Chapter 03 Doing Business in Global Markets McGraw-Hill/Irwin 0 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 3-2 Why Trade With Other Nations? • Global trade allows countries to produce what they make best and buy what they need from others. 3-3 3-4 TRADING with OTHER NATIONS • Countries with abundant natural resources (like Venezuela or Russia) need technological resources from other countries (like Japan). 3-5 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 99% in 2012. • Life expectancy in less developed areas rose from 40.9 years in 1950 to 70.5 years in 2012. Source: The World Bank, June 2014 3-6 % of Company Earnings From Outside U.S. Company Total Assets Reinvested Overseas in 2011 Total Assets Reinvested Overseas in 2012 Total Added in 2012 GENERAL ELECTRIC CO $102,000 $108,000 $6,000 PFIZER INC $63,000 $73,000 $10,000 MICROSOFT CORP $44,800 $60,800 $16,000 MEREC CO $44,300 $53,400 $9,100 JOHNSON & JOHNSON $41,600 $49,000 $7,400 INTL BUSINESS MACHINES CORP $37,900 $44,400 $6,500 EXXON MOBIL CORP $47,000 $43,000 -$4,000 CITIGROUP INC $35,900 $42,600 $6,700 CISCO SYSTEMS INC $36,700 $41,300 $4,600 APPLE INC $23,400 $40,400 $17,000 http://online.wsj.com/news/interactive/FORCASH20130311?ref=SB10001424127887324 034804578348131432634740 3-7 PLEASURE DOING BUSINESS Best Countries for Business out of 183 Countries Economy Ease of Doing Starting a Paying Business Rank Business Taxes Singapore Hong Kong SAR, China New Zealand United States Denmark Malaysia Korea, Rep. Georgia Norway United Kingdom 1 2 3 . 4 5 6 7 8 9 10 3 5 1 20 40 16 34 8 53 28 5 4 23 64 12 36 25 29 17 14 Trading Across Borders 1 2 21 22 8 5 3 43 26 16 © 2013 The World Bank, All Rights Reserved 3-8 TOP 10 COUNTRIES - BILLIONARIES Country Number Person Networth $73 B Source United States 492 Bill Gates Telecom China 152 Wang Jianlin $14.6 B Investment Property Russia 111 Alisher Usmanov $19.6 B Metal & Mining Germany 85 Karl Albrecht $25.4 B Aldi - Discount Superchains Brazil 65 Jorge Paulo Lemann $21.9 B Banker India 56 Mukesh Ambani $19.6 B Petrochemicals United Kingdom 47 Gerald Cavendish Grosvenor & Family $8.5 Duke of Westminister Land Owner Hong Kong 45 Li Ka-shing $31 B Diversified France 43 Liliane Bettencourt & Family $30 B L’Oreal Italy 35 Michele Ferrero & Family $26 B Chocolate Manufacturing 3-9 Why Trade with Other Nations? LG1 TRADING with OTHER NATIONS • Countries with abundant natural resources (like Venezuela or Russia) need technical 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. 3-10 THEORIES of 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. U. S. China China Software U. S. Clothing 3-11 THEORIES of 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. Absolute = Virtual Monopoly South Africa The Rest of the World Diamond Production 3-12 IMPORTING and EXPORTING • Importing -- Buying products from another country. • The U.S. is the largest importing nation in the world. • Exporting -- Selling products to another country. 3-13 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. 3-14 Rising U.S. Trade Deficit http://www.americaneconomicalert.org/ticker_home.asp 3-15 Source: US Dept of Commerce, Bureau of Economic Analysis GETTING INVOLVED in EXPORTING • Exporting provides a great boost to the U.S. economy. • It is estimated, every $1 billion in U.S. dollars exported generates over 7,000 U.S. jobs. 3-16 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. 3-17 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. 3-18 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 3-19 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. 3-20 EXPORT ASSISTANCE CENTERS & 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 HOW EXPORTS AFFECT the GDP Source: Bloomberg Businessweek, November 22, 2011. 3-22 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. 3-23 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. 3-24 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 3-25 TIME to MAKE the DONUTS… Dunkin’ Donuts Flavors in Taiwan • • • • • • • • Sweet Potato Honeydew Melon Corn Crumb Soft Rice Cake Green Apple Kiwi Fruit Mango Pineapple Strawberry Source: World Features Syndicate. 3-26 GOLDEN ARCHES GLOWING ACROSS the GLOBE • McDonald’s has more than 34,492 restaurants in over 119 countries in 2013. • Maintains varying menus around the world due to the different preferences of its customers. • Responds to challenges by funding research and adding healthier options. 3-27 THAT’S at MCDONALD’S? • Malaysia: Bubur Ayam McD – Chicken strips in porridge with onions, ginger, and shallots. • Egypt: Mcarabia “Grilled Kofta” - Two grilled Kofta patties with lettuce, tomatoes, onions and tehina sauce folded in 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 2014. 3-28 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. 3-29 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. 3-30 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. 3-31 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. 3-32 WHERE DO THEY INVEST? Leading Foreign Destination Investors © 2013 3-33 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. 3-34 Forces Affecting Trading in Global Markets LG4 FORCES AFFECTING GLOBAL TRADE • Socio-cultural • Economic and Financial • Legal and Regulatory • Physical and Environmental 3-35 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 3-36 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. 3-37 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. 3-38 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. 3-39 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. 3-40 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. 3-41 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. 3-42 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. 3-43 TRADING with OTHER NATIONS • Free Trade -- The movement of goods and services among nations without political or economic barriers. 3-44 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. 3-45 TARIFFS • Tariffs -- Taxes on imports. - - Revenue – Raise money for governments. Protective – Raise the retail price of imports so domestic goods are competitively priced. 3-46 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. 3-47 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. 3-48 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 and COMESA are common markets. 3-49 EU MEMBERS 3-50 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. 3-51 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). 3-52 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. 3-53 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. 3-54 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 3-55 3-56 3-57