C h a p ter

Rawpixel.com/Shutterstock.com
Global Business

Learning Objectives
Why
What you will be able to do once you complete this chapter:
Should
3-1 Explain the economic basis for international 3-4 Outline the extent of international business
You Care?
business. and the economic outlook for trade. Free trade—are you for or against
3-5 Discuss international trade agreements and it? Most economists support free-
3-2 Explore the methods by which a firm can trade policies, but public support
international economic organizations working
organize for and enter into international to foster trade. can be lukewarm, and certain
markets. groups are adamantly opposed,
3-6 Describe the various sources of export
assistance. alleging that “trade harms large
3-3 Discuss the restrictions nations place on
segments of U.S. workers,”
international trade, the objectives of these
3-7 Identify the institutions that help firms and “degrades the environment,” and
restrictions, and their results. nations finance international business. “exploits the poor.”

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 Inside Business
Hershey’s Global Reach

I n more than 120 years of operation, the Hershey Company has

expanded far from its headquarters of Hershey, Pennsylvania,
to do business in Shanghai, São Paulo, and beyond. Its pantry
produce quality snacks, whether the company has total ownership
of the plant—as it does in North America, Malaysia, and India—or
operates a joint venture, as it does in Brazil and in China.
of famous brands includes Hershey’s Kisses, Reese’s Pieces, Competition in the global chocolate market is heating up.
Almond Joy, Twizzlers, and Jolly Rancher. Although Hershey is U.S. competitors include Mars, known for M&Ms and Snickers,
the top U.S. seller of chocolate candy, the company is also looking and Mondelez, which owns the Cadbury brand everywhere
beyond sweets to tap the profit potential of other snacks, such as except in the United States, where Hershey has licensed it.
Krave protein snacks, which it acquired not long ago. With an eye toward future growth, Hershey is investing in China
From the earliest days, Hershey was an importer of ingre- because of the buying power of that country’s expanding middle
dients for its signature chocolate bars. Today, the company class. What’s next for the company founded by Milton Hershey
buys much of its cocoa from Ghana and Ivory Coast, aiming for in 1894?1
100 percent certified sustainable cocoa to protect both the planet
and the people. Quality and purity are major considerations, Did you know?
which is why Hershey closely scrutinizes every link in the supply One company plant in Hershey, Pennsylvania, produces
chain for its ingredients. It also has rigorous processes in place to more than 70 million Hershey’s Kisses every day.

Hershey is just one of a growing number of companies, large and small, that are doing
business with firms in other countries. Some companies, such as General Electric, sell to
firms in other countries; others, such as Pier 1 Imports, buy goods around the world to
import into the United States. Combustion Associates of Corona, California, is a small
business founded by husband and wife immigrants from Bangladesh. The company
makes and exports large power generators to more than forty developing countries.
Whether they buy or sell products across national borders, these companies are all
contributing to the volume of international trade that is fueling the global economy.
Theoretically, international trade is every bit as logical and worthwhile as
interstate trade between, say, California and Washington. Yet, nations tend to
restrict the import of certain goods for a variety of reasons. For example, recently,
the United States restricted the import of Mexican fresh tomatoes because they were
undercutting price levels of domestic fresh tomatoes.
Despite such restrictions, international trade has increased almost steadily since
World War II. Many of the industrialized nations have signed trade agreements
intended to eliminate problems in international business and to help less-developed
nations participate in world trade. Individual firms around the world have seized
the opportunity to compete in foreign markets by exporting products and increasing
foreign production, as well as by other means.
Signing the Trade Act of 2002, President George W. Bush remarked, “Trade is
an important source of good jobs for our workers and a source of higher growth
for our economy. Free trade is also a proven strategy for building global prosperity
and adding to the momentum of political freedom. Trade is an engine of economic
growth. In our lifetime, trade has helped lift millions of people and whole nations
out of poverty and put them on the path of prosperity.”2 In his national best seller,
The World Is Flat, Thomas L. Friedman states, “The flattening of the world has
presented us with new opportunities, new challenges, new partners but, also,
alas new dangers, particularly as Americans it is imperative that we be the best

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 global citizens that we can be—because in a flat world, if you don’t visit a bad
neighborhood, it might visit you.”
We describe international trade in this chapter in terms of modern specialization,
whereby each country trades the surplus goods and services it produces most efficiently
for products in short supply. We explore several methods of entering international
markets and explain the restrictions nations place on products and services from other
countries and present some of the possible advantages and disadvantages of these
restrictions. We describe the extent of international trade and identify the organizations
working to foster it. We then outline the various sources of export assistance available
from the federal government. Finally, we identify some of the institutions that provide
the complex financing necessary for modern international trade.

3-1  The Basis for International Business

International business encompasses all business activities that involve exchanges Learning Objective
across national boundaries. Thus, a firm is engaged in international business when 3-1 Explain the economic basis
it buys some portion of its input from, or sells some portion of its output to, an for international business.
organization located in a foreign country. (A small retail store may sell goods
produced in some other country. However, because it purchases these goods from
American distributors, it is not engaged in international trade.)

3-1a  Absolute and Comparative Advantage international business  all

Some countries are better equipped than others to produce particular goods business activities that involve
or services. The reason may be a country’s natural resources, its labor supply, exchanges across national
boundaries
or even customs or a historical accident. Such a country would be best off if it
absolute advantage  the ability to
could specialize in the production of such products so that it can produce them
produce a specific product more
most efficiently. The country could use what it needed of these products and efficiently than any other nation
then trade the surplus for products it could not produce efficiently on its own. comparative advantage  the ability
Saudi Arabia thus has specialized in the production of crude oil and petroleum to produce a specific product more
products; South Africa, in diamonds; and Australia, in wool. Each of these countries efficiently than any other product
is said to have an absolute advantage with regard to a particular
product. An absolute advantage is the ability to produce a
specific product more efficiently than any other nation.
One country may have an absolute advantage with regard to
several products, whereas another country may have no absolute
advantage at all. Yet it is still worthwhile for these two countries
to specialize and trade with each other. To see why this is so,
imagine that you are the president of a successful manufacturing
firm and that you can accurately type 90 words per minute. Your
assistant can type 80 words per minute but would run the business
poorly. Thus, you have an absolute advantage over your assistant
liveslow/iStock/Thinkstock

in both typing and managing. However, you cannot afford to type

your own letters because your time is better spent in managing the
business. That is, you have a comparative advantage in managing.
A comparative advantage is the ability to produce a specific
product more efficiently than any other product.
Your assistant, on the other hand, has a comparative
advantage in typing because he or she can do that better than A U.S. absolute advantage. The United States has
managing the business. Thus, you spend your time managing, long specialized in the production of wheat. Because
and you leave the typing to your assistant. Overall, the business of its natural resource, the United States and some
is run as efficiently as possible because you are each working in other countries enjoy an absolute advantage—their
accordance with your own comparative advantage. ability to produce wheat more efficiently than
The same is true for nations. Goods and services are countries in other parts of the world.
produced more efficiently when each country specializes in the

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 products for which it has a comparative advantage. Moreover, by definition, every
country has a comparative advantage in some product. The United States has many
comparative advantages—in research and development, high-technology industries,
and identifying new markets, for instance.

3-1b  Exporting and Importing

Suppose that the United States specializes in producing corn. It then will produce a
surplus of corn, but perhaps it will have a shortage of wine. France, on the other hand,
specializes in producing wine but experiences a shortage of corn. To satisfy both needs—
for corn and for wine—the two countries should trade with each other. The United
States should export corn and import wine. France should export wine and import corn.
Exporting is selling and shipping raw materials or products to other nations.
The Boeing Company, for example, exports its airplanes to a number of countries
for use by their airlines. Figure 3-1 shows selected top merchandise-exporting states
in the United States.
Importing is purchasing raw materials or products in other nations and bringing
them into one’s own country. Thus, buyers for Macy’s department stores may
purchase rugs in India or raincoats in England and have them shipped back to the
United States for resale.
Importing and exporting are the principal activities in international trade. They
give rise to an important concept called the balance of trade. A nation’s balance of
trade is the total value of its exports minus the total value of its imports over some
period of time. If a country imports more than it exports, its balance of trade is
negative and is said to be unfavorable. (A negative balance of trade is unfavorable
because the country must export money to pay for its excess imports.)
In 2016, the United States imported $2,713 billion worth of goods and services
and exported $2,208 billion worth. It thus had a trade deficit of $505 billion. A
trade deficit is a negative balance of trade (see Figure 3-2). However, the United
States has consistently enjoyed a large and rapidly growing surplus in services. For
example, in 2016, the United States imported $504.7 billion worth of services and
exported $752.4 billion worth, thus creating a favorable balance of $247.7 billion.3

FIGURE 3-1 Selected Top Merchandise-Exporting States

Texas and California accounted for about one-fifth of all 2016 U.S. merchandise exports.

Texas $231.1

California $163.5

Washington $79.6
Billions of dollars

New York $76.7

exporting  selling and shipping Illinois $59.8

raw materials or products to other
nations
Michigan $54.7
importing  purchasing raw
materials or products in other
nations and bringing them into Florida $52.0
one’s own country Total 2016 U.S.
balance of trade  the total value Ohio $49.3 $2,208 billion
of a nation’s exports minus the
total value of its imports over some Louisiana $48.4
period of time
trade deficit  a negative balance Source: U.S. Department of Commerce, Census Bureau, https://www.census.gov/foreign-trade/statistics/state/data/index.html
of trade (accessed August 2, 2017).

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 FIGURE 3-2 U.S. International Trade in Goods and Services

If a country imports more goods than it exports, the balance of trade is negative, as it was
in the United States from 2000 to 2016.

2,800

2,600

2,400

2,200 Imports

2,000

1,800
Exports
1,600

1,400
Billions of dollars

1,200

1,000

800

600

400

200

–200

–400

–600
Balance of Trade
–800
2000 ’02 ’04 ’06 ’08 ’10 ’12 ’14 ’16

Source: U.S. Department of Commerce, International Trade Administration, https://bea.gov/newsreleases/international/trade

/2017/pdf/trade1216.pdf (accessed February 16, 2017).

e p t ✓
o n c eck
C Ch
Question: Are trade deficits bad?
Answer: In testimony before the Senate Finance Committee, Daniel T. Griswold,
associate director of the Center for Trade Policy at the Cato Institute, remarked, ▸▸ Why do firms engage in
“The trade deficit is not a sign of economic distress, but of rising domestic demand international trade?
and investment. Imposing new trade barriers will only make Americans worse off ▸▸ What is the difference between
while leaving the trade deficit virtually unchanged.” an absolute advantage and a
comparative advantage?
On the other hand, when a country exports more than it imports, it is said to
have a favorable balance of trade. This has consistently been the case for Japan over ▸▸ What is the difference between
the last two decades or so. balance of trade and balance of
A nation’s balance of payments is the total flow of money into a country minus payments?
the total flow of money out of that country over some period of time. Balance of
payments, therefore, is a much broader concept than balance of trade. It includes
balance of payments  the total
imports and exports, of course. However, it also includes investments, money spent flow of money into a country minus
by foreign tourists, payments by foreign governments, aid to foreign governments, the total flow of money out of that
and all other receipts and payments. country over some period of time

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 A continual deficit in a nation’s balance of payments (a negative balance) can
cause other nations to lose confidence in that nation’s economy. Alternatively, a
continual surplus may indicate that the country encourages exports but limits
imports by imposing trade restrictions.

Methods of Entering
3-2 
International Business
Learning Objective A firm that has decided to enter international markets can do so in several ways.
3-2 Explore the methods by We will discuss several different methods. These different approaches require
which a firm can organize for and varying degrees of involvement in international business. Typically, a firm begins its
enter into international markets. international operations at the simplest level. Then, depending on its goals, it may
progress to higher levels of involvement.

3-2a  Licensing
Licensing is a contractual agreement in which one firm permits another to produce and
market its product and use its brand name in return for a royalty or other compensation.
For example, Yoplait yogurt is a French yogurt licensed for production in the United
States. The Yoplait brand maintains an appealing French image, and in return, the U.S.
producer pays the French firm a percentage of its income from sales of the product.
Licensing is especially advantageous for small manufacturers wanting to launch
a well-known domestic brand internationally. For example, all Spalding sporting
products are licensed worldwide. The licensor, the Questor Corporation, owns the
Spalding name but produces no goods itself. Licensing thus provides a simple method
for expanding into a foreign market with virtually no investment. On the other hand,
if the licensee does not maintain the licensor’s product standards, the product’s image
may be damaged. Another possible disadvantage is that a licensing arrangement may
not provide the original producer with any foreign marketing experience.

3-2b  Exporting
A firm also may manufacture its products in its home country and export them for
sale in foreign markets. As with licensing, exporting can be a relatively low-risk

Kheng Guan Toh/Shutterstock.com

licensing  a contractual agreement

in which one firm permits another
to produce and market its product
and use its brand name in return
for a royalty or other compensation

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 method of entering foreign markets. Unlike licensing, however, it is not a simple
method; it opens up several levels of involvement to the exporting firm.
At the most basic level, the exporting firm may sell its products outright to an
export-import merchant, which is essentially a merchant wholesaler. The merchant
assumes all the risks of product ownership, distribution, and sale. It may even
purchase the goods in the producer’s home country and assume responsibility for
exporting the goods. An important and practical issue for domestic firms dealing
with foreign customers is securing payment. This is a two-sided issue that reflects
the mutual concern rightly felt by both parties to the trade deal: The exporter would
like to be paid before shipping the merchandise, whereas the importer obviously
would prefer to know that it has received the shipment before releasing any funds.
Neither side wants to take the risk of fulfilling its part of the deal only to discover
later that the other side has not. The result would lead to legal costs and complex,
lengthy dealings that would waste everyone’s resources. This mutual level of mistrust,
in fact, makes good business sense and has been around since the beginning of trade
centuries ago. The solution then was the same as it still is today—for both parties to
use a mutually trusted go-between who can ensure that the payment is held until
the merchandise is in fact delivered according to the terms of the trade contract.
The go-between representatives employed by the importer and exporter are still, as
they were in the past, the local domestic banks involved in international business.

Exporting to International Markets American companies may manufacture

their products in the United States and export them for sale in foreign markets.
Exporting can be a relatively low-risk method of entering foreign markets.
Here is a simplified version of how it works. After signing contracts detailing
the merchandise sold and terms for its delivery, an importer will ask its local bank to
issue a letter of credit for the amount of money needed to pay for the merchandise.
The letter of credit is issued “in favor of the exporter,” meaning that the funds are tied
specifically to the trade contract involved. The importer’s bank forwards the letter of
credit to the exporter’s bank, which also normally deals in international transactions.
The exporter’s bank then notifies the exporter that a letter of credit has been received
in its name, and the exporter can go ahead with the shipment. The carrier transporting
the merchandise provides the exporter with evidence of the shipment in a document
called a bill of lading. The exporter signs over title to the merchandise (now in transit)
to its bank by delivering signed copies of the bill of lading and the letter of credit.
In exchange, the exporter issues a draft from the bank, which orders the
importer’s bank to pay for the merchandise. The draft, bill of lading, and letter of
credit are sent from the exporter’s bank to the importer’s bank. Acceptance by the
importer’s bank leads to return of the draft and its sale by the exporter to its bank,
meaning that the exporter receives cash and the bank assumes the risk of collecting
the funds from the foreign bank. The importer is obliged to pay its bank on delivery
of the merchandise, and the deal is complete.
In most cases, the letter of credit is part of a lending arrangement between the
importer and its bank. Of course, both banks earn fees for issuing letters of credit and
letter of credit  issued by a bank
drafts and for handling the import-export services for their clients. Furthermore, the on request of an importer stating
process incorporates the fact that both importer and exporter will have different local that the bank will pay an amount of
currencies and might even negotiate their trade in a third currency. The banks look after money to a stated beneficiary
all the necessary exchanges. For example, the vast majority of international business is bill of lading  document issued by
negotiated in U.S. dollars, even though the trade may be between countries other than the a transport carrier to an exporter to
United States. Thus, although the importer may end up paying for the merchandise in its prove that merchandise has been
shipped
local currency and the exporter may receive payment in another local currency, the banks
draft  issued by the exporter’s
involved will exchange all necessary foreign funds in order to allow the deal to take place.
bank, ordering the importer’s
Alternatively, the exporting firm may ship its products to an export-import bank to pay for the merchandise,
agent, which arranges the sale of the products to foreign intermediaries for a thus guaranteeing payment once
commission or fee. The agent is an independent firm—like other agents—that sells accepted by the importer’s bank

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 and may perform other marketing functions for the exporter. The exporter, however,
Joint venture. Large retains title to the products during shipment and until they are sold.

doomu/Shutterstock.com
pipelines can involve multiple An exporting firm also may establish its own sales offices, or branches, in foreign
countries. They can be countries. These installations are international extensions of the firm’s distribution
organized based on the use system. They represent a deeper involvement in international business than
of joint ventures. the other exporting techniques we have discussed—and thus they
carry a greater risk. The exporting firm maintains control over
sales, and it gains both experience in and knowledge of foreign
markets. Eventually, the firm also may develop its own sales
force to operate in conjunction with foreign sales offices.

3-2c  Joint Ventures

A joint venture is a partnership formed to achieve a specific goal or to operate for a
specific period of time. A joint venture with an established firm in a foreign country
provides immediate market knowledge and access, reduced risk, and control over
product attributes. However, joint-venture agreements established across national
borders can become extremely complex. As a result, joint-venture agreements generally
require a very high level of commitment from all the parties involved.
A joint venture may be used to produce and market an existing product in a
foreign nation or to develop an entirely new product. Recently, for example, Archer
Daniels Midland Company (ADM), one of the world’s leading food processors,
entered into a joint venture with Gruma SA, Mexico’s largest corn flour and tortilla
company. Besides a 22 percent stake in Gruma, ADM also received stakes in other
joint ventures operated by Gruma. One of them will combine both companies’ U.S.
corn flour operations, which account for about 25 percent of the U.S. market. ADM
also has a 40 percent stake in a Mexican wheat flour mill. ADM’s joint venture
increased its participation in the growing Mexican economy, where ADM already
produces corn syrup, fructose, starch, and wheat flour.

3-2d  Totally Owned Facilities

At a still deeper level of involvement in international business, a firm may develop
totally owned facilities, that is, its own production and marketing facilities in one
or more foreign nations. This direct investment provides complete control over
operations, but it carries a greater risk than the joint venture. The firm is really
establishing a subsidiary in a foreign country. Most firms do so only after they have
acquired some knowledge of the host country’s markets.
Direct investment may take either of two forms. In the first, the firm builds
or purchases manufacturing and other facilities in the foreign country. It uses
these facilities to produce its own established products and to market them in that
country and perhaps in neighboring countries. Firms such as General Motors, Union
Carbide, and Colgate-Palmolive are multinational companies with worldwide
manufacturing facilities. Colgate-Palmolive factories are becoming Eurofactories,
supplying neighboring countries as well as their own local markets.
A second form of direct investment in international business is the purchase
of an existing firm in a foreign country under an arrangement that allows it to
operate independently of the parent company. When Sony Corporation (a Japanese
firm) decided to enter the motion picture business in the United States, it chose to
purchase Columbia Pictures Entertainment, Inc., rather than start a new motion
picture studio from scratch.

3-2e  Strategic Alliances

strategic alliance  a partnership
formed to create competitive A strategic alliance , the newest form of international business structure, is
advantage on a worldwide basis a partnership formed to create competitive advantage on a worldwide basis.

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 Strategic alliances are very similar to joint ventures. The number of strategic
alliances is growing at an estimated rate of about 20 percent per year. In fact,
in the automobile and computer industries, strategic alliances are becoming the
predominant means of competing. International competition is so fierce and
the costs of competing on a global basis are so high that few firms have all
the resources needed to do it alone. Thus, individual firms that lack the internal
resources essential for international success may seek to collaborate with
other companies.
An example of such an alliance is the New United Motor Manufacturing,
Inc. (NUMMI), formed by Toyota and General Motors to make automobiles of
both firms. This enterprise united the quality engineering of Japanese cars with the
marketing expertise and market access of General Motors.

3-2f  Trading Companies

A trading company provides a link between buyers and sellers in different countries.
A trading company, as its name implies, is not involved in manufacturing or owning
assets related to manufacturing. It buys products in one country at the lowest price
consistent with quality and sells to buyers in another country. An important function
of trading companies is taking title to products and performing all the activities
necessary to move the products from the domestic country to a foreign country. For
example, large grain-trading companies operating out of home offices both in the
United States and overseas control a major portion of the world’s trade in basic food
commodities. These trading companies sell homogeneous agricultural commodities
that can be stored and moved rapidly in response to market conditions.

3-2g  Countertrade c e pt ck ✓
In the early 1990s, many developing nations had major restrictions on converting
domestic currency into foreign currency. Therefore, exporters had to resort to
Con Che
barter agreements with importers. Countertrade is essentially an international barter ▸▸ Two methods of engaging in
transaction in which goods and services are exchanged for different goods and international business may be
categorized as either direct or
services. Examples include Saudi Arabia’s purchase of ten 747 jets from Boeing with
indirect. How would you classify
payment in crude oil and Philip Morris’s sale of cigarettes to Russia in return for each of the methods described
chemicals used to make fertilizers. in this chapter? Why?
▸▸ What is a letter of credit? A bill
3-2h  Multinational Firms of lading? A draft?

A multinational enterprise is a firm that operates on a worldwide scale without ties ▸▸ In what ways is a multinational
to any specific nation or region. The multinational firm represents the highest level enterprise different from a large
corporation that does business
of involvement in international business. It is equally “at home” in most countries
in several countries?
of the world. In fact, as far as the operations of the multinational enterprise are
concerned, national boundaries exist only on maps. It is, however, organized under ▸▸ What are the steps in entering
the laws of its home country. international markets?
Table 3-1 shows the ten largest foreign and U.S. public multinational companies;
the ranking is based on a composite score reflecting each company’s best three out
of four rankings for sales, profits, assets, and market value. Table 3-2 describes steps
in entering international markets. trading company  provides a
According to the former chairman of the board of Dow Chemical Company, link between buyers and sellers in
different countries
a multinational firm of U.S. origin, “The emergence of a world economy and of
countertrade  an international
the multinational corporation has been accomplished hand in hand.” He sees
barter transaction
multinational enterprises moving toward what he calls the “anational company,”
multinational enterprise  a firm
a firm that has no nationality but belongs to all countries. In recognition of this that operates on a worldwide scale
movement, there already have been international conferences devoted to the question without ties to any specific nation
of how such enterprises would be controlled. or region

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 TABLE 3-1 The Ten Largest Foreign and U.S. Multinational Corporations
2016 Rank Company Business Country Revenue ($ millions)
1 Walmart Stores General Merchandise United States 482,130
2 State Grid Power Grids China 329,601
3 China National Petroleum Energy China 299,271
4 Sinopec Group Energy China 294,344
5 Royal Dutch Shell Energy Netherlands 272,156
6 ExxonMobil Energy United States 246,204
7 Volkswagen Automobiles Germany 236,600
8 Toyota Automobiles Japan 236,592
9 Apple Computers/Office Equipment United States 233,715
10 BP Energy United Kingdom 225,982
Source: http://fortune.com/global500/(accessed February 16, 2017).

TABLE 3-2 Steps in Entering International Markets

Step Activity Marketing Tasks
1 Identify exportable products Identify key selling features
Identify needs that they satisfy
Identify the selling constraints that are imposed
2 Identify key foreign markets for Determine who the customers are
the products Pinpoint what and when they will buy
Do market research
Establish priority, or “target,” countries
3 Analyze how to sell in each priority Locate available government and private-sector resources
market (methods will be affected by Determine service and backup sales requirements
product characteristics and unique
features of country/market)
4 Set export prices and payment Establish methods of export pricing
terms, methods, and techniques Establish sales terms, quotations, invoices, and conditions of sale
Determine methods of international payments, secured and unsecured
5 Estimate resource requirements Estimate financial requirements
and returns Estimate human resources requirements (full- or part-time export
department or operation)
Estimate plant production capacity
Determine necessary product adaptations
6 Establish overseas distribution Determine distribution agreement and other key marketing decisions
network (price, repair policies, returns, territory, performance, and termination).
Know your customer (use U.S. Department of Commerce international
marketing services)
7 Determine shipping, traffic, and Determine methods of shipment (air or ocean freight, truck, rail)
documentation procedures and Finalize containerization
requirements Obtain validated export license
Follow export-administration documentation procedures
8 Promote, sell, and be paid Use international media, communications, advertising, trade shows,
and exhibitions
Determine the need for overseas travel (when, where, and how
often?). Initiate customer follow-up procedures
9 Continuously analyze current Recognize changing factors influencing marketing strategies
marketing, economic, and political Constantly re-evaluate
situations
Source: U.S. Department of Commerce, International Trade Administration, Washington, DC.

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 Using Social Media

Pinterest Is Social in Many Languages

Pinterest, known as “the world’s catalog of ideas,” has grown Another change is a series of featured image collec-
into a multinational business. The social media site functions tions tailored to users in particular countries, including
as an online bulletin board where users can “pin” images Brazil, France, Germany, and Japan. The idea is to highlight
from various online sources. Headquartered in San Francisco, local content, such as recipes from locally known chefs,
Pinterest also maintains offices in four other U.S. cities plus and increase engagement while attracting new users. In
Berlin, London, Paris, São Paolo, and Tokyo. The company fact, when a user logs in and searches, Pinterest custom-
makes millions of dollars every year from advertising and izes the results according to country as well as language.
brand promotion, aiming to achieve $3 billion in annual rev- Being social in so many languages is helping Pinterest move
enue within a short time. quickly toward its growth goals.
Although Pinterest appealed mainly to U.S. users in the
Sources: Based on information in Gavin O’Malley, “Pinterest Revamps Pin As Save
early years, it quickly went global by redesigning its mobile Button, Promotes Global Expansion,” MediaPost, June 3, 2016, http://www.mediapost
app to accommodate almost any language. It also revamped .com/publications/article/277305/pinterest-revamps-pin-as-save-button-promotes-glo
.html; Yoree Koh, “Pinterest Works to Pin Down Path to Wider International Audience,”
its terminology, changing the button that invited users to “pin Wall Street Journal, March 23, 2016, http://www.wsj.com/articles/pinterest-works
it” because many non-U.S. users didn’t understand what the -to-pin-down-path-to-wider-international-audience-1458725401; Kia Kokalitcheva
“Pinterest Crosses Key Milestone In Quest To Be a Truly Global Business,” Fortune, April
phrase meant. Now the button says “save,” a word Pinterest 28, 2016, http://fortune.com/2016/12/19/brainstorm-health-12-19-intro/;
has found to be easily translated and understood worldwide. www.pinterest.com.

3-3  Restrictions to International Business

Specialization and international trade can result in the efficient production of want- Learning Objective
satisfying goods and services on a worldwide basis. As we have noted, international 3-3 Discuss the restrictions
business generally is increasing. Yet the nations of the world continue to erect nations place on international
barriers to free trade. They do so for reasons ranging from internal political and trade, the objectives of these
economic pressures to simple mistrust of other nations. We examine first the types of restrictions, and their results.
restrictions that are applied and then the arguments for and against trade restrictions.

3-3a  Types of Trade Restrictions

Nations generally are eager to export their products. They want to provide markets
for their industries and to develop a favorable balance of trade. Hence, most trade
restrictions are applied to imports from other nations.

Tariffs  Perhaps the most commonly applied trade restriction is the customs (or
import) duty. An import duty (also called a tariff) is a tax levied on a particular
foreign product entering a country. For example, the United States imposed a
2.2 percent import duty on fresh Chilean tomatoes, an 8.7 percent duty if tomatoes
are dried and packaged, and nearly 12 percent if tomatoes are made into ketchup or
salsa. The two types of tariffs are revenue tariffs and protective tariffs; both have the
effect of raising the price of the product in the importing nations, but for different
reasons. Revenue tariffs are imposed solely to generate income for the government.
For example, the United States imposes a duty on Scotch whiskey solely for revenue
purposes. Protective tariffs, on the other hand, are imposed to protect a domestic import duty (tariff)  a tax levied on
industry from competition by keeping the price of competing imports level with a particular foreign product entering
or higher than the price of similar domestic products. Because fewer units of the a country

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 product will be sold at the increased price, fewer units will be imported. The French
and Japanese agricultural sectors would both shrink drastically if their nations
abolished the protective tariffs that keep the price of imported farm products high.
Today, U.S. tariffs are the lowest in history, with average tariff rates on all imports
under 3 percent.
Some countries rationalize their protectionist policies as a way of offsetting an
international trade practice called dumping. Dumping is the exportation of large
quantities of a product at a price lower than that of the same product in the home
market.
Thus, dumping drives down the price of the domestic item. Recently, for example,
the Pencil Makers Association, which represents eight U.S. pencil manufacturers,
charged that low-priced pencils from Thailand and the People’s Republic of China
were being sold in the United States at less than fair value prices. Unable to compete
with these inexpensive imports, several domestic manufacturers had to shut down.
To protect themselves, domestic manufacturers can obtain an antidumping duty
through the government to offset the advantage of the foreign product. Recently, for
example, the U.S. Department of Commerce imposed antidumping duties of up to
99 percent on a variety of steel products imported from China, following allegations
by U.S. Steel Corp. and other producers that the products were being dumped at
unfair prices.

Nontariff Barriers  A nontariff barrier is a nontax measure imposed by a government

to favor domestic over foreign suppliers. Nontariff barriers create obstacles to the
marketing of foreign goods in a country and increase costs for exporters. The following
are a few examples of government-imposed nontariff barriers:
●● An import quota is a limit on the amount of a particular good that may be

imported into a country during a given period of time. The limit may be set in
terms of either quantity (so many pounds of beef) or value (so many dollars’
worth of shoes). Quotas also may be set on individual products imported from
specific countries. Once an import quota has been reached, imports are halted
until the specified time has elapsed.
●● An embargo is a complete halt to trading with a particular nation or of a

particular product. The embargo is used most often as a political weapon.

At present, the United States has import embargoes against Iran and North
dumping  exportation of large Korea—both as a result of extremely poor political relations.
quantities of a product at a price ●● A foreign-exchange control is a restriction on the amount of a particular foreign

lower than that of the same currency that can be purchased or sold. By limiting the amount of foreign currency
product in the home market
importers can obtain, a government limits the amount of goods importers can
nontariff barrier  a nontax
purchase with that currency. This has the effect of limiting imports from the
measure imposed by a government
to favor domestic over foreign country whose foreign exchange is being controlled.
suppliers ●● A nation can increase or decrease the value of its money relative to the currency

import quota  a limit on the of other nations. Currency devaluation is the reduction of the value of a nation’s
amount of a particular good that currency relative to the currencies of other countries.
may be imported into a country
during a given period of time Devaluation increases the cost of foreign goods, whereas it decreases the
embargo  a complete halt to cost of domestic goods to foreign firms. For example, suppose that the British
trading with a particular nation or in pound is worth $2. In this case, an American-made $2,000 computer can be
a particular product purchased for £1,000. However, if the United Kingdom devalues the pound so
foreign-exchange control  a that it is worth only $1, that same computer will cost £2,000. The increased
restriction on the amount of a cost, in pounds, will reduce the import of American computers—and all foreign
particular foreign currency that can
be purchased or sold
goods—into England.
On the other hand, before devaluation, a £500 set of English bone china will
currency devaluation  the
reduction of the value of a nation’s cost an American $1,000. After the devaluation, the set of china will cost only
currency relative to the currencies $500. The decreased cost will make the china—and all English goods—much
of other countries more attractive to U.S. purchasers. Bureaucratic red tape is more subtle than the

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 CareerWorks!

Tips from Successful Global Entrepreneurs

Whether you start your own business or want to work for flexibility and strength to try new things and evolve as
a company with overseas operations, global entrepre- needed to be effective in a global situation. If you’re
neurs offer these important tips for career success in the prepared to pivot, you can find a way to work and
global economy. prosper in any culture.
●● “Don’t just adapt to the culture, embrace it.” This ●● “Success really is a function of the number of things
advice comes from Ryan McMunn, founder and head you try.” Paul Singh, a serial entrepreneur with a
of the multinational firm BRIC Language Systems. tech background, notes that failure can actually be
McMunn emphasizes the importance of understanding a stepping stone to success. To do well in today’s
and accepting international norms and values so you international business environment, be relentless in
can “bridge the cultural divide” in your dealings with moving ahead with new things, and learn from both
people from other countries. The more you can learn failures and successes as you progress in your career.
about the culture and how it may affect your business,
the better prepared you’ll be. Sources: Based on information and quotes in Anushia Kandasivam, “Patrick Grove’s
Insights to Building a Successful Startup,” Digital News Asia, November 23, 2016,
www.digitalnewsasia.com/business/catcha-founder-patrick-groves-insights-building
●● “Pivot means having the courage to experiment, the -successful-startup; Ryan McMunn, “7 Tips for the International Entrepreneur,”
audacity to test, and try again if it doesn’t work.” Entrepreneur, April 20, 2016, www.entrepreneur.com/article/272745; Stan Linhorst,
“The Future Belongs to Entrepreneurs, Says Venture Capitalist Paul Singh,” Syracuse.
This quote from Patrick Grove, head of Catcha Group, com, October 11, 2016, http://www.syracuse.com/news/index.ssf/2016/10/paul
reflects the entrepreneur’s experience in having the _singh_entrepreneurship.html.

other forms of nontariff barriers. Yet it can be the most

frustrating trade barrier of all. A few examples are the
unnecessarily restrictive application of standards and
complex requirements related to product testing, labeling,
and certification.

Cultural Barriers Another type of nontariff barrier is

related to cultural attitudes. Cultural barriers can impede
acceptance of products in foreign countries. For example,
illustrations of feet are regarded as despicable in Thailand.
Even so simple a thing as the color of a product or its
artjazz/Shutterstock.com

package can present a problem. In Japan, black and white

are the colors of mourning, so they should not be used
in packaging. In Brazil, purple is the color of death. And
in Egypt, green is never used on a package because it is
the national color. When customers are unfamiliar with
particular products from another country, their general
perceptions of the country itself affect their attitude toward Restricting trade through tariffs. Due to the recent
the product and help to determine whether they will buy increase in inexpensive solar products from China and
it. Because Mexican cars have not been viewed by the Taiwan, many American manufacturers were forced out of
world as being quality products, Volkswagen, for example, business. To help fix this issue, the United States placed a
may not want to advertise that some of its models sold tariff on Chinese- and Taiwanese-produced solar panels.
in the United States are made in Mexico. Many retailers Some industry experts believe that the increased prices
on the Internet have yet to come to grips with the task caused by the tariffs could curb the adoption of solar
of designing an online shopping site that is attractive and energy in the United States.
functional for all global customers.

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 Gifts to authorities—sometimes quite large ones—may be standard business
procedure in some countries. In others, including the United States, they are called
bribes or payoffs and are strictly illegal.

3-3b  Reasons for Trade Restrictions

Various reasons are given for trade restrictions either on the import of specific
products or on trade with particular countries. We have noted that political
considerations usually are involved in trade embargoes. Other frequently cited
reasons for restricting trade include the following:
●● To equalize a nation’s balance of payments. This may be considered necessary to
restore confidence in the country’s monetary system and in its ability to repay
its debts.
●● To protect new or weak industries. A new, or infant, industry may not be strong
enough to withstand foreign competition. Temporary trade restrictions may be
used to give it a chance to grow and become self-sufficient. The problem is that
once an industry is protected from foreign competition, it may refuse to grow,
and “temporary” trade restrictions will become permanent. For example, a
recent report by the Government Accountability Office (GAO), the congressional
investigative agency, has accused the federal government of routinely imposing
quotas on foreign textiles without “demonstrating the threat of serious damage”
to U.S. industry. The GAO said that the Committee for the Implementation of
Textile Agreements sometimes applies quotas even though it cannot prove the
textile industry’s claims that American companies have been hurt or jobs have
been eliminated.
●● To protect national security. Restrictions in this category generally apply to
technological products that must be kept out of the hands of potential enemies.
For example, strategic and defense-related goods cannot be exported to
unfriendly nations.
●● To protect the health of citizens. Products may be embargoed because they are
dangerous or unhealthy (e.g., farm products contaminated with insecticides).
●● To retaliate for another nation’s trade restrictions. A country whose exports
are taxed by another country may respond by imposing tariffs on imports from
that country.
●● To protect domestic jobs. By restricting imports, a nation can protect jobs in
domestic industries. According to a 2017 White House press release, “For too
long, Americans have been forced to accept trade deals that put the interests of
insiders and the Washington elite over the hard-working men and women of this
country. As a result, blue-collar towns and cities have watched their factories
close and good-paying jobs move overseas, while Americans face a mounting
trade deficit and a devastating manufacturing base.”4 However, protecting
these jobs can be expensive. Several economists argue that President Trump’s
protectionist policies may hurt in the long term, but could have positive effects
for the U.S. economy in the short run.

3-3c  Reasons Against Trade Restrictions

Trade restrictions have immediate and long-term economic consequences—both
within the restricting nation and in world trade patterns. These include the following:
●● Higher prices for consumers. Higher prices may result from the imposition
of tariffs or the elimination of foreign competition, as described earlier. For
example, imposing quota restrictions and import protections adds $25 billion
annually to U.S. consumers’ apparel costs by directly increasing costs for
imported apparel.

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 ●● Restriction of consumers’ choices. Again, this is a direct result of the elimination
of some foreign products from the marketplace and of the artificially high prices
that importers must charge for products that are still imported.
c e pt ck ✓
Con Che
●● Misallocation of international resources. The protection of weak industries
results in the inefficient use of limited resources. The economies of both the
restricting nation and other nations eventually suffer because of this waste.
▸▸ List and briefly describe the
●● Loss of jobs. The restriction of imports by one nation must lead to cutbacks— and principal restrictions that may
the loss of jobs—in the export-oriented industries of other nations. Furthermore, be applied to a nation’s imports.
trade protection has a significant effect on the composition of employment. U.S.
▸▸ What reasons are generally
trade restrictions—whether on textiles, apparel, steel, or automobiles—benefit
given for imposing trade
only a few industries while harming many others. The gains in employment restrictions?
accrue to the protected industries and their primary suppliers, and the losses
are spread across all other industries. A few states gain employment, but many ▸▸ What are the general effects of
other states lose employment. import restrictions on trade?

3-4  The Extent of International Business

Restrictions or not, international business is growing. Although the worldwide Learning Objective
recessions of 1991 and 2001–2002 slowed the rate of growth, and the 2008– 3-4 Outline the extent of
2009 global economic crisis caused the sharpest decline in more than 75 years, international business and the
globalization is a reality of our time. In the United States, international trade now economic outlook for trade.
accounts for over one-fourth of gross domestic product (GDP). As trade barriers
decrease, new competitors enter the global marketplace, creating more choices for
consumers and new opportunities for job seekers. International business will grow
along with the expansion of commercial use of the Internet.

3-4a  The Economic Outlook for Trade

Although the global economy continued to grow robustly until 2007, economic
performance was not equal: growth in the advanced economies slowed and then
stopped in 2009, whereas emerging and developing economies continued to grow.
Looking ahead, the International Monetary Fund (IMF), an
international bank with 189 member nations, expected a
gradual global growth to continue in 2017 and 2018 in both
advanced and emerging developing economies. The IMF
expected the world economic growth to be 3.4 percent and
3.6 percent in 2017 and 2018, respectively.5

Canada and Western Europe  The U.S.-Canada economic

relationship is the most efficient, most integrated, and most
dynamic in the world. Together, the two nations generated
iStock.com/NicolasMcComber

$669.4 billion in bilateral trade in 2015—almost $2 billion

a day, or $23,000 every second. More than 96,000 American
companies currently export to Canada, and 70 percent of
Canada’s exports come to the United States. In the euro area,
expected growth is only about 1.6 percent. Regardless, the
U.S. trade with the EU is one of the largest and most complex
in the world; generating an estimated goods flow of over
$687 billion in 2016, and representing an estimated International expansion. Uber continues its globalization
30 percent of global trade.6 In most other advanced efforts by offering its services in more than 83 countries
economies, including Norway, Sweden, Switzerland, and the and over 674 cities worldwide.
United Kingdom, growth is expected to be robust.

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 Mexico and Latin America According to the International Monetary Fund
(IMF), Latin American exports are growing annually. This region is home to
11 Free Trade Area countries. In addition to Mexico, these countries include
Chile, Colombia, Peru, and the six countries of the Dominican Republic-Central
America FTA or “CAFTA-DR” (Costa Rica, The Dominican Republic, El Salvador,
Guatemala, Honduras, and Nicaragua).

Japan  Japan is the world’s third largest economy and the United States’ fourth
largest trading partner. After nearly two decades of deflation and low growth,
Japan’s economy is showing signs of recovery.

Other Asian Countries  The economic growth in emerging and developing Asia
remained relatively strong in 2016 and 2017 despite the global recession. China’s
emergence as a global economic power has been among the most dramatic economic
developments of recent decades. Indeed, China has grown to be the world’s second
largest economy, and the United States shares more than half a trillion dollars
in annual bilateral trade—our largest trading relationship. Also, as the emerging
middle class in India, the world’s largest democracy, buys U.S. products, it means
jobs and income for the U.S. middle class. With a market of over 1.34 billion of the
world’s consumers and per capita incomes expected to grow at a rate of 7.5 percent
over the next several years, India’s vast market promises U.S. companies’ continued
strong demand for goods and services. In short, the key emerging economies in Asia
are leading the global recovery.

Africa  Sub-Saharan Africa is home to seven of the top ten fastest growing economies
in the world—with estimated future growth of 3 to 4 percent for each of the next
two years. U.S. trade to and from Africa has tripled over the past decade, and U.S.
exports to this region exceed $22.3 billion. The growth in the African continent is
projected to be positive, but uncertain.7

Exports and the U.S. Economy  In 2016, U.S. exports supported more than
11.8 million full- and part-time jobs during a historic time, when exports as
a percentage of GDP reached the highest levels since 1916. The new record,

U.S. exports. U.S. aircraft

and spacecraft products
represent the third largest
U.S. exports.

Maxene Huiyu/Shutterstock.com

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 13.5 percent of GDP in 2013, shows that U.S. businesses have great opportunities
in the global marketplace. Even though the global economic crisis caused the
number of jobs supported by exports to decline sharply to 8.5 million in 2009,
c e pt ck ✓
Con Che
globalization represents a huge opportunity for all countries—rich or poor.
Indeed, in 2016, for the first time, the U.S. exports exceeded $2.34 trillion and
supported 11.8 million jobs, an increase of 3.3 million jobs since 2009. The
15-fold increase in trade volume over the past 65 years has been one of the most ▸▸ According to the IMF, what
important factors in the rise of living standards around the world. During this are the economic growth
projections for 2017 and 2018?
time, exports have become increasingly important to the U.S. economy. Exports
as a percentage of U.S. GDP have increased steadily since 1985, except in the ▸▸ What is the importance of
2001 and 2008 recessions. Our exports to developing and newly industrialized exports to the U.S. economy?
countries are on the rise. Table 3-3 shows U.S. exports and imports for selected ▸▸ Which nations are the principal
world areas in 2016, and Table 3-4 shows the value of U.S. merchandise exports trading partners of the United
to, and imports from, each of the nation’s ten major trading partners. Note that States? What are the major U.S.
Canada and Mexico are our best partners for our exports; China and Canada, imports and exports?
for imports.

TABLE 3-3 U.S. Exports and Imports for Selected World Areas in 2016

in Billions of Dollars
Selected World Area* Exports Imports
North America $498 $572
Europe $318 $483
Euro Area $200 $326
European Union $270 $417
Pacific Rim $362 $809
South/Central America $137 $108
Africa $22 $27
OPEC $71 $78
Other Countries $67 $159
*Countries may be included in more than one area grouping.
Source: U.S. Department of Commerce, Census Bureau, https://bea.gov/newsreleases/international/trade/2017/pdf/trad1216.pdf (accessed
February 16, 2017).

TABLE 3-4 Top Trading Partners: Value of U.S. Merchandise Exports and Imports,

December 2016
Exports Imports Total Trade Percent of
Rank Country ($ billions) ($ billions) ($ billions) Total Trade
1 China 115.8 462.8 578.6 15.9
2 Canada 266.8 278.1 544.9 15.0
3 Mexico 231.0 294.1 525.1 14.4
4 Japan 63.3 132.2 195.5 5.4
5 Germany 49.4 114.2 163.6 4.5
6 Korea, South 42.3 69.9 112.2 3.1
7 United Kingdom 55.4 54.3 109.7 3.0
8 France 30.9 46.8 77.7 2.1
9 India 21.7 46.0 67.7 1.9
10 Taiwan 26.1 39.3 65.4 1.8
Source: U.S. Department of Commerce, Census Bureau, Top Trading Partners, www.census.gov/foreign-trade/statistics/highlights/top
/top1612yr.html (accessed February 17, 2017).

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 3-5  International Trade Agreements
Learning Objective 3-5a  The General Agreement on Tariffs and Trade
3-5  Discuss international and the World Trade Organization
trade agreements and
At the end of World War II, the United States and 22 other nations organized
international economic
the body that came to be known as GATT. The General Agreement on Tariffs
organizations working to
and Trade (GATT) is an international organization of 164 nations dedicated
foster trade.
to reducing or eliminating tariffs and other barriers to world trade. These
164 nations accounted for more than 97 percent of the world’s merchandise
trade. GATT, headquartered in Geneva, Switzerland, provided a forum for
tariff negotiations and a means for settling international trade disputes and
problems. Most-favored-nation status (MFN) was the famous principle of
GATT. It meant that each GATT member nation was to be treated equally by
all contracting nations. Therefore, MFN ensured that any tariff reductions or
other trade concessions were extended automatically to all GATT members.
From 1947 to 1994, the body sponsored eight rounds of negotiations to reduce
trade restrictions. Three of the most fruitful were the Kennedy Round, the Tokyo
Round, and the Uruguay Round.

The Kennedy Round (1964–1967) In 1962, the United States Congress

passed the Trade Expansion Act. This law gave President John F. Kennedy the
authority to negotiate reciprocal trade agreements that could reduce U.S. tariffs
by as much as 50 percent. Armed with this authority, which was granted for
a period of five years, President Kennedy called for a round of negotiations
through GATT.
These negotiations, which began in 1964, have since become known as the
Kennedy Round. They were aimed at reducing tariffs and other barriers to trade in
both industrial and agricultural products. The participants succeeded in reducing
tariffs on these products by an average of more than 35 percent. However, they were
less successful in removing other types of trade barriers.

The Tokyo Round (1973–1979) In 1973, representatives of approximately

100 nations gathered in Tokyo for another round of GATT negotiations. The
Tokyo Round was completed in 1979. The participants negotiated tariff cuts
of 30 to 35 percent, which were to be implemented over an eight-year period.
In addition, they were able to remove or ease such nontariff barriers as import
quotas, unrealistic quality standards for imports, and unnecessary red tape in
customs procedures.

The Uruguay Round (1986–1993)  In 1986, the Uruguay Round was launched
to extend trade liberalization and widen the GATT treaty to include textiles,
agricultural products, business services, and intellectual-property rights. This most
ambitious and comprehensive global commercial agreement in history concluded
overall negotiations on December 15, 1993, with delegations on hand from
109 nations. The agreement included provisions to lower tariffs by greater than
General Agreement on Tariffs one-third, to reform trade in agricultural goods, to write new rules of trade for
and Trade (GATT)  an international intellectual property and services, and to strengthen the dispute-settlement process.
organization of nations dedicated These reforms were expected to expand the world economy by an estimated
to reducing or eliminating tariffs and
$200 billion annually.
other barriers to world trade
The Uruguay Round also created the World Trade Organization (WTO) on
World Trade Organization (WTO) 
powerful successor to GATT
January 1, 1995. The WTO was established by GATT to oversee the provisions of
that incorporates trade in goods, the Uruguay Round and resolve any resulting trade disputes. Membership in the
services, and ideas WTO obliges 164 member nations to observe GATT rules.

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 Developing Entrepreneurial Skills

Plan a Startup During Global

Entrepreneurship Week
Every November, millions of future entrepreneurs business world. Middle Tennessee State University holds
spread across 160 countries participate in Global an Entrepreneurship Fair with panels, lectures, and how-to
Entrepreneurship Week. The goal is to learn from and demonstrations for student entrepreneurs. More than 100
be encouraged by meeting with peers, mentors, educa- high-school students submit business plans and make a
tors, industry experts, and experienced entrepreneurs. A brief pitch to faculty judges. At the Tri County Technology
growing number of colleges and high schools are hosting Center in Bartlesville, Oklahoma, student entrepreneurs tell
workshops, panel discussions, and competitions to help success stories and offer business tips in person and via
would-be entrepreneurs polish their plans for startup social media.
businesses. Watch for the events in your area during November,
For example, the School of Hotel Administration at check the Global Entrepreneurship Week USA site for
Cornell University in New York recently hosted a com- details (http://www.gewusa.org/), and get ready for your
petition, inviting individuals and teams of students to own startup.
submit presentations proposing a new business venture.
Sources: Based on information in “Mexican Eatery Idea Wins ‘Pitch Deck’ Competition,”
Executives from the hospitality industry judged the entries Cornell Chronicle, November 22, 2016, http://www.news.cornell.edu/stories/2016/11
and provided feedback about the business ideas. Students /mexican-eatery-idea-wins-pitch-deck-competition; Tim Adkins, “Cheatham Well
Represented in MTSU Fair,” The Tennessean, November 21, 2016, http://www
not only had the opportunity to win cash prizes, but they .tennessean.com/news; Elisa Smith, “Global Entrepreneurship Week Is a Game
also had a chance to polish their startup pitches in front Changer,” Sacramento State News (CA), November 10, 2016, http://www.csus.edu
/news/articles/2016/11/10/global-entrepreneurship-week-is-a-game-changer.shtml;
of experts. At Sacramento State in California, students can Kassidy McKee, “Tri County Tech Students Continue Successful Endeavors,” Bartlesville
attend workshops with alumni known for business inno- Examiner-Enterprise, November 18, 2016, http://www.examiner-enterprise.com
/business/20161118/tri-county-tech-students-continue-successful-endeavours;
vation and pose questions to in-class speakers from the http://gew.co/; http://www.gewusa.org/.

3-5b International Economic Organizations

Working to Foster Trade
The primary objective of the WTO is to remove barriers to trade on a worldwide
basis. On a smaller scale, an economic community is an organization of nations
formed to promote the free movement of resources and products among its
members and to create common economic policies. A number of economic
communities now exist.

The European Union Operating as a single market with 28 countries, the

European Union (EU), also known as the European Economic Community and
the Common Market, was formed in 1957 by six countries—France, the Federal
Republic of Germany, Italy, Belgium, the Netherlands, and Luxembourg. Its
objective was freely conducted commerce among these nations and others that
might later join. As shown in Figure 3-3, many more nations have joined the EU
since then. The EU, with a population of over 508 million is now an economic
force to be recognized by even the most advanced economies such as of the United
States and Japan.
Since January 2002, 19 member nations of the EU have been participating in economic community  an
the new common currency, the euro. The euro, used by over 339 million Europeans, organization of nations formed to
promote the free movement of
is the single currency of the European Monetary Union nations. However, the resources and products among its
remaining nine EU members, including the United Kingdom, still maintain their members and to create common
own currencies. economic policies

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 FIGURE 3-3 The Evolving European Union

Member states FINLAND

Candidate countries NORWAY

ESTONIA
SWEDEN

DENMARK LATVIA RUSSIA

LITHUANIA
RUSSIA
NETHERLANDS
IRELAND
BELARUS
UNITED
KINGDOM* POLAND

BELGIUM GERMANY
CZECH
REPUBLIC UKRAINE
LUXEMBOURG SLOVAKIA

AUSTRIA
SWITZERLAND HUNGARY MOLDOVA
ATL ANTI C
SLOVENIA ROMANIA
O CE AN FRANCE CROATIA
BOSNIA &
HERZEGOVINA
ITALY MONTENEGRO Black Sea
BULGARIA

ALBANIA MACEDONIA

PORTUGAL SPAIN

GREECE TURKEY
Mediterranean Sea

MALTA
ALGERIA TUNISIA
MOROCCO CYPRUS

*
Note: The U.K. is scheduled to leave the European Union on March 29, 2019, http://www.bbc.com/news/uk-politics-32810887 (accessed July 17, 2017).
Source: europa.eu/european-union/about-eu/countries_en (accessed February 17, 2017).

On June 23, 2016, citizens of the United Kingdom

voted to exit the European Union, commonly known as
Brexit. Brexit is one of the most surprising turns in European
integration and trans-Atlantic trade following decades of an
ever-expanding European Union and EU market. Although
the United Kingdom voted on the 2016 referendum to
withdraw from the EU, it will remain a full EU member with
access to the EU single market until it formally leaves the EU.
Ronnie Chua/Shutterstock.com

The North American Free Trade Agreement  The North

American Free Trade Agreement (NAFTA) joined the United
States with its first- and second-largest export trading partners,
Canada and Mexico. Implementation of NAFTA on January 1,
1994, created a market of more than 491 million people. This
market consists of Canada (population 36 million), the United
States (325 million), and Mexico (130 million). According to the
Office of the U.S. Trade Representative, after 23 years, NAFTA
Nafta. The North American Free Trade Agreement is over
23 years old. NAFTA is the world’s largest free trade area. has achieved its core goals of expanding trade and investment
U.S. exports to Canada and Mexico support more than 3 between the United States, Canada, and Mexico. For example,
million American jobs and U.S. trade with NAFTA partners from 1993 to 2016, trade among the NAFTA nations increased
has unlocked opportunities for millions of Americans nearly four-fold, from $297 billion to $1.1 trillion.
by supporting Made-in-America jobs and exports. Many NAFTA is built on the Canadian Free Trade Agreement,
American small business exporters’ first customers are signed by the United States and Canada in 1989, and on
in Canada or Mexico. the substantial trade and investment reforms undertaken
by Mexico since the mid-1980s. Initiated by the Mexican

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 government, formal negotiations on NAFTA began in June 1991 among the three
governments. The support of NAFTA by President Bill Clinton, former Presidents
Ronald Reagan and Jimmy Carter, and Nobel Prize-winning economists provided the
impetus for U.S. congressional ratification of NAFTA in November 1993. By 2008,
NAFTA had gradually eliminated all tariffs and quotas on goods produced and traded
among Canada, Mexico, and the United States to provide for a totally free-trade area.
However, NAFTA is not without its critics. Critics maintain that NAFTA
●● has not achieved its goals
●● has resulted in job losses
●● hurts workers by eroding labor standards and lowering wages
●● undermines national sovereignty and independence
●● does nothing to help the environment, and
●● hurts the agricultural sector.
In 2017, President Trump was committed to renegotiate NAFTA. “If our partners
refuse a negotiation that gives American workers a fair deal, then the President will
give notice of the United States’ intent to withdraw from NAFTA”.8 Stay tuned.
The proponents of NAFTA call the agreement a remarkable economic success
story for all three partners. They maintain that NAFTA
●● has contributed to significant increases in trade and investment
●● has benefited companies in all three countries
●● has resulted in increased sales, new partnerships, and new opportunities
●● has created high-paying export-related jobs, and
●● resulted in better prices and selection in consumer goods.

The Central American Free Trade Agreement  The Central American Free Trade
Agreement (CAFTA) was created in 2003 by the United States and four Central American
countries—El Salvador, Guatemala, Honduras, and Nicaragua. The CAFTA became
CAFTA-DR when the Dominican Republic joined the group in 2007. On January 1,
2009, Costa Rica joined CAFTA-DR as the sixth member. CAFTA-DR creates the third-
largest U.S. export market in Latin America, behind only Mexico and Brazil.

The Association of Southeast Asian Nations The Association of Southeast

Asian Nations, with headquarters in Jakarta, Indonesia, was established in 1967 to
promote political, economic, and social cooperation among its seven member countries:
Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, and Vietnam.
With three new members, Cambodia, Laos, and Myanmar, this region of more than
629 million people, and GDP of $2.4 trillion, is already our fifth-largest trading partner.

The Commonwealth of Independent States The Commonwealth of

Independent States was established in December 1991 by the newly independent
states as an association of 11 republics of the former Soviet Union.

Trans-Pacific Partnership (TPP) On November 12, 2011, the leaders of the

nine countries—Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru,
Singapore, Vietnam, and the United States—formed the Trans-Pacific Partnership.
With three new members—Canada, Japan and Mexico—this partnership will boost
the economies of the member countries, lower barriers to trade and investment,
increase exports, and create more jobs.
During his presidential campaign, President Trump had threatened to withdraw
from the Trans-Pacific Partnership and make certain that any new trade deals are
in the interest of American workers. Indeed, on January 23, 2017, President Trump
signed an executive memorandum ordering the U.S. withdrawal from the Trans-
Pacific Partnership agreement and related negotiations.

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 The Common Market of the Southern Cone (MERCOSUR)  Headquartered
in Montevideo, Uruguay, the Common Market of the Southern Cone (MERCOSUR)
was established in 1991 under the Treaty of Asuncion to unite Argentina, Brazil,

c e pt ck ✓ Paraguay, and Uruguay as a free-trade alliance; Colombia, Ecuador, Peru, Bolivia,

and Chile joined later as associates.

Con Che The Organization of Petroleum Exporting Countries The Organization of

▸▸ Define and describe the Petroleum Exporting Countries was founded in 1960 in response to reductions in
major objectives of the World the prices that oil companies were willing to pay for crude oil. The organization was
Trade Organization (WTO) and conceived as a collective bargaining unit to provide oil-producing nations with some
the international economic control over oil prices.
communities. An important note: At the time of this writing, the Trump Administration
▸▸ What is the North American Free believed that with tough and fair trade agreements, international trade can be
Trade Agreement (NAFTA)? What used to grow our economy, return millions of jobs to America’s shores, and
is its importance for the United revitalize our nation’s suffering communities. In addition, the United States will
States, Canada, and Mexico? crack down on those nations that violate trade agreements and harm American
workers.9

3-6  Sources of Export Assistance

Learning Objective Many federal agencies assist U.S. firms in developing export-promotion
3-6 Describe the various programs. The export services and programs of these agencies can help American
sources of export assistance. firms to compete in foreign markets and create new jobs in the United States.
For example, recently the International Trade Administration coordinated
77 trade missions to 38 countries. More than 1,120 companies secured over
$1.25 billion in export sales during these missions. With its network of

c e pt ck ✓ 108 offices in the United States and more than 75 countries, the U.S. Commercial

Con Che
Service of the U.S. Department of Commerce uses its global presence and
international marketing expertise to help U.S. companies sell their products and
services worldwide. Table 3-5 provides an overview of selected export assistance
▸▸ List some key sources of export programs.
assistance. How can these These and other sources of export information enhance the business opportunities
sources be useful to small of U.S. firms seeking to enter expanding foreign markets. Another vital energy factor
business firms? is financing.

TABLE 3-5 U.S. Government Export Assistance Programs

1 U.S. Export Assistance Centers, https://www.sba.gov Provides assistance in export marketing and trade
/managing-business/exporting/us-export-assistance-centers finance
2 International Trade Administration, www.ita.doc.gov/ Offers assistance and information to exporters through
its domestic and overseas commercial officers
3 U.S. and Foreign Commercial Services, www.export Helps U.S. firms compete more effectively in the global
.gov/ marketplace and provides information on foreign markets
4 Advocacy Center, http://2016.export.gov/advocacy/ Facilitates advocacy to assist U.S. firms competing for
major projects and procurements worldwide
5 Trade Information Center, http://selectusa.commerce.gov Provides U.S. companies information on federal
/investment-incentives/trade-information-center-tic.html programs and activities that support U.S. exports
6 STAT-USA/lnternet, https://www.usa.gov/statistics Offers a comprehensive collection of business,
economic, and trade information on the Web
7 Small Business Administration, www.sba.gov/oit/ Publishes many helpful guides to assist small- and
medium-sized companies
8 National Trade Data Bank, http://grow.exim.gov/finance Provides international economic and export-promotion
-guide?gclid5CK3H0p2KndICFUi5wAodTiQH3g information supplied by more than 20 U.S. agencies

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 3-7  Financing International Business
International trade compounds the concerns of financial managers. Currency Learning Objective
exchange rates, tariffs and foreign exchange controls, and the tax structures 3-7 ldentify the institutions
of host nations all affect international operations and the flow of cash. In that help firms and nations
addition, financial managers must be concerned both with the financing of their finance international business.
international operations and with the means available to their customers to
finance purchases.
Fortunately, along with business in general, a number of large banks have become
international in scope. Many have established branches in major cities around the
world. Thus, like firms in other industries, they are able to provide their services
where and when they are needed. In addition, financial assistance is available from
U.S. government and international sources.
The U.S. Small Business Administration provides up to $5 million in short-term
loans to U.S. small business exporters. The agency also provides small businesses
that have exporting potential, but need funds to cover the initial costs of entering
an export market, with up to $500,000 in export development financing to buy,
produce goods, or provide services for exports. Several of today’s international
financial organizations were founded many years ago to facilitate free trade and
the exchange of currencies among nations. Some, such as the Inter-American
Development Bank, are supported internationally and focus on developing
countries. Others, such as the Export-Import Bank, are operated by one country
but provide international financing.

3-7a  The Export-Import Bank of the United States

The Export-Import Bank of the United States, created in 1934, is an independent
agency of the U.S. government whose function is to assist in financing the exports
of American firms. Ex-Im Bank, as it is commonly called, extends and guarantees
credit to overseas buyers of American goods and services and guarantees short-term
financing for exports. It also cooperates with commercial banks in helping American
exporters to offer credit to their overseas customers. In the last decade, Ex-Im Bank
has supported more than 1.7 million jobs in all 50 states. In 2016, more than
90 percent of the Bank’s transactions—more than 2,600—directly supported
American small businesses.10
According to Fred P. Hochberg, former chairman and president of Ex-Im
Bank, “Working with private lenders we are helping U.S. exporters put Americans
to work producing the high quality goods and services that foreign buyers prefer.”

3-7b  Multilateral Development Banks

A multilateral development bank (MDB) is an internationally supported bank that
provides loans to developing countries to help them grow. The most familiar is the
World Bank, a cooperative of 189 member countries, which operates worldwide.
Established in 1944 and headquartered in Washington, DC, the bank provides low-
interest loans, interest-free credits, and grants to developing countries. The loans Export-Import Bank of the
United States  an independent
and grants help these countries to:
agency of the U.S. government
●● supply safe drinking water whose function is to assist in
financing the exports of American
●● build schools and train teachers firms
●● increase agricultural productivity multilateral development
●● expand citizens’ access to markets, jobs, and housing bank (MDB)  an internationally
supported bank that provides loans
●● improve health care and access to water and sanitation to developing countries to help
●● manage forests and other natural resources them grow

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 Mission possible. The
Export-Import Bank of the
United States (Ex-Im Bank)
is the official export credit
agency of the United States.
Ex-Im Bank’s mission is
to assist in financing the
U.S. goods and services
to international markets
with more than 83 years of
experience. Its goal is to end
extreme poverty by 2030,
promote shared prosperity,

B Christopher/Alamy Stock Photo

and support the global
sustainable development
agenda.

●● build and maintain roads, railways, and ports, and

●● reduce air pollution and protect the environment.11
Four other MDBs operate primarily in Central and South America, Asia, Africa,
and Eastern and Central Europe. All five are supported by the industrialized nations,
including the United States.

The Inter-American Development Bank The Inter-American Development

Bank (IDB), the oldest and largest regional bank, was created in 1959 by 19 Latin
American countries and the United States. The bank, which is headquartered in
Washington, DC, makes loans and provides technical advice and assistance to
countries. Today, the IDB is owned by 48 member states.

The Asian Development Bank  With 67 member nations, the Asian Development
Bank (ADB), created in 1966 and headquartered in the Philippines, promotes
economic and social progress in Asian and Pacific regions. The U.S. government is
the second-largest contributor to the ADB’s capital, after Japan.

The African Development Bank The African Development Bank (AFDB),

also known as Banque Africaines de Development, was established in 1964
with headquarters in Abidjan, Ivory Coast. Its members include 54 African and
27 non-African countries from the Americas, Europe, and Asia. The AFDB’s
goal is to foster the economic and social development of its African members.
The bank pursues this goal through loans, research, technical assistance, and the
development of trade programs.

European Bank for Reconstruction and Development  Established in 1991

to encourage reconstruction and development in Eastern and Central European
countries, the London-based European Bank for Reconstruction and Development
is owned by 65 countries and two intergovernmental institutions (the European
Union and the European Investment Bank). Its loans are geared toward developing
market-oriented economies and promoting private enterprise.

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 Ethics and Social Responsibility Concerns

Tourism with Social Purpose

Gondwana Ecotours takes social responsibility an opportunity to introduce eco-minded tour-
on the road to remote places where the money ists, a few at a time, to people and places off
earned from thoughtful tourism can help local the beaten track.
economies. Founded by Jared Sternberg in To get his business off the ground, Sternberg
2013, New Orleans-based Gondwana now runs focused on potential itineraries, selected
dozens of small-group trips every year to far- accommodations and hired local tour guides,
flung destinations. One tour takes travelers to and arranged activities for tourists to experi-
see the Northern Lights in Alaska, another goes ence the local culture. For example, during the
deep into Ecuador’s rainforest, and a third fol- Rwanda tour, a women’s group takes visitors
lows mountain gorillas through Rwanda. As part to the market, where they buy ingredients for a
of its social responsibility, the company pays cooking class. Gondwana donates money to the
carbon offsets for each traveler’s flights, and women’s group, the women get to demonstrate
donates a percentage of each tour’s profits to their cooking skills, and the tourists meet locals
the local community. and experience their customs in a unique way.
The founder didn’t set out to start a tour- Looking ahead, it will soon buy carbon offsets
ism business with social purpose. After for each traveler’s trip, start to finish.
graduating from law school in New Orleans, Sources: Based on information in Diane Daniel, “In Transit, Q&A: Jared Sternberg
Sternberg volunteered with the Achuar tribe in Uses Tours to Save People and Places,” New York Times, December 18, 2015,
p. TR-2; “New Orleans Startup Offers Sustainable Ecotours Worldwide,” Silicon
the Amazon. He quickly realized that tourism Bayou News, February 11, 2016, http://siliconbayounews.com/2016/02/11
could be a positive force for helping preserve /new-orleans-startup-offers-sustainable-ecotours-worldwide/; Elaine Glusacapril,
“5 Hotels and 5 Tours for the Eco-Conscious Traveler,” New York Times, April 20,
the environment and protect the traditional 2016, www.nytimes.com/2016/04/24/travel/hotels-tours-ecotourism-green
way of life in these areas. He also recognized -travel.html?_r50.

3-7c  The International Monetary Fund

The International Monetary Fund (IMF) is an international bank with 189
member nations that makes short-term loans to developing countries experiencing
balance-of-payment deficits. This financing is contributed by member nations, and it
must be repaid with interest. Loans are provided primarily to fund international trade.
Created in 1945 and headquartered in Washington, DC, the bank’s main goals are to:
●● promote international monetary cooperation
●● facilitate the expansion and balanced growth of international trade
●● promote exchange rate stability
●● assist in establishing a multilateral system of payments, and
●● make resources available to members experiencing balance-of-payment
difficulties.

3-7d  The Challenges Ahead

The challenge of the 21st century is to build on common bonds and shared
values to help fully integrate the United States, Europe, and other established International Monetary Fund
(IMF)  an international bank
economies with a new group of rapidly emerging economies—such as China, that makes short-term loans to
India, Brazil, Russia, and others. There are over 302,000 exporters in the United developing countries experiencing
States and more than 58 percent sell to only one foreign country, usually Canada balance-of-payment deficits

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 or Mexico. This group of U.S. exporters together represents less than 5 percent
of overall U.S. exports. Free Trade Agreements have helped to open markets

e p t ✓ such as Australia, Canada, Central America, Chile, Israel, Jordan, Korea,

o n c eck Mexico, and Singapore. The challenge, for large and small businesses, is to reach
C Ch these markets.
In a recent speech at Oxford University, Pascal Lamy, former Director-
▸▸ What is the Export-Import Bank General of the World Trade Organization stated, “We live in a world of ever-
of the United States? How does growing independence and interconnectedness. Our interdependence has grown
it assist U.S. exporters? beyond anyone’s imagination. The world of today is virtually unrecognizable
▸▸ What is a multilateral from the world in which we lived one generation ago.” The most striking
development bank (MDB)? Who example of globalization is Apple. Apple’s iPod is designed in the United States,
supports these banks? manufactured with components from Japan, Korea, and several other Asian
▸▸ What is the International countries, and assembled in China by a company from Chinese Taipei. Nowadays,
Monetary Fund? What types of most products are not “Made in the UK” or “Made in France”; they are in fact
loans does the IMF provide? “Made in the World.”12

Summary
3-1 Explain the economic basis for international business. 3-3 Discuss the restrictions nations place on
International business encompasses all business activi- international trade, the objectives of these
ties that involve exchanges across national boundaries. restrictions, and their results.
International trade is based on specialization, whereby Despite the benefits of world trade, nations tend to use tar-
each country produces the goods and services that it iffs and nontariff barriers (import quotas, embargoes, and
can produce more efficiently than any other goods and other restrictions) to limit trade. These restrictions typically
services. A nation is said to have a comparative advan- are justified as being needed to protect a nation’s economy,
tage relative to these goods. International trade develops industries, citizens, or security. They can result in the loss of
when each nation trades its surplus products for those in jobs, higher prices, fewer choices in the marketplace, and the
short supply. misallocation of resources.
A nation’s balance of trade is the difference between the
value of its exports and the value of its imports. Its balance 3-4 Outline the extent of international business and the
of payments is the difference between the flow of money into economic outlook for trade.
and out of the nation. Generally, a negative balance of trade World trade is generally increasing. Trade between the United
is considered unfavorable. States and other nations is increasing in dollar value but
decreasing in terms of our share of the world market. Exports
3-2 Explore the methods by which a firm can organize as a percentage of U.S. GDP have increased steadily since
for and enter into international markets. 1985, except in the 2001 and 2008 recessions.
A firm can enter international markets in several ways. It may
license a foreign firm to produce and market its products. It 3-5 Discuss international trade agreements and
may export its products and sell them through foreign inter- international economic organizations working to
mediaries or its own sales organization abroad, or it may foster trade.
sell its exports outright to an export-import merchant. It may The General Agreement on Tariffs and Trade (GATT) was
enter into a joint venture with a foreign firm. It may establish formed to dismantle trade barriers and provide an environ-
its own foreign subsidiaries, or it may develop into a multina- ment in which international business can grow. Today, the
tional enterprise. World Trade Organization (WTO) and various economic com-
Generally, each of these methods represents an increas- munities carry on this mission. These world economic com-
ingly deeper level of involvement in international business, munities include the European Union, the NAFTA, the CAFTA,
with licensing being the simplest and the development of a the Association of Southeast Asian Nations, the Pacific Rim,
multinational corporation the most involved. the Commonwealth of Independent States, the Caribbean

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 Basin Initiative, the Common Market of the Southern Cone, Advocacy Center, National Trade Data Bank, and other gov-
the Organization of Petroleum Exporting Countries, and the ernment and international agencies.
Organization for Economic Cooperation and Development.
3-7 Identify the institutions that help firms and nations
3-6 Describe the various sources of export assistance. finance international business.
Many government and international agencies provide The financing of international trade is more complex than that
export assistance to U.S. and foreign firms. Sources of of domestic trade. Institutions such as the Ex-Im Bank and
export assistance include U.S. Export Assistance Centers, the International Monetary Fund have been established to
the International Trade Administration, U.S. and Foreign provide financing and ultimately to increase world trade for
Commercial Services, Export Legal Assistance Network, American and international firms.

Key Terms
You should now be able to define and give an example relevant to each of the following terms:

international business (67) letter of credit (71) nontariff barrier (76) World Trade Organization
absolute advantage (67) bill of lading (71) import quota (76) (WTO) (82)
comparative advantage (67) draft (71) embargo (76) economic community (83)
exporting (68) strategic alliance (72) foreign-exchange control Export-Import Bank of the
importing (68) trading company (73) (76) United States (87)
balance of trade (68) countertrade (73) currency devaluation (76) multilateral development
trade deficit (68) multinational enterprise (73) General Agreement on bank (MDB) (87)
balance of payments (69) import duty (tariff) (75) Tariffs and Trade (GATT) International Monetary Fund
licensing (70) dumping (76) (82) (IMF) (89)

Discussion Questions
1. The United States restricts imports but, at the same 4. When should a firm consider expanding from strictly
time, supports the WTO and international banks whose domestic trade to international trade? When should
objective is to enhance world trade. As a member of it consider becoming further involved in international
Congress, how would you justify this contradiction to trade? What factors might affect the firm’s decisions in
your constituents? each case?
2. What effects might the devaluation of a nation’s currency 5. How can a firm obtain the expertise needed to produce
have on its business firms, its consumers, and the debts and market its products in, for example, the EU?
it owes to other nations?
3. Should imports to the United States be curtailed by, say
20 percent to eliminate our trade deficit? What might
happen if this were done?

Video Case
Alibaba and Global E-Commerce: Should Amazon Be Afraid?

From rural farmers to multimillionaires, millions of people in “We grew up in a rural area which left us few choices.
China are reaping economic opportunities from the growing I never thought about my future or had any belief in it,” the
e-commerce market. One entrepreneur earns $5 million entrepreneur says.
in sales annually from his ladies’ handbag e-commerce At the center of this is Alibaba, an online marketplace
business—a far cry from his humble origins. Although his founded by entrepreneur Jack Ma in 1999. Jack Ma con-
success might be the exception to the norm, many Chinese ceived of an online portal that could connect Chinese
consumers with similar backgrounds have found jobs work- manufacturers with buyers from other countries. He chose
ing in e-commerce. the name of Alibaba because it was globally recognized

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 based on the famous character in the collection Arabian Another issue that Alibaba is coming across as it
Nights. Today this multibillion dollar firm has 500 million expands involves counterfeit products. In China counterfeit
registered users. Its sales surpass those of eBay and goods have traditionally been more accepted than in other
Amazon combined. Alibaba runs a number of businesses countries. Its international e-commerce site AliExpress has
that handle approximately 80 percent of all online shop- gained widespread popularity in Russia, the United States,
ping in China. Unlike Amazon, it does not own is own and Brazil, but its rise in popularity has been accompa-
merchandise but acts as a portal to bring buyers and nied by a rise in counterfeit goods sold through the site.
sellers together. Regulators are worried that the site is allowing counterfeits
This is just the beginning for Alibaba. In 2014 it was listed to go straight from Chinese manufacturers to consum-
on the U.S. stock exchange with an initial offering of $25 billion, ers on a global scale. In fact, Kering SA—a French luxury
the largest IPO to date. To emphasize its global intentions, group—filed a lawsuit against Alibaba accusing the firm of
Alibaba opened offices in France, Germany, and Italy. It is knowingly allowing the sale of counterfeit products. Alibaba
also focused on selling more international brands such as denies the charges and is working with government bodies
Macy’s, Apple, and L’Oreal. In its quest to expand into media, to improve counterfeiting controls.
Alibaba entered into licensing agreement with Disney to sell Despite the risks of investing in a firm that they cannot
a streaming device that will broadcast movies, television actually own, investors were eager to purchase shares during
shows, e-books, games, and more. Alibaba’s initial public offering. China is overtaking the United
Although it is listed on the U.S. stock exchange, investing States as the largest e-commerce market, and the opportuni-
in Alibaba differs from the traditional model due to regulatory ties are too good for many investors to pass up. They believe
and legal barriers. The Chinese government restricts foreign Alibaba has the potential for massive global growth as it is
investment in certain areas, meaning that global investors less capital intensive and therefore more flexible than global
outside of China cannot own shares of Alibaba outright. In rivals such as Amazon.com.13
reality, investors purchased shares of a shell corporation in
the Cayman Islands. Alibaba itself owns all of its non-Chinese Questions
assets. Jack Ma has the most power in the company, and 1. What are some of the barriers Alibaba is facing as it
some investors are concerned about his tendency to make expands globally?
large decisions or transfer ownership without consulting 2. Why would the sale of counterfeit products through its
many other people. sites be damaging to Alibaba?

Building Skills for Career Success

1. Social Media Exercise 2. Based on the information in the videos you watched,
do you believe that Nike is a good corporate citizen
Although Nike was founded in the Pacific Northwest and still has because of its efforts to sustain the planet? Why or why
its corporate headquarters near Beaverton, Oregon, the com- not?
pany has become a multinational enterprise. The firm employs
3. Prepare a one- to two-page report that describes how
more than 62,000 people across six continents and is now a Nike is taking steps to reduce waste, improve the envi-
global marketer of footwear, apparel, and athletic equipment. ronment, and reduce its carbon footprint while manufac-
Because it operates in more than 160 countries around the turing products around the globe.
globe and manufactures products in more than 900 factories
in 501 different countries, sustainability is a big initiative for
Nike. Today, Nike uses the YouTube social media site to 2. Building Team Skills
share its sustainability message with consumers, employees, The North American Free Trade Agreement among the United
investors, politicians, and other interested stakeholders. States, Mexico, and Canada went into effect on January 1,
To learn about the company’s efforts to sustain the planet, 1994. It has made a difference in trade among the countries
follow these steps: and has affected the lives of many people.
●● Make an Internet connection and go to the YouTube
website (www.youtube.com). Assignment
●● Enter the words “Nike” and “Sustainability” in the search 1. Working in teams and using the resources of your library
window and click the search button. investigate NAFTA. Answer the following questions:
1. View at least three different YouTube videos about Nike’s a. What are NAFTA’s objectives?
sustainability efforts. b. What are its benefits?

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 c. What impact has NAFTA had on trade, jobs, and foreign country would you like to work? What problems
travel? might you face?
d. Some Americans were opposed to the implementa-
tion of NAFTA. What were their objections? Have any Assignment
of these objections been justified? 1. Choose a country in which you might like to work.
e. Has NAFTA influenced your life? How? 2. Research the country. The National Trade Data Bank is a
2. Summarize your answers in a written report. Your good place to start. Find answers to the following questions:
team also should be prepared to give a class a. What language is spoken in this country? Are you
presentation. proficient in it? What would you need to do if you are
not proficient?
3. Researching Different Careers b. What are the economic, social, and legal systems like
Today, firms around the world need employees with special in this nation?
skills. In some countries, such employees are not always c. What is its history?
available, and firms then must search abroad for qualified d. What are its culture and social traditions like? How might
applicants. One way they can do this is through global they affect your work or your living arrangements?
workforce databases. As business and trade operations 3. Describe what you have found out about this country in
continue to grow globally, you may one day find yourself a written report. Include an assessment of whether you
working in a foreign country, perhaps for an American com- would want to work there and the problems you might
pany doing business there or for a foreign company. In what face if you did.

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 Running a Business Part 1

Let’s Go Get a Graeter’s!

Only a tiny fraction of family-owned businesses are still growing laborious process.” Graeter’s “French pot” manufacturing
four generations after their founding, but happily for lovers of method ensures that very little air gets into the product.
premium-quality ice cream, Graeter’s is one of them. As a result, the company’s ice cream is dense and
Now a nearly $50 million firm with national creamy, not light and fluffy—so dense, in fact, that
distribution, Graeter’s was founded in Cincinnati each pint weighs nearly a pound.
in 1870 by Louis Charles Graeter and his wife, Another success factor is the use
Regina Graeter. The young couple made ice of simple, fresh ingredients like high-
cream and chocolate candies in the back grade chocolate, choice seasonal fruits,
room of their shop, sold them in the front and farm-fresh cream. Graeter’s imports
room, and lived upstairs. Ice cream was a some ingredients, such as vanilla from
special treat in this era before refrigeration, Madagascar, and buys other ingredients
and the Graeters started from scratch every from U.S. producers known for their qual-
day to make theirs from the freshest, finest ity. “We use a really great grade of chocolate,”
ingredients. Even after freezers were invented, says Bob Graeter. “We don’t cut corners on that
the Graeters continued to make ice cream in small . . . Specially selected great black raspberries,
batches to preserve the quality, texture, and rich flavor. strawberries, blueberries, and cherries go into our
After her husband’s death, Regina’s entrepreneurial ice cream because we feel that we want to provide
leadership became the driving force behind Graeter’s flavor not from artificial or unnatural ingredients but
expansion from 1920 until well into the 1950s. At a from really quality, ripe, rich fruits.” Instead of tiny
time when few women owned or operated a business, chocolate chips, Graeter’s products contain giant
Regina opened 20 new Graeter’s stores in the Cincinnati chunks formed when liquid chocolate is poured into
area and added manufacturing capacity to support the ice-cream base just before the mixture is frozen
this ambitious—and successful— growth strategy. Her and packed into pints.
sons and grandchildren followed her into the business
and continued to open ice-cream shops all around Ohio Maintaining the Core of Success
and beyond. Today, three of Regina’s great-grandsons run Graeter’s “fanatical devotion to product quality” and its
Graeter’s with the same attention to quality that made the time-tested recipes have not changed over the years. The
firm famous. In her honor, the street in front of the company’s current generation of owners is maintaining this core of
ultramodern Cincinnati factory is named Regina Graeter Way. the company’s success while mixing in a generous dash of
innovation. “If you just preserve the core,” Bob Graeter says,
The Scoop on Graeter’s Success “ultimately you stagnate. And if you are constantly stimulat-
Graeter’s fourth-generation owners are Richard Graeter II ing progress and looking for new ideas, well, then you risk
(CEO), Robert (Bob) Graeter (vice president of operations), losing what was important.... Part of your secret to long-term
and Chip Graeter (vice president of retail operations). They success is knowing what your core is and holding to that.
grew up in the business, learning through hands-on experi- Once you know what you’re really all about and what is most
ence how to do everything from packing a pint of ice cream important to you, you can change everything else.”
to locking up the store at night. They also absorbed the One of those “important” things is giving back to the com-
family’s dedication to product quality, a key reason for the munity and its families via local charities and other initiatives.
company’s enduring success. “Our family has always been “Community involvement is just part of being a good corporate
contented to make a little less profit in order to ensure our citizen,” observes Richard Graeter. When Graeter’s celebrated a
long-term survival,” explains the CEO. recent new store opening, for example, it made a cash donation
Throughout its history, Graeter’s has used a unique, time- to the neighborhood public library. It is also a major sponsor of
consuming manufacturing process to produce its signature The Cure Starts Now Foundation, a research foundation seeking
ice creams in small batches. “Our competition is making a cure for pediatric brain cancer. In line with its focus on natural
thousands and thousands of gallons a day,” says Chip goodness, Graeter’s has been doing its part to preserve the
Graeter. “We are making hundreds of gallons a day at the environment by recycling and by boosting production efficiency
most. All of our ice cream is packed by hand, so it’s a very to conserve water, energy, and other resources.

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 Graeter’s Looks to the Future the economic ups and downs of recent years, Graeter’s has
continued to expand, and its ice creams are now distributed
Even though Graeter’s recipes reflect its 19th-century heri-
through 6,200 stores in 46 states. Oprah Winfrey and other
tage, the company is clearly a 21st-century operation. It has
celebrities have praised its products in public. But the owners
more than 200,000 Facebook “likes,” connects with brand
are just as proud of their hometown success. “Graeter’s in
fans on Twitter, and invites customers to subscribe to its
Cincinnati is synonymous with ice cream,” says Bob Graeter.
email newsletter. The company sells its products online and
“People will say, ‘Let’s go get a Graeter’s.’”14
ships orders via United Parcel Service to ice-cream lovers
across the continental United States. Its newly opened pro- Questions
duction facility uses state-of-the-art refrigeration, storage, 1. How have Graeter’s owners used the four factors of pro-
and sanitation—yet the ice cream is still mixed by hand rather duction to build the business over time?
than by automated equipment. With an eye toward future 2. Which of Graeter’s stakeholders are most affected by the
growth, Graeter’s is refining its information system to provide family’s decision to take a long-term view of the business
managers with all the details they need to make timely deci- rather than aiming for short-term profit? Explain your answer.
sions in today’s fast-paced business environment. 3. Knowing that Graeter’s competes with multinational cor-
Graeter’s competition ranges from small, local businesses porations as well as small businesses, would you recom-
to international giants such as Unilever, which owns Ben & mend that Graeter’s expand by licensing its brand to a
Jerry’s, and Nestle, which owns Haagen-Dazs. Throughout company in another country? Why or why not?

Building a Business Plan Part 1

A business plan is a carefully constructed guide for a person introduction for your business plan and the benefits to the
starting a business. The purpose of a well-prepared business community that your business will provide. In the exercises
plan is to show how practical and attainable the entrepre- for Parts 2 through 6, you will add more components to your
neur’s goals are. It also serves as a concise document that plan and eventually build a plan that actually could be used
potential investors can examine to see if they would like to to start a business. The flowchart shown in Figure 3-4 gives
invest or assist in financing a new venture. A business plan an overview of the steps you will be taking to prepare your
should include the following 12 components: business plan.
●● Introduction
●● Executive summary The First Step: Choosing Your Business
●● Benefits to the community One of the first steps for starting your own business is to
●● Company and industry decide what type of business you want to start. Take some
●● Management team time to think about this decision. Before proceeding, answer
●● Manufacturing and operations plan the following questions:
●● Labor force
●● Why did you choose this type of business?
●● Marketing plan
●● Why do you think this business will be successful?
●● Financial plan
●● Would you enjoy owning and operating this type
of business?
●● Exit strategy
Warning: Do not rush this step. This step often requires
●● Critical risks and assumptions
much thought, but it is well worth the time and effort. As an
●● Appendix
added bonus, you are more likely to develop a quality busi-
A brief description of each of these sections is provided ness plan if you really want to open this type of business.
in Chapter 5. This is the first of seven exercises that appear Now that you have decided on a specific type of business,
at the ends of each of the seven major parts in this textbook. it is time to begin the planning process. The goal for this part
The goal of these exercises is to help you work through the is to complete the introduction and benefits-to-the-community
preceding components to create your own business plan. For components of your business plan.
example, in the exercise for this part, you will make decisions Before you begin, it is important to note that the business
and complete the research that will help you to develop the plan is not a document that is written and then set aside.

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 FIGURE 3-4 Business Plan

Identify product/service/
1 concept opportunity
(The Big Idea).

Determine market feasibility/

2
potential.
Determine market size (in
3 4 Complete competitive analysis.
units and dollars).
Go/no go decision (proceed or
5
look for another opportunity).

6 Develop marketing strategy.

Identify marketing mix

7 components (product, place,
price, promotion).
Determine location, size, Establish administrative
9 type, and layout of necessary 10 organization and personnel
Determine beginning physical facilities. requirements.
inventory and project your
8
seasonal inventory for the
next three years. Estimate the initial capital
11
requirements for the business.
Identify critical risks and Choose the legal form of your
12
13 assumptions to develop organization.
alternate plans. List possible sources of
14 startup capital and the
amount you expect from each.

Prepare an opening balance

sheet for the business, based
15
on figures from steps 11
Prepare pro forma profit and and 14. Estimate monthly (or seasonal)
16 loss statements for the first 17 cash flows for each of the first
three years of operation. three years of operation.
Prepare pro forma balance
18 sheets for the first three years
of operation.

Compute financial ratios for

each year projected in the
19
financial statements; compare
ratios to industry averages.

Prepare executive summary

20
of plan.

Present plan to lenders or

21
investors.

Source: Hatten, Timothy, Small Business Management, Fifth Edition. Copyright 2012 Cengage Learning.

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 It is a living document that an entrepreneur should refer to 1.3. Then include a summary statement of the business’s
continuously in order to ensure that plans are being carried financial needs, if any. You probably will need to revise
through appropriately. As the entrepreneur begins to execute your financial needs summary after you complete a
the plan, he or she should monitor the business environment detailed financial plan later in Part 6.
continuously and make changes to the plan to address any 1.4. Finally, include a statement of confidentiality to keep
challenges or opportunities that were not foreseen originally. important information away from potential
Throughout this course, you will, of course, be building competitors.
your knowledge about business. Therefore, it will be appro-
priate for you to continually revisit parts of the plan that you The Benefits-to-the-Community Component
have already written in order to refine them based on your
In this section, describe the potential benefits to the commu-
more comprehensive knowledge. You will find that writing
nity that your business could provide. Chapter 2 in your
your plan is not a simple matter of starting at the beginning
textbook, “Ethics and Social Responsibility in Business,” can
and moving chronologically through to the end. Instead, you
help you in answering some of these questions. At the very
probably will find yourself jumping around the various com-
least, address the following issues:
ponents, making refinements as you go. In fact, the second
1.5. Describe the number of skilled and nonskilled jobs
component—the executive summary—should be written last,
the business will create, and indicate how purchases
but because of its comprehensive nature and its importance
of supplies and other materials can help local busi-
to potential investors, it appears after the introduction in the nesses.
final business plan. By the end of this course, you should be
1.6. Next, describe how providing needed goods or services
able to put the finishing touches on your plan, making sure
will improve the community and its standard of living.
that all the parts create a comprehensive and sound whole
1.7. Finally, state how your business can develop new
so that you can present it for evaluation.
technical, management, or leadership skills; offer
attractive wages; and provide other types of individual
The Introduction Component growth.
1.1. Start with the cover page. Provide the business name,
street address, telephone number, Web address (if any), Review of Business Plan Activities
name(s) of owner(s) of the business, and the date the
plan is issued. Read over the information that you have gathered. Because
the Building a Business Plan exercises at the end of Parts 2
1.2. Next, provide background information on the company
and include the general nature of the business: retailing, through 6 are built on the work you do in Part 1, make sure
manufacturing, or service; what your product or service that any weaknesses or problem areas are resolved before
is; what is unique about it; and why you believe that your continuing. Finally, write a brief statement that summarizes all
business will be successful. the information for this part of the business plan.

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