INTERNATIONAL BUSINESS AND TRADE INTERNATIONAL BUSINESS AND TRADE

DEFINITION OF TERMS – eight rounds of tariff negotiations that reduced the

ASEAN Association of Southeast Asian Nations average worldwide tariffs on manufactured goods
CMEA Council for Economic Assistance from 45 percent to less than 7 percent.
EU European Union
FDI Foreign Direct Investment WTO
GATT General Agreement on Tariffs and Trade – a formal structure for continued negotiations to
LDCs Least Developed Countries reduce trade barriers and to act as a mechanism for
MNCs Multinational Corporations settling trade disputes.
NAFTA North American Free Trade Agreement
RTAs Regional Trade Agreements RTAs
SOEs State-Owned Enterprises – agreements among nations in a particular region
WTO World Trade Organization to reduce tariffs and develop similar technical and
economic standards.
GLOBALIZATION
– the worldwide trend of economic integration NAFTA
across borders allowing businesses to expand – a multilateral treaty that links the United States,
beyond their domestic boundaries. Canada, and Mexico in an economic bloc that
allows freer exchange of goods and services.
MNC
– any company that engages in business functions FDI
beyond its domestic borders. – a multinational firm’s ownership, in part or in
whole, of an operation in another country.
INTERNATIONAL BUSINESS – having ownership or control of at least 10 percent
– when a company conducts any business
functions beyond its domestic borders. SOEs – legal entities that are created and governed
by the government to engage in business activities.
EMERGING MARKET MULTINATIONALS
– influential multinationals from emerging markets MULTINATIONAL MANAGEMENT – the formulation
that are changing the traditional rules of of strategies and the design of management
competition and establishing new business systems that successfully take advantage of
models. international opportunities and respond to
international threats.
DEVELOPED ECONOMIES
– mature economies with substantial per capita GLOBAL PRODUCT – the same product or service
GDPs and international trade and investments. regardless of the nationality of the customer.

DEVELOPING ECONOMIES GLOBAL CUSTOMERS – global customers search

– have grown extensively over the past two decades the world for products or services without regard for
transition economies countries in the process of national boundaries
changing from government-controlled economic
systems to capitalistic systems. BUSINESS ETHICS – approach used by companies
when they face ethical dilemmas.
LDCs
– poorest nations, often plagued with unstable SUSTAINABLE PRACTICES
political regimes, high unemployment, and low – business practices that minimize the impact of
worker skills. business operations on the earth’s environment,
thereby enhancing the ability of the earth’s
GATT ecosystems to stay healthy and to continue
– tariff negotiations between several nations that functioning indefinitely.
reduced the average worldwide tariff on
manufactured goods.
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HISTORICAL TIMELINE
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STRATEGIES OF MNCs TRANSNATIONAL STRATEGY

LOCAL RESPONSIVENESS STRATEGY – two goals get top priority:
– responding to differences in the markets in all the 1) seeking location advantages
countries in which a company operates. 2) gaining economic efficiencies from
operating worldwide
GLOBAL INTEGRATION STRATEGY
– conducting business similarly throughout the LOCATION ADVANTAGES
world and locating company units wherever there is – dispersing value-chain activities anywhere in the
high quality and low cost. world where the company can do them best or
cheapest.
GLOBAL–LOCAL DILEMMA
– choice between a local responsiveness or global GLOBAL PLATFORM
approach to a multinational’s strategies. – country location where a firm can best perform
some, but not necessarily all, of its value-chain
VALUE CHAIN activities.
– a way of identifying all the areas where a firm can
create value for customers. INTERNATIONAL STRATEGIES
– selling global products and using similar
marketing techniques worldwide.
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MULTIDOMESTIC STRATEGY
– emphasizing local responsiveness issues at the
country level.

REGIONAL STRATEGY
– managing raw-material sourcing, production,
marketing, and support activities within a particular
region

GLOBALIZATION DRIVERS
– conditions in an industry that favor transnational
or international strategies over multidomestic or
regional strategies COMMON MARKETS add to the customs union the
free movement of labor, capital, and technology
--------o-------- among member nations

REGIONAL TRADE AGREEMENTS (RTAs) ECONOMIC UNION adds to the common market
RTAs the agreement to coordinate economic policies,
agreements among groups of nations to reduce which include such factors as monetary policies,
tariffs and develop similar technical and economic taxation, and currencies
standards
TRADE CREATION occurs when higher-cost
PREFERENTIAL TRADE AGREEMENT production in one member country is replaced with
preferential trade relations granted to a group of lower-cost production from another member
nations, not necessarily reciprocal country

FREE TRADE AREAS TRADE DIVERSION occurs when high-cost trade

reciprocal agreements among groups of nations to among member nations replaces trade with lower-
remove tariffs and other trade barriers among cost producers who are outside of the agreement
members, but each nation is free to impose any
barriers or preferential treatments to other nations --------o--------

TRADE DEFLECTION OFFSHORING vs OUTSOURCING

occurs in free trade areas when companies from OFFSHORING
nonmember countries enter the free trade area – outsourcing to a foreign company or using foreign
through a member country with low trade barriers direct investment to move company operations to a
RULES OF ORIGIN specify how much of the foreign country.
content or valued added of a product must be
produced in a member country to count as OUTSOURCING
“produced” in the country – contracting with other companies to perform
certain activities in the value chain.
CUSTOMS UNION a free trade area with the
additional provision that members use uniform --------o--------
treatment of outsiders regarding trade policies
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ABSOLUTE vs COMPARATIVE ADVANTAGES ECONOMIES OF SCALE

ABSOLUTE ADVANTAGE – each additional unit of production costs less to
– that arising from cost, quality, or resource produce than did the previous unit.
advantages associated with a particular nation.
– when the production of a good in country A takes NATIONAL DIAMOND
fewer units of labor than production of the good in FIRM STRATEGY, STRUCTURE, AND RIVALRY
country B. – how a company is run and how it competes.
COMPARATIVE ADVANTAGE RELATED AND SUPPORTING INDUSTRIES
– the relative advantage in production efficiency – the existence of suppliers and related talents.
that a nation has internally over another. DEMAND CONDITIONS
– the home country demand for the industry’s
OPPORTUNITY COSTS output.
– the choice to produce one good requires you to FACTOR ENDOWMENTS
give up the opportunity to produce another good. – similar to HO theory but with additional
possibilities.
TRANSACTION COSTS
– the costs associated with negotiating, monitoring, MONOPOLISTIC ADVANTAGE THEORY
and enforcing contracts. – argues that FDI should occur only when foreign
companies have unique competitive advantages
--------o-------- over local companies.

TRADE BARRIERS INTERNALIZATION THEORY

TARIFFS – asks the question of when it is less costly to do
– taxes applied to imported or exported goods. something yourself in another country rather than
selling your product or service.
PRINCIPLE OF NONDISCRIMINATION
– requires that trade agreements between any two DUNNING’S ECLECTIC THEORY
nations apply to all GATT signers. – focuses on three advantages that a company
must have to succeed with FDI: ownership,
AUTARKY internalization, and location.
– the absence of trade.
HECKSCHER–OHLIN THEORY (HO)
DIRECT EXPORTING – a nation’s comparative advantage comes from the
– more aggressive exporting strategy, where relative abundance of its factor endowments.
exporters take on the duties of intermediaries and
make direct contact with customers in the foreign LEONTIEF PARADOX
markets. – when a capital-intensive country exports more
labor-intensive goods and imports capitalintensive
--------o-------- goods.

PRODUCT LIFE CYCLE

PRODUCT LIFE CYCLE THEORY
– major industrial economies focus on new product
development and innovation and less-developed
countries focus on production of mature products.

NEW TRADE THEORY

– countries gain comparative advantage through the
cost-saving gains from specialization and
economies of scale.