Competing in the Global Marketplace Chapter 3 1 1

Chapter 3 Learning Goals Why is global trade important to the United States? How is global trade measured? Why do nations trade? What are the barriers to international trade? How do governments and institutions foster world trade? What are international economic communities? How do companies enter the global marketplace? 2 2

Chapter 3 Learning Goals What threats and opportunities exist in the global marketplace? What are the advantages of multinational corporations? What are the trends in the global marketplace?

Learning Goal 1 Why is global trade important to the United States? Improves relations with friends and allies; eases tensions among nations Bolsters economies, raises people’s standard of living, and improves quality of life U.S. is the largest importer/exporter in the world One of 16 jobs in the U.S. is supported by exports

responsiveness to international business opportunities Global Vision: responsiveness to international business opportunities awareness of threats from foreign competition use international networks for production and distribution Coca-Cola derives 80% of its profits from overseas (Source: Fortune, Sept. 28, 1998, p. 313)

Learning Goal 2 How is global trade measured? Balance of trade Difference in value between a country’s exports and its imports over some period Balance of payments Difference between a country’s total payments to other countries and its total receipts from other countries Exchange rate Price of one country’s currency in terms of another country’s currency

Measuring Trade Between Nations 1. Exports and Imports 2. Balance of Trade trade surplus vs. trade deficit 3. Balance of Payments the difference between total payments to other countries and total receipts from other countries 4. Changing Value of Currency 2 2

Trade Between US and China Baby carriage, toys, & sports Aircraft & parts Fertilizer Shoes Communication Communication Source: Newsweek, Nov. 29, 1999, pp. 56-57 2 2

Learning Goal 3 Why do nations trade? Nations gain by trading Principle of comparative advantage Each country should specialize in the goods it can produce most readily and cheaply Trade those goods for those that other countries can produce most readily and cheaply Results in more goods at lower prices Free trade allows trade among nations without government restrictions

Why Nations Trade: 1. Absolute advantage a country can sell a product at a lower price than any other country, or a country is the only country that can provide a given product 2. Comparative advantage lower prices result from every country specializing in products it can produce most readily and cheaply, trading them for products specialized in by other countries 2 2

Learning Goal 4 What are the barriers to international trade? Three major barriers Natural barriers Distance Language Tariff barriers, or taxes on imported goods Non-tariff barriers Import quotas Embargoes Buy-national and customs regulations Exchange controls

Barriers to Global Trade: 1. Natural Barriers examples: distance, language 2. Tariff Barriers taxes on imported goods 3. Nontariff Barriers import quotas embargoes buy-national regulations custom regulations exchange controls 2 2

Fostering Global Trade: 1. Anti-dumping laws prevent charging lower price in foreign markets than in home market for same product 2. Uruguay Round agreement signed in 1994 by 117 nations to lower trade barriers 2 2

Learning Goal 5 How do governments and institutions foster world trade? World Trade Organization Has dramatically lowered trade barriers worldwide Covers services, intellectual property rights, and exchange controls World Bank Makes loans to developing nations to help build infrastructures International Monetary Fund Makes loans to member nations that cannot meet their budgetary expenses

Fostering Global Trade: 3. World Trade Organization provides lower trade barriers among member nations, and helps resolve trade disputes 4. World Bank & International Monetary Fund lend money to developing nations and troubled nations 2 2

10 Benefits of the WTO Helps promote peace Handles disputes constructively Its rules increase efficiency Its rules make functioning easier Free trade cuts cost of living Permits more choice of products Trade raises incomes Trade stimulates economic growth Shields governments from lobbying Encourages good government Source: World Trade Organization: www.wto.org

Learning Goal 6 What are international economic communities? Reduce trade barriers among themselves Often establish common tariffs and other trade barriers toward non-member countries Best-known economic communities European Union NAFTA Mercosur

International Economic Communities 1. North American Free Trade Agreement (NAFTA) 1993 agreement creating free-trade zone including Canada, Mexico, and United States 2. The European Union organization of 15 European nations (as of 1999) that fosters political and economic integration of Europe the eurodollar is a new currency to be distributed in 11 of the countries 2 2

Industries With High Export Growth Potential Automobile parts & services Apparel Dental equipment Construction equipment Electronic components Toys & games Building products Industrial chemicals Sources: US Department of Commerce & North American Forum, www.nafta.net 2 2

Learning Goal 7 How do companies enter the global marketplace? Exporting Licensing Contract manufacturing Joint ventures Direct investment

Participating in the Global Marketplace 1. Exporting 2. Licensing 3. Contract Manufacturing 4. Joint Ventures 5. Direct Foreign Investment 6. Countertrade 2 2

Countertrade Example Nestle had a surplus of After Eight dinner mints packaged for Christmas Atwood Richards helped distribute the mints in Eastern Europe, a place where the packaging would appear to represent winter rather than Christmas specifically Source: Atwood Richards, www.atwoodrichards.com

Learning Goal 8 What threats and opportunities exist in the global marketplace? Government trade policies can be loose or restrictive Countries can be nationalistic Governments can change Products may fail due to lack of understanding of the culture of the target country Developing countries may lack an economic infrastructure

Learning Goal 9 What are the advantages of multinational corporations? Can sidestep restrictive trade and licensing restrictions by having headquarters in more than one country Can move their operations from one country to the next based on more favorable economic conditions Can tap into a vast source of technological expertise by drawing upon the knowledge of a global workforce

Threats and Opportunities in the Global Marketplace intense nationalism language barriers cultural misunderstanding Opportunities: ability to overcome trade problems can sidestep regulatory problems flexibility to shift production as conditions change tap new technology from other countries save labor costs 2 2

Learning Goal 10 What are the trends in the global marketplace? Firms will continue to seek opportunities outside their country’s borders When an organization enters a new global market, competitors typically follow Technological improvements in communication and transportation will make it easier to sell and distribute products internationally

Trends Affecting Global Trade: 1. Market Expansion Forecasting International has predicted that all industries will go global (Source: HR News: The Society for Human Resource Management, Dec. 1999, p. 17) 2. Resource Acquisition 3. Competition 4. Technological Change 5. Government Actions 2 2