Doing Business in

Global Markets

Chapter 03

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

1. Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.

2. Explain the importance of importing and exporting, and understand key terms used in global business.

3. Illustrate the strategies used in reaching global markets and explain the role of multinational corporations.

4. Evaluate the forces that affect trading in global markets.

5. Debate the advantages and disadvantages of trade protectionism.

6. Discuss the changing landscape of the global market and the issue of offshore outsourcing.

LEARNING GOALS Chapter Three

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Why do nations trade with each other?

• No nation can produce everything it needs

• Mutually beneficial exchange

• Surplus of Natural Resources

• Lack of Technological Know-How

• Shrinking Global Markets

The Dynamic Global Market

• Over 90% of companies doing business globally believe it is important for employees to have international experience.

BUSINESS in the GLOBAL MARKET LG1

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Why Trade With Other Nations?

• Countries with abundant natural resources (like Venezuela or Russia) 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. (E.U., NAFTA)

TRADING with OTHER NATIONS LG1

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U.S. Companies Earnings From Outside U.S.

This graph tell us that without global business these companies would not thrive

Company Total Revenue Overseas Percent

Wal-Mart $420 billion $109 billion 26%

Exxon-Mobil $342 billion $154 billion 45%

General Electric $149 billion $80 billion 54%

Bank of America $134 billion $27 billion 20%

Ford $129 billion $66 billion 51%

IBM $100 billion $64 billion 64%

Boeing $64 billion $26 billion 41%

Intel $44 billion $37 billion 85%

Amazon $34 billion $15 billion 45%

McDonald's $24 billion $16 billion 66%

Nike $21 billion $10.5 billion 50%

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The Dynamic Global Market

World Population by continent:

8%6%

12%

13%60%

1% United States

South America

Africa

Europe

Asia

Australia

** The U.S. is the largest importing nation in the World!

Why are international markets important to U.S. Companies?

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U.S. Trading Partners

Region Exports Imports Asia 26.5% 36.3% West. Europe 24.0 20.8 North America 22.5 18.7 Latin America 21.8 17.3 Middle East 2.7 3.3 Africa 1.7 2.3 C./E. Europe/ Baltic States/CIS 0.9 1.3 Total 100% 100%

Why is Asia the highest in both Ex. And Imp?

Source: HuffPost Business, March 2, 2011.

Getting Involved in Global Trade WHOM DOES the U.S. OWE?

Countries that Own the Most U.S. Debt LG2

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Which of the following are reasons nations trade with each other?

A) No nation can produce everything B) Mutually beneficial Exchange C) Threat of war D) Both A and C E) Both A and B

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T or F

Nations who trade with others are more likely to develop faster than those who don’t.

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True free trade means:

A) The movement of goods and services without political and economic barriers among nations

B) The movement of goods and services without political barriers among nations

C) The movement of goods and services without economic barriers among nations

D) The movement of goods and services with political and economic barriers among nations

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True or False

The U.S. is the largest importer of goods in the world.

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THE THEORIES OF COMPARATIVE AND ABSOLUTE ADVANTAGE.

• COMPARATIVE ADVANTAGE THEORY : – Sell to other countries products that are

produced most effectively and efficiently.

– Buy from other countries products that cannot be produce as effectively or efficiently.

Measuring Global Trade

LG2

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Comparative Advantage

Comparative

U. S.

Kenya

Software Engineering

U. S.

Coffee

Kenya

Measuring Global Trade

LG2

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THE THEORIES OF COMPARATIVE AND ABSOLUTE ADVANTAGE.

• ABSOLUTE ADVANTAGE: – Exists when a country has a monopoly in

producing a specific product.

– The country is able to produce a product more efficiently than all other countries.

Measuring Global Trade

LG2

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Absolute Advantage

Absolute Advantage

Rice Production

China

The Rest of the World

Measuring Global Trade

LG2

Which of the following is true of the theory of comparative advantage?

A) Sell to other countries those products that are produced most effectively and efficiently.

B) Buy from other countries those products that cannot be produce as effectively or efficiently.

C) Sell to other countries those products that are not produced effectively and efficiently

D) Both A and B

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Which of the following countries would have an absolute advantage?

A) Country A: Produces 90 percent of the world’s coal

B) Country B: Produces more coal than Country C

C) Country C: Produces 50,000 tons of coal D) Country D: Produces a lot of natural gas

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MEASURING GLOBAL TRADE.

HOW HEALTHY IS OUR ECONOMY? Deficit or Surplus

BALANCE OF TRADE is the difference between the amount

of export and the amount of imports

• Exports (selling) (minus) Imports (buying)

Measuring Global Trade

LG2

TRADE SURPLUS

• A favorable balance of trade or TRADE SURPLUS exists when the value of a nation’s exports exceeds its imports.

Ex. U.S. to Japan: 32 Billion in Export

VS

20 Billion in Import

=12 Billion (Surplus)

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Measuring Global Trade

LG2

TRADE DEFICIT

• An unfavorable balance of trade or TRADE DEFICIT occurs when the value of a country’s imports exceeds that of its exports.

Ex. U.S. to Germany

45 Billion in Export

VS

60 Billion in Import

=15 Billion (Deficit)

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Measuring Global Trade

LG2

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BALANCE OF PAYMENTS

BALANCE OF PAYMENTS is the difference between: – Money coming into a country (from exports) and

Money leaving the country (for imports)

– Plus money from other factors such as • Tourism • Foreign aid • Foreign investment

Measuring Global Trade

LG2

Favorable vs. Unfavorable

• A FAVORABLE BALANCE OF PAYMENTS means more money is flowing into than flowing out of the country.

• An UNFAVORABLE BALANCE OF PAYMENTS means more money is leaving than coming into the country.

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Measuring Global Trade

LG2

Example 1: Country X • Exports: $300 Billions (Positive) • Imports: $450 Billions (Negative) • Tourism Revenues: $25 Billions (Positive) • Foreign Aid Received: $15 Billions (Positive) • U.S. Investments: $12 Billions (Positive) • Balance of Payments for Country X:

– (300 + 25 + 15 + 12) – 450 – 352 – 450 = - 98

• Unfavorable Balance of Payments of 98 Bil. 3-30

Example 1: Country Y • Exports: $500 Billions (Positive) • Imports: $350 Billions (Negative) • Tourism Revenues: $15 Billions (Positive) • Foreign Aid: $5 Billions (Positive) • U.S. Investments: $23 Billions (Positive) • Balance of Payments for Country X:

– (500 + 15 + 5 + 23) – 350 Billions – 543 – 350 = 193 Billions

• Favorable Balance of Payments of 193 Bil.

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Which of the following are factored in when calculation a Balance of Payment?

A) Imports B) Exports C) Domestic loans D) Tourism receipts E) A, B, & D

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In 2009, the U.S. exported $300 billion worth of goods, and imported $355 billion. -What is the balance of trade for 2009 (in dollar)? -Does the U.S. run a trade surplus or deficit?

A) $55 million trade surplus B) $45 million trade deficit C) $45 million trade surplus D) $55 million trade deficit

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In 2009, the U.S. exported $300 billion worth of goods, and imported $355 billion. Referring to the previous example, the U.S. also brought in $75 billion from tourism revenue and provided $28 billion in foreign aid to Iraq. What is the U.S. balance of payment (in dollar)? Is it a favorable or unfavorable balance? A) $8 million (unfavorable) B) $48 million (unfavorable) C) $158 million (unfavorable) D) $8 million (favorable)

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Measuring Global Trade

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

• Dumping is prohibited.

• China, Brazil and Russia have been penalized for dumping steel in the U.S.

UNFAIR TRADE PRACTICES LG2

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Trade Protectionism

• Trade protectionism is the use of government regulations to limit the import of G & S.

• TARIFFS are taxes on imports, making imported goods more expensive .

• PROTECTIVE TARIFFS are import taxes designed to raise the price of imported products. (To protect the economy)

• REVENUE TARIFFS are designed to raise money for the government.

Measuring Global Trade

LG2

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Trade Protectionism

• IMPORT QUOTA is a limit on the number of products in certain categories that a nation can import.

• An EMBARGO is a complete ban on the import or export of a certain product or stopping all trade with a particular country.

• NONTARIFF BARRIERS are long term ties with suppliers, customers, and distributors.

Measuring Global Trade

LG2

Tariff used to generate revenue for the government is known as:

A) Protective tariff B) Embargo tariff C) Revenue tariff D) Import quota tariff

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Tariff used to protect national industries is known as: A) Import quota tariff B) Embargo tariff C) Protective tariff D) Revenue tariff

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A nation’s complete ban on trade with another country is known as:

A) Quota B) Tariff C) Embargo D) Barrier

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U.S. Embargo

• Cuba • Iran • North Korea • Liberia • Sierra Leone • Sudan • Syria

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Which strategy would you choose?

• Small manufacturer of bike helmets • Medium manufacturer of Bluetooth speakers • Large manufacturer of car batteries • U.S. ice cream retailer with 1200 stores in the

U.S. • U.S. copyright owner of Goofy Rabbit cartoon

Character.

Strategies for Reaching Global Markets

Least Amount of commitment, control, risk and profit potential Most

Licensing Exporting Franchising Contract Manufacturing

International joint ventures and strategic

alliances

Foreign direct

investment

KEY STRATEGIES for REACHING GLOBAL MARKETS LG3

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STRATEGIES FOR REACHING GLOBAL MARKETS

• LICENSING is a global strategy in which a firm (the LICENSOR) allows a foreign company (the LICENSEE) to produce its products in exchange for a fee (a ROYALTY.) (Disney in Paris and Tokyo)

• EXPORTING is selling products in other countries.

• FRANCHISING is an arrangement whereby someone with a good idea for a business product or service sells the rights to use the idea.

• CONTRACT MANUFACTURING also called OUTSOURCING when a foreign company makes goods to which a domestic company then attaches its brand name;. (DELL and Compal Electronics Inc in Taiwan)

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STRATEGIES FOR REACHING GLOBAL MARKETS

• A JOINT VENTURE is a partnership in which two or more companies (often from different countries) join to undertake a major project. (NUMMI plant between GM and Toyota 1984-2010 and Tesla Motors and Toyota 2010)

• FOREIGN DIRECT INVESTMENT is buying of permanent property and businesses in foreign nations. (Nestle buying Dreyer’s Ice Cream in U.S.) (Kraft Foods buying Cadbury )

• A FOREIGN SUBSIDIARY is a company owned and controlled

by another company known as the ‘parent’ company. (Nestle U.S.A)

Getting Involved in Global Trade

• Small businesses may be the key in global job growth.

• Only 1% of U.S. small businesses export, yet they account for 30% of total U.S. exports.

GOING GLOBAL with a SMALL BUSINESS LG2

• President Obama wants small businesses to help double exports by 2015.

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Exporting Goods and Services

• Exporting provides a great boost to the U.S. economy.

• It’s estimated every $1 billion in U.S. exports generate over 7,000 U.S. jobs.

GETTING INVOLVED in EXPORTING LG2

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Importing Goods and Services

• Students attending schools abroad tend to notice products that they’re used to are unavailable in their new country.

• By working with producers in their native country, some become importers while still in school.

GETTING INVOLVED in IMPORTING LG2

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Foreign Direct Investment

• Multinational Corporation -- A company that manufactures and markets products in many different countries and has multinational stock ownership and management.

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

MULTINATIONAL CORPORATIONS LG3

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Forces Affecting Trading in Global Markets

• Sociocultural

• Economic and Financial

• Legal and Regulatory

• Physical and Environmental

FORCES AFFECTING GLOBAL TRADE LG4

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Socio-cultural Forces

• To be involved in global trade, you must be aware of the cultural differences among nations including:

CULTURAL DIFFERENCES LG4

- Ethnocentrism - Social Structures - Religion - Manners - Values - Language - Personal Communication

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Which of the following strategies is the safest for a small company to expand? Why?

A) Licensing B) Exporting C) Foreign Direct Investment D) Foreign Subsidiary

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Which of the following strategies is most commonly used in fast food expansion?

A) Licensing B) Exporting C) Franchising D) Outsourcing

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Which of the following strategies would work best if Marvel comics wanted to do business in Russia for the first time? A) Foreign Direct Investment B) Importing C) Franchising D) Licensing

International Slogan Blunders

• The Jolly Green Giant” for Green Giant in Arabic directly translates to “Intimidating Green Ogre.

• Braniff International Airways´ slogan Fly in leather came out as “Fly naked” Spanish (“Vuela en cuero”).

• When Kentucky Fried Chicken opened their first store in China, they discovered their slogan, “finger lickin’ good” translated to “eat your fingers off.

• In Italy a campaign for Schweppes Tonic water translated the drink´s name into “Schweppes Toilet Water.”

• IKEA named one of its new desks “FARTFULL” to promote “fährt” (speed) given the desks’ wheels and the design.

• The Brewing Company Coors translated its slogan “Turn it loose” into “Suffer from diarrhea” in Spanish.

• An American T-shirt designer printed shirts for the Spanish market to promot the visit of the Pope. Instead of “I saw the Pope” (el Papa), the shirts read “I saw the potato” (la papa).

• When General Motors introduced the Chevy Nova in South America, it was apparently unaware that "no va" means "it won't go."

• When Parker Pen marketed a ballpoint pen in Mexico, its ads were supposed to say "It won't leak in your pocket and embarrass you. However, the company mistakenly thought the spanish word "embarazar" meant embarrass. Instead the ads said that "It wont leak in your pocket and make you pregnant."