Chapter 3 Doing Business in Global Markets ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Learning Objectives LO 3-1 Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade. LO 3-2 Explain the importance of importing and exporting, and understand key terms used in global business. LO 3-3 Illustrate the strategies used in reaching global markets and explain the role of multinational corporations. LO 3-4 Evaluate the forces that affect trading in global markets. LO 3-5 Debate the advantages and disadvantages of trade protectionism. LO 3-6 Discuss the changing landscape of the global market and the issue of offshore outsourcing. ©McGraw-Hill Education. The Dynamic Global Market 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 are also expanding abroad. • Importing — Buying products from another country. • Exporting — Selling products to another country. • The United States is the largest importing and the third-largest exporting nation in the world. LO 3-1 ©McGraw-Hill Education. Figure 3.1 World Population by Continent LO 3-1 ©McGraw-Hill Education. Why Trade with Other Nations? 1 of 2 Countries with abundant natural resources (like Venezuela or Iraq) 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. LO 3-1 ©McGraw-Hill Education. Figure 3.2 The Pros and Cons of Free Trade Jump to long description in appendix ©McGraw-Hill Education. LO 3-1 Why Trade with Other Nations? 2 of 2 The Theories of Comparative and Absolute Advantage • Comparative advantage — A country should sell to other countries those products that it produces most efficiently, and buy from other countries those products that it cannot produce as effectively or 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. LO 3-1 ©McGraw-Hill Education. Getting Involved in Global Trade 1 of 3 Importing Goods and Services • 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. Exporting Goods and Services • Exporting provides a great boost to the U.S. economy. • It’s estimated every $1 billion in U.S. exports generates over 7,000 U.S. jobs. LO 3-2 ©McGraw-Hill Education. Getting Involved in Global Trade 2 of 3 Measuring Global Trade • Balance of trade — The total value of a nation’s exports compared to its imports over a particular period. • Trade surplus (favorable) — Occurs when the value of a country’s exports exceeds that of its imports. • Trade deficit (unfavorable) — Occurs when the value of a country’s imports exceeds that of its exports. LO 3-2 ©McGraw-Hill Education. Getting Involved in Global Trade 3 of 3 Measuring Global Trade continued • Balance of payments — The difference between money coming into a country (from exports) and money leaving the country (from imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment. • 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. • Dumping — Selling products in a foreign country at lower prices than those charged in the producing country. • Dumping is prohibited. • China and Brazil have been penalized for dumping steel in the United States. LO 3-2 ©McGraw-Hill Education. Figure 3.3 Largest Exporting Nations in the World and the Largest U.S. Trade Partners Jump to long description in appendix ©McGraw-Hill Education. LO 3-2 Figure 3.4 Strategies for Reaching Global Markets Jump to long description in appendix ©McGraw-Hill Education. LO 3-3 Strategies for Reaching Global Markets 1 of 9 Licensing • Licensing — A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a 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 LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 2 of 9 Exporting • EACs provide hands-on exporting assistance and trade-finance support for small and medium-sized 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 LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 3 of 9 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 or service in a given territory in a specified manner. • Franchisors need to be careful to adapt their product to the countries they serve. • Domino’s Pizza and Dunkin Donuts all adapted their products to different tastes in different countries. LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 4 of 9 Contract Manufacturing • Contract manufacturing — A foreign company’s production of private-label goods to which a domestic company then attaches its own brand name or trademark; part of the broad category 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 LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 5 of 9 International Joint Ventures and Strategic Alliances • Joint venture — A partnership in which two or more companies (often from different countries) 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 LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 6 of 9 International Joint Ventures and Strategic Alliances continued • Strategic alliance — A long-term partnership between two or more companies established to help each company build competitive market advantages. • They don’t typically share costs, risks, management or profits. • Strategic alliances provide broad access to markets, capital, and technical expertise. LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 7 of 9 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. • Primary advantage: Parent company maintains complete control over its technology or expertise. • Primary disadvantage: Must commit funds and technology within foreign boundaries. LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 8 of 9 Foreign Direct Investment continued • Multinational corporation — An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational 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. LO 3-3 ©McGraw-Hill Education. Strategies for Reaching Global Markets 9 of 9 Foreign Direct Investment continued • 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 governmentowned make some fear they might be used for: • Geopolitical objectives • Gaining control of strategic natural resources • Obtaining sensitive technologies LO 3-3 ©McGraw-Hill Education. Figure 3.5 The Largest Multinational Corporations in the World Rank Company Country 1 Walmart United States 2 State Grid China 3 China National Petroleum China 4 Sinopec Group China 5 Royal Dutch Shell Netherlands 6 Exxon Mobil United States 7 Volkswagen Germany 8 Toyota Motor Japan 9 Apple United States 10 BP Great Britain LO 3-3 ©McGraw-Hill Education. Source: Fortune, www.fortune.com, accessed June 2017. Forces Affecting Trading in Global Markets 1 of 5 Sociocultural Forces • To be involved in global trade, you must be aware of the cultural differences among nations, including: • Social structures • Religion • Manners and customs • Values and attitudes • Language • Personal communication LO 3-4 ©McGraw-Hill Education. Figure 3.6 Oops, Did We Say That? Jump to long description in appendix ©McGraw-Hill Education. LO 3-4 Forces Affecting Trading in Global Markets 2 of 5 Economic and Financial Forces • 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 products become cheaper. • Low value of the dollar — Dollar is trading for less foreign currency; foreign goods become more expensive. • Floating exchange rates — Currencies float in value depending on the supply and demand for them in the global market. LO 3-4 ©McGraw-Hill Education. Forces Affecting Trading in Global Markets 3 of 5 Economic and Financial Forces continued • Devaluation — Lowering the value of a nation’s currency relative to others currencies. • Countertrading — A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services. LO 3-4 ©McGraw-Hill Education. Forces Affecting Trading in Global Markets 4 of 5 Legal and Regulatory Forces • There’s no global system of laws. • Laws may be inconsistent. • U.S. businesses must follow U.S. laws while conducting global business. • Organization for Economic Cooperation and Development (OECD) and Transparency International fight to end corruption and bribery in foreign markets and have had limited success. LO 3-4 ©McGraw-Hill Education. Figure 3.7 Countries Rated Highest on Corrupt Business 1. Somalia 6. Sudan 2. South Sudan 7. Libya 3. North Korea 8. Afghanistan 4. Syria 9. Venezuela 5. Yemen 10. Iraq LO 3-4 ©McGraw-Hill Education. Source: Transparency International, 2017. Forces Affecting Trading in Global Markets 5 of 5 Physical and 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 makes for a tough business environment. LO 3-4 ©McGraw-Hill Education. Trade Protectionism 1 of 6 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. • Tariffs — A tax imposed on imports. • Protective tariffs • Revenue tariffs LO 3-5 ©McGraw-Hill Education. Trade Protectionism 2 of 6 Import quota — A limit on the number of products in certain categories that 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. LO 3-5 ©McGraw-Hill Education. Trade Protectionism 3 of 6 The World Trade Organization • General Agreement on Tariffs and Trade (GATT) — A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions. • World Trade Organization (WTO) — An independent entity of 164 member nations whose purpose is to oversee cross-border trade issues and global business practices; headquartered in Geneva. LO 3-5 ©McGraw-Hill Education. Trade Protectionism 4 of 6 Common Markets • Common market — A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; also called a trading bloc. • Some common markets are: • European Union (EU) • Mercosur • ASEAN • COMESA LO 3-5 ©McGraw-Hill Education. Figure 3.8 Members of the European Union Jump to long description in appendix ©McGraw-Hill Education. LO 3-5 Trade Protectionism 5 of 6 The North American and Central American Free Trade Agreements • North American Free Trade Agreement (NAFTA) — Agreement that created a free-trade area among the United States, Canada, and Mexico; ratified in 1994. • Central American Free Trade Agreement (CAFTA) — Agreement that created a free-trade zone with Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua; signed into law in 2005. LO 3-5 ©McGraw-Hill Education. Trade Protectionism 6 of 6 The North American and Central American Free Trade Agreements continued • NAFTA Objectives 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 (patents and copyrights). 5. Establish a framework for further regional trade cooperation. 6. Improve working conditions in North America. LO 3-5 ©McGraw-Hill Education. The Future of Global Trade 1 of 2 China • With over 1.38 billion people, has transformed the world economic map. Over 400 of the Fortune 500 companies have invested in China. India • Has seen huge growth in information technology, biotechnology, and pharmaceuticals. Russia • Projected to be a wealthy global economy by 2025, but declining oil prices have slowed the economy. It is also plagued by political, currency, and social problems. Brazil • Seventh-largest economy in the world with well-developed agriculture, mining, manufacturing, and service sectors. LO 3-6 ©McGraw-Hill Education. The Future of Global Trade 2 of 2 The Challenge of Offshore Outsourcing • Outsourcing — Process whereby one 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. Globalization and Your Future • Study foreign languages. • Learn about foreign cultures. • Take global business courses. LO 3-6 ©McGraw-Hill Education. Figure 3.9 The Pros and Cons of Offshore Outsourcing Jump to long description in appendix ©McGraw-Hill Education. LO 3-6 Appendix of Long Image Descriptions ©McGraw-Hill Education. Appendix 1 Figure 3.2 The Pros and Cons of Free Trade Pros of free trade: • • • • • The global market contains over 7 billion potential customers for goods and services. Productivity grows when countries produce goods and services in which they have a comparative advantage. Global competition and less-costly imports keep prices down, so inflation does not curtail economic growth. Free trade inspires innovation for new products and keeps firms competitively challenged. Uninterrupted flow of capital gives countries access to foreign investments, which help keeps interest rates low. Cons of free trade: • • • • Domestic workers (particularly in manufacturing-based jobs) can lose their jobs due to increased imports or production shifts to low-wage global markets. Workers may be forced to accept pay cuts from employers, who can threaten to move their jobs to lower-cost global markets. Moving operations overseas because of intense competitive pressure often means the loss of service jobs and growing numbers of white-collar jobs. Domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries. Return to original slide ©McGraw-Hill Education. Appendix 2 Figure 3.3 Largest Exporting Nations in the World and the Largest U.S. Trade Partners World’s Largest Exporting Nations: United States and Italy Top U.S. Trading Partners: India and Taiwan Both: Canada, Mexico, Netherlands, United Kingdom, France, Germany, China, Japan, and South Korea Return to original slide ©McGraw-Hill Education. Appendix 3 Figure 3.4 Strategies for Reaching Global Markets From least to most amount of commitment, control, risk, and profit potential, the strategies are: Licensing Exporting Franchising Contract manufacturing International joint ventures and strategic alliances Foreign direct investment Return to original slide ©McGraw-Hill Education. Appendix 4 Figure 3.6 Oops, Did We Say That? KFC’s patented slogan “Finger-Lickin’ Good” was understood in Japanese as “Bite Your Fingers Off.” PepsiCo attempted a Chinese translation of “Come Alive, You’re in the Pepsi Generation” that read to Chinese customers as “Pepsi Brings Your Ancestors Back from the Dead.” Coors Brewing Company put its slogan “Turn It Loose” into Spanish and found it translated as “Suffer from Diarrhea.” Perdue Chicken used the slogan “It Takes a Strong Man to Make a Chicken Tender,” which was interpreted in Spanish as “It takes an Aroused Man to Make a Chicken Affectionate.” On the other side of the translation glitch, Electrolux, a Scandinavian vacuum manufacturer, tried to sell its products in the U.S. market with the slogan “Nothing Sucks Like an Electrolux.” Return to original slide ©McGraw-Hill Education. Appendix 5 Figure 3.8 Members of the European Union Members of the European Union: Ireland, Portugal, Spain, France, Luxembourg, Belgium, Netherlands, Denmark, Germany, Liechtenstein, San Marino, Monaco, Italy, Vatican City, Malta, Sweden, Finland, Estonia, Latvia, Lithuania, Poland, Czech Republic, Austria, Slovakia, Hungary, Slovenia, Croatia, Romania, Bulgaria, Greece, Cyprus, Azores, Madeira, Canary Islands, Guiana, Réunion, Martinique, and Guadeloupe. Applicants of the European Union: Iceland, Serbia, Kosovo, Macedonia, Albania, and Turkey. Exiting the European Union: United Kingdom Return to original slide ©McGraw-Hill Education. Appendix 6 Figure 3.9 The Pros and Cons of Offshore Outsourcing Pros of offshore outsourcing: • Less-strategic tasks can be outsourced globally so that companies can focus on areas in which they can excel and grow. • Outsourced work allows companies to create efficiencies that in fact let them hire more workers. • Consumers benefit from lower prices generated by effective use of global resources and developing nations grow, thus fueling global economic growth. Cons of offshore outsourcing: • Jobs may be lost permanently and wages fall due to low-cost competition offshore. • Offshore outsourcing may reduce product quality and can therefore cause permanent damage to a company’s reputation. • Communication among company members, with suppliers, and with customers becomes much more difficult. Return to original slide ©McGraw-Hill Education.