Chapter 03
Doing
Business
in
Global
Markets
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
TRADING with OTHER NATIONS
• Countries with abundant natural resources (like
Venezuela or Russia) need technological
resources from other countries (like Japan).
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Why Trade With Other Nations?
• Global trade allows countries to
produce what they make best
and buy what they need from
others.
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Company % of
Earnings From Outside U.S.
Pfizer
Microsoft
Intel
Gillette
Coca-Cola
AIG
0%
Source: Investment Advisor, August 2000
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20%
40%
60%
80%
100%
TRADING with OTHER NATIONS
Theories of Advantage
Comparative
Absolute
COMPARATIVE 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.
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Theories of Advantage
Comparative
U. S.
China
China
Software
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U. S.
Clothing
ABSOLUTE ADVANTAGE
• Absolute Advantage -- A country has a
monopoly on producing a specific
product or is able to produce it more
efficiently than all other countries.
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Theories of Advantage
Absolute = Virtual Monopoly
South Africa
The Rest of
the World
Diamond Production
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IMPORTING and EXPORTING
• 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.
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MEASURING GLOBAL TRADE
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HOW to MEASURE GLOBAL TRADE
• Balance of Trade -- The total value of a nation’s
exports compared to its imports measured over
time.
• Trade Surplus -- When the value of a country’s
exports is more than that of its imports.
• Trade Deficit -- When the value of a country’s
exports is less than that of its imports.
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Rising U.S. Trade Deficit
http://www.americaneconomicalert.org/ticker_home.asp
Source: US Dept of Commerce, Bureau of Economic Analysis
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BALANCE of PAYMENTS
• 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.
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UNFAIR TRADE PRACTICES
• Dumping -- Selling products in a foreign country at
lower prices than those charged in the producing
country.
• Dumping is prohibited in the U.S.
• China, Brazil and Russia have been penalized
for dumping steel in the U.S.
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KEY STRATEGIES for REACHING
GLOBAL MARKETS
Licensing
Least
Exporting
Franchising
Contract
Manufacturing
International
joint ventures
and strategic
alliances
Amount of commitment, control, risk and profit potential
Foreign
direct
investment
Most
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LICENSING
• 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.
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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.
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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.
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HOW EXPORTS
AFFECT the GDP
Source: Bloomberg Businessweek, November 22, 2011.
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HOW EXPORTS
AFFECT the GDP
Source: Bloomberg Businessweek, November 22, 2011.
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HOW EXPORTS
AFFECT the GDP
Source: Bloomberg Businessweek, November 22, 2011.
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GOING GLOBAL with a
SMALL BUSINESS
• Small businesses may be the key in global job
growth.
• Only 1% of U.S. small businesses export, yet
they account for 30% of total U.S. exports.
• President Obama
wants small
businesses to help
double exports by
2015.
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FRANCHISING
• 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.
• Pizza Hut and Dominos learned that pizza
topping preferences differ all around the world.
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What’s On Your Pizza
•
•
•
•
•
•
•
Costa Rica - Coconut
France - Bacon, onion and fresh cream
India - Pickled ginger, minced mutton and tofu
Australia - Shrimp and pineapple
Pakistan - Curry
Brazil - Green peas
Japan - Squid and mayo jaga
Source: World Features Syndicate
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GOLDEN ARCHES GLOWING
ACROSS the GLOBE
• McDonald’s has more than 32,000 restaurants in
over 117 countries.
• Maintains varying menus around the world due to
the different preferences of its customers.
• Responds to challenges
by funding research and
adding healthier options.
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THAT’S at MCDONALD’S?
• Malaysia: Bubur Ayam McD – Chicken strips in porridge
with onions, ginger, and shallots.
• Egypt: Mcarabia – Grilled chicken with tehina sauces,
lettuce, tomato and onion on Arabic bread.
• Japan: Teritama – Teriyaki burger topped with an egg.
• Germany: Want a beer with your burger? You can order
one in the German stores.
• Israel: Operates using Kosher kitchens.
Source: McDonalds, www.mcdonalds.com, March 2009.
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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.
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JOINT VENTURES
• 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.
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STRATEGIC ALLIANCES
• 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.
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FOREIGN DIRECT INVESTMENT
• 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.
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WHERE DO THEY INVEST?
Leading Destinations for Foreign Investors
Source: Investor’s Business Daily, www.investors.com, June 30, 2008.
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MULTINATIONAL CORPORATIONS
• 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.
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Forces Affecting
Trading in Global
Markets
LG4
FORCES AFFECTING
GLOBAL TRADE
• Sociocultural
• Economic and
Financial
• Legal and
Regulatory
• Physical and
Environmental
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CULTURAL DIFFERENCES
• 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
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LOST in TRANSLATION
Advertisements Gone Wrong
• Braniff Airlines’ slogan "Fly in leather” translated
in Spanish as "Fly naked.”
• Gerber used their U.S. label – a cute baby – on
African products. They found out that labels on
African products picture what’s inside the
package.
• In Italy, Schweppes Tonic Water was mistaken
as Schweppes Toilet Water.
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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 their soul is kept.
• In Brazil, your meeting may not start on time because
punctuality isn’t important to the culture.
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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.
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EXCHANGE RATES
• 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.
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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.
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LEGAL CONCERNS OVERSEAS
• 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.
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ENVIRONMENTAL FORCES
• 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.
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TRADING with OTHER NATIONS
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TRADING with OTHER NATIONS
• Free Trade -- The movement of goods and
services among nations without political or economic
barriers.
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TRADE PROTECTIONISM
• 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.
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TARIFFS
• Tariffs -- Taxes on imports.
• Two kinds of tariffs:
-
Revenue – Raise money
for governments.
Protective – Raise the
retail price of imports so
domestic goods are
competitively priced.
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IMPORT QUOTAS and EMBARGOS
• 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. embargo against Cuba.
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WORLD TRADE ORGANIZATION
• General Agreement on Tariffs and Trade -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 152 member nations whose
purpose is to oversee cross-border trade issues and
global business practices.
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COMMON MARKETS
• 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 and the
ASEAN are common markets.
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EU MEMBERS
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NAFTA
• North American Free Trade Agreement -Ratified in 1994, created a free-trade area among
the United States, Canada and Mexico.
• NAFTA’s objectives are:
-
-
Eliminate trade barriers and facilitate cross-border
movement of goods and services.
Promote conditions of fair competition.
Increase investment opportunities.
Provide effective protection and enforcement of
intellectual property rights.
Establish a framework for further regional trade
cooperation.
Improve working conditions in North America.
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CAFTA
Central American Free Trade Agreement -Passed in 2005, created a free-trade zone with Costa
Rica, Dominican Republic, El Salvador, Guatemala,
Honduras and Nicaragua.
• Free traders hope CAFTA will lead to the creation
of a Free Trade Area of the Americas (FTAA).
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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.
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FUTURE of GLOBAL TRADE
• 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.
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OUTSOURCING
• 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
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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
expanding abroad.
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PLAN for YOUR GLOBAL CAREER
• Study foreign languages
• Learn about foreign cultures
• Take global business courses.
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