Competing in World Markets

Chapter 4

Boosts economic growth

Expands markets

More efficient production systems

Less reliance on the economies of home nations

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

Decisions to operate abroad depend upon

availability, price, and quality of:

– Labor

– Natural resources

– Capital

– Entrepreneurship

Companies doing business overseas must make

strategic decisions.

International Sources of Factors of Production

Example: Indian colleges and universities produce

thousands of highly qualified computer scientists and

engineers each year. To take advantage of this talent,

many U.S. computer software and hardware firms

have set up operations in India, and many others are

outsourcing information technology and customer

service jobs there.

International Sources of Factors of Production

• Trading with other countries also allows a company

to spread risk because different nations may be at

different stages of the business cycle or in different

phases of development.

• If demand falls off in one country, the company may

still enjoy strong demand in other nations.

• Example: Companies such as Kellogg’s and IKEA

have long used international sales to offset lower

domestic demand.

International Sources of Factors of Production

New social and cultural factors

Economic and political environments

Legal restrictions

Additional Environmental Factors to which Companies are Exposed

As developing nations expand into the global

marketplace, opportunities grow.

Many developing countries have posted high growth

rates of annual GDP.

United States 4.4%

China 11.1%

India 9.4%

Current GDP data

Size of the International Marketplace

Size of the International Marketplace

Population Size and Prosperity

Though developing nations generally have lower per capita income, many have strong GDP growth rates and their huge

populations can be lucrative (profitable) markets.

Top 10 Trading Partners with U.S.

• If a country focuses on producing what it does best,

it can export surplus domestic output and buy

foreign products that it lacks or cannot efficiently

produce.

• The potential for foreign sales of a particular item

depends largely on whether the country has an

absolute advantage or a comparative advantage.

Absolute and Comparative Advantage

A country has an absolute advantage in making a

product for which it can maintain a monopoly or that

it can produce at a lower cost than any competitor.

Example: China’s domination of silk production for

centuries.

A nation can develop a comparative advantage if it

can supply its products more efficiently and at lower

price than it can supply other goods.

Example: India’s combination of a highly educated

workforce and low wage scale in software development.

Example: China is profiting from its comparative

advantage in producing textiles.

Absolute and Comparative Advantage

Balance of trade: Difference between a nation’s

imports and exports.

Balance of payments: Overall flow of money into or

out of a country.

Balance of payments surplus = more money into

country than out

Balance of payments deficit = more money out of

country than in

Measuring Trade Between Nations

Major U.S. Exports and Imports

U.S. demand for imported goods is partly a reflection of the nation’s prosperity and

diversity.

U.S. imports more goods than it exports but exports more services than it imports.

• A nation’s exchange rate is the rate at which its

currency can be exchanged for the currencies of other

nations.

• Currency rates are influenced by: Domestic economic and political conditions

Central bank intervention

Balance-of-payments position

Speculation over future currency values

Business transactions are usually conducted in

currency of the region where they happen.

Exchange Rates

Exchange Rates

Barriers to International Trade

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.

Social and Cultural 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.

Economic Differences

Political Climate

Stability is a key consideration.

Legal Environment

Domestic law and regulations

International regulations

Foreign country’s law

Climate of corruption.

International Regulations

Treaties between countries doing foreign trade.

Tariffs are taxes charged on imported goods.

Political and Legal Differences

Government Corruption

Transparency International produces an annual corruption index for businesspeople

and the general public.

Tariffs - taxes, surcharges, or duties on foreign products.

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.

Dumping is the act of selling a product abroad at a very low

price.

An embargo imposes a total ban on importing a specified

product.

Types of Trade Restrictions

General Agreement on Tariffs and Trade (GATT)

Most industrialized nations found organization in 1947 to reduce tariffs and relax quotas.

The World Trade Organization succeeded GATT Representatives from 153 countries

Reduce tariffs and promote trade

World Bank Funds projects to build and expand infrastructure in developing countries

International Monetary Fund (IMF) Operates as lender to troubled nations in an effort to promote trade

Organizations Promoting Trade

North American Free Trade Agreement (NAFTA) World’s largest free-trade zone: United States, Canada, Mexico.

U.S. and Canada are each other’s biggest trading partners.

European Union Best-known example of a common market.

Goals include promoting economic and social progress, introducing European citizenship as complement to national citizenship, and giving EU a significant role in international affairs.

International Economic Communities

European Union

International Economic Communities

Determining which foreign market(s) to enter

Analyzing the expenditures required to enter a new market

Deciding the best way to organize the overseas operations

Good starting point for research: CIA World Factbook

Key Decisions For Going Global

International Trade Research

Risk increases with the level of involvement

Many companies employ multiple strategies

Exporting and importing are entry-level strategies

Importing is the process of bringing in goods produced abroad.

Exporting is the act of selling your goods overseas.

• Entering into contractual agreements such as

franchising, licensing, and subcontracting deals

• Direct investment in the foreign market through

acquisitions, joint ventures, or establishment of an

overseas division.

Levels of Involvement

• Franchising is a

contractual agreement

in which a wholesaler

or retailer (the

franchisee) gains the

right to sell the

franchisor’s products

under that company’s

brand name if it agrees

to the related operating

requirements.

Countertrade and Franchising

America’s Top 10 Franchises

• Franchising - Example: Domino’s Pizza has

expanded to more than 8,000 stores in more

than 60 international markets around the

world. Its largest international market is in

Mexico, but wherever it operates, the

company fine-tunes its menus to meet local

tastes with such specialties as barbecued

chicken in the Bahamas, black bean

sauce in Guatemala, squid in Japan,

chorizo in Mexico, and

Konyalım in Turkey.

Countertrade and Franchising

A foreign licensing agreement allows a firm to produce or sell its product.

Subcontracting involves hiring local firms to distribute, produce, or sell goods and services.

Countertrade and Franchising

The relocation of business processes to a lower-cost overseas location is offshoring.

Not initiating business but gaining cost savings

Extremely controversial

The ultimate level of global involvement is direct investment.

Directly operating production and marketing in foreign country

Acquisition

Joint ventures

Overseas division

Offshoring and Direct Investment

Multinational corporation (MNC) - An organization with significant foreign operations and marketing activities outside its home country.

Multinational Corporations