Competing in Global Markets

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Chapter 4 Competing in Global Markets
Learning Goals
Explain how international trade organizations and
economic communities reduce barriers to
international trade. Compare the different levels
of involvement used by businesses when entering
global markets. Distinguish between a global
business strategy and a multidomestic business
strategy.
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Explain international business and why nations
trade. Discuss types of advantage in
international trade. Describe measurements of
international trade and exchange rates. Identify
the major barriers that confront global
businesses.
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Exports Domestically produced goods and services
sold in markets in other countries. Imports
Foreign-made products and services purchased by
domestic consumers. WHY NATIONS TRADE  Boosts
economic growth by providing access to new
markets and needed resources.  More efficient
production systems.  Less reliance on economies
of home nations.
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International Sources of Factors of
Production  Decisions to operate abroad depend
on availability, price, and quality
of  Labor Natural resources  Capital  Ent
repreneurship  Allows a company to spread risk
throughout nations in different stages of the
business cycle or development.
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Size of the International Marketplace  World
population 7 billion
1 in 5 people live in relatively well-developed
countries.  Share of worlds population in
less-developed countries will grow in coming
years. Some countries have giant
markets  China1.3 billion India1.1 billion
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 Population size is no guarantee of
prosperity.  Though developing
nations generally have lower per capita income,
many have strong GDP growth rates and their huge
populations can be lucrative markets.
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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 Chinas domination of
silk production for centuries.  Rare these
days, mostly tied to climate advantages for
growing certain crops.  Comparative advantage
Country can supply a product more efficiently and
at lower cost than it can supply other goods,
compared with other countries.  Example
Indias combination of a highly educated
workforce and low wage scale.
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MEASURING TRADE BETWEEN NATIONS Balance of trade
Difference between a nations imports and
exports. Balance of payments Overall flow of
money into or out of a country.  Effects of
trade  Overseas loans and borrowing  Internati
onal investments profits from them Foreign
aid payments Balance of payments surplus
more money into country than out Balance of
payments deficit more money out of country than
in
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Major U.S. Exports and Imports  U.S. leads
world, exports and imports annually total 3
trillion. U.S. imports more goods than
exports exports more services than imports.
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Exchange Rates Exchange rate Value of one
nations currency relative to the currencies of
other nations.  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 for each currency in the
international market.  National governments
deliberately influence exchange rates  Currency
blocs  Currency devaluation
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 Business transactions usually conducted in
currency of the region where they happen.  Rates
can quickly create or wipe out competitive
advantage.  Currency converters available at
http//beginnersinvest.about.com/cs/currencycalc/i
ndex.htm.  Hard currencies Currencies that
owners can easily convert into other
currencies.   Euro   U.S. dollar  Japanese
yen  Foreign currency market is worlds biggest,
with daily volume of 1.5 trillion, 50 times the
size of all equity markets put together.
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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.  Example Devalued
currency can make market less attractive for
exports but more attractive for investments
because payment in local currency is a relative
bargain.
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Political and Legal Differences Political Climate
Stability is a key consideration. Legal
Environment Three dimensions U.S. law,
international regulations, laws of the countries
where they plan to trade. Corruption can be an
important issue.  Foreign Corrupt Practices Act
Forbids U.S. companies from bribing foreign
officials, candidates, or government
representatives. International Regulations
Friendship, commerce, and navigation treaties
between U.S. and other nations.  Tariffs Taxes
charged on imported goods. Enforcement
problems, as with piracy.
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Types of Trade Restrictions Tariffs Taxes,
surcharges, or duties on foreign products.
 Revenue tariffs generate income for the
government.  Protective tariffs raise prices of
imported goods to level the playing field for
domestic competitors. Nontariff Barriers Also
called administrative trade barriers  Quotas
limit the amount of a product that can be
imported over a specified time period.  Prevent
dumping, selling a product abroad at a very low
price.  An embargo imposes a total ban on
importing a specified product or all trading with
a particular country. Exchange controls
through central banks or government agencies
regulate the buying and selling of currency to
shape foreign exchange in accordance with
national policy.
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REDUCING BARRIERS TO INTERNATIONAL
TRADE Organizations Promoting International
Trade  General Agreement on Tariffs and Trade
(GATT) sponsored negotiations to reduce worldwide
barriers to trade. Founded 1947 Uruguay
Round of negotiations cut average tariffs by
one-third, or 700 billion.  Led to the
establishment of the World Trade Organization.
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World Trade Organization Monitors GATT
agreements.  149 member countries.  Began
monitoring GATT agreements in 1995.  Has become
controversial. Criticisms of its
policies  Lead to increased pollution and
human rights abuses. Hurt small foreign
businesses that serve cultural tastes and
practices.  Promote export of manufacturing
jobs to low-wage countries. World Bank Lends
money to less-developed and developing
countries.  Funds projects that build or
expand infrastructure.  Provides assistance
and advice.  Imposes lending requirements
intended to build economies of borrower
nations.
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International Monetary Fund Promotes trade
through financial cooperation.  Makes
short-term loans to member nations to meet
expenses.  Operates as lender of last resort
for troubled nations.  Requires significant
commitments from borrowers to address problems
that led to the crisis, such as curtailing
imports or devaluing currency. Eight
economic powers recently agreed to offer full
debt relief to distressed African countries in
exchange for government reforms in education and
welfare.
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International Economic Communities Reduce trade
barriers and promote regional economic
cooperation. Free-trade area Members trade
freely among selves without tariffs or trade
restrictions.  Customs union Establishes a
uniform tariff structure for members trade with
nonmembers.  Common market Members bring all
trade rules into agreement. NAFTA (1994)
Worlds largest free-trade zone United States,
Canada, Mexico. Combined population 435
million  Total GDP nearly 14 trillion  U.S.
and Canada are each others biggest trading
partners.
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CAFTA (2005) Free-trade zone among United
States, Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras, and
Nicaragua.  Total GDP nearly 14 trillion
33 billion traded annually between U.S. and
these countries. European Union Best-known
example of a common market.  Combined
population 450 million people in 25 countries
Total GDP 12 trillion Goals include promoting
economic and social progress, introducing
European citizenship as complement to national
citizenship, and giving EU a significant role in
international affairs.
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GOING GLOBAL  Three key decisions for companies
considering going global  What foreign
market(s) will the company enter?  Analysis of
local demand, availability of resources
Existing and potential competition, tariff rates,
currency stability, investment
barriers  Good starting point for research
CIAs World Factbook  What expenditures are
required to enter a new market? What is the
best way to organize overseas operations?
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Levels of Involvement Risk and control both
increase with the level of involvement. Importers
and Exporters Most basic level of international
involvement, with the least risk and
control.  Exports handled by intermediaries
called export trading companies. Can also
rely on export management company for advice and
expertise.  Can also rely on offset
agreement, through which a small local firm is
subcontractor of the larger firm.  Can be
indirectFirm manufactures a product that is a
component of another product sold overseas.
Can be directFirm sells its own products in
overseas markets.
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Countertrade Payments made in the form of local
products, not currency.  Commonly used when
there is inadequate access to needed foreign
currency.  Can provide opportunity to enter a
new market with a heavy debt burden or unstable
currency. Contractual Agreements Often come after
a company has some experience in international
sales. Include franchising, foreign licensing,
and subcontracting. Franchising Contractual
agreement in which a wholesaler or a retailer
(the franchisee) gains the right to sell the
franchisors products under that companies brand
name in exchange for agreeing to related
operating requirements.  Foreign licensing
agreement Firm has right to sell in specified
geographic area Subcontracting Hiring local
companies to produce, distribute, or sell goods
or services.
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Offshoring Relocation of business processes to
lower-cost location overseas.  China Preferred
destination for production offshoring.  India
Preferred destination for services
offshoring.  Allows businesses to keep costs
low and remain competitive.  Generates
controversy because of apparent link between jobs
sent overseas and jobs lost at home. International
Direct Investment Includes establishment of
manufacturing facilities, opening of an overseas
division, and acquisition of an existing firm in
the host country. Highest level of global
involvement Joint ventures Allow companies to
share risks, costs, profits, and management
responsibility with one or more host country
nationals.
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From Multinational Corporation to Global
Business Multinational corporation (MNC) An
organization with significant foreign operations
and marketing activities outside its home
country.
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DEVELOPING A STRATEGY FOR INTERNATIONAL
BUSINESS Global Business Strategies  Firm sells
same product in essentially the same manner
throughout the world. Works well for products
with nearly universal appeal and luxury
items. Multidomestic Business Strategies   Firm
develops products and marketing strategies that
appeal to customs, tastes, and buying habits of
particular national markets. Example Spinach,
egg, and tomato soup on the menu in KFCs menu
in China.
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Multidomestic Business Strategies