International Business and Trade Quiz 1 (Reviewer) PDF

INTERNATIONAL BUSINESS AND TRADE - QUIZ 1 (REVIEWER) SIX DOMAIN OF INTERNATIONAL - International means – foreign or BUSINESS multinational Activities, strategies, structure and decision- YT VIDEO (Interna...

INTERNATIONAL BUSINESS AND TRADE - QUIZ 1 (REVIEWER) SIX DOMAIN OF INTERNATIONAL - International means – foreign or BUSINESS multinational Activities, strategies, structure and decision- YT VIDEO (International Business making process of multinational enterprises Explained: Why Go International?) (MNE) Interactions between MNE and other actors Why Do Companies Engage in (importers/exporters), organizations, International Business? institutions, etc. Organizations participate in Cross-border activities of firm (trade, finance, international business for the same reason investment, technology transfer) students engage in academic pursuits. How the international environment affects the Companies engage in international business processes of firm to increase/expand sales, to acquire resources & knowledge, and reduce the risk International dimension of organizational associated with a competitive labor market. forms Cross-country comparative studies of 3 Major Objectives of International businesses in different countries and Business environments 1. Increasing Sales Organizations are drawn to DEFINITION OF TERMS international activity for the increased earning potential offers. They select International Business markets and design products to maximize - is defined as a business that engages in in profit in the same way that a student might international (cross-border economic select a major based on a high earning activities. potential. - refers to the action of doing business abroad. 2. Acquiring Resources & Knowledge - the performance of trade and investment Organizations engage in international activities by firms across national borders business to acquire resources and - consist of business transactions between knowledge. By conducting business parties form more than one country internationally, organizations gain access - defined as all commercial transactions, to additional natural resources, lower including sales, investments, and production costs, higher quality goods and transportations, that take place between services, and untapped genius in new two or more countries. markets. Beyond the tangible benefits - sells product worldwide but has facilities connecting business in a foreign country only in its home country exposes organizations to innovate - smaller scope encompassing only two or business methods and thoughtful more countries processes that meet customer needs. 3. Reducing Risk tariffs, or taxes on imports, as a way to not Organizations that operate only discourage bringing in goods from internationally, reduce the risk associated abroad, but profit off it. Tariff – a tax or duty to be paid on a with operating in one market alone. A global particular class of imports or exports. organization can more easily find sales in Mercantilism created barriers to other markets should be one of the countries international trade. Countries aim to face an economic downturn. International produce as much as possible on their own, businesses also reduce the risk that their including things they weren’t able to make competitors achieve a competitive efficiently. advantage through international businesses In the late 18th century, so-called classical of their own. economists (Jean-Baptiste Say, David International Trade Ricardo, Adam Smith) refuted these long - Exchange of goods and or services across held beliefs, championing the idea that international borders societies should trade with one another to - Exchange of products and services across be more successful because of national borders through exporting or comparative advantage. importing The idea that when countries focus on - Is the trade between residents of two making things they’re competitively good at countries. and import the rest, everyone benefits. This is known as Specialization, and when YT VIDEO (International Trade Explained) countries don’t have to spend time and All countries export, sell products and resources producing textiles or wine for ex., services abroad. And import buy goods and there’s more room for them to innovate and services from foreign trading partners. These create entirely new products. goods are manufactured items or agricultural Today, we measure countries in commodities. economies in productivity. Their ability to utilize their limited resources for maximum Services, a dynamic and growing part of trade, value. refer to all intangible goods such as advertising This metric is known as Gross Domestic and telecommunication. Product, which totals the sum of all the final goods and services a country Why can’t countries produce their own produces in a year. Each country’s human, goods or materials, and provide more jobs physical, technological, and financial in business domestically? resources, determine what that country can Before the 19th century, most European produce efficiently and successfully. countries tried to do just that prioritizing self- Measuring GDP instead of just gold, helped sufficiency in a system called mercantilism. boost trade and grow economies. Mercantilism aimed to maximize exports, After the World War Two, the newly formed minimize imports, and increase the country’s United Nations created the General supply of gold. This system led to strict Agreement on Tariffs and Trade (GATT).  This agreement substantially lowered trade Global Business barriers, like tariffs; and created rules to - Business around the globe which includes dictate how countries should trade freely. international activities The GATT became the World Trade - Is a company that operates facilities (such Organization (WTO) in 1995 and tried to as factories and distributions center) in eliminate even more obstacles to keep up many countries around the world with the changing world. - Larger scope which includes the whole The WTO expanded the definition of trade to world include not just goods but services, and to YT VIDEO (Introduction to Global create rules governing intellectual property Business) such as copyright or patent. The WTO is also Understanding macroeconomics, an arena for countries to hammer out the microeconomics, understanding exchange rules and regulations of international trade rates – these are all fundamental to be in and lodge complaints if they believe those business. rules aren’t followed. The fact of global change has put us into a According to the principle of comparative situation where we really need to sit down advantage, if one country can’t sell a high and do some serious development of quality product at a reasonable price point, strategic options. or new technology make the business When we enter a new market, it’s not the uncompetitive, it will not succeed. thrill of creating a profit, but it’s the thrill Some countries and industries are accused about understanding a completely new of skirting the rules of international trade, culture. and that’s where the WTO tries to come in. For example, agricultural subsidies provided Globalization by wealthy governments make it hard for - Is the close integration of countries and sellers from smaller or poorer countries to people around the world reasonable export their crops to those countries. Some countries forge bilateral YT VIDEO (What is Globalization?) and regional trade agreements to address Globalization are pathways for investing, their particular needs and trade strategies. communicating, and exchanging ideas. In 1994, the North American Free Trade Globalization is connecting countries all Agreement (NAFTA), was designed to over the world, even countries on opposite facilitate more trade among the United sides of the planet. States, Mexico, and Canada. NAFTA Globalization has made the whole planet provided a blueprint for similar types of richer too, especially people in poorer agreements between other countries. countries. From 1990 to 2015, world trade volume While globalization has brought more increased more than fivefold (5x) from 3.5 benefits for more people than ever before. trillion to 19 trillion. It’s also true that not everyone has benefited from the increased wealth.  More than ever, we need international YT VIDEO (How Franchising Works | cooperation, countries working together, and Examples from McDonald’s) the International Monetary Fund (IMF) McDonald’s is a great example of how the franchising model can be a success for working with its member countries to build both the franchisor and franchisee. the best possible bridges to get us to the One of the clear advantages of purchasing future. a franchise, is that the franchise doesn’t have to establish their own brand and Global reputation. - means all-encompassing and worldwide Brands with a good reputation are not easy to build and franchising cuts out this process of building a brand for the business ADVANTAGES OF INTERNATIONAL owner. BUSINESS Support, advice, and training are also Optimal Use of Available Resources positives of investing in a franchise. Many Improved Standard of Living franchisors provide training and support to Consumer Benefits their franchisees as it is in their best interest for the franchisee to be successful. Promotion of Industrialization On the other side, there are negatives to Cultural Development purchasing a franchise. First, being the Creating Employment Opportunities cost. Increasing Public Income Another drawback are the ongoing fees. The franchisee must pay a percentage of DISADVANTAGE OF INTERNATIONAL their profits to the franchisor along with a percentage to cover advertising costs. BUSINESS A franchisee cannot change the product Competition with Developed Countries range, pricing and advertising of products Competition between Nations as these are all set to ensure the brand Exploitation stays consistent for its customers. Legal Issues Overall, the franchise model is a low-risk way of starting a well-organized, Complex Technical Steps successful business. Negative Impact on the Domestic Industry Licensing MODE OF ENTRY IN INTERNATIONAL - Business arrangement in which one MARKET company gives another company permission to manufacture its product for Franchising a specified payment - Method of distributing products - Generally, involves allowing another or services involving a franchisor, who company to use patents, trademarks, establishes the brand's trademark or trade copyrights, designs, and other intellectual name and a business system, and a in exchange for a percentage of revenue franchisee, who pays a royalty and often or a fee. an initial fee for the right to do business under the franchisor's name and system. YT VIDEO (What is Licensing?) - Begin Putting Together a Comprehensive It’s possible for retailers and manufacturers Export Plan. to simply borrow that trust by labeling their 2nd step, Plan your Market Entry products with the marks of these trusted Strategy brands. This growing form of marketing is called Licensing. - Conducting Foreign Market Research Brand owners can earn the trust and loyalty - Free Market Research Country of millions of consumers all over the world. Commercial Guides And those consumers associate their - Industry Association favorite brands with specific and important 3rd step, Find Foreign Buyers values, but these values extend into product - Develop your Global Web Presence categories far beyond the ones currently - Attending or Exhibiting at Industry produced by the brand owners. This leftover value is called Untapped Brand Equity and Trade Shows it's often simply waiting for a retailer or 4 step, How Do I Get Paid? th manufacturer to put it to good use. - U.S Bank is a good first stop. Ask about Licensing this valuable brand equity will label extended terms, money to expand, their products in a way they deeply connects or insurance to guarantee payment with the consumers and can often give an from foreign buyers. exclusive advantage to licensee or retailer - Export Financing Options putting them miles ahead of their competitors. - Find a Reputable Overseas Buyer Licensing can repeatedly create and win for 5th step, Educate Yourself on the Steps the retailer, win for the brand, and a win for Required the consumer. - Determine if your product or service Brands are the best friends of the product needs a U.S. Export License markets. In the same way, retailers and - Review required Documentation manufacturers can help brand owners discover the full value of their brand’s equity. Shipping Options - Research foreign Standards, Exporting Certifications, or Regulations that - The sale of products and services in foreign may apply to your product countries that are sourced from the home 6th step, Research and Confirm country. Duties, Taxes, Shipping and Insurance YT VIDEO (The Export Process Overview Learn How to Export) Essential Elements of the Export Process 1st step, How Do You Get Ready to - Get Ready to Export Export? - Plan your Market Entry Strategy - Do you have the resources and capacity - Start Finding Foreign Buyers ready to export? - Determine Terms of Payment - Does your product have potential foreign - Educate Yourself on the Steps demand? Required to Successfully Ship Goods - Integrate Exporting into your Business and Complete the Transaction Plan?  - Research and Confirm Duties, Taxes, Merger and Acquisition Shipping and Insurance Costs - Occurs when two separate entities combine forces to create a new, joint Joint Venture organization. - Business arrangement in which two or - Acquisition refers to the takeover of one more parties agree to pool their resources entity by another. for the purpose of accomplishing a specific task YT VIDEO (Mergers and Acquisitions | - Strategic alliance where two or more With Real-World Examples) parties agree to pool resources for a 1. Definition specific project or business activity Mergers and Acquisitions (M&A) refer to the process of combining two or more YT VIDEO (What is a Joint Venture?) companies into a single entity or acquiring A Joint Venture of JV is a business one company by one another. agreement in which the parties agree to Merger – two companies combine to form develop, for a finite time, a new entity and a new entity new assets by contributing equity. Acquisitions – one company buys another They exercise control over the enterprise 2. Benefits and consequently share revenues, i. Market Expansion expenses, and assets. ii. Synergies and Cost Savings In European Law, the term ‘joint venture’ or iii. Diversification joint undertaking is an elusive legal iv. Acquire New Technologies / Capabilities concept, better defined under the rules of v. Financial Benefits company law. 3. Failed Reasons In France, the term ‘joint venture’ is variously i. Cultural clash translated ‘association d’enterprises’, ii. Poor due diligence ‘enterprise conjointe’, ‘coenterprise’ or iii. Overpayment ‘enterprise commune’. iv. Integration challenges In Germany, the term ‘joint venture’ is better v. Strategic misalignment represented as a “combination of vi. Regulatory Issues companies.” vii. Failure to communicate A joint venture takes place when two 4. Strategies parties come together to take on one project. i. Develop a clear strategy In a joint venture, both parties are equally ii. Conduct due diligence invested in the project in terms of money, iii. Secure financing time, and effort to build on the original iv. Plan for integration concept. v. Communicate effectively vi. Seek legal and financial advice 5. Summary Brownfield – DISADVANTAGES M&A deals can be complex and involve Will fail when: many legal, financial, and regulatory 1. Parent company overpays for acquired firm 2. Cultural clash: resolution takes longer than considerations. They typically involve expected extensive due diligence to assess the risks 3. Not enough evaluation before purchase and benefits of the deal, negotiation of terms and conditions, and obtaining regulatory SUMMARY approvals. Wholly Owned Subsidiary Wholly Owned Subsidiaries Strengths: - Firms can increase their sphere of - Company entirely owned and managed by operations another company, known as the parent - Firms have full control over subsidiary company. Weaknesses: - The parent company owns the subsidiary's - Owning subsidiaries require immense common stock and fully controls its resources and money operations, policies, and management. - Smaller business may not be able to afford subsidiaries YT VIDEO (Wholly Owned Subsidiaries) Turnkey Project - Project in which the supplier or provider is 2 Ways to Invest in Subsidiaries responsible to the client for the entire 1. Greenfield result of the project and presents it to the - starting a subsidiary from scratch client completely finished and ready to 2. Brownfield use. - purchasing an existing local business YT VIDEO (Turnkey Project) Greenfield – ADVANTAGES A Turnkey Project is a contract between a 1. Customize subsidiaries to suit the firm supplier and a purchaser that gives the 2. Easy to implement operating routines purchaser the rights of having the Greenfield – DISADVANTAGES ownership of the product designed, built, 1. Slow to establish and manufactured by the supplier fully - construction of facilities completed and ready for use. - staff hiring & training - starting production ADVANTAGES 2. High Risk - Opting for a turnkey project, helps to - uncertain success reduce the workload of the purchases as - preemption by competitors there is no need for them to manage and supervise the project, since the supplier Brownfield – ADVANTAGES is fully responsible for the entire project. 1. Acquisition takes a short time 2. Less risk involved - With a turnkey project, the purchaser would not have to pay for extra costs as with as with any increase in costs during the project such as rise in cost of materials, is fully covered by the supplier. - Therefore, the purchaser only has to pay the sum agreed upon the contract negotiations. DISADVANTAGES - With turnkey projects, the purchaser would have no say in the project such as choosing the preferred sub-contractors to provide service during the project as everything is up to the supplier to decide. - As turnkey project budgets are presented before the designs of the project is finalized, budgets conferred may be higher than necessary. - In addition, the supplier may present higher project budgets in order to cover for any unexpected increase in costs. Therefore, this leads to the purchaser paying more than necessary.