Professional Documents
Culture Documents
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International Business
International business
All business activities that involve exchanges across national boundaries
Some countries are better equipped than others to produce particular goods or services
Absolute advantage
The ability to produce a specific product more efficiently than any other nation
Comparative advantage
The ability to produce a specific product more efficiently than any other product
Goods and services are produced more efficiently when each country specializes in the products for which it has a comparative advantage
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Limited
Capabilities Economies of Scale
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Countrys total output increases Offering lower prices Variety of products Allows companies to expand their markets and achieve production and distribution efficiencies
Figure 3.1
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Balance
of Payments
Cash Inflow
Deficit
Cash Outflow
Business In Action 3e
Chapter 3 - 8
Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=90730&table_id=1&area_id=3, accessed April 19, 2010.
Figure 3.2
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Key Documents
As we will see in the following exhibits, letters of credit, order bills of lading and sight drafts are critical in conducting international trade
An example of a letter of credit occurs when an importer obtains a banks promise to pay on its behalf, knowing the exporter will trust the bank When the exporter ships the merchandise to the importers country, title to the merchandise is given to the bank on a document called an order bill of lading The exporter asks the bank to pay for the goods using a sight draft The bank, having paid for the goods, now passes title to the importer who eventually reimburses the bank
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Advantages of L/Cs are that it reduces risk of default and a confirmed L/C helps secure financing Disadvantages of L/Cs are the fees charged and that the L/C reduces the available credit of the importer
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Draft
A draft, sometimes called a bill of exchange (B/E) check, is the instrument normally used in international commerce to effect payment
It is a written order by an exporter instructing an importer or its agent to pay a specified amount at a specified time The party initiating the draft is the maker, drawer, or originator while the counterpart is the drawee In a commercial transaction where the buyer is the drawee it is a trade draft, or the buyers bank when it is called a bank draft
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Draft
If properly drawn, drafts can become negotiable instruments
As such they provide a convenient instrument for financing the international movement of merchandise To become a negotiable instrument, there are four requirements
Must be written and signed by buyer Must contain unconditional promise to pay Must be payable on demand or at a fixed date Must be payable to bearer
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Draft
Types of drafts include
Sight drafts which is payable on presentation to the drawee (exporter is paid at once) Time drafts exporter receives the expected draft (bankers acceptance) back from the bank, allow a delay in payment. It is presented to the drawee who accepts it with a promise to pay at some later date
When a time draft is drawn on a bank, it becomes a bankers acceptance. Exporter may hold the bankers acceptance until maturity When drawn on a business firm it becomes a trade acceptance
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Bankers Acceptances
Bankers Acceptance
When a draft is accepted by a bank, it becomes a bankers acceptance Example: Acceptance of $100,000 for exporter
Face amount of acceptance
Less 1.5% p.a. commission for 6 months Amount received by exporter in 6 months Less 7% p.a. discount rate for 6 months Amount received by exporter at once
$100,000
750
$ 99,250 3,500
$95,750
Exporter may discount the acceptance note in order to receive the funds up-front
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Bill of Lading
Bill of Lading (B/L) is issued to the exporter by a common carrier (is a person or company that transports goods or
people for any person or company and that is responsible for any possible loss of the goods during transport)
details a shipment of merchandise, gives title to the goods, and requires the carrier to deliver the merchandise to the appropriate party It serves the purpose of being a receipt, a contract and a document of title
As a contract the B/L indicates the obligation of the carrier to provide certain transportation As a document of title, the B/L is used to obtain payment or written promise of payment before the merchandise is released to the importer
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Bill of Lading
Characteristics of the Bill of Lading
A straight B/L provides that the carrier deliver the merchandise to the designated consignee ( ) only An order B/L directs the carrier to deliver the goods to the order of a designated party, usually the shipper ( , ) A B/L is usually made payable to the order of the exporter
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Export-Import Bank
Known as the Eximbank, it facilitates the financing of US exports through various loan guarantee and insurance programs
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Exhibit 20.9 Instruments for Financing Short-Term Domestic and International Trade Receivables
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