Contemporary Business

18th Edition
Louis E. Boone; David L. Kurtz; Susan Berston

Chapter 4

Competing in World Markets

Learning Objectives
1. Explain why nations trade.
2. Describe how trade is measured between nations.
3. Identify the barriers to international trade.
4. Discuss reducing barriers to international trade.
5. Explain the decisions to go global.
6. Discuss developing a strategy for international
business.

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Why Nations Trade
• As domestic markets mature, so does economic growth
• As sales slow, companies can expand their markets in other
nations
• Companies can seek growth opportunities in other nations
• More efficient production systems
• Less reliance on the economies of home nations
• Exports: Domestically produced goods and services sold in
other countries
• Imports: Foreign-made products and services purchased by
domestic consumers
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International Sources of Factors of Production
• Decisions to operate globally depend upon:
• Land
• Labor
• Capital
• Entrepreneurship
• Doing business overseas spreads risk, because different
nations at various stages of business cycle or development
spreads risk.
• If demand falls off in one country, it may enjoy strong
demand in another.

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Size of International Marketplace
• As developing nations expand into the global
marketplace, opportunities grow
• Many developing countries have posted high growth
rates of annual GDP
• United States
• China
• India
• Current GDP data

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Population and Wealth
Table 4.1 The World’s Top 10 Nations Based on Population and Wealth
Population Per Capita GDP
Country (In Millions) Country (In U.S. Dollars)
China 1,379 Qatar 124,927
India 1,281 Luxembourg 109,192
European Union 511 Singapore 90,531
United States 326 Brunei 76,743
Indonesia 260 Ireland 72,632
Brazil 207 Norway 70,590
Pakistan 204 Kuwait 69,669
Nigeria 190 United Arab Emirates 68,245
Bangladesh 157 Switzerland 61,360
Russia 142 Hong Kong 61,016

Source: World Factbook, www.cia.gov, accessed March 1, 2018.

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Absolute and Comparative 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 in software development

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Comparative Advantage

China enjoys a comparative advantage in producing textiles.

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Measuring Trade Between Nations
• Balance of Trade: Difference between a nation’s imports
and exports
• Balance of Trade Surplus: When a country exports more than it
imports
• Balance of Trade Deficit: When a country imports more than it
exports
• Balance of payments: Overall flow of money into or out
of a country
• Balance of payments surplus: more money has moved into a
country than out of it
• Balance of payments deficit: more money has moved out of a
country than into it
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Major U.S. Imports and Exports
Table 4.2 Top 10 U.S. Merchandise Exports and Imports
Amount Amount
Exports (In Billions) Imports (In Billions)
Machinery including computers $201.7 Electrical machinery, equipment $356.8
Electrical machinery, equipment 174.2 Machinery including computers 349.1
Mineral fuels including oil 138 Vehicles 294.6
Aircraft, spacecraft 131.2 Mineral fuels including oil 204.2
Vehicles 130.1 Pharmaceuticals 96.4
Optical, technical, medical apparatus 83.6 Optical, technical, medical apparatus 86.2
Plastics, plastic articles 61.5 Furniture, bedding, lighting, signs, prefab buildings 67.2
Gems, precious metals 60.4 Gems, precious metals 60
Pharmaceuticals 45.1 Plastics, plastic articles 54.9
Organic chemicals 36.2 Organic chemicals 46.1

Source: United States International Trade Commission, “U.S. Trade by Industry, Sector, and
Selected Trading Partners (data),” www.usitc.gov, accessed March 1, 2018.

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Exchange Rates
• Exchange rate: the rate at which a nation’s currency
can be exchanged for the currencies of other nations.
• 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
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Currency Devaluation

Devaluation: drop in a
currency’s value relative
to other currencies or to a
fixed standard.

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Barriers to International Trade

Figure 4.2 Barriers to International Trade

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Social and Cultural 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.

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Economic Differences
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.

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Political and Legal Differences
• Political Climate
• Legal Environment
• International Regulations
• Treaties between U.S. and other nations.
• Tariffs are taxes charged on imported goods.
• Enforcement problems, as with piracy.

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Corruption in Business and Government
Transparency International produces an annual corruption index for
businesspeople and the general public

Figure 4.3 Corruption in Business and Government

Source: Data from Transparency International, “Corruption Perceptions Index 2017, Results,”
www.transparency.org, accessed March 1, 2018.

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Types of Trade Restrictions
• Tariffs
• Taxes surcharges, or duties on foreign products
• Generate income for the government
• Protective tariffs raise prices of imported goods

• Nontariff Barriers
• Administrative trade barriers
• Quotas
• Dumping
• Embargo Exchange
• Exchange controls through central banks or government agencies

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Reducing Barriers to International Trade
• The world has moved toward more free trade
• Many communities and groups monitor and promote
free trade
• Trade Sanctions
• International Economic Communities reduce trade
barriers and promote regional economic cooperation

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Organizations Promoting Trade
General Agreement on Tariffs and Trade (GATT)
• Most industrialized nations found organization in 19 47 to reduce tariffs
and relax quotas

The World Trade Organization succeeded GATT

• Representatives from 153 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

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International Economic Communities
• North American Free Trade Agreement (NAFTA)
• Central America-Dominican Republic Free Trade
Agreement (CAFTA)
• European Union

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North American Free Trade Agreement

The North American Free Trade

Agreement, or NAFTA, created
the world’s largest free trade
zone between Canada, the
United States and Mexico.

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European Union

Figure 4.4 Nations of the European Union

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Going Global
• Determining the growth potential of each of the
foreign markets being considered
• Analyzing the expenditures required to enter new
markets
• Understanding the operational complexities and
deciding the best way to organize overseas operations
• Understanding foreign regulations and standards
• Good starting point for research: CIA World Factbook

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Top Global Franchise Companies
Table 4.3 Top 10 Global Franchise Companies
Name Type Initial Investment
McDonald’s Hamburger Fast Food Restaurant Up to $2.5 MM
KFC Fried Chicken Up to $2.6 MM
Burger King Hamburger Fast Food Restaurant Up to $2.9 MM
Pizza Hut Pizza Restaurant Chain Up to $1.2 MM
7-Eleven Convenience Store Up to $1.2 MM
Marriott International Hotel Franchises Up to $96.5 MM
RE/MAX International Real Estate Company Up to $219K
Dunkin’ Donuts Doughnut and Coffee House Company Up to $1.7 MM
InterContinental Hotels Hotels Up to $98 MM
and Resorts
Subway® Submarine Sandwiches Up to $320K

Source: “Top 100 Global Franchises,” Global Direct, www.franchisedirect.com, accessed March 3, 2018.

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Levels of Involvement
• Risk increases with the level of involvement
• Many companies employ multiple strategies
• Exporting and important are entry-level strategies
• Importing is the process of bringing in goods
produced abroad
• Exporting is the act of selling your goods overseas

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Countertrade and Franchising
• Countertrade – international transactions that do not involve
currency payments but use bartering.
• Franchising - a contractual agreement in which a local entity
gains rights to sell the franchisor’s product in the foreign market.
• Franchise 500 list from Entrepreneur magazine
• Foreign licensing agreement - allows a firm to produce or sell its
product, use its trademark, patent or manufacturing process.
• Subcontracting - involves hiring local firms to distribute,
produce, or sell goods and services.

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Offshoring and Direct 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 international
direct investment
• Directly operating production and marketing in foreign country
• Acquisition
• Joint Venture
• Overseas Division

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Multinational Corporations
Table 4.4 The World’s Top 10 Leading Companies By Sales
Rank Company Industry Country of Origin
1 ICBC China Banking China
2 China Construction Bank Banking China
3 Berkshire Hathaway Conglomerate United States
4 JPMorgan Chase Banking United States
5 Wells Fargo Banking United States
6 Agricultural Bank of China Banking China
7 Bank of America Banking United States
8 Bank of China Banking China
9 Apple Technology United States
10 Toyota Motor Automobile Japan

Source: “The World’s Biggest Public Companies,” Forbes, www.forbes.com, accessed March 5,
2018.

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Developing a Strategy for International
Business
Global Business (Standardization) Strategies
• Firm sells same product in essentially the product in the
same manner throughout the world
• Works well for products with nearly universal appeal

Multidomestic (Adaptation) Strategies

• Firm develops products and marketing strategies that
appeal to customs, tastes, and buying habits of particular
national markets

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Copyright
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