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Global. Markets 7/25/2014. Your instructor: Byron Lilly. Chapter 3: Doing Business in. Buying products from another country (and bringing them here).

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Chapter 3: Doing Business in Global Markets Your instructor: Byron Lilly Buying products from another country (and bringing them here). Oil, natural gas, cars & trucks, car parts, potash, gold, wood Money
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Chapter 3: Doing Business in Global Markets Your instructor: Byron Lilly Buying products from another country (and bringing them here). Oil, natural gas, cars & trucks, car parts, potash, gold, wood Money Selling products to another country (and sending them there.) Money Cars, trucks, car parts, oil, natural gas, aircraft 1 Global trade enables nations to specialize in producing what they are best at. Making extra amounts of those things and trading the excess for what they re not as good at making turns out to be cheaper than making everything themselves! Comparative Advantage Theory was invented in 1817, but it is still true today! States that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently. But it s really just governments getting out of the way and letting companies decide who to buy from. The movement of goods and services among nations without political or economic barriers. 2 3 The distribution of income in the United States is positively skewed, and has become increasingly so since 5 6 The total value of a nation s exports compared to its imports measured over a particular period. page 64 A better definition: A country s exports minus its imports. When exports are greater than imports, the balance of trade will be positive. This is called a trade surplus. Country Exports Imports Balance of Trade U.S. $1,575 $2,273 -$698 China $2,210 $1,950 $260 A country s exports minus its imports. Trade Surplus - When balance of trade is a positive number. Also known as a favorable balance of trade. Trade Deficit - When the balance of trade is a negative number. Also known as an unfavorable balance of trade. 7 The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment. Note that the portion in boldface type is the balance of trade! A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty.) 8 Oriental Land Company The rights to use the characters, the ride designs and names, etc. The Disney Company Royalties, management fees and consulting fees The oldest, and still one of the most popular strategies Costs include: shipment, insurance, import tariffs. Risks include: damage in transit, difficulty collecting payment. Export Assistance Centers 9 Joint Venture: A new company jointly-owned by two or more existing companies. CFM International is a joint venture between U.S. company General Electric and French company Snecma to manufacture aircraft engines. General Electric and Snecma are the parent companies. CFM International is the joint venture. If no new legal entity is created, it s not a joint venture! 10 Strategic Alliance: Any contract between two or more companies binding each to help the other in specific ways that does not create a new jointly-owned legal entity. Philips and Salesforce.com Announce a Strategic Alliance to Deliver Cloud-based Healthcare Information Technology (June 2014) In a move to accelerate the transformation of the healthcare industry, Royal Philips and salesforce.com announced a strategic alliance to deliver an open, cloud-based healthcare platform. The buying (or building) of tangible property and/or businesses in foreign nations. Includes, but is not limited to, foreign subsidiaries 11 The parent company is located in the home country. The foreign sub is located in the host country. Pepsico Japan is a Japanese company wholly owned by Pepsico, a U.S. company. It manufactures and sells a wide variety of beverages and snacks in Japan. True or False? Foreign direct investment refers to the buying of goods produced in another country. 12 True or False? If Nissan, a Japanese company, wholly owns and solely operates an automobile assembly plant located in Tennessee, then this is an example of foreign direct investment in the United States. True or False? Apple contracts with a firm in Germany to assemble all of its iphone 5 s. This is an example of a joint venture. Facts: The Tsingtao Brewing company pays a fee to Anheuser-Busch for the right to brew and distribute Budweiser beer in China. True or False? : Tsingtao is the licensor and the fee paid is a royalty. 13 True or False? An example of foreign direct investment would be Coca Cola granting a Japanese firm the use of its formula and trademark for a fee. Counter-intuitive fact: U.S.- based exporters are helped when the dollar weakens and hurt when the dollar strengthens # planes sold to Europe Avg. Price in Euros Revenue in Euros (millions) 7,998 7,998 Exchange rate.719 /$.778 /$ Revenue in Dollars (millions) $11,123 $10,280 14 # planes sold to Europe Avg. Price in Euros Revenue in Euros (millions) 7,998 7,998 Exchange rate.778 /$.753 /$ Revenue in Dollars (millions) $10,280 $10,622 Dollar Goes Up Importers Exporters Helped Hurt Dollar Weakens Hurt Helped True or False? A devaluation of the U.S. dollar would make American goods cheaper to foreign buyers. 15 Prohibits U.S. companies, their employees or agents from making questionable or dubious payments to foreign officials to secure business contracts. Penalties in the 22 month period from Jan to October 2013 alone totalled over $740 million! Ralph Lauren, Eli Lilly, Tyco, Oracle, and Pfizer were among the companies penalized. The use of government regulations to limit the import of goods and services. Tariff: A tax imposed on imports. Protective tariff: A tariff designed to protect domestic businesses from cheap imports. An 8%-30% tariff on imported steel materials such as steel plates, bars, tubes, rods, and wire Imposed March 2002 and lifted December 2003 Designed to protect profits and jobs at U.S. steelmakers such as Nucor and United States Steel. Nippon Steel of Japan, ArcelorMittal of Belgium, and a number of Chinese steel makers were beating them on price. 16 A tariff designed solely to raise revenue for the government How can you tell if it s a protective tariff or a revenue tariff? 1. Look at the preamble to the bill or executive order that imposed the tariff, or 2. Notice whether there are any domestic firms to protect or not. Import Quota: A limit on the number of products in certain categories that a nation can import. Example: In 1981, sensing that the U.S. Congress was about to impose import quotas on the importation of cars and trucks from Japan, the Japanese government pre-empted that development by implementing voluntary export restraints, starting at 1.68 million units per year. Embargo: A complete ban on the import or export of a certain product, or the stopping of all trade with a particular country. Example: The U.K. placed an embargo in the importation of beef from Argentina in 1969 after a disastrous outbreak of foot-and-mouth disease in its herds believed to have been caused by Argentinian imports. 17 Nontariff barriers: Restrictive standards that detail how a product must be made, packaged, or sold in a country intended to favor domestic producers. Examples: 1. Denmark requires butter to be sold in cubes, and does not permit it to be sold in tubs. 2. South Korea excludes most U.S. cars by saying the engines are too large. In 1948, 23 nations signed the General Agreement on Tariffs and Trade (GATT). This established a framework through which these nations could agree to mutual reductions in their import tariffs. Over the next several decades, many more nations signed on to this trade treaty. By 1986, 124 nations were signatories. In 1986, the GATT signatories began to negotiate the Uruguay Round of amendments to the GATT; and by 1994, these amendments had been approved. These amendments: 1. Lowered tariffs between member nations by an additional 38 percent, and 2. Established the World Trade Organization 18 Can be used to mean either: 1. The judicial body in Geneva Switzerland established in 1986 that decides trade disputes between GATT signatories, or 2. The 152 signatories to the latest version of the GATT. Also called a trading bloc, is a regional group of countries that have: 1. A common set of external tariffs 2. No internal tariffs, and 3. The coordination of laws to facilitate exchange between the member countries. Example: The European Union, or EU. 19 A slightly different kind of agreement from a common market. Adopts just one of the three elements of a common market: No internal tariffs Example: The North American Free Trade Agreement between the United States, Canada, and Mexico 20
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