Chapter Three Competing in Global Markets 3-1 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Growing World Population 12 10.8 10 In Billions 8 6.0 6 8.5 6.5 5.3 4 2 0 1990 1998 2010 2030 2060 Source: Population Reference Bureau 3-2 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. U. S. Trade in Goods & Services ($ Billions) 2500 2000 1500 Imports Exports 1000 500 0 1975 1980 1985 1990 1995 1998 Source: St. Louis Business Monthly, Oct. 1999 3-3 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Company % of Earnings From Outside U.S. Pfizer Microsoft Intel Gillette Coca-Cola AIG 0% 20% 40% 60% 80% 100% Source: Investment Advisor, August 2000 3-4 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Why Trade With Other Nations? Reasons No nation can produce all its needs Mutually beneficial exchange Natural Resources or Technology- Produce or Buy? Free Trade Theories of Advantage 3-5 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Theories of Advantage Absolute = Virtual Monopoly South Africa Output per Unit of Input The Rest of the World Diamond Production 3-6 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Theories of Advantage Comparative U. S. China China U. S. Output per Unit of Input Software Clothing 3-7 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Specialize & Trade Software Clothing 3-8 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Checklist for Exporters Analyze your capabilities Define export potential of product ID best foreign markets for product Use available government assistance Study entry strategies/export procedures 3-9 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Developing Countries Need Infrastructure 1.2 billion people lack clean drinking water 2 billion people lack electricity 3 billion people lack adequate sanitation Corporate investment in infrastructure rose 10fold in 1990’s Source: Business Week, May 3, 1999 3-10 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Percentage of Households With: Electricity Automobile Color TV U.S. China India Running Water Refrigerators Telephones 0% 20% 40% 60% 80% 100% Source: Gallup India PVT, LTD. 3-11 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. China’s Telecom Growth 200 180 160 140 120 100 80 60 40 20 0 Users in millions Internet Hosts Business Lines Residential Lines 1996 1997 1998 1999 2000 Source: Wired, September 2000. 3-12 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Import Goods- Money Goes Out of Country 3-13 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Export Goods- Money Comes Into the Country 3-14 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Trade Deficits/SurplusesBalance of Trade(1999) U. S. Exports to Japan Food/Beverages Raw Materials Chemicals & Pharmaceuticals $58.6 Billion Balance of Trade 1999 (cont’d) Japan U.S. Exports to Computers & Telecommunications Cars/Trucks Consumer Products Semi-Finished Goods $113.9 B 3-16 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 1999 Balance of Trade $58.6 B Goods To Japan $113.9 B Goods From Japan Yen to U.S. $55.3 B Dollars to Japan U.S. Balance of Payments = Unfavorable McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 3-17 Trading in Global Markets: The U. S. Experience U. S. Never Been Aggressive at Exporting- intense competition U. S. Is World’s Largest Exporter U. S. = Debtor Nation Foreign Direct Investment – Sign of Strength – “Selling of America” 3-18 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Modes of Entry into the Global Markets (Figure 3.4) 3-19 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Strategies for Reaching Global Markets Exporting Joint Ventures & Strategic Alliances Franchising Subsidiaries Contract Manu. Foreign Direct Investment Licensing 3-20 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Forces Affecting Trading in Global Markets Sociocultural Economic/Currency Shifts Legal/Regulatory Physical/Environmental Protectionism Global E-Commerce 3-21 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Foreign Legal Standards Legal questions Foreign Corrupt Practices Act of Antitrust 1978- U.S. Labor Relations businesses MUST Patents, copyrights follow U.S. law in Trade Practices conducting Taxes business globally Product Liability No bribes to Child Labor secure contract Prison Labor 3-22 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Cultural Differences in Global Markets Language Religion Aesthetics Materialism Values & Attitudes 3-23 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Did You Know? Turkey it’s rude to cross your arms while you are facing someone. In the Arab world the left hand is considered unclean; don’t eat with it! In India never pat someone’s head, it’s the seat of the soul. The Chinese associate gifts such as straw sandals, clocks and handkerchiefs with funerals. In 3-24 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Favorite Campbell Soups Around the World Britain - Tomato Japan - Corn South America Cream of Asparagus Hong Kong Watercress & Duck Gizzard United States Chicken Noodle, Cream of Mushroom Australia- Cream of Pumpkin 3-25 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Nations That Have Not Converted to the Metric System United States Brunei Yemen Liberia Myanmar (Burma) 3-26 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. What’ the 2nd Most Valuable Global Business Language German 4% Other 6% Chinese 11% Japanese 16% Spanish 63% Source: Accountemps Poll 3-27 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Protectionism Mercantilism Tariffs – Protective – Revenue Import Quota & Embargo 3-28 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Trade Agreements/Unions General Agreement on Tariffs and Trade (GATT)- WTO Common Markets/European Union North American Free Trade Agreement (NAFTA) 3-29 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Exchange Rates- U. S. Dollars to Other Currencies $ Goes DownIncreases Demand for U. S. Products – Balance of Trade Improves $ Goes UpDecreases Demand for U. S. Products – Balance of Trade Widens 3-30 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Sources of Foreign Direct Investments In the U.S. Japan 5% Canada 11% Other 4% Europe 32% Asia 13% Latin America 17% Britain 18% Source: U.S. Commerce Dept. 3-31 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Survey of Country Corruption Most Corrupt = 1.0 Least Corrupt = 10.0 Nigeria Indonesia Colombia Russia China U.S. Hong Kong Germany Canada Denmark 1 2 3 4 5 6 7 8 9 10 Source: Business Week, June 14, 1999 3-32 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved.