BUS 100 – Introduction to Business

Alaa Hamade

Chapter 3
Doing Business in Global
Markets

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 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.

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 Why Trade with Other Nations? 1 of 2
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.

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 Figure 3.2 The Pros and Cons of Free
Trade

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 Why Trade with Other Nations? 2 of 2
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.

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 Getting Involved in Global Trade 1 of 3
Importing Goods and Services
• Students attending schools abroad tend to notice products that
they’re used to are unavailable in their new country.
• By working with producers in their native country, some become
importers while still in school.

Exporting Goods and Services

• Exporting provides a great boost to the U.S. economy.
• It’s estimated every $1 billion in U.S. exports generates over
7,000 U.S. jobs.

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 Getting Involved in Global Trade 2 of 3
Measuring Global Trade
• Balance of trade — The total value of a nation’s exports
compared to its imports over a particular period.
• Trade surplus (favorable) — Occurs when the value of a
country’s exports exceeds that of its imports.
• Trade deficit (unfavorable) — Occurs when the value of a
country’s imports exceeds that of its exports.

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 Getting Involved in Global Trade 3 of 3
Measuring Global Trade continued
• 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.
• 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.

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 Which Country?
For this exercise, assume you are the owner of a small electronics firm based
in the American Midwest. Your research department has developed a cellular
phone that translates conversations into any of 24 languages. From
conversations with business associates and friends, you have identified two
especially attractive overseas markets—Brazil and Australia. Use the CIA
World Factbook to help you research these two countries.
Excercise

A. What is the total population for each country? Which country’s

population is growing the fastest? What is the median age?
B. Compare the government types for each country. What type of legal
system does each have?
C. Which country has the largest number of cellular phones in use? What
percentage of the population uses cellular phones?
D. Based on your research, which country, Brazil or Australia, would you
choose to introduce your product? Why?

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 Figure 3.4 Strategies for Reaching
Global Markets

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 Strategies for Reaching Global
Markets 1 of 9

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
• Disney licensing toy makers

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 Strategies for Reaching Global
Markets 2 of 9

Exporting
• Export Assistance Centers (EAC) provide hands-on exporting
assistance and trade-finance support for small and medium-
sized businesses that wish to directly export goods and services.
• Export-trading companies (ETC) help companies engage in
indirect exporting by:
• Matching buyers and sellers
• Dealing with foreign customs offices, documentation, and
conversions

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 Strategies for Reaching Global
Markets 3 of 9

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.
• Most fast food chains

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 Strategies for Reaching Global
Markets 4 of 9

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
• Apple using Foxconn to manufacture iPhones

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 Strategies for Reaching Global
Markets 5 of 9

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:
• Google and NASA developing Google Earth
• Airline alliances

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 Strategies for Reaching Global
Markets 6 of 9

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:
• Spotify and Uber (customers control the stereo in the ride)
• Starbucks and Barnes and Noble (similar to what Borders does)

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 Strategies for Reaching Global
Markets 7 of 9

Foreign Direct Investment

• Foreign direct investment (FDI) — The buying of permanent
property and businesses in foreign nations.
• Amazon buying Souq
• 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.
• Google and Facebook having offices in Dubai

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 Strategies for Reaching Global
Markets 8 of 9

Foreign Direct Investment continued

• 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.

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 Strategies for Reaching Global
Markets 9 of 9

Foreign Direct Investment continued

• 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

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 Forces Affecting Trading in Global
Markets 1 of 5

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

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 Figure 3.6 Oops, Did We Say That?

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 Forces Affecting Trading in Global
Markets 2 of 5

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.

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 Forces Affecting Trading in Global
Markets 3 of 5

Economic and Financial Forces continued

• 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.

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 Forces Affecting Trading in Global
Markets 4 of 5

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.

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 Forces Affecting Trading in Global
Markets 5 of 5

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.

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 Trade Protectionism 1 of 5
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

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 Trade Protectionism 2 of 5
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.

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 Trade Protectionism 3 of 5
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.

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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

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 Figure 3.8 Members of the European
Union

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 Trade Protectionism 5 of 5
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.

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 The Future of Global Trade 1 of 2
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.
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 The Future of Global Trade 2 of 2
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.

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 Figure 3.9 The Pros and Cons of
Offshore Outsourcing

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