Chapter 3
Business In Global Markets
Under Standing 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.
 Advantages of global business :1- Businesses will have entirely new markets in which to sell their products.
2- They can save on the costs of labor by producing overseas.
 Disadvantages of global business :1- Companies face new cultural challenges.
Global Trade :
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Most companies cite global expansion as a link to its future growth.
To know how important global business is we might take the USA market as an example
( e.g. US market count for over 300 million people “ wow “ , but the global market has
over 6 billion potential customers in the 193 countries that make up the global market.)
→ that’s why the global market is attractive.
75% of the world population live in developing areas where technology, education, and
per capital income still lag considerably behind those of developed nations → and with
time there will develop the resources to purchase goods from other countries , which is
where business gets interesting for the companies.
Examples of global business could be : (e.g. when companies buy billions of dollars
worth of goods from countries such as India, Vietnam and China.
And e.g. MacDonald’s being a popular restaurant in many countries.
Thomas Friedman wrote a book called “ The world is flat “, in it he discusses how the
competitive field is leveling for all countries.(e.g. India provide low-cost labor for the
world). He also discusses how technology is the main drive i.e. reason for the
phenomenon of the ‘’Flattening of the world’’.
USA is the largest exporting and importing nation in the world.
Exporting:- is selling products to another country.
Importing:- is buying products from another country.
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Competition in exporting is very intense.
Why Trade Globally? :
Countries trade with other countries for several reasons such as :
1- No nation what so ever can produce all of the products that its people want and
need.
2- 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.
3- Some nations (e.g. China – Russia) have an abundance of natural resources and a
lack of technological know-how, while others (e.g. Japan, Taiwan, Switzerland) have
sophisticated technology but few natural resources, so trade relations enable each
nation to produce what it is most capable of producing and to buy what it needs in a
mutually beneficial exchange relationship → which happens through the process of
Free Trade.
Free trade:- is the movement of goods and services among nations without
political or economic trade barriers. → must be a member in the WTO (word trade
organization)
Comparative advantage and Absolute advantage :-
Global Trade :- is the exchange of goods and services across national borders (e.g.
exchange of goods, services, art, sports, cultural events, medical advances, labor etc).
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. (e.g. Egypt selling cotton ,and Saudi
Arabia selling oil).
*It should be noted that 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. (e.g. S. Africa →
Diamond, middle east --- oil).
Most absolute advantage situations involve natural resources that one country have and others
do not have.
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Absolute advantage can also be difficult to sustain if:
* conditions change (e.g. war or resource finish)
* or resources are discovered elsewhere.
Measuring Trade :It is used so countries could know how they compare in trading with other countries:-
Balance of payments & 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.
*A favorable balance of trade → or trade surplus → occurs when the value of the countries
experts exceeds that of its import, i.e. money coming into the country is more than the money
going out of the country.
*An un favorable balance of trade → or trade deficit → occurs when the value of the countries
imports exceeds that of its exports, i.e. money going out of the country is more than the money
coming into the country.
Balance of payments:- is the difference between money coming into a country (from
exports) and money leaving the country (for imports)
money coming or leaving a country
from other factors such as tourism, foreign aid, military expenditures and foreign investment.
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The goal is always to have more money flowing into the country than flowing out of the
country.
Favorable balance of payment → money coming in is more than going out.
Unfavorable balance of payment → money going out is more than money coming in.
Unfair Trade practices:
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Unfair trade Practices is one of the concerns in measuring trade, and many countries are
enforcing laws to prohibit these practices.
There are mainly two unfair trade practices:
a-
Dumping :- which is selling products in a foreign country at lower price than those
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charged in the producing country.
Sometimes dumping can include selling products in a country below what it cost to
produce the product.
To overcome this problem, countries impose a certain percentage of overhead and a
certain percentage of profit margins on imported goods from certain countries, specially
the ones that practice dumping.
There is also evidence that some governments offer financial incentives to certain
industries to sell goods in global markets for less than they sell them at home.
Dumping can: * hinder a country from selling its own products domestically at a fair
price.
Also * it can impact and skew measurement trade data.
b- The Gray Market:- refers to the flow of goods in a distribution channel or channels
other than those intended by the manufacturer.
Strategies For Reaching Global Markets:
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There are several strategies a business can use to enter the global market.
The amount of: Commitment
Control
Risk
Profit potential
of each strategy varies from least to most according to the strategy.
Strategies for reaching Global markets:- are
(Licensing)( exporting)( Franchising)( contract manufacturing)( Int. joint ventures& strategic alliances)( Foreign Direct Investment)
least -------------------------------------------------------------------------------------------------------------- most
commitment, control, risk, and profit potential
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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).
The company giving the license is the: licensor.
The foreign company paying for the license is the: licensee.
A company with an interest in licensing generally needs to send company
representatives to the foreign producer to help set up the production process.
The licensor may also assist or work with a licensee in such areas as:- Distribution
Promotion
Consulting.
So in summery licensing:- agreement is simply one where a company allows another
company to produce goods under their names.
 Advantages of a licensing agreement are:1- The licensor can gain additional revenues from a product that it normally would not
have generated in its home markets.
2- Also the licensee often must purchase start up supplies, component materials, and
consulting services from the licensing firm, which means extra income for the
licensor.
(e.g. Coca cola, Pepsi cola → give licensing to companies all over the world to produce their
product.)
 Disadvantages of licensing:1- Often the licensor must grant licensing rights to its product for an extended period
(20 years or longer) → so if the product experiences remarkable growth and success
in the foreign market, the bulk of the revenues earned will belong to the licensee.
2- The foreign licensee might learn the licensing company technology or product
secret, and so may break the agreement and begin to produce a similar product on
its own → so the licensing firm may lose its trade secrets, and the agreed upon
royalties.
2-Exporting:
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Because of the intensified global competition→ the U.S.gov. has created Export
Assistance Centers (EACs)
The (EACs) :Provide hands-on exporting assistance and trade finance support for small and medium
size business that choose to directly export goods and services.
Also there is specialist called export-trading companies → or also called exportmanagement companies → they:
Can step in to negotiate and establish the trading relationships desired for the small
companies who don’t have the experience or don’t know how to start.
The export-trading company matches buyers and sellers from different countries.
Provide needed services (e.g. dealing with foreign customs offices, documentation
requirements, even weights and measures).
Help exporters with a key risky element of doing business globally which is mainly
getting paid.
3-Franchising:
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Franchising agreement:- is 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.
Franchisor: is the company which sells the Franchise.
Franchisee: is the company which buys the Franchise.
Franchising: is done domestically and internationally.
Franchising is different from licensing in that:Licensing could be for a single product → while 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.
Franchisors have to be careful to adopt their product or service to the countries they
serve → sot they have to research before beginning their overseas ventures.
4-Contract manufacturing:Contract manufacturing : is when a foreign company’s production of private
label goods where there after a domestic company attaches its own brand name or
trademark. It’s also known as “out sourcing”.
((e.g. Dell computer → contracts with a Taiwanese company which produces the note
book PCs which it puts Dell label on it .))
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Contract manufacturing enables a company to experiment in a new markets without
incurring heavy start-up costs such as a manufacturing plant. → so if the brand name
becomes a success, the company has penetrated a new market with relatively low risk.
A company can use contract manufacturing also to meet an unexpected increase in
orders.
A major disadvantage here is that :intellectual property and copy right laws are
different in every country → so the foreign manufactures could steel the idea of your
product and start manufacturing it for him self and selling it cheaper.
5-International Joint Ventures & Strategic Alliances :Int. joint venture:- is a partnership in which two or more companies (often from different
countries) undertake a major project.
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Companies that engage in a partnership grow much faster than their counterpart
companies that do not.
Joint ventures can even be mandated by the government as a condition of doing
business in their country.
(e.g. its difficult to enter the china market → but when a foreign company have a joint
venture with a Chinese firm, it can enter the Chinese market).
Reasons for doing joint ventures:1- Joint ventures can be used by some companies also to expand their rather low share in
some international markets.
2- Joint ventures can be used to do huge research and come out with a new product or
develop existing product.
3- It can also be used to bring together unique partners. (e.g. university of Pittsburgh and
the Italian government entered a joint venture to bring a new medical transplant center
to Sicily in Italy.).
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Benefits of Int. joint ventures are:Shared technology.
Shared marketing and management expertise.
Entry into markets where foreign companies are often not allowed unless their goods
are produced locally.
Shared risk.
Disadvantages:One partner can learn the other’s technology and practices, and then go off on its own
and use what it has learned.
A shred technology may become obsolete.
The joint venture may become too large to be as flexible as needed.
Strategic Alliance:
Strategic Alliance :- is a long-term partnership between
two or more companies
established to help each company build competitive market advantages.
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Such alliances : can provide access to markets, capital and technical expertise.
Difference between joint venture and alliance: is that the alliances do not typically
involve sharing costs, risks, management or even profits.
Strategic alliances can be flexible and they can be effective between firms of vastly
different size.
(e.g. alliance between KLM and American air).
6-Foreign Direct Investment:Foreign Direct Investment :- (FDI):- is the buying
business in foreign nations.
of permanent property and
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As the size of foreign market expands, many firms increase foreign direct investment
and establish a foreign subsidiary.
Foreign Subsidiary:- is a company that is owned in foreign country by the home
company (called the parent company).
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This subsidiary 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 management.
The legal requirements of both the country where the parent firm is located (i.e. home
country) and the foreign country where the subsidiary is located (i.e. host country) have
to be observed.
 Advantages:-
The parent company maintains complete control over any technology or expertise it
may possess.
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Disadvantages :The parent company is committing a large amount of funds and technology within
foreign boundaries → so if the relations between home country and host country go
bad, the firm assets could be taken over by the foreign country’s government → which
is called expropriation.
(e.g. Nestle’ → is a major firm with many foreign investments, also its an example of a
multinational corporation which is:
Multinational Corporation:- is an organization that manufactures and markets
products in many different countries; it has multinational stock ownership and
multinational management. They are extremely large corporations, but not all large
firms involved in global business are multinationals.
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So to enter in global business requires selecting a strategy that best fits the goals of the
business.
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