Chapter 03 Doing Business in Global Markets Mc

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

TRADING with OTHER NATIONS • Countries with abundant natural resources (like Venezuela or Russia) need technological resources from other countries (like Japan). 3 -2

Why Trade With Other Nations? • Global trade allows countries to produce what they make best and buy what they need from others. 3 -3

Company % of Earnings From Outside U. S. Source: Investment Advisor, August 2000 3 -4

TRADING with OTHER NATIONS Theories of Advantage Comparative Absolute

COMPARATIVE 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. 3 -8

Theories of Advantage Comparative U. S. China Software 3 -9 U. S. Clothing

ABSOLUTE ADVANTAGE • Absolute Advantage -- A country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. 3 -10

Theories of Advantage Absolute = Virtual Monopoly South Africa The Rest of the World Diamond Production 3 -11

IMPORTING and EXPORTING • 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. 3 -12

MEASURING GLOBAL TRADE 3 -13

HOW to MEASURE GLOBAL TRADE • Balance of Trade -- The total value of a nation’s exports compared to its imports measured over time. • Trade Surplus -- When the value of a country’s exports is more than that of its imports. • Trade Deficit -- When the value of a country’s exports is less than that of its imports. 3 -14

Rising U. S. Trade Deficit http: //www. americaneconomicalert. org/ticker_home. asp Source: US Dept of Commerce, Bureau of Economic Analysis 3 -15

BALANCE of PAYMENTS • 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. 3 -16

UNFAIR TRADE PRACTICES • Dumping -- Selling products in a foreign country at lower prices than those charged in the producing country. • Dumping is prohibited in the U. S. • China, Brazil and Russia have been penalized for dumping steel in the U. S. 3 -17

KEY STRATEGIES for REACHING GLOBAL MARKETS Licensing Least Exporting Franchising Contract Manufacturing International joint ventures and strategic alliances Amount of commitment, control, risk and profit potential Foreign direct investment Most 3 -18

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. 3 -19

GETTING INVOLVED in EXPORTING • 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. 3 -20

EXPORT ASSISTANCE CENTERS and EXPORT TRADING CENTERS • EACs provide hands-on exporting assistance and trade-finance support for small and mediumsized 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. 3 -21

HOW EXPORTS AFFECT the GDP Source: Bloomberg Businessweek, November 22, 2011. 3 -22

HOW EXPORTS AFFECT the GDP Source: Bloomberg Businessweek, November 22, 2011. 3 -23

HOW EXPORTS AFFECT the GDP Source: Bloomberg Businessweek, November 22, 2011. 3 -24

GOING GLOBAL with a SMALL BUSINESS • 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. • President Obama wants small businesses to help double exports by 2015. 3 -25

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. • Pizza Hut and Dominos learned that pizza topping preferences differ all around the world. 3 -26

What’s On Your Pizza • • Costa Rica - Coconut France - Bacon, onion and fresh cream India - Pickled ginger, minced mutton and tofu Australia - Shrimp and pineapple Pakistan - Curry Brazil - Green peas Japan - Squid and mayo jaga Source: World Features Syndicate 3 -27

GOLDEN ARCHES GLOWING ACROSS the GLOBE • Mc. Donald’s has more than 32, 000 restaurants in over 117 countries. • Maintains varying menus around the world due to the different preferences of its customers. • Responds to challenges by funding research and adding healthier options. 3 -29

THAT’S at MCDONALD’S? • Malaysia: Bubur Ayam Mc. D – 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. Source: Mc. Donalds, www. mcdonalds. com, March 2009. 3 -30

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. 3 -31

JOINT VENTURES • 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. 3 -32

STRATEGIC ALLIANCES • Strategic Alliance -- A long-term partnership between two or more companies established to help each company build competitive market advantages. • Strategic alliances don’t typically share costs, risks, management or profits. • Strategic alliances provide broad access to markets, capital and technical expertise. 3 -33

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. 3 -34

WHERE DO THEY INVEST? Leading Destinations for Foreign Investors Source: Investor’s Business Daily, www. investors. com, June 30, 2008. 3 -35

MULTINATIONAL CORPORATIONS • 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. 3 -37

Forces Affecting Trading in Global Markets LG 4 FORCES AFFECTING GLOBAL TRADE • Sociocultural • Economic and Financial • Legal and Regulatory • Physical and Environmental 3 -39

CULTURAL DIFFERENCES • To be involved in global trade, you must be aware of the cultural differences among nations including: - Social Structures Religion Manners Values Language Personal Communication 3 -40

LOST in TRANSLATION Advertisements Gone Wrong • Braniff Airlines’ slogan "Fly in leather” translated in Spanish as "Fly naked. ” • Gerber used their U. S. label – a cute baby – on African products. They found out that labels on African products picture what’s inside the package. • In Italy, Schweppes Tonic Water was mistaken as Schweppes Toilet Water. 3 -41

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 their soul is kept. • In Brazil, your meeting may not start on time because punctuality isn’t important to the culture. 3 -42

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. 3 -43

EXCHANGE RATES • 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. 3 -44

DEVALUATION and COUNTERTRADING • 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. 3 -45

LEGAL CONCERNS OVERSEAS • 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. 3 -46

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. 3 -47

TRADING with OTHER NATIONS 3 -48

TRADING with OTHER NATIONS • Free Trade -- The movement of goods and services among nations without political or economic barriers. 3 -49

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. 3 -50

TARIFFS • Tariffs -- Taxes on imports. • Two kinds of tariffs: - Revenue – Raise money for governments. Protective – Raise the retail price of imports so domestic goods are competitively priced. 3 -51

IMPORT QUOTAS and EMBARGOS • 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. embargo against Cuba. 3 -52

WORLD TRADE ORGANIZATION • General Agreement on Tariffs and Trade -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 152 member nations whose purpose is to oversee cross-border trade issues and global business practices. 3 -53

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 and the ASEAN are common markets. 3 -54

EU MEMBERS 3 -55

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

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. • Free traders hope CAFTA will lead to the creation of a Free Trade Area of the Americas (FTAA). 3 -57

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. 3 -58

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. 3 -59

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. • With the growth of global markets, companies have been shifting to offshore outsourcing – outsourcing with other countries. Photo Courtesy of: Vitor Lima 3 -60

BUSINESS in the 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 expanding abroad. 3 -61

PLAN for YOUR GLOBAL CAREER • Study foreign languages • Learn about foreign cultures • Take global business courses. 3 -62