MGT131

CH3
The Dynamic Global Market
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 are also expanding abroad.
› Importing: Buying products from another country.
› Exporting: Selling products to another country.
› The United States is the largest importing and the third-largest exporting
nation in the world.
Why Trade with Other Nations?
Countries with abundant natural resources (like Venezuela or Iraq) 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.
The Theories of Comparative and Absolute Advantage
• Comparative advantage: A country should sell to other countries those
products that it produces most efficiently, and buy from other countries
those products that it cannot produce as effectively or 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.
Figure 3.2 the Pros and Cons of Free Trade
Getting Involved in Global Trade
Importing Goods and Services
o Imports lead to an outflow of funds from the country since import
transactions involve payments to sellers residing in another country.
o Exports are goods and services that are produced domestically, but then sold
to customers residing in other countries.
Measuring Global Trade
o Balance of trade: The total value of a nation’s exports compared to its
imports over a particular period.
o Trade surplus (favorable): Occurs when the value of a country’s exports
exceeds that of its imports.
o Trade deficit (unfavorable): Occurs when the value of a country’s imports
exceeds that of its exports.
o Balance of payments: The difference between money coming into a country
(from exports) and money leaving the country (from imports) plus money
flows from other factors such as tourism, foreign aid, military expenditures,
and foreign investment.
 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.
o Dumping: Selling products in a foreign country at lower prices than those
charged in the producing country.
 Dumping is prohibited.
 China and Brazil have been penalized for dumping steel in the United
States.

Figure 3.4 Strategies for Reaching Global Markets

Strategies for Reaching Global Markets
Licensing
• Licensing: A global strategy in which a firm (the licensor) allows a foreign
company (the licensee) to produce its product in exchange for a fee (a
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

Brand licensing examples

-McDonald’s: Its infamous Happy Meal boxes contain miniature toys of whichever
movie is out in theatres that month—from Trolls to Fast and Furious. McDonald’s
gets a licensing agreement from the creator of those movies. It gives the fast food
brand permission to manufacture those characters for their Happy Meal boxes.
-Disney. We can find Mickey Mouse, and Star Wars characters on merchandise all
over the world—not just official Disney stores. Third-party brands get a license to
use Disney’s characters on their clothes, home decor, and mugs. Disney also licenses
its movies, TV shows, and music.
-If you’re paying to use a software, you’re buying a single-user or team license.

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
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 or service
in a given territory in a specified manner.
› Franchisors need to be careful to adapt their product to the countries
they serve.
Domino’s Pizza and Dunkin Donuts all adapted their products to different tastes in
different countries.
Contract Manufacturing
• Contract manufacturing: A foreign company’s production of private-label
goods to which a domestic company then attaches its own brand name or
trademark; part of the broad category 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

International Joint Ventures and Strategic Alliances

• Joint venture: A partnership in which two or more companies (often from
different countries) 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
Examples of Joint ventures
Founded in May 2003, BMW Brilliance Automotive Ltd. (BBA) is a joint venture
between BMW Group and Brilliance Group. Business operations of BBA include R&D,
procurement, production, sales and after-sales services of BMW automobiles in
China.
Ford and Toyota have developed a new hybrid powertrain for light trucks and
SUVs, allowing drivers who want the capabilities of a larger vehicle to get the gas
mileage of a smaller car. By collaborating, the companies expect to offer hybrid
trucks and SUVs earlier than they would if they worked separately.

International Joint Ventures and Strategic Alliances continued

• Strategic alliance: A long-term partnership between two or more companies
established to help each company build competitive market advantages.
› They don’t typically share costs, risks, management or profits.
› Strategic alliances provide broad access to markets, capital, and
technical expertise.
Examples of Alliances
The deal between Starbucks and Barnes & Noble. Starbucks brews the coffee.
Barnes & Noble stocks the books. They do what they do best while sharing the costs
of space to the benefit of both companies.
Despite being in different industries, Louis Vuitton and BMW are both exclusive
luxury brands. Those who can afford a BMW vehicle can probably also afford a Louis
Vuitton bag. Because of their shared audience and values, the two brands partnered
up to create a collection of Louis Vuitton bags custom made to pair with the BMW i8
sports car.

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.
› Primary advantage: Parent company maintains complete control over
its technology or expertise.
› Primary disadvantage: Must commit funds and technology within
foreign boundaries.
• Multinational Corporation: An organization that manufactures and markets
products in many different countries and has multinational stock ownership
and multinational 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.
• 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
Foreign Direct Investment
The United States has been and remains a popular spot for foreign direct
investment. Global automobile manufacturers like Toyota, Honda, and Mercedes
have spent millions of dollars building facilities in the United States.

Forces Affecting Trading in Global Markets

→ Sociocultural
→ Economic and Financial
→ Legal and Regulatory
→ Physical and Environmental

Sociocultural Forces
• To be involved in global trade, you must be aware of the cultural differences
among nations, including:
¤ Social structures
¤ Religion
¤ Manners and customs
¤ Values and attitudes
¤ Language
¤ Personal communication

Oops, Did We Say That?

Example, In order to be successful, its imperative global companies are aware of
religious implications in making business decisions. Islam prohibits eating pork and
Hindus do not consume beef. Such religious restrictions are very important for
companies like McDonald’s and Pizza Hut to follow in countries such as Saudi Arabia
and India.
Problems companies have faced with translations of advertising globally: In Italy,
Schweppes Tonic Water was mistaken as Schweppes Toilet Water.
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 products become cheaper.
→ Low value of the dollar: Dollar is trading for less foreign currency;
foreign goods become more expensive.
→ Floating exchange rates: Currencies float in value depending on the
supply and demand for them in the global market.
→ Devaluation: Lowering the value of a nation’s currency relative to others
currencies.
→ Countertrading: A complex form of bartering in which several countries
may be involved, each trading goods for goods or services for services.

Foreign Tourists and the Dollar

When the dollar is “up,” foreign goods and travel are a bargain for U.S. consumers.
When the dollar trades for less foreign currency, however, foreign tourists often
flock to U.S. cities to enjoy relatively cheaper vacations and shopping trips.
 Do U.S. exporters profit more when the dollar is up or when it is down?
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.
¤ Organization for Economic Cooperation and Development (OECD) and
Transparency International fight to end corruption and bribery in foreign
markets and have had limited success.
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 makes
for a tough business environment.
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.
• Tariffs: A tax imposed on imports.
► Protective tariffs
► Revenue tariffs
Import quota: A limit on the number of products in certain categories that 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.
Imported Products and Jobs
Some workers believe that too many U.S. jobs have been lost due to the growing
number of imported products.
 Should governments protect their industries by placing tariffs on imported
products? Why or why not?
The World Trade Organization
• General Agreement on Tariffs and Trade (GATT): A 1948 agreement that
established an international forum for negotiating mutual reductions in trade
restrictions.
• World Trade Organization (WTO): An independent entity of 164 member
nations whose purpose is to oversee cross-border trade issues and global
business practices; headquartered in Geneva.
Common Markets
• 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.
• Some common markets are:
¤ European Union (EU)
¤ Mercosur
¤ ASEAN
¤ COMESA
The North American and Central American Free Trade Agreements
• North American Free Trade Agreement (NAFTA): Agreement that created a
free-trade area among the United States, Canada, and Mexico; ratified in
1994.
• Central American Free Trade Agreement (CAFTA): Agreement that created a
free-trade zone with Costa Rica, the Dominican Republic, El Salvador,
Guatemala, Honduras, and Nicaragua; signed into law in 2005.
• NAFTA Objectives
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 (patents and copyrights).
5. Establish a framework for further regional trade cooperation.
6. Improve working conditions in North America.
The Future of Global Trade
China
• With over 1.38 billion people, has transformed the world economic map.
Over 400 of the Fortune 500 companies have invested in China.
India
• Has seen huge growth in information technology, biotechnology, and
pharmaceuticals.
Russia
• Projected to be a wealthy global economy by 2025, but declining oil prices
have slowed the economy. It is also plagued by political, currency, and
social problems.
Brazil
• Seventh-largest economy in the world with well-developed agriculture,
mining, manufacturing, and service sectors.
Growth in China
China’s economy is booming, and a highly educated middle class with money to
spend is emerging, especially in the cities. Many observers believe China will
continue its growth and play a major role in the global economy.
 Are U.S. firms prepared to compete?
The Challenge of Offshore Outsourcing
Outsourcing: Process whereby one 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.
Globalization and Your Future
• Study foreign languages.
• Learn about foreign cultures.
• Take global business courses.

Figure 3.9 The Pros and Cons of Offshore Outsourcing