1. Competing in the Global Marketplace
CHAPTER 3
© Corbis / Jupiterimages
The Essentials of the
Future of Business, 4th Edition McDaniel & Gitman
Prepared by Deborah Baker
Chapter 3
Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

2. Learning Goals CHAPTER 3
1 Why is global trade important to the United States and how is it measured?
2 Why do nations trade?
3 What are the barriers to international trade?
4 How do governments and institutions foster world trade?
CHAPTER 3

3. Learning Goals (continued)
5 What are international economic communities?
6 How do companies enter the global marketplace?
7 What threats and opportunities exist in the global marketplace?
8 What are the advantages of multinational corporations?
9 What are the trends in the global marketplace?
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4. BIZ Flixs Mr. Baseball “Teach Him Properly”
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Competing in the Global Marketplace
Mr. Baseball
“Teach Him Properly”
Jack is a “product” that has been exported to Japan by the United States. Do you agree with this statement?
How does Jack’s trade to the Chunichi Dragons involve the principle of competitive advantage?
How is Jack participating in the global marketplace? How are the New York Yankees? How are the Chunichi Dragons?
BIZ Flixs
Click on the camera icon to view Chapter 3’s BIZ Flicks, highlighting the movie Mr. Baseball.
Jack Elliot is a baseball player traded to the Chunichi Dragons by the New York Yankees. He begrudgingly goes and alienates himself from the team and managers. This movie is a case study in entering the global marketplace. Jack begins with no understanding of the cultural differences between his country and his new team, and instead of learning these differences, he insists on doing things his way.
Businesses entering the global marketplace need to learn the differences between countries in order to work effectively.
Mr. Baseball / Corbis

5. Global Trade in the United States1
Why is global trade important to the United States and how is it measured? 1

6. Global Vision
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Competing in the Global Marketplace
Recognizing and reacting to international business opportunities
Being aware of threats from foreign competitors
The word global refers to a boundless mobility and competition in social, business, and intellectual arenas. Having a global vision has become a business imperative. Having a global vision means recognizing and reacting to international business opportunities, being aware of threats from foreign competitors, and effectively using international networks to obtain raw materials and move finished products to the customer.
Effectively using international distribution networks 1

7. The Importance of Global Business to the U.S.
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The Importance of Global Business to the U.S.
U.S. exports a fifth of industrial production and a third of its farm products
One of every five jobs in U.S. is supported by exports
A third of U.S. corporate profits is from international trade and foreign investment
Exports accounted for almost 25 percent of U.S. economic growth
Over the past two decades, world trade has climbed from $200 billion a year to more than $11 trillion. U.S. companies play a major role in the growth in world trade.
Foreign competition in the domestic market used to be rare, but now occurs in almost every industry. Nevertheless, the global market has created vast, new business opportunities for many U.S. firms. 1

8. Measuring Trade Between Nations
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Balance of Payments
Imports
Exports
Balance of Trade
Exchange Rates
International trade serves multiple purposes. It improves relationships with allied countries, helps ease tension among nations, and bolsters economies to raise living standards, provide jobs, and improve the quality of life.
Some of the key measures of international trade are shown on this slide. 1

9. Measuring Trade Between Nations
exports
Goods and services produced in one country and sold to other countries.
imports
Goods and services that are bought from other countries. 1

10. Measuring Trade Between Nations
balance of trade
The difference between the value of a country’s exports and the value of its imports during a specific time.
balance of payments
A summary of a country’s international financial transactions showing the difference between the country’s payments to and its receipts from other countries.
floating exchange
rate
A system in which prices of currencies move up and down based upon the demand for and
supply of the various currencies. 1

11. CONCEPT check 1 What is global vision, and why is it important?
What impact does international trade have on the U.S. economy?
Explain the impact of a currency devaluation. 1

12. Why Nations Trade 2
Why do nations trade? 2

13. Demographic Factors 2 absolute advantage comparative advantage
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Competing in the Global Marketplace
absolute advantage
A country can produce and sell products at a lower cost and is the only provider of a product
comparative advantage
A country should specialize in the products that it can produce most readily and cheaply, and trade those for goods that foreign countries can produce most readily and cheaply
One might argue that the best way to protect workers and the domestic economy is to stop trade with other nations. However, nations are good at producing different things. In that case you benefit by exporting things you do well. Economists refer to this specialization concept as advantage. 2

14. The Fear of Trade and Globalization
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Millions of Americans have lost jobs
Millions fear losing their jobs
Employers threaten to export jobs if workers do not accept pay cuts
Service and white-collar jobs are vulnerable to operations move
© Stefan Zaklin / Getty Images
Many people fear world trade and globalization. The negatives of global trade are shown here. 2

15. The Fear of Trade and Globalization
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outsourcing
Sending work functions to another country resulting in domestic workers losing their jobs.
Some economists feel that outsourcing leads to cheaper goods and services for U.S. consumers. It should also stimulate exports to fast-growing countries. However as many as 40 million jobs may be shipped out of the country in the next decade or two. 2

16. Benefits of Globalization
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Productivity grows more quickly when countries produce goods and services in which they have a comparative advantage.
Global competition and cheap imports keep prices down
An open economy spurs innovation
The U.S. buys $2 trillion a year from other countries
Prices for many heavily traded goods have fallen
Income from U.S. foreign subsidiaries is over $200 billion a year
A closer look at the economy indicates that globalization has been the engine that creates jobs and wealth. Benefits of globalization are shown here. 2

17. CONCEPT check
Describe the policy of free trade and its relationship to comparative advantage.
Why do people fear globalization?
What are the benefits of globalization? 2

18. Barriers to Trade 3
What are the barriers to international trade? 3

19. Barriers to Trade 3 Natural Barriers Tariff Barriers
Chapter 3
Competing in the Global Marketplace
Nontariff Barriers
Tariff Barriers
Natural Barriers
In general, trade barriers keep firms from selling to one another in foreign markets. Obstacles to international trade are natural barriers, tariff barriers, and nontariff barriers.
Natural barriers can be either physical or cultural. Distance and language are examples of natural trade barriers.
A tariff is a tax imposed by a nation on imported goods. Protective tariffs make imported products less attractive to buyers than domestic products.
Nontariff barriers include the import quota, which limits the quantity of a certain good that can be imported. 3

20. For and Against Tariffs
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For Tariffs
Against Tariffs
Protect infant industries
Protect American jobs
Aid in military preparedness
Discourage free trade
Raise prices
Congress has debated the issue of tariffs since This slide shows arguments for and against the use of tariffs. 3

21. Nontariff Barriers 3 Import quotas Embargos Buy-National Regulations
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Nontariff Barriers
Import quotas
Embargos
Buy-National Regulations
Exchange Controls
Governments use other tools besides tariffs to restrict trade. Nontariff barriers are shown on this slide.
Import quotas limit the quantities of certain goods that can be imported.
An embargo is a complete ban against importing or exporting a product.
Government rules that give special privileges to domestic manufacturers and retailers are called buy-national regulations.
Exchange controls are laws that require a company earning foreign exchange from its exports to sell the foreign exchange to a control agency, usually a central bank. 3

22. CONCEPT check 3 Discuss the concept of natural trade barriers.
Describe several tariff and nontariff barriers to trade. 3

23. Fostering Global Trade4
How do governments and institutions foster world trade? 4

24. Fostering Global Trade
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Competing in the Global Marketplace
Antidumping Laws
The Uruguay Round and the WTO
The World Bank and International Monetary Fund
Dumping is the practice of charging a lower price for a product in foreign markets than in the firm’s home market. The company might be trying to win foreign customers, or it might be seeking to get rid of surplus goods. Antidumping laws are enforced by the Commerce Department.
The Uruguay Round of trade negotiations is an agreement to dramatically lower trade barriers worldwide. The World Trade Organization replaced the old General Agreement on Tariffs and Trade (GATT), and has emerged as the world’s most powerful institution for reducing trade barriers and opening markets.
Two international financial organizations are instrumental in fostering global trade. The World Bank offers low-interest loans, as well as advice and information, to developing nations. The International Monetary Fund was founded in 1945, and promotes trade, makes short-term loans to member nations, and acts as a lender of last resort for troubled nations. 4

25. Antidumping Laws 4 dumping
The practice of charging a lower price for a product in foreign markets than in the firm’s home market. 4

26. The Uruguay Round and the WTO
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The Uruguay Round and the WTO
The Uruguay Round
A 1994 agreement to lower trade barriers worldwide.
World Trade Organization (WTO)
An organization established by the Uruguay Round in 1994 to oversee international trade, reduce trade barriers, and resolve disputes among member nations.
The Uruguay Round has now been signed by 148 nations, and is the most ambitious global trade agreement ever negotiated. 4

27. The World Bank and International Monetary Fund
An international bank that offers low-interest loans, as well as advice and information, to developing nations.
International Monetary Fund (IMF)
An international organization, founded in 1945, that promotes trade, makes short-term loans to member nations, and acts as a lender of last resort for troubled nations. 4

28. CONCEPT check 4 Describe the purpose and role of the WTO.
What are the roles of the World Bank and the IMF in world trade? 4

29. International Economic Communities5
What are international economic communities?
An economic community is created by formalizing trade agreements among nations that frequently trade with each other. 5

30. International Economic Communities
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preferential tariff
A tariff that is lower for some nations than for others.
free-trade zone
An area where the nations allow free, or almost free, trade among each other while imposing tariffs on goods of nations outside the zone. 5

31. International Economic Communities
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International Economic Communities
North American Free Trade Agreement
Central America Free Trade Agreement
In a free-trade zone, few duties or rules restrict trade among the partners.
The North American Free Trade Agreement (NAFTA) created the world’s largest free-trade zone. The agreement, which was ratified in 1993, includes Canada, the United States, and Mexico.
The largest new trade agreement is Mercosur, which includes Peru, Brazil, Argentina, Uruguay, and Paraguay.
The Central America Free Trade Agreement passed in Members include the U.S., Costa Rica, the Dominical Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
In 1993, members of the European Community ratified the Maastricht Treaty, to develop a unified European Market. Currently there are 27 members nations. One of the principal objectives of the EU is to promote economic progress of all member countries. The EU has stimulated economic progress by eliminating trade barriers, differences in tax laws and product standards, and establishment of a common currency, the Euro.
The European Union 5

32. The European Union 5 Chapter 3 Competing in the Global Marketplace
The EU’s 27 member nations are shown in Exhibit 3.1. 5
Exhibit 3.1 Source: Adapted from European Union, “European Countries,”

33. CONCEPT check 5 Explain the pros and cons of NAFTA.
What is the European Union? Will it ever be a United States of Europe? 5

34. Participating in the Global Marketplace6
How do companies enter the global marketplace? 6

35. Why Go Global? 6 Earn additional profits
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Competing in the Global Marketplace
Potential for cost savings
Saturated domestic markets and excess capacity
Possess exclusive market information
Leverage a unique product or technological advantage
Earn additional profits
Companies decide to enter the global marketplace for a number of reasons, with earning additional profits as the most important one. 6

36. Participating in the Global Marketplace
Chapter 3
Competing in the Global Marketplace
Risk
Return
Export
Licensing
Contract
Manu-
facturing
Joint
Venture
Direct Foreign
Invest-
ment
What steps can companies take to benefit from the aging of its workers and to effectively manage a multigenerational workforce?
Why is the increasing demand for energy worldwide a cause for concern?
Describe several strategies that companies use to remain competitive in the global economy.
A company can enter global trade in several ways. The least complicated and least risky alternative is exporting, or selling domestically produced products to buyers in another country.
Each of the ways to enter the global marketplace is described on the next slide. 6

37. Entering the Global Marketplace
Licensing
Legal process allowing use of manufacturing/patents/knowledge.
Contract Manufacturing
Private-label manufacturing by a foreign country
Joint Venture
Domestic firm buys/joins a foreign company to create new entity.
Export
Sell domestically produced products to buyers in other countries.
Direct Investment
Active ownership of a foreign company/manufacturing facility. 6

38. Entering the Global Marketplace
Chapter 3
Competing in the Global Marketplace
Entering the Global Marketplace
countertrade
A form of international trade in which part or all of the payment for goods and services is in the form of other goods and services.
International trade does not always involve cash. Countertrade is a fast-growing way to conduct international business. Roughly 30 percent of all international business involves countertrade. 6

39. CONCEPT check
Discuss several ways that a company can enter international trade.
Explain the concept of countertrade. 6

40. Threats and Opportunities in the Global Marketplace7
What threats and opportunities exist in the global marketplace? 7

41. Threats and Opportunities in the Global Marketplace
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Competing in the Global Marketplace
Threats and Opportunities in the Global Marketplace
Economic Environment
Cultural Differences
Political Considerations
© Gavin Wilson / Splash News and Pictures / Newscom
Politics, cultural differences, and the economic environment can represent both opportunities and pitfalls in the global marketplace.
The political structure of a country may jeopardize a foreign producer’s success in international trade. Nationalism is the sense of national consciousness that boosts the culture and interest of one country over those of all other countries. In a hostile climate, a government may expropriate or confiscate a foreign company’s assets.
Culture is the common set of values shared by a country’s citizens that determine what is socially acceptable. Language, customs, traditions, and personal relationships are important cultural differences.
The level of economic development varies: from countries where survival is a struggle, to countries that are highly developed. Business opportunities are usually better in countries that have an economic infrastructure in place. Infrastructure is the basic institutions and public facilities upon which an economy’s development depends. 7

42. Political Considerations
nationalism
A sense of national consciousness that boosts the culture and interests of one country over those of all other countries.
In a hostile climate, a government may expropriate or confiscate a foreign company’s assets. 7

43. Economic Environment 7 Infrastructure Money and banking Education
Chapter 3
Competing in the Global Marketplace
Infrastructure
Money and banking
Education
Transportation
Communications
Energy
Market system
Infrastructure is the basic institutions and public facilities upon which an economy’s development depends. 7

44. CONCEPT check
Explain how political factors can affect international trade.
Describe several cultural factors that a company involved in international trade should consider.
How can economic conditions affect trade opportunities? 7

45. Impact of Multinational Corporations8
What are the advantages of multinational corporations? 8

46. The Impact of Multinational Corporations
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Competing in the Global Marketplace
The Impact of Multinational Corporations
multinational corporations
Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located.
Some multinational corporations, such as Exxon and Wal-Mart, are larger than the GDP of all but a few nations in the world.
Multinational corporations engage heavily in international trade, and take political and cultural differences into account.
Many brands have more sales outside the U.S. than at home. For example, Coca-Cola has 80 percent of its sales outside the United States. . 8

47. The Multinational Advantage
Overcome trade problems
Sidestep regulatory problems
Shift production from one plant to another
Tap new technology from around the world
Save in labor costs 8

48. CONCEPT check 8 What is a multinational corporation?
What are the advantages of multinationals? 8

49. Trends in Global Competition9
What are the trends in the global marketplace? 9

50. Trends in Global Competition
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Market expansion
Blocking foreign investment
Emergence of China and India
Market expansion: The need for market expansion is the most fundamental reason for the growth in world trade. The limited size of domestic markets often motivates managers to seek markets beyond their national frontiers. Economies of large-scale manufacturing demand big markets.
Blocking foreign investment: Governments are placing restrictions on foreign purchases of factories, land, and companies in their countries. This has a major impact on U.S. multinationals because they serve foreign markets primarily through sales in their foreign affiliates and not through export.
China and India are impacting businesses. The boom in China’s exports has left few sectors unscathed. India is influential in developing software and multimedia features for next-generation devices. Technical and managerial skills in both countries are becoming more important than cheap assembly labor. 9

51. CONCEPT check
What trends will foster continued growth in world trade?
Describe some of the ways businesses can take advantage of these trends to “go global.” 9