*Chapter Three

*
Doing
Business in
Global
Markets

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
 *Why Trade With
TRADING with OTHER NATIONS Other Nations?

LG1
*
• Today, over 90 percent of the companies doing
business globally. The reason is not surprising—there
are over 7.1 billion potential customers in the 194
countries that make up the global market.
• Countries with abundant natural resources (like
Venezuela or Russia) 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.
3-2
 *
IMPORTING and EXPORTING The Dynamic
Global Market

• Importing -- Buying products LG1

*
from another country.
• Exporting -- Selling products
to another country.
• The U.S. is the largest
importing and the second
largest (China-largest)
exporting nation in the world.
Bangladesh remains the
second biggest apparel
exporter ($29 billion) in 2018
(China-largest). 3-3
 *The Dynamic
IMPORTING and EXPORTING (Cont'd) Global Market

LG1
*
• Bangladesh’s Top • Bangladesh’s Top
Imports: Exports:
• Machinery including • Apparel
computers • Footwear
• Cotton • Fish
• Electrical machinery and
• Leather
equipment
• Plastics and plastic
• Mineral fuels including oil
articles
• Iron and steel • Bicycles

Source: http://www.worldstopexports.com 3-4

 *
HOW FREE TRADE Why Trade With
Other Nations?
BENEFITS the WORLD LG1
*
Global trade has led the world in a new direction:
• Literacy rates worldwide have increased from
56% in 1950 to 84% in 2006.
• Life expectancy in less developed areas rose
from 40.9 years in 1950 to 72.6 years for 2019.

Source: The Progressive Policy Institute, World Health Organization .

3-5
 *
COMPARATIVE and ABSOLUTE The Theories of
Comparative and
Absolute Advantage
ADVANTAGE LG1
*
• Comparative Advantage -- A country should sell
to other countries those products that it produces
most effectively and efficiently, and buy from other
countries those products that it cannot produce as
effectively or efficiently. Bangladesh sell RMG and buy
Machinery.

• Absolute Advantage -- A country has a monopoly

on producing a specific product or the advantage
that exists when a country produces a specific
product more efficiently than all other countries.
China – Manufacturing, Canada – Agricultural Production,
Bangladesh – RMG Manufacturing at low cost.
3-6
 *
GOING GLOBAL with a Getting Involved
in Global Trade
SMALL BUSINESS
LG2
*
• Small businesses may be
the key in global job
growth.
• They make up almost half
of the private sector.
• Only 30% of small
businesses export.
• By 2018, it’s expected half
of small businesses will
export.
3-7
 *
GETTING INVOLVED in Exporting Goods
and Services
EXPORTING LG2
*
• Exporting provides a
great boost to the U.S.
economy.
• It’s estimated every $1
billion in U.S. exports
generate over 7,000
U.S. jobs.

3-8
 *
FINDING CRACKS in the
GREAT WALL
(Spotlight on Small Business) *
• MFG.com is an online exchange for
manufacturers and suppliers.
• Growing numbers of Chinese manufacturers
began visiting the site.
• MFG staff had to learn about the Chinese
business culture.
• China now accounts for 11% of MFG.com’s
revenue.
3-9
 *
Measuring
Global Trade

LG2
*
• Balance of Trade -- The total value of a nation’s
exports compared to its imports measured over a
particular period. BOT = NX – NI (+ = Surplus; - = Deficit)

• Trade Surplus -- When the value of a country’s

exports is more than that of its imports. A favorable
balance of trade.

• Trade Deficit -- When the value of a country’s

exports is less than that of its imports. An
unfavorable balance of trade.
3-10
 *
BALANCE of PAYMENTS Measuring
Global Trade

LG2
*
• Balance of Payments -- The difference between
money coming into a country (from exports) and
money leaving the country (from imports) plus other
money flows coming into or leaving a country 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.
3-11
 *
Measuring
UNFAIR TRADE PRACTICES Global Trade

LG2
*
• Dumping -- Selling products in a foreign country at
lower prices than those charged in the producing
country.

• Dumping is prohibited.

• China, Brazil and Russia have been penalized

for dumping steel in the U.S.

3-12
 *
Strategies for
KEY STRATEGIES for REACHING Reaching Global
Markets
GLOBAL MARKETS LG3
*

International
Contract Foreign
Licensing Exporting Franchising joint ventures
Manufacturing direct
and strategic
investment
alliances

Least Amount of commitment, control, risk and profit potential Most

3-13
 *
Licensing

•
LG3
*
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).
Example: Coca-Cola has entered into global licensing
agreements with over 300 licensees.

• 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.
- The licensor may also assist or work with a licensee in
such areas as distribution, promotion, and consulting .
3-14
 *
Franchising

LG3
*
• 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/service in a given
area.

• Franchisors need to be careful to adapt their product

to the countries they serve.

• Pizza Hut and Dominos learned that pizza topping

(Mushrooms, Onions, Bacon etc.) preferences differ all
around the world.
3-15
 *
The SUN NEVER SETS
on MICKEY D’S
(Reaching Beyond Our Borders) *
• McDonald’s has more than 31,000 restaurants in
over 118 countries.
• Maintains varying menus around the world due to
the different preferences of its customers.
• Responds to challenges by funding research and
adding healthier options.

3-16
 FRANCHISING
ADVANTAGES DISADVANTAGES

• Management and • Large start-up costs

marketing assistance • Shared profit
• Personal ownership
• Management regulation
• Nationally recognized
• Coattail effects
name
• Financial advice and • Restrictions on selling
assistance • Fraudulent franchisors
• Lower failure rate
 *
CONTRACT MANUFACTURING Contract
Manufacturing
LG3
*
• Contract Manufacturing -- A foreign company
produces private-label goods to which a domestic
company then attaches its own brand name or
trademark. A form of outsourcing. Example: Nike has
more than 800 contract factories around the world that
manufacture all its footwear and apparel.
• 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.
3-18
 *
JOINT VENTURES International Joint
Ventures and
Strategic Alliance
LG3
*
Joint Venture -- A partnership in which two or more
companies (often from different countries) join to
undertake a major project. Example: Disney and China’s
state-owned Shanghai Shendi Group entered a joint venture to
create a Disneyland theme park in Shanghai. Metrorail Project in
Dhaka.

• 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 3-19
 *
STRATEGIC ALLIANCES International Joint
Ventures and
Strategic Alliance

LG3
*
• Strategic Alliance -- A long-term partnership
between two or more companies established to help
each company build competitive market advantages.
Example: Hewlett-Packard has strategic alliances with
Hitachi and Samsung.

• Unlike joint ventures, strategic alliances don’t

typically share costs, risks, management or
profits.
• Strategic alliances provide broad access to
markets, capital and technical expertise.
3-20
 *
FOREIGN DIRECT INVESTMENT Foreign Direct
Investment
LG3
*
• Foreign Direct Investment (FDI) -- The buying of
permanent property and businesses in foreign
nations. Hyundai, Nokia in BD
• Foreign Subsidiary -- A company owned in a
foreign country by another company called the parent
company. The most common form of FDI. Walt Disney
Entertainment owns 100% of Marvel Entertainment which
produces movies.
- Primary Advantage: Parent company maintains
complete control over its technology or expertise.
- Primary Disadvantage: Must commit funds and
technology within foreign boundaries.
3-21
 *
Foreign Direct
MULTINATIONAL CORPORATIONS Investment
LG3
*
• Multinational Corporation -- A company that
manufactures and markets products in many
different countries and has multinational stock
ownership and multinational management.
Example: Nestlé is a multinational corporation
• 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.
3-22
 MERGERS and AQUISITIONS

• Merger -- The result of two firms joining to form one

company, MarutiSuzuki.
• Acquisition -- One company’s purchase of the
property and obligations of another company.
 TYPES of MERGERS

• Vertical Merger -- Joins two firms in different

stages of related business. With distribution channel.
• Horizontal Merger -- Joins two firms in the same
industry and allows them to diversify or expand their
products.
• Conglomerate Merger -- Unites firms in
completely unrelated industries in order to diversify
business operations and investments.
 *
SOVEREIGN WEALTH FUNDS Foreign Direct
Investment
LG3
*
• Sovereign Wealth Funds (SWFs) -- A growing form of
foreign direct investment is the use of sovereign wealth
funds (SWFs); Investment funds controlled by governments
holding large stakes in foreign companies. Unilever holds
60.4% and Government of Bangladesh holds 39.6% of its
share.
• 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.
- Undermining the management of the companies in which they
invest.
3-25
 *
Forces Affecting
FORCES AFFECTING TRADING Trading in Global
Markets
IN GLOBAL MARKETS LG4
*
• Sociocultural

• Economic and Financial

• Legal and Regulatory

• Physical and Environmental

3-26
 *
CULTURAL DIFFERENCES Socio-cultural
Forces

• To be involved in global trade, you must be aware

LG4
*
of the cultural differences among nations
including: social structures, religion, manners and
customs, values and attitudes, language, and
personal communication.

• Religion is an important part of any society’s culture

and can have a significant impact on business
operations. halal
• Understanding sociocultural differences is also
important in managing employees.
• A sound philosophy is: Never assume what works
in one country will work in another. 3-27
 *
LOST in TRANSLATION Socio-cultural
Forces
Advertisements Gone Wrong
LG4
*
• Gerber used their U.S. label – a cute baby – on
African products. They found out that labels on
African products picture what’s inside the
package.

• In Italy, Schweppes Tonic Water was mistaken

as Schweppes Toilet Water.

3-28
 *
EXCHANGE RATES Economic and
Financial Forces

• Exchange Rate -- The value of one nation’s

LG4
*
currency relative to the currencies of other
countries. 1 USD equals 86.82 BDT

• High value of the dollar – Dollar is trading for more

foreign currency; foreign goods are less expensive
because it takes fewer dollars to buy them. However,
U.S. produced goods become more expensive because
of the dollar’s high value.

• Low value of the dollar – Dollar is trading for less

foreign currency; foreign goods are more expensive.
3-29
 *
EXCHANGE RATES (CONT’D) Economic and
Financial Forces

LG4
• Global financial markets operate under a system
*
called floating exchange rates, which means that
Currencies float in value depending on the supply
and demand for them in the global market.
• Changes in currency values can cause many
problems globally. For instance, labor costs for
multinational corporations like Nestlé, General
Electric, and Sony can vary considerably as
currency values shift, causing them to juggle
production from one country to another.
3-30
 *
DEVALUATION and Economic and
Financial Forces
COUNTERTRADING
LG4
*
• Devaluation -- Lowers the value of a nation’s
currency relative to others.

• Sometimes, due to a nation’s weak currency, the only

way to trade is bartering, the exchange of
merchandise for merchandise or service for service
with no money traded.

• Countertrading -- A complex form of bartering in which

several countries may be involved, each trading goods
for goods or services for services. Example:
US(Laptop)-BD (RMG)-Japan(US sells RMG to Japan for Car)
3-31
 *Legal and
LEGAL CONCERNS OVERSEAS Regulatory
Forces
LG4
*
• There’s no global system of laws.

• Laws may be inconsistent.

• U.S. businesses must follow U.S. laws and

regulations in conducting business globally.

• The Organization for Economic Cooperation and

Development (OECD) and Transparency
International fight to end corruption and bribery
in foreign markets and have had limited
success.
3-32
 *Physical and
ENVIRONMENTAL FORCES Environmental
Forces

• Developing countries have LG4

*
primitive transportation and
storage systems that make
international distribution
difficult or impossible.
• Often, technological
capabilities are far from
those in the U.S. which
make for a tough business
environment. Computer and
Internet use in many developing
countries is thin or nonexistent.
3-33
 *
TRADE PROTECTIONISM Trade
Protectionism

LG5
*
• Trade Protectionism -- The use of government
regulations to limit the import of goods and services.
IRAN, RUSSIA

• Advocates of protectionism believe it allows

domestic producers to survive, grow and produce
jobs.

• Business, economics, and politics have always

been closely linked.

3-34
 *
TARIFFS Trade
Protectionism
• Tariffs -- Taxes on imports. making
imported goods more expensive to
LG5
*
buy.

• Two kinds of tariffs:

- Protective – Raise the retail price
of imports so domestic goods are
competitively priced. These tariffs
are meant to save jobs for domestic
workers and keep industries-from
closing down because of foreign
competition.
- Revenue – Raise money for
governments. 3-35
 *
IMPORT QUOTAS and EMBARGOS Trade
Protectionism

• Import Quota -- Limits the number of products in

LG5
*
certain categories a nation can import. The United
States has import quotas on a number of products,
including sugar and shrimp, to protect U.S. companies
and preserve jobs.
• Nations also prohibit the export of specific products. For
instance, prohibit exporting goods such as high-tech
weapons that could endanger national security.

• 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.
3-36
 *
OUTSOURCING The Challenge
of Offshore
Outsourcing
LG6
*
• Outsourcing -- Purchasing goods and services
from sources outside a firm rather than
providing them within the company.
• 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.

3-37
 *
WORLD TRADE ORGANIZATION The World Trade
Organization

LG5
*
• General Agreement on Tariffs and Trade
(GATT) -- A global forum for reducing trade
restrictions on goods, services, ideas and cultural
problems.

• World Trade Organization (WTO) --

Headquartered in Geneva, the WTO is an
independent entity of 164 member nations whose
purpose is to oversee cross-border trade issues and
global business practices.

3-38
 *
COMMON MARKETS Common
Markets

LG5
*
• Common Market -- A regional group of countries
with a common external tariff, no internal tariffs and
coordinated laws to facilitate exchange among
members.

• The European Union (EU), Mercosur and the

ASEAN are common markets.

3-39
 *
NAFTA and CAFTA
The North American
and Central American
Free Trade
Agreements
LG5 *
• North American Free Trade Agreement --
Ratified in 1994, created a free-trade area among
the United States, Canada and Mexico.

• Central American Free Trade Agreement --

Passed in 2005, created a free-trade zone with
Costa Rica, Dominican Republic, El Salvador,
Guatemala, Honduras and Nicaragua.

3-40
“To acquire knowledge, one must study;
but to acquire wisdom, one must
observe”
Marilyn vos Savant