Chapter 4 Competing in Global Markets als o

Chapter 4 Competing in Global Markets als o G g n i n r a Le 1 5 Explain how international trade organizations and economic communities reduce barriers to international trade. Explain international business and why nations trade. 2 Discuss types of advantage in international trade. 3 Describe measurements of international trade and exchange rates. 4 Identify the major barriers that confront global businesses. 6 7 Compare the different levels of involvement used by businesses when entering global markets. Distinguish between a global business strategy and a multidomestic business strategy.

Exports Domestically produced goods and services sold in markets in other countries. Imports Foreign-made products and services purchased by domestic consumers. WHY NATIONS TRADE • Boosts economic growth by providing access to new markets and needed resources. • More efficient production systems. • Less reliance on economies of home nations.

International Sources of Factors of Production • Decisions to operate abroad depend on availability, price, and quality of • Labor • Natural resources • Capital • Entrepreneurship • Allows a company to spread risk throughout nations in different stages of the business cycle or development.

Size of the International Marketplace • World population = 7 billion • 1 in 5 people live in relatively well-developed countries. • Share of world’s population in less-developed countries will grow in coming years. • Some countries have giant markets • China— 1. 3 billion • India— 1. 1 billion

• Population size is no guarantee of prosperity. • Though developing nations generally have lower per capita income, many have strong GDP growth rates and their huge populations can be lucrative markets.

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. • Rare these days, mostly tied to climate advantages for growing certain crops. • 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.

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. • Effects of trade • Overseas loans and borrowing • International investments & profits from them • Foreign aid payments • Balance of payments surplus = more money into country than out • Balance of payments deficit = more money out of country than in

Major U. S. Exports and Imports • U. S. leads world, exports and imports annually total $3 trillion. • U. S. imports more goods than exports; exports more services than imports.

Exchange Rates Exchange rate Value of one nation’s currency relative to the currencies of other nations. • 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 for each currency in the international market. • National governments deliberately influence exchange rates • Currency blocs • Currency devaluation

• Business transactions usually conducted in currency of the region where they happen. • Rates can quickly create or wipe out competitive advantage. • Currency converters available at http: //beginnersinvest. about. com/cs/currencycalc/index. htm. • Hard currencies Currencies that owners can easily convert into other currencies. • Euro • U. S. dollar • Japanese yen • Foreign currency market is world’s biggest, with daily volume of $1. 5 trillion, 50 times the size of all equity markets put together.

BARRIERS TO INTERNATIONAL TRADE

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.

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. • Example: Devalued currency can make market less attractive for exports but more attractive for investments because payment in local currency is a relative bargain.

Political and Legal Differences Political Climate Stability is a key consideration. Legal Environment Three dimensions: U. S. law, international regulations, laws of the countries where they plan to trade. Corruption can be an important issue. • Foreign Corrupt Practices Act Forbids U. S. companies from bribing foreign officials, candidates, or government representatives. International Regulations Friendship, commerce, and navigation treaties between U. S. and other nations. • Tariffs Taxes charged on imported goods. • Enforcement problems, as with piracy.

Types of Trade Restrictions Tariffs Taxes, surcharges, or duties on foreign products. • Revenue 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. • Prevent dumping, selling a product abroad at a very low price. • An embargo imposes a total ban on importing a specified product or all trading with a particular country. • Exchange controls through central banks or government agencies regulate the buying and selling of currency to shape foreign exchange in accordance with national policy.

REDUCING BARRIERS TO INTERNATIONAL TRADE Organizations Promoting International Trade • General Agreement on Tariffs and Trade (GATT) sponsored negotiations to reduce worldwide barriers to trade. • Founded 1947 • Uruguay Round of negotiations cut average tariffs by one-third, or $700 billion. • Led to the establishment of the World Trade Organization.

World Trade Organization Monitors GATT agreements. • 149 member countries. • Began monitoring GATT agreements in 1995. • Has become controversial. Criticisms of its policies: • Lead to increased pollution and human rights abuses. • Hurt small foreign businesses that serve cultural tastes and practices. • Promote export of manufacturing jobs to low-wage countries. World Bank Lends money to less-developed and developing countries. • Funds projects that build or expand infrastructure. • Provides assistance and advice. • Imposes lending requirements intended to build economies of borrower nations.

International Monetary Fund Promotes trade through financial cooperation. • Makes short-term loans to member nations to meet expenses. • Operates as lender of last resort for troubled nations. • Requires significant commitments from borrowers to address problems that led to the crisis, such as curtailing imports or devaluing currency. • Eight economic powers recently agreed to offer full debt relief to distressed African countries in exchange for government reforms in education and welfare.

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. NAFTA (1994) • World’s largest free-trade zone: United States, Canada, Mexico. • Combined population: 435 million • Total GDP: nearly $14 trillion • U. S. and Canada are each other’s biggest trading partners.

CAFTA (2005) • Free-trade zone among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. • Total GDP: nearly $14 trillion • $33 billion traded annually between U. S. and these countries. European Union • Best-known example of a common market. • Combined population: 450 million people in 25 countries • Total GDP: $12 trillion • Goals include promoting economic and social progress, introducing European citizenship as complement to national citizenship, and giving EU a significant role in international affairs.

GOING GLOBAL • Three key decisions for companies considering 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 • Good starting point for research: CIA’s World Factbook • What expenditures are required to enter a new market? • What is the best way to organize overseas operations?

Levels of Involvement • Risk and control both increase with the level of involvement. Importers and Exporters Most basic level of international involvement, with the least risk and control. • Exports handled by intermediaries called export trading companies. • Can also rely on export management company for advice and expertise. • Can also rely on offset agreement, through which a small local firm is subcontractor of the larger firm. • Can be indirect—Firm manufactures a product that is a component of another product sold overseas. • Can be direct—Firm sells its own products in overseas markets.

Countertrade Payments made in the form of local products, not currency. • Commonly used when there is inadequate access to needed foreign currency. • Can provide opportunity to enter a new market with a heavy debt burden or unstable currency. Contractual Agreements Often come after a company has some experience in international sales. Include franchising, foreign licensing, and subcontracting. Franchising Contractual agreement in which a wholesaler or a retailer (the franchisee) gains the right to sell the franchisors’ products under that companies brand name in exchange for agreeing to related operating requirements. • Foreign licensing agreement Firm has right to sell in specified geographic area • Subcontracting Hiring local companies to produce, distribute, or sell goods or services.

Offshoring Relocation of business processes to lower-cost location overseas. • China: Preferred destination for production offshoring. • India: Preferred destination for services offshoring. • Allows businesses to keep costs low and remain competitive. • Generates controversy because of apparent link between jobs sent overseas and jobs lost at home. International Direct Investment Includes establishment of manufacturing facilities, opening of an overseas division, and acquisition of an existing firm in the host country. • Highest level of global involvement • Joint ventures Allow companies to share risks, costs, profits, and management responsibility with one or more host country nationals.

From Multinational Corporation to Global Business Multinational corporation (MNC) An organization with significant foreign operations and marketing activities outside its home country.

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 and luxury items. 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.

Multidomestic Business Strategies