Bus& 101 Chapter 03Competing In The Global Market

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Goals

• Global Markets• Importing, Exporting and Global Business Terms• Free Trade

• Comparative Advantage• Absolute Advantage

• Strategies to Reach Global Markets• What Forces affect trading in Global Markets• Advantages and Disadvantages of Trade

Protectionism• Offshore Outsourcing

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World Population By Continent

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The U.S. is the largest importing nation in the World!The U.S. is the largest importing nation in the World!

3-4Growing World Population

10.8

8.5

6.56.05.3

0

2

4

6

8

10

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1990 1998 2010 2030 2060

In In BillionsBillions

Source: Source: Population Reference Bureau

Globe

•300 million people in USA•6.7 Billion people in world•194 countries

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Import/Export

•Importing▫Buying products from another

country▫The U.S. is the largest importing

nation in the world•Exporting

▫Selling products to another country▫Germany 1st, USA 2nd, China 3rd (textbook)

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Leading Goods Exporters•

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Why Trade With Other Nations?

• No nation can produce all that they needs

• Some nations can produce things more cheaply than others

• Some countries have natural resources that other countries do not–Oil is only found in some countries

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Why Trade With Other Nations?

• In the USA cabinet makers and wooden airplane and boomerang makers get all their birch plywood from Finland and the Baltics– Why? Because Finland and the Baltics have a

natural source of birch plywood that the USA does not.

– The cost that the USA would pay if it made the wood in the USA is more than if it is made in Finland and shipped to the USA

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What Products does the USA Export?•Machines•Autos•Aircrafts•Medical equipment•Apples and Beef to Mexico•Boomerangs to Europe and Japan

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Why Is Global Trade Beneficial?

•Global trade enables a nation to produce what it is most capable of producing and to buy what it needs from others in a mutually beneficial exchange relationship. This happens through a process called Free Trade

•Free Trade• The movement of goods and services among nations

without political or economic barriers

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Free Trade• Comparative Advantage Theory (David Ricardo

19th c)– Theory that states that a country should sell to

other counties those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently

– USA and India• India can run call centers and accounting/bookkeeping

tasks more efficiently than USA• USA can create software more effectively & efficiently

than many other countries

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Free Trade• Absolute Advantage

– The advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries• South Africa used to have an absolute advantage with

diamonds

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Theories of Advantage

Output per Output per Unit of Unit of InputInput

ComparativeComparative

U. S.U. S.

ChinaChina

SoftwarSoftwaree

U. S.U. S.

ChinaChina

ClothinClothingg

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Theories of Advantage

AbsoluteAbsolute

Output Output per Unit of per Unit of

InputInput

Diamond Diamond ProductionProduction

South South AfricaAfrica

The Rest of The Rest of the World the World

== VirtualVirtual MonopolyMonopoly

Small Business & Free Trade

•Do small businesses import and export?

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CountryCountry StrengthsStrengthsUnited StatesUnited States Technology,Technology,

R & D SpendingR & D Spending

FinlandFinlandUniv. Enrollment, Efficient Legal Univ. Enrollment, Efficient Legal

System, Business EthicsSystem, Business Ethics

TaiwanTaiwanCell-phone Ownership, Cell-phone Ownership,

Tech. Innovation,Tech. Innovation,

Local Firms CompetitivenessLocal Firms Competitiveness

SingaporeSingapore Savings Rate, Math/Science Savings Rate, Math/Science Education, Political TrustEducation, Political Trust

SwedenSweden H.S. Enrollment, Press Freedom, H.S. Enrollment, Press Freedom, Phone AccessPhone Access

Global Competitiveness

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Free TradePros Cons

6.7 billion customers in the world

Lose jobs because of cheap imports or because company moves overseas

Productivity (more output for the same inputs) increases around the world

Wages may be reduced because of competition

Cheap goods keep prices lowLoss of service jobs overseas like call centers and accounting

Free trade inspires innovation around the worldWhen the supply of money increases, rates go down

Companies can lose their competitive advantage when competitors build similar operations in low-wage countries

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U. S. Trade in Goods & Services (Billions)

0

200

400

600

800

1000

1200

1400

1600

1975 1980 1985 1990 1995 2000 2002 2005

Exports

Imports

Source: St. Louis Business Monthly, Oct. 1999 & World Trade Organization & Wikipedia

Balance of Balance of TradeTrade

Balance Of Trade• Balance of Trade = Total Exports – Total Imports • Trade Deficit

– Balance of Trade is negative = Total Exports – Total Imports

– 100 – 200 = -100• Trade Surplus

– Balance of Trade is positive = Total Exports – Total Imports

– 200 – 100 = 100• It is advantageous if a country has more flowing

out of the country than in (we are selling more)

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Balance Of Payments

• The difference between money coming into a country (from exports) and money leaving the country (for imports) Plus money from other factors such as tourism, foreign aid, military expenditures, and foreign investment

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Balance Of Payments (Money Flow)

• Balance of Payments =Total Exports – Total Imports+/- (tourism + foreign aid + military expenditures + foreign investment + other)

• It is advantageous if a country has more money flowing into the country than out (we are probably selling more)

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Dumping

•Selling products in a foreign country at lower prices than those charged in the producing country

•China was accused of dumping apple concentrate (apple juice) on USA market at an unreasonably low price

• Japan was accused of dumping steel in USA

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Strategies To Reach Global Markets

• Licensing• Exporting• Franchising• Contract Manufacturing• Joint Ventures• Joint Ventures & Strategic Alliances• Foreign Direct Investment• Multinational Corporations

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Strategies To Reach Global Markets

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Licencing Exporting FranchisingContract

Manufactur-ing

International Joint Ventures &

Strategic Alliances

Foreign Dircet

Investment

LEAST MOSTAmount of Commitment, Control, Risk, &Profit Potential

Licensing And Franchising

• Licensing– A global strategy in which a firm (the licensor) allows a

foreign company (the licensee) to produce its product or use trademark in exchange for a fee (a royalty)

– Disney– Advantage: Create new revenue with few setup costs– Disadvantage: Transfer of knowledge

• Franchising– Arrangement whereby someone with a good idea for a

business sells the rights to use the business name and sell a product or service to others in a given territory in a specified manner

– Shell, Dunkin Donuts, McDonalds• These two things are similar

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Contract Manufacturing (Outsourcing)

•A foreign country’s production of private-label goods to which a domestic company then attaches its brand name or trade mark

•Nike and Mattel

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International Joint Ventures & Strategic Alliances• Joint Ventures

– A partnership in which two or more companies join to undertake a major project. 2 create new company.

– Examples: Nummi,• Strategic Alliances

– A long-term partnership between two or more companies established to help each company build competitive market advantage. 2 remain independent companies.

– Unlike Joint Adventures in that they typically do not share: costs, risks, managements, profits

– Examples: Microsoft & Facebook (2007), Verizon Wireless & Google

• Advantages: Two minds are often better than one; Entry into new markets that not otherwise allow entry

• Disadvantages: Your secrets (business advantage) may be shared

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Foreign Direct Investment

•The buying of permanent property and businesses in foreign nations▫Usually, the legal environment of both countries

must be observed▫Examples: Toyota, Honda, Mercedes

•Foreign Subsidiary▫A Parent company in one country buys a company in

another country•Advantage: control over proprietary information•Disadvantage: within another county

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Multinational Corporation

•An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management

•Nestle

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World

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NC

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Company Country

Market Capitalization (Billions)

ExxonMobal US $406Wal-Mart US $214China Mobil China $209I & C Bank of China China $183GE US $178P & G US $177Microsoft US $169Volkswagen Germany $168Shell Netherlands $166Petrochina China $161

$406 $214 $209

$183 $178 $177

$169 $168 $166 $161

ExxonMobal

China Mobil

GE

Microsoft

Shell

Forces Affecting Trading In Global Markets•Socialcultural Forces•Economic Forces•Financial Forces•Legal & Regulatory Forces•Physical and Environmental Forces

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Socialcultural Forces• Culture

– The values, beliefs, rules and institutions held by a specific group of people

– Culture can include: social structure, religion, manners and customs, values & attitudes, language…

• In order to do business in another country you must understand the culture– American businesspeople are notoriously bad at

understanding other cultures (ethnocentric)– Japanese companies like Toyota are good at adapting

to USA culture

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•Language

–Coors Brewing slogan–“Turn It Loose” was translated into

Spanish that read:–“Suffer From Diarrhea”

–KFC slogan–“finger-lickin’ good” was translated into

Japanese that read–“Bite Your Fingers Off”

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3-35Did You Know?• In Turkey it’s In Turkey it’s ruderude to cross your arms while you to cross your arms while you

are facing someone.are facing someone.

• In the Arab world the left hand is considered In the Arab world the left hand is considered unclean; unclean; don’t eat with it!don’t eat with it!

• In India never pat someone’s head, it’s the In India never pat someone’s head, it’s the seat seat of the soul.of the soul.

• The Chinese associate gifts such as straw The Chinese associate gifts such as straw sandals, clocks and handkerchiefs with sandals, clocks and handkerchiefs with funerals.funerals.

Economic Forces

•Economic facts like high unemployment, low or high income levels, or recessions affect what kind of opportunities there are for businesses

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Financial Forces

•There is no worldwide currency•USA uses dollars, Japan uses yen,

China uses the Yuan•Exchange rate

▫The value of one nation’s currency relative to the currencies of others

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Exchange Rates

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Name In US$ Per US$

Per US$

Cost In Other Country

United States Dollar $1.00 / $1 $1 / $1 1 1,000.00$ British Pound to US Dollar $1.5288 / £1 £0.654 / $1 0.654 654.00£ Chinese Yuan to US Dollar $0.14637 / ¥1 ¥6.832 / $1 6.832 6,832.00￥ Euro to US Dollar $1.35830 / €1 €0.736 / $1 0.736 736.00€ Japanese Yen to US Dollar $0.01067 / ¥1 ¥93.76 / $1 93.76 93,760.00¥ South Korean Won to US Dollar $0.00089 / W1 W1124 / $1 1124 1,124,000.00₩

Exchange Rates• A high value of the dollar means that a

dollar would be traded for more foreign currency than before– Example:

• $1 is traded for ¥6 (Chinese Yuan), and then it goes up: $1 is traded for ¥6.5.–The $1 could buy more in China–The dollar has a higher value and so it can buy more from

China–Foreign goods become cheaper when the dollar is high–China can buy less from us

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Exchange Rates• A low value of the dollar means that a dollar

would be traded for less foreign currency than before

• $1 is traded for ¥6 (Chinese Yuan), and then it goes down: $1 is traded for ¥5.5.–The $1 could buy less in China–The dollar has a lower value and so it can buy less from

China–Foreign goods become more expensive when the dollar is

low–China could buy more from us

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Exchange Rates

•From USA’s point of view, a high value of the dollar▫More Imports▫Fewer Exports

•From USA’s point of view, a low value of the dollar▫More Exports▫Fewer Imports

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Floating Exchange Rate

• Most Exchange Rates are set by supply and demand (Float)– This can be a great risk for business because as

currencies go up and down, revenues and expenses will go up and down

• Devaluation– Lowering the value of a nation’s currency relative to

other currencies– Counties sometimes do this to make their products

cheaper for other countries to buy

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Fluxuations in Foreign Exchange Rates•Can cause businesses expenses to go up or

down•Can cause businesses revenues to go up or

down•Business use currency derivatives to hedge

against exchange rate movements

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Countertrading

•A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services. Accounts for about 20% of global exchanges.

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Legal & Regulatory Forces

• No central system of law exists• Conducting business in many counties with

inconsistent laws is difficult and adds to the expense and risk of doing business globally

• American companies are not allowed to give briberies (Foreign Corrupt Practices Act of 1978) even though some counties require it (Competitive Disadvantage for American companies)

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Physical And Environmental Forces

•Some countries do not have▫Efficient transportation systems▫Legal systems▫Infrastructure Internet E-commerce?

European appliances•This can make doing business nearly

impossible

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Trade Protectionism

• The use of government regulations to limit the import of goods and services–Tariff–Import Quota–Embargo

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Trade Protectionism• Tariff

– A Tax imposed on imports to keep jobs at home and help businesses survive

– Revenue Tariff• Designed to raise money for government

– Protective Tariff• Designed to raise price of foreign products (help domestic

producers)• Examples in 2000s in USA: Steele, Textiles and Sugar

industries• Import Quota

– Limit import quantity• Embargo

– Complete ban on import or export

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Trade Protectionism

• Advocates–Help business to survive and grow–Help infant businesses to grow–Keep jobs at home

• Opponents–Free trade is inhibited–Long-term growth and productivity

are reduced

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Common Market

•A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange

•Also called a trading bloc•Example: European Union, NAFTA

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Organizations That Try To Reduce Barriers To Free Trade•GATT (General Agreement on Tariffs and

Trade)▫A 1948 agreement that established an

international form for negotiating mutual reductions in trade restrictions

•WTO (World Trade Organization)▫Replaced GATT▫Helps to mediate trade disputes

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NAFTA (North American Free Trade Agreement)

• Free-trade agreement between Mexico, Canada and the USA

• Goals–Eliminate trade barriers to help facilitate

cross-border movement of goods/services–Promote fair competition–Increase investment opportunities–Increase protection of intellectual

property rights (patents, etc.)–Improve working conditions

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NAFTA•Opponents

▫Loss of USA jobs▫Capital leaves USA▫Exploit workers in Mexico▫Pollute Mexico

•Advocates▫Open new markets▫Resources more efficiently allocated▫Trade has dramatically increase between

the 3 countries▫Largest trade bloc in terms of GDP –

helps to compete with European Union

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NAFTA: http://useconomy.about.com/od/tradepolicy/tp/NAFTA_Facts.htm

Pro Con

• Increased Trade• Boosted U.S. Farm

Exports• Created Trade Surplus

in Services• Reduced Oil and

Grocery Prices• Stepped Up Foreign

Direct Investment

• U.S. Jobs Were Lost• U.S. Wages Were

Suppressed• Mexico's Farmers Were

Put Out of Business• Maquiladora Workers

Were Exploited• Mexico's Environment

Deteriorated

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NAFTA Facts– From Textbook

• USA exports increased from $135 billion to $250 billion• Trade volume amongst all three has gone from $289

billion to $930 billion• US Department of Labor estimates that 500,000 USA jobs

have been lost• Annual per capita income in Mexico is about $9,000 and in

the USA it is about $36,000• Some argue that working conditions have become more

unsafe in Mexico– Other fact sources

• http://useconomy.about.com/od/tradepolicy/tp/NAFTA_Facts.htm

– Try Goggling this:• current facts about NAFTA

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Future Of Global Trade•The world is more connected:

▫The Internet has allowed the follow of information to be just a mouse click away

•Offshore Outsourcing

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Offshore OutsourcingPros Cons

Jobs are lost in the company's country

Wages are pushed down from global competition

Consumers get lower cost itemsLower quality or dangerous products

Jobs are created in other countries

Communication between companies, suppliers and customers becomes more difficult - but for internet…

Outsource routine elements of the business like manufacturing and bookkeeping so that you can focus on what you do best like design & innovation

3-58Pro’s & Con’s of Offshore Outsourcing

Pro’s

• More focus on areas where they can excel and grow

• Outsourced work creates efficiencies, resulting in hiring more workers

• Fuels global market growth

Con’s

• Jobs lost/wages fall

• Reduces product quality

• Communication becomes much more difficult

Global Markets, Comparative Advantage And Absolute Advantage

• Comparative Advantage means that countries should produce what they can produce most efficiently and buy from others what they cannot produce most efficiently. If countries can do this everyone is better off.

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Global Markets, Comparative Advantage And Absolute Advantage• Why trade with other countries?

– Countries have what other countries need, or want what other countries have

– Natural resources and technological skills are not distributed evenly around the world

• Markets have become more global to try and realize the benefits promised by free trade and competitive advantage

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Importing, Exporting And Global Business Terms

•Free Trade•Balance of Trade•Balance of Payments•Exporting•Importing

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Strategies To Reach Global Markets

• Licensing• Exporting• Franchising• Contract Manufacturing• Joint Ventures• Joint Ventures & Strategic Alliances• Foreign Direct Investment• Multinational Corporations

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What Forces Affect Trading In Global Markets

•Socio-cultural•Economic & Financial•Legal & Regulatory•Physical & Environmental

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Advantages And Disadvantages Of Trade Protectionism

•Advocates▫Help business to survive and grow▫Help infant businesses to grow▫Keep jobs at home

•Opponents▫Free trade is inhibited▫Long-term growth and productivity are

reduced

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The Global Markets And Offshore Outsourcing

•The trend is towards:▫More business on-line▫More offshore Outsourcing

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Thee Cs

•Character•Competence•Commitment

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Li Yifei, President Of MTV Networks China, Is A Strong Example Of A Global Business Person

•Speaks different languages•Understands cultural differences

between countries•Understands economic differences

between countries

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Economic Growth Depends On•Open markets

▫But are markets really open? What about the farming payments from the USA

government that distort prices and prevent cheaper imports?

•Global trade▫What about the faulty and dangerous products from

China? Lead paint on toys Poison in baby food

▫But what if we grew most of our own food in our state instead of importing so much food?

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This Textbook And Most Economists Assume That Economic Growth Is A Positive And Without It People Will Be Less Well Off

• Is this always true?▫What about self-sustaining tribes in South America

that don’t grow or shrink?▫What about increased pollution in China that has

accompanied fast economic growth?

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