CHAPTER 3 Doing Business in Global Markets Mc

LEARNING OBJECTIVES 1. Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade. 2. Explain the importance of importing and exporting, and understand key terms used in global business. 3. Illustrate the strategies used in reaching global markets and explain the role of multinational corporations. 1 -2

LEARNING OBJECTIVE 4. Evaluate the forces that affect trading in global markets. 5. Debate the advantages and disadvantages of trade protectionism. 6. Discuss the changing landscape of the global market and the issue of offshore outsourcing. 1 -3

LEILA JANAH Samasource • Started Samasource to help people in developing countries rise out of poverty. • Janah has been working to combat world poverty since she was a teen. • Employees are carefully selected and are taught new skills. 3 -4

NAME that COMPANY This Swiss-based company has many foreign subsidiaries including Jenny Craig (weight management), Ralston Purina, Chef America (maker of Hot Pockets) and Dreyer’s Ice Cream in the United States as well as Perrier in France. The company employs over 328, 000 people and has operations in almost every country in the world. Name that company! 1 -5

BUSINESS in the GLOBAL MARKET LO 3 -1 • Over 90% of companies doing business globally believe it is important for employees to have international experience. • U. S. organizations (like UPS, MLB, the NFL and the NBA) are also expanding abroad. 3 -6

WORLD POPULATION by CONTINENT LO 3 -1 3 -7

WORLD POPULATION GROWTH LO 3 -1 3 -8

IMPORTING and EXPORTING LO 3 -1 • Importing -- Buying products from another country. • Exporting -- Selling products to another country. • The U. S. is the largest importing and the second largest exporting nation in the world. 3 -9

PLEASURE DOING BUSINESS LO 3 -1 Best Countries for Business 2013 Rank Country 2012 Rank 1 Ireland - 2 New Zealand - 3 Hong Kong - 4 Denmark - 5 Sweden 3 6 Finland 2 7 Singapore 1 8 Canada - 9 Norway - 10 Netherlands - Source: Forbes, www. forbes. com, accessed November 2014. 3 -10

CAN YOU SPARE a DIME? LO 3 -1 Home Countries for Some of the World’s Billionaires • U. S. – 516 billionaires • China – 136 billionaires • Russia – 88 billionaires • Germany – 82 billionaires • India – 54 billionaires • U. K. – 43 billionaires • Hong Kong – 41 billionaires Source: Forbes, www. forbes. com, accessed November 2014. 3 -11

TRADING with OTHER NATIONS LO 3 -1 • 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 -12

PROS and CONS of FREE TRADE LO 3 -13

COMPARATIVE and ABSOLUTE ADVANTAGE LO 3 -1 • Comparative Advantage -- A country should sell the products it produces most efficiently and buy from other countries the products it cannot produce as 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. 3 -14

GOING GLOBAL with a SMALL BUSINESS LO 3 -2 • Small businesses may be the key in global job growth. • Only 1% of U. S. small businesses export, yet they account for 30% of total U. S. exports. 3 -15

WHOM DOES the U. S. OWE? LO 3 -2 Countries that Own the Most U. S. Debt Source: Max Fisher, Washington Post, www. washingtonpost. com, accessed November 2014. 3 -16

GETTING INVOLVED in IMPORTING LO 3 -2 • 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. 3 -17

GETTING INVOLVED in EXPORTING LO 3 -2 • 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 -18

HOW to MEASURE GLOBAL TRADE LO 3 -2 • Balance of Trade -- The total value of a nation’s exports compared to its imports measured over a particular period. • Trade Surplus (Favorable) -- When the value of a country’s exports is more than that of its imports. • Trade Deficit (Unfavorable) -- When the value of a country’s exports is less than that of its imports. 3 -19

BALANCE of PAYMENTS LO 3 -2 • Balance of Payments -- The difference between money coming into a country (from exports) and money leaving the country (from imports) plus other money flows. • 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 -20

UNFAIR TRADE PRACTICES LO 3 -2 • 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 -21

LARGEST EXPORTING NATIONS and TRADE PARTNERS LO 3 -22

TEST PREP • What are two of the main arguments favoring the expansion of U. S. businesses into global markets? • What is comparative advantage, and what are some examples of this concept at work in the United States? • How are a nation’s balance of trade and balance of payments determined? • What is meant by dumping in global trade? 3 -23

KEY STRATEGIES for REACHING GLOBAL MARKETS Licensing Least Exporting Franchising Contract Manufacturing International joint ventures and strategic alliances Amount of commitment, control, risk and profit potential LO 3 -3 Foreign direct investment Most 3 -24

LICENSING LO 3 -3 • Licensing -- When a firm (licensor) provides the right to manufacture its product or use its trademark to a foreign company (licensee) for a fee (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. 3 -25

EXPORT ASSISTANCE CENTERS and EXPORT TRADING CENTERS LO 3 -3 • 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. 3 -26

FRANCHISING LO 3 -3 • 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. • Yum! Brands, home of KFC, Taco Bell and Pizza Hut, learned that food preferences differ all around the world. 3 -27

TIME to MAKE the DONUTS… LO 3 -3 Dunkin’ Donuts Flavors in Taiwan • Sweet Potato • Honeydew Melon • Green Apple • Kiwi Fruit • Mango • Pineapple Photo Credit: Dennis Yang • Strawberry • Corn Crumb Soft Rice Cake Source: World Features Syndicate. 3 -28

MCDONALD’S: OVER 100 CULTURES SERVED • Mc. Donald’s has more than 34, 000 restaurants in over 118 countries. • Maintains varying menus around the world due to the different preferences of its customers. • Attracts top-level college graduates to be trained for management spots. • Only 8 of every 1, 000 applicants actually makes it into the program! 3 -29

THAT’S at MCDONALD’S? • Malaysia: Bubur Ayam Mc. D – Chicken strips in porridge with onions, ginger, and shallots. • Egypt: Mcarabia – Grilled chicken with tehina sauces, lettuce, tomato and onion on Arabic bread. • Japan: Teritama – Teriyaki burger topped with an egg. • Germany: Want a beer with your burger? You can order one in the German stores. • Israel: Operates using Kosher kitchens. Source: Mc. Donalds, www. mcdonalds. com, accessed November 2014. 3 -30

CONTRACT MANUFACTURING LO 3 -3 • 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. • 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 -31

JOINT VENTURES LO 3 -3 • Joint Venture -- A partnership in which two or more companies 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. 3 -32

STRATEGIC ALLIANCES LO 3 -3 • 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. 3 -33

FOREIGN DIRECT INVESTMENT LO 3 -3 • 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. The most common form of FDI. - Primary Advantage: Parent company maintains complete control over its technology or expertise. - Primary Disadvantage: Must commit funds and technology within foreign boundaries. 3 -34

LO 3 -3 BUYING AMERICAN? Model State(s) manufacturing % of American parts Toyota Camry Kentucky & Indiana 75% Honda Accord Ohio 70% Chevrolet Malibu Kansas & Michigan 66% Nissan Altima Tennessee 60% Ford Fusion Michigan 30% 3 -35

MULTINATIONAL CORPORATIONS LO 3 -3 • Multinational Corporation -- A company that manufactures and markets products in many different countries and has multinational stock ownership and 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. 3 -36

LARGEST MULTINATIONAL CORPORATIONS LO 3 -3 Company Home Country 1 Royal Dutch Shell Netherlands 2 Walmart Stores United States 3 Exxon. Mobil United States 4 Sinopec Group China 5 China National Petroleum China 6 BP United Kingdom 7 State Grid China 8 Toyota Motor Japan 9 Japan Post Holdings Japan 10 Chevron United States 3 -37

SOVEREIGN WEALTH FUNDS LO 3 -3 • Sovereign Wealth Funds (SWFs) -- Funds controlled by governments holding investment 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. - Undermining the management of the companies in which they invest. 3 -38

TEST PREP • What are the advantages of using licensing as a method of entry in global markets? What are the disadvantages? • What services are usually provided by an exporttrading company? • What is the key difference between a joint venture and a strategic alliance? • What makes a company a multinational corporation? 3 -39

FORCES AFFECTING GLOBAL TRADE LO 3 -4 • Sociocultural • Economic and Financial • Legal and Regulatory • Physical and Environmental 3 -40

CULTURAL DIFFERENCES LO 3 -4 • To be involved in global trade, you must be aware of the cultural differences among nations including: - Social Structures - Religion - Manners - Values - Language - Personal Communication 3 -41

LOST in TRANSLATION LO 3 -4 Advertisements Gone Wrong • Braniff Airlines’ slogan "Fly in leather” translated in Spanish as "Fly naked. ” • Siri, Apple’s digital assistant on i. Phone, is a common slang term for “butt” in Japanese. • In Italy, Schweppes Tonic Water was mistaken as Schweppes Toilet Water. • Nokia’s line of Lumia phones is Spanish for “prostitute. ” 3 -42

FROM SETTING PICKS to PICKING GRAPES • When Yao Ming was facing retirement, he moved on to other ventures. • Yao has set himself apart from others by opening high-end winery. • His cheapest bottles go for about $87! 3 -43

READY to TRAVEL ABROAD? LO 3 -4 Know Your Cultural Differences • In Turkey, it’s rude to cross your arms while facing someone. • In many Middle Eastern countries, you shouldn’t eat or shake hands with the left hand because it is considered unclean. • In India, you should never pat anyone’s head. It’s where one’s soul is kept. • In Brazil, your meeting may not start on time because punctuality isn’t important to the culture. 3 -44

DO as the GERMANS… LO 3 -4 How to Not Embarrass Yourself in Germany • Always use titles like Doctor, Frau, or Herr. • Always provide food and drinks for your birthday. • Don’t remove your jacket until your host does. • Wear conservative business attire, anything else is considered sloppy. • Never jaywalk. • Always keep your hands on the table when eating. 3 -45

EXCHANGE RATES LO 3 -4 • 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 goods are less expensive. • Low value of the dollar – Dollar is trading for less foreign currency; foreign goods are more expensive. • Currencies float in value depending on the supply and demand for them in the global market. 3 -46

DEVALUATION and COUNTERTRADING LO 3 -4 • Devaluation -- Lowers the value of a nation’s currency relative to others. • Countertrading -Complex form of bartering in which several countries each trade goods or services for other goods or services. 3 -47

LEGAL and REGULATORY FORCES LO 3 -4 • 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 and Transparency International fight to end corruption and bribery in foreign markets and have had limited success. 3 -48

ENVIRONMENTAL FORCES LO 3 -4 • 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 make for a tough business environment. 3 -49

TEST PREP • What are four major hurdles to successful global trade? • What does ethnocentricity mean and how can it affect global success? • How would a low value of the dollar affect U. S. exports? • What does the Foreign Corrupt Practices Act prohibit? 3 -50

TRADE PROTECTIONISM LO 3 -5 • 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. 3 -51

TARIFFS LO 3 -5 • Tariffs -- Taxes on imports, making imported goods more expensive. • Two kinds of tariffs: - Protective – Raise the retail price of imports so domestic goods are competitively priced. - Revenue – Raise money for governments. 3 -52

IMPORT QUOTAS and EMBARGOS LO 3 -5 • Import Quota -- Limits the number of products in certain categories 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. embargos against Cuba, Iran and North Korea. 3 -53

WORLD TRADE ORGANIZATION LO 3 -5 • 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 159 member nations whose purpose is to oversee cross-border trade issues and global business practices. 3 -54

COMMON MARKETS LO 3 -5 • 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, the ASEAN and the COMESA are common markets. 3 -55

EU MEMBERS LO 3 -56

NAFTA and CAFTA LO 3 -5 • 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 -57

NAFTA OBJECTIVES LO 3 -5 1) Eliminate trade barriers and facilitate crossborder 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. 5) Establish a framework for further regional trade cooperation. 6) Improve working conditions in North America. 3 -58

NEW FREE TRADE AGREEMENTS LO 3 -5 • Today, free trade agreements are being negotiated Colombia and Panama. • The U. S. is considering an agreement with a nine-nation free trade bloc called the Trans. Pacific Partnership. 3 -59

TEST PREP • What are the advantages and disadvantages of trade protectionism and of tariffs? • What is the primary purpose of the WTO? • What is the key objective of a common market like the EU? • Which three nations comprise NAFTA? 3 -60

FUTURE of GLOBAL TRADE LO 3 -6 • Brazil is expected to be one of the wealthier economies by 2030. • Russia is a large oil producing country with many multinationals interested in developing there. • India has seen huge growth in information technology, pharmaceuticals and biotechnology. • With over 1. 3 billion people, China has transformed the world economic map. Many multinationals invest heavily in China. 3 -61

LO 3 -6 OUTSOURCING • Outsourcing -- Process by which a 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. Photo Credit: Vitor Lima 3 -62

OFFSHORE OUTSOURCING LO 3 -63

PLAN for YOUR GLOBAL CAREER LO 3 -6 • Study foreign languages. • Learn about foreign cultures. • Take global business courses. 3 -64

MAKING YOUR OPERATION YOUR VACATION • Some insurance companies encourage patients to seek medical care in foreign countries. • Procedures are cheaper and involve top-flight doctors at state-of-the-art facilities. • Would it be ethical to force patients to travel to other countries to save money? 3 -65

COSTS of MEDICAL PROCEDURES ABROAD Angioplasty Gastric Bypass Heart Bypass Hip Replacement Nose Job Tummy Tuck United States $47, 000 $18, 000 $88, 000 $33, 000 $6, 200 $6, 400 United Kingdom $8, 000 $16, 500 $13, 921 $23, 500 $4, 810 Mexico $15, 000 $13, 800 $37, 800 $11, 500 $2, 800 $3, 000 India $11, 000 $6, 800 $14, 400 $8, 000 $2, 800 $2, 900 Costa Rica $13, 000 $11, 200 $31, 500 $14, 500 $3, 400 $5, 300 Source: AARP Magazine, November 2014. 3 -66

TEST PREP • What are the major threats to doing business in global markets? • What key challenges must India and Russia face before becoming global economic leaders? • What does the acronym BRIC stand for? • What are the two primary concerns about offshore outsourcing? 3 -67