International Business and Trade - Midterms Reviewer

Chapter 1 – We Live in a Global - China, India, and Japan 15,000

Economy years ago.
- Africa and South America
The Foundation of International Business thousands of years ago
- Eleventh Century
International Business – all business
- Fifteenth and Sixteenth Centuries
activities needed to create, ship, and sell
- Colonization
goods and services across national borders.
Selected Countries and Their Colonial
May also be called:
Heritage
- Global Business
- International Trade
- Foreign Trade
Why is International Business Important?
- It allows you to purchase popular
items made in other countries.
Without global business, life would
be different. People around the world
would not have the opportunity to
enjoy goods and services made in
other countries.
- It provides a source of raw materials
and parts and demand for foreign
products. Global business allows for
new market and investment
Global E-Commerce Opportunities
opportunities.
Technology allows firm to buy, sell, and
A global dependency exists when items that
exchange information around the world. The
consumers need and want are created in
internet, automated production methods, and
other countries.
video conferencing are changing the way
Global Opportunities – many people invest people do business.
in businesses to earn money for themselves.
As companies expand into other countries,  Companies sell goods and services to
they create new investment opportunities. anyone with internet access.
 Businesses buy online from suppliers
Improved Political Relations in other countries.
International business activities can help to  Firms meet customers’ geographic
improve mutual understanding, and cultural needs.
communication, and the level of respect  People process information and
among people in different nations. distribute data world-wide.
 Marketers research global customers
International Business Started in: and markets online.
International Business Basics
Fundamentals of International Trade
Imports – a good or service bought in one
country that was produced in another.
Exports – goods and services produced in
home country for sale to other markets.
Trade Barriers – restrictions that reduce
free trade among countries.
- Import taxes increase the cost of
foreign products.
- Quotas restrict the number of
imports.
- Laws prevent certain products from
coming into a country.
The International Business Environment
Buying and selling goods and services is
similar in most parts of the world.
Consumers try to satisfy their needs and
wants at a fair price.
International Business Environment
Factors
Geographic Conditions – the climate,
terrain, seaports, and natural resources of a
country will influence its business activities.
It also will restrict what type of businesses
that can operate in a certain type of climate.
A nation with many seaports and rivers is
able to easily ship products for foreign trade.
- Climate
- Terrain, seaways
- Natural Resources
- Agricultural Products
Cultural and Social Factors
Culture is the accepted behaviors, customs,
and values of a society. A society’s culture
has a strong influence on business activities.
The main culture and social factors that
affect international business are:
- language
- education
- religion
- values
- customs
- social relationships.
Political and Legal Factors
Government restricts the activities of
consumers and business operators. The most
common political and legal factors that
affect international business activities
includes:
- the type of government
- the stability of the government
- government policies toward business
Economic Conditions
Everyone faces the problem of limited
resources to satisfy numerous needs and
wants.
- Type of economic system
- The availability of natural resources
- The general education level of the
country’s population
The Global Business World
International Business Skills – certain
skills are needed in every type of job. These
skills or abilities will continue to be
important as business activities among
countries increase.
 History – your awareness of the past
can help you better understand
today’s international business
relations.
 Geography – it is more than names
on a map. Knowledge of geography
will help you understand how the
 climate and terrain of a country can
affect transportation, housing, and
other business activities.
 Foreign Language – as countries
increasingly participate in foreign
trade activities, your ability to
communicate effectively with people
from other societies increases in
importance.
 Cultural Awareness –
understanding the cultures vary from
nation to nation allows people to be
more sensitive to customs and
traditions of all societies.
 Study Skills – asking questions,
taking notes, and doing research are
the tools necessary to keep up to date
on changes in international business.
Chapter 2 – Our Global Economy
Economics and Decision Making
The Basic Economic Problem
1. Scarcity refers to the limited
resources available to satisfy the
unlimited needs and wants of people.
2. Economics is the study of how
people choose to use limited
resources to satisfy their unlimited
needs and wants.
Making Economic Decisions
People and countries cope with scarcity by
making decisions.
 Coping with Scarcity
 Making Choices
Decision-Making Process:
Step 1. Define the Problem
Step 2. Identify the Alternatives
Step 3. Evaluate the Alternatives
Step 4. Make a choice.
Opportunity Cost is the most attractive
alternative given up when a choice is made.
Step 5. Take action on the choice.
Step 6. Review the decision.
The decision-making process helps
individuals, companies, and nations make
wiser economic decisions.
Basics of Economics
Determining prices involves two main
elements – supply and demand.
Supply – is the relationship between the
amount of a good or service that businesses
are willing and able to make available and
the price.
Demand – is the relationship between the
amount of good or service that consumers
are willing and able to purchase and the
price.
Market Price – the point at which supply
and demand cross.
Changing Prices
Prices constantly change.
Inflation – an increase in the average prices
of goods and services in a country. It is an
indication of the buying power pf a
country’s monetary unit.
Two basic causes:
1. When demand exceeds supply, prices
go up. This is called demand-pull
inflation. It can occur when a
government tries to solve economic
problems by printing more money.
 2. When the expenses of a business
increase. This is known as cost-push
inflation. This was a result of higher
price charged by a company.
Economic Resources Satisfy Needs
Factors of Production
 Natural Resources – also known as
land, these resources are the raw
materials that come from the earth,
from the water, and from the air.
 Human Resources – also known as
labor, these resources are the people
who work to create goods and
services.
 Capital Resources – also called
capital, these resources include
buildings, money, and factories used
in the production process.
Economic Systems
Every nation decides how to use its factors
of production to create goods and services
for its people.
An economic system is the method a
country uses to answer the basic economic
questions. Economic systems can be
categorized based on ownership of resources
and government involvement in business
activities.
Types of Economic Systems
1. Command Economies – the
government or central-planning
committee regulates the amount,
distribution, and price of everything
produced.
The political and economic
environment where the government
owns all of the productive resources
of the economy and a single party
controls the government is called
communism.
2. Market Economies – based on the
forces of supply and demand. Market
economies are those in which
individual companies and consumers
make the decisions about what, how,
and for whom items will be
produced. The economic and
political environment where a market
economy exists is called capitalism.
- Private Property – individuals
have the right to buy and sell
productive resources and to own
business enterprises.
- Profit Motive – individuals are
inspired by the opportunity to be
rewarded for taking business
risks and for working hard.
- Free, Competitive Marketplace
– consumers have the power to
use their choices to determine
what is to be produced and to
influence the prices to be
charged.
3. Mixed Economies – blend between
government involvement in business
and private ownership. The income
from these enterprises is used to hep
fund government activities.
Socialism refers to a political and
economic system with most basic
industries owned and operated by
government with the government
controlled by the people as a whole.
Achieving Economic Development
Development Factors
 Literacy Level – countries with
better education systems usually
provide more goods and services that
 are of higher quality for their
citizens.
 Technology – automated production,
distribution, and communications
systems allow companies to create
and deliver goods, services, and
ideas quickly.
 Agricultural Technology – an
economy that is largely involved in
agriculture does not have the
manufacturing base to provide
citizens with a large number of high-
quality products.
Types of Development
 Industrialized Countries – a
country with strong business activity
that is usually the result of advanced
technology and a highly educated
population.
Infrastructure – refers to a
nation’s transportation,
communication, and utility systems.
Industrialized countries are actively
involved in international business
and foreign trade.
 Less-developed Countries – is a
country with little economic wealth
and an emphasis on agriculture and
mining. Sometimes these countries
have abundant resources but no
technology to make use of them.
 Developing Countries – are
evolving from less developed to
industrialized. These nations are
characterized by improving
educational systems, increasing
technology, and expanding
industries.
Resources Satisfy Needs
The Economics of Foreign Trade
 Absolute Advantage – exists when
a country can produce a good or
service at a lower cost than other
countries.
 Comparative Advantage – exists
when a country can produce a good
or service with more efficiency than
other countries.
Measuring Economic Progress
 Measure of Production
- Gross Domestic Product –
measures the output of goods that
a country produces within its
borders. It includes items
produced with foreign resources.
- Gross National Product –
measures the total value of all
goods and services produced by
the resources of a country.
 International Trade Activity
- Balance of Trade – is the
difference between a country’s
exports and imports.
- Foreign Exchange Rate – is the
value of one country’s money in
relation to the value of the money
of another country.
- Foreign Debt – is the amount a
country owes to other countries.
 Other Economic Measurements
- Consumer Price Index - it is
a federal government report
published by the Bureau of
Labor Statistics. This
information can help
consumers and business
managers make buying
decisions.
 - Unemployment Rate – when
people are not earning an
income, they cannot purchase
needed goods and services.
This cause other people to
lose their jobs. The result is a
weaker economy.
Chapter 3 – Cultural Influences on
Global Business
3-1. Culture Around the World
Culture – a system of learned, shared,
unifying, and interrelated beliefs, values,
and assumptions.
Subculture – is a subset or part of a larger
culture. A subculture may have some values,
beliefs, and assumptions that are different
than the larger culture of which it is a part.
Cultural Baggage – the idea that you carry
your beliefs, values, and assumptions with
you at all times.
3-2. Culture and Social Organizations.
Family Relationships
Cultures and Subcultures influence the ways
in which societies organize themselves.
1. Family Units
A nuclear family is a group that consists of
a parent or parents and unmarried children
living together.
An Extended Family is a group that
consists of the parents, children, and other
relatives living together.
2. Family – Work Relationships
Society’s Institutions
1. Education – the family unit provides
the early education for its younger
members. It instructs the young in
the ways of its culture.
o Religious Groups often
provide moral and spiritual
education
o Schools provide formal
education, which prepares
people to function
productively as members of
society.
2. Gender Roles – in most cultures,
family members are assigned
different roles to fulfill. Sometimes
these roles are based upon genders.
3. Mobility
4. Class System – means of dividing
the members of a cultural group into
various levels. The levels can be
based upon such factors as
education, occupation, heritage,
conferred or inherited status, and
income.
3-3. Communication Across Cultures
Language Differences
All cultures and subcultures use language to
communicate with other societies. Language
facilitates international business
transactions.
Direct and Indirect Communication
Contexting – refers to how direct or indirect
communication is. A low-context culture is
one that communicates very directly. These
cultures value words and interpret them
literally. A high-context culture is one that
communicates indirectly. These cultures
attach little value to the literal meanings of
words and interpret them figuratively.
Non-verbal Communication – is a
communication that does not involve the use
of words.
1. Body Language – refers to the
meaning conveyed by facial
expressions, upper and lower body
movements, and gestures.
2. Appearance – in the international
business world, appearance counts.
Your clothing has no voice, but it
can communicate.
3. Eye Contact – eye movements vary
from culture to culture. They are
another means of nonverbal
communication.
4. Touching – it another part of
nonverbal communication.
5. Personal Space – different cultural
groups use space for communication
purposes.
6. Color
7. Numbers
8. Emblems
9. Smells
3-4. Values Around the World
Values are ideas that people cherish and
believe to be important. They tend to vary
from culture to culture.
1. Individualism and Collectivism
Individualism – the belief in the
individual and her or his ability to
function relatively independently.
Collectivism – the belief that the
group is more important than the
individual.
2. Technology – fundamental beliefs
about technology also vary from
culture to culture.
3. Leadership, Power, and Authority
4. Religion – religious beliefs also
regulate the behaviors of members of
many cultural groups, including
business organizations.
5. Time – time is another factor to
which different cultural groups
attach different meanings.
Adjusting to Cultural Differences
Ethnocentrism – the belief that one’s
culture is better than other cultures. It is a
major obstacle to conducting successful
international business.
Culture Shock – a normal reaction to all the
differences of another culture.
Chapter 4 – Government and
Global Business
Political Environment and Global
Business
Political System – the means by which
people in a society make the rules by which
they live.
Democracy – all citizens take part in
making the rules that govern them. A
democracy emphasizes the importance of the
individual’s needs and interests.
Totalitarian System – political control is
held by either one person or a small group of
people. In a totalitarian system, one political
party holds all the power and prohibits
others from participating.
Mixed Systems – this has the characteristics
of both systems.
Political Relationships in Business
Global Companies Operating in Host
Countries
Host Country – the country in which a
multinational enterprise is a guest.
Multinational Enterprises – Quotas – a limit on the quantity, or
stimulate economic activity. They fulfill a
number of positive roles in host countries
while operating within the existing
economic, social, and legal constraints.
Social Responsibility – the process
whereby people function as good citizens
and are sensitive to their surroundings.
Global Companies’ Relationships with
Home Countries
Home Country – the country in which a
multinational enterprise is head-quartered.
As a domestic corporation in its home
country, a multinational enterprise is
expected to comply with the home country’s
social, economic, and legal mandates.
How Government Discourages Global
Business
Government Activities Influence Business
1. Laws that Protect Workers and
Consumers
2. Trade Barriers – governments that
establish such trade barriers are
enforcing protectionism.
Protectionism – is a government policy of
protecting local or domestic industries from
foreign competition.
 Establishing tariffs or customs duties
to increase the price of imported
products.
 Placing quotas on the importing of
certain products
 Requiring domestic companies to
boycott particular countries
 Enacting restrictive licensing
requirements for importers.
Tariffs – a tariff or duty, is a tax placed on
products that are traded internationally.
monetary amount of a product that can be
imported from a given country. The quota
creates a limited supply of the imported
good.
Boycotts – a government issues an absolute
restriction on the import of certain products
from certain countries.
Licensing Requirements – the license
grants permission to import a product. This
license can be withdrawn at any time.
Political Risks in International Business
Government actions or political policies can
change at any time, thereby adversely
affecting foreign companies.
Trade Sanctions – governments can impose
trade restrictions against another country to
protest that country’s behavior. This use of
trade barriers is usually the direct result of
political disputes between countries. A
country can impose a trade embargo
against another country and stop all import-
export trade with that country.
Expropriation – occurs when a government
takes control and ownership of foreign-
owned assets and companies.
Economic Nationalism – refers to the trend
of some countries to restrict foreign
ownership of companies and to establish
laws that protect against foreign imports.
Civil Unrest of War – interrupts
production, sales, and other business
activities.
Evidence of the following factors signals the
possibility of civil unrest in a country.
  Social disorder
 Extreme income unevenness, with a
few very rich people and a massive
number of poor people
 Frequent changes in the structure and
activity of political parties.
International Taxes
1. Customs Duty – or import tax, is a
tax assessed on imported products.
2. Sales Tax – a tax on the sale of
product. Sales tax are considered
regressive taxes because the same
rate of tax is charged to all
consumers, no matter what their
income level.
3. Excise Tax – a tax levied on the sale
or consumption of specific products
or commodities.
4. Payroll-Related Tax – those taxes
that are automatically deducted from
an employee’s pay.
5. Value-Added Tax (VAT) – a tax
assessed on the increase in value of
goods from each stage of production
to final consumption.
6. Income Taxes – a tax on the amount
of income a person or corporation
earns, minus allowable deductions
and credits. It is usually a
progressive tax because the
percentage a person pays increases or
progresses, the more income a
person makes.
How Government Encourages Global
Business
1. Free-Trade Zones – a designated
area, usually around a seaport or
airport, where products can be
imported duty-free and then stored,
assembled, and used in
manufacturing.
2. Most Favored Nation – MFN status
allows a country to export into the
granting country under the lowest
customs duty rates. Products
imported from countries without
MFN status are charged a higher
rate.
3. Free-Trade Agreements – member
countries agree to eliminate duties
and trade barriers on products traded
among members.
4. Common Markets – members
eliminate duties and other trade
barriers, allow companies to invest
freely in each member’s country, and
allow workers to move freely across
borders.
Government Protection from
International Risk
1. Export-Import Bank of the United
States (EXIM) – provides export
loans, export loan guarantees, and
export credit insurance.
2. Overseas Private Investment
Corporation (OPIC)
Tax Incentives
 A corporate tax deduction on income
earned by their foreign subsidiaries.
 Double-taxation avoidance treaties –
provides relief from double taxation.
 Tax environment.
Chapter 5 – Structures of
International Business Organizations
Methods of Business Ownership
Advantages of Sole Proprietorship:
1. Ease of Starting – obtaining a
business license and meeting other
 minor legal requirements are usually
the steps needed to start a sole
proprietorship.
2. Freedom to Make Business
Decisions – as a single proprietor, all
company decisions are your own.
3. Owner keeps all Profits – since you
are taking all of the risk, you receive
all of the financial rewards.
4. Pride of Ownership – as your own
boss, you have the chance to see the
results of your efforts.
Disadvantages of a Sole Proprietorship
1. Limited Sources of Funds – the
ability to raise money for a sole
proprietorship is limited to the
owner’s contributions plus loans.
2. Long Hours and Hard Work –
when you own your own business,
you cannot call in sick or take a
vacation unless you have dedicated
employees you trust.
3. Unlimited Risks – as the sole
owner, you are responsible for all
aspects of the enterprise.
Unlimited Liability means
that the owner’s personal
assets can be used to pay for
any debts of the business.
4. Limited life of the business
Partnership – a business that is owned by
two or more people, but is not incorporated.
Advantages of a Partnership:
1. Ease of Creation – a partnership is
easy to start. A written agreement is
created to communicate
responsibilities and the division of
profits.
2. Additional Sources of Funds – with
several owners, a partnership can
raise more capital, expand business
activities, and earn larger profits.
3. Availability of Different Talents
Disadvantages of a Partnership:
1. Partners are Liable – a partnership
has unlimited liability. Any or all of
the partners may be held personally
responsible for the debts of the
business.
2. Profits are shared among several
owners – even if an uneven work-
load occurs, the net income is
divided based on the agreement.
3. Potential for Disagreement among
Owners – differences in opinions are
likely to occur in every work
situation.
4. Business Can Dissolve Suddenly –
when one partner dies or cannot
continue in the partnership, the
business must stop.
Corporation – a business that operates as a
legal entity separate from any of the owners.
A corporation raises money for business
activities through the sale of stock to
individuals and organizations that wish to be
part owners of the corporation.
Stock Certificate – a document that
represents ownership in a corporation.
The owners of a corporation are called
Stockholders or Shareholders.
Stockholders usually have two main rights.
The first, is to earn dividends
And the second, is to vote on company
policies.
Dividends – share of company profits.
Advantages of a Corporation:
1. More Sources of Funds
2. Fixed Financial Liability of
Owners
3. Specialized Management
4. Unlimited Life of the Company
Disadvantages of a Corporation:
1. Difficult Creation Process
A charter is the document granted by
the state or federal government that
allows a company to form a corporation.
2. Owners have Limited Control
3. Double Taxation
Operations of Global Businesses
Other Forms of Business Organization
1. Municipal Corporation – an
incorporated town or city organized
to provide services for citizens rather
than to make a profit.
2. Nonprofit Corporations – created
to provide a service and are not
concerned with making a profit.
3. Cooperative – a business owned by
its members and operated for their
benefit.
A Multinational Company or Corporation
(MNC) is an organization that conducts
business in several countries.
Characteristics of Multinational Companies
 Worldwide Market View – they
view the entire world as their
potential market.
 Standardized Product – companies
look for similarities among markets
to offer a standardized product
whenever possible.
 Culturally-Sensitive Hiring – they
use consistent hiring policies
throughout the world but are also
culturally sensitive to host countries.
 International and Local
Perspective – these businesses
distribute products, prices, and
promote with both an international
outlook and a local perspective.
Starting Global Business Activities
Methods for getting involved in
international business:
1. Indirect Exporting – occurs when a
company sells its products in a
foreign market without any special
activity for that purpose.
2. Direct Exporting – occurs when a
company actively seeks and conducts
exporting.
3. Management Contracting – a
situation in which a company sells
only its management skills.
4. Licensing – selling the right to use
some intangible property for a fee or
royalty.
5. Franchising – the right to use a
company name or business process
in a specific way.
6. Joint Venture – an agreement
between two or more companies
from different countries to share a
business project.
7. Foreign Direct Investment – occurs
when a company buys land or other
resources in another country.
 8. Wholly-Owned Subsidiary – an
independent company owned by a
parent company.
Chapter 6 – importing, Exporting,
and Trade Relations
6-1. Importing Procedures.
The importance of Importing
Imports – are services or products bought
by a company or government from
businesses in other countries.
The importing business can create new sales
and or expand sales with existing customers.
1. Product Demand – customers who
want a unique item or a certain
quality may purchase a foreign-made
product.
2. Lower Costs – the prices of goods
and services are constantly changing.
3. Production Inputs – companies
regularly purchase raw materials and
component parts for processing or
assembly from other countries.
Importing Activities
Step 1. Determine Demand
Step 2. Contact Suppliers
Step 3. Finalize Purchase
Step 4. Receive Goods
A customs official is a government
employee authorized to collect the duties
levied on imports.
6-2. Exporting Procedures
The Exporting Process
Step 1. Find Potential Customers
Step 2. Meet the Needs of the Customers
Step 3. Agree on Sales Terms
 Free on board (FOB) – the selling
price of the product includes the cost
of loading the exported goods onto
transport vessels at the specified
place.
 Cost, Insurance, and Freight (CIF)
– means that cost of the goods,
insurance, and freight are included in
the price quoted.
 Cost and Freight (C&F) – indicates
that the price includes the cost of the
goods and freight, but the buyer must
pay for insurance separately.
Step 4. Provide products or services
 Freight Forwarder – is a company
that arranges to ship goods to
customers in other countries.
 Bill of Lading – a document stating
the agreement between the exporter
and the transportation company.
 Certificate of Origin – a document
that states the name of the country in
which the shipped goods were
produced.
Step 5. Complete the Transaction
Other Exporting Issues
 Avoiding Exporting Hurdles
 Exporting Services
6-3. Importance of Trade Relations.
The Economic Effect of Foreign Trade
The difference between a country’s exports
and imports is called its balance of trade.
Balance of Payments – measures the total
flow of money coming into a country minus
the total flow going out.
Trade Deficit – the total amount a country Three Factors Affecting Competition
owes to other countries as a result of
1. Number of Companies
importing more goods and services than the
2. Business Costs
country is exporting.
3. Product Differences
Trade Agreements
Benefits and Concerns of Competition
Economic Community – an organization of
Competition can improve the economic
countries that bond together to allow a free
situation and living conditions of a nation.
flow of products. An economic community
is also called a common market. Types of Competitive Situations
Benefits of Economic Community: 1. Pure Competition is a market
situation with many sellers, each
 Expanded trade with other regions of
offering the same product.
the world
2. Monopolistic Competition refers to
 Reduced tariffs for the member
market situation with many sellers,
countries
each with a slightly different
 Lower prices for consumers within product.
the group 3. Oligopoly the few sellers usually
 Expanded employment and offer products that are slightly
investment opportunities different. However, competition is
Barter Agreements mainly the result of large companies
being able to advertise and sell their
The exchange of goods and services goods in many geographic areas.
between two parties with no money involved 4. Monopoly is a situation in which
is called direct barter. one seller controls the entire market
Countertrade – the exchange of products or for a product or service.
services between companies in different
countries with the possibility of some
currency exchange,
Free-Trade Zones – an area designated by a
government for duty-free entry of
nonprohibited goods.
6-4. The Nature of Competition.
Domestic Market – made up of all the
companies that sell similar products within
the same country.
International Market – made up of
companies that compete against companies
in several countries.