Chapter 3 Doing Business in Global Markets

Embargo

A complete ban on the import or export of a certain product, or stopping of all trade within a particular country.

What is the key difference between a joint venture and a strategic alliance?

A joint venture is a partnership between two or more companies whereby they undertake a major project. Joint ventures generally involve: (a) sharing technology and risk; (b) sharing marketing and management expertise; (c) entry into markets where foreign companies are often not allowed unless goods are produced locally. In a strategic alliance partners do not share costs, risks, management, or even profits. The purpose is to gain advantages in building competitive market advantages.

Import Quota

A limit on the number of products in certain categories that a nation can import.

How would a low value of the dollar affect U.S. exports?

A low value of the dollar would make U.S. exports cheaper in foreign markets and may lead to higher demand for U.S. products.

What makes a company a multinational corporation?

A multinational corporation manufactures and markets products in many different countries and has multinational stock ownership and management. Only firms that have manufacturing capacity or other physical presence in other countries can be called multinational.

Common Market

A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; also called a trading bloc. An example is the European Union.

Tariff

A tax imposed on imports.

What are the advantages to a firm of using licensing as a method of entry in global markets? What are the disadvantages?

Advantages to licensing: a firm can often gain revenues in a market it would not have generated in its home market; licensees must purchase start-up supplies and consulting services from the licensing firm; licensors spend little or no money to produce and market their products. Disadvantages to licensing: if a product is extremely successful in another market, the licensor does not receive the bulk of the revenues, and if the foreign licensee learns the company's technology and product secrets, it may break the agreement and begin producing similar products on its own.

NAFTA (North American Free Trade Agreement)

Agreement that created a free-trade area among the United States, Canada and Mexico.

Ethnocentricity

An attitude that your own culture is superior to other cultures.

Joint venture benefits

Can increase a company's footprint and global growth and Can be used by competing companies to join forces.

Sovereign Wealth Funds (SWFs) disadvantage

Can make some fear they might be used for achieving geopolitical objectives, gaining control of strategic natural resources, and Obtaining sensitive technologies.

What is comparative advantage, and what are some examples of this concept at work in the United States?

Comparative advantage theory was proposed by David Ricardo and simply states that a country should sell to other countries those products it produces most effectively and efficiently, and buy from other countries those products it cannot produce as effectively and efficiently. Examples include the U.S. producing goods and services such as software and engineering services and buying goods such as coffee and shoes from other nations.

Floating exchange rates

Currencies float in value depending on the supply and demand for them in the global market.

Physical and Environmental Forces

Developing countries have limited transportation and storage systems that make international distribution difficult or impossible. Technological differences also influence the features and feasibility of exportable products.

Low value of the dollar

Dollar is trading for less foreign currency; foreign goods become more expensive.

High value of the dollar

Dollar is trading for more foreign currency; foreign products become cheaper.

What is meant by the term dumping in global trade?

Dumping is the selling of products in foreign countries at lower prices than those charged in the producing country. This tactic is sometimes used to reduce surplus products in foreign markets or gain a foothold in a new market.

What does ethnocentricity mean, and how can it affect global success?

Ethnocentricity is an attitude that your nation's culture is superior to other cultures. It can affect global trade because all nations are proud of their cultures and do not aspire to be like other countries. Thus it's easy to offend potential customers by being ethnocentric.

contract manufacturing benefits

Experiment in a new market without incurring heavy start-up costs and temporarily meet an unexpected increase in orders.

What services are usually provided by an export-trading company?

Export trading companies provide such services as assistance in associating and establishing the desired trading relationships, matching buyers and sellers from different countries, and help dealing with foreign customs offices, documentation, and weights and measures.

The World Trade Organization

General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO)

drawbacks of outsourcing

Jobs may be lost permanently and wages fall, may reduce product quality and can therefore cause permanent damage to a company's reputation, and communication becomes much more difficult

Strategies for reaching global markets

Licensing, exporting, franchising, contract manufacturing, international joint ventures, strategic alliances, and foreign direct investment

Foreign Direct Investment disadvantage

Must commit funds and technology within foreign boundaries

What are two of the main arguments favoring the expansion of U.S. businesses into global markets?

One major argument favoring the expansion of U.S. business is that the sheer size of the global market (7.7 billion people) is too large to ignore. Plus it's difficult for an economy, even one as large as the U.S. economy, to produce all the goods and services its citizens desire.

Foreign Direct Investment advantage

Parent company maintains complete control over its technology or expertise.

Outsourcing

Process whereby one firm contracts with other companies to do some or all of its functions.

Importing goods and services

Products that are widely available in one country may be unavailable in another. By working with producers in their native country, people can become major importers.

Revenue tariffs

Raise money for government

Forces Affecting Trading in Global Markets

Sociocultural Forces, Economic and Financial Forces, Legal and Regulatory Forces, Physical and Environmental Forces

What does the Foreign Corrupt Practices Act prohibit?

The Foreign Corrupt Practices Act prohibits "questionable" or "dubious" payments to foreign officials to secure business contracts. Other nations do not have to follow this law, causing some disadvantages for U.S. businesses.

What is the primary purpose of the WTO?

The World Trade Organization (WTO) was established to mediate trade disputes among nations.

How are a nation's balance of trade and balance of payments determined?

The balance of trade is the difference in the total value of a nation's exports compared to its imports. The balance of payments is the difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows coming into or leaving a country from other factors such as tourism, foreign aid, military expenditures, and foreign investment

What are the two primary concerns associated with offshore outsourcing?

The key concern about offshore outsourcing is the loss of jobs. Today such loss includes professional services as well as production jobs. Questions also linger about outsourcing sensitive products like airline maintenance and medical devices. Consumers' fears about quality and product safety keep the issue center stage.

What are the major threats to doing business in global markets?

The major threats to doing business in global markets are terrorism, nuclear proliferation, rogue states, and other issues.

What is the key objective of a common market like the European Union?

The purpose of a common market like the EU is to have common external tariffs, no internal tariff, and coordinated laws to facilitate exchange between member nations. This enables smaller nations to compete as a group against large economies like the United States, China, and Japan.

Trade Protectionism

The use of government regulations to limit the import of goods and services, and Allows domestic producers to survive, grow, and produce jobs.

What key challenges must China face before becoming the major global economic leader?

There are concerns about China's one-party political system, human rights abuses, currency issues, and increasing urban population growth. Another challenge is China's underground economy, which creates piracy and counterfeiting.

Legal and Regulatory Forces

There's no global system of laws and Laws may be inconsistent

What are the advantages and disadvantages of trade protectionism and of tariffs?

Trade protectionism is the use of government regulations to limit the import of goods and services. It can be a barrier to global trade. Trade protectionism often involves the use of tariffs or taxes on imported goods that makes them more expensive to buy. Protective tariffs can be an advantage to workers in certain industries since it makes the products they produce more cost competitive with imported products. American labor unions have sought certain protective tariffs. Revenue tariffs are designed as a source of revenue for the government. Most economists do not favor the use of tariffs; instead they are in favor of free trade.

Economic and Financial Forces

changes in nation's exchange rates can have important implications in global markets

Benefits of outsourcing

companies can focus on areas in which they can excel and grow, allows companies to create efficiencies that in fact let them hire more workers, and Consumers benefit from lower prices which fuel global economic growth

Franchising

contractual agreement whereby someone with a good idea for a business sells others the rights to use the name and sell a product or service in a given territory in a specified manner.

Licensing benefits

gaining revenues and spending little or no money to produce or market their products.

Protective tariffs

import taxes

Sociocultural Forces

influences and trends originating in a country's, a society's, or a culture's human relationships and values that may affect an organization

Exporting Goods and Services

less competition, boost to economy, generates jobs,

What are four major hurdles to successful global trade?

sociocultural forces, economic and financial forces, legal and regulatory forces, and physical and environmental forces.