© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 2 The Evolution of International Business Introduction to Global Business Briefly explain why trade and foreign investment are good for society as a whole. Describe the major international trade theories and how they operate. Evaluate trade policy, the main instruments of trade policy, and their impact on business, consumers, and governments. Explain the rationale behind a country’s choice of managing trade. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. After studying this chapter, you should be able to: Terms International business All commercial transactions, both private and public between nations of the world Trade The two-way flow of exports and imports of goods (merchandise trade) and services (service trade) Foreign direct investment Inflows of capital from abroad for investing in domestic plant and equipment for the production of goods and/or services and for buying domestic firms © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 2.1 WORLD’S TEN LARGEST ECONOMIES: PURCHASING POWER PARITY (PPP) BASIS* (U.S. $ 2012) *PPP conversion factor is the number of units of a country’s currency that is required to buy the same amount of goods and services in the domestic market that a U.S. dollar would buy in the United States. **GNI is the total value of goods and services produced by a country plus net receipts of employee compensation and property income from abroad. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Benefits of International Trade © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A greater amount of choice in the availability of goods and services Competition results in lower prices for goods and services consumed Increased quality of life and higher living standards EXHIBIT 2.2 WORLD TRADE PATTERNS: TOP TEN EXPORTING NATIONS IN 2012 (PERCENTAGE OF TOTAL WORLD EXPORTS) © 2017 Cengage Learning. All Ri.

1. © 2017 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
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Chapter 2
The Evolution of
International Business
Introduction to Global Business
Briefly explain why trade and foreign investment are good for
society as a whole.
Describe the major international trade theories and how they
operate.
Evaluate trade policy, the main instruments of trade policy, and
their impact on business, consumers, and governments.
Explain the rationale behind a country’s choice of managing
trade.
© 2017 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
After studying this chapter, you should be able to:
Terms
International business
All commercial transactions, both private and public between
nations of the world
Trade
The two-way flow of exports and imports of goods

2. (merchandise trade) and services (service trade)
Foreign direct investment
Inflows of capital from abroad for investing in domestic plant
and equipment for the production of goods and/or services and
for buying domestic firms
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copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
EXHIBIT 2.1 WORLD’S TEN LARGEST ECONOMIES:
PURCHASING POWER PARITY (PPP) BASIS* (U.S. $ 2012)
*PPP conversion factor is the number of units of a country’s
currency that is required to buy the same amount of goods and
services in the domestic market that a U.S. dollar would buy in
the United States.
**GNI is the total value of goods and services produced by a
country plus net receipts of employee compensation and
property income from abroad.
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Benefits of International Trade
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3. A greater amount of choice in the availability of goods and
services
Competition results in lower prices for goods and services
consumed
Increased quality of life and
higher living standards
EXHIBIT 2.2 WORLD TRADE PATTERNS: TOP TEN
EXPORTING NATIONS IN 2012 (PERCENTAGE OF TOTAL
WORLD EXPORTS)
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EXHIBIT 2.3 NET INFLOWS OF FOREIGN DIRECT
INVESTMENT BY REGION AND INDUSTRIALIZATION
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EXHIBIT 2.3 NET INFLOWS OF FOREIGN DIRECT
INVESTMENT BY REGION AND INDUSTRIALIZATION
(continued)
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Major Theories of International Trade
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Mercantilism
The premise that a nation could only gain from external trading
if it had a trade surplus
Specialization
Free trade en-courages countries to specialize in the production
of those goods and services that they most efficiently produce

5. Factor Endowments
Nations primarily export goods and services that intensely use
their abundant factors of production
Trade Theory Terms
Factors of production
Endowments used to produce goods and services:
Land (quantity, quality, and mineral resources beneath it)
Labor (quantity and skills)
Capital (cost)
Technology (quality)
Trade surplus
When the value of exports exceeds the value of imports; the
opposite of a trade deficit
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Wealth Accumulation as a Basis for Trade Theory: Mercantilism
Mercantilism is the oldest form of trade theory.

6. Practiced during the 1500–1750 period as Europe moved toward
nationalism
Wealth—both personal and national—largely determined by the
amount of precious metal owned
Mercantilists believed that for a nation to be wealthy, it must
export as much as possible and import as little as possible so
that the country would have a trade surplus.
Mercantilists did not want to see the big picture:
If all nations increased exports and decreased imports, there
would be a surplus of exports that would lead to unpleasant
results.
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Specialization as a Basis for Trade Theory: Absolute and
Comparative Advantage
Absolute advantage
The ability of one country to produce a good or service more
efficiently than another
Comparative advantage
The ability of one country that has an absolute advantage in the
production of two or more goods (or services) to produce one of
them relatively more efficiently than the other
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Factor Endowments as a Basis
for Trade Theory

7. The Heckscher–Ohlin (H–O) theory
Attributes the comparative advantage of a nation to its factor
endowments: land (quantity, quality, and mineral resources
beneath it), labor (quantity and skills), capital (cost), and
technology (quality)
Key assumptions of the H–O theory:
Perfect competition in the marketplace
Perfect immobility of factors of production among countries
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Factor Endowments as a Basis
for Trade Theory (continued)
Factor price equalization theory
When factors are allowed to move freely among trading nations,
efficiency increases, which leads to superior allocation of
production of goods and services among countries.
Free mobility of factors will lead to efficient reallocation of
resources (factors of production) until price equilibrium is
reached.
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Porter’s “Diamond” Model of
National Competitive Advantage
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Chance
Demand
conditions
Factor
conditions
Government
Firm strategy,
structure, and
rivalry
Related and
supporting
industries
The Practice of Trade Policy
Trade policy
All government actions that seek to alter the size of
merchandise and/or service flows from and to a country
Instruments of trade policy
Tariffs (custom duties)
Preferential duties
Most favored nation status
Nontariff barriers
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9. Inbound Goods: Taxes on Imports
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Tariffs
Customs duties on imports that are collected by a designated
government agency responsible for regulating imports
Specific Tariff
An import tax that assigns a fixed dollar amount per physical
unit
Ad Valorem Tariff
A tax on imports levied as a constant percentage of the
monetary value of one unit of the imported good
Preferential Duties
Generalized System of Preferences (GSP)
An import tariff established by a nation for goods of certain

10. countries and not applied to the same goods of other countries
An agreement where a large number of developed countries
permit duty-free imports of a selected list of products that
originate from specific countries
Outbound Goods: Taxes on Exports
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A negative tariff or tax break aimed at boosting exports
Export Subsidy
Taxes meant to raise export cost and divert production for home
consumption
Export Taxes
International Trade Organizations
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International Monetary
Fund (IMF)
World
Bank
Bretton Woods
General Agreement on Tariffs and Trade (GATT)
World Trade
Organization (WTO)
Nontariff Barriers
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Import Quotas
Quantitative Restrictions (QRs) limit the amount or number of
units of products that can be imported to a country
Voluntary Export Restraint (VER)
An arrangement under which an efficient exporting nation
agrees to limit exports of a product to another country for a
temporary period

12. Domestic Content Provisions
Regulations requiring that a certain percentage of the value of
import be sourced domestically
Current Practice of “Managed” Trade
Socioeconomic Rationale
Countertrade
Export cartels
Protection of infant industries
Questionable labor practices
Environmental considerations
Health and safety
Geopolitical Rationale
National security
Protection of critical (strategic) industries
Embargoes
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13. international business
trade
foreign direct investment
outsourcing
mercantilism
factors of production
trade surplus
absolute advantage
comparative advantage
factor price equalization theory
Heckscher–Olin (H–O) theory
trade policy
tariffs
custom duties
specific tariff
ad valorem tariff
preferential duties
generalized system of preferences (GSP)
export subsidy
export taxes
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Key Terms
most favored nation (MFN)
import quotas
voluntary export restraint (VER)
domestic content provisions
managed trade
countertrade
export cartels

14. infant industry argument
embargoes
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Key Terms (continued)
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Chapter 1
The Rise of Globalization
Introduction to Global Business
Explain the characteristics of globalization and describe how it
functions.
Identify how major international institutions facilitate
globalization.
Evaluate the need for strong and transparent institutions that
can adapt to global competition.
Describe the key policy measures that make globalization
sustainable.
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15. classroom use.
After studying this chapter, you should be able to:
Describe the role of information technology in bridging the
global digital divide.
Describe the validity of the anti-globalization argument.
Explain the case made to temporarily support those people
negatively affected by globalization.
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After studying this chapter, you should be able to:
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EXHIBIT 1.1 IMPACT OF THE GLOBAL CREDIT CRISIS
What Is Globalization?
Globalization is the socioeconomic reform process of
eliminating trade, investment, cultural, information technology,
and political barriers across countries.
It can lead to increased economic growth and geopolitical
integration and interdependence among nations of the world.
It is no longer simply another word for “Westernization” or
“Americanization.”
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Emerging Economies
Emerging economies
Are implementing more open trade and free-market policies to
“compete with everyone from everywhere for everything”
Are becoming the world’s center of economic gravity through
innovation, research, and development
BRIC economies
Brazil, Russia, India, and China
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EXHIBIT 1.2 STRATEGIC COMPETITORS 2020
Decoupling
A global shift in which industrialized country-dependent
developing economies grow based on their own underlying
economic strengths rather than those of highly-developed
countries
Multipolar world
A world economy in which the engines of growth are comprised

17. of both industrialized (e.g., the United States) and emerging
market economies (e.g., BRIC countries)
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Decoupling and the Move to a Multipolar World Economic
Order
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EXHIBIT 1.3 A MULTIPOLAR WORLD ECONOMIC ORDER
Key International Institutions That
Facilitate Globalization
The International Monetary Fund (IMF)
The World Bank
The World Trade Organization (WTO)
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The International Monetary Fund
International Monetary Fund’s role in global financial stability:
Provides a forum for cooperation on international monetary
problems

18. Facilitates international trade that promotes job creation,
economic growth, and poverty reduction
Promotes exchange rate stability and an open system of
international payments
Lends countries foreign exchange to help address balance of
payment problems
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The World Bank
World Bank’s initial role was to aid the reconstruction of
Europe after World War II.
Current focus areas:
Global integration through trade liberalization
Analysis and national trading policy advice
Agreements supporting international standards in financial
systems
Information and knowledge transfer to developing countries to
support sustainable development
Eradicating communicable diseases
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19. TABLE 1.1 THE WORLD BANK GROUP’S
DEVELOPMENTAL INSTITUTIONSInternational Bank for
Reconstruction and
Development (IBRD)Supports reconstruction and restructuring
of member countries using funds raised in international capital
marketsInternational Development Association (IDA)Provides
long-term low-interest social sector and infrastructure loans to
the poorest members using foreign aid funds provided by the
rich nation membersInternational Finance Corporation
(IFC)Provides loans and takes equity position in private
companies of developing countries and works toward
developing capital markets in those economiesMultilateral
Investment Guarantee Agency (MIGA)Provides political risk
coverage for private investments made in developing
countriesInternational Center for the Settlement of Investment
Disputes (ICSID)Works on issues related to foreign investment
disputes
The World Trade Organization
The WTO began trading in 1948 under the General Agreement
on Tariffs and Trade (GATT).
Liberalized trade by lowering and/or removing trade barriers
such as tariffs, quotas, and subsidies
WTO promotes global trade by:
Administering trade agreements
Acting as a forum for trade negotiations
Settling trade disputes
Reviewing national trade policies
Providing developing countries with technical assistance and
training programs
Cooperating with the IMF and the World Bank
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20. classroom use.
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Multilateral Trading System Principles Fostered by WTO
Agreements
Trade without discrimination
Increasingly freer trade
Promotion of fair competition
Encouragement of economic reforms in developing countries
WTO Agreements
Predictability of trading relationships
Institutional Structure and
Its Impact on Globalization
What is institutional structure?
Institutions are the rules, enforcement mechanisms, and
organizations that support market transactions.
Impact of globalization:
Demand for transparency, openness, and disclosure from
political institutions
Need for adaptive institutions that provide societal stability and
incentives for private investment
Increasing expectations of accountability and responsibility for
those who govern
Importance of independent judiciary and free press
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Effective Policy Measures That
Promote Globalization
Good
governance
Competitive
markets
Anticorruption
policies
Effective Policy Measures
Property
rights
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Impact of Information Technology
on Globalization
The Digital Generation
Expanding the Global Use of Information Technology
The Digital Divide Myth

22. “Leapfrogging” into the Internet and Cell Phone Era
The Globalization Controversy
Arguments against globalization:
Job losses and income stagnation
Loss of local control over economic policies and developments
Disappearance of old industries
Related erosion of communities
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Making Globalization Work for All
Globalization’s Winners

23. Globalization’s Losers
China
India
Brazil
Central Asia
Much of Africa
North Korea
globalization
emerging economies
decoupling
multipolar world
international monetary system
economic reforms
capital markets
liberalization of the trading system
institutions
adaptive institutions

24. accountability
transparency
antitrust laws
digital era
bandwidth
the web
digital divide
sustainable development
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Key Terms