Doing Business in Global Markets Chapter 03 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

1. Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade. 2. Explain the importance of importing and exporting, and understand key terms used in global business. 3. Illustrate the strategies used in reaching global markets and explain the role of multinational corporations. 4. Evaluate the forces that affect trading in global markets. 5. Debate the advantages and disadvantages of trade protectionism. 6. Discuss the changing landscape of the global market and the issue of offshore outsourcing. LEARNING GOALS Chapter Three 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, MLB, the NFL and the NBA) are also expanding abroad. UPSMLBNFLNBA BUSINESS in the GLOBAL MARKET LG1 3-3

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 third largest exporting nation in the world. IMPORTING and EXPORTING LG1 3-4

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 3-5

Source: The World Bank, June Global trade has led the world in a new direction: Literacy rates worldwide have increased from 56% in 1950 to 89% in Life expectancy in less developed areas rose from 40.9 years in 1950 to 69 years in HOW FREE TRADE BENEFITS the WORLD Why Trade With Other Nations? LG1 3-6

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. COMPARATIVE and ABSOLUTE ADVANTAGE LG1 3-7

Getting Involved in Global Trade 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 SMALL BUSINESS LG2 President Obama wants small businesses to help double exports by

Source: HuffPost Business, March 2, Getting Involved in Global Trade WHOM DOES the U.S. OWE? Countries that Own the Most U.S. Debt LG2 3-9

Importing Goods and Services Students attending schools abroad tend to notice products that they’re used to are unavailable in their new country. By working with producers in their native country, some become importers while still in school. GETTING INVOLVED in IMPORTING LG2 3-10

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 7,000 U.S. jobs. GETTING INVOLVED in EXPORTING LG2 3-11

Measuring Global Trade Balance of Trade -- The total value of a nation’s exports compared to its imports measured over a particular period. Trade Surplus (Favorable) -- When the value of a country’s exports is more than that of its imports. Trade Deficit (Unfavorable) -- When the value of a country’s exports is less than that of its imports. HOW to MEASURE GLOBAL TRADE LG2 3-12

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 3-13

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 3-14

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 KEY STRATEGIES for REACHING GLOBAL MARKETS LG3 3-15

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. EXPORT ASSISTANCE CENTERS and EXPORT TRADING CENTERS LG3 3-16

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 3-17

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 3-18

Forces Affecting Trading in Global Markets Sociocultural Economic and Financial Legal and Regulatory Physical and Environmental FORCES AFFECTING GLOBAL TRADE LG4 3-19

Socio-cultural Forces To be involved in global trade, you must be aware of the cultural differences among nations including: CULTURAL DIFFERENCES LG4 - Social Structures - Religion - Manners - Values - Language - Personal Communication 3-20

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. Currencies float in value depending on the supply and demand for them in the global market. EXCHANGE RATES LG4 3-21

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. DEVALUATION and COUNTERTRADING LG4 3-22

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 3-23

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 3-24

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 3-25

Trade Protectionism Tariffs -- Taxes on imports, making imported goods more expensive. Two kinds of tariffs: - Protective – Raise the retail price of imports so domestic goods are competitively priced. - Revenue – Raise money for governments. TARIFFS LG5 3-26

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. embargos against Cuba, Iran and North Korea. IMPORT QUOTAS and EMBARGOS LG5 3-27

The World Trade Organization General Agreement on Tariffs and Trade (GATT) -- 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 153 member nations whose purpose is to oversee cross-border trade issues and global business practices.WTO WORLD TRADE ORGANIZATION LG5 3-28

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, the ASEAN and the COMESA are common markets.European Union (EU)MercosurASEANCOMESA COMMON MARKETS LG5 3-29

Common Markets EU MEMBERS LG5 3-30

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. Central American Free Trade Agreement -- Passed in 2005, created a free-trade zone with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua NAFTA LG5 3-31

NEW FREE TRADE AGREEMENTS Today, free trade agreements are being negotiated with South Korea, Colombia and Panama. The U.S. is considering an agreement with a nine-nation free trade bloc called the Trans- Pacific Partnership. LG The North American and Central American Free Trade Agreements

The Future of Global Trade 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 FUTURE of GLOBAL TRADE LG6 3-33

The Challenge of Offshore Outsourcing Outsourcing -- Process by which a firm contracts with other companies to do some or all of its functions. U.S. firms have outsourced payroll functions, accounting and manufacturing for years. OUTSOURCING LG6 With the growth of global markets, companies have been shifting to offshore outsourcing – outsourcing with other countries. Photo Courtesy of: Vitor Lima 3-34

Globalization and Your Future Study foreign languages. Learn about foreign cultures. Take global business courses. PLAN for YOUR GLOBAL CAREER LG6 3-35