1. Doing Business in Global Markets Chapter 03 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 1. Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade. 2. Explain the importance of importing and exporting, and understand key terms used in global business. 3. Illustrate the strategies used in reaching global markets and explain the role of multinational corporations. LEARNING GOALS Chapter Three 3-2

3. 4. Evaluate the forces that affect trading in global markets. 5. Debate the advantages and disadvantages of trade protectionism. 6. Discuss the changing landscape of the global market and the issue of offshore outsourcing. LEARNING GOALS Chapter Three 3-3

4. Profile China has the world’s largest media market, but much remains controlled by the state. Lan attracts 200 million daily viewers and has interviewed some of the world’s most famous people. Lan used her media clout to create a media empire, despite struggles. YANG LAN Co-Founder and Chair of Sun Media Group 3-4

5. We franchise 37,000 of our KFC, Taco Bell and Pizza Hut restaurants in 109 countries around the world. We found in Japan that a favorite pizza enjoyed by our patrons was topped with squid and sweet mayonnaise. In China it’s a must to serve a “dragon twister” with our chicken. Name that company! NAME that COMPANY Chapter Three 3-5

6. The Dynamic Global Market Over 90% of companies doing business globally believe it is important for employees to have international experience. U.S. organizations (like UPS, MLB, the NFL and the NBA) are also expanding abroad. UPSMLBNFLNBA BUSINESS in the GLOBAL MARKET LG1 3-6

7. The Dynamic Global Market WORLD POPULATION by CONTINENT LG1 3-7

8. The Dynamic Global Market Importing -- Buying products from another country. Exporting -- Selling products to another country. The U.S. is the largest importing and the third largest exporting nation in the world. IMPORTING and EXPORTING LG1 3-8

9. Source: Forbes, September 27, 2010. The Dynamic Global Market PLEASURE DOING BUSINESS Best Countries for Business LG1 3-9

10. Source: Forbes, www.forbes.com, June 2011.www.forbes.com U.S. – 412 billionaires China – 115 billionaires Russia – 101 billionaires India – 55 billionaires Germany – 52 billionaires U.K. – 32 billionaires Canada – 22 billionaires The Dynamic Global Market CAN YOU SPARE a DIME? Home Countries for Some of the World’s Billionaires LG1 3-10

11. Why Trade With Other Nations? Countries with abundant natural resources (like Venezuela or Russia) need technological resources from other countries (like Japan). Global trade allows countries to produce what they make best and buy what they need from others. Free Trade -- The movement of goods and services among nations without political or economic barriers. TRADING with OTHER NATIONS LG1 3-11

12. Source: Bloomberg Businessweek, November 22, 2011. HOW EXPORTS AFFECT the GDP Why Trade With Other Nations? LG1 3-12

13. Source: Bloomberg Businessweek, November 22, 2011. HOW EXPORTS AFFECT the GDP Why Trade With Other Nations? LG1 3-13

14. Source: Bloomberg Businessweek, November 22, 2011. HOW EXPORTS AFFECT the GDP Why Trade With Other Nations? LG1 3-14

15. Source: The World Bank, June 2011. Global trade has led the world in a new direction: Literacy rates worldwide have increased from 56% in 1950 to 89% in 2011. Life expectancy in less developed areas rose from 40.9 years in 1950 to 69 years in 2011. HOW FREE TRADE BENEFITS the WORLD Why Trade With Other Nations? LG1 3-15

16. The Theories of Comparative and Absolute Advantage Comparative Advantage -- A country should sell the products it produces most efficiently and buy from other countries the products it cannot produce as efficiently. Absolute Advantage -- A country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. COMPARATIVE and ABSOLUTE ADVANTAGE LG1 3-16

17. Getting Involved in Global Trade Small businesses may be the key in global job growth. Only 1% of U.S. small businesses export, yet they account for 30% of total U.S. exports. GOING GLOBAL with a SMALL BUSINESS LG2 President Obama wants small businesses to help double exports by 2015. 3-17

18. Source: HuffPost Business, March 2, 2011. Getting Involved in Global Trade WHOM DOES the U.S. OWE? Countries that Own the Most U.S. Debt LG2 3-18

19. Jordan Kassalow visited Mexico and saw how the lack of eyeglasses affected the local workers. He founded VisionSpring, part charity and part franchisor, with a partner. VisionSpring employs mostly women needing additional income. They buy glasses from VisionSpring and then sell them to locals. This gives eyesight to those who need it and stimulates the local economy. A SMALL BUSINESS with a BIG VISION (Spotlight on Small Business) 3-19

20. Importing Goods and Services Students attending schools abroad tend to notice products that they’re used to are unavailable in their new country. By working with producers in their native country, some become importers while still in school. GETTING INVOLVED in IMPORTING LG2 3-20

21. Exporting Goods and Services Exporting provides a great boost to the U.S. economy. It’s estimated every $1 billion in U.S. exports generate over 7,000 U.S. jobs. GETTING INVOLVED in EXPORTING LG2 3-21

22. Measuring Global Trade Balance of Trade -- The total value of a nation’s exports compared to its imports measured over a particular period. Trade Surplus (Favorable) -- When the value of a country’s exports is more than that of its imports. Trade Deficit (Unfavorable) -- When the value of a country’s exports is less than that of its imports. HOW to MEASURE GLOBAL TRADE LG2 3-22

23. Measuring Global Trade Balance of Payments -- The difference between money coming into a country (from exports) and money leaving the country (from imports) plus other money flows. The goal is to have more money flowing into a country than out – a favorable balance. An unfavorable balance is when more money flows out of a country. BALANCE of PAYMENTS LG2 3-23

24. Measuring Global Trade Dumping -- Selling products in a foreign country at lower prices than those charged in the producing country. Dumping is prohibited. China, Brazil and Russia have been penalized for dumping steel in the U.S. UNFAIR TRADE PRACTICES LG2 3-24

25. Progress Assessment What are two of the main arguments favoring the expansion of U.S. businesses into global markets? What’s comparative advantage, and what are some examples of this concept at work in global markets? How are a nation’s balance of trade and balance of payments determined? What’s meant by dumping in global trade? PROGRESS ASSESSMENT 3-25

26. Strategies for Reaching Global Markets Least Amount of commitment, control, risk and profit potential Most LicensingExportingFranchising Contract Manufacturing International joint ventures and strategic alliances Foreign direct investment KEY STRATEGIES for REACHING GLOBAL MARKETS LG3 3-26

27. Licensing Licensing -- When a firm (licensor) provides the right to manufacture its product or use its trademark to a foreign company (licensee) for a fee (royalty). Licensing can benefit a firm by: - Gaining revenues it wouldn’t have otherwise generated. - Spending little or no money to produce or market their products. LICENSING LG3 3-27

28. Exporting EACs provide hands-on exporting assistance and trade-finance support for small and medium- sized businesses that wish to directly export goods and services. ETCs help companies engage in indirect exporting by:  Matching buyers and sellers.  Dealing with foreign customs offices, documentation, and conversions. EXPORT ASSISTANCE CENTERS and EXPORT TRADING CENTERS LG3 3-28

29. Franchising Franchising -- A contractual agreement whereby someone with a good idea for a business sells others the rights to use the name and sell a product/service in a given area. Franchisors need to be careful to adapt their product to the countries they serve. Yum! Brands, home of KFC, Taco Bell and Pizza Hut, learned that food preferences differ all around the world.KFCTaco BellPizza Hut FRANCHISING LG3 3-29

30. Franchising Source: World Features Syndicate. Sweet Potato Honeydew Melon Green Apple Kiwi Fruit Mango Pineapple Strawberry Corn Crumb Soft Rice Cake TIME to MAKE the DONUTS… Dunkin’ Donuts Flavors in Taiwan LG3 Photo Courtesy of: Dennis Yang 3-30

31. McDonald’s has more than 32,000 restaurants in over 117 countries.McDonald’s Maintains varying menus around the world due to the different preferences of its customers. GOLDEN ARCHES GLOWING ACROSS the GLOBE (Reaching Beyond Our Borders) Attracts top-level college graduates to be trained for management spots. Only 8 of every 1,000 applicants actually makes it into the program! 3-31

32. Franchising Source: McDonalds, www.mcdonalds.com, June 2011.www.mcdonalds.com Malaysia: Bubur Ayam McD – Chicken strips in porridge with onions, ginger, and shallots. Egypt: Mcarabia – Grilled chicken with tehina sauces, lettuce, tomato and onion on Arabic bread. Japan: Teritama – Teriyaki burger topped with an egg. Germany: Want a beer with your burger? You can order one in the German stores. Israel: Operates using Kosher kitchens. THAT’S at MCDONALD’S? LG3 3-32

33. Contract Manufacturing Contract Manufacturing -- A foreign company produces private-label goods to which a domestic company then attaches its own brand name or trademark. A form of outsourcing. Contract manufacturing can be used to: - Allow a company to experiment in a new market without incurring heavy start-up costs such as building a manufacturing plant. - Temporarily meet an unexpected increase in orders. CONTRACT MANUFACTURING 3-33

34. International Joint Ventures and Strategic Alliances Joint Venture -- A partnership in which two or more companies join to undertake a major project. The benefits of joint ventures: - Shared technology and risk. - Shared marketing and management expertise. - Entry into markets where foreign companies are often not allowed unless goods are produced locally. JOINT VENTURES LG3 3-34

35. International Joint Ventures and Strategic Alliances Strategic Alliance -- A long-term partnership between two or more companies established to help each company build competitive market advantages. STRATEGIC ALLIANCES LG3 Strategic alliances don’t typically share costs, risks, management or profits. Strategic alliances provide broad access to markets, capital and technical expertise. 3-35

36. Foreign Direct Investment Foreign Direct Investment (FDI) -- The buying of permanent property and businesses in foreign nations. Foreign Subsidiary -- A company owned in a foreign country by another company called the parent company. The most common form of FDI. - Primary Advantage: Parent company maintains complete control over its technology or expertise. - Primary Disadvantage: Must commit funds and technology within foreign boundaries. FOREIGN DIRECT INVESTMENT LG3 3-36

37. Foreign Direct Investment Multinational Corporation -- A company that manufactures and markets products in many different countries and has multinational stock ownership and management. Not all large global businesses are multinational. Only firms that have manufacturing capacity or some other physical presence in different nations can truly be multinational. MULTINATIONAL CORPORATIONS LG3 3-37

38. Foreign Direct Investment SOVEREIGN WEALTH FUNDS Sovereign Wealth Funds (SWFs) -- Investment funds controlled by governments holding large stakes in foreign companies. The size of the funds and the fact that they are government-owned make some fear they might be used for: - Geopolitical objectives. - Gaining control of strategic natural resources. - Obtaining sensitive technologies. - Undermining the management of the companies in which they invest. LG3 3-38

39. Progress Assessment What are the advantages of using licensing as a method of entry in global markets? What are the disadvantages? What services are usually provided by an export- trading company? What’s the key difference between a joint venture and a strategic alliance? What makes a company a multinational corporation? PROGRESS ASSESSMENT 3-39

40. Forces Affecting Trading in Global Markets Sociocultural Economic and Financial Legal and Regulatory Physical and Environmental FORCES AFFECTING GLOBAL TRADE LG4 3-40

41. Socio-cultural Forces To be involved in global trade, you must be aware of the cultural differences among nations including: CULTURAL DIFFERENCES LG4 - Social Structures - Religion - Manners - Values - Language - Personal Communication 3-41

42. Socio- cultural Forces Braniff Airlines’ slogan "Fly in leather” translated in Spanish as "Fly naked.” Siri, Apple’s new digital assistant on iPhone 4S, is a common slang term for “butt” in Japanese. In Italy, Schweppes Tonic Water was mistaken as Schweppes Toilet Water. Nokia’s line of Lumia phones is Spanish for “prostitute.” LOST in TRANSLATION Advertisements Gone Wrong LG4 3-42

43. Socio- cultural Forces READY to TRAVEL ABROAD? Know Your Cultural Differences In Turkey, it’s rude to cross your arms while facing someone. In many Middle Eastern countries, you shouldn’t eat or shake hands with the left hand because it is considered unclean. In India, you should never pat anyone’s head. It’s where one’s soul is kept. In Brazil, your meeting may not start on time because punctuality isn’t important to the culture. LG4 3-43

44. Socio- cultural Forces DO as the GERMANS… How to Not Embarrass Yourself in Germany Always use titles like Doctor, Frau, or Herr. Always provide food and drinks for your birthday. Don’t remove your jacket until your host does. Wear conservative business attire, anything else is considered sloppy. Never jaywalk. Always keep your hands on the table when eating. LG4 3-44

45. Economic and Financial Forces Exchange Rate -- The value of one nation’s currency relative to the currencies of other countries. High value of the dollar – Dollar is trading for more foreign currency; foreign goods are less expensive. Low value of the dollar – Dollar is trading for less foreign currency; foreign goods are more expensive. Currencies float in value depending on the supply and demand for them in the global market. EXCHANGE RATES LG4 3-45

46. Economic and Financial Forces Devaluation -- Lowers the value of a nation’s currency relative to others. Countertrading -- Complex form of bartering in which several countries each trade goods or services for other goods or services. DEVALUATION and COUNTERTRADING LG4 3-46

47. Legal and Regulatory Forces There’s no global system of laws. Laws may be inconsistent. U.S. businesses must follow U.S. laws while conducting global business. The Organization for Economic Cooperation and Development (OECD) and Transparency International fight to end corruption and bribery in foreign markets and have had limited success. LEGAL CONCERNS OVERSEAS LG4 3-47

48. Physical and Environmental Forces Developing countries have transportation and storage systems that make international distribution difficult or impossible. Often, technological capabilities are far from those in the U.S. which make for a tough business environment. ENVIRONMENTAL FORCES LG4 3-48

49. Progress Assessment What are four major hurdles to successful global trade? What does ethnocentricity mean and how can it affect global success? How would a low value of the dollar affect U.S. exports? What does the Foreign Corrupt Practices Act prohibit? PROGRESS ASSESSMENT 3-49

50. Trade Protectionism Trade Protectionism -- The use of government regulations to limit the import of goods and services. Advocates of protectionism believe it allows domestic producers to survive, grow and produce jobs. TRADE PROTECTIONISM LG5 3-50

51. Trade Protectionism Tariffs -- Taxes on imports, making imported goods more expensive. Two kinds of tariffs: - Protective – Raise the retail price of imports so domestic goods are competitively priced. - Revenue – Raise money for governments. TARIFFS LG5 3-51

52. Trade Protectionism Import Quota -- Limits the number of products in certain categories a nation can import. Embargo -- A complete ban on the import or export of a certain product or the stopping of all trade with a particular country. Political disagreements can lead to embargos, like the U.S. embargos against Cuba, Iran and North Korea. IMPORT QUOTAS and EMBARGOS LG5 3-52

53. The World Trade Organization General Agreement on Tariffs and Trade (GATT) -- A global forum for reducing trade restrictions on goods, services, ideas and cultural problems. World Trade Organization (WTO) -- Headquartered in Geneva, the WTO is an independent entity of 153 member nations whose purpose is to oversee cross-border trade issues and global business practices.WTO WORLD TRADE ORGANIZATION LG5 3-53

54. Common Markets Common Market -- A regional group of countries with a common external tariff, no internal tariffs and coordinated laws to facilitate exchange among members. The European Union (EU), Mercosur, the ASEAN and the COMESA are common markets.European Union (EU)MercosurASEANCOMESA COMMON MARKETS LG5 3-54

55. Common Markets EU MEMBERS LG5 3-55

56. The North American and Central American Free Trade Agreements North American Free Trade Agreement -- Ratified in 1994, created a free-trade area among the United States, Canada and Mexico. NAFTA’s objectives are: 1) Eliminate trade barriers and facilitate cross-border movement of goods and services. 2) Promote conditions of fair competition. 3) Increase investment opportunities. 4) Provide effective protection and enforcement of intellectual property rights. 5) Establish a framework for further regional trade cooperation. 6) Improve working conditions in North America. NAFTA LG5 3-56

57. CAFTA Central American Free Trade Agreement -- Passed in 2005, created a free-trade zone with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua. LG5 3-57 The North American and Central American Free Trade Agreements

58. NEW FREE TRADE AGREEMENTS Today, free trade agreements are being negotiated with South Korea, Colombia and Panama. The U.S. is considering an agreement with a nine-nation free trade bloc called the Trans- Pacific Partnership. LG5 3-58 The North American and Central American Free Trade Agreements

59. Progress Assessment What are the advantages and disadvantages of trade protectionism and of tariffs? What’s the primary purpose of the WTO? What’s the key objective of a common market like the EU? Which three nations comprise NAFTA? PROGRESS ASSESSMENT 3-59

60. The Future of Global Trade With over 1.3 billion people, China has transformed the world economic map. Many multinationals invest heavily in China. India has seen huge growth in information technology, pharmaceuticals and biotechnology. Russia is a large oil producing country with many multinationals interested in developing there. Brazil is expected to be one of the wealthier economies by 2030. FUTURE of GLOBAL TRADE LG6 3-60

61. The Challenge of Offshore Outsourcing Outsourcing -- Process by which a firm contracts with other companies to do some or all of its functions. U.S. firms have outsourced payroll functions, accounting and manufacturing for years. OUTSOURCING LG6 With the growth of global markets, companies have been shifting to offshore outsourcing – outsourcing with other countries. Photo Courtesy of: Vitor Lima 3-61

62. Some insurance companies encourage patients to seek medical care in foreign countries. Procedures are cheaper and involve top-flight doctors at state-of-the-art facilities. Would it be ethical to force patients to travel to other countries to save money? SEE the SIGHTS, MEET the DOCTORS (Making Ethical Decisions) 3-62

63. Globalization and Your Future Study foreign languages. Learn about foreign cultures. Take global business courses. PLAN for YOUR GLOBAL CAREER LG6 3-63

64. Progress Assessment What are the major threats to doing business in global markets? What key challenges must India and Russia face before becoming global economic leaders? What does the acronym BRIC stand for? What are the two primary concerns about offshore outsourcing? PROGRESS ASSESSMENT 3-64