1. * * Doing Business in Global Markets Chapter Three McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. * * The Dynamic Global Market Importing -- Buying products from another country. Exporting -- Selling products to another country. IMPORTING and EXPORTING LG1 3-2

3. * * Why Trade With Other Nations? 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. TRADING with OTHER NATIONS LG1 3-3

4. * * The Theories of Comparative and Absolute Advantage 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. LG1 COMPARATIVE and ABSOLUTE ADVANTAGE 3-4

5. * * Measuring Global Trade 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. HOW to MEASURE GLOBAL TRADE LG2 3-5

6. * * Measuring Global Trade 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. BALANCE of PAYMENTS LG2 3-6

7. * * Measuring Global Trade 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. UNFAIR TRADE PRACTICES LG2 3-7

8. * * Strategies for Reaching Global Markets Least Amount of commitment, control, risk and profit potential Most LicensingExportingFranchising Contract Manufacturing International joint ventures and strategic alliances Foreign direct investment LG3 KEY STRATEGIES for REACHING GLOBAL MARKETS 3-8

9. * * Licensing 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. LICENSING LG3 3-9

10. * * Franchising 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.Pizza HutDominos FRANCHISING LG3 3-10

11. * * Franchising Source: World Features Syndicate. Sweet Potato Honeydew Melon Corn Crumb Soft Rice Cake Green Apple Kiwi Fruit Mango Pineapple Strawberry TIME to MAKE the DONUTS… Dunkin’ Donuts Flavors in Taiwan LG3 3-11

12. * * Franchising Source: McDonalds, www.mcdonalds.com, September 2010.www.mcdonalds.com Malaysia: Bubur Ayam McD – 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. THAT’S at MCDONALD’S? LG3 3-12

13. * * International Joint Ventures and Strategic Alliance 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. - Examples: Sony-Ericsson; pharmaceuticals JOINT VENTURES LG3 3-13

14. * * International Joint Ventures and Strategic Alliance Strategic Alliance -- A long-term partnership between two or more companies established to help each company build competitive market advantages. Unlike joint ventures, strategic alliances don’t typically share costs, risks, management or profits. Strategic alliances provide broad access to markets, capital and technical expertise. Example: frequent flyer miles STRATEGIC ALLIANCES LG3 3-14

15. * * Foreign Direct Investment Foreign Direct Investment (FDI) -- The buying of permanent property and businesses in foreign nations. FOREIGN DIRECT INVESTMENT LG3 3-15

16. * * Forces Affecting Trading in Global Markets Sociocultural Economic and Financial Legal and Regulatory Physical and Environmental FORCES AFFECTING GLOBAL TRADE LG4 3-16

17. * * Socio-cultural Forces 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 CULTURAL DIFFERENCES LG4 3-17

18. * * Socio- cultural Forces 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 LG4 3-18

19. * * Socio- cultural Forces READY to TRAVEL ABROAD? 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 their soul is kept. In Brazil, your meeting may not start on time because punctuality isn’t important to the culture. LG4 3-19

20. * * Economic and Financial Forces 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. EXCHANGE RATES LG4 3-20

21. * * Economic and Financial Forces 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. www.londoncountertrade.org. DEVALUATION and COUNTERTRADING LG4 3-21

22. * * Legal and Regulatory Forces 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 LG4 3-22

23. * * Physical and Environmental Forces 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. ENVIRONMENTAL FORCES LG4 3-23

24. * * Trade Protectionism 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. TRADE PROTECTIONISM LG5 3-24

25. * * Trade Protectionism Tariffs -- Taxes on imports. Two kinds of tariffs: - Protective – Raise the retail price of imports so domestic goods are competitively priced. - Revenue – Raise money for governments. TARIFFS LG5 3-25

26. * * Trade Protectionism 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 LG5 3-26

27. * * The Future of Global Trade China is the largest global consumer of steel, copper, coal and cement and second only to the U.S. in the consumption of oil. Multinationals are investing 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. FUTURE of GLOBAL TRADE LG6 3-27

28. * * The Challenge of Offshore Outsourcing Outsourcing -- Purchasing goods and services from sources outside a firm rather than providing them within the company. 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. OUTSOURCING LG6 3-28