Sole Proprietorship vs. Corporations

Sole Proprietorship

• A business owned by one person
• To start a sole proprietorship, a product/service to sell, money for start-up expenses, and management skills are needed

Advantages

• Easy to start
• Freedom to make decisions
• Owner keeps all profits
• Pride of ownership

Disadvantages

• Limited funding sources
• Long hours and hard work are required
• Unlimited risks
• Limited business life

Corporation

• Corporations account for nearly 90% of sales in the US
• Corporations raise money by selling stock, making buyers part owners
• A stock certificate represents ownership in a corporation
• Corporation owners are Stockholders/Shareholders and have the right to earn dividends and vote on company policies
• Stockholders indirectly control company management and elect the board of directors
• The Board of Directors hires managers to run the company
• Corporations act as a legal entity, unlike sole proprietorships and partnerships

Advantages

• More funding sources
• Fixed financial liability of owners
• Specialized management
• Unlimited company life

Disadvantages

• Difficult creation process
• Owners have limited control
• Subject to double taxation

Other Forms of Organization for Internationalization

• Municipal corporations are towns/cities that provide citizen services, but they also partner with foreign cities for trade/cultural exchange
• Nonprofit corporations provide a service without seeking profit and include churches, hospitals, colleges, universities, and charities
• Cooperatives are businesses owned and operated for the benefit of their members, often formed in communities or places of worship

Multinational Companies (MNCs)

• Operate in multiple countries and are also called global, transnational, or worldwide companies
• MNCs typically have a parent company in their home country with divisions/companies in host countries

Characteristics

• Worldwide Market View: They see whole world as potential market and seek product ideas/materials globally
• Standardized Product: They look for market similarities to offer standardized products
• Culturally-Sensitive Hiring: Use consistent hiring policies and recruit managers internationally
• International and Local Perspective: Distribute, price, and promote with both an international and local outlook

Methods of International Business Involvement

• Companies get involved in international business in 8 main ways
• As you become more involved in the business, the firm takes on more risk, but also more control

Indirect Exporting

• When a company sells its product internationally without trying to
• Called casual/accidental exporting because its not planned
• Uses agents and brokers to connect sellers and buyers
• Has minimum costs and risks

Direct Exporting

• When a company actively seeks and conducts exporting
• Requires creating an exporting department and hiring a manager
• Can use agents or brokers outside of the company
• More costly than indirect exporting, but brings more control

Management Contracting

• Selling management skills
• Ability to find business opportunities, coordinate resources, solve problems, and make productive decisions is important
• Low risk because managers can leave a country quickly
• Contract manufacturing is a variation of this

Licensing

• Allowing a company to use a procedure it owns
• Selling the right to use intangible property (production process, trademark, brand name) for a fee/royalty
• Low monetary investment and risk
• The potential financial return is also frequently low

Franchising

• Granting the right to use a company name/business process in a specific way
• Organizations set up a business that looks and operates like the parent company
• Marketing elements must meet cultural sensitivities and legal requirements
• Similar to licensing, but franchising involves selling a product/service

Joint Ventures

• An agreement between two companies from different countries to share a business project
• Benefits include sharing raw materials, shipping/production facilities, and management activities
• Drawbacks include sharing profits and less control
• Costs, risks, and profits can be shared in any combination

Foreign Direct Investment (FDI)

• When a company makes a direct investment by buying land/resources in another country
• Types of FDI include real estate, existing companies, and wholly-owned subsidiaries
• Some countries restrict how much land/factories may be sold to foreign owners. Some only allow 49% ownership

Importance of Importing

• Imports are services/products that a company/government buys from a business in another country
• Companies import to sell goods/services in their own country
• Businesses import to create new and expand sales
• Companies get involved in importing for consumer demand, lower costs, and for foreign-made parts in domestic manufacturing

Exporting

• Companies export goods or services to companies in other countries
• Indirect exporting: sells products in a foreign market without actively seeking those opportunities
• Direct exporting: business actively seeks export opportunities

Process of Exporting

• Before selling, find any potential buyers
• Trade leads are lists for companies planning to do business overseas
• Every transaction involves shipping and payment terms
• Free on board (FOB)= product price includes cost of loading goods onto transport vessels
• Cost, insurance, and freight (CIF)= costs include goods, insurance, and freight included in the price
• Cost and freight (C&F) goods and freight is included, but the buyer must pay for insurance separately
• Determine if people in other countries can use your product/service
• Some products are standardized worldwide
• After the agreement is reached on selling terms, the goods are shipped
• A freight forwarder arranges to ship goods to customers
• Companies must prepare export documents
• A bill of lading: agreement between exporter and transportation company(proof with receipt)
• A certificate of origin: the document states the name of the country in which the goods were produced
• Financial institutions convert currency and are involved with the payment step

The Economic Effect of Foreign Trade

• Balance of trade is the difference between a country's exports and imports
• Balance of payments measures the total flow of money coming into and out of a country

Balance of Payments

• Exports, imports, investments, tourism, and financial assistance are included in this
• Positive/favorable balance of payments: nation receives more money in a year than it pays out
• Negative balance of payments: unfavorable and is the result when a country sends more money out than it brings in

Trade Agreements

• Competitiveness to reduce restrictions by signing trade agreements
• Trade agreements occur between countries to promote economic development
• Individual nations and companies may reach agreements that encourage international business activities

The World Trade Organization (WTO)

• After World War II, international leaders promoted peaceful international trade, made ground rules and The General Agreement on Tariffs and Trade (GATT) in 1947, operating in January 1948
• In 1995, GATT was replaced by the World Trade Organization (WTO)
• WTO has the power to settle trade disputes and enforce its members freetrade agreements
• Several main goals:
  • Lowering tariffs that discourage free trade
  • Eliminating import quotas, subsidies and unfair technical standards that reduce competition -Recognizing protection for patents, copyrights, trademarks and software and intellectual property
  • Reducing barriers for banks, insurance companies and other financial services
  • Assisting poor countries with trade policies and economic growth

Economic Communities

• An organization of countries that bond together to permit a free flow of products
• A group acts as a single country for business activities
• Also called a common market
• Types of cooperation between:
  • European Union (EU)
  • Latin American Free Trade Association (LAFTA)
  • Association of Southeast Asian Nations (ASEAN)
  • Economic Community of West African States (ECOWAS)
  • North American Free Trade Agreement- (NAFTA)

Free-Trade Zones

• An area that a government has designated for duty-free entry of non-prohibited goods
• Located at a harbor or airport which is a point of entry into a nation
• Merchandise is stored, displayed, or used without duties being paid
• Import taxes are imposed when the items pass from the freetrade zone into a customs area

International Business Competition

• Companies compete in domestic and international markets
• Domestic market: companies selling similar products within that same country
• International market: companies competing against companies in several countries
• Factors Affecting Competition: number of companies, business costs, and product difference

Types of Competitive Situations

• An industry refers to companies in the same type of business
  • Pure competition is market with many sellers offering the same product
  • Monopolistic competition refers to market with many sellers each having with slightly different products
  • Oligopoly is where there are a few large companies that control industries
  • Monopoly is when one company controls the total supply of a product or service