Chapter 3: Doing Business in Global Markets

Importance of Global Market/ Roles of Comparative & Absolute Advantage (1)

-Global trade enables a nation to produce what is most capable of producing and buying what it needs from others
-Global market is important because no country can produce all the products its people want and need
-getting started globally is a matter of observing, being determined, and taking risks
-You can sell any good/ service in other countries and the competition isn’t as bad
-Absolute advantage doesn’t last forever, global competition causes it to fade
-Comparative (countries should sell to each other) vs. Absolute (country produces product efficiently than others)
Pros of Free Trade: Cons of Free Trade:
-More customers -domestic workers lose jobs
-Growth in Productivity -Less pay for workers
-Keeps prices down -Loss of service jobs
-Inspires innovation -Increase in white collar jobs
-Keeps interest rates low -lose comparative advantage

Importing/Exporting & Key Terms and Ideas (2)

-Exporting helps economy because it gains more money through world economy & creates more jobs
-Balance of trade & balance of payments are used to measure global trade
-If u have more exports than imports, you have extra money to use on other things
-Good balance of payments has more money coming in than out, bad is less money coming and more going

Strategies for Reaching Global Markets / Multinational Corporations (3)

-8 Key strategies to compete in global markets are licensing, exporting, franchising, contract manufacturing,
international joint ventures, and strategic alliances, foreign subsidiaries, and foreign direct investment
-licensing benefits a firm as it allows them to gain more revenue & it doesn’t use much pocket money as it uses the
licensee's money
-EAC (Exporting Assistance Centers) help ease businesses into global markets
-contract manufacturing allows companies to experiment in new markets without worrying about start up costs
-benefits of joint venture: shared technology & risk, shared marketing & management expertise, and entry into
markets without worrying about producing foreign goods
-drawbacks are joint ventures can end for various reasons, and other companies can learn the other’s tech and use it
to their advantage
-strategic alliances don’t share costs, risk, management, or profits, they only provide access to markets, capital, and
technical expertise
-foreign subsidiaries allows the company to have control over any technology or expertise, but you need to pay for
funds and technology
-only firms that have manufacturing capacity in different nations can be called multinational

Forces That Affect Trading (4)

-cultural, economical & financial, legal & regulatory, and physical & environmental forces makes it hard to trade in
global markets
-culture: religion, culture, sociocultural differences
-financial: income and portion sizes, diff currencies, changes in currency
-legal: diff rules and regulations,
-physical: transportation, storage system, pollution, unclean, slow technology
Trade Protectionism (5) :
-trade protectionism allows domestic companies to grow and produce more jobs
-2 tariffs: protective: raise retail price of imports (competitively prices domestic products)
-revenue: raise money for gov
-non tariff barrier aren’t as specific but they are detrimental
-some common markets: Mercosur, European Union (EU), Association of SouthEast Asian Nations (ASEAN)
-NAFTA’s objectives : (1) eliminate trade barriers & facilitate cross border movement of goods & services, (2)
promote conditions of fair competition, (3) increase investment opportunities, (4) provide effective protection &
enforcement of intellectual property rights, (5) establish framework for further regional trade cooperation, (6)
improve working conditions in North America

Changing Landscapes of Global Market/ Offshore Outsourcing (6)

-China is on the way to becoming the biggest economy because it is the largest exporter and has a lot of FDI
-India has a growing young population, knowledge on technology, and is starting to address difficult trade laws
-Brazil & Russia were projected to be wealthy but have been faced with difficulties
Pros of Outsourcing:
-less- strategic so companies can focus on certain areas
-creates efficiencies, leads to more workers
-consumers benefit, and developing nations grow
Cons:
-low-cost competition
-reduce product quality & cause damage to companies reputation
-communication becomes difficult
-offshore outsourcing leads to a loss of jobs as many companies save costs hiring specific workers offshore
-outsourcing leads to loss of jobs and poor-quality products

Key Terms:
Importing: Buying products from another country (1)
Exporting: Selling products to another country (1)
Free Trade: Movement of goods and services among nations without political or economical barriers (1)
Comparative Advantage Theory: A country should sell to other countries those products it produces most effectively
and efficiently, and buy from other countries those products it cannot produce (1)
Absolute Advantage: a country can produce a specific product more efficiently than all other countries (1)
Balance of Trade: Total value of a nation’s export compared to its imports measured over a particular period (2)
Trade Surplus: Occurs when the value of a country’s exports exceeds that of its imports (2)
Trade Deficit: Occurs when a country’s exports is less than its imports (2)
Balance of Payments: The difference between money coming into a country and money leaving the country plus
money flows coming into or leaving the country from other factors such as tourism, foreign aid, military
expenditures. (2)
Dumping: Selling products into a foreign country at lower prices than those charged in producing country (2)
Licensing: The right to manufacture its product or use its trademark to a foreign country for a fee (3)
Contract Manufacturing: A foreign company produces private-label goods to which a domestic company then
attaches its own brand name or trademark (3)
Joint Venture: partnership in which two or more companies join to undertake a major project (3)
Strategic Alliances: long-term partnership between two or more companies established to help each other build
competitive market advantages (3)
(FID) Foreign Direct Investment: The buying of permanent property and businesses in foreign countries (3)
(FFID) Foreign Subsidiary: A company owned in a foreign country by another company called the parent company
(3)
Multinational Corporation: One that manufactures and markets products in many different countries and has
multinational stock ownership and management (3)
(FFDI) Sovereign Wealth Funds: investment funds controlled by governments holding investment stakes in foreign
countries (3)
Exchange Rate: The value of one currency relative to another country’s currency (4)
Floating Exchange Rates: currencies float in value according to the supply and demand for them in the global
market for currency (4)
Devaluation: Lowers the value of a nation's currency relative to others (4)
Countertrading: complex form of bartering in which several countries trade goods or services for other goods and
services (4)
Trade Protectionism: Use of government regulations to limit the import of goods and services (5)
Tariffs: Taxes on imports (5)
Import Quota: Limits number of products in certain categories that a nation can import (5)
Embargo: Complete ban on the import or export of a certain product or stopping of all trade w a particular country
(5)
General Agreements on Tariffs and Trade (GATT) : Global forum for reducing trade, restrictions on goods, services,
ideas, and cultural programs (5)
World Trade Organization: meditates trade disputes among nations (5)
Common Market: Regional group of countries with a common external tariff & coordinated laws to facilitate
exchange among members (5)
-North American Free Trade Agreement (NAFTA): A free trade area among the US, Canada, and Mexico (5)