Business without Borders Chapter 3: THE WORLD MARKETPLACE

With technology and telecommunications booming, and trade barriers falling, the economic boundaries between nations have begun to blur. AN UNPRECEDENTED OPPORTUNITY

WORLDWIDE ECONOMIC GROWTH NationPopulationPer Capita GDP (U.S. Dollars) GDP Growth Rates China1,330,044,605$6, % India1,147,995,898$2, % United States303,824,646$48, % Indonesia237,512,355$3, % Brazil196,342,592$10, %

KEY REASONS FOR INTERNATIONAL TRADE  Access to Factors of Production  Reduced Economic Risk  Innovation  Competitive Advantage

COMPETITIVE ADVANTAGE A country has an absolute advantage when it can produce more of a good than other nations, using the same amount of resources. Comparative advantage - the benefit a country has in a given industry if it can make products at a lower opportunity Cost. Opportunity cost –The cost of giving up the second-best choice when making a decision.

GLOBAL TRADE: TAKING MEASURE  Balance of Trade  Trade Deficit  Trade Surplus  Balance of Payments  Balance of Payments Deficit  Balance of Payments Surplus  Exchange Rates  Countertrade Total value of imports > Total value of exports Total value of imports < Total value of exports $$ flowing in > $$ flowing out $$ flowing in < $$ flowing out

United States Balance of Trade The balance of trade is the difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than is imported; a negative balance of trade is known as a trade deficit or, informally, a trade gap. YearJanFebMarAprMayJunJulAugSepOctNovDecTotal

U.S. Balance of Payments (International Transactions) Current Account Balance: 1st quarter 2009: -$101.5 billion 4th quarter 2008: -$154.9 billion 3rd quarter 2008: -$174.1 billion 2nd quarter 2008: -$180.9 billion 1st quarter 2008: -$175.6 billion

EXCHANGE RATES: WHO BENEFITS? STRONG DOLLAR VS EURO: (Example: $1.00 = 1.20 euros) U.S. travelers to Europe Dollar buys more in Europe American firms with European operations Operating cost are lower European exporters European products costs less in U.S. WEAK DOLLAR VS. EURO: (Example: $1.00 =.60 euros) European travelers to U.S. Euro buys more in America European firms with American operations Operating costs are lower American exporters American products cost less in Europe

American Dollar Exchange Rate CountryCurrencyISO03/06/0903/05/09Change AUSTRALIADollarAUD % BELGIUMFrancBEF % CANADADollarCAD % DENMARKKroneDKK % EUROPEAN UNIONEuroEUR % FINLANDMarkkaFIM % FRANCEFrancFRF % GERMANYMarkDEM % HONG KONGDollarHKD % ISRAELSheqelILS % ITALYLiraITL % JAPANYenJPY % KOREA (SOUTH)WonKRW % MEXICOPesoMXN % NETHERLANDSGuilderNLG % NEW ZEALANDDollarNZD % NORWAYKroneNOK % RUSSIARubleRUB % SAUDI ARABIARiyalSAR % SINGAPOREDollarSGD % SOUTH AFRICARandZAR % SPAINPesetaESP % SWEDENKronaSEK % SWITZERLANDFrancCHF % TAIWANDollarTWD % UNITED KINGDOMPoundGBP % in USD

GLOBAL MARKET DEVELOPMENT OPTIONS ExportingLicensingFranchising Direct Investment Lower Risk Higher Risk Less Control More Control

STRATEGIES FOR FINDING GLOBAL SUPPLIERS Foreign Outsourcing/Contract Manufacturing Contracting with foreign suppliers to produce products, usually at a fraction of the domestic cost. ImportingBuying products that have been produced or grown in foreign nations. ExportingProducing products domestically and selling them abroad

STRATEGIES FOR REACHING GLOBAL MARKETS  Licensing  Authority given by domestic firm for rights to produce/market its product and use trademarks/patents.  Franchising  Providing the right to produce and market products under its operating requirements.  Direct Investment  Firms acquire businesses or develop new facilities in foreign countries.  Joint Ventures  Two or more companies joining forces to pursue specific opportunities (Partnership or Strategic Alliances Coke/Pepsi McDonalds

MULTINATIONAL FIRMS Shell Oil Michelin Tires Jaguar Automobiles Nokia Cell Phones Nestle Quick Netherlands/England France India Finland Switzerland Columbia RecordsJapan/Germany Do you know where the firm that ultimately owns each brand is headquartered?

BARRIERS TO INTERNATIONAL TRADE  Sociocultural Differences  Economic Differences  Political & Legal Differences

SOCIAL/CULTURAL DIFFERENCES  Nonverbal Communication  Forms of Address  Attitudes toward punctuality  Religious Celebrations  Business Practice/Gifts Think beyond the obvious differences. Social/cultural differences can rapidly undermine business relationships.

OOPS: TRANSLATION GAFFS  “It takes a virile man to make a chicken affectionate”  Perdue Farms slogan “It takes a tough man to make a chicken tender” translation in Mexico.  Irish Manure Liquor / Silver Dung Rolls Royce?  Several foreign companies have introduced products in Germany with the word “mist” which roughly translates into “dung” or “manure”  “Nothing sucks like an Electrolux”  Electrolux, a Swedish maker vacuum cleaners, introduced their vacuums in the U.S. with a literal translation of their slogan.  “Come Alive”  Pepsi’s campaign in China failed because its message came across as “Pepsi brings your ancestors back from their graves.”

ECONOMIC DIFFERENCES  Exchange Rates  Population  Per Capita Income  Infrastructure  Transportation  Communication  Energy  Finance Can you profitably provide your product or service to meet the needs of the market?

POLITICAL & LEGAL DIFFERENCES  Political regimes differ around the world  Legal Differences  Lack of Enforcement  Bribery  Political Climate  Stability  Violence  Piracy and intellectual property is a problem in several foreign nations

PROTECTIONISM Reasons to Create Trade Restrictions Reasons to Eliminate Trade Restrictions Protect domestic industryReduce prices and increase choices for consumers Protect domestic jobs in key industries Increase domestic jobs Retaliate against countries who have engaged in unfair trade practices Build exporting opportunities Pressure other countries to change their policies and practices Use world resources more efficiently

TRADE RESTRICTIONS  Tariffs  Taxes levied against imports  Quotas  Limitations on the amount of specific products that may be imported from certain countries  Voluntary Export Restrictions  Limitations on the amount of specific products that one nation will export to another  Embargo  Total ban on international trade of a certain item or a total halt in trade with a specific nation

GLOBAL EMPLOYMENT “ “ A new study suggests that 2.3 million service jobs will have moved from the United States to other countries by 2008, up from 900,000 as of 2003.

REVERSE BRAIN DRAIN  Many talented immigrants are moving home to take advantage of new economic opportunities.  US companies can cut costs by sourcing employees from overseas.  But is America losing potential innovators such as Sergey Brin, founder of Google?

FREE TRADE: THE MOVEMENT GAINS MOMENTUM There has been a global move toward free trade – the unrestricted movement of good and services across borders.

GATT AND WORLD TRADE ORGANIZATION (WTO)  General Agreement on Tariffs & Trade (GATT)  Established in 1948  Now encompasses 125 nations  Slashed tariffs by about 30%   Promote International Trade  Settle Trade Disputes

FREE TRADE  The World Bank  185 Member Countries  Reduce World Poverty in Developing World  Influence Global Economy  Provide Financial Assistance Low interest loans  The International Monetary Fund  Support Stable Exchange Rates  Facilitate International Payments  Adopt Economic Policies  Promote Trade  Lend money to member nations

TRADING BLOCS/COMMON MARKETS  The North American Free Trade Agreement (NAFTA)  The largest trading bloc  US, Canada, Mexico  European Union (EU)  The largest common market  27 nations; combined GDP $15Trillion  Goal is to bolster Europe’s trade position Groups of Countries promoting the free flow of goods and services