1. Copyright © 2003 by South-Western. All Rights Reserved. Text by Profs. Gene Boone & David Kurtz Multimedia Presentation by Prof. Milton Pressley The University of New Orleans milton.pressley@uno.edu CHAPTER FOUR COMPETING IN GLOBAL MARKETS

2. Copyright © 2003 by South-Western. All Rights Reserved. Explain the importance of international business and the main reasons why nations trade Explain the importance of international business and the main reasons why nations trade Discuss the relationship of absolute and comparative advantage to international trade Discuss the relationship of absolute and comparative advantage to international trade Describe how nations measure international trade and the significance of exchange rates Describe how nations measure international trade and the significance of exchange rates Identify the major barriers that confront global businesses Identify the major barriers that confront global businesses LEARNING GOALS

3. Copyright © 2003 by South-Western. All Rights Reserved. Explain how international trade organizations and economic communities reduce barriers to international trade Explain how international trade organizations and economic communities reduce barriers to international trade Compare the different levels of involvement used by businesses when entering global markets Compare the different levels of involvement used by businesses when entering global markets Describe the types of international organizational structures available to businesses Describe the types of international organizational structures available to businesses Distinguish between a global business strategy and multidomestic business strategy Distinguish between a global business strategy and multidomestic business strategy LEARNING GOALS

4. Copyright © 2003 by South-Western. All Rights Reserved. CHAPTER OVERVIEW Exports: domestically produced goods and services sold in markets and other countries Exports: domestically produced goods and services sold in markets and other countries Imports: foreign goods and services purchased by domestic customers Imports: foreign goods and services purchased by domestic customers © PhotoDisc

5. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE International trade is vital because: International trade is vital because: It expands markets for products It expands markets for products Allows companies to seek out growth opportunities in other nations Allows companies to seek out growth opportunities in other nations Makes production and distribution systems more efficient Makes production and distribution systems more efficient Reduces firms’ dependence on the economies of their home nations Reduces firms’ dependence on the economies of their home nations © PhotoDisc

6. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Decision to operate abroad depends on the availability, price and quality of labor, natural resource, capital, and entrepreneurship in the foreign country Key factors for participating in the information economy are skilled human resources and entrepreneurship International Sources of Factors of Production

7. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Other key factors in choosing overseas markets include favorable regulatory conditions and healthy business climates Trading with other countries also allows a firm to spread risk International Sources of Factors of Production

8. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Firms are attracted to international business by the sheer size of the marketplace As developing nations expand, the potential for reaching new groups of customers increases Even though people in developing nations have relatively low per capita incomes, their huge populations often offer lucrative markets International Sources of Factors of Production Size of International Marketplace Marketplace

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10. Figure 4.1 The United Technologies Vision: Emerging Markets are Growing Figure 4.1 The United Technologies Vision: Emerging Markets are Growing

11. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Major trading partners of U.S. firms include the country’s northern and southern neighbors International Sources of Factors of Production Size of International Marketplace Major World Markets

12. Copyright © 2003 by South-Western. All Rights Reserved. Top Ten U.S. Trading Partners __________ *From Chapter 1 Figure 1.6* Top Ten U.S. Trading Partners __________ *From Chapter 1

13. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.2 Major World Markets for the 21 st Century

14. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE North America Over 400 million people GDP of $9.2 trillion U.S. Single largest market in the world Most stable economy GDP is more than ¼ of total world output Canada Smaller than U.S. Has similar level of economic development International Sources of Factors of Production Size of International Marketplace Major World Markets

15. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Mexico Moving quickly Development due largely to North American Free Trade Agreement Maquiladoras: foreign- owned businesses that manufacture products for export from Mexico International Sources of Factors of Production Size of International Marketplace Major World Markets

16. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Western Europe Sophisticated and powerful industrial region Combined GDP 3/4ths the size of the U.S.’s Over 50% of U.S. investments in foreign firms flow to Europe Ireland is Europe’s fastest-growing economy International Sources of Factors of Production Size of International Marketplace Major World Markets

17. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE The Pacific Rim Major nations include Australia China Indonesia Japan Malaysia Philippines Singapore South Korea Taiwan Major industries: electronics, autos and banking International Sources of Factors of Production Size of International Marketplace Major World Markets

18. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Latin America Privatization during the 1990s encouraged investment – much of it from the U.S. and Europe Cuts in government spending took their toll on those who relied on government services and jobs A big market for high-tech products International Sources of Factors of Production Size of International Marketplace Major World Markets

19. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.3 Terra: Web Portals for Latin America, Spain, and the United States

20. Copyright © 2003 by South-Western. All Rights Reserved. WHY NATIONS TRADE Absolute and Comparative Advantage Absolute advantage: exists when a country makes a product for which it can maintain a monopoly or that it can produce at a lower cost than any competitor Comparative advantage: when a country can supply a product more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries International Sources of Factors of Production Size of International Marketplace Major World Markets Absolute and Comparative Advantage Absolute and Comparative Advantage

21. Copyright © 2003 by South-Western. All Rights Reserved. MEASURING TRADE BETWEEN NATIONS Balance of trade: surplus or deficit relationship between a nation’s exports and imports Balance of trade: surplus or deficit relationship between a nation’s exports and imports © PhotoDisc

22. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.4 U.S. International Trade in Goods and Services

23. Copyright © 2003 by South-Western. All Rights Reserved. MEASURING TRADE BETWEEN NATIONS Balance of payments: surplus or deficit flow of money into or out of a country Balance of payments: surplus or deficit flow of money into or out of a country © PhotoDisc

24. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.5 Components of the Balance of Payments

25. Copyright © 2003 by South-Western. All Rights Reserved. MEASURING TRADE BETWEEN NATIONS Major U.S. Exports and Imports Major U.S. Exports and Imports U.S. is the world leader in international trade U.S. is the world leader in international trade © PhotoDisc

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27. MEASURING TRADE BETWEEN NATIONS Exchange Rate: value of one nation’s currency relative to the currencies of other countries Exchange Rate: value of one nation’s currency relative to the currencies of other countries Compute Exchange Rates Here  © PhotoDisc

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29. BARRIERS TO INTERNATIONAL TRADE All businesses encounter social and cultural, economic, legal and political barriers to both local and domestic trade All businesses encounter social and cultural, economic, legal and political barriers to both local and domestic trade © PhotoDisc

30. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.6 Barriers to International Trade

31. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Social and Cultural Differences Social and Cultural Differences Language Language English is the main language of business English is the main language of business However, more people speak Mandarin Chinese and Spanish However, more people speak Mandarin Chinese and Spanish © PhotoDisc

32. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Values and Religious Attitudes Values and Religious Attitudes Marked differences in attitudes between capitalist countries and those adopting capitalism Marked differences in attitudes between capitalist countries and those adopting capitalism Differences even among capitalist countries Differences even among capitalist countries © PhotoDisc

33. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Economic Differences Economic Differences Infrastructure: basic systems of communication, transportation, and energy systems Infrastructure: basic systems of communication, transportation, and energy systems © PhotoDisc

34. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Currency Conversion and Shifts Currency Conversion and Shifts Businesses often trade in U.S. Dollars Businesses often trade in U.S. Dollars But, any currency can be used But, any currency can be used Rapid and unexpected currency shifts can influence business decisions Rapid and unexpected currency shifts can influence business decisions © PhotoDisc

35. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Political and Legal Differences Political and Legal Differences Political Climate Political Climate Stability of political climate is important Stability of political climate is important © PhotoDisc

36. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Legal Environment Legal Environment Foreign Corrupt Practices Act forbids bribery in foreign business practices Foreign Corrupt Practices Act forbids bribery in foreign business practices © PhotoDisc

37. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.7 Corruption in Business and Government: The Clean and the Sleazy

38. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE International Regulations International Regulations Treaties and agreements help regulate international commerce Treaties and agreements help regulate international commerce © PhotoDisc

39. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Types of Trade Restrictions Types of Trade Restrictions Some intended to punish or protest countries political actions Some intended to punish or protest countries political actions Others imposed to promote trade with certain countries Others imposed to promote trade with certain countries Others protect countries from unfair competition Others protect countries from unfair competition © PhotoDisc

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41. BARRIERS TO INTERNATIONAL TRADE Tariffs: tax imposed by the importing country on goods that cross its borders Tariffs: tax imposed by the importing country on goods that cross its borders © PhotoDisc

42. Copyright © 2003 by South-Western. All Rights Reserved. BARRIERS TO INTERNATIONAL TRADE Nontariff Barriers Nontariff Barriers Restrict imports in more subtle ways than tariffs Restrict imports in more subtle ways than tariffs Quotas: limits to the amounts of particular products than can be imported Quotas: limits to the amounts of particular products than can be imported Dumping: intended to favor the exporting country by reducing price of a product in the importing country Dumping: intended to favor the exporting country by reducing price of a product in the importing country Embargo: total ban on imports of a specific product (or all products) from a specified country Embargo: total ban on imports of a specific product (or all products) from a specified country © PhotoDisc

43. Copyright © 2003 by South-Western. All Rights Reserved. REDUCING BARRIERS TO INTERNATIONAL TRADE Organizations Promoting International Trade Organizations Promoting International Trade World Trade Organization (WTO): 136-member international institution that monitors GATT agreements and mediates international trade disputes World Trade Organization (WTO): 136-member international institution that monitors GATT agreements and mediates international trade disputes World Bank: primarily funds projects that build or expand a nation’s infrastructure World Bank: primarily funds projects that build or expand a nation’s infrastructure International Monetary Fund (IMF): created to promote trade through financial cooperation and the elimination of barriers International Monetary Fund (IMF): created to promote trade through financial cooperation and the elimination of barriers © PhotoDisc

44. Copyright © 2003 by South-Western. All Rights Reserved. REDUCING BARRIERS TO INTERNATIONAL TRADE International Economic Communities reduce trade barriers and promote regional economic integration -- often in the form of a: International Economic Communities reduce trade barriers and promote regional economic integration -- often in the form of a: Free-trade area Free-trade area Customs union Customs union Common market Common market

45. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.8 NAFTA, MERCOSUR, and ASEAN Free-Trade Areas

46. Copyright © 2003 by South-Western. All Rights Reserved. International Economic Communities North American Free Trade Agreement (NAFTA): 1984 agreement among the U.S., Canada, and Mexico to break down tariffs and trade restrictions North American Free Trade Agreement (NAFTA): 1984 agreement among the U.S., Canada, and Mexico to break down tariffs and trade restrictions European Union (EU): 15-nation European economic alliance based in Europe European Union (EU): 15-nation European economic alliance based in Europe

47. Copyright © 2003 by South-Western. All Rights Reserved. GOING GLOBAL Key decisions before expanding overseas include Key decisions before expanding overseas include Determining which foreign market(s) to enter Determining which foreign market(s) to enter Analyzing the expenditures required Analyzing the expenditures required Deciding on the best way to organize overseas operations Deciding on the best way to organize overseas operations © PhotoDisc

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49. GOING GLOBAL Levels of involvement include: Levels of involvement include: Exporting or importing Exporting or importing Contractual agreements like franchising, licensing, and subcontracting Contractual agreements like franchising, licensing, and subcontracting Direct investment through Direct investment through Acquisitions Acquisitions Joint ventures Joint ventures Establishment of overseas division Establishment of overseas division © PhotoDisc

50. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.9 Levels of Involvement in International Business

51. Copyright © 2003 by South-Western. All Rights Reserved. GOING GLOBAL Importers and Exporters Importers and Exporters Importers: Firms that bring in goods produced abroad to sell domestically Importers: Firms that bring in goods produced abroad to sell domestically Exporters: Firms that produce or purchase goods at home to sell overseas Exporters: Firms that produce or purchase goods at home to sell overseas © PhotoDisc

52. Copyright © 2003 by South-Western. All Rights Reserved. GOING GLOBAL Countertrade: international trade involving payments made in the form of local products, not currency Countertrade: international trade involving payments made in the form of local products, not currency © PhotoDisc

53. Copyright © 2003 by South-Western. All Rights Reserved. Contractual Agreements 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 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 FranchisingFranchising © PhotoDisc

54. Copyright © 2003 by South-Western. All Rights Reserved. Contractual Agreements Franchising Foreign Licensing When one firm allows another to produce or sell its product, or use its trademark, patent, or manufacturing processes in a specific geographic area in return for a royalty or other compensation When one firm allows another to produce or sell its product, or use its trademark, patent, or manufacturing processes in a specific geographic area in return for a royalty or other compensation A $26 billion industry A $26 billion industry © PhotoDisc

55. Copyright © 2003 by South-Western. All Rights Reserved. Contractual Agreements Franchising Foreign Licensing SubcontractingSubcontracting Involves hiring local companies to produce, distribute, or sell goods or services Involves hiring local companies to produce, distribute, or sell goods or services Takes advantage of the subcontractors expertise in local culture, regulations and contacts Takes advantage of the subcontractors expertise in local culture, regulations and contacts Saves money on import duties and labor costs Saves money on import duties and labor costs © PhotoDisc

56. Copyright © 2003 by South-Western. All Rights Reserved. Contractual Agreements Franchising Foreign Licensing Subcontracting International Direct Investment Investing in production and marketing operations and facilities in a foreign country Investing in production and marketing operations and facilities in a foreign country May take the form of: May take the form of: Acquisition Acquisition Joint venture Joint venture Establishment of an overseas division Establishment of an overseas division © PhotoDisc

57. Copyright © 2003 by South-Western. All Rights Reserved. From Multinational Corporation to Global Business Multinational Corporation (MNC): firm with significant operations and marketing activities outside of its home country Multinational Corporation (MNC): firm with significant operations and marketing activities outside of its home country © PhotoDisc

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59. Sources of Export Assistance U.S. Department of Commerce U.S. Department of Commerce 1-800-USA-TRADE 1-800-USA-TRADE WWW site  WWW site  Commerce Department’s 68 district offices Commerce Department’s 68 district offices © PhotoDisc

60. Copyright © 2003 by South-Western. All Rights Reserved. INTERNATIONAL ORGANIZATION STRUCTURES Following the decision to go global, the most appropriate organizational structure for the expanded operation must be decided Following the decision to go global, the most appropriate organizational structure for the expanded operation must be decided © PhotoDisc

61. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.10 Alternative Structures for International Organizations

62. Copyright © 2003 by South-Western. All Rights Reserved. INTERNATIONAL ORGANIZATION STRUCTURES Independent Agents Independent Agents Marketing intermediaries serving as independent sales forces in foreign markets Marketing intermediaries serving as independent sales forces in foreign markets Paid by commission on sales booked Paid by commission on sales booked

63. Copyright © 2003 by South-Western. All Rights Reserved. Independent Agents Licensing Agreements Licensing Agreements Some firms license their products, brand names, or production processes to overseas firms Some firms license their products, brand names, or production processes to overseas firms In return, they receive an up-front fee plus an ongoing percentage of sales In return, they receive an up-front fee plus an ongoing percentage of sales INTERNATIONAL ORGANIZATION STRUCTURES

64. Copyright © 2003 by South-Western. All Rights Reserved. Independent Agents Licensing Agreements Branch Offices Branch Offices Firm establishes its own overseas facility Firm establishes its own overseas facility Improves its control and strengthens its presence in the host country Improves its control and strengthens its presence in the host country Requires extensive investment in time and experience Requires extensive investment in time and experience INTERNATIONAL ORGANIZATION STRUCTURES

65. Copyright © 2003 by South-Western. All Rights Reserved. Independent Agents Licensing Agreements Branch Offices Strategic Alliances Company partners with another in the country where it wants to do business Company partners with another in the country where it wants to do business Can create competitive advantages by combining resources Can create competitive advantages by combining resources INTERNATIONAL ORGANIZATION STRUCTURES

66. Copyright © 2003 by South-Western. All Rights Reserved. Independent Agents Direct Investment Direct Investment Licensing Agreements Branch Offices Strategic Alliances Firm buys an existing company or builds a factory, retail outlet, or other facility Firm buys an existing company or builds a factory, retail outlet, or other facility Most complete involvement in foreign trade Most complete involvement in foreign trade Highest risk Highest risk INTERNATIONAL ORGANIZATION STRUCTURES

67. Copyright © 2003 by South-Western. All Rights Reserved. Figure 4.11 Destinations and Sources of Direct Investment Dollars

68. Copyright © 2003 by South-Western. All Rights Reserved. DEVELOPING A STRAGEGY FOR INTERNATIONAL BUSINESS Global Business Strategy: offering a standardized, worldwide product and selling it in essentially the same manner throughout a firm’s domestic and foreign markets Global Business Strategy: offering a standardized, worldwide product and selling it in essentially the same manner throughout a firm’s domestic and foreign markets Multidomestic Business Strategy: developing and marketing products to serve different needs and tastes in separate national markets Multidomestic Business Strategy: developing and marketing products to serve different needs and tastes in separate national markets © PhotoDisc

69. Copyright © 2003 by South-Western. All Rights Reserved. WHAT’S AHEAD Examination of the special advantages and challenges that small-business owners encounter Examination of the special advantages and challenges that small-business owners encounter Overview of the major business ownership structures Overview of the major business ownership structures Discussion of recent trends affecting business ownership Discussion of recent trends affecting business ownership © PhotoDisc