Understanding business 10th chapter 3 doing business in global market

Why Trade With Other Nations?3-3 • Global trade allows countries to produce what they make best and buy what they need from others... • Global trade allows countries to produce what the

Doing Business

in Global Markets

Chapter 03

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc All rights reserved.

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Why Trade With Other Nations?

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• Global trade allows countries

to produce what they make

best and buy what they need

from others

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• Countries with abundant natural resources (like

Venezuela or Russia) need technological

resources from other countries (like Japan)

TRADING with OTHER NATIONS

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Source: The World Bank, June 2014

Global trade has led the world in a new direction:

• Literacy rates worldwide have increased from

56% in 1950 to 99% in 2012.

• Life expectancy in less developed areas rose

from 40.9 years in 1950 to 70.5 years in 2012.

HOW FREE TRADE BENEFITS the WORLD

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% of Company Earnings From Outside U.S.

http://online.wsj.com/news/interactive/FORCASH20130311?

ref=SB10001424127887324034804578348131432634740

Company Total Assets Reinvested

Overseas in 2011 Total Assets Reinvested Overseas in 2012 Total Added in 2012

.

.

PLEASURE DOING BUSINESS

Best Countries for Business out of 183 Countries

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© 2013  The World Bank, All Rights Reserved

Economy Business Rank Ease of Doing Starting a Business Paying Taxes Trading Across

TOP 10 COUNTRIES - BILLIONARIES

Country Number Person Networth Source

United States 492 Bill Gates $73 B Telecom

China 152 Wang Jianlin $14.6 B Investment

Property Russia 111 Alisher Usmanov $19.6 B Metal & Mining

Germany 85 Karl Albrecht $25.4 B Aldi - Discount

Superchains Brazil 65 Jorge Paulo Lemann $21.9 B Banker

India 56 Mukesh Ambani $19.6 B Petrochemicals

United Kingdom 47 Gerald Cavendish

Grosvenor & Family $8.5 Duke of Westminister - Land

Owner Hong Kong 45 Li Ka-shing $31 B Diversified

France 43 Liliane Bettencourt &

Family $30 B L’OrealItaly 35 Michele Ferrero & Family $26 B Chocolate

Manufacturing

• Countries with abundant natural

resources (like Venezuela or Russia) need technical 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

• Countries with abundant natural

resources (like Venezuela or Russia) need technical 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

Why Trade with

Other Nations?

LG1 TRADING with OTHER NATIONS

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• Comparative Advantage A country

should sell the products it produces most

efficiently and buy from other countries the

products it cannot produce as efficiently.

THEORIES of COMPARATIVE ADVANTAGE

• Absolute Advantage A country has a

monopoly on producing a specific product or is able to produce it more efficiently than all other countries.

THEORIES of ABSOLUTE ADVANTAGE

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Absolute

Diamond Production

South Africa

The Rest

of the World = Virtual Monopoly

• Importing Buying products

from another country.

• The U.S is the largest

importing nation in the

• Balance of Trade The total value of a nation’s

exports compared to its imports measured over time.

• Trade Surplus When the value of a country’s

exports is more than that of its imports.

• Trade Deficit When the value of a country’s

exports is less than that of its imports

H

O W

t o

M E A S U R E

G L O B A L

T R A D E

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Rising U.S Trade Deficit

Source: US Dept of Commerce, Bureau of Economic Analysis

http://www.americaneconomicalert.org/ticker_home.asp

• Exporting provides a great boost to the U.S economy.

• 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.

flows out of a country

BALANCE of PAYMENTS

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

country.

• Dumping is prohibited in the U.S

• China, Brazil and Russia have been

penalized for dumping steel in the U.S

UNFAIR TRADE PRACTICES

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

Licensing Exporting Franchising Manufacturing Contract

International joint ventures and strategic alliances

Foreign direct investment

KEY STRATEGIES for REACHING

GLOBAL MARKETS

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• 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:

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• EACs provide hands-on exporting assistance

and trade-finance support for small and sized businesses that wish to directly export

medium-goods and services

• ETCs help companies engage in indirect

exporting by:

documentation, and conversions.

EXPORT ASSISTANCE CENTERS

& EXPORT TRADING CENTERS

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Source: Bloomberg Businessweek, November 22, 2011.

HOW EXPORTS

AFFECT the GDP

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• 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

GOING GLOBAL with a

• 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 preferences differ all around the world

F

R A N C H I S I N G

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What’s On Your Pizza

• Costa Rica - Coconut

• France - Bacon, onion and fresh cream

• India - Pickled ginger, minced mutton and tofu

• Australia - Shrimp and pineapple

• Pakistan - Curry

• Brazil - Green peas

• Japan - Squid and mayo jaga

Source: World Features Syndicate

Source: World Features Syndicate.

TIME to MAKE the DONUTS…

Dunkin’ Donuts Flavors in Taiwan

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• McDonald’ s has more than 34,492 restaurants in

over 119 countries in 2013

the different preferences of its customers.

GOLDEN ARCHES GLOWING

ACROSS the GLOBE

by funding research and

adding healthier options.

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Source: McDonalds, www.mcdonalds.com , March 2014.

with onions, ginger, and shallots.

patties with lettuce, tomatoes, onions and tehina sauce folded in Arabic bread.

one in the German stores

THAT’S at MCDONALD’S?

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• 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.

- 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.

CONTRACT MANUFACTURING

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• 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.

JOINT VENTURES

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• Strategic Alliance A long-term partnership

between two or more companies established to help

each company build competitive market advantages.

provide broad access

to markets, capital and

technical expertise.

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• 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

© 2013

WHERE DO THEY INVEST?

Leading Foreign Destination Investors

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• 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

MULTINATIONAL CORPORATIONS

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• To be involved in global trade, you must be

aware of the cultural differences among nations including:

• Braniff Airlines’ slogan "Fly in leather” translated

in Spanish as "Fly naked.”

• 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.

LOST in TRANSLATION

Advertisements Gone Wrong

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READY to TRAVEL ABROAD?

Know Your Cultural Differences

someone.

or shake hands with the left hand because it is

considered unclean.

where their soul is kept.

punctuality isn’t important to the culture.

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DO as the GERMANS…

How to Not Embarrass Yourself in Germany

considered sloppy.

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• Exchange Rate The value of one nation’s

currency relative to the currencies of other countries.

more foreign currency; foreign goods are less

expensive.

foreign currency; foreign goods are more

expensive.

and demand for them in the global market.

EXCHANGE RATES

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• Devaluation Lowers the

value of a nation’s

currency relative to

• Countertrading

Complex form of bartering

in which several countries

each trade goods or

services for other goods

or services.

DEVALUATION and COUNTERTRADING

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• There’s no global system of laws.

• Laws may be inconsistent

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

conducting global business

• 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

LEGAL CONCERNS OVERSEAS

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• Developing countries

have transportation and

storage systems that

make international

distribution difficult or

impossible.

capabilities are far from

those in the U.S which

make for a tough

business environment.

ENVIRONMENTAL FORCES

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• Free Trade The movement of goods and

services among nations without political or

economic barriers.

TRADING with OTHER NATIONS

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• Trade Protectionism

The use of government

regulations to limit the

import of goods and

• Tariffs Taxes on imports.

for governments

retail price of imports so domestic goods are

competitively priced.

TARIFFS

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• 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 embargo against Cuba

IMPORT QUOTAS and EMBARGOS

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• General Agreement on Tariffs and Trade

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 152 member nations whose

purpose is to oversee cross-border trade issues and global business practices.

WORLD TRADE ORGANIZATION

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• Common Market A regional group of countries

with a common external tariff, no internal tariffs and

coordinated laws to facilitate exchange among

members.

COMMON MARKETS

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EU MEMBERS

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• North American Free Trade Agreement

Ratified in 1994, created a free-trade area among

the United States, Canada and Mexico.

movement of goods and services.

intellectual property rights.

cooperation.

NAFTA

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Central American Free Trade Agreement

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

• Free traders hope CAFTA will lead to the creation

of a Free Trade Area of the Americas (FTAA)

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NEW FREE TRADE AGREEMENTS

agreements are being

negotiated with South

Korea, Colombia and

Panama

an agreement with a

nine-nation free trade

bloc called the

Trans-Pacific Partnership

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• With over 1.3 billion people, China has

transformed the world economic map Many

multinationals invest heavily in China

• India has seen huge growth in information

technology, pharmaceuticals and biotechnology

• Russia is a large oil producing country with many multinationals interested in developing there

• Brazil is expected to be one of the wealthier

economies by 2030

FUTURE of GLOBAL TRADE

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• Outsourcing Process by which a firm contracts

with other companies to do some or all of its

functions.

accounting and manufacturing for years.

OUTSOURCING

markets, companies have

been shifting to offshore

outsourcing – outsourcing

with other countries.

Photo Courtesy of: Vitor Lima

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