CyberSummary

THE ROLE OF INTERNATIONAL BUSINESS

International business refers to the buying, selling, and trading of goods and services across national boundaries. Falling political barriers and new technology are making it possible for more and more businesses to sell their products overseas as well as at home.

Nations and businesses engage in international trade to obtain raw materials and goods that would otherwise be unavailable to them. Which goods and services a nation sells depends on what resources it has. When a nation is the only source of an item, the only producer of an item, or can produce an item more efficiently than any other nation, it is said to have an absolute advantage. Most international trade, however, is based on comparative advantage, which occurs when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items.

Exporting is the sale of goods and services to foreign markets. Importing is the purchase of goods and services from foreign sources.

A nation's balance of trade is the difference in value between its exports and imports. A nation that exports more than it imports has a favorable balance of trade. Because the United States imports more products than it exports, it has a negative balance of trade, or trade deficit. The trade deficit fluctuates according to such factors as the health of the United States and other economies, productivity, perceived quality, and exchange rates. Trade deficits may contribute to the failure of businesses, the loss of jobs, and a lowered standard of living. The difference between the flow of money into and out of a country is called the balance of payments. The balance of payments includes a country's balance of trade, foreign investments, foreign aid, military expenditures, and money spent by tourists.

INTERNATIONAL TRADE BARRIERS

When a company decides to do business outside its own country, it will encounter a number of barriers, so it must research the other country's economic, political, legal, social, cultural, and technological backgrounds and learn how to deal with tariffs, quotas, and other concerns.

When considering doing business abroad, U.S. businesspeople cannot take for granted that other countries offer the same things as are found in industrialized nations--economically advanced countries such as the United States and Japan. Less-developed countries (LDCs) are characterized by low per capita income (income generated by the nation's production of goods and services divided by the population), which means that consumers are not as likely to purchase nonessential products. A country's level of development is determined in part by its infrastructure, the physical facilities that support economic activities, such as railroads, highways, ports, air fields, utilities and power plants, schools, hospitals, communication systems, and commercial distribution systems.

The ratio at which one nation's currency can be exchanged for another's or for gold is the exchange rate. A government may alter the value of its national currency. Devaluation decreases the value of a currency in relation to other currencies; it stimulates a nation's economy by encouraging other nations to buy more of the country's goods and services and discouraging its own citizens from purchasing imported items and vacationing abroad. Revaluation, which increases the value of a currency in relation to other currencies, occurs rarely.

A company that decides to enter the international marketplace must contend with potentially complex relationships among the different laws of its own nation international laws, and the laws of the nation with which it will be trading, various trade restrictions imposed on international trade, and changing political climates. The United States has a number of laws and regulations that govern the activities of U.S. firms engaged in international trade, such as the Webb-Pomerene Export Trade Act and the Foreign Corrupt Practices Act. It also has a variety of friendship commerce, and navigation treaties with other nations that allow business to be transacted by Americans and citizens of the specified countries. Outside U.S. borders, businesspeople are likely to find that the laws of other nations differ from those of the United States. Many of the legal rights that Americans take for granted do not exist in other countries, and a firm doing business abroad must understand and obey the laws of the host country. Some countries have copyright and patent laws that are less strict than those of the United States; some countries fail to honor U.S. laws.

Tariffs and other trade restrictions are part of a country's legal structure but may be established or removed for political reasons. An import tariff is a tax levied by a nation on goods imported into the country. Such tariffs may be fixed (a specific amount of money levied on each unit of a product) or ad valorem (based on the value of the item). Import tariffs are commonly imposed to protect domestic products by raising the price of imported ones. Advocates of protective tariffs argue that their use protects domestic industries, particularly new ones, from well-established foreign competitors; critics counter that their use inhibits free trade and competition. Exchange controls restrict the amount of a particular currency that can be bought or sold. Some countries control their foreign trade by forcing businesspeople to buy and sell foreign products through a central agency such as a central bank.

A quota limits the number of units of a particular product that can be imported into a country. An embargo prohibits trade in a particular product, usually for political, economic, health, or religious reasons. A common reason for setting quotas is to prohibit dumping, which occurs when a country or business sells products at less than what it costs to produce them. Foreign businesses may engage in dumping to gain quick entry into a market, when the domestic market for a firm's product is too small to support an efficient level of production, or when technologically obsolete products are no longer salable in the country of origin.

Political considerations in international trade are seldom written down and often change rapidly. War, policies deemed unacceptable by society, and mundane political affairs affect international business daily. Businesses engaged in international trade must consider the relative instability of some nations, because a sudden change in power can result in a regime that is hostile to foreign investment. Political concerns may lead a group of companies or nations to form a cartel, agreeing to act as a monopoly and not compete with each other, to generate a competitive advantage in world markets.

Most businesspeople engaged in international trade underestimate the importance of social and cultural differences, which can derail an important transaction. Languages often do not translate literally, and businesses often must develop new names, packaging, and promotional material for products in foreign countries. Body language--nonverbal, usually unconscious communication through gestures, posture, and facial expression--may affect business negotiations. Some nations may have different concepts of personal space and time as well as customs and traditions that are unfamiliar to foreign businesspeople. Many countries lack the technological infrastructure found in the U.S., and some marketers are viewing such barriers as opportunities. Such problems cannot always be avoided, but they can be minimized through research.

TRADE AGREEMENTS, ALLIANCES, AND ORGANIZATIONS

Although economic, political, legal, and sociocultural issues may seem like daunting barriers to international trade, there are also organizations and agreements that foster international trade that can help businesses get involved in and succeed in global markets.

The General Agreement on Tariffs and Trade (GATT), originally signed by 23 nations in 1947, provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved. More than 100 nations abided by its rules. GATT sponsors rounds of negotiations aimed at reducing trade restrictions. The most recent round, the Uruguay Round (1988-1994), reduced trade barriers for most products and provided new rules to prevent dumping.

The World Trade Organization, an international organization dealing with the rules of trade between nations, was created in 1995 by the Uruguay Round. The goal is to help producers of goods and services and exporters and importers conduct their business. The WTO administers the WTO trade agreements, presents a forum for trade negotiations, handles trade disputes, monitors national trade policies, provides technical assistance and training for developing countries, and cooperates with other international organizations. It is hoped that reducing trade barriers will help nations develop closer relationships, and as this happens, global markets should become more efficient.

The North American Free Trade Agreement (NAFTA), which went into effect on January 1, 1994, effectively merged Canada, the United States, and Mexico into one market. NAFTA eliminates most tariffs and trade restrictions on agricultural and manufactured products among the three countries over a period of 15 years. Although controversial, NAFTA has become a positive factor for U.S. firms wishing to engage in international business.

The European Union (EU) was established in 1958 to promote trade among its members. To facilitate free trade among its members, the EU is working toward the standardization of business regulations and requirements, import duties, and value-added taxes; the elimination of customs checks; and the creation of a standardized currency (the euro) for use by all members.

The Common Market of the Southern Cone (MERCOSUR) was established as a free-trade alliance to unite Argentina, Brazil, Paraguay, and Uruguay. Bolivia and Chile joined later, making the alliance the third largest trading bloc, behind NAFTA and the EU. The Asia-Pacific Economic Cooperation (APEC) promotes open trade and technical cooperation among its 21 member nations.

The World Bank, more formally known as the International Bank for Reconstruction and Development, was established and supported by the industrialized nations in 1946 to loan money to underdeveloped and developing countries. It loans its own funds or borrows funds from member nations to finance a variety or projects.

The International Monetary Fund (IMF) was established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation. It makes short-term loans to member countries that have balance-of-payment deficits and provides foreign currencies to member nations.

GETTING INVOLVED IN INTERNATIONAL BUSINESS

Businesses may get involved in international trade at many levels. The degree of commitment of resources and effort required increases according to the level at which a business involves itself in international trade.

Many companies first get involved in international trade when they import goods from other countries for resale in their own businesses. A business may get involved in exporting when it is called upon to supply a foreign company with a particular product. Such exporting enables firms of all sizes to participate in international business. Exporting sometimes takes place through countertrade agreements, which involve bartering products for other products instead of for currency. A company may market its products overseas directly or import goods directly from their manufacturer, or it may go through an export agent that handles international transactions for other firms. The advantage of using an export agent is that the company does not have to deal with foreign currencies or red tape; the disadvantage is that the business must raise its price or provide a larger discount than it would in a domestic transaction.

The next level is using a trading company, which buys goods in one country and sells them to buyers in another country. A trading company handles all activities required to move products from one country to another, including consulting, marketing research, advertising, insurance, product research and design, and warehousing.

Licensing is a trade arrangement in which one company--the licenser--allows another company--the licensee--to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a royalty fee. Franchising is 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 franchiser's business, in return for a financial commitment and the agreement to conduct business in accordance with the franchiser's standard of operations. Licensing and franchising enable a company to enter the international marketplace without spending large sums of money abroad or hiring or transferring personnel overseas. They also permit a business to establish goodwill for its products in a foreign land. If the licensee (or franchisee) fails to maintain high standards of quality, the product's image may be hurt.

The next level is contract manufacturing, which occurs when a company hires a foreign firm to produce a specified volume of the company's product to specification; the final product carries the domestic company's name.

A company that wants to do business in another country may set up a joint venture by finding a local partner (occasionally, the host nation itself) to share the costs and operation of the business. A strategic alliance is a partnership formed to create competitive advantage on a worldwide basis.

Direct investment is the ownership of overseas facilities. A company may control the facilities outright, or it may hold a majority ownership interest in the company that controls the facilities. Outsourcing, a form of direct investment, involves transferring manufacturing or other tasks to countries where labor and supplies are less expensive.

The highest level of international business involvement is the multinational corporation (MNC), a corporation that operates on a worldwide scale, without significant ties to any one nation or region. Multinationals often have greater assets and larger populations than some of the countries in which they do business.

INTERNATIONAL BUSINESS STRATEGIES

Planning in a global economy requires businesspeople to understand the economic legal, political, and sociocultural realities of the countries in which they will operate. These factors will affect the strategy a business chooses to use when doing business outside its own borders.

Companies doing business internationally have traditionally used a multinational strategy, customizing their products, promotion, and distribution according to cultural, technological, regional, and national differences. More and more companies are moving from this customization strategy to a global strategy (globalization), which involves standardizing products (and, as much as possible, their promotion and distribution) for the whole world, as if it were a single entity. Before moving outside their own borders, companies must conduct environmental analyses to evaluate the potential of and problems associated with various markets and to determine what strategy is best for doing business in those markets. Failure to do so may result in losses and even negative publicity.

Managers who can meet the challenges of creating and implementing effective and sensitive business strategies for the global marketplace can help lead their companies to success. Being globally aware is therefore an important quality for today's managers and will become a critical attribute for managers of the twenty-first century.