Chapter 03
Doing
Business in
Global
Markets
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Three
LEARNING GOALS
1. Importance of the global market, comparative
advantage, and absolute advantage.
2. Importance of importing and exporting, and key
terms used in global business.
3. Strategies used in reaching global markets and the
roles of multinational corporations.
4. Evaluate the forces affecting trade in global markets.
5. The advantages and disadvantages of trade
protectionism.
6. Discuss changes in global market and the issues of
offshore outsourcing
3-2
The Dynamic
Global Market
LG1
BUSINESS in the
GLOBAL MARKET
• Over 90% of companies
doing business globally
believe it is important
for employees to have
international
experience.
• U.S. organizations (like
UPS, MLB, the NFL and
the NBA) are also
expanding abroad.
3-3
The Dynamic
Global Market
IMPORTING and EXPORTING
LG1
• Importing -- Buying products
from another country.
• Exporting -- Selling products
to another country.
• The U.S. is the largest
importing and the third
largest exporting nation in the
world.
3-4
Why Trade With
Other Nations?
TRADING with OTHER NATIONS
LG1
• Countries with abundant natural resources (like
Venezuela or Russia) need technological
resources from other countries (like Japan).
• Global trade allows countries to produce what
they make best and buy what they need from
others.
• Free Trade -- The movement of goods and
services among nations without political or economic
barriers.
3-5
Importing Goods
and Services
LG2
GETTING INVOLVED in
IMPORTING
• Students attending
schools abroad tend to
notice products that
they’re used to are
unavailable in their new
country.
• By working with producers
in their native country,
some become importers
while still in school.
3-6
Exporting Goods
and Services
LG2
GETTING INVOLVED in
EXPORTING
• Exporting provides a
great boost to the U.S.
economy.
• It’s estimated every $1
billion in U.S. exports
generate over 7,000
U.S. jobs.
3-7
Globalization
and Your Future
PLAN for YOUR GLOBAL CAREER
LG6
• Study foreign
languages.
• Learn about
foreign cultures.
• Take global
business courses.
3-8
Why Trade With
Other Nations?
LG1
HOW FREE TRADE
BENEFITS the WORLD
Global trade has led the world in a new direction:
• Literacy rates worldwide have increased from
56% in 1950 to 89% in 2011.
• Life expectancy in less developed areas rose
from 40.9 years in 1950 to 69 years in 2011.
Source: The World Bank, June 2011.
3-9
Why Trade With
Other Nations?
LG1
HOW EXPORTS
AFFECT the GDP
Source: Bloomberg Businessweek, November 22, 2011.
3-10
Why Trade With
Other Nations?
LG1
HOW EXPORTS
AFFECT the GDP
Source: Bloomberg Businessweek, November 22, 2011.
3-11
Why Trade With
Other Nations?
LG1
HOW EXPORTS
AFFECT the GDP
Source: Bloomberg Businessweek, November 22, 2011.
3-12
Measuring
Global Trade
HOW to MEASURE GLOBAL TRADE
LG2
• Balance of Trade -- The total value of a nation’s
exports compared to its imports measured over a
particular period.
• Trade Surplus (Favorable) -- When the value of
a country’s exports is more than that of its imports.
• Trade Deficit (Unfavorable) -- When the value of
a country’s exports is less than that of its imports.
3-13
Measuring
Global Trade
BALANCE of PAYMENTS
LG2
• Balance of Payments -- The difference between
money coming into a country (from exports) and
money leaving the country (from imports) plus other
money flows.
• The goal is to have more money flowing into a
country than out – a favorable balance.
• An unfavorable balance is when more money
flows out of a country.
3-14
Getting Involved
in Global Trade
LG2
WHOM DOES the U.S. OWE?
Countries that Own the Most U.S. Debt
Source: HuffPost Business, March 2, 2011.
3-15
The Theories of
Comparative and
Absolute Advantage
LG1
COMPARATIVE and ABSOLUTE
ADVANTAGE
• Comparative Advantage -- A country should sell
the products it produces most efficiently and buy from
other countries the products it cannot produce as
efficiently.
• Absolute Advantage -- A country has a monopoly
on producing a specific product or is able to produce it
more efficiently than all other countries.
3-16
The Dynamic
Global Market
PLEASURE DOING BUSINESS
Best Countries for Business
LG1
2010 Rank
Country
2009 Rank
1
Denmark
1
2
Hong Kong
9
3
New Zealand
5
4
Canada
3
5
Singapore
4
6
Ireland
14
7
Sweden
7
8
Norway
10
9
United States
2
10
United Kingdom
6
Source: Forbes, September 27, 2010.
3-17
The Dynamic
Global Market
LG1
•
•
•
•
•
•
•
CAN YOU SPARE a DIME?
Home Countries for Some of the World’s Billionaires
U.S. – 412 billionaires
China – 115 billionaires
Russia – 101 billionaires
India – 55 billionaires
Germany – 52 billionaires
U.K. – 32 billionaires
Canada – 22 billionaires
$38B GDP per Baire
$41B GDP per Baire
$12B GDP per Baire
$24B GDP per Baire
$52B GDP per Baire
$59B GDP per Baire
$59B GDP per Baire
Source: Forbes, www.forbes.com, June 2011.
3-18
Strategies for
Reaching Global
Markets
LG3
Licensing
Least
KEY STRATEGIES for REACHING
GLOBAL MARKETS
Exporting
Franchising
Contract
Manufacturing
(Outsourcing)
International
joint ventures
and strategic
alliances
Amount of commitment, control, risk and profit potential
Foreign
direct
investment
Most
3-19
Licensing
LICENSING
LG3
• Licensing -- When a firm (licensor) provides the
right to manufacture its product or use its trademark
to a foreign company (licensee) for a fee (royalty).
• Licensing can benefit a firm by:
- Gaining revenues it wouldn’t have otherwise
generated.
- Spending little or no money to produce or market
their products.
3-20
Exporting
LG3
EXPORT ASSISTANCE CENTERS
and EXPORT TRADING CENTERS
• EACs provide hands-on exporting assistance
and trade-finance support for small and mediumsized businesses that wish to directly export
goods and services.
• ETCs help companies engage in indirect
exporting by:
- Matching buyers and sellers.
- Dealing with foreign customs offices,
documentation, and conversions.
3-21
Franchising
FRANCHISING
LG3
• Franchising -- A contractual agreement whereby
someone with a good idea for a business sells
others the rights to use the name and sell a
product/service in a given area.
• Franchisors need to be careful to adapt their
product to the countries they serve.
• Yum! Brands, home of KFC, Taco Bell and Pizza
Hut, learned that food preferences differ all
around the world.
3-22
Contract
Manufacturing
CONTRACT MANUFACTURING
• Contract Manufacturing -- A foreign company
produces private-label goods to which a domestic
company then attaches its own brand name or
trademark. A form of outsourcing.
• Contract manufacturing can be used to:
- Allow a company to experiment in a new market
without incurring heavy start-up costs such as
building a manufacturing plant.
- Temporarily meet an unexpected increase in
orders.
3-23
International Joint
Ventures and
Strategic Alliances
JOINT VENTURES
LG3
• Joint Venture -- A partnership in which two or more
companies join to undertake a major project.
• The benefits of joint ventures:
- Shared technology and risk.
- Shared marketing and management expertise.
- Entry into markets where foreign companies are
often not allowed unless goods are produced
locally.
3-24
International Joint
Ventures and
Strategic Alliances
STRATEGIC ALLIANCES
LG3
• Strategic Alliance -- A long-term partnership
between two or more companies established to help
each company build competitive market advantages.
• Strategic alliances
don’t typically share
costs, risks,
management or profits.
• Strategic alliances
provide broad access
to markets, capital and
technical expertise.
3-25
Foreign Direct
Investment
FOREIGN DIRECT INVESTMENT
LG3
• Foreign Direct Investment (FDI) -- The buying of
permanent property and businesses in foreign
nations.
• Foreign Subsidiary -- A company owned in a
foreign country by another company called the parent
company. The most common form of FDI.
- Primary Advantage: Parent company maintains
complete control over its technology or
expertise.
- Primary Disadvantage: Must commit funds and
technology within foreign boundaries.
3-26
Forces Affecting
Trading in Global
Markets
LG4
FORCES AFFECTING
GLOBAL TRADE
• Sociocultural
• Economic and
Financial
• Legal and
Regulatory
• Physical and
Environmental
3-27
Measuring
Global Trade
UNFAIR TRADE PRACTICES
LG2
• Dumping -- Selling products in a foreign country at
lower prices than those charged in the producing
country.
• Dumping is prohibited.
• China, Brazil and Russia have been penalized
for dumping steel in the U.S.
3-28
Physical and
Environmental
Forces
ENVIRONMENTAL FORCES
LG4
•
•
•
•
Developing countries have
transportation and storage systems
that make international distribution
difficult or impossible.
Often, technological capabilities are
far from those in the U.S. which
make for a tough business
environment.
Sometime, technology can help
developing countries leap frog
developed countries
Quality standards that provide
limited value are circumvented by
developing countries
3-29
The Challenge
of Offshore
Outsourcing
OUTSOURCING
LG6
• Outsourcing -- Process by which a firm contracts
with other companies to do some or all of its
functions.
• U.S. firms have outsourced payroll functions,
accounting and manufacturing for years.
• With the growth of global
markets, companies have
been shifting to offshore
outsourcing – outsourcing
with other countries.
Photo Courtesy of: Vitor Lima
3-30
SEE the SIGHTS,
MEET the DOCTORS
(Making Ethical Decisions)
• Some insurance companies encourage patients
to seek medical care in foreign countries.
• Procedures are cheaper and involve top-flight
doctors at state-of-the-art facilities.
• Would it be ethical to force patients to travel to
other countries to save money?
• What if they where able to get a new
experimental life-saving treatment that the US
FDA has refused to approve?
3-31
Foreign Direct
Investment
MULTINATIONAL CORPORATIONS
LG3
• Multinational Corporation -- A company that
manufactures and markets products in many
different countries and has multinational stock
ownership and management.
• Not all large global businesses are multinational.
• Only firms that have manufacturing capacity or
some other physical presence in different
nations can truly be multinational.
3-32
Foreign Direct
Investment
SOVEREIGN WEALTH FUNDS
LG3
• Sovereign Wealth Funds (SWFs) -- Investment
funds controlled by governments holding large
stakes in foreign companies.
• The size of the funds and the fact that they are
government-owned make some fear they might
be used for:
-
Geopolitical objectives.
Gaining control of strategic natural resources.
Obtaining sensitive technologies.
Undermining the management of the companies in
which they invest.
3-33
Economic and
Financial Forces
EXCHANGE RATES
LG4
• Exchange Rate -- The value of one nation’s
currency relative to the currencies of other
countries.
• High value of the dollar – Dollar is trading for more
foreign currency; foreign goods are less expensive.
• Low value of the dollar – Dollar is trading for less
foreign currency; foreign goods are more expensive.
• Currencies float in value depending on the supply
and demand for them in the global market.
3-34
Economic and
Financial Forces
LG4
DEVALUATION and
COUNTERTRADING
• Devaluation -- Lowers the
value of a nation’s
currency relative to
others.
• Countertrading -Complex form of
bartering in which several
countries each trade
goods or services for
other goods or services.
3-35
Legal and
Regulatory
Forces
LEGAL CONCERNS OVERSEAS
LG4
• There’s no global system of laws.
• Laws may be inconsistent.
• U.S. businesses must follow U.S. laws while
conducting global business.
• The Organization for Economic Cooperation and
Development (OECD) and Transparency
International fight to end corruption and bribery
in foreign markets and have had limited
success.
3-36
Trade
Protectionism
TRADE PROTECTIONISM
LG5
• Trade Protectionism -The use of government
regulations to limit the
import of goods and
services.
• Advocates of
protectionism believe it
allows domestic
producers to survive,
grow and produce jobs.
• Fair trade advocacy
3-37
Trade
Protectionism
TARIFFS
LG5
• Tariffs -- Taxes on imports,
making imported goods more
expensive.
• Two kinds of tariffs:
-
-
Protective – Raise the
retail price of imports so
domestic goods are
competitively priced.
Revenue – Raise money
for governments.
3-38
Trade
Protectionism
IMPORT QUOTAS and EMBARGOS
LG5
• Import Quota -- Limits the number of products in
certain categories a nation can import.
• Embargo -- A complete ban on the import or export
of a certain product or the stopping of all trade with a
particular country.
• Political disagreements can lead to embargos,
like the U.S. embargos against Cuba, Iran and
North Korea.
3-39
The World Trade
Organization
WORLD TRADE ORGANIZATION
LG5
• General Agreement on Tariffs and Trade
(GATT) -A global forum for reducing trade restrictions on
goods, services, ideas and cultural problems.
• World Trade Organization (WTO) -Headquartered in Geneva, the WTO is an
independent entity of 153 member nations whose
purpose is to oversee cross-border trade issues and
global business practices.
3-40
Common
Markets
COMMON MARKETS
LG5
• Common Market -- A regional group of countries
with a common external tariff, no internal tariffs and
coordinated laws to facilitate exchange among
members.
• The European Union (EU), Mercosur, the ASEAN,
NAFTA and the COMESA are common markets.
3-41
Common
Markets
EU MEMBERS
LG5
3-42
The North
American and
Central American
Free Trade
Agreements
NAFTA
LG5
• North American Free Trade Agreement -Ratified in 1994, created a free-trade area among
the United States, Canada and Mexico.
• NAFTA’s objectives are:
1) Eliminate trade barriers and facilitate cross-border
movement of goods and services.
2) Promote conditions of fair competition.
3) Increase investment opportunities.
4) Provide effective protection and enforcement of
intellectual property rights.
5) Establish a framework for further regional trade
cooperation.
6) Improve working conditions in North America.
3-43
The North
American and
Central American
Free Trade
Agreements
CAFTA
LG5
• Central American Free Trade Agreement -Passed in 2005, created a free-trade zone with Costa
Rica, Dominican Republic, El Salvador, Guatemala,
Honduras and Nicaragua.
3-44
The North
American and
Central American
Free Trade
Agreements
LG5
NEW FREE
TRADE AGREEMENTS
• Today, free trade
agreements are being
negotiated with South
Korea, Colombia and
Panama.
• The U.S. is considering
an agreement with a
nine-nation free trade
bloc called the TransPacific Partnership.
3-45
The Future of
Global Trade
FUTURE of GLOBAL TRADE
LG6
• With over 1.3 billion people, China has
transformed the world economic map. Many
multinationals invest heavily in China.
• India has seen huge growth in information
technology, pharmaceuticals and biotechnology.
• Russia is a large oil producing country with many
multinationals interested in developing there.
• Brazil is expected to be one of the wealthier
economies by 2030.
3-46
Socio-cultural
Forces
CULTURAL DIFFERENCES
LG4
• To be involved in global trade, you must be
aware of the cultural differences among nations
including:
-
Social Structures
Religion
Manners
Values
Language
Personal Communication
3-47
Sociocultural
Forces
LG4
LOST in TRANSLATION
Advertisements Gone Wrong
• Braniff Airlines’ slogan "Fly in leather”
translated in Spanish as "Fly naked.”
• Siri, Apple’s new digital assistant on iPhone 4S,
is a common slang term for “butt” in Japanese.
• In Italy, Schweppes Tonic Water was mistaken
as Schweppes Toilet Water.
• Nokia’s line of Lumia phones is Spanish for
“prostitute.”
3-48
Sociocultural
Forces
LG4
READY to TRAVEL ABROAD?
Know Your Cultural Differences
• In Turkey, it’s rude to cross your arms while facing
someone.
• In many Middle Eastern countries, you shouldn’t eat
or shake hands with the left hand because it is
considered unclean.
• In India, you should never pat anyone’s head. It’s
where one’s soul is kept.
• In Brazil, your meeting may not start on time because
punctuality isn’t important to the culture.
3-49
Sociocultural
Forces
LG4
DO as the GERMANS…
How to Not Embarrass Yourself in Germany
• Always use titles like Doctor, Frau, or Herr.
• Always provide food and drinks for your birthday.
• Don’t remove your jacket until your host does.
• Wear conservative business attire, anything else is
considered sloppy.
• Never jaywalk.
• Always keep your hands on the table when eating.
3-50
Progress
Assessment
PROGRESS ASSESSMENT
• What are the advantages and disadvantages of
trade protectionism and of tariffs?
• What’s the primary purpose of the WTO?
• What’s the key objective of a common market
like the EU?
• Which three nations comprise NAFTA?
3-51
Progress
Assessment
PROGRESS ASSESSMENT
• What are four major hurdles to successful global
trade?
• What does ethnocentricity mean and how can it
affect global success?
• How would a low value of the dollar affect U.S.
exports?
• What does the Foreign Corrupt Practices Act
prohibit?
3-52
Progress
Assessment
PROGRESS ASSESSMENT
• What are the advantages of using licensing as a
method of entry in global markets? What are the
disadvantages?
• What services are usually provided by an exporttrading company?
• What’s the key difference between a joint
venture and a strategic alliance?
• What makes a company a multinational
corporation?
3-53
Progress
Assessment
PROGRESS ASSESSMENT
• What are two of the main arguments favoring
the expansion of U.S. businesses into global
markets?
• What’s comparative advantage, and what are
some examples of this concept at work in global
markets?
• How are a nation’s balance of trade and
balance of payments determined?
• What’s meant by dumping in global trade?
3-54
Progress
Assessment
PROGRESS ASSESSMENT
• What are the major threats to doing business in
global markets?
• What key challenges must India and Russia face
before becoming global economic leaders?
• What does the acronym BRIC stand for?
• What are the two primary concerns about
offshore outsourcing?
3-55