What can you describe about these businesses?

Objectives
1. describe the nature of multi-national corporations; 2. discuss the goals of multi-national corporations; 3. explain the reasons of business going abroad

It is any business that has productive activities in two or more countries.

What are some constrains in managing a multi-national corporation?

At five oclock sharp, the whistle blew and everyone left. Mr. Johnson was not happy with this situation and wondered why no one thought his offer was enough motivation.

Fred Johnson, the new operations manager for a French company in Saudi Arabia, had a problem. He wanted to ship the product on which his five employees were working. It was almost five oclock, though, which was quitting time, and the workers were already starting to put things away. Fred thought that if they worked a little longer, they could finish the job. He called them together and said, Listen, I think we can get this tonight. If you stay stay for forty-five minutes more, Ill buy each of you a drink.

Cont: Goal of MNCs

Obtain Greater Profits acquire products for the home market Satisfy management desire for expansion Sources of raw materials and financing

Frustration
Mr. Johnson went to the bar that night to drink by himself, not realizing that
Arabs do not drink alcohol.

Why do investors would like to operate a multi-national corporation? (goals)

Increase Profits and Sales Open up new markets
search for new markets outside their home country many of these markets are growing faster rate than the home.

New market creation

With little local manufacturing , it is a good market for exporters of consumer goods.

Why are sales in new markets increasing than the home markets?

By increasing total revenue

By decreasing the cost of goods sold

How could multi-national corporation decrease its cost of goods sold?

Acquire products for the home market Satisfy management desire for expansion Sources of raw materials and financing

How could multi-national corporation protect its market, profit and sales?

 Protect Markets, Profits and Sales

Protect domestic market
Establish foreign operations in markets where principal accounts are, to prevent competitors from
gaining access to those accounts. coming.

By moving part or all of its production facilities to the countries from which its competition is
Example: 1. Japanese auto parts supplier have followed the Japanese car manufacturers to the United States. 2. Mitsubishi Bank, the lead bank for Honda, opened an office in Columbus, Ohio, to serve Hondas Ohio plant.

Reasons for operating abroad

Lack of foreign exchange Local production by competitors Downstream markets Protectionism Guarantee supply of raw materials Acquire technology and management know how Geographic diversification Political Stability

International Business Theories

1. Mercantilism
An economic philosophy based on the belief that

(1) a nations wealth depends on accumulated treasure, usually gold; and

(2) Increase wealth, government policies should promote exports and discourage imports An export that brings dollars to the country is called positive Imports that cause dollar outflow are labelled negative

objectives
identify the theories that attempt to explain why certain goods are traded
internationally.

discuss the theories that attempt to explain why certain goods are traded
internationally;

Gains from Specialization and Trade

Commodity Tons of rice Automobiles

United States
2

Japan 2

Both gained: because each nation specialized in producing the product at which it was more efficient and then traded its surplus for goods that it could not produce as efficiently.

Picture of a country with less expensive labor example India, China

Cont: International Business theories

Theory of Absolute Advantage
The capability of one nation to produce more of a good with the same amount of input than another country. According to Adam Smith: In this theory both nations would gain from trade.

Questions/Discussion:
1. Explain Adam Smiths theory of absolute advantage 2. How does Ricardos theory of comparative advantage differ from the theory of
absolute advantage?

3. What is the relationship between the Heckscher-Ohlin factor endownment theory and the theories in question 1?
4. It seems that free, unrestricted international trade, in which each nation produces and exports products for which it has a comparative advantage, will enable everyone to have a higher level of living. Why, then does every country have import duty restrictions?

Cont:
4. Workers are paid $20 an hour in the United States but only $4 in Taiwan. Of course, we cant compete. We need to protect our jobs from cheap foreign labor. What are some possible problems with these statement? 5. There are two general classifications of import duties: tariff and nontariff barriers.

a. Describe the various types of tariff barriers b. What are some of the nontariff barriers?

Each Country Specializes

Commodity Tons of rice Automobiles

United States 6 0

Japan 0 8

Total 6 8

Theory of Comparative Advantage by Ricardo

A nation having absolute disadvantages in the production of two goods with
respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less.

Factor Endowment Heckscher-Ohlin theory

States that international and interregional differences in production costs
occur because of differences in the supply of production factors.

Countries export products requiring large amounts of their abundance

production factors and import products requiring large amount of their scarce production factors.

Examples
China, relatively well endowed with labor compared to Netherlands, ought to
concentrate on producing labor-intensive goods

Netherlands, with relatively more capital than labor, should specialize in

capital-intensive products.

Theories of Foreign Direct Investment

Monopolistic advantage theory Product and factor market imperfections International product life cycle Other theories Cross investment Internalization theory Dunnings electric theory of international production
Reference: page 112 International Business by Don Ball and Wendell McCulloch GS658.049B21

 Nontariff barriers
Nontariff barriers are all forms of discrimination against imports other than the import duties.

Quantitative

1. Quotas are numerical limits for a specific kind of goods that a country will permit
to be imported without restriction during a specified period. If the quota is absolute once the specified amount has been imported further importation for the rest of the period (usually a year) is prohibited.

Kinds of Restrictions
Tariff Barriers
Tariffs or import duties are taxes levied on imported goods primarily for the purpose of raising their selling price in the importing nations market to reduce competition for domestic producers.

Kinds of tariff
A tariff is a tax placed on imported goods. Each country has separate regulations, but there are five main
types of tariffs: revenue, ad valorem, specific, prohibitive and protective.

A revenue tariff increases government funds. For example, countries that do not grow bananas may create a
tax on importing bananas. The government would then make money from businesses that import the fruit.

An ad valorem tariff means that the tax applies to a percentage of the import's value such as a set number of
cents on every dollar of value. A specific tariff, on the other hand, means that the tax is not concerned with the estimated value of the imported goods, but rather is based on specific amount of the goods. This type may apply to the number of goods imported or to the weight, volume or other measurement of the goods. tariff is used to raise the price of imported goods as a protective measure against the competition from foreign markets. A higher tax allows a local company to compete with foreign competition.

A prohibitive tariff is one that is such as high cost that it keeps the item from being imported. A protective

Japan formally offered 75 percent of its goods for tariff liberalization in the first year in negotiations for the Trans-Pacific Partnership free trade pact on Saturday, a source close to

the negotiations said.

Nonquantitative nontariff barriers

1. Direct government participation in trade
Granting of subsidies

2. Customs and other administrative procedures

Government policies and procedures that either discriminate against imports or favour exports.

Arguments for Trade Restrictions and Their Rebuttal

National defense Protect infant industry

Protect domestic jobs from cheap foreign labor

Scientific tariff on fair competition Retaliation a. dumping b. subsidies

 identify the theories of foreign direct investment; explain some of the theories of foreign direct investment discuss the importance of knowing the theories of foreign direct invesment