Competing in Global Markets Chapter 4 Competing in Global Markets

Chapter Objectives Explain the importance of international business and the main reasons nations trade. Discuss the relationship of absolute and comparative advantage to international trade. Describe how nations measure international trade and the significance of exchange rates. Identify the major barriers that confront global businesses. Explain how international trade organizations and economic communities reduce barriers to international trade. Compare the different levels of involvement used by businesses when entering global markets. Distinguish between a global business strategy and a multidomestic business strategy.

Competing in Global Markets Exports—domestically produced goods and services sold in other countries. Imports—foreign goods and services purchased by domestic customers.

Why Nations Trade International trade is vital because: It expands markets for products Allows companies to seek out growth opportunities in other nations Makes production and distribution systems more efficient Reduces firms’ dependence on the economies of their home nations 1. The United States is both the largest importer and exporter, although less than 5 percent of the world's population lives within its borders. 2. With the increasing globalization of the world's economies, the international marketplace offers tremendous opportunities for U.S. and foreign businesses to expand into new markets. 3. Doing business globally also provides new sources of materials and labor. 4. Trading with other countries reduces a company's dependence on economic conditions in its home markets. 5. Countries that encourage international trade enjoy higher levels of economic activity, employment, and wages than those that restrict it.

Why Nations Trade International Sources of Factors of Production Business decisions to operate abroad depend on the availability, price, and quality of labor, natural resources, capital and entrepreneurship. 1. Decisions to operate abroad depend on the availability, price, and quality of labor, natural resources, capital and entrepreneurship 2. Trading allows companies to spread risk because different nations are at different stages of the business cycle or in different phases of development

Why Nations Trade Size of the International Marketplace Firms are attracted to international business by the sheer size of the marketplace As developing nations expand, the potential for reaching new groups of customers increases Even though people in developing nations have relatively low per capita incomes, their huge populations often offer lucrative markets 1. 1 in every 5 of the world’s 6-billion-plus people live in relatively well-developed countries 2. As developing nations expand, the potential for reaching new groups of customers increases 3. Only two of the ten most populous countries, have high per capita GDP 4. Many developing countries have high rates of annual GDP growth, making them prime candidates for customer expansion

The World’s Top 10 Nations Based on Population and Wealth

Why Nations Trade Major World Markets Major trading partners of U.S. firms include the country’s northern and southern neighbors Emerging Markets Major World Markets 1. North America a. Combined population of over 400 million b. Canada – Two-thirds of Canada’s GDP is generated in the service sectors c. Mexico – moving quickly from developing-nation to industrial-nation status mostly due to NAFTA 2. Western Europe a. Comprise a sophisticated and powerful industrial region b. Combined GDP 75% as large as the U.S. c. Germany, the UK, France and Italy are especially important 3. The Pacific Rim a. Includes Australia, China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea and Taiwan b. Strongest competition to U.S. in electronics, automobiles, and banking c. China has traditionally been considered a strong manufacturer of toys and clothing, but is increasing its capabilities in low-cost production of high-tech products 4. Latin America a. Privatization of ports, railways, telecommunications, mining and energy created new industries b. Much of this investment came from U.S. and Europe

Major Emerging Markets for the 21st Century

Why Nations Trade Absolute and Comparative Advantage Absolute Advantage Exists when a country makes a product for which it can maintain a monopoly or that it can produce at a lower cost than any competitor 1. When a country can maintain a monopoly or produce at a lower cost than any competitor 2. Rare, but some countries approximate an absolute advantage in some products

Why Nations Trade Absolute and Comparative Advantage Supplying a product more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries. 1. When a county supplies a product more efficiently and at a lower price than it can supply other goods, compared with the output of other countries. 2. Reduced labor costs can assist with maintaining a comparative advantage

Measuring Trade Between Nations Balance of trade—difference between a nation’s exports and imports. Trade surplus Trade deficit 1. Trade surplus – when a country exports more than it imports and achieves a positive balance of trade 2. Trade deficit – when a country imports more than it exports and achieves a negative balance of trade 3. U.S. has run a trade deficit since 1976

U.S. International Trade in Goods and Services

Measuring Trade Between Nations Balance or payments—difference in money flows into or out of a country. Balance of payments surplus Balance of payments deficit 1. Can be affected by overseas loans and borrowing, international investments, profits from such investments, and foreign aid payments 2. Balance of payments surplus – more money has moved into a country than out 3. Balance of payments deficit – more money has gone out of the country than in

Components of the Balance of Payments

Measuring Trade Between Nations Major U.S. Exports and Imports The U.S., with combined exports of over $2 trillion, leads the world in the international trade of goods and services.

Top 10 U.S. Exports and Imports

Measuring Trade Between Nations Exchange Rates—value of one nation's currency relative to the currencies of other nations. Devaluation—describes a fall in a currencies value relative to other currencies. Floating Exchange Rates Hard versus Soft Currencies 1. Currency values fluctuate or “float” depending on supply and demand in the international market 2. Currency traders create a market for the world’s currencies based on each country’s relative trade and investment prospects 3. National governments often intervene to adjust the exchange rates of their own currencies. 4. Other forms of influence also exist, including: a. Creation of currency blocks by linking exchange rates to each other b. Protectionist policies to guard their economies against trade imbalances c. Devaluation – a fall in a currency’s value relative to other currencies or to a fixed standard. 5. Exchange rates can change quickly and eliminate a competitive advantage, so they are important factors in determining whether or not to invest abroad 6. Hard versus soft currencies relate to their ability to convert quickly into other currencies

Barriers to International Trade All businesses encounter social and cultural, economic, legal and political barriers to both local and domestic trade Businesses face several obstacles in the global marketplace. 1. Companies must be sensitive to social and cultural differences, such as languages, values, and religions, when operating in other countries. 2. Economic differences include standards of living variations and levels of infrastructure development. 3. Legal and political barriers are among the most difficult to judge. Each country sets its own laws regulating business practices. 4. Trade restrictions like tariffs and administrative barriers also present obstacles to international business.

Barriers to International Trade Social and Cultural Differences Language Values and Religious Attitudes Language 1. More people speak Mandarin Chinese than English 2. Potential communications barriers include more than mistranslation 3. Messages can be misconveyed through inappropriate media, overlooked customs and regulations, ignored differences in taste and gift giving Values and Religious Attitudes 1. Americans place high value on efficiency and low unemployment; Europeans value employee benefits more 2. The US is a nation that values unity with tolerance of regional differences; Europeans value regional differences more 3. Religion plays an important role in every society

Barriers to International Trade Economic Differences Infrastructure Currency Conversion and Shifts Infrastructure 1. Basic systems of communication, transportation, and energy 2. Financial systems, such as the forms of money (credit cards, checks, cash, debit cards, electronic transfer systems) are also a type of infrastructure for businesses Currency Conversion and Shifts 1. Rapid and unexpected shifts can make pricing difficult 2. Shifts in exchange rates can influence attractiveness of various business decisions

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Barriers to International Trade Political and Legal Differences Political Climate Legal Environment International Regulations Political Climate 1. Stability of local and national governments 2. Host countries often pass laws designed to protect their own interests, often at the expense of foreign businesses 3. Changes in political structures almost always bring changes in the legal, and thus the business, environments Legal Environment 1. When conducting business internationally, U.S. managers must contend with three legal dimensions: U.S. law, International regulations, the laws of the country in which business is to be done 2. The Foreign Corrupt Practices Act forbids U.S. companies from bribing foreign officials, political candidates, or government representatives 3. The Corruption Perceptions Index, created by a Berlin-based organization, rates the degree of corruption in 90 countries based upon observations of business people and the general public International Regulations 1. Treaties and signed agreements that dictate the conduct of international business and protect each countries activities 2. Friendship, commerce, and navigational treaties exist between the US and other countries 3. Local regulations also affect business interactions 4. While these international and local regulations can create barriers to trade, the lack of regulations can create other problems

Corruption in Business and Government

Barriers to International Trade Types of Trade Restrictions Tariffs—tax imposed on imported goods. Nontariff Barriers Quotas Dumping Embargo Exchange controls 1. Can limit consumer choices and increase costs of foreign-made products 2. Trade restrictions often are prompted by the political environment. a. Some restrictions are intended to punish or protest countries’ political actions b. The Helms-Burton Act of 1996 imposes trade sanctions against Cuba, and permits U.S. companies and citizens to sue foreign companies if they use assets expropriated from U.S. owners to do business in Cuba c. Other restrictions are imposed to promote trade with certain countries 3. Most trade restrictions take the form of tariffs a. Taxes, surcharges, or duties on foreign products b. Revenue tariffs generate income for the government c. Protective tariffs raise the retail price of imported products to match or exceed domestic products 4. However, non-tariff or administrative barriers also exit a. quotas--limit the amounts of particular products that countries can import during specified time periods b. prevent dumping – a practice of selling products abroad at prices below its cost of production or its selling price in the nation of production c. embargoes – impose a total ban on importing a specified product or even a total halt on all products from a particular country d. exchange controls – imposed through a central bank or government agency, affecting both importers and exporters, by requiring all exchanges to take place through a designated agency

Arguments for and against Trade Restrictions

Reducing Barriers to International Trade Organizations Promoting International Trade General Agreement on Tariffs and Trade World Trade Organization (WTO)— 135 member international institution that monitors GATT agreements and mediates international trade disputes. GATT – General Agreement on Tariffs and Trade – a series of negotiations, called rounds, that substantially reduced worldwide tariffs and other barriers World Trade Organization 1. Beginning in 1995 has monitored GATT agreements among member nations 2. Unlike GATT, the WTO’s decisions are binding on parties involved 3. Concerns have been raised about WTO a. the lowering of trade barriers has encouraged nations to keep costs low, in order to compete, by using practices that harm the environment and abuse human rights b. trade unions are concerned about the export of job to countries with lower labor costs

Reducing Barriers to International Trade Organizations Promoting International Trade World Bank International Monetary Fund World Bank 1. Founded shortly after WWII by industrialized countries to lend money to less-developed and developing countries 2. Primarily funds projects that build or expand the nation’s infrastructures 3. Provide the largest source of advice and assistance to developing nations 4. Critics believe the loans are often made with conditions that hurt the borrower nation and to make payments these nations have often had to cut vital social programs International Monetary Fund 1. Established one year after World Bank 2. Created to promote trade through financial cooperation and to eliminate barriers 3. Makes short-term loans to member nations that are unable to meet their budgetary expenses 4. Significant commitments are often made in order to secure the loan, which are supposed to address the underlying conditions that created the need for the loan in the first place 5. Critics believe that the IMF’s policies of placing restrictions on government spending, as a way to address underlying difficulties, often misses the real issues of insolvency 6. Also, many believe IMF has placed many poor nations in impossible positions repaid 7. Arguments in favor of debt reductions are debated

Reducing Barriers to International Trade International Economic Communities North American Free Trade Agreement– (NAFTA) 1994 agreement among the U.S., Canada, and Mexico to break down tariffs and trade restrictions. MERCOSUR ASEAN European Union—25 nation European economic alliance. Countries may establish freWorld Bank 1. Founded shortly after WWII by industrialized countries to lend money to less-developed and developing countries 2. Primarily funds projects that build or expand the nation’s infrastructures 3. Provide the largest source of advice and assistance to developing nations 4. Critics believe the loans are often made with conditions that hurt the borrower nation and to make payments these nations have often had to cut vital social programs International Monetary Fund 1. Established one year after World Bank 2. Created to promote trade through financial cooperation and to eliminate barriers 3. Makes short-term loans to member nations that are unable to meet their budgetary expenses 4. Significant commitments are often made in order to secure the loan, which are supposed to address the underlying conditions that created the need for the loan in the first place 5. Critics believe that the IMF’s policies of placing restrictions on government spending, as a way to address underlying difficulties, often misses the real issues of insolvency 6. Also, many believe IMF has placed many poor nations in impossible positions repaid 7. Arguments in favor of debt reductions are debated e-trade areas in which they trade freely among themselves without tariffs or trade restrictions Customs unions and common markets are examples NAFTA – North American Free Trade Agreement – created one such free-trade area 1. eliminates all trade barriers and investment restrictions over a 14-year period 2. consumer choices are expanded 3. domestic producers have larger markets 4. critics are concerned about domestic job loss, lowering of environmental and human rights standards European Union - EU 1. goals include promoting economic and social programs, introducing European citizenship as a complement to national citizenship, and giving the EU a more significant role in international affairs 2. involves standardizing business regulations, requirements, import duties and taxes, and eliminating customs checks to stimulate economic growth 3. introduction of Euro as common currency also eliminates currency exchange rate fluctuations

NAFTA, MERCOSUR, and ASEAN Free-Trade Areas

The 25 Nations of the European Union

The introduction of the euro was an event of enormous cultural and financial significance.

Going Global While expanding into overseas markets can increase profits and marketing opportunities, it also introduces new complexities to operations. Key decisions before expanding overseas include Determining which foreign market (s) to enter Analyzing the expenditures required Deciding on the best way to organize overseas operations 1. determine which foreign market(s) to enter – by conducting extensive research on local demand, availability of needed resources, and ability of local workforce, 2. analyze the expenditures required to enter a new market - including tariff rates, currency stability, investment barriers 3. decide on the best way to organize the overseas operations

International Trade Research Resources

Going Global Levels of Involvement in International Business

Going Global Importers and Exporters Importers: Firms that bring in goods produced abroad to sell domestically Exporters: Firms that produce or purchase goods at home to sell overseas Counter trade Exporting and importing, the first level of involvement in international business, involves the lowest degree of both risk and control. 1. Companies may rely on export trading or management companies to assist in distribution of their products. Countertrade – exchanging goods or services for local products, rather than currency 1. particularly useful in countries with soft currency 2. in developing countries without enough credit

Going Global Contractual Agreements Franchising. Foreign Licensing. Subcontracting. International Direct Investment Acquisitions Joint Ventures Contractual agreements such as franchising, foreign licensing, and subcontracting offer additional, flexible options. 1. Franchising – a contractual agreement in which a wholesaler or retailer gains the rights to sell the franchiser’s products under that company’s brand name 2. Foreign Licensing – one firms allows another to produce or sell its products, or use its trademark, patent or manufacturing processes in a specific geographic area in return for royalties or other compensation 3. Subcontracting – involves hiring local companies to produce, distribute, or sell goods or services, allowing a foreign firm to take advantage of the subcontractor’s expertise in local customs, contacts and regulations; although the originating firm loses some control 4. Franchising and licensing are especially appropriate for services. 5. Companies may also choose local subcontractors to produce goods for local sales. International direct investment in production and marketing facilities provides the highest degree of control but also the greatest risk. 1. Firms make direct investments by acquiring foreign companies or facilities, forming joint ventures with local firms, and setting up their own overseas divisions.

Going Global From Multinational Corporation to Global Business Multinational Corporation—firm with significant operations and marketing activities outside its home country. 1. concerns have been raised about the amount of influence MNCs have on international business 2. changes have taken place, the US no longer being the only MCN player

The World’s Top Ten Marketers

Going Global Sources of Export Assistance U.S. Department of Commerce Website 1-800-USA-TRADE Commerce Department’s 68 district offices

Destinations and Sources of Direct Investment Dollars

Developing a Strategy for International Business Global Business Strategies Offering a standardized, worldwide product and selling it in essentially the same manner throughout a firm’s domestic and foreign markets. Multidomestic Business Strategy Developing and marketing products to serve different needs and tastes of separate national markets. A company that adopts a global (or standardization) strategy develops a single, standardized product and marketing strategy for implementation throughout the world. The firm sells the same product in essentially the same manner in all countries in which it operates. Under a multidomestic (or adaptation) strategy, the firm develops a different treatment for each national market. It develops products and marketing strategies that appeal to the customs, tastes, and buying habits of particular national markets.