Competing in World Markets

Chapter

4

LO 4.1 Explain the importance of international business and the primary reasons nations trade, and discuss the concepts of absolute and comparative advantage in international trade.

LO 4.2 Describe how nations measure international trade and the significance of exchange rates.

LO 4.3 Identify the major barriers that confront global businesses.

Learning Objectives

LO 4.4 Explain how international trade organizations and economic communities reduce barriers to international trade.

LO 4.5 Compare the different levels of involvement used by businesses when entering global markets.

LO 4.6 Distinguish between a global business strategy and a multidomestic business strategy.

Boosts economic growth Expands markets More efficient production systems Less reliance on the economies of home nations

Exports: Domestically produced goods and services sold in other countries

Imports: Foreign goods and services purchased by domestic customers

Why Nations Trade

Decisions to operate abroad depend upon availability, price, and quality of:– Labour– Natural resources– Capital– Entrepreneurship

Companies doing business overseas must make strategic decisions.

International Sources of Factors of Production

New social and cultural practices Economic and political environments Legal restrictions

Companies can expand their markets, seek growth opportunities in other nations, make their production and distribution systems more efficient, and reduce their dependence on the economies of their home nations.

Additional Environmental Factors to which Companies are Exposed

As developing nations expand into the global marketplace, opportunities grow.

Many developing countries have posted high growth rates of annual GDP. Until the 2008-10 economic slowdown, U.S. and Canadian GDP rates grew at an annual rate of about 4 percent.

In less developed countries, GDP growth rates were greater; China averaged 10.1% and India averaged 7.5%.

Current GDP data

Size of the International Marketplace

The World’s Top 10 Nations

Though developing nations generally have lower per capita income,

many have strong GDP growth rates, and their huge populations

can be lucrative markets.

A country has an absolute advantage in making a product when it has a monopoly on making that product or when it can produce the product at a lower cost than any other country.

Example: China’s domination of silk production for centuries

A nation can develop a comparative advantage when it can supply its products more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries.

Example: India’s combination of a highly educated workforce and low wage scale in software development

Absolute and Comparative Advantage

Test Your Knowledge

Why does Spain have an near absolute advantage in growing

saffron?

a. Spain has some of the lowest labour rates in the world so the

time-consuming harvesting process is less expensive.

b. Treaties limit which country can produce saffron.

c. The spice is relatively inexpensive, so other countries are not

interested in growing it.

d. Saffron thrives in Spain’s climate, and soil but does not do as

well elsewhere.

Test Your Knowledge

Why does Spain have an near absolute advantage in growing

saffron?

a. Spain has some of the lowest labour rates in the world so the

time-consuming harvesting process is less expensive.

b. Treaties limit which country can produce saffron.

c. The spice is relatively inexpensive, so other countries are not

interested in growing it.

d. Saffron thrives in Spain’s climate, and soil but does not do as

well elsewhere.

Answer: D

Balance of trade: The difference between a nation’s exports and imports

Balance of payments: The overall money flows into or out of a country

Balance-of-payments surplus = more money into a country than out of it

Balance-of-payments deficit = more money out of a country than into it

Measuring Trade Between Nations

The difference between a nation’s imports and its exports is called the

a. balance of tradeb. exchange ratec. balance of payments d. budget deficit

Test Your Knowledge

The difference between a nation’s imports and its exports is called the

a. balance of tradeb. exchange ratec. balance of payments d. budget deficit

Answer: A

Test Your Knowledge

Currency rates are influenced by: Domestic economic and political conditions Central bank intervention Balance-of-payments position Speculation over future currency values

Values fluctuate, or “float,” depending on supply and demand.

National governments can deliberately influence exchange rates.

Business transactions are usually conducted in the currency of the region where they happen.

Rates can quickly create or wipe out competitive advantages.

Exchange Rates

Barriers to International Trade

Language: Potential problems include mistranslation, inappropriate messaging, lack of understanding of local customs, and differences in taste.

Values and Religious Attitudes: Differing values about business efficiency, employment levels, importance of regional differences, and religious practices, holidays, and values about issues such as interest-bearing loans.

Social and Cultural Differences

Infrastructure: The basic systems of a country’s communication, transportation, and energy facilities

Currency Conversion and Shifts: Fluctuating values can make pricing in local currencies difficult, and affect decisions about market desirability and investment opportunities.

Economic Differences

Political Climate Stability is a key consideration

Legal Environment Canadian law International regulations Country’s law in which trade is planned Climate of corruption (see Canada Takes Aim At

Foreign Corruption)

International Regulations Treaties between Canada and other nations Tariffs: Taxes imposed on imported goods Enforcement issues

Political and Legal Differences

Test Your Knowledge

Trade restrictions create what kind of barrier to

international trade?

a. Legal and political

b. Economic

c. Social

d. Cultural

Test Your Knowledge

Trade restrictions create what kind of barrier to

international trade?

a. Legal and political

b. Economic

c. Social

d. Cultural

Answer: A

Corruption in Business and Government

Transparency International produces an annual corruption index for businesspeople

and the general public.

Tariffs: taxes, surcharges, or duties on foreign products Revenue tariffs generate income for the government. Protective tariffs raise prices of imported goods to level the

playing field for domestic competitors. Nontariff barriers: also called administrative trade

barriers Quota: A limit set on the amounts of particular products

that can be imported Dumping: Selling products in other countries at prices

below production costs or below typical prices in the home market

Embargo: A total ban on importing specific products or a total stop to trading with a particular country

Exchange control: a restriction on important certain products or a restriction against certain companies to reduce trade and the spending of foreign currency

In accordance with national policy, through central banks or government

Types of Trade Restrictions

The world is moving toward more free trade.

There are many communities and groups that monitor and promote trade.International economic communities reduce trade barriers and promote regional economic cooperation.Free-trade area: Members trade freely among selves without tariffs or trade restrictions. Customs union: Establishes a uniform tariff structure for members’ trade with nonmembers.Common market (or economic union): Members bring all trade rules into agreement.

Reducing Barriers to Trade

General Agreement on Tariffs and Trade (GATT) Major industrialized nations found this multinational

organization in 1947 to reduce tariffs and relax import quotas.

The World Trade Organization succeeded GATT Representatives from 157 countries Monitors GATT agreements and mediates

international trade disputes World Bank

Funds projects to build and expand infrastructure in developing countries

International Monetary Fund (IMF) Operates as lender to troubled nations in an effort

to promote trade

Organizations Promoting Trade

North American Free Trade Agreement (NAFTA) World’s largest free-trade zone: Canada, United States,

Mexico U.S. and Canada are each other’s biggest trading partners.

Central America-Dominican Republic Free Trade Agreement (CAFTA-DR)

Free-trade area among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

European Union Best-known example of a common market; 27 member

countries. Goals include promoting economic and social progress,

introducing European citizenship as complement to national citizenship, and giving EU a significant role in international affairs.

International Economic Communities

Determining which foreign market(s) to enter Analyzing the expenditures required to enter a new

market Deciding the best way to organize the overseas

operations

CIA World Factbook

Going Global

International Trade Research Resources on the Internet

Risk increases with the level of involvement Many companies employ multiple strategies Exporting and importing are entry-level

strategies Importing is the process of bringing in goods

produced abroad Exporting is the act of selling home goods

overseas

Levels of Involvement

Countertrade: A barter agreement whereby trade between two or more nations involves payment made in the form of local products instead of currency

Franchising: A contract-based agreement in which a franchisee can produce and/or sell the franchisor’s products under that company’s brand name if the franchisee agrees to the operating terms and requirements

Countertrade and Franchising

Foreign licensing agreement: An international agreement in which one firm allows another firm to produce or sell its product, or use its trademark, patent, or manufacturing processes, in a specific geographical area, in return for royalties or other compensation

Subcontracting: An agreement that involves hiring other companies to produce, distribute, or sell goods and services

Countertrade and Franchising

The relocation of business processes to lower-cost overseas locations

Not initiating business but gaining cost savings to stay competitive

Extremely controversial

The ultimate level of global involvement is direct investment

Directly operating production and marketing in a foreign country

Acquisition (purchase firm from host country) Joint venture (partnership between companies) Overseas division (set up offices overseas)

Offshoring and International Direct Investment

Global business (standardization) strategies Firm sells same product in essentially the same

manner throughout the world. Works well for products with nearly universal

appeal.

Multidomestic (adaptation) strategies Firm develops products and marketing strategies

that appeal to customs, tastes, and buying habits of particular national markets.

Developing a Strategy for International Business

Multinational corporation (MNC): A firm with many operations and marketing activities outside its home country

The World’s Top 10 Leading Companies