>>>>>>>> Chapter 4

Competing in Global
Markets
 n g G oa l s
Learni

1 Explain international business and 5 Explain how international trade

why nations trade. organizations and economic
communities reduce barriers to
international trade.
2 Discuss types of advantage in
international trade.
Compare the different levels of
6 involvement used by businesses
Describe measurements of
3 when entering global markets.
international trade and exchange
rates.
Distinguish between a
7 global business strategy
4 Identify the major barriers that and a multidomestic
confront global businesses. business strategy.
 N a ti on s T r a d e
W h y
• Boosts economic growth
• Expands markets
• More efficient production systems
• Less reliance on economies of
home nations
Exports: Domestically produced Imports: Foreign-made products
goods and services sold in and services purchased by
markets in other countries. domestic consumers.
 a l S o u r c e s o f
In t er na t io n
o f P r o d uc t io n
Factors
• Decisions to operate abroad depend upon availability, price, and quality of:
– Labor
– Natural resources
– Capital
– Entrepreneurship
• Companies can spread risk throughout nations
 I n te r n a ti on a l
S iz e of t h e
Marketplace

• As developing nations expand into the global

marketplace, opportunities grow

• Many developing countries have posted high

growth rates of annual GDP
– United States 4.4%
– China 11.1%
– India 9.4%
 o n Si ze a n d
Populati
Prosperity
Though developing nations generally have lower per capita income,
many have strong GDP growth rates and their huge populations
can be lucrative markets.
 d in g P a r tn e r s
Top T e n T r a
it ed S t a t es
With the Un
 C om p a r a ti ve
Abs o lut e a n d
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.

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.
 s ur i n g T r a d e
Mea
e n N a t i on s
Betwe

Balance of trade: Difference between a nation’s imports and exports.

Balance of payments: Overall flow of money into or out of a country.

Balance of payments surplus = more money into country than out

Balance of payments deficit = more money out of country than in
 E x po r ts a n d
Major US
Imports

• U.S. demand for imported goods is partly a reflection of the

nation’s prosperity and diversity.
• U.S. imports more goods than it exports, but exports more
services than it imports.
 g e R a tes
Exchan
• Currency Rates are 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.

• National governments can deliberately influence exchange rates.
• Business transactions are usually conducted in currency of the
region where they happen.
• Rates can quickly create or wipe out competitive advantage.
 I n ter n a t i o n a l
Ba r r i e r s t o
Tra d e
 d C u lt u r a l
Social an
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.
 c D i ff e re n c e s
Ec o n om i

• 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.
 a n d L ega l
Political
Differences
• Political Climate
– Stability is a key consideration.
• Legal Environment
– U.S. law
– International regulations
– Country’s law
– Climate of corruption. Foreign Corrupt Practices Act forbids U.S.
companies from bribing foreign officials, candidates, or government
representatives.
• International Regulations
– Treaties between U.S. and other nations.
– Tariffs are taxes charged on imported goods.
– Enforcement problems, as with piracy
 n t C o rru p t io n
Gov ern m e

Transparency International produces an annual corruption

index for businesspeople and the general public.
 e s o f T ra d e
Typ
Re s t r i c t io n s
Tariffs - taxes, surcharges, or duties on foreign products.
– 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.
– Dumping is the act of selling a product abroad at a very low price.
– An embargo imposes a total ban on importing a specified product
or all
– Exchange controls through central banks or government agencies
regulate the buying and selling of currency to shape foreign
exchange in accordance with national policy.
 a r r i er s to
ci n g B
Redu l T ra d e
r n a t io n a
Inte
The world is moving toward more free trade.
• There are many communities and groups that monitor and
promote trade
• 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.
 n s P r om o t in g
O r g a n iz at io
t io n a l T r a d e
Interna

• General Agreement on Tariffs and Trade (GATT)

– Most industrialized nations found organization in 1947 to reduce
tariffs and relax quotas
• The World Trade Organization succeeded GATT
– Representatives from 151 countries
– Reduce tariffs and promote trade
• World Bank
– Funds projects to build and expand infrastructure in developing
countries
• International Monetary Fund (IMF)
– Operates as lender to troubled nations in an effort to promote
trade
 a l E c o n o m ic
Internation
C om m u n i ti es

North American Free Trade Agreement (NAFTA)

• World’s largest free-trade zone: United States, Canada, Mexico.
• U.S. and Canada are each other’s biggest trading partners.

Central America-Dominican Republic Free Trade Agreement (CAFTA)

• Free-trade zone among United States, Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras, and Nicaragua.
• $33 billion traded annually between U.S. and these countries.

European Union
• Best-known example of a common market.
• 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

 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
 What expenditures are required to enter a new
market?
 What is the best way to organize overseas
operations?
 Good starting point for research: CIA’s World
Factbook
 t i on a l T r a d e
Interna
Research
 v ol v e me n t
Levels of In

• Risk increases with the level of

involvement
• Many companies employ
multiple strategies
• Exporting and Importing are
entry-level strategies
– Importing is the process of
bringing in goods produced abroad
– Exporting is the act of selling your
goods overseas.
 & Fr a n c h i s ing
C ount er tr ad e

• Countertrade – international transactions that do not

involve currency payments but use bartering.
• Franchising – a contractual agreement where a local
entity gains rights to sell the franchisor’s product in the
foreign market.
• A foreign licensing agreement allows a firm to produce
or sell its product
• Subcontracting involves hiring local firms to distribute,
produce or sell goods and services.
 g & D i r ec t
Offshorin
Investment

• The relocation of business processes to a lower-cost

overseas location is offshoring
– Not initiating business but gaining cost savings
– Extremely controversial

• The ultimate level of global involvement is direct

investment
– Directly operating production and marketing in foreign country.
– Acquisition
– Joint Ventures
– Overseas Division
 C o r p o r a t io n s
Mu lt i n a ti on a l

Multinational corporation (MNC) An organization with significant foreign

operations and marketing activities outside its home country.
 a S tr a te g y fo r
Dev e lop i n g
l B u s i n e s s
Internationa
Global Business Strategies
• Firm sells same product in essentially the same manner
throughout the world.
• Works well for products with nearly universal appeal.

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.