Business Chapter 3: Doing Business in Global Markets

Figure 3.6 Oops, Did We Say That?

A global marketing strategy can be very difficult to implement. Look at the problems these well-known companies encountered in global markets.

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.

Figure 3.1 World Population by Continent

As shown on this map, 59.64 percent of the world's population lives in Asia while only 4.73 percent lives in North America.

The Dynamic Global Market

Business in the Global Market • Global business is expanding rapidly. • World population of 7.7 billion makes it a huge market of potential customers. • Global trade: • Importing — Buying products from another country. • Exporting — Selling products to another country.

Trade Protectionism₆

Central American Free-Trade Agreements • CAFTA, the Central American Free Trade Agreement, created a free-trade zone with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

Trade Protectionism₄

Common Markets • 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. Some common markets are: • European Union (EU). • Mercosur. • ASEAN. • COMESA.

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

Comparative Advantage Theory - Theory that states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently. The U.S. has a comparative advantage in producing goods and services, such as software development and engineering services. In contrast, it lacks a comparative advantage in growing coffee or making shoes; thus, we import most of the shoes and coffee we consume.

Strategies for Reaching Global Markets₄

Contract Manufacturing • A foreign company's production of private-label goods to which a domestic company then attaches its own brand name or trademark; part of the broad category of outsourcing. • Can help companies: • Experiment in a new market without incurring heavy start-up costs such as building a manufacturing plant. • Temporarily meet an unexpected increase in orders.

Figure 3.8 Members of the European Union

Current EU members are highlighted in yellow. Countries that have applied for membership are in orange.

What is meant by the term dumping in global trade?

Dumping — Selling products in a foreign country at lower prices than those charged in the producing country.

Forces Affecting Trading in Global Markets₂

Economic and Financial Forces • 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 products become cheaper. • Low value of the dollar — Dollar is trading for less foreign currency; foreign goods become more expensive. • Floating exchange rates — Currencies float in value depending on the supply and demand for them in the global market.

Forces Affecting Trading in Global Markets₃

Economic and Financial Forces continued • Devaluation — Lowering the value of a nation's currency relative to other currencies. • Countertrading — A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services.

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.

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.

Strategies for Reaching Global Markets₂

Exporting • Export Assistance Centers (EACs). • Help small- and medium-sized businesses with direct exporting by providing exporting assistance and trade-finance support. • Export-trading companies (ETCs). • Help companies with indirect exporting by negotiating and establishing trading relationships.

Strategies for Reaching Global Markets₇

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. • Primary advantage: Parent company maintains complete control over its technology or expertise. • Primary disadvantage: Must commit funds and technology within foreign boundaries.

Strategies for Reaching Global Markets₈

Foreign Direct Investment continued • Multinational corporation — An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational 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.

Strategies for Reaching Global Markets₉

Foreign Direct Investment continued • Sovereign wealth funds (SWFs) — Investment funds controlled by governments holding large stakes in foreign companies. • The size of the funds and government-ownership make some fear they might be used for: • Achieving geopolitical objectives. • Gaining control of strategic natural resources. • Obtaining sensitive technologies.

What are four major hurdles to successful global trade?

Four major hurdles to successful global trade are: 1. sociocultural forces, 2. economic and financial forces 3. legal and regulatory forces 4. physical and environmental forces

Strategies for Reaching Global Markets₃

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 or service in a given territory in a specified manner. • Large and small franchisors can be successful in foreign countries. • Franchisors need to adapt their products to the countries they serve.

The Future of Global Trade₃

Globalization and Your Future • Study foreign languages, learn about foreign cultures, and take global business courses to develop a global perspective. • Globalization is real. • Economic competition promises to intensify. • Small, medium, and large businesses have global market potential.

Trade Protectionism₂

Import Quota • A limit on the number of products in certain categories that 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. • Nontariff barriers are not as specific or formal but can be just as detrimental to free trade.

Getting Involved in Global Trade₁

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. Exporting Goods and Services • Selling abroad may be easier due to less competition. • Exporting provides a boost to the U.S. economy. • Exports generate over 7,000 jobs in the U.S. • Exports represent about 12 percent of U.S. GDP and account for 11.5 million jobs.

Strategies for Reaching Global Markets₅

International Joint Ventures and Strategic Alliances • Joint venture — A partnership in which two or more companies (often from different countries) join to undertake a major project. • Often mandated by countries as a condition of doing business (China). • Can increase a company's footprint and global growth. • Can be used by competing companies to join forces.

Strategies for Reaching Global Markets₆

International Joint Ventures and Strategic Alliances continued • Strategic alliance — A long-term partnership between two or more companies established to help each company build competitive market advantages. • They don't typically share costs, risks, management, or profits. • Strategic alliances provide broad access to markets, capital, and technical expertise.

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

Its one-party political system, human rights abuses, currency issues, increasing urban population growth, trade restrictions, and aging population.

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

Joint venture — A partnership in which two or more companies (often from different countries) join to undertake a major project. Strategic alliance — A long-term partnership between two or more companies established to help each company build competitive market advantages. 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.

Forces Affecting Trading in Global Markets₄

Legal and Regulatory Forces • There's no global system of laws. • Laws may be inconsistent. • U.S. businesses must follow U.S. laws while conducting global business. • Organization for Economic Cooperation and Development (OECD) and Transparency International fight to end corruption and bribery in foreign markets and have had limited success.

Strategies for Reaching Global Markets₁

Licensing • A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a 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.

Getting Involved in Global Trade₂

Measuring Global Trade • Balance of trade — Total value of a nation's exports compared to its imports over a particular period. • Trade surplus (favorable) — When the value of a country's exports exceeds that of its imports. • Trade deficit (unfavorable) — When the value of a country's imports exceeds that of its exports.

Getting Involved in Global Trade₃

Measuring Global Trade continued • Balance of payments — The difference between money coming into a country (from exports) and money leaving the country (from imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment. • 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. • Dumping — Selling products in a foreign country at lower prices than those charged in the producing country. • Dumping is prohibited in U.S.

Trade Protectionism₅

NAFTA and U.S.-Mexico-Canada Agreement (USMCA) • North American Free Trade Agreement (NAFTA) — Agreement that created a free-trade area among the United States, Canada, and Mexico; passed in 1993. • Its attempts to boost job growth, fight poverty, improve environmental controls, and close the wage gap between Mexico and the United States largely failed. • United States-Mexico-Canada Agreement (USMCA) —New agreement to replace NAFTA; ratified in 2020. • To create level playing field for U.S. workers with improved rules.

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 (6.9 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 citizen's desire.

What makes a company a multinational corporation?

Only firms that have manufacturing capacity or some other physical presence in different nations can truly be called multinational.

Forces Affecting Trading in Global Markets₅

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.

The Pros and Cons of Offshore Outsourcing

Pros • Less-strategic tasks can be outsourced globally so that companies can focus on areas in which they can excel and grow. • Outsourced work allows companies to create efficiencies that in fact let them hire more workers. • Consumers benefit from lower prices generated by effective use of global resources and developing nations grow, thus fueling global economic growth. Cons • Jobs may be lost permanently, and wages fall due to low-cost competition offshore. • Offshore outsourcing may reduce product quality and can therefore cause permanent damage to a company's reputation. • Communication among company members, with suppliers, and with customers becomes much more difficult.

The Pros and Cons of Free Trade

Pros • The global market contains over 7.7 billion potential customers for goods and services. • Productivity grows when countries produce goods and services in which they have a comparative advantage. • Global competition and less-costly imports keep prices down, so inflation does not curtail economic growth. • Free trade inspires innovation for new products and keeps firms competitively challenged. • Uninterrupted flow of capital gives countries access to foreign investments, which help keep interest rates low. Cons • Domestic workers (particularly in manufacturing-based jobs) can lose their jobs due to increased imports or production shifts to low-wage global markets. • Workers may be forced to accept pay cuts from employers, who can threaten to move their jobs to lower-cost global markets. • Moving operations overseas because of intense competitive pressure often means the loss of service jobs and growing numbers of white-collar jobs. • Domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries.

Why Trade with Other Nations?₁

Resource and Products • Countries with abundant natural resources (like Venezuela) need technological 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.

Forces Affecting Trading in Global Markets₁

Sociocultural Forces • Culture — Set of values, beliefs, rules, and institutions held by a specific group of people. • Social structures, religion, manners and customs, values and attitudes, language, and personal communication. • Ethnocentricity — An attitude that your own culture is superior to other cultures. • Businesspeople need to understand cultural differences and think globally.

The Future of Global Trade₂

The Challenge of Offshore Outsourcing • Outsourcing — Process whereby one 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. • There are some quality issues.

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.

Why Trade with Other Nations?₂

The Theories of Comparative and Absolute Advantage • Comparative advantage — A country should sell to other countries those products that it produces most efficiently and buy from other countries those products that it cannot produce as effectively or efficiently. • Absolute advantage — A country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries.

Trade Protectionism₃

The World Trade Organization • General Agreement on Tariffs and Trade (GATT) — A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions. • World Trade Organization (WTO) — An independent entity of 164 member nations whose purpose is to oversee cross-border trade issues and global business practices; headquartered in Geneva.

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

The key advantages of using licensing as a method of entry into global markets are: (a) a firm can often gain revenues in a market it would not have generated in its home market (b) licensees must purchase start-up supplies and consulting services from the licensing firm (c) licensors spend little or no money to produce and market their products. Disadvantages to licensing include: (a) if a product is extremely successful in another market, the licensor does not receive the bulk of the revenues (b) 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.

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: 1. terrorism 2. nuclear proliferation 3. 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 Protectionism₁

Trade Protectionism • The use of government regulations to limit the import of goods and services. • Allows domestic producers to survive, grow, and produce jobs. • Tariffs — A tax imposed on imports. • Protective tariffs — Import taxes. • Revenue tariffs — Raise money for government.

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.

The Future of Global Trade₁

• With over 1.4 billion people, China is the world's largest exporter and has the second-largest economy. • With over 1.3 billion people, India is expected to become world's most populated country. It has seen huge growth in information technology, pharmaceuticals and biotechnology. • Russia's economy has slowed, and it is plagued with political, currency, and social problems. • Brazil was expected to dominate the global market as a supplier of raw materials, but it has had economic troubles and widespread political corruption.