CHAPTER 3
Doing
Business in
Global
Markets
McGraw-Hill/Irwin
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
LEARNING OBJECTIVES
1. Discuss the importance of the global market and the
roles of comparative advantage and absolute
advantage in global trade.
2. Explain the importance of importing and exporting,
and understand key terms used in global business.
3. Illustrate the strategies used in reaching global
markets and explain the role of multinational
corporations.
1-2
LEARNING OBJECTIVE
4. Evaluate the forces that affect trading in global
markets.
5. Debate the advantages and disadvantages of trade
protectionism.
6. Discuss the changing landscape of the global
market and the issue of offshore outsourcing.
1-3
LEILA JANAH
Samasource
•
Started Samasource to help
people in developing
countries rise out of poverty.
•
Janah has been working to
combat world poverty since
she was a teen.
•
Employees are carefully
selected and are taught new
skills.
3-4
NAME that COMPANY
This Swiss-based company has many foreign
subsidiaries including Jenny Craig (weight
management), Ralston Purina, Chef America
(maker of Hot Pockets) and Dreyer’s Ice Cream
in the United States as well as Perrier in France.
The company employs over 328,000 people and
has operations in almost every country in the
world.
Name that company!
1-5
BUSINESS in the
GLOBAL MARKET
LO 3-1
• 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.
3-6
WORLD POPULATION
by CONTINENT
LO 3-1
3-7
WORLD POPULATION
GROWTH
LO 3-1
3-8
IMPORTING and EXPORTING
LO 3-1
• Importing -- Buying products
from another country.
• Exporting -- Selling products
to another country.
• The U.S. is the largest
importing and the second
largest exporting nation in the
world.
3-9
PLEASURE DOING BUSINESS
LO 3-1
Best Countries for Business
2013 Rank
Country
2012 Rank
1
Ireland
-
2
New Zealand
-
3
Hong Kong
-
4
Denmark
-
5
Sweden
3
6
Finland
2
7
Singapore
1
8
Canada
-
9
Norway
-
10
Netherlands
-
Source: Forbes, www.forbes.com, accessed November 2014.
3-10
CAN YOU SPARE a DIME?
LO 3-1
Home Countries for Some of the World’s Billionaires
• U.S. – 516 billionaires
• China – 136 billionaires
• Russia – 88 billionaires
• Germany – 82 billionaires
• India – 54 billionaires
• U.K. – 43 billionaires
• Hong Kong – 41 billionaires
Source: Forbes, www.forbes.com, accessed November 2014.
3-11
TRADING with OTHER NATIONS
LO 3-1
• 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.
3-12
PROS and CONS of FREE TRADE
LO 3-1
3-13
COMPARATIVE and ABSOLUTE
ADVANTAGE
LO 3-1
• 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.
3-14
GOING GLOBAL with a
SMALL BUSINESS
LO 3-2
• 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.
3-15
WHOM DOES the U.S. OWE?
LO 3-2
Countries that Own the Most U.S. Debt
Source: Max Fisher, Washington Post, www.washingtonpost.com, accessed November 2014.
3-16
GETTING INVOLVED in
IMPORTING
LO 3-2
• 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.
3-17
GETTING INVOLVED in
EXPORTING
LO 3-2
• 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.
3-18
HOW to MEASURE GLOBAL TRADE
LO 3-2
• 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.
3-19
BALANCE of PAYMENTS
LO 3-2
• 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.
3-20
UNFAIR TRADE PRACTICES
LO 3-2
• 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.
3-21
LARGEST EXPORTING NATIONS
and TRADE PARTNERS
LO 3-2
3-22
TEST PREP
• What are two of the main arguments favoring the
expansion of U.S. businesses into global
markets?
• What is comparative advantage, and what are
some examples of this concept at work in the
United States?
• How are a nation’s balance of trade and balance
of payments determined?
• What is meant by dumping in global trade?
3-23
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
LO 3-3
Foreign
direct
investment
Most
3-24
LICENSING
LO 3-3
• 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.
3-25
EXPORT ASSISTANCE CENTERS
and EXPORT TRADING CENTERS
LO 3-3
• 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.
3-26
FRANCHISING
LO 3-3
• 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.
3-27
TIME to MAKE the DONUTS…
LO 3-3
Dunkin’ Donuts Flavors in Taiwan
• Sweet Potato
• Honeydew Melon
• Green Apple
• Kiwi Fruit
• Mango
• Pineapple
Photo Credit: Dennis Yang
• Strawberry
• Corn Crumb Soft Rice Cake
Source: World Features Syndicate.
3-28
MCDONALD’S:
OVER 100 CULTURES SERVED
• McDonald’s has more than 34,000 restaurants in
over 118 countries.
• Maintains varying menus around the world due to
the different preferences of its customers.
• Attracts top-level college
graduates to be trained
for management spots.
• Only 8 of every 1,000
applicants actually makes
it into the program!
3-29
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, accessed November 2014.
3-30
CONTRACT MANUFACTURING
LO 3-3
• 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.
3-31
JOINT VENTURES
LO 3-3
• 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.
3-32
STRATEGIC ALLIANCES
LO 3-3
• 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.
3-33
FOREIGN DIRECT INVESTMENT
LO 3-3
• 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.
3-34
LO 3-3
BUYING AMERICAN?
Model
State(s)
manufacturing
% of American
parts
Toyota Camry
Kentucky & Indiana
75%
Honda Accord
Ohio
70%
Chevrolet Malibu
Kansas & Michigan
66%
Nissan Altima
Tennessee
60%
Ford Fusion
Michigan
30%
3-35
MULTINATIONAL CORPORATIONS
LO 3-3
• 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.
3-36
LARGEST MULTINATIONAL
CORPORATIONS
LO 3-3
Company
Home Country
1
Royal Dutch Shell
Netherlands
2
Walmart Stores
United States
3
ExxonMobil
United States
4
Sinopec Group
China
5
China National Petroleum
China
6
BP
United Kingdom
7
State Grid
China
8
Toyota Motor
Japan
9
Japan Post Holdings
Japan
10
Chevron
United States
3-37
SOVEREIGN WEALTH FUNDS
LO 3-3
• Sovereign Wealth Funds (SWFs) -- Funds
controlled by governments holding investment 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.
3-38
TEST PREP
• 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 is the key difference between a joint venture
and a strategic alliance?
• What makes a company a multinational
corporation?
3-39
FORCES AFFECTING
GLOBAL TRADE
LO 3-4
• Sociocultural
• Economic and
Financial
• Legal and
Regulatory
• Physical and
Environmental
3-40
CULTURAL DIFFERENCES
LO 3-4
• 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
3-41
LOST in TRANSLATION
LO 3-4
Advertisements Gone Wrong
• Braniff Airlines’ slogan "Fly in leather”
translated in Spanish as "Fly naked.”
• Siri, Apple’s digital assistant on iPhone, 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.”
3-42
FROM SETTING PICKS to
PICKING GRAPES
• When Yao Ming was
facing retirement, he
moved on to other
ventures.
• Yao has set himself apart
from others by opening
high-end winery.
• His cheapest bottles go for
about $87!
3-43
READY to TRAVEL ABROAD?
LO 3-4
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.
3-44
DO as the GERMANS…
LO 3-4
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.
3-45
EXCHANGE RATES
LO 3-4
• 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.
3-46
DEVALUATION and
COUNTERTRADING
LO 3-4
• 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.
3-47
LEGAL and
REGULATORY FORCES
LO 3-4
• 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 and Transparency International fight
to end corruption and bribery in foreign markets
and have had limited success.
3-48
ENVIRONMENTAL FORCES
LO 3-4
• 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.
3-49
TEST PREP
• 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?
3-50
TRADE PROTECTIONISM
LO 3-5
• 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.
3-51
TARIFFS
LO 3-5
• 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.
3-52
IMPORT QUOTAS and EMBARGOS
LO 3-5
• 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.
3-53
WORLD TRADE ORGANIZATION
LO 3-5
• 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 159 member nations whose
purpose is to oversee cross-border trade issues and
global business practices.
3-54
COMMON MARKETS
LO 3-5
• 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
and the COMESA are common markets.
3-55
EU MEMBERS
LO 3-5
3-56
NAFTA and CAFTA
LO 3-5
• North American Free Trade Agreement -Ratified in 1994, created a free-trade area among the
United States, Canada and Mexico.
• Central American Free Trade Agreement -Passed in 2005, created a free-trade zone with Costa
Rica, Dominican Republic, El Salvador, Guatemala,
Honduras and Nicaragua.
3-57
NAFTA OBJECTIVES
LO 3-5
1) Eliminate trade barriers and facilitate crossborder 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.
3-58
NEW FREE
TRADE AGREEMENTS
LO 3-5
• Today, free trade
agreements are being
negotiated Colombia
and Panama.
• The U.S. is considering
an agreement with a
nine-nation free trade
bloc called the TransPacific Partnership.
3-59
TEST PREP
• What are the advantages and disadvantages of
trade protectionism and of tariffs?
• What is the primary purpose of the WTO?
• What is the key objective of a common market like
the EU?
• Which three nations comprise NAFTA?
3-60
FUTURE of GLOBAL TRADE
LO 3-6
• Brazil is expected to be one of the wealthier
economies by 2030.
• Russia is a large oil producing country with many
multinationals interested in developing there.
• India has seen huge growth in information
technology, pharmaceuticals and biotechnology.
• With over 1.3 billion people, China has
transformed the world economic map. Many
multinationals invest heavily in China.
3-61
LO 3-6
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 Credit: Vitor Lima
3-62
OFFSHORE OUTSOURCING
LO 3-6
3-63
PLAN for YOUR GLOBAL CAREER
LO 3-6
• Study foreign
languages.
• Learn about
foreign cultures.
• Take global
business courses.
3-64
MAKING YOUR OPERATION
YOUR VACATION
• 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?
3-65
COSTS of MEDICAL
PROCEDURES ABROAD
Angioplasty
Gastric
Bypass
Heart
Bypass
Hip
Replacement
Nose
Job
Tummy
Tuck
United
States
$47,000
$18,000
$88,000
$33,000
$6,200
$6,400
United
Kingdom
$8,000
$16,500
$13,921
$23,500
$3,500
$4,810
Mexico
$15,000
$13,800
$37,800
$11,500
$2,800
$3,000
India
$11,000
$6,800
$14,400
$8,000
$2,800
$2,900
Costa
Rica
$13,000
$11,200
$31,500
$14,500
$3,400
$5,300
Source: AARP Magazine, November 2014.
3-66
TEST PREP
• 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?
3-67