Chapter 3

Doing Business in Global

Markets

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 Learning Objectives
LO 3-1 Discuss the importance of the global market and the
roles of comparative advantage and absolute advantage
in global trade.
LO 3-2 Explain the importance of importing and exporting, and
understand key terms used in global business.
LO 3-3 Illustrate the strategies used in reaching global markets
and explain the role of multinational corporations.
LO 3-4 Evaluate the forces that affect trading in global markets.
LO 3-5 Debate the advantages and disadvantages of trade
protectionism.
LO 3-6 Discuss the changing landscape of the global market and
the issue of offshore outsourcing.

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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.

LO 3-1
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 Figure 3.1 World Population
by Continent

LO 3-1
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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.

LO 3-1
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 Figure 3.2 The Pros and Cons of Free
Trade

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LO 3-1
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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.

LO 3-1
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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.

LO 3-2
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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.

LO 3-2
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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.

LO 3-2
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 Figure 3.3 Largest Exporting Nations in the
World and the Largest U.S. Trade Partners

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LO 3-2
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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

LO 3-3
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 Strategies for Reaching Global
Markets 2 of 9

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

LO 3-3
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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.

LO 3-3
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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

LO 3-3
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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

LO 3-3
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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.

LO 3-3
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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.
• 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.

LO 3-3
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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.

LO 3-3
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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

LO 3-3
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 Figure 3.5 The Largest Multinational
Corporations in the World

Rank Company Country

1 Walmart United States
2 State Grid China
3 China National Petroleum China
4 Sinopec Group China
5 Royal Dutch Shell Netherlands
6 Exxon Mobil United States
7 Volkswagen Germany
8 Toyota Motor Japan
9 Apple United States
10 BP Great Britain

LO 3-3
©McGraw-Hill Education. Source: Fortune, www.fortune.com, accessed June 2017.
 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

LO 3-4
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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.
• Floating exchange rates — Currencies float in value depending on
the supply and demand for them in the global market.

LO 3-4
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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.

LO 3-4
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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.

LO 3-4
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 Figure 3.7 Countries Rated Highest
on Corrupt Business

1. Somalia 6. Sudan
2. South Sudan 7. Libya
3. North Korea 8. Afghanistan
4. Syria 9. Venezuela
5. Yemen 10. Iraq

LO 3-4
©McGraw-Hill Education. Source: Transparency International, 2017.
 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.

LO 3-4
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 Trade Protectionism 1 of 6
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

LO 3-5
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 Trade Protectionism 2 of 6
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.

LO 3-5
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 Trade Protectionism 3 of 6
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.

LO 3-5
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 Trade Protectionism 4 of 6
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

LO 3-5
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 Figure 3.8 Members of the European
Union

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 Trade Protectionism 5 of 6
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.

LO 3-5
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 Trade Protectionism 6 of 6
The North American and Central American Free Trade
Agreements continued
• 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.

LO 3-5
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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.
LO 3-6
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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.

LO 3-6
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 Figure 3.9 The Pros and Cons of
Offshore Outsourcing

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 Appendix of Long Image
Descriptions

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 Appendix 1 Figure 3.2 The Pros and Cons
of Free Trade
Pros of free trade:
• The global market contains over 7 billion potential customers for goods and services.
• Productivity grows when countries produce goods and services in which they have a
comparative advantage.
• Global competition and less-costly imports keep prices down, so inflation does not curtail
economic growth.
• Free trade inspires innovation for new products and keeps firms competitively challenged.
• Uninterrupted flow of capital gives countries access to foreign investments, which help
keeps interest rates low.
Cons of free trade:
• Domestic workers (particularly in manufacturing-based jobs) can lose their jobs due to
increased imports or production shifts to low-wage global markets.
• Workers may be forced to accept pay cuts from employers, who can threaten to move their
jobs to lower-cost global markets.
• Moving operations overseas because of intense competitive pressure often means the loss
of service jobs and growing numbers of white-collar jobs.
• Domestic companies can lose their comparative advantage when competitors build
advanced production operations in low-wage countries.

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 Appendix 2 Figure 3.3 Largest Exporting
Nations in the World and the Largest U.S.
Trade Partners

World’s Largest Exporting Nations: United States and Italy

Top U.S. Trading Partners: India and Taiwan
Both: Canada, Mexico, Netherlands, United Kingdom,
France, Germany, China, Japan, and South Korea

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 Appendix 3 Figure 3.4 Strategies for
Reaching Global Markets

From least to most amount of commitment, control, risk,

and profit potential, the strategies are:
Licensing
Exporting
Franchising
Contract manufacturing
International joint ventures and strategic alliances
Foreign direct investment

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 Appendix 4 Figure 3.6 Oops, Did We Say
That?
KFC’s patented slogan “Finger-Lickin’ Good” was understood in
Japanese as “Bite Your Fingers Off.”
PepsiCo attempted a Chinese translation of “Come Alive, You’re in the
Pepsi Generation” that read to Chinese customers as “Pepsi Brings
Your Ancestors Back from the Dead.”
Coors Brewing Company put its slogan “Turn It Loose” into Spanish
and found it translated as “Suffer from Diarrhea.”
Perdue Chicken used the slogan “It Takes a Strong Man to Make a
Chicken Tender,” which was interpreted in Spanish as “It takes an
Aroused Man to Make a Chicken Affectionate.”
On the other side of the translation glitch, Electrolux, a Scandinavian
vacuum manufacturer, tried to sell its products in the U.S. market with
the slogan “Nothing Sucks Like an Electrolux.”

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 Appendix 5 Figure 3.8 Members of the
European Union
Members of the European Union: Ireland, Portugal, Spain,
France, Luxembourg, Belgium, Netherlands, Denmark,
Germany, Liechtenstein, San Marino, Monaco, Italy,
Vatican City, Malta, Sweden, Finland, Estonia, Latvia,
Lithuania, Poland, Czech Republic, Austria, Slovakia,
Hungary, Slovenia, Croatia, Romania, Bulgaria, Greece,
Cyprus, Azores, Madeira, Canary Islands, Guiana,
Réunion, Martinique, and Guadeloupe.
Applicants of the European Union: Iceland, Serbia, Kosovo,
Macedonia, Albania, and Turkey.
Exiting the European Union: United Kingdom

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 Appendix 6 Figure 3.9 The Pros and Cons
of Offshore Outsourcing
Pros of offshore outsourcing:
• Less-strategic tasks can be outsourced globally so that companies can
focus on areas in which they can excel and grow.
• Outsourced work allows companies to create efficiencies that in fact let
them hire more workers.
• Consumers benefit from lower prices generated by effective use of
global resources and developing nations grow, thus fueling global
economic growth.
Cons of offshore outsourcing:
• Jobs may be lost permanently and wages fall due to low-cost
competition offshore.
• Offshore outsourcing may reduce product quality and can therefore
cause permanent damage to a company’s reputation.
• Communication among company members, with suppliers, and with
customers becomes much more difficult.

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