Chapter 3: THE WORLD MARKETPLACE Business without Borders

AN UNPRECEDENTED OPPORTUNITY With technology and telecommunications booming, and trade barriers falling, the economic boundaries between nations have begun to blur. Note the impact of technology on the speed in which globalization is currently growing. Discuss why technology breaks down international barriers.

WORLDWIDE ECONOMIC GROWTH The opportunities around the world are growing. The number of people of with cell phones is a big indicator. Cell phone penetration in China and India is skyrocketing. 350 million in China which is going to double in the next 5 years and 55 million in India which is a 900% increase.

KEY REASONS FOR INTERNATIONAL TRADE Access to Factors of Production Reduced Economic Risk Innovation Competitive Advantage Emphasize that globalization provides a variety of new opportunities for companies to gain access to new customers, creative/cheap labor and inexpensive infrastructure for facilities. Decisions to trade require countries to look at the opportunity cost.

COMPETITIVE ADVANTAGE Opportunity cost –The cost of giving up the second-best choice when making a decision. 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.

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 Click the Internet icon to review trade statistics. The website is interactive and will allow you to select the statistics that you would like to view.

EXCHANGE RATES: WHO BENEFITS? STRONG DOLLAR VS EURO: (Example: $1.00 = 1.20 euros) WEAK DOLLAR VS. EURO: (Example: $1.00 = .60 euros) U.S. travelers to Europe European travelers to U.S. American firms with European operations European firms with American operations European exporters American exporters Discuss the measures of trade and what it means that the dollar is weak. How does that impact customers? American consumers? American businesses? U.S. travelers to Europe: Dollar buys more in Europe. American firms with European operations: Operating costs are lower. European exporters: Europe products are less in US, they export more and we import more. European travelers to the U.S.: Euro buys more in America. European firms with American operations: Operating costs are lower. American exporters: Products are less expensive in Europe, we export more, Europe imports more.

STRATEGIES FOR FINDING GLOBAL SUPPLIERS Foreign Outsourcing/Contract Manufacturing – contracting with Foreign suppliers to produce products, usually at a fraction of the domestic cost. Importing – buying products that have been produced or grown in foreign nations. Note the examples in the text and the relationships that Gap, Apple and other domestic companies have with foreign manufacturers. Note how technology has made it easier and more efficient to work with foreign partners. Click link to view a China Manufacturers’ website and global sourcing services they offer.

STRATEGIES FOR REACHING GLOBAL MARKETS Licensing Authority given by domestic firm for rights to produce/market its product and use trademarks/patents. Franchising Offering businesses in other countries the right to produce and market products under its operating requirements. Direct Investment Firms acquire businesses or develop new facilities in foreign countries. The links will take you to the websites of Kentucky Fried Chicken (right) and McDonalds (left). Note to students the cultural differences on the websites of the different fast food companies. In South Africa all of the children are black and the sport being shown is soccer. What have been you experiences with fast-food in other countries? Many companies may also decide to employ a variety of strategies to reach global markets. These strategies may also include partnerships.

THE SLEEPING DRAGON AWAKES After years closed off from the world, China is experiencing economic growth of approximately 10% per year In one generation, per capita income in China has tripled 300 million have been pulled from poverty China ranks 3rd in international commerce China will play a pivotal role in shaping the world economy

FOREIGN INVESTMENT RISK

MULTINATIONAL FIRMS Do you know where the firm that ultimately owns each brand is headquartered? Nestle Quick Switzerland Nokia Cell Phones Finland Jaguar Automobiles United States Click the slide for the answers to each product/company to appear. Michelin Tires France Shell Oil Netherlands/England Columbia Records Japan/Germany

BARRIERS TO INTERNATIONAL TRADE Sociocultural Differences Economic Differences Political & Legal Differences Review Exhibit 3.1. Click the link to go to the CIA Factbook. Ask the students to suggest several countries and then review their social, economic and political situations. Compare the GDP for each country with the students. Note that the factbook details other potential barriers/issues that may be social/political.

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

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.

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? Companies will need to think about internet access and electronic payment availability. Most companies have figured out innovative versions of their product that are profitable in foreign markets.

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 industry Reduce 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 Use world resources more efficiently

TRADE RESTRICTIONS Tariffs Quotas Voluntary Export Restrictions Embargo

United States to other countries 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% World Trade Organization (WTO) Promote International Trade Settle Trade Disputes Note the recent controversies of the WTO.

FREE TRADE The World Bank The International Monetary Fund 184 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 Organizations believe that trade is important to eradicate poverty.

TRADING BLOCS/COMMON MARKETS Groups of Countries promoting the free flow of goods and services The North American Free Trade Agreement (NAFTA) The largest trading bloc US, Canada, Mexico European Union (EU) The largest common market Note EU membership and the countries planning to join.