* * Doing Business in Global Markets Chapter Three Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

* * Profile First female foreign trade minister of the United Arab Emirates (UAE). Adapts her personal communication processes to match the culture of the people with whom she is interacting. SHEIKA LUBNA AL-QUASIMI Foreign Trade Minister of the UAE 3-2

* * The Dynamic Global Market Over 90% of companies doing business globally believe it is important for employees to have international experience. U.S. organizations (like UPS, the NFL and the NBA) are also expanding abroad. UPSNFL NBA BUSINESS in the GLOBAL MARKET LG1 3-3

* * The Dynamic Global Market LG1 WORLD POPULATION by CONTINENT 3-4

* * The Dynamic Global Market 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. IMPORTING and EXPORTING LG1 3-5

* * Source: World Features Syndicate and Interbrand.com. U.S. – 51 brands Germany – 9 brands Japan – 8 brands France – 8 brands U.K. – 6 brands Switzerland – 5 brands The Dynamic Global Market WHERE ARE THEY FROM? Countries of Origin for World’s Most Powerful Brands LG1 3-6

* * Source: Forbes, March 30, U.S. – 359 billionaires Germany – 54 billionaires Russia – 32 billionaires China – 28 billionaires India – 24 billionaires U.K. – 25 billionaires Canada – 20 billionaires The Dynamic Global Market CAN YOU SPARE a DIME? Home Countries for Some of the World’s Billionaires LG1 3-7

* * 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 3-8

* * Source: The Progressive Policy Institute, World Health Organization. Global trade has led the world in a new direction: Literacy rates worldwide have increased from 56% in 1950 to 84% in Life expectancy in less developed areas rose from 40.9 years in 1950 to 70.1 years in HOW FREE TRADE BENEFITS the WORLD LG1 Why Trade With Other Nations? 3-9

* * 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 3-10

* * Getting Involved in Global Trade Small businesses may be the key in global job growth. They make up almost half of the private sector. Only 30% of small businesses export. By 2018, it’s expected half of small businesses will export. GOING GLOBAL with a SMALL BUSINESS LG2 3-11

* * Source: Investor’s Business Daily, June 30, Getting Involved in Global Trade WHERE DO THEY INVEST? Leading Destinations for Foreign Investors LG2 3-12

* * Source: U.S. Dept. of Treasury, January 31, Getting Involved in Global Trade WHO DOES the U.S. OWE? Countries that Own the Most U.S. Debt LG2 3-13

* * Importing Goods and Services Starbucks CEO, Howard Shultz, found his importing opportunity in Italy. He transformed a coffee shop in Seattle to mimic the European cafes.Starbucks LG2 GETTING INVOLVED in GLOBAL TRADE 3-14

* * Exporting Goods and Services Exporting provides a great boost to the U.S. economy. It’s estimated every $1 billion in U.S. exports generate over 20,000 U.S. jobs. LG2 GETTING INVOLVED in EXPORTING 3-15

* * MFG.com is an online exchange for manufacturers and suppliers.MFG.com Growing numbers of Chinese manufacturers began visiting the site. MFG staff had to learn about the Chinese business culture. China now accounts for 11% of MFG.com’s revenue. FINDING CRACKS in the GREAT WALL (Spotlight on Small Business) 3-16

* * 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 3-17

* * 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 3-18

* * 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 3-19

* * Progress Assessment What are two of the main arguments favoring the expansion of U.S. businesses into global markets? What’s comparative advantage? What are some examples of this concept at work in global markets? How are a nation’s balance of trade and balance of payments determined? What’s meant by dumping in global trade? PROGRESS ASSESSMENT 3-20

* * 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 3-21

* * 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 3-22

* * Exporting 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. LG3 EXPORT ASSISTANCE CENTERS and EXPORT TRADING CENTERS 3-23

* * 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 Hut Dominos FRANCHISING LG3 3-24

* * 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 3-25

* * McDonald’s has more than 31,000 restaurants in over 118 countries.McDonald’s Maintains varying menus around the world due to the different preferences of its customers. Responds to challenges by funding research and adding healthier options. The SUN NEVER SETS on MICKEY D’S (Reaching Beyond Our Borders) 3-26

* * Franchising Source: McDonalds, March Malaysia: Bubur Ayam McD – Chicken strips in porridge with onions, ginger, and shallots.Bubur Ayam McD 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 3-27

* * Contract Manufacturing 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. CONTRACT MANUFACTURING LG3 3-28

* * 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. JOINT VENTURES LG3 3-29

* * 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. STRATEGIC ALLIANCES LG3 3-30

* * Foreign Direct Investment 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. FOREIGN DIRECT INVESTMENT LG3 3-31

* * Foreign Direct Investment 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 LG3 3-32

* * Foreign Direct Investment SOVEREIGN WEALTH FUNDS Sovereign Wealth Funds (SWFs) -- Investment funds controlled by governments holding large 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. LG3 3-33

* * Progress Assessment 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 export- trading company? What’s the key difference between a joint venture and a strategic alliance? What makes a company a multinational corporation? PROGRESS ASSESSMENT 3-34

* * Forces Affecting Trading in Global Markets Sociocultural Economic and Financial Legal and Regulatory Physical and Environmental FORCES AFFECTING GLOBAL TRADE LG4 3-35

* * 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 3-36

* * 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 3-37

* * 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 3-38

* * 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. Currencies float in value depending on the supply and demand for them in the global market. EXCHANGE RATES LG4 3-39

* * 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. DEVALUATION and COUNTERTRADING LG4 3-40

* * 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 3-41

* * 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 3-42

* * Progress Assessment 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? PROGRESS ASSESSMENT 3-43

* * 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 3-44

* * 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 3-45

* * 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 3-46

* * The World Trade Organization 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.WTO WORLD TRADE ORGANIZATION LG5 3-47

* * Common Markets 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 and the ASEAN are common markets.European Union (EU)Mercosur ASEAN COMMON MARKETS LG5 3-48

* * The North American and Central American Free Trade Agreements North American Free Trade Agreement -- Ratified in 1994, created a free-trade area among the United States, Canada and Mexico. NAFTA’s objectives are: - Eliminate trade barriers and facilitate cross-border movement of goods and services. - Promote conditions of fair competition. - Increase investment opportunities. - Provide effective protection and enforcement of intellectual property rights. - Establish a framework for further regional trade cooperation. - Improve working conditions in North America. NAFTA LG5 3-49

* * The North American and Central American Free Trade Agreements CAFTA 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). LG5 3-50

* * The U.S. trade deficit with Mexico has increased. There are positives though: -Trade with Canada and Mexico has nearly tripled since Though manufacturing jobs are down, output has increased 54% in the U.S. Though NAFTA has not delivered on all promises, it isn’t the major cause of our nation’s current economic state. NAFTA or SHAFTA? (Legal Briefcase) 3-51

* * Progress Assessment What are the advantages and disadvantages of trade protectionism and of tariffs? What’s the primary purpose of the World Trade Organization (WTO)? What’s the key objective of a common market like the EU? Which three nations comprise NAFTA? Which nations comprise CAFTA? PROGRESS ASSESSMENT 3-52

* * 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 3-53

* * 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 3-54

* * Source: Investor’s Business Daily, December 1, The Challenge of Offshore Outsourcing ELECTRONICS MANUFACTURING AROUND the WORLD LG6 3-55

* * 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? TAKE TWO ASPIRIN and GO to THAILAND (Making Ethical Decisions) 3-56

* * Globalization and Your Future Study foreign languages Learn about foreign cultures Take global business courses. PLAN for YOUR GLOBAL CAREER LG6 3-57

* * Progress Assessment How has the Internet impacted doing business in global markets? What are the economic risks of doing business in countries like China? What might be some important factors that will have an impact on global trading? What are the two primary concerns of offshore outsourcing? PROGRESS ASSESSMENT 3-58