1. Competing in Global Markets
Chapter 17
Competing in Global Markets

2. Learning Goals
Explain international business and why nations trade.
Discuss types of advantage in international trade.
Describe measurements of international trade and 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. 1 5 2 6 3 7 4

3. Why Nations Trade Boosts economic growth Expands markets
More efficient production systems
Less reliance on economies of home nations
International trade is beneficial for the economy and individual businesses because it boosts economic growth. Importing and exporting are the most common ways in which businesses act globally but there are other investments that businesses can invest globally that will be discussed later in the lecture.
Exports: Domestically produced goods and services sold in markets in other countries.
Imports: Foreign-made products and services purchased by domestic consumers.

4. Why Nations Trade
Nations trade for the same reasons that individuals do—because they believe that the products they receive are worth more than the products they give up. An important reason for trade—whether among people, states, or countries—is specialization. When people specialize, they produce the things they do best and exchange those products for the things that other people do best.

5. International Sources of
Factors of Production
Decisions to operate abroad depend upon availability, price, and quality of:
Labor
Natural resources
Capital
Entrepreneurship
Companies can spread risk throughout nations
Companies can spread their investment risk by “going global”. Businesses are looking globally for factors of production as well as labor and customers.

6. 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
United States 4.4%
China 11.1%
India 9.4%
Discuss the size of the world and specific markets as opportunities to any businesses. Specifically discuss the size and changes in India and China. Note that the combination of size and wealth attracts businesses. The growing middle class in both China and India – current GDP growth is outpacing US.

7. Population Size and Prosperity
Though developing nations generally have lower per capita income, many have strong GDP growth rates and their huge populations can be lucrative markets.
The growth of GDP in developing nations is a big opportunity for businesses. People alone are not enough to create a market. Many of the largest populous countries have low GDP. But the GDP of many developing countries is growing in double digits – China and India are good examples.

8. Top Ten Trading Partners
With the United States
The United States trades with multiple countries. Foreign trade make up an important part of the US economy.

9. Absolute and Comparative
Advantage
Absolute advantage: Country can maintain a monopoly or produce at a lower cost than any competitor.
Example: China’s domination of silk production for centuries.
Comparative advantage: Country can supply a product more efficiently and at lower cost than it can supply other goods, compared with other countries.
Example: India’s combination of a highly educated workforce and low wage scale.
Absolute advantages are rare theses days. Climate differences can provide advantages. India has the opposite time of the United States and can offer customer support via the phone and web when we are sleep. Many advantages today may be technological.

10. Measuring Trade Between Nations
Balance of trade: Difference between a nation’s imports and exports.
Balance of payments: Overall flow of money into or out of a country.
Balance of payments surplus = more money into country than out
Balance of payments deficit = more money out of country than in
The United States has run a trade deficit every year since Although the US is a top exporter, the US imports a wide range of products. The measurement of trade allows nations to review the inflows and outflows of trade. Balance of trade determines the balance of payments.

11. Major US Exports and Imports
U.S. demand for imported goods is partly a reflection of the nation’s prosperity and diversity.
U.S. imports more goods than it exports, but exports more services than it imports.
Major services that the US exports include services from Citibank, Walt Disney, Allstate Insurance, Federal Express, McDonalds, and Starbucks. Businesses in many foreign countries want the expertise of US professionals.

12. 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 currency of the region where they happen.
Rates can quickly create or wipe out competitive advantage.
The exchange rate is the value of one nation’s currency compared to the currencies of other nations. The Euro, Yen and Dollar are easily converted currencies or “hard currencies”. Foreign currency is the world’s biggest market with daily volume of about $1.5 trillion. Some government take steps to devalue their currency which is a process of dropping the value relative to other currencies. Currency rates and changes is a large part of doing business globally.

13. Barriers to International Trade
The barriers to trade range from specific rules and laws to implicit barriers like language and values.

14. 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.
Although English is the second most widely spoken language in the world, language and attitudes can serve as barriers to doing business. Communication barriers are greater than simple translation.

15. Economic Differences
Infrastructure: Basic systems of communication, transportation, energy facilities, and financial systems.
Currency Conversion and Shifts: Fluctuating values can make pricing in local currencies difficult and affect decisions about market desirability and investment opportunities.
Devalued currency can make market less attractive for exports but more attractive for investments because payment in local currency is a relative bargain. Furthermore, bad roads and limited access to the Internet can cause problems with shipping and communication. Implicit economic differences can cause huge problems.

16. Political and Legal Differences
Political Climate
Stability is a key consideration.
Legal Environment
U.S. law
International regulations
Country’s law
Climate of corruption. Foreign Corrupt Practices Act forbids U.S. companies from bribing foreign officials, candidates, or government representatives.
International Regulations
Treaties between U.S. and other nations.
Tariffs are taxes charged on imported goods.
Enforcement problems, as with piracy
In some cases like counterfeits and intellectual property, the enforcement of international regulations along with the climate of corruption can be key issues for doing business abroad. Discuss that the US has many trade agreements and is a member of the World Trade Organization (WTO) in an effort to support and promote trade. Click on the Foreign Corrupt Practices Act to go to the website for more detail.

17. Government Corruption
Transparency International produces an annual corruption
index for businesspeople and the general public.
Click on Transparency International to view the report and other information with the class.

18. Types of Trade Restrictions
Tariffs - taxes, surcharges, or duties on foreign products.
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
Quotas limit the amount of a product that can be imported over a specified time period.
Dumping is the act of selling a product abroad at a very low price.
An embargo imposes a total ban on importing a specified product or all
Exchange controls through central banks or government agencies regulate the buying and selling of currency to shape foreign exchange in accordance with national policy.
Many of the restrictions exist to protect domestic/local businesses. But, as a member of a trade organization like WTO, countries agree to reduce and restrict barriers.

19. 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 members’ trade with nonmembers.
Common market: Members bring all trade rules into agreement.
There are many groups and organizations that have been developed to promote more free trade.

20. Organizations Promoting International Trade
General Agreement on Tariffs and Trade (GATT)
Most industrialized nations found organization in 1947 to reduce tariffs and relax quotas
The World Trade Organization succeeded GATT
Representatives from 151 countries
Reduce tariffs and promote trade
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
The WTO and trade in general have become controversial as issues like domestic jobs and worker’s rights in countries like China continue to erupt. Discuss the controversy regarding globalization and trade versus protectionism.

21. International Economic Communities
North American Free Trade Agreement (NAFTA)
World’s largest free-trade zone: United States, Canada, Mexico.
U.S. and Canada are each other’s biggest trading partners.
Central America-Dominican Republic Free Trade Agreement (CAFTA)
Free-trade zone among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
$33 billion traded annually between U.S. and these countries.
European Union
Best-known example of a common market.
Goals include promoting economic and social progress, introducing European citizenship as complement to national citizenship, and giving EU a significant role in international affairs.
Click each of the organizations to view the website for more details about the organizations. Highlight the European Union and how the consolidation of currency and collaboration is changing the continent.

22. Going Global What foreign market(s) will the company enter?
Analysis of local demand, availability of resources
Existing and potential competition, tariff rates, currency stability, investment barriers
What expenditures are required to enter a new market?
What is the best way to organize overseas operations?
Good starting point for research: CIA’s World Factbook
Click the CIA World Factbook link and review a few countries to note the differences regarding economies and GDP. Business professionals must think and plan about going global and clearly understand the market/country they are entering.

23. International Trade Research
With the growth of globalization, there are a verity of resources available to aid professionals who are looking to go global.

24. 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 your goods overseas.
Risk increases with the level of involvement that a business choices. Importing and exporting are entry-level strategies to going global. Many companies actually employ multiple international strategies.

25. Countertrade & Franchising
Countertrade – international transactions that do not involve currency payments but use bartering.
Franchising – a contractual agreement where a local entity gains rights to sell the franchisor’s product in the foreign market.
A foreign licensing agreement allows a firm to produce or sell its product
Subcontracting involves hiring local firms to distribute, produce or sell goods and services.
Companies should be very clear regarding contractual agreements with local parties. This is very important in international sales. Franchising globally has the same basics as franchising in the US. Franchising is another key reason to understand international contractual agreements.

26. Offshoring & Direct Investment
The relocation of business processes to a lower-cost overseas location is offshoring
Not initiating business but gaining cost savings
Extremely controversial
The ultimate level of global involvement is direct investment
Directly operating production and marketing in foreign country.
Acquisition
Joint Ventures
Overseas Division
Highlight the controversies from offshoring. Growing competition and the goal to drive down costs has increased offshoring and the trend is not slowing. Discuss the differences between acquisition, joint ventures and overseas divisions which are all ways to employ direct investment.

27. Multinational Corporations
Multinational corporation (MNC) An organization with significant foreign operations and marketing activities outside its home country.

28. Developing a Strategy for International Business
Global Business Strategies
Firm sells same product in essentially the same manner throughout the world.
Works well for products with nearly universal appeal.
Multidomestic Business Strategies
Firm develops products and marketing strategies that appeal to customs, tastes, and buying habits of particular national markets.
Example: Spinach, egg, and tomato soup on the menu in KFC’s menu in China.