INTERNATIONAL TRADE AND THE WORLD ECONOMY

 
Figure 6.1
Trade : 
voluntry exchange of goods, services assets, or money between one person or organization and another. Because it is voluntary, both parties to the transaction must believe they will gain from the exchange or else they would not complete i. 

Iternational Trade :
Trade between residents of two countries. The residents may be individuals,firms, not-for-profit organizations, or other forms of associations.

Why does international trade occur? The answer follow directly from our definition of trade: Both parties to the transaction, who happen to reside in two different countries, believe they benefit from the voluntary exchange. Behind this simple truth lies much economic theory. Business practice, government policy, and international conflict-topics we cover in this and the next four chapters

    As figure 6.1 indicates, world trade has grown dramatically in the half century since the end of World War II. Total international merchandise trade in 2006 was $12.1 trillion, or approximately 25 percent of the world's $48.2 trillion gross domestic product (GDP); trade in services that year amounted to $2.7 trillion. The Quad countries accounted for 55 percent of the world's merchandise export ( see Figure 6.2); China , 8 percent; and other countries ,37 percent. Such international trade has important direct and indirect effect on national economies. On the one hand , exports spark additional economic activity in the domestic economy. Caterpillar 's $10.5 billion in exports generates orders for its U.S.suppliers, wages for its U.S. workers, and dividend payment for its U.S. shareholders , all of which then create income for local automobile dealers , grocery stores,and others, which in turn add to their own payrolls. On the other hand,imports can pressure domestic suppliers to cut their prices and improve their competitiveness. Failure to respond to foreign competition may lead to closed factories and unemployed workers.

Figure 6.2
Source of the World's
Merchandise Exports,
2006


     Because of the obvious significance of international trade to businesses, consumers,and workers, scholars have attempted to develop theories to explain and predict the forces that motivate such trade. Government use these theories when they design policies they hope will benefit their countries' industries and citizens. Managers use them to identify promising markets and profitable internationalization strategie

Caterpillar: making money by moving mountains 2

     Caaterpillar engages in many forms of international business. It is an exporter, sending its well-known yellow eath moving equipment to virtually every country in the world. It is an importer, purchasing parts from Asian, European, and North Ameican suppliers. Cat is an international Investor, owning and operating factories on six continents. It also is an international borrower, seeking short-term and long-term capital from investors and banks throughout the world. The company is involved in the international licensing of technology, both in purchasing the right to use innovative technologies developed by foreignfirms and in selling the use of its own technologies to other foreign firms. It also franchises the rights to sell its equipment to 59 U.S dealers and 123 foreign dealers.

     Of cours, given the fierceness of international competition, Caterpillar's future is no more assured than that of any other global enterprise. Its archival, Komatsu Ltd., enjoyed lower labor costs during the 1980s and a reputation for producing innovative, high-quality products. In the early 1980s, Komatsu undercut Cat's prices to U.S. customers by as much as 40 percent, causing an 11 percent erosion in Cat's domestic market share. Slashing its own prices, Cat stopped the market-share losses, although its profitability suffered. The rise in the value of the  yen from 1985 to 1995-it reached a peak of 80 yen to the dollar in April 1995-helped Cat by eroding Komatsu's cost advantage. Unfortunately for Cat, the yen fell 44 percent in value over the next 40 months, reaching a low of 144 yen to the dollar in August 1998: advantage Komatsu. A decade later, the situation reversed once again. The falling value of the dollar_- in August 2008, one dollar brought only 106 yen- made life easier for Caterpillar and more difficult for Komatsu. Because these exchange rate changes continueally affect the price competitiveness of Cat's product, Cat's manager know they must accelerate their drive to become more cost-efficient in the face of Komatsu's competition.

Caterpillar: making money by moving mountains 3

     Caterpillar is a miscrocosm of the complex business relationships that bind firms and countries in the comtemporary global marketplace. In this chapter we analyz the underlying economicforces that shape and structure the international business transactions conducted by Caterpillar and the thousands of other firms. We discuss the major theories that explain and predict international trade and investment activity. These theories help firms sharpen their global business strategies, identify promising export and investment opportunties, and react to threats posed by foreign competitors. As they introduce you to the economic environment in which firms compete, the theories help you understand why a firm such as Caterpillar can be simultaneously an exporter, importer, international investor, international borrower, franchiser, and licensor and license of technology.

QUESTIONS :

1. How important is intellectual property to the world economy?

2. Should the average consumer concern himself or herself with theft of intellectual property? What about the average citizen? The average worker?

3. Does intellectual property theft undermine the workings of the free-market system?

4. What is the impact of china's lack of aggressive enforcement of intellectual property rights on its economic development in the short run? In the long run?

VIDEO

Uploaded on SlideServe by lotus | Upload your own presentation

INTERNATIONAL TRADE AND INVESTMENT

Course Number 1166 Professor of Management Practice Dante Roscini Fall; Q1Q2; 3 credits 24 sessions Paper Career Focus This course is intended for students who expect their careers to be influenced by trends in international trade and investment. Many HBS graduates will engage directly or indirectly in commerce and finance across national borders. Increasingly, political and economic events abroad shape the opportunities and constraints faced by managers in the majority of industries across the globe. Educational Objectives Markets and industries can vary dramatically across national borders. Understanding the global macro issues and the related politics of globalization may once have been a luxury; it is now, for most high-level managers and investors, simply a necessity and can make the difference between success and failure. Despite the ease with which it is often conducted, doing business across borders is not the same as doing it at home. Rather, it entails a whole new set of managerial challenges: reassessing competitive advantage; evaluating diverse political environments and legal structures; considering the impact of different policies and regulations; assessing currency and other financial risks; considering trading regimes; and understanding widely disparate cultures and business norms. The purpose of MITI is to build a framework of analysis that enables managers to understand the challenges of international trade and investment and to master the opportunities they represent. MITI's framework of analysis is based on a systematic evaluation of the informal and formal rules that define markets for goods, services, and capital. Course Content The course consists of four inter-related modules. The first module, Firms in the Global Economy, consists of cases that deal with the role of firms within the global economy. Discussions focus on the political and economic origins of our current era of globalization and how the rules that constrain and enable firms are changing. The second module, National Policy and Firms Response, focuses on national policies that shape flows of goods and capital. Using a series of company-based cases, we investigate different logics of national regulation, and the tools that firms have available for predicting, avoiding, or even employing the long arm of government policy. The third module, The Politics and Rules of International Trade shifts ou

Caterpillar: making money by moving mountains 1

Given the fieceness of international competition, caterpillar's future is no more assured that that of any other global enterprise.

Caterpillar, Inc., headquartered in Peoria, lllinois, is the world's largest producer of heavy earthmoving and construction equipment, with a 30 percent share of the global market. The company's complex involvment in international business is typical of most major firms today. Cat, as the company is widely known, manufactures engines and earthmoving, constructions and materials-handling equipment at over 100 factories spread over 23 countries. About 49 percent of its 95,000 employees work outside the United States. More than half of its 2006 output of $41.5billion was purchased by foreign customers: $10.5 billion as exports from the United States and the reminder as output from cat's 60 overseas factories. Caterpillar is no newcomer to international production. It stablished its first oversease factory in the United Kingdom in 1951. Its 1963 joint venture with Mitsubishi Heavy Industries was one of the first such investments by a U.S. firm in Japan. In 1998 it purchased Perkins Engines, a British producer of small-to medium-sized diesel engines, which had been a primary supplier of such engines to Cat. Caterpillar has leveraged the Perkins acquisition to develop new products or the small and compact construction equipment market and for the agricultral market.
          Because downtime on a critical piece of equipment can halt construction, success in this industry depends on equipment reliability and after-sales support.

Caterpillar has two competitive advantages that have enabled it to dominated the international heavy-equipment market:

1. A commitment to quality that makes the caterpillar brand name a symbol of tough, realible products.

2. An effective network of 182 dealers worldwide who sell and service caterpillar's products.
   
        The importance of these two elements has been summed up by John Bibby, a typical Cat customer, who runs John Bibby Backhoe Hire, an excavating firm in a Melbourne, Australia, Suburb. Bibby is a small operator-he owns only one piece of equipment-so when his backhoe is not operating, his business is essentially shut down:

       It was embarrassing before I got my Cat machine because something would break down every week. Now, that kind of thing just doesn't happen very often...and when it does, they send somebody out straight away and the blokes fix it right up. I'm happy with the parts you can get and the avaibiality of them. And I know a lot of the boys now. You know, once you're in a good thing, you don't want to get out of it.