Competing in the Global Marketplace CHAPTER 3 © Corbis / Jupiterimages The Future of Business The Essentials 4th Edition Gitman & McDaniel Prepared by Deborah Baker Chapter 3 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

Learning Goals CHAPTER 3 1 Why is global trade important to the United States and how is it measured? 2 Why do nations trade? 3 What are the barriers to international trade? 4 How do governments and institutions foster world trade? CHAPTER 3

Learning Goals (continued) 5 What are international economic communities? 6 How do companies enter the global marketplace? 7 What threats and opportunities exist in the global marketplace? 8 What are the advantages of multinational corporations? 9 What are the trends in the global marketplace? CHAPTER 3

Global Trade in the United States 1 Why is global trade important to the United States and how is it measured? 1

Global Vision Chapter 3 Competing in the Global Marketplace Recognizing and reacting to international business opportunities Being aware of threats from foreign competitors The word global refers to a boundless mobility and competition in social, business, and intellectual arenas. Having a global vision has become a business imperative. Having a global vision means recognizing and reacting to international business opportunities, being aware of threats from foreign competitors, and effectively using international networks to obtain raw materials and move finished products to the customer. Effectively using international distribution networks 1

The Importance of Global Business to the U.S. Chapter 3 Competing in the Global Marketplace The Importance of Global Business to the U.S. U.S. exports a fifth of industrial production and a third of its farm products One of every five jobs in U.S. is supported by exports A third of U.S. corporate profits is from international trade and foreign investment Exports accounted for almost 25 percent of U.S. economic growth Over the past two decades, world trade has climbed from $200 billion a year to more than $11 trillion. U.S. companies play a major role in the growth in world trade. Foreign competition in the domestic market used to be rare, but now occurs in almost every industry. Nevertheless, the global market has created vast, new business opportunities for many U.S. firms. 1

Measuring Trade Between Nations exports Goods and services produced in one country and sold to other countries. imports Goods and services that are bought from other countries. 1

Measuring Trade Between Nations balance of trade The difference between the value of a country’s exports and the value of its imports during a specific time. balance of payments A summary of a country’s international financial transactions showing the difference between the country’s payments to and its receipts from other countries. floating exchange rate A system in which prices of currencies move up and down based upon the demand for and supply of the various currencies. 1

CONCEPT check 1 What is global vision, and why is it important? What impact does international trade have on the U.S. economy? Explain the impact of a currency devaluation. 1

Why Nations Trade 2 Why do nations trade? 2

Demographic Factors 2 absolute advantage comparative advantage Chapter 3 Competing in the Global Marketplace absolute advantage A country can produce and sell products at a lower cost and is the only provider of a product comparative advantage A country should specialize in the products that it can produce most readily and cheaply, and trade those for goods that foreign countries can produce most readily and cheaply One might argue that the best way to protect workers and the domestic economy is to stop trade with other nations. However, nations are good at producing different things. In that case you benefit by exporting things you do well. Economists refer to this specialization concept as advantage. 2

The Fear of Trade and Globalization Chapter 3 Competing in the Global Marketplace outsourcing Sending work functions to another country resulting in domestic workers losing their jobs. Some economists feel that outsourcing leads to cheaper goods and services for U.S. consumers. It should also stimulate exports to fast-growing countries. However as many as 40 million jobs may be shipped out of the country in the next decade or two. 2

Benefits of Globalization Chapter 3 Competing in the Global Marketplace Productivity grows more quickly when countries produce goods and services in which they have a comparative advantage. Global competition and cheap imports keep prices down An open economy spurs innovation The U.S. buys $2 trillion a year from other countries Prices for many heavily traded goods have fallen Income from U.S. foreign subsidiaries is over $200 billion a year A closer look at the economy indicates that globalization has been the engine that creates jobs and wealth. Benefits of globalization are shown here. 2

CONCEPT check Describe the policy of free trade and its relationship to comparative advantage. Why do people fear globalization? What are the benefits of globalization? 2

Barriers to Trade 3 What are the barriers to international trade? 3

Barriers to Trade 3 Natural Barriers Tariff Barriers Chapter 3 Competing in the Global Marketplace Nontariff Barriers Tariff Barriers Natural Barriers In general, trade barriers keep firms from selling to one another in foreign markets. Obstacles to international trade are natural barriers, tariff barriers, and nontariff barriers. Natural barriers can be either physical or cultural. Distance and language are examples of natural trade barriers. A tariff is a tax imposed by a nation on imported goods. Protective tariffs make imported products less attractive to buyers than domestic products. Nontariff barriers include the import quota, which limits the quantity of a certain good that can be imported. 3

For and Against Tariffs Chapter 3 Competing in the Global Marketplace For Tariffs Against Tariffs Protect infant industries Protect American jobs Aid in military preparedness Discourage free trade Raise prices Congress has debated the issue of tariffs since 1789. This slide shows arguments for and against the use of tariffs. 3

Nontariff Barriers 3 Import quotas Embargos Buy-National Regulations Chapter 3 Competing in the Global Marketplace Nontariff Barriers Import quotas Embargos Buy-National Regulations Exchange Controls Governments use other tools besides tariffs to restrict trade. Nontariff barriers are shown on this slide. Import quotas limit the quantities of certain goods that can be imported. An embargo is a complete ban against importing or exporting a product. Government rules that give special privileges to domestic manufacturers and retailers are called buy-national regulations. Exchange controls are laws that require a company earning foreign exchange from its exports to sell the foreign exchange to a control agency, usually a central bank. 3

CONCEPT check 3 Discuss the concept of natural trade barriers. Describe several tariff and nontariff barriers to trade. 3

Fostering Global Trade 4 How do governments and institutions foster world trade? 4

Fostering Global Trade Chapter 3 Competing in the Global Marketplace Antidumping Laws The Uruguay Round and the WTO The World Bank and International Monetary Fund Dumping is the practice of charging a lower price for a product in foreign markets than in the firm’s home market. The company might be trying to win foreign customers, or it might be seeking to get rid of surplus goods. Antidumping laws are enforced by the Commerce Department. The Uruguay Round of trade negotiations is an agreement to dramatically lower trade barriers worldwide. The World Trade Organization replaced the old General Agreement on Tariffs and Trade (GATT), and has emerged as the world’s most powerful institution for reducing trade barriers and opening markets. Two international financial organizations are instrumental in fostering global trade. The World Bank offers low-interest loans, as well as advice and information, to developing nations. The International Monetary Fund was founded in 1945, and promotes trade, makes short-term loans to member nations, and acts as a lender of last resort for troubled nations. 4

Antidumping Laws 4 dumping The practice of charging a lower price for a product in foreign markets than in the firm’s home market. 4

The Uruguay Round and the WTO Chapter 3 Competing in the Global Marketplace The Uruguay Round and the WTO The Uruguay Round A 1994 agreement to lower trade barriers worldwide. World Trade Organization (WTO) An organization established by the Uruguay Round in 1994 to oversee international trade, reduce trade barriers, and resolve disputes among member nations. The Uruguay Round has now been signed by 148 nations, and is the most ambitious global trade agreement ever negotiated. 4

The World Bank and International Monetary Fund An international bank that offers low-interest loans, as well as advice and information, to developing nations. International Monetary Fund (IMF) An international organization, founded in 1945, that promotes trade, makes short-term loans to member nations, and acts as a lender of last resort for troubled nations. 4

CONCEPT check 4 Describe the purpose and role of the WTO. What are the roles of the World Bank and the IMF in world trade? 4

International Economic Communities 5 What are international economic communities? An economic community is created by formalizing trade agreements among nations that frequently trade with each other. 5

International Economic Communities Chapter 3 Competing in the Global Marketplace preferential tariff A tariff that is lower for some nations than for others. free-trade zone An area where the nations allow free, or almost free, trade among each other while imposing tariffs on goods of nations outside the zone. 5

International Economic Communities Chapter 3 Competing in the Global Marketplace International Economic Communities North American Free Trade Agreement Central America Free Trade Agreement In a free-trade zone, few duties or rules restrict trade among the partners. The North American Free Trade Agreement (NAFTA) created the world’s largest free-trade zone. The agreement, which was ratified in 1993, includes Canada, the United States, and Mexico. The largest new trade agreement is Mercosur, which includes Peru, Brazil, Argentina, Uruguay, and Paraguay. The Central America Free Trade Agreement passed in 2005. Members include the U.S., Costa Rica, the Dominical Republic, El Salvador, Guatemala, Honduras, and Nicaragua. In 1993, members of the European Community ratified the Maastricht Treaty, to develop a unified European Market. Currently there are 27 members nations. One of the principal objectives of the EU is to promote economic progress of all member countries. The EU has stimulated economic progress by eliminating trade barriers, differences in tax laws and product standards, and establishment of a common currency, the Euro. The European Union 5

CONCEPT check 5 Explain the pros and cons of NAFTA. What is the European Union? Will it ever be a United States of Europe? 5

Participating in the Global Marketplace 6 How do companies enter the global marketplace? 6

Why Go Global? 6 Earn additional profits Chapter 3 Competing in the Global Marketplace Potential for cost savings Saturated domestic markets and excess capacity Possess exclusive market information Leverage a unique product or technological advantage Earn additional profits Companies decide to enter the global marketplace for a number of reasons, with earning additional profits as the most important one. 6

Entering the Global Marketplace Licensing Legal process allowing use of manufacturing/patents/knowledge. Contract Manufacturing Private-label manufacturing by a foreign country Joint Venture Domestic firm buys/joins a foreign company to create new entity. Export Sell domestically produced products to buyers in other countries. Direct Investment Active ownership of a foreign company/manufacturing facility. 6

Entering the Global Marketplace Chapter 3 Competing in the Global Marketplace Entering the Global Marketplace countertrade A form of international trade in which part or all of the payment for goods and services is in the form of other goods and services. International trade does not always involve cash. Countertrade is a fast-growing way to conduct international business. Roughly 30 percent of all international business involves countertrade. 6

CONCEPT check Discuss several ways that a company can enter international trade. Explain the concept of countertrade. 6

Threats and Opportunities in the Global Marketplace 7 What threats and opportunities exist in the global marketplace? 7

Political Considerations nationalism A sense of national consciousness that boosts the culture and interests of one country over those of all other countries. In a hostile climate, a government may expropriate or confiscate a foreign company’s assets. 7

Economic Environment 7 Infrastructure Money and banking Education Chapter 3 Competing in the Global Marketplace Infrastructure Money and banking Education Transportation Communications Energy Market system Infrastructure is the basic institutions and public facilities upon which an economy’s development depends. 7

CONCEPT check Explain how political factors can affect international trade. Describe several cultural factors that a company involved in international trade should consider. How can economic conditions affect trade opportunities? 7

Impact of Multinational Corporations 8 What are the advantages of multinational corporations? 8

The Impact of Multinational Corporations Chapter 3 Competing in the Global Marketplace The Impact of Multinational Corporations multinational corporations Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located. Some multinational corporations, such as Exxon and Wal-Mart, are larger than the GDP of all but a few nations in the world. Multinational corporations engage heavily in international trade, and take political and cultural differences into account. Many brands have more sales outside the U.S. than at home. For example, Coca-Cola has 80 percent of its sales outside the United States. . 8

The Multinational Advantage Overcome trade problems Sidestep regulatory problems Shift production from one plant to another Tap new technology from around the world Save in labor costs 8

CONCEPT check 8 What is a multinational corporation? What are the advantages of multinationals? 8

Trends in Global Competition 9 What are the trends in the global marketplace? 9

CONCEPT check What trends will foster continued growth in world trade? Describe some of the ways businesses can take advantage of these trends to “go global.” 9