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Instructor’s Manual – Chapter 3
Chapter 3: Business in a Borderless World
Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s
highlights. Follow-up via the Connect exercises is then encouraged to provide a holistic understanding of the
chapter.
C H A P T E R F O R E C A S T
In this chapter, we explore business in this exciting global marketplace. First, we look at the nature of
international business, including barriers and promoters of trade across international boundaries. Next, we
consider the levels of organizational involvement in international business. Finally, we briefly discuss strategies
for trading across national borders.
L E A R N I N G O B J E C T I V E S
LO 3-1 Explore some of the factors within the international trade environment that influence business.
LO 3-3 Specify some of the agreements, alliances, and organizations that may encourage trade across
international boundaries.
L E A R N T H E T E R M S
100)
102)
direct investment (p. 105)
dumping (p. 92)
franchising (p. 103)
International Monetary Fund
(IMF) (p. 101)
joint venture (p. 105)
North American Free Trade
World Trade Organization
(WTO) (p. 95)
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K E Y T E R M S A N D D E F I N I T I O N S
absolute advantage
A monopoly that exists when a country is the only source of an
item, the only producer of an item, or the most efficient producer
of an item.
Asia-Pacific Economic
Cooperation (APEC)
Association of Southeast
Asian Nations (ASEAN)
An international trade alliance that promotes open trade and
economic and technical cooperation among member nations.
A trade alliance that promotes trade and economic integration
among member nations in Southeast Asia.
balance of payments
The difference between the flow of money into and out of a
country.
balance of trade
The difference in value between a nation’s exports and its imports.
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.
comparative advantage
The basis of most international trade, when a country specializes
in products that it can supply more efficiently or at a lower cost
than it can produce other items.
contract manufacturing
The hiring of a foreign company to produce a specified volume of
the initiating company’s product to specification; the final product
carries the domestic firm’s name.
countertrade agreements
Foreign trade agreements that involve bartering products for
other products instead of for currency.
direct investment
The ownership of overseas facilities.
dumping
The act of a country or business selling products at less than what
it costs to produce them.
embargo
A prohibition on trade in a specific product.
European Union (EU)
A union of European nations established in 1958 to promote trade
among its members, one of the largest single markets today.
exchange controls
Regulations that restrict the amount of currency that can be
bought or sold.
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exchange rate
The ratio at which one nation’s currency can be exchanged for
another nation’s currency.
exporting
The sale of goods and services to foreign markets.
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 a
franchiser’s business, in return for a financial commitment and the
agreement to conduct business in accordance with the franchiser’s
standard of operations.
General Agreement on
Tariffs and Trade (GATT)
A trade agreement, originally signed by 23 nations in 1947, that
provided a forum for tariff negotiations and a place where
international trade problems could be discussed and resolved.
global strategy
(globalization)
A strategy that involves standardizing products (and as much as
possible, their promotion and distribution) for the whole world, as
if it were a single entity.
import tariff
A tax levied by a nation on goods imported into the country.
importing
The purchase of goods and services from foreign sources.
infrastructure
The physical facilities that support a country’s economic activities,
such as railroads, highways, ports, airfields, utilities and power
plants, schools, hospitals, communication systems, and
commercial distribution systems.
international business
The buying, selling, and trading of goods and services across
national boundaries.
International Monetary
Fund (IMF)
Organization established in 1947 to promote trade among
member nations by eliminating trade barriers and fostering
financial cooperation.
joint venture
The sharing of the costs and operation of a business between a
foreign company and a local partner.
licensing
A trade arrangement in which one company—the licensor—allows
another company—the licensee—to use its company name,
products, patents, brands, trademarks, raw materials, and/or
production processes in exchange for a fee or royalty.
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Instructor’s Manual – Chapter 3
multinational corporation
(MNC)
A corporation that operates on a worldwide scale, without
significant ties to any one nation or region.
multinational strategy
North American Free
Trade Agreement (NAFTA)
A plan, used by international companies, that involves customizing
products, promotion, and distribution according to cultural,
technological, regional, and national differences.
Agreement that eliminates most tariffs and trade restrictions on
agricultural and manufactured products to encourage trade
among Canada, the United States, and Mexico.
offshoring
The relocation of business processes by a company or subsidiary
to another country. Offshoring is different than outsourcing
because the company retains control of the offshored processes.
outsourcing
The transferring of manufacturing or other tasks—such as data
processing—to countries where labor and supplies are less
expensive.
quota
A restriction on the number of units of a particular product that
can be imported into a country.
strategic alliance
A partnership formed to create competitive advantage on a
worldwide basis.
trade deficit
A nation’s negative balance of trade, which exists when that
country imports more products than it exports.
trading company
A firm that buys goods in one country and sells them to buyers in
another country.
World Bank
An organization established by the industrialized nations in 1946
to loan money to underdeveloped and developing countries;
formally known as the International Bank for Reconstruction and
Development.
World Trade Organization
(WTO)
International organization dealing with the rules of trade between
nations.
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C O N T E N T O U T L I N E
The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS
learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with
LECTURE NOTES to drive home teaching points. There is also a reminder on when CONNECT activities can be
used. This is created so that you can facilitate in–class or online discussion effectively.
LO 3-1
Explore some of the factors within the international trade
environment that influence business.
• Introduction
• The Role of International Business
o Why Nations Trade
o Trade between Countries
o Balance of Trade
Key Terms:
• International business
• Absolute advantage
• Comparative advantage
• Outsourcing
• Exporting
• Importing
• Balance of trade
• Trade deficit
• Balance of payments
Lecture Outline and Notes:
I. The Role of International Business
A. International business refers to the buying, selling, and trading of goods
and services across national boundaries.
1. Falling political barriers and new technology are making it possible
for more companies to sell their products in new markets.
a. For example, American brands such as McDonald’s are becoming
increasingly popular in places like China.
2. Most of the world’s population and two-thirds of its total purchasing
power are outside the U.S.
3. Global marketing requires balancing global brands with the need of
1. Nations and businesses engage in trade:
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PPT 3.7
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understanding
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a brief animated
explanation.
b. To sell surplus materials or goods to acquire funds to buy the
goods, services, and ideas its people need
2. An absolute advantage exists when a country is the only source of
an item, the only producer of an item, or the most efficient producer
3. A comparative advantage occurs when a country specializes in
products that it can supply more efficiently or at a lower cost than it
4. As a result of some countries gaining a comparative advantage over
outsourcing, or transferring manufacturing and other tasks to
tasks can be accomplished for lower costs.
D. Balance of Trade
1. A nation’s balance of trade is the difference in value between its
exports and imports.
harmful because it can mean the failure of businesses, the loss
favorable balance of trade, or trade surplus.
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2. The balance of payments is the difference between the flow of
money into and out of a country. (Table 3.2)
LO 3-2
Investigate some of the economic, legal-political, social, cultural,
and technological barriers to international business.
• International Trade Barriers
o Economic Barriers
Key Terms:
• Infrastructure
• Exchange rate
• Import tariff
• Dumping
• Cartel
PPT 3.11
PPT 3.12
PPT 3.13
II. International Trade Barriers
borders.
B. Economic Barriers
1. Economic Development
a. When considering doing business abroad, businesspeople need
such as the United States, Japan, Great Britain, and Canada.
2) Less-developed countries (LDCs) are less economically
there.
b. A country’s level of development is determined by its
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PPT 3.14
PPT 3.15
PPT 3.16
PPT 3.17
2. Exchange Rates
a. The ratio at which one nation’s currency can be exchanged for
another nation’s currency is the exchange rate.
1) Influences the cost of imports and exports.
b. Devaluation occurs when a government decreases the value of
its currency in relation to other currencies.
1) Encourages other nations to buy more of a country’s goods
and services.
currencies. It occurs rarely.
C. Ethical, Legal, and Political Barriers
with potentially complex relationships among the different laws of
its own nation, international laws, and the laws of the nation with
which it will be trading; various trade restrictions imposed on
2. Laws and Regulations
a. The U.S. has many laws governing activities of U.S. firms
engaged in international trade.
c. Laws in other countries differ from U.S. laws and businesspeople
need to be aware of the differences before conducting business
there.
those countries are flooded with counterfeit products.
3. Tariffs and Trade Regulations.
a. Tariffs and other trade restrictions are part of a country’s legal
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PPT 3.18
PPT 3.19
b. An import tariff is a tax levied by a nation on imported goods.
1) A fixed tariff is a specific amount of money levied on each
unit of product brought into the country.
2) An ad valorem tariff is based on the value of the item.
3) Countries sometimes levy tariffs for political reasons.
4) Import tariffs are more commonly employed to protect
domestic products by raising the price of imported ones.
5) Critics of tariffs argue that their use inhibits free trade and
competition; others believe they are necessary to keep
domestic wages high and unemployment low.
c. Exchange controls restrict the amount of currency that can be
bought or sold.
can be imported into a country.
e. An embargo prohibits trade in a specific good. It may be
dumping, the selling of products for less than it costs to produce
them.
1) A company may dump its products because it permits quick
entry into a market; the domestic market for the firm’s
product is too small to support an efficient level of
production; or because technologically obsolete products
are no longer salable in the country of origin.
controls, sometimes prompting trade wars.
4. Political Barriers
create a hostile or even dangerous environment for business.
b. Political considerations may lead to the formation of a cartel, a
not compete with each other, to create a competitive advantage
in world markets.
1) OPEC is an example of a cartel.
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PPT 3.24
PPT 3.25
D. Social and Cultural Barriers
1. Most businesspeople engaged in international trade underestimate
the importance of social and cultural differences. (Table 3.3)
2. Differences in spoken and written language may create problems for
businesses; even when words are correctly translated, cultural
differences may affect the meaning of translated words.
3. Differences in body language and personal space may generate
uncomfortable feelings and misunderstanding when businesspeople
a. Body language is nonverbal, usually unconscious communication
through gestures, posture, and facial expression.
comfortable talking to another.
c. Acceptable gestures also vary from culture to culture.
7. Unlike the U.S., most countries use the metric system for
measurement.
8. Problems linked to cultural and social differences may be minimized
E. Technological Barriers.
1. Lack of technological infrastructures can be viewed as a barrier or as
an opportunity.
Africa are creating opportunities for cell phone companies.
2. Changes in technology also bring new challenges and competition.
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LO 3-3
Specify some of the agreements, alliances, and organizations that
may encourage trade across international boundaries.
• Trade Agreements, Alliances, and Organizations
o General Agreement on Tariffs and Trade
o The North American Free Trade Agreement
o The European Union
o Asia-Pacific Economic Cooperation
o Association of Southeast Asian Nations
o World Bank
o International Monetary Fund
Key Terms:
• General Agreement on
Tariffs and trade (GATT)
• World Trade
Organization (WTO)
• North American Free
Trade Agreement
(NAFTA)
• European Union (EU)
• Asia-Pacific Economic
Cooperation (APEC)
• Association of
Southeast Asian Nations
(ASEAN)
• World Bank
• International Monetary
Fund (IMF)
PPT 3.27
III. Trade Agreements, Alliances, and Organizations
A. General Agreement on Tariffs and Trade (GATT)
1. The General Trade Agreement on Tariffs and Trade (GATT), originally
signed by 23 nations, provided a forum for tariff negotiations and
discussions of international trade problems. More than 100 nations
abide by its rules.
2. The World Trade Organization, an international organization dealing
with the rules of trade between nations, was created in 1995 by the
Uruguay Round of GATT negotiations.
conduct business.
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PPT 3.28
PPT 3.30
B. The North American Free Trade Agreement (NAFTA) went into effect in
1994 and merged Canada, the U.S., and Mexico into one market.
1. NAFTA has eliminated most tariffs and trade restrictions on
agricultural and manufactured products among the three countries.
a. NAFTA makes it easier for U.S. businesses to invest in Mexico
and Canada; provides protection for intellectual property;
expands trade by requiring equal treatment of U.S. firms in both
countries; and simplifies country-of-origin rules, hindering
Japan’s use of Mexico as a staging ground for further
penetration into U.S. markets.
continue to arise over the implementation of the agreement.
5. Mexicans have been disappointed that the agreement failed to
create more jobs.
international business.
C. The European Union (EU)
2. To facilitate free trade among its members, the EU is working toward
standardization of business regulations, import duties, and value-
added taxes; elimination of customs checks; and has a standardized
currency (the euro) for use by all members.
3. The long-term goals are to eliminate all trade barriers within the EU,
improve the economic efficiency of the EU nations, and stimulate
economic growth.
5. The prosperity of the EU has suffered in recent years.
b. Greece was forced to default, which negatively impacts other EU
nations because it makes them appear riskier as well.
c. Standard & Poor’s downgraded the sovereign debt of several EU
nations.
d. Germany, however, has largely avoided the economic woes
plaguing other countries. It was not downgraded but maintained
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PPT 3.31
PPT 3.32
D. Asia-Pacific Economic Cooperation (APEC)
1. Promotes open trade and economic and technical cooperation
2. Differs from other international trade alliances in its commitment to
facilitating business and its practice of allowing the business/private
sector to participate in a wide range of APEC activities.
3. Despite some economic turmoil, companies of the APEC have
business.
a. China has become a manufacturing powerhouse.
Vietnam, and Hong Kong, have also become major
manufacturing and financial centers.
E. Association of Southeast Asian Nations (ASEAN)
3. In 1993, ASEAN began to reduce or phase out tariffs among countries
and eliminate nontariff trade barriers.
4. However, ASEAN is facing challenges as a unified trade bloc. Unlike
members are quite different. Major conflicts have also occurred
between member-nations.
5. Despite these challenges, ASEAN plans to increase economic
integration by 2015, but unlike the European Union, it will not have a
1. Also known as the International Bank for Reconstruction and
Development
G. International Monetary Fund (IMF).
2. The IMF tries to avoid financial crises and panics by alerting the
international community about countries that will not be able to
repay their debts.
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LO 3-4
Summarize the different levels of organizational involvement in
international trade.
• Getting Involved in International in International Business
o Exporting and Importing
o Trading Companies
o Licensing and Franchising
o Contract Manufacturing
o Outsourcing
o Offshore
o Joint Ventures and Alliances
o Direct Investment
Key Terms:
• Countertrade
agreements
• Trading company
• Licensing
• Franchising
• Contract manufacturing
• Offshoring
• Joint venture
• Strategic alliance
• Direct investment
• Multinational
corporation (MNC)
PPT 3.33
IV. Getting Involved in International Business
A. Businesses get involved in international trade at many levels, and the
degree of resources and effort required increases according to the level
at which a firm involves itself in international trade.
B. Exporting and Importing
1. Many companies first get involved in international trade when they
import goods from other countries for their own businesses. A
business may first get involved in exporting when it is called upon to
supply a foreign company with a particular product.
a. While China is the leading exporter, the U.S. and Germany are
fairly equal in exports. (Figure 3.2)
2. Exporting sometimes takes place through countertrade agreements,
which involve bartering products for other products instead of
a. An advantage of using an agent is that the company does not
have to deal with foreign currencies or the red tape of
discount than it would in a domestic transaction.
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PPT 3.34
PPT 3.35
C. Trading Companies
1. Buy goods in one country and sell them to buyers in another
country.
2. They perform all activities that are required to move products from
one country to another.
D. Licensing and Franchising
1. Licensing is a trade arrangement in which one company, the
licensor, allows another company, the licensee, to use its company
a. Licensing is an attractive alternative to direct investment when
the political stability of a foreign country is in doubt or when
resources are unavailable for direct investment.
b. Licensing is especially advantageous for small manufacturers
wanting to launch a well-known brand internationally.
2. Franchising is a form of licensing in which a company, the franchiser,
standard of operations.
a. Subway and McDonald’s are the top two global franchises.
McDonald’s has to adapt its menu somewhat to appeal to local
abroad or transferring personnel to handle overseas operations.
E. Contract manufacturing occurs when a foreign company produces a
F. Outsourcing
1. Is controversial
2. Insourcing, when foreign companies transfer jobs and business to the
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PPT 3.37
PPT 3.38
PPT 3.40
G. Offshoring
1. The relocation of business processes by a company or subsidiary to
another country
2. Different than outsourcing because the company retains control of
the process—not subcontracting to a different company.
3. Reasons to offshore involve lower wages, skilled labor, and taking
advantage of different time zones.
H. Joint Ventures and Alliances
companies or individuals. A company may also lack sufficient
resources or expertise to operate in another country.
2. A joint venture is a partnership between a foreign company and a
domestic business or government.
3. A strategic alliance is a partnership formed to create a competitive
advantage on a worldwide basis. It is especially useful in industries
company.
I. Direct Investment
marketing facilities.
a. Walmart directly invested in China but had to allow for unions in
order to fit in with the local culture.
2. Multinational corporations operate on a worldwide scale, without
significant ties to any one nation or region and represent the highest
level of international business involvement. (Table 3.5)
scarce resources, exploit labor in less-developed countries, and
harm the environment.
b. Many multinationals originated in the U.S.
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LO 3-5
Contrast two basic strategies used in international business.
• International Business Strategies
o Developing Strategies
o Managing the Challenges of Global Business
Key Terms:
• Multinational strategy
• Global strategy
(globalization)
PPT 3.41
V. International Business Strategies
A. Developing Strategies
1. Companies doing business internationally have traditionally used a
multinational strategy, customizing their products, promotion, and
distribution according to cultural, technological, regional, and
national differences.
2. More and more companies are moving from this customization
strategy to a global strategy (globalization), which involves
standardizing products (and, as much as possible, promotion and
distribution) for the whole world, as if it were a single entity.
3. Before moving outside their own borders, companies must conduct
environmental analyses to evaluate the potential of and problems
associated with various markets and to determine which strategy is
best for doing business in those markets.
4. Astute businesspeople today “think globally, act locally.”
B. Managing the Challenges of Global Business
1. Many barriers to global trade have fallen.
2. Managers who meet the challenges of creating and implementing
effective and sensitive business strategies can be successful.
3. Benchmarking of international best practices can help firms.