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CHAPTER 3 Doing Business in Global Markets Mc. Graw-Hill/Irwin Copyright © 2015 by the CHAPTER 3 Doing Business in Global Markets Mc. Graw-Hill/Irwin Copyright © 2015 by the Mc. Graw-Hill Companies, Inc. All rights reserved.

INTERNATIONAL BUSINESS AND TRADE § § LO 3 -1 International business • All business INTERNATIONAL BUSINESS AND TRADE § § LO 3 -1 International business • All business activities that involve exchanges across national boundaries Is International Trade (Business) Good? – Absolutely! – No single country (or business) has the resources and capabilities to produce everything its citizens want or need at prices they are willing to pay • Does Spain produce enough corn for its citizens? • Does the US produce enough oil for its citizens? – PROFIT PURSUIT; Global = Bigger Market • Can you think of any MNC’s (multi-national companies)? Some countries are better equipped than others to produce particular goods or services. • Absolute advantage – The ability to produce more of a product than any other nation – Ex. Saudia Arabia->crude oil; South Africa->diamonds; Australia->wool • Comparative advantage – The ability to produce a specific product more efficiently than any other nation Goods and services are produced more efficiently when each country specializes in the products for which it has a comparative advantage. 3 -2

BUSINESS in the GLOBAL MARKET LO 3 -1 • Over 90% of companies doing 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 -3

WORLD POPULATION by CONTINENT LO 3 -1 3 -4 WORLD POPULATION by CONTINENT LO 3 -1 3 -4

WORLD POPULATION GROWTH LO 3 -1 3 -5 WORLD POPULATION GROWTH LO 3 -1 3 -5

IMPORTING and EXPORTING LO 3 -1 • Importing -- Buying products from another country. 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 -6

PLEASURE DOING BUSINESS LO 3 -1 Best Countries for Business 2013 Rank Country 2012 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 -7

CAN YOU SPARE a DIME? LO 3 -1 Home Countries for Some of the 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 -8

TRADING with OTHER NATIONS LO 3 -1 • Countries with abundant natural resources (like 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 -9

PROS and CONS of FREE TRADE LO 3 -10 PROS and CONS of FREE TRADE LO 3 -10

COMPARATIVE and ABSOLUTE ADVANTAGE LO 3 -1 • Comparative Advantage -- A country should 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 -11

GOING GLOBAL with a SMALL BUSINESS LO 3 -2 • Small businesses may be 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 -12

WHOM DOES the U. S. OWE? LO 3 -2 Countries that Own the Most 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 -13

GETTING INVOLVED in IMPORTING LO 3 -2 • Students attending schools abroad tend to 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 -14

GETTING INVOLVED in EXPORTING LO 3 -2 • Exporting provides a great boost to 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 -15

HOW to MEASURE GLOBAL TRADE LO 3 -2 • Balance of Trade -- The 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 -16

BALANCE of PAYMENTS LO 3 -2 • Balance of Payments -- The difference between 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 -17

UNFAIR TRADE PRACTICES LO 3 -2 • Dumping -- Selling products in a foreign 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 -18

LARGEST EXPORTING NATIONS and TRADE PARTNERS LO 3 -2 3 -19 LARGEST EXPORTING NATIONS and TRADE PARTNERS LO 3 -2 3 -19

KEY STRATEGIES for REACHING GLOBAL MARKETS Licensing Least Exporting Franchising Contract Manufacturing International joint 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 -20

LICENSING LO 3 -3 • Licensing -- When a firm (licensor) provides the right 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 -21

EXPORT ASSISTANCE CENTERS and EXPORT TRADING CENTERS LO 3 -3 • EACs provide hands-on 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 -22

FRANCHISING LO 3 -3 • Franchising -- A contractual agreement whereby someone with a 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 -23

TIME to MAKE the DONUTS… LO 3 -3 Dunkin’ Donuts Flavors in Taiwan • 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 -24

MCDONALD’S: OVER 100 CULTURES SERVED • Mc. Donald’s has more than 34, 000 restaurants 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 -25

THAT’S at MCDONALD’S? • Malaysia: Bubur Ayam Mc. D – Chicken strips in porridge 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 -26

CONTRACT MANUFACTURING LO 3 -3 • Contract Manufacturing -- A foreign company produces private-label 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 -27

JOINT VENTURES LO 3 -3 • Joint Venture -- A partnership in which two 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 -28

STRATEGIC ALLIANCES LO 3 -3 • Strategic Alliance -- A long-term partnership between two 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 -29

FOREIGN DIRECT INVESTMENT LO 3 -3 • Foreign Direct Investment (FDI) -- The buying 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 -30

LO 3 -3 BUYING AMERICAN? Model State(s) manufacturing % of American parts Toyota Camry 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 -31

MULTINATIONAL CORPORATIONS LO 3 -3 • Multinational Corporation -- A company that manufactures and 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 -32

LARGEST MULTINATIONAL CORPORATIONS LO 3 -3 Company Home Country 1 Royal Dutch Shell Netherlands 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 -33

SOVEREIGN WEALTH FUNDS LO 3 -3 • Sovereign Wealth Funds (SWFs) -- Funds controlled 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 -34

FORCES AFFECTING GLOBAL TRADE LO 3 -4 • Sociocultural • Economic and Financial • FORCES AFFECTING GLOBAL TRADE LO 3 -4 • Sociocultural • Economic and Financial • Legal and Regulatory • Physical and Environmental 3 -35

CULTURAL DIFFERENCES LO 3 -4 • To be involved in global trade, you must 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 -36

LOST in TRANSLATION LO 3 -4 Advertisements Gone Wrong • Braniff Airlines’ slogan 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 -37

FROM SETTING PICKS to PICKING GRAPES • When Yao Ming was facing retirement, he 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 -38

READY to TRAVEL ABROAD? LO 3 -4 Know Your Cultural Differences • In Turkey, 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 -39

DO as the GERMANS… LO 3 -4 How to Not Embarrass Yourself in Germany 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 -40

EXCHANGE RATES LO 3 -4 • Exchange Rate -- The value of one nation’s 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 -41

DEVALUATION and COUNTERTRADING LO 3 -4 • Devaluation -- Lowers the value of a 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 -42

LEGAL and REGULATORY FORCES LO 3 -4 • There’s no global system of laws. 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 -43

ENVIRONMENTAL FORCES LO 3 -4 • Developing countries have transportation and storage systems that 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 -44

TRADE PROTECTIONISM LO 3 -5 • Trade Protectionism -- The use of government regulations 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 -45

TARIFFS LO 3 -5 • Tariffs -- Taxes on imports, making imported goods more 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 -46

IMPORT QUOTAS and EMBARGOS LO 3 -5 • Import Quota -- Limits the number 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 -47

WORLD TRADE ORGANIZATION LO 3 -5 • General Agreement on Tariffs and Trade (GATT) 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 -48

COMMON MARKETS LO 3 -5 • Common Market -- A regional group of countries 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 -49

EU MEMBERS LO 3 -50 EU MEMBERS LO 3 -50

NAFTA and CAFTA LO 3 -5 • North American Free Trade Agreement -Ratified in 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 -51

NAFTA OBJECTIVES LO 3 -5 1) Eliminate trade barriers and facilitate crossborder movement of 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 -52

NEW FREE TRADE AGREEMENTS LO 3 -5 • Today, free trade agreements are being 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 -53

FUTURE of GLOBAL TRADE LO 3 -6 • Brazil is expected to be one 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 -54

LO 3 -6 OUTSOURCING • Outsourcing -- Process by which a firm contracts with 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 -55

OFFSHORE OUTSOURCING LO 3 -6 3 -56 OFFSHORE OUTSOURCING LO 3 -6 3 -56

PLAN for YOUR GLOBAL CAREER LO 3 -6 • Study foreign languages. • Learn PLAN for YOUR GLOBAL CAREER LO 3 -6 • Study foreign languages. • Learn about foreign cultures. • Take global business courses. 3 -57

MAKING YOUR OPERATION YOUR VACATION • Some insurance companies encourage patients to seek medical 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 -58

COSTS of MEDICAL PROCEDURES ABROAD Angioplasty Gastric Bypass Heart Bypass Hip Replacement Nose Job 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 -59