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Chapter Three
Competing in Global Markets
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World Trade of World GDP
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Why Has Trade Increased?

• Companies have figured out how to reduce
  transportation costs.
• Recognizing the potential benefits to their
  citizens, countries have cooperated to reduce
  import tariffs.

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Theory of Comparative Advantage
China
Output per Dollar of Input
U.S.
U.S.
China
Aircraft
Clothing
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• Export what you make more efficiently than
  another nation
• Trade for what that other nation makes more
  efficiently

Aircraft
Clothing

• Such trades are mutually beneficial

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Trade Deficits/Surpluses, Balance of Trade Example

• U. S. Exports to Japan
• Nuclear Reactors
• Aircraft
• Medical and Industrial Equipment
• Cereal Grains
• 63 Billion in 2007

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Balance of Trade Example (cont.)

• Japan Exports to U.S.
• Cars and Trucks
• TVs, Stereos, Laptops, and Other Home Electronic
  Equipment
• Still and Video Cameras
• 145 B in 2007

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The Balance of Trade was Unfavorable for the U.S.
in 2007
These flows were out of balance by 82 B.
63 B Goods/Svcs To Japan
145 B Goods/Svcs From Japan
At the end of the year, the U.S. owed Japan
money. The U.S. had to give Japan American
assets worth 82 B (stocks, bonds, land,
companies) and/or continue to pay interest on the
82 B debt until they do.
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The Balance of Trade was Unfavorable for the U.S.
in 2007
These flows were out of balance by 82 B.
63 B Goods To Japan
145 B Goods From Japan
At the end of the year, the U.S. owed Japan
money. The U.S. had to give Japan American
assets worth 82 B (stocks, bonds, land,
companies) and/or continue to pay interest on the
82 B debt until they do.
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The Balance of Payments The difference between
money coming into a country (from exports) and
money leaving the country (for imports) plus
money flows from other factors such as tourism,
foreign aid, overseas military expenditures, and
foreign investment.
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Components of the U.S. Balance of Payments
Deficit, 2003 (Billions)
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A favorable balance of payments When more money
is flowing into a country than out of a country.
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Strategies for Reaching Global Markets

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International Licensing

• The licensor agrees to let the licensee make and
  sell products under its brand name within its own
  country in exchange for a royalty.
• Examples
• Tokyo and Hong Kong Disneyland
• Coca Cola Japan, Mexico, France

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International Licensing

• Advantages
• Dont need to export product
• Leverage OPM
• Leverage locals time, effort, and knowledge of
  local customs

• Disadvantages
• Typically only 5-10 of revenue
• Licensee may break contract and become a
  competitor

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Exporting

• The oldest, and still one of the most popular
  strategies
• Costs include shipment, insurance, import
  tariffs.
• Risks include damage in shipment, difficulty
  collecting payment.
• Export Assistance Centers

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Franchising

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Contract Manufacturing

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International Joint Ventures and Strategic
Alliances

• Its only a joint venture if two or more existing
  firms create a new company and each pour
  resources into it. They then split the profits.
• Example
• New United Motors (Nummi)

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International Joint Ventures and Strategic
Alliances

• Strategic alliance A long-term partnership
  between two or more companies that does not
  create a jointly-owned subsidiary.
• Example
• Mayo Clinic and Microsoft

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Foreign Subsidiaries

• A company located in one country but owned by a
  company headquartered in another country.
• Most multinational high tech firms have foreign
  subsidiaries in each country in which they do
  business.

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Foreign Subsidiaries
Hewlett-Packard U.S.
Hewlett-Packard U.K.
Hewlett-Packard France
Hewlett-Packard Italy
Hewlett-Packard Japan
Hewlett-Packard Spain
Hewlett-Packard Australia
Hewlett-Packard Sweden
Hewlett-Packard Denmark
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Foreign Direct Investment

• The buying of permanent property and businesses
  in foreign nations.
• Includes, but is not limited to, foreign
  subsidiaries

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Special Risks That Exporters and Foreign Sub
Owners Face

• Sociocultural differences
• See pages 82-83 and Figure 3.7 for examples

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Understanding Currency Exchange Risk

• Suppose today 1 dollar .64 Euro
• And tomorrow 1 dollar .63 Euro
• Did the dollar strengthen or weaken?
• If you were traveling in Europe, would that be
  good or bad for you?
• If you owned a U.S. company that exported a lot
  of products, would that be good or bad for you?
• What if you owned an import business that
  imported a lot of products from Europe?

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Understanding Currency Exchange Risk
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Trade Protectionism

• Mercantilism
• Tariffs
• Protective
• Revenue
• Import Quota Embargo
• Non-tariff barriers

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The GATT and the WTO

• The General Agreement on Tariffs and Trade
  (GATT) is a multilateral trade treaty with a
  growing list of signatories
• First signed in 1948
• The Uruguay Round was an important set of
  amendments (1992-1994)

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Common Markets

• Best example is the European Union (EU).
• Three elements
• No internal tariffs
• A common set of external tariffs
• The coordination of laws to facilitate exchange
  between member nations

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Free-Trade Areas

• No internal tariffs
• Best example is the North American Free Trade
  Agreement (NAFTA)
• Signatories are the U.S., Canada, and Mexico