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Competing in World Markets
4 Chapter Competing in World Markets
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Learning Objectives LO 4.1 Explain the primary reasons why nations trade. LO 4.2 Describe how trade is measured between nations. LO 4.3 Identify the major barriers to international trade. LO 4.4 Explain how international trade organizations and economic communities reduce barriers to international trade. LO 4.5 Compare the different levels of involvement used by businesses when entering global markets. LO 4.6 Distinguish between a global business strategy and a multidomestic business strategy.
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Why Nations Trade Boosts economic growth Expands markets
More efficient production systems Less reliance on the economies of home nations Exports: Domestically produced goods and services sold in other countries Imports: Foreign goods and services purchased by domestic customers
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International Sources of Factors of Production
Decisions to operate abroad depend upon availability, price, and quality of: Labour Natural resources Capital Entrepreneurship Companies doing business overseas must make strategic decisions
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Additional Environmental Factors to which Companies are Exposed
New social and cultural practices Economic and political environments Legal restrictions Companies can expand their markets, seek growth opportunities in other nations, make their production and distribution systems more efficient, and reduce their dependence on the economies of their home nations
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Size of the International Marketplace
As developing nations expand into the global marketplace, opportunities grow Many developing countries have posted high growth rates of annual GDP. Until the economic slowdown, U.S. and Canadian GDP rates grew at an annual rate of about 4 percent In less developed countries, GDP growth rates were greater; China averaged 10.1% and India averaged 7.5% Current GDP data
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The World’s Top 10 Nations
Though developing nations generally have lower per capita income, many have strong GDP growth rates, and their huge populations can be lucrative markets Table 4.1 The World’s Top 10 Nations
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Absolute and Comparative Advantage
A country has an absolute advantage in making a product when it has a monopoly on making that product or when it can produce the product at a lower cost than any other country Example: China’s domination of silk production for centuries A nation can develop a comparative advantage when it can supply its products more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries Example: India’s combination of a highly educated workforce and low wage scale in software development
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Test Your Knowledge Why does Spain have an near absolute advantage in growing saffron? a) Spain has some of the lowest labour rates in the world so the time-consuming harvesting process is less expensive. b) Treaties limit which country can produce saffron. c) The spice is relatively inexpensive, so other countries are not interested in growing it. d) Saffron thrives in Spain’s climate, and soil but does not do as well elsewhere. Answer: d
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Measuring Trade Between Nations
Balance of trade: The difference between a nation’s exports and imports Balance of payments: The overall money flows into or out of a country Balance-of-payments surplus = more money into a country than out of it Balance-of-payments deficit = more money out of a country than into it
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Test Your Knowledge The difference between a nation’s imports and its exports is called the a) balance of trade. b) exchange rate. c) balance of payments. d) budget deficit. Answer: a
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Exchange Rates Currency rates are influenced by:
Domestic economic and political conditions Central bank intervention Balance-of-payments position Speculation over future currency values Values fluctuate, or “float,” depending on supply and demand National governments can deliberately influence exchange rates Business transactions are usually conducted in the currency of the region where they happen Rates can quickly create or wipe out competitive advantages
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Barriers to International Trade
FIGURE 4.2 Barriers to International Trade
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Social and Cultural Differences
Language: Potential problems include mistranslation, inappropriate messaging, lack of understanding of local customs, and differences in taste Values and Religious Attitudes: Differing values about business efficiency, employment levels, importance of regional differences, and religious practices, holidays, and values about issues such as interest-bearing loans
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Economic Differences Infrastructure: The basic systems of a country’s communication, transportation, and energy facilities Currency Conversion and Shifts: Fluctuating values can make pricing in local currencies difficult, and affect decisions about market desirability and investment opportunities
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Political and Legal Differences
Political Climate Stability is a key consideration Legal Environment Canadian law International regulations Country’s law in which trade is planned Climate of corruption (see Canada Takes Aim At Foreign Corruption) International Regulations Treaties between Canada and other nations Tariffs: Taxes imposed on imported goods Enforcement issues
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Test Your Knowledge Trade restrictions create what kind of barrier to international trade? a) legal and political b) economic c) social d) cultural Answer: a
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Corruption in Business and Government
Transparency International produces an annual corruption index for businesspeople and the general public
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Types of Trade Restrictions
Tariffs: taxes, surcharges, or duties on foreign products Revenue tariffs generate income for the government Protective tariffs raise prices of imported goods to level the playing field for domestic competitors Nontariff barriers: also called administrative trade barriers Quota: A limit set on the amounts of particular products that can be imported Dumping: Selling products in other countries at prices below production costs or below typical prices in the home market Embargo: A total ban on importing specific products or a total stop to trading with a particular country Exchange control: a restriction on important certain products or a restriction against certain companies to reduce trade and the spending of foreign currency In accordance with national policy, through central banks or government
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Reducing Barriers to International Trade
The world is moving toward more free trade There are many communities and groups that monitor and promote trade International economic communities reduce trade barriers and promote regional economic cooperation Free-trade area: Members trade freely among selves without tariffs or trade restrictions Customs union: Establishes a uniform tariff structure for member’s trade with nonmembers Common market (or economic union): Members bring all trade rules into agreement
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Organizations Promoting Trade
General Agreement on Tariffs and Trade (GATT) Major industrialized nations found this multinational organization in 1947 to reduce tariffs and relax import quotas The World Trade Organization succeeded GATT Representatives from 157 countries Monitors GATT agreements and mediates international trade disputes World Bank Funds projects to build and expand infrastructure in developing countries International Monetary Fund (IMF) Operates as lender to troubled nations in an effort to promote trade
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International Economic Communities
North American Free Trade Agreement (NAFTA) World’s largest free-trade zone: Canada, United States, Mexico U.S. and Canada are each other’s biggest trading partners Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) Free-trade area among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua European Union Best-known example of a common market; 27 member countries Goals include promoting economic and social progress, introducing European citizenship as complement to national citizenship, and giving EU a significant role in international affairs
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Going Global Determining which foreign market(s) to enter
Analyzing the expenditures required to enter a new market Deciding the best way to organize the overseas operations CIA World Factbook
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International Trade Research Resources on the Internet
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Levels of Involvement Risk increases with the level of involvement
Many companies employ multiple strategies Exporting and importing are entry-level strategies Importing is the process of bringing in goods produced abroad Exporting is the act of selling home goods overseas
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Countertrade and Franchising
Countertrade: A barter agreement whereby trade between two or more nations involves payment made in the form of local products instead of currency Franchising: A contract-based agreement in which a franchisee can produce and/or sell the franchisor’s products under that company’s brand name if the franchisee agrees to the operating terms and requirements
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Countertrade and Franchising (cont’d)
Foreign licensing agreement: An international agreement in which one firm allows another firm to produce or sell its product, or use its trademark, patent, or manufacturing processes, in a specific geographical area, in return for royalties or other compensation Subcontracting: An agreement that involves hiring other companies to produce, distribute, or sell goods and services
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Offshoring and International Direct Investment
The relocation of business processes to lower-cost overseas locations Not initiating business but gaining cost savings to stay competitive Extremely controversial The ultimate level of global involvement is direct investment Directly operating production and marketing in a foreign country Acquisition (purchase firm from host country) Joint venture (partnership between companies) Overseas division (set up offices overseas)
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Developing a Strategy for International Business
Global business (standardization) strategies Firm sells same product in essentially the same manner throughout the world Works well for products with nearly universal appeal Multidomestic (adaptation) strategies Firm develops products and marketing strategies that appeal to customs, tastes, and buying habits of particular national markets
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The World’s Top 10 Leading Companies
Multinational corporation (MNC): A firm with many operations and marketing activities outside its home country Source: “The Global 2000,” Forbes, accessed March 30, 2012,
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