International Trade and Investment

INTERNATIONAL TRADE AND INVESTMENT

Globalization:

Deepening relationships and broadening interdependence among people from different countries.

International business:

All business transactions, private and governmental, that involves two or more countries

Two reasons for studying globalization and international business:

                        The growth of globalization creates both opportunities and threats for individuals, companies, and countries.

                        The conduct of international business is distinct from that of domestic business because companies must operate in diverse foreign environments and must engage in specialized types of transactions, such as exporting and importing and currency conversion

Why Countries Need International Business

Three primary reasons include:

(1) Availability

Natural advantage: the ability to produce due to readily available resources such as minerals and agricultural products

Acquired advantage: based on research and development

Most new products originate and find their largest markets in the wealthier countries such as the United States, Germany, Japan, France, the United Kingdom, and Italy

The fastest growth area in world trade has been in services, which has grown from less than 4% to more than 20% of world trade between 1980 and 1999

Manufacturing now accounts for less than 20% of the economies of the wealthier countries

(1) Cost

The production of various goods and services requires different combinations of inputs

The cost of these inputs varies from one country to another for a variety of complex reasons

            Comparative advantage

When an individual, firm, or country uses its resources to specialize in the production of those goods and services that are most productive and profitable, it is producing according to comparative advantage

Comparative advantage implies specialization.

The Growth of Globalization

Company’s abilities to exchange goods and services internationally, shift production to other countries, and learn from abroad about more efficient means of operating have been growing because of

            Technological developments,

            Rising incomes,

            Liberalization of cross-border movements, and

            More cooperative arrangements among countries

These four factors interplay and affect each other

Foreign direct investment (FDI): investment that results in the foreign control of a domestic enterprise

                        Technological developments:

            Developments in communications and transportation are at the forefront of technologies that push globalization

                        Rising incomes:

            Global discretionary income has risen to the point that there is now widespread demand for products that would have been considered luxuries in the past

            As incomes grow, so does tax revenue

            Much of the revenue goes to programs and projects that enhance the potential of international business

                        Liberalization of cross-border movements:

            Every country restricts the movement across its borders of goods and services as well as the resources to produce them

            Governments today impose fewer restrictions on cross-border movements than they did a decade or two ago for three main reasons:

            Idea of open economies

            Greater efficiency by competing against foreign companies

                        Other countries will follow their example

                        Cooperation among countries:

            Countries cooperate in many ways through international organizations, treaties, and consultations

            Countries cooperate to:

                        Gain reciprocal advantages

                        Attack problems that cannot be solved alone

                        Deal with concerns lying outside anyone‘s territory

Advantages and Challenges of Globalization

                        As the largest economy in the world, the United States has a profound impact on other countries

                        Countries face challenges as they try to maximize positive effects from globalization while minimizing negative ones

                        These are usually trade-offs, such as low consumer prices versus minimal employment disruption

                        The possible trade-offs from globalization are almost unlimited

Advantages and Challenges of Globalization

           Productivity: the amount of output relative to the amount of input

Globalization allows the benefits of productivity developments in one nation to move more quickly to other nations

A downside to this transfer is that individuals and companies must adjust to compete

           Consumers

Consumers benefit from globalization through their ability to choose from a greater variety of products and services and to buy from cheaper production locations

A potential problem is the consumers‘ weaker control over supplies from foreign countries

           Employment

Globalization allows the benefits of productivity developments in one nation to move more quickly to other nations

Critics of globalization contend that the quality, as well as the quantity, of jobs should be considered

The Environment

            Many of the most desired resources are in the poorest areas of the world where people can benefit economically from exploiting these resources

            On the other hand, concern is high over the depletion of finite resources, potential climatic changes, and despoliation of the environment

Monetary and fiscal conditions

An advantage of globalization is that money, if allowed to move freely, should go where it will be most needed and have the highest productivity

Monetary, fiscal, and regulatory differences remain

           Sovereignty

Globalization may undermine sovereignty in two ways:

Contact with other countries creates more cultural borrowing

Countries are concerned that important decisions may be made abroad that will undermine their national well-being

What Makes International Business Different?

Different National Environments:

            Most countries vary internally, causing companies to alter their business practices from one region to another

            To conduct business successfully abroad, companies must often adopt practices other than what they are accustomed to domestically

Legal-Political Environment:

Companies that conduct business internationally are subject to the laws of each country in which they operate

Political relationships between countries also influence what companies can do internationally

There are sometimes differences in laws between countries

Economic Environment

In fact, the average income in most of the world‘s countries is very low

Generally, poor countries have smaller markets on a per capita basis, less educated populations, higher unemployment or underemployment, poor health conditions, greater supply problems, higher political risk, and more foreign exchange problems

The Cultural Environment

Culture: refers to the specific learned norms of a society based on attitudes, values, beliefs, and frameworks for processing information and tasks

These norms vary from one country to another

Mobility

            Impediments to the movement of goods and the inputs to produce them are more pronounced among countries than within them