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Lecture 06

International Business:
Competing in the Global
Shafayet Ullah
Section A1, A2 and A6

Competing in Global Markets

Definition: IB refers to the buying, selling, and

trading of goods and services across national
boundaries. Expansion of technology, liberalization
of cross border movement.
Exportsdomestically produced goods and services
sold in other countries.
Importsforeign goods and services purchased by
domestic customers.

Why Nations Trade

International trade is vital because:
It expands markets for products
Allows companies to seek out growth
opportunities in other nations
Makes production and distribution systems more
Reduces firms dependence on the economies of
their home nations

Why Nations Trade contd

Absolute Advantage

when a country makes a product for

which it can maintain a monopoly or that it can
produce at a lower cost than any competitor

Comparative Advantage

a product more efficiently and at a

lower price than it can supply other goods,
compared with the outputs of other countries.

Concepts of Intl Business

Balance of Trade: the difference in value between a

nations exports and its imports.
Balance of Payments: the difference between the
flow of money into and out of a country. A countrys
balance of trade, foreign investments, foreign aid,
loans etc.
The difference can be trade surplus/trade deficit
Trade Deficit: Negative balance of trade, I.e. import
is more than export


of the Balance of Payments

Measuring Trade Between


Exchange Ratesvalue of one nation's currency relative to the currencies

of other nations.
Fixed Exchange Rates Exchange rates are fixed. The central bank
takes action to keep the exchange rates fixed.
Devaluationdescribes a fall in a currencys value relative to other
currencies (to increase exports i.e. to reduce trade deficit
expansionary policy).
Depreciation and appreciation- Similar to devaluation and revaluation
but in this case, its automatic.
Floating Exchange Rates Demand and supply of currency determine
the exchange rate
Hard versus Soft Currencies- Currencies that owners can easily
convert into other currencies are called hard currencies e.g. the Euro,
the U.S. dollar, the Japanese yen. Currencies that can not be readily
converted are soft currencies e.g. Russian ruble, Bangladeshi Taka

Open and Closed Economies

Open Economy: Economy that engages in

international trade

Closed economy: Economy that doesnt engage in

international trade.

Barriers to International Trade

Social and Cultural Differences

Language: Understanding a business colleagues primary language

may prove to be the difference between closing an international
business transaction and losing the sale to someone else.
Company representatives operating in foreign markets must not only
choose correct and appropriate words but also translate words correctly
to convey the intended meanings.
Firms also may need to rename products or rewrite slogans for foreign
Values and Religious Attitudes: People in different countries do not
necessarily share the same values or religious attitudes. U.S. society
places a higher value on business efficiency and low unemployment
whereas in European society, employee benefits are more valued.

Global Etiquette: Learning about


Smiling in public in Romania is not appropriate.

In parts of the Middle East, you should never use your left hand when
you offer someone your business card.
In South Korea, dont write a persons name in red ink; this is an
indication that the person is deceased.
Sunday is holiday in many countries, Friday is holiday in few Muslim
Different systems in measurement, such as, Lbs Vs. Kg., Yards Vs

Black is associated with death in western countries. But white has the
same connotation in parts of Asia and purple in Latin America.

Economic Differences
Infrastructure: refers to basic systems of communication
(television, radio, print media and telecommunications),
transportation (roads and highways, railroads and airports) and
energy facilities (power plants and gas and electric utilities).
Currency Conversion and Shifts: Rapid and unexpected
currency shifts can make pricing in local currencies difficult. A
devalued currency may make a nation less desirable as an
export destination because of reduced demand in that market.
However, devaluation would make a country desirable in terms of
importing from that country e.g. importing RMG from Bangladesh
or setting up production factories or international service outlets
because of the cheap labor cost

Economic Differences

Economic development: Developed VS. Underdeveloped

nations. Infrastructure- physical facilities that support a countrys
economic activities. E.g. roads, ports, utilities and power plants,
schools, hospitals, communication systems, commercial
distribution system, security forces.

Exchange Rates: the ratio at which one nations currency can be

exchanged for another nations currency. US: Ban = $1: Tk
57.86. Devaluation -decreases the value of currency in relation to
other currencies. Ant. Revaluation

Legal and Political Barriers

Tariffs and Trade Restrictions:

Exchange controls: regulations that restrict the amount of

currency that can be bought or sold.
Quota restriction on a number of units of a particular
product imported into a country.
Embargo a prohibition on trade in particular product
Dumping selling less than what it costs to produce

Political Barriers: Political unrest, sudden change in


Cartel a group of firms or nations that agrees to act as a

monopoly and not compete with each other, in order to
generate a competitive advantage in world markets.

Legal and Political Barriers

Political Climate:
An important factor in any international business
investment is the stability of the political climate. For
Bangladesh, a huge barrier to attract foreign
investments is lack of political stability.

Legal and Political Barriers

Legal Environment:
Different in different countries. Until recently, many countries,
including France and Germany, not only accepted the practice of
bribing foreign officials in countries where such practices were
customary but allowed tax deductions for these expenses.
Chinese pay huilu, Russians rely on vzyatka, in the Middle East
and South Asia, palms are greased with baksheesh. The U.S.,
France, Germany and 31 other countries recently signed the
OECD Anti-bribery convention. This agreement makes offerings
or paying bribes a criminal offense and ends the deductibility of

Reducing Barriers to International

World Bank
1.Founded shortly after WWII by industrialized countries to
lend money to less-developed and developing countries
2. Primarily funds projects that build or expand the nations
3. Provide the largest source of advice and assistance to
developing nations
4. Critics believe the loans are often made with conditions
that hurt the borrower nation and to make payments these
nations have often had to cut vital social programs

Reducing Barriers to International

International Monetary Fund
1. Established one year after World Bank
2. Created to promote trade through financial cooperation and to
eliminate barriers
3. Makes short-term loans to member nations that are unable to meet
their budgetary expenses
4. Significant commitments are often made in order to secure the loan,
which are supposed to address the underlying conditions that created
the need for the loan in the first place
5. Critics believe that the IMFs policies of placing restrictions on
government spending, as a way to address underlying difficulties, often
misses the real issues of insolvency
6. Also, many believe IMF has placed many poor nations in impossible
positions repaid
7. Arguments in favor of debt reductions are debated

International Economic

North American Free Trade Agreement (NAFTA) 1994

agreement among the U.S., Canada, and Mexico to break
down tariffs and trade restrictions.
eliminates all trade barriers and investment restrictions over a
14-year period
consumer choices are expanded
domestic producers have larger markets
critics are concerned about domestic job loss, lowering of
environmental and human rights standards

International Economic
European Union25 nation European economic alliance.

goals include promoting economic and social

programs, introducing European citizenship as a
complement to national citizenship, and giving the
EU a more significant role in international affairs
involves standardizing business regulations,
requirements, import duties and taxes, and
eliminating customs checks to stimulate economic
introduction of Euro as common currency also
eliminates currency exchange rate fluctuations

International Economic

SAARC- (South Asian Association for Regional

Cooperation): Bangladesh, India, Pakistan, Nepal,
Bhutan, Srilanka, Maldives, Afganistan
MERCOSUR (Brazil, Argentina, Paraguay, Uruguay,
Chile and Bolivia
ASEAN (10-country association of South East Asian

Levels of organizational
involvement in international trade

Franchising: A form of licensing in which a company the

franchiser- agrees to provide a franchisee a name, logo,
methods of operation, advertising, products, and other elements
associated with the franchisers business, in return for a financial
commitment and the agreement to conduct business in
accordance with the franchisers standard of operations. E.g.
McDonalds, Pizza Hut, Holiday Inn.

Contract Manufacturing: the hiring of a foreign company to

produce a specified volume of the initiating companys product to
specification; the final product carries the domestic firms name.

Levels of organizational
involvement in international trade

Joint Venture: the sharing of the costs and operation

of business between a foreign company and a local

Multinational corporation (MNC): a corporation that

operates on a worldwide scale, without significant
ties to any one nation or region. E.g. IBM, GM,
Exxon, Ford Motors, GE.

Going Global

Contractual Agreements

Franchising: A contractual agreement in which a wholesaler

or retailer (franchisee) gains the right to sell the
franchisors products under that companys brand name if it
agrees to the related operating requirements e.g. Pizza Hut
and KFC in Bangladesh
Foreign Licensing: In a foreign licensing agreement, one
firm allows another to produce or sell its product, or use its
trademark, patent or manufacturing process in a specific
geographical area. In return, the firm gets a royalty or other
Subcontracting: It involves hiring local companies to
produce, distribute or sell goods or services.

Going Global

International Direct Investment

Acquisitions: In an acquisition, a company purchases

another existing firm in the host country.
Joint Ventures: It allow companies to share risks, costs,
profits and management responsibilities with one or more
host country nationals.

From Multinational Corporation to Global Business

Multinational Corporationfirm with significant operations

and marketing activities outside its home country.