INTERNATIONAL TRADE 3.

Workers – can lead to higher

employment rates home and abroad.
International Trade – the buying and selling 4. Nations – nations benefit due to
of goods and services across international increased foreign investment =
boundaries. increased standard of living and
options.
Exports – countries sell all goods and
services produced domestically to buyers Advantages of International Trade
abroad. • Comparative advantage
• Economies of scale, competition
Imports – countries buy goods and services • Transfer of technology
from other countries for domestic use. • More job creation

Importance of International Trade Disadvantages of International Trade

1. To earn foreign exchange • Over-dependence
2. Encourages investment • Unfair to new companies
3. Division of labor & specialization • A threat to national security
4. Optimum allocation & utilization of
• Pressure on natural resources
resources
5. Stability in price level
6. Availability of multiple choices
7. Brings reputation & helps earn
goodwill EXPORTING, IMPORTING AND GLOBAL
SOURCING
Components of International Trading
1. Globalization – the process of
integrating economies, cultures, and History of Importing and Exporting
societies across borders. • Dates back to the Roman Empire
2. Freight – the transportation of goods • European and Asian traders imported
by air, sea, or land. and exported goods across Eurasia
3. Tariff – a tax imposed on imported or • Trading along Silk Road during the
exported goods. 13th and 14th centuries
4. Cost – includes production costs, • Trade caravans from China and India
transportation expenses, and other to Constantinople and Alexandria.
associated fees. From there, Italian ships transported
5. Import – bringing goods into a the goods to European ports.
country from abroad. • The European demand fir spices
6. Customs – the government agency gave rise to the spice trade of 1400s
responsible for regulating • Spices used to preserve meat, as
international trade and collecting flavoring, medicines
duties. • Spice trading involved many
7. Outsourcing – when a company middlemen inflating the price 1000
hires external services or production percent
from another country.
8. Exchange rate – the value of one Why do we mean by Exporting and
currency relative to another. Importing?
9. Documents – required paperwork for • Exporting – sale of products and
customs clearance, such as invoices, services in foreign countries that are
bills of lading, and certificates of sourced or made in the home country
origin. • Importing – buying goods and
10. Pricing – determine the cost of services from foreign sources and
goods for international markets. bringing them back into the home
11. Law – legal regulations governing country
international trade. – also known as global sourcing
12. Origin – the country where a product
was manufactured or produced. Why do companies Export?
13. Insurance – coverage to protect • To expand their market reach
against risks during transportation or • Easiest way to participate in global
storage. trade
• Less costly investment than the other
Benefits of International Trade entry strategies
1. Consumers – the competition that
• Much easier to simply stop exporting
the foreign companies offer
than it is to extricate oneself from the
encourages high-quality and low-
other entry modes gives a company
prices.
quick access to new markets
2. Producers – producers can expand
• Export management company
by conducting operations in other
(EMC) – an independent company
countries.
 that performs the duties hat a firm’s someone who’s producing directly
own export department would within the country. At this point, many
execute in exchange for a fee or companies begin to reconsider
commission for its services having a local presence.
– handles the necessary
documentation, finds buyers for the Specialized mode of entry
export and takes title of the goods for 1. Contractual modes – involve the
direct export. use of contracts rather than
investment
Exporting – licensing and franchising
• Effective entry strategy for 2. Investment modes – joint venture or
companies that are just beginning to wholly owned subsidiary
enter a new foreign market
• Low-cost, low-risk option compared Licensing
to the other strategies • The granting of permission by the
• Companies can sell into foreign licenser to the licensee to use
country either through a local intellectual property rights, such as
distributor or through their own trademarks, patents, brand names,
salespeople or technology, under defined
• Government export-trade offices can conditions.
help a company find a local distributor • The multinational firm usually has no
• Internet has provided a more efficient ownership interest
way for foreign companies to find • Low-risk option because there’s
local distributors and enter into typically no up-front investment
commercial transactions
• Distributors – export intermediaries Franchising
who represent the company in the • Similar to a licensing agreement,
foreign market under a franchising agreement, the
– in many cases, the distributors take multinational firm grants rights on its
title to the goods and then resell them intangible property, like technology or
– distributors know the local market a brand name, to a foreign company
and are a cost-effective way to enter for a specified period of time and
the market receives royalty in return
• The difference is that the franchiser
Benefits of Exporting: Vitrac provides a bundle of services and
• Market – the company has access to products to franchisee
a new market, which has brought
added revenues. Joint Ventures (also called equity joint
• Money – not only has Vitrac earned venture)
more revenue, but it has also gained • A contractual, strategic partnership
access to foreign currency, which between two or more separate
benefits companies located in certain business entities to pursue a
regions of the world, such as in business opportunity together.
Vitrac’s home country of Egypt. • Partners in an equity joint venture
• Manufacturing – the cost to each contribute capital and resources
manufacture a given unit decreased in exchange for an equity stake and
because Vitrac has been able to share in any resulting profits. (In an
manufacture at higher volumes and nonentity joint venture, there is no
buy source materials in higher contribution of capital to form a new
volumes, thus benefitting from entity.)
volume discounts
Risks of Joint Ventures
Risks of Exporting • Challenge of finding the right partner
• If you merely, export to a country, the – not just in terms of business focus
distributor or buyer might switch to or but also in terms of compatible
at least threaten to switch to a cultural perspectives and
cheaper supplier in order to get a management practices.
better place • Local partner may gain the know-how
• Someone might start making the to produce its own competitive
product locally and take the market product service to rival multinational
from you firms
• Local buyers sometimes believe that
a company which only exports to When deciding which mode of entry to
them isn’t very committed to choose, companies should ask
providing long-term service and themselves two key questions:
support once a sale is complete. 1. How much of our resources are we
Thus, they may prefer to buy from willing to commit? The fewer the
 resources (i.e., money, time, and • Summarizes all the inter-country
expertise) the company wants (or can transactions (ALL international
afford) to devote, the better it is for transactions) and is a wider term
the company to enter the foreign which includes BOT
market on a contractual basis—
through licensing, franchising,
management contracts, or turnkey
projects.
2. How much control do we wish to
retain? The more control a company
wants, the better off it is establishing
or buying a wholly owned subsidiary
or, at least, entering via a joint
venture with carefully delineated
responsibilities and accountabilities
between the partner companies.

Regardless of which entry strategy a

company chooses, several factors are
always important.
1. Cultural and linguistic differences
2. Quality and training of local contacts
and/or employees
3. Political and economic issues
4. Experience of the partner company

Building Long-Term Relationships

• Guanxi – one of the most important
cultural factors in China is guanxi,
which is loosely defined as a
connection based on reciprocity.

Why Imports and Exports matter to you

• The volume and nature of imports
and exports deeply affects economy
of any country.
• Imports and Exports can affect a
country’s Gross Domestic Product
(GDP), its exchange rate, and its
level of inflation and interest rates
This, in turn, can make goods and
services more expensive or create
jobs and stimulate domestic
production. It can also affect interest
rates you pay for credit card debt,
home loans and other borrowing.

The Balance of Trade

• Balance of Trade (BOT) = Value of
Exports – Value of Imports
• Trade Surplus – positive BOT
(exports > imports)
• Trade deficit – negative BOT (exports
< imports)

Difference between BOP and BOT

• Balance of trade (BOT) is the
difference that is obtained from the
export and import of goods
• Balance of payments (BOP) is the
difference between the inflow and
outflow of foreign exchange.
Transactions related to goods are
included in BOT. Transactions
related to transfers, goods and
services are included in BOP.