1 Bus 101 Chapter 03 Competing In The

1 Bus& 101 Chapter 03 Competing In The Global Market

2 Goals • Global Markets • Importing, Exporting and Global Business Terms • Free Trade • Comparative Advantage • Absolute Advantage • Strategies to Reach Global Markets • What Forces affect trading in Global Markets • Advantages and Disadvantages of Trade Protectionism • Offshore Outsourcing

3 World Population By Continent The U. S. is the largest importing nation in the World!

Growing World Population 3 -4 In Billions Source: Population Reference Bureau

5 Globe • 300 million people in USA • 6. 7 Billion people in world • 194 countries

6 Import/Export • Importing ▫ Buying products from another country ▫ The U. S. is the largest importing nation in the world • Exporting ▫ Selling products to another country ▫ Germany 1 st, USA 2 nd, China 3 rd (textbook)

7 Leading Goods Exporters • http: //www. economist. com/markets/in dicators/displaystory. cfm? story_id=158 19403

8 Why Trade With Other Nations? • No nation can produce all that they needs • Some nations can produce things more cheaply than others • Some countries have natural resources that other countries do not – Oil is only found in some countries

9 Why Trade With Other Nations? • In the USA cabinet makers and wooden airplane and boomerang makers get all their birch plywood from Finland the Baltics – Why? Because Finland the Baltics have a natural source of birch plywood that the USA does not. – The cost that the USA would pay if it made the wood in the USA is more than if it is made in Finland shipped to the USA

10 What Products does the USA Export? • • • Machines Autos Aircrafts Medical equipment Apples and Beef to Mexico Boomerangs to Europe and Japan

11 Why Is Global Trade Beneficial? • Global trade enables a nation to produce what it is most capable of producing and to buy what it needs from others in a mutually beneficial exchange relationship. This happens through a process called Free Trade • Free Trade • The movement of goods and services among nations without political or economic barriers

12 Free Trade • Comparative Advantage Theory (David Ricardo 19 th c) – Theory that states that a country should sell to other counties those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently – USA and India • India can run call centers and accounting/bookkeeping tasks more efficiently than USA • USA can create software more effectively & efficiently than many other countries

13 Free Trade • Absolute Advantage – The advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries • South Africa used to have an absolute advantage with diamonds

Theories of Advantage 3 -14 Comparative U. S. China U. S. Output per Unit of Input Software Clothing

Theories of Advantage 3 -15 Absolute = Virtual Monopoly South Africa Output per Unit of Input The Rest of the World Diamond Production

16 Small Business & Free Trade • Do small businesses import and export?

Global Competitiveness 3 -17 Country Strengths United States Technology, R & D Spending Finland Univ. Enrollment, Efficient Legal System, Business Ethics Taiwan Cell-phone Ownership, Tech. Innovation, Local Firms Competitiveness Singapore Savings Rate, Math/Science Education, Political Trust Sweden H. S. Enrollment, Press Freedom, Phone Access

18

U. S. Trade in Goods & Services (Billions) Balance of Trade Source: St. Louis Business Monthly, Oct. 1999 & World Trade Organization & Wikipedia 3 -19

20 Balance Of Trade • Balance of Trade = Total Exports – Total Imports • Trade Deficit – Balance of Trade is negative = Total Exports – Total Imports – 100 – 200 = -100 • Trade Surplus – Balance of Trade is positive = Total Exports – Total Imports – 200 – 100 = 100 • It is advantageous if a country has more flowing out of the country than in (we are selling more)

21 Balance Of Payments • The difference between money coming into a country (from exports) and money leaving the country (for imports) Plus money from other factors such as tourism, foreign aid, military expenditures, and foreign investment

22 Balance Of Payments (Money Flow) • Balance of Payments = Total Exports – Total Imports +/- (tourism + foreign aid + military expenditures + foreign investment + other) • It is advantageous if a country has more money flowing into the country than out (we are probably selling more)

23 Dumping • Selling products in a foreign country at lower prices than those charged in the producing country • China was accused of dumping apple concentrate (apple juice) on USA market at an unreasonably low price • Japan was accused of dumping steel in USA

24 Strategies To Reach Global Markets • • Licensing Exporting Franchising Contract Manufacturing Joint Ventures & Strategic Alliances Foreign Direct Investment Multinational Corporations

25 Strategies To Reach Global Markets

26 Licensing And Franchising • Licensing – A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product or use trademark in exchange for a fee (a royalty) – Disney – Advantage: Create new revenue with few setup costs – Disadvantage: Transfer of knowledge • Franchising – Arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory in a specified manner – Shell, Dunkin Donuts, Mc. Donalds • These two things are similar

27 Contract Manufacturing (Outsourcing) • A foreign country’s production of private-label goods to which a domestic company then attaches its brand name or trade mark • Nike and Mattel

28 International Joint Ventures & Strategic Alliances • Joint Ventures – A partnership in which two or more companies join to undertake a major project. 2 create new company. – Examples: Nummi, • Strategic Alliances – A long-term partnership between two or more companies established to help each company build competitive market advantage. 2 remain independent companies. – Unlike Joint Adventures in that they typically do not share: costs, risks, managements, profits – Examples: Microsoft & Facebook (2007), Verizon Wireless & Google • Advantages: Two minds are often better than one; Entry into new markets that not otherwise allow entry • Disadvantages: Your secrets (business advantage) may be shared

29 Foreign Direct Investment • The buying of permanent property and businesses in foreign nations ▫ Usually, the legal environment of both countries must be observed ▫ Examples: Toyota, Honda, Mercedes • Foreign Subsidiary ▫ A Parent company in one country buys a company in another country • Advantage: control over proprietary information • Disadvantage: within another county

30 Multinational Corporation • An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management • Nestle

31 World’s Largest MNCs

32 Forces Affecting Trading In Global Markets • • • Socialcultural Forces Economic Forces Financial Forces Legal & Regulatory Forces Physical and Environmental Forces

33 Socialcultural Forces • Culture – The values, beliefs, rules and institutions held by a specific group of people – Culture can include: social structure, religion, manners and customs, values & attitudes, language… • In order to do business in another country you must understand the culture – American businesspeople are notoriously bad at understanding other cultures (ethnocentric) – Japanese companies like Toyota are good at adapting to USA culture

34 • Language –Coors Brewing slogan – “Turn It Loose” was translated into Spanish that read: – “Suffer From Diarrhea” –KFC slogan – “finger-lickin’ good” was translated into Japanese that read – “Bite Your Fingers Off”

Did You Know? 3 -35 • In Turkey it’s rude to cross your arms while you are facing someone. • In the Arab world the left hand is considered unclean; don’t eat with it! • In India never pat someone’s head, it’s the seat of the soul. • The Chinese associate gifts such as straw sandals, clocks and handkerchiefs with funerals.

36 Economic Forces • Economic facts like high unemployment, low or high income levels, or recessions affect what kind of opportunities there are for businesses

37 Financial Forces • There is no worldwide currency • USA uses dollars, Japan uses yen, China uses the Yuan • Exchange rate ▫ The value of one nation’s currency relative to the currencies of others

38 Exchange Rates

39 Exchange Rates • A high value of the dollar means that a dollar would be traded for more foreign currency than before – Example: • $1 is traded for ¥ 6 (Chinese Yuan), and then it goes up: $1 is traded for ¥ 6. 5. – The $1 could buy more in China – The dollar has a higher value and so it can buy more from China – Foreign goods become cheaper when the dollar is high – China can buy less from us

40 Exchange Rates • A low value of the dollar means that a dollar would be traded for less foreign currency than before • $1 is traded for ¥ 6 (Chinese Yuan), and then it goes down: $1 is traded for ¥ 5. 5. – The $1 could buy less in China – The dollar has a lower value and so it can buy less from China – Foreign goods become more expensive when the dollar is low – China could buy more from us

41 Exchange Rates • From USA’s point of view, a high value of the dollar ▫ More Imports ▫ Fewer Exports • From USA’s point of view, a low value of the dollar ▫ More Exports ▫ Fewer Imports

42 Floating Exchange Rate • Most Exchange Rates are set by supply and demand (Float) – This can be a great risk for business because as currencies go up and down, revenues and expenses will go up and down • Devaluation – Lowering the value of a nation’s currency relative to other currencies – Counties sometimes do this to make their products cheaper for other countries to buy

43 Fluxuations in Foreign Exchange Rates • Can cause businesses expenses to go up or down • Can cause businesses revenues to go up or down • Business use currency derivatives to hedge against exchange rate movements

44 Countertrading • A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services. Accounts for about 20% of global exchanges.

45 Legal & Regulatory Forces • No central system of law exists • Conducting business in many counties with inconsistent laws is difficult and adds to the expense and risk of doing business globally • American companies are not allowed to give briberies (Foreign Corrupt Practices Act of 1978) even though some counties require it (Competitive Disadvantage for American companies)

46 Physical And Environmental Forces • Some countries do not have ▫ Efficient transportation systems ▫ Legal systems ▫ Infrastructure Internet E-commerce? European appliances • This can make doing business nearly impossible

47 Trade Protectionism • The use of government regulations to limit the import of goods and services –Tariff –Import Quota –Embargo

48 Trade Protectionism • Tariff – A Tax imposed on imports to keep jobs at home and help businesses survive – Revenue Tariff • Designed to raise money for government – Protective Tariff • Designed to raise price of foreign products (help domestic producers) • Examples in 2000 s in USA: Steele, Textiles and Sugar industries • Import Quota – Limit import quantity • Embargo – Complete ban on import or export

49 Trade Protectionism • Advocates –Help business to survive and grow –Help infant businesses to grow –Keep jobs at home • Opponents –Free trade is inhibited –Long-term growth and productivity are reduced

50 Common Market • A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange • Also called a trading bloc • Example: European Union, NAFTA

51 Organizations That Try To Reduce Barriers To Free Trade • GATT (General Agreement on Tariffs and Trade) ▫ A 1948 agreement that established an international form for negotiating mutual reductions in trade restrictions • WTO (World Trade Organization) ▫ Replaced GATT ▫ Helps to mediate trade disputes

52 NAFTA (North American Free Trade Agreement) • Free-trade agreement between Mexico, Canada and the USA • Goals – Eliminate trade barriers to help facilitate cross-border movement of goods/services – Promote fair competition – Increase investment opportunities – Increase protection of intellectual property rights (patents, etc. ) – Improve working conditions

53 NAFTA • Opponents ▫ Loss of USA jobs ▫ Capital leaves USA ▫ Exploit workers in Mexico ▫ Pollute Mexico • Advocates ▫ Open new markets ▫ Resources more efficiently allocated ▫ Trade has dramatically increase between the 3 countries ▫ Largest trade bloc in terms of GDP – helps to compete with European Union

54 NAFTA: http: //useconomy. about. com/od/tradepolicy/tp/NAFTA_Facts. htm Pro Con • Increased Trade • Boosted U. S. Farm Exports • Created Trade Surplus in Services • Reduced Oil and Grocery Prices • Stepped Up Foreign Direct Investment • U. S. Jobs Were Lost • U. S. Wages Were Suppressed • Mexico's Farmers Were Put Out of Business • Maquiladora Workers Were Exploited • Mexico's Environment Deteriorated

55 NAFTA Facts – From Textbook • USA exports increased from $135 billion to $250 billion • Trade volume amongst all three has gone from $289 billion to $930 billion • US Department of Labor estimates that 500, 000 USA jobs have been lost • Annual per capita income in Mexico is about $9, 000 and in the USA it is about $36, 000 • Some argue that working conditions have become more unsafe in Mexico – Other fact sources • http: //useconomy. about. com/od/tradepolicy/tp/NAFTA_F acts. htm – Try Goggling this: • current facts about NAFTA

56 Future Of Global Trade • The world is more connected: ▫ The Internet has allowed the follow of information to be just a mouse click away • Offshore Outsourcing

57

Pro’s & Con’s of Offshore Outsourcing 3 -58 Pro’s Con’s • More focus on areas where they can excel and grow • Jobs lost/wages fall • Outsourced work creates efficiencies, resulting in hiring more workers • Communication becomes much more difficult • Fuels global market growth • Reduces product quality

59 Global Markets, Comparative Advantage And Absolute Advantage • Comparative Advantage means that countries should produce what they can produce most efficiently and buy from others what they cannot produce most efficiently. If countries can do this everyone is better off.

60 Global Markets, Comparative Advantage And Absolute Advantage • Why trade with other countries? – Countries have what other countries need, or want what other countries have – Natural resources and technological skills are not distributed evenly around the world • Markets have become more global to try and realize the benefits promised by free trade and competitive advantage

61 Importing, Exporting And Global Business Terms • Free Trade • Balance of Payments • Exporting • Importing

62 Strategies To Reach Global Markets • Licensing • Exporting • Franchising • Contract Manufacturing • Joint Ventures & Strategic Alliances • Foreign Direct Investment • Multinational Corporations

63 What Forces Affect Trading In Global Markets • Socio-cultural • Economic & Financial • Legal & Regulatory • Physical & Environmental

64 Advantages And Disadvantages Of Trade Protectionism • Advocates ▫ Help business to survive and grow ▫ Help infant businesses to grow ▫ Keep jobs at home • Opponents ▫ Free trade is inhibited ▫ Long-term growth and productivity are reduced

65 The Global Markets And Offshore Outsourcing • The trend is towards: ▫ More business on-line ▫ More offshore Outsourcing

66 Thee Cs • Character • Competence • Commitment

67 Li Yifei, President Of MTV Networks China, Is A Strong Example Of A Global Business Person • Speaks different languages • Understands cultural differences between countries • Understands economic differences between countries

68 Economic Growth Depends On • Open markets ▫ But are markets really open? What about the farming payments from the USA government that distort prices and prevent cheaper imports? • Global trade ▫ What about the faulty and dangerous products from China? Lead paint on toys Poison in baby food ▫ But what if we grew most of our own food in our state instead of importing so much food?

69 This Textbook And Most Economists Assume That Economic Growth Is A Positive And Without It People Will Be Less Well Off • Is this always true? ▫ What about self-sustaining tribes in South America that don’t grow or shrink? ▫ What about increased pollution in China that has accompanied fast economic growth?