low unemployment whereas in European society, employee benefits are more valued.

Global Etiquette: Learning about DifferencesSmiling in public in Romania is not appropriate.In parts of the Middle East, you should never use your left hand when you offer someone your business card. In South Korea, dont write a persons name in red ink; this is an indication that the person is deceased.Sunday is holiday in many countries, Friday is holiday in few Muslim countries. Different systems in measurement, such as, Lbs Vs. Kg., Yards Vs Miters. Black is associated with death in western countries. But white has the same connotation in parts of Asia and purple in Latin America.

Economic Differences

Infrastructure: refers to basic systems of communication (television, radio, print media and telecommunications), transportation (roads and highways, railroads and airports) and energy facilities (power plants and gas and electric utilities).

Currency Conversion and Shifts: Rapid and unexpected currency shifts can make pricing in local currencies difficult. A devalued currency may make a nation less desirable as an export destination because of reduced demand in that market. However, devaluation would make a country desirable in terms of importing from that country e.g. importing RMG from Bangladesh or setting up production factories or international service outlets because of the cheap labor cost

Economic DifferencesEconomic development: Developed VS. Underdeveloped nations. Infrastructure- physical facilities that support a countrys economic activities. E.g. roads, ports, utilities and power plants, schools, hospitals, communication systems, commercial distribution system, security forces.

Exchange Rates: the ratio at which one nations currency can be exchanged for another nations currency. US: Ban = $1: Tk 57.86. Devaluation -decreases the value of currency in relation to other currencies. Ant. Revaluation

Legal and Political BarriersTariffs and Trade Restrictions:Exchange controls: regulations that restrict the amount of currency that can be bought or sold.Quota restriction on a number of units of a particular product imported into a country. Embargo a prohibition on trade in particular productDumping selling less than what it costs to producePolitical Barriers: Political unrest, sudden change in power,Cartel a group of firms or nations that agrees to act as a monopoly and not compete with each other, in order to generate a competitive advantage in world markets.

Legal and Political BarriersPolitical Climate: An important factor in any international business investment is the stability of the political climate. For Bangladesh, a huge barrier to attract foreign investments is lack of political stability.

Legal and Political BarriersLegal Environment: Different in different countries. Until recently, many countries, including France and Germany, not only accepted the practice of bribing foreign officials in countries where such practices were customary but allowed tax deductions for these expenses. Chinese pay huilu, Russians rely on vzyatka, in the Middle East and South Asia, palms are greased with baksheesh. The U.S., France, Germany and 31 other countries recently signed the OECD Anti-bribery convention. This agreement makes offerings or paying bribes a criminal offense and ends the deductibility of bribes.

Reducing Barriers to International TradeWorld Bank 1.Founded shortly after WWII by industrialized countries to lend money to less-developed and developing countries2. Primarily funds projects that build or expand the nations infrastructures3. Provide the largest source of advice and assistance to developing nations4. Critics believe the loans are often made with conditions that hurt the borrower nation and to make payments these nations have often had to cut vital social programs

Reducing Barriers to International TradeInternational Monetary Fund1. Established one year after World Bank2. Created to promote trade through financial cooperation and to eliminate barriers3. Makes short-term loans to member nations that are unable to meet their budgetary expenses4. Significant commitments are often made in order to secure the loan, which are supposed to address the underlying conditions that created the need for the loan in the first place5. Critics believe that the IMFs policies of placing restrictions on government spending, as a way to address underlying difficulties, often misses the real issues of insolvency6. Also, many believe IMF has placed many poor nations in impossible positions repaid7. Arguments in favor of debt reductions are debated

International Economic CommunitiesNorth American Free Trade Agreement (NAFTA) 1994agreement among the U.S., Canada, and Mexico to break down tariffs and trade restrictions.eliminates all trade barriers and investment restrictions over a 14-year periodconsumer choices are expandeddomestic producers have larger marketscritics are concerned about domestic job loss, lowering of environmental and human rights standards

International Economic CommunitiesEuropean Union25 nation European economic alliance.goals include promoting economic and social programs, introducing European citizenship as a complement to national citizenship, and giving the EU a more significant role in international affairsinvolves standardizing business regulations, requirements, import duties and taxes, and eliminating customs checks to stimulate economic growthintroduction of Euro as common currency also eliminates currency exchange rate fluctuations

International Economic CommunitiesSAARC- (South Asian Association for Regional Cooperation): Bangladesh, India, Pakistan, Nepal, Bhutan, Srilanka, Maldives, AfganistanMERCOSUR (Brazil, Argentina, Paraguay, Uruguay, Chile and BoliviaASEAN (10-country association of South East Asian nations

Levels of organizational involvement in international tradeFranchising: A form of licensing in which a company the franchiser- agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with the franchisers business, in return for a financial commitment and the agreement to conduct business in accordance with the franchisers standard of operations. E.g. McDonalds, Pizza Hut, Holiday Inn.

Contract Manufacturing: the hiring of a foreign company to produce a specified volume of the initiating companys product to specification; the final product carries the domestic firms name.

Levels of organizational involvement in international tradeJoint Venture: the sharing of the costs and operation of business between a foreign company and a local partner.

Multinational corporation (MNC): a corporation that operates on a worldwide scale, without significant ties to any one nation or region. E.g. IBM, GM, Exxon, Ford Motors, GE.

Going GlobalContractual AgreementsFranchising: A contractual agreement in which a wholesaler or retailer (franchisee) gains the right to sell the franchisors products under that companys brand name if it agrees to the related operating requirements e.g. Pizza Hut and KFC in BangladeshForeign Licensing: In a foreign licensing agreement, one firm allows another to produce or sell its product, or use its trademark, patent or manufacturing process in a specific geographical area. In return, the firm gets a royalty or other compensationSubcontracting: It involves hiring local companies to produce, distribute or sell goods or services.

Going GlobalInternational Direct InvestmentAcquisitions: In an acquisition, a company purchases another existing firm in the host country.Joint Ventures: It allow companies to share risks, costs, profits and management responsibilities with one or more host country nationals.From Multinational Corporation to Global BusinessMultinational Corporationfirm with significant operations and marketing activities outside its home country.