Chapter
4
Competing in
Global Market
Course: BUS 101
Lecturer: Aunima Nazmun Nahar (NNA)
Overview
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Why nations trade
Absolute and comparative advantage
Barriers to international trades
Types of trade restriction
Going global
Developing a strategy for international business
Why nations trade
1. International Factors of Production:
Business decisions to operate abroad depend on
the basic factors of production in the foreign
country. These are▫ Availability, price, and quality of labor: Example:
RMG in BD
▫ Natural resources: Example: Diamond in
South Africa or Oil in Saudi Arabia
▫ Capital. Example: India, UK, US
Why nations trade (cont)
2. Diversifying Risk: Trading with other
countries also allows a company to spread risk
because different nations may be at different
stages of the business cycle or in different phases
of development. If demand falls off in one
country, the company may still enjoy strong
demand in other nations.
• Example: Nandos in BD vs Nandos in UK,
Pizza hut in India vs Pizza hut in BD
Why nations trade (cont)
3. Size of the International Marketplace: As
developing nations expand their involvement in
global business, the potential for reaching new
groups of customers dramatically increases. on
the other hand developed nations (US or UK)
expand their business to the developing nation
due to the huge population (India, China)
and the GDP growth rate (Malaysia) in
those countries
Absolute and Comparative
Advantage
• A country has an absolute advantage in
making a product for which it can maintain a
monopoly or that it can produce at a lower cost
than any competitor.
▫ Absolute advantages are rare these days. But some
countries manage to approximate absolute
advantages in some products. Climate differences
can give some nations or regions an advantage in
growing certain plants. Saffron is cultivated
primarily in Spain, where the plant thrives in its
soil and climate.
Absolute and Comparative
Advantage
• A nation can develop a comparative advantage in
a product if it can supply it more efficiently and
at a lower price than it can supply other goods,
compared with the outputs of other countries
▫ Software development in India due to high
educational skill and low salary demand by them
▫ RMG sector by China and India due to low
labor cost
Barriers to International Trade
1. Social and Cultural Differences:
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Language: China, Thailand
Culture: in Mexico yellow flower can’t be
given in any special occasion as a gift coz it’s
used in funeral
Value: European society values employee
benefits more than US society. They provide a
four weeks of paid vacation for employees
whereas US doesn’t provide it in the first year
Religious attitude: Islamic Banking system
in BD
Barriers to International Trade (cont)
2. Economic differences: Business
opportunities are flourishing in densely
populated countries such as China and India,
as local consumers eagerly buy Western
products. Although such prospects might tempt
American firms, managers must first consider
the economic factors before trading with those
countries. The key economic factors are:
a) Infrastructure
b) Currency conversion and shifts
Barriers to International Trade (cont)
a) Infrastructure: refers to basic systems of
communication (telecommunications, television,
radio, and print media), transportation (roads
and highways, railroads, and airports), and
energy facilities (power plants and gas and
electric utilities). The Internet and technology use
can also be considered part of infrastructure.
Example: Ethiopia doesn’t accept any debit or
credit card which is a drawback in trading with
this country. Power problem in BD
Barriers to International Trade (cont)
b) Currency Conversion and Shifts: Shifts in
exchange rates can also influence the
attractiveness of various business decisions. A
devalued currency may make a nation less
desirable as an export destination because of
reduced demand in that market. However,
devaluation can make the nation desirable as an
investment opportunity because investments
there will be a bargain in terms of the investor’s
currency. Example: RMG in BD
Barriers to International Trade (cont)
3. Political and Legal Differences:
▫ Political Climate: The current RMG sector in
Bangladesh
▫ Legal Environment: The Foreign Corrupt Practices
Act forbids U.S. companies from bribing. Still,
corruption creates a difficult obstacle for Americans
who want to do business in many foreign countries.
Chinese pay huilu, and Russians rely on vzyatka. In
the Middle East, palms are greased with baksheesh.
▫ Lack of International Regulations: Software
piracy in Asia voids the intellectual property rights
laws and regulations enforced by the World Trade
Organization (WTO)
Types of Trade Restrictions
• Tariffs: Taxes, surcharges, or duties on foreign
products are referred to as tariffs. Two types:
revenue and protective tariffs
▫ The purpose of revenue tariffs generate is to
income for the government
▫ The sole purpose of a protective tariff is to raise
the retail price of imported products to match or
exceed the prices of similar products
manufactured in the home country.
Types of Trade Restrictions
• Nontariff Barriers:
▫ Quotas limit the amounts of particular products
that countries can import during specified time
periods.
▫ An embargo imposes a total ban on importing a
specified product or even a total halt to trading
with a particular country.
Going Global
• Determining which foreign market(s) to enter
• Analyzing the expenditures required to enter a
new market
• Deciding the best way to organize the overseas
operations
Going Global
• Levels of Involvement: After a firm has
completed its research and decided to do
business overseas, it can choose one or more
strategies:
1. Exporting or importing
2. Entering into contractual agreements:
a) franchising,
b) Licensing
c) subcontracting deals
3. Off shoring
4. Direct investment in the foreign
1. Importers and Exporters
▫ When a firm brings in goods produced abroad to sell
domestically, it is an importer.
▫ Conversely, companies are exporters when they
produce or purchase goods at home and sell them in
overseas markets
▫ The most basic level of international involvement
▫ Least risk and Least control
▫ Two types of exporting: Direct and Indirect exporting
▫ A company engages in indirect exporting when it
manufactures a product that becomes part of another
product that is sold in foreign markets.
▫ direct exporting occurs when a company seeks to
sell its own products in markets outside its own
country
2. Contractual Agreements:
a) A franchise is a contractual agreement in which a
wholesaler or retailer (the franchisee) gains the right
to sell the franchisor’s products under that
company’s brand name if it agrees to the related
operating requirements. The franchisee can also
receive marketing, management and business
services from the franchisor. E.g. Pizza Hut
b) In a foreign licensing agreement, one firm
allows another to produce or sell its product, or use
its trademark, patent, or manufacturing processes,
in a specific geographical area. In return, the firm
gets a royalty or other compensation. E.g. Coca
cola
c) Subcontracting involves hiring local
companies to produce, distribute, or sell goods
or services. It allows a foreign firm to take
advantage of the subcontractor’s expertise in
local culture, contacts, and regulations.
3. Off-shoring or the relocation of business
processes to a lower-cost location overseas.
▫ E.g. China for product off-shoring and India for
service off-shoring
4. International Direct Investment:
a) Acquisition: When a company
purchases another existing firm in the
host country.
 Facebook acquired Whats app
b) Joint ventures allow companies to
share risks, costs, profits, and
management responsibilities with one
or more host country nationals.
 Lafarge-Surma
 Lotus-Tesco
Developing a Strategy for
International Business
1. Global business (or standardization)
strategy; where a firm sells the same product
in essentially the same manner throughout the
world
2. Multi-domestic business strategy:
developing and marketing products to serve
different needs and tastes of separate national
markets.