BUSINESS IN GLOBAL
MARKETS
Chapter 3
Learning objectives
1.
Define global business.
2.
Understand the importance of global trade.
3.
Discuss the roles of comparative and absolute
advantage in global trade.
4.
Discuss the two indicators for measuring global
trade.
5.
Discuss the different strategies for reaching global
markets.
Understanding Globalization
• Global business
• It refers to any activity that seeks to provide goods and
services to others across national borders while
operating at a profit.
• Cultural changes: companies face new cultural
challenges when they engage in international business
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Global Trade
• US vs. Global Market
• Most companies cite global expansion as a link to its
future growth.
• Global market is attractive to large and small businesses
alike.
• Exporting:- is selling products to another country.
• Importing:- is buying products from another country.
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Why Trade Globally?
• Countries trade with other countries for several reasons
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such as :
No nation what so ever can produce all of the products that
its people want and need.
Even if a country becomes self-sufficient other nations
would seek to trade with that country in order to meet the
needs of their own people.
Some nations have an abundance of natural resources and
a lack of technological know-how, while others have
sophisticated technology but few natural resources,
Free trade:- is the movement of goods and services among
nations without political or economic trade barriers.
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Comparative Advantage and Absolute
Advantage
• Global Trade :- is the exchange of goods and services
across national borders
• Comparative Advantages Theory :- A country should
sell to other countries those products that it produce most
effectively and efficiently → and buy from other countries
those products it cannot produce as effectively or
efficiently.
• Every country has a comparative advantage in something
• Absolute advantage :- it happens when a country has
monopoly on producing a specific product or is able to
produce it more efficiently than all other countries.
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Measuring Trade
Balance of Payments and Trade Deficits
To measure the effectiveness of global trade → nations
follow two key indicators:- balance of trade & balance of
payment.
Balance of Trade :- is a nation’s ratio of exports to import.
Balance of payments:- is the difference between money
coming into a country (from exports) and money leaving
the country (for imports)
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Measuring Trade
• Unfair trade practices
• Unfair trade Practices is one of the concerns in measuring
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trade, and many countries are enforcing laws to prohibit
these practices.
There are mainly two unfair trade practices:
Dumping: selling products in a foreign country at lower
price than those charged in the producing country.
Sometimes dumping can include selling products in a
country below what it cost to produce the product.
The Gray Market:- refers to the flow of goods in a
distribution channel or channels other than those intended
by the manufacturer.
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Strategies for Reaching Global Markets
• There are several strategies a business can use to enter
the global market.
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Strategies for Reaching Global Markets
• Licensing
• a company may decide to go global by licensing the right
to manufacture its product or use its trade mark to a
foreign company for a fee ( a royalty).
• agreement is simply one where a company allows
another company to produce goods under their names.
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Strategies for Reaching Global Markets
Exporting
• Export Assistance Centers (EACs)
• Organizations may start exporting or selling their goods
to other countries
• Export trading companies may help companies with a
risky part of getting paid for their goods
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Strategies for Reaching Global Markets
Franchising
• Franchise Agreement (Franchisor & Franchisee)
• Product adaptation
• An arrangement where by someone with a good idea for a
business sells to others the right to use the business
name and sell the product or service in a given territory.
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Strategies for Reaching Global Markets
• Franchising
• Franchising is different from licensing in that where
licensing might be for a single product, franchising allows
the use of an entire concept including the label, how the
good is manufactured or made, and the look and feel of
the business
• US franchisors such as McDonald’s, 7-Eleven etc have
many global units operated by foreign franchisors
• Franchisors have to be careful to adapt their product or
service to the countries they serve.
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Comparaison chart
Governed by
Registration
Territorial rights
Franchising
Securities law
Required
Offered to franchisee
Support and training
Provided by franchiser
Royalty payments
Use of trademark/logo
Yes
Logo and trademark retained by
franchiser and used by
franchisee
McDonalds, Subway, 7-11,
Dunkin Donuts
Franchiser exercise control over
franchisee.
Examples
control
Licensing
Contract law
Not required
Not offered; licensee can sell
similar licenses and products in
same area
Not provided
Yes
Can be licensed
Microsoft Office
licensor does not have control
over licensee
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Strategies for Reaching Global Markets
• Contract manufacturing involves a foreign company’s
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production of private label goods to which a domestic
company then attaches its own brand name or trademark.
The practice is also known as outsourcing.
Contract manufacturing enables a company to experiment in
a new market without incurring heavy start-up costs such as a
manufacturing plant.
A firm can also use contract manufacturing temporarily to
meet an unexpected increase in orders.
One of the major disadvantages is that intellectual property
and copyright laws are different in every country
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Strategies for Reaching Global Markets
• International Joint Ventures and Strategic Alliance
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Joint ventures is a partnership in which two or more
companies (often from different countries) undertake a
major project.
Joint ventures can be used by governments as a
condition of doing business in their country
It can be used as a way of getting into countries, eg China
Joint ventures can be developed for reasons such as
expanding the market for a low selling product in the
home country
They can also be used to share technology
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Strategies for Reaching Global Markets
• Greenfield Investment
• This is an alternative to a joint venture
• A Greenfield investment is when a company decides to
enter a country and build offices and production facility
• The major disadvantage here is that there may be lack of
knowledge of the country’s ways of doing business
• A Greenfield investment is a form of foreign direct
investment (FDI)
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Strategies for Reaching Global Markets
• Strategic Alliances
• This is an agreement between two or more companies to
work together to achieve competitive market advantages
• It is a long term partnership between two or more
companies established to help each company build
competitive market advantages
• These alliances can help provide access to markets,
capital and technical expertise
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Strategies for Reaching Global Markets
• Foreign Direct Investment (FDI)
• is the buying of permanent property and business in
foreign nations.
• As the size of the market expands, many firms increase
foreign direct investment and establish a foreign
subsidiary
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Strategies for Reaching Global Markets
• Foreign Subsidiary:- is a company that is owned in
foreign country by the home company (called the parent
company).
• This company would operate like a domestic firm in the
foreign nation, with production, distribution, promotion,
pricing and other business functions under the control of
the foreign subsidiary’s management
• The legal requirements of both the country where the
parent firm is located (called the home country) and the
foreign country where the subsidiary is located (called the
host country) have to be observed
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Strategies for Reaching Global Markets
• The major advantage of a foreign subsidiary is that the
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home company maintains complete control over any
technological or expertise it may possess.
The major shortcoming : The parent company is
committed to a large amount of funds and technology
within foreign boundaries
Should relations with the host country go bad the firm’s
assets could be taken over by the foreign government
Such a takeover is called ‘expropriation’
Creating a subsidiary might not be the best course of
action for a small business; as a company grows it may
be possible.
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Strategies for Reaching Global Markets
• Expropriation
• When a host government takes over a foreign subsidiary
in a country
• This can happen if relations with the host country go bad.
They will take over the assets of the foreign company
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Strategies for Reaching Global Markets
• Multinational corporartion
• This is an organization that manufacturers and markets
products in many different countries. It has multinational
stock ownership and multinational management
• These are extremely large corporations, but not all large
firms involved in global businesses are multi nationals
• Only firms that have manufacturing capacity or some
other physical presence in different nations can truly be
called multinationals