Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

CHAPTER 3

Doing

Business in

Global

Markets

LEARNING OBJECTIVES

1-2

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.

LEARNING OBJECTIVE

1-3

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.

LEILA JANAHSamasource

3-4

• Started Samasource to help

people in developing

countries rise out of poverty.

• Janah has been working to

combat world poverty since

she was a teen.

• Employees are carefully

selected and are taught new

skills.

NAME that COMPANY

1-5

This Swiss-based company has many foreign

subsidiaries including Jenny Craig (weight

management), Ralston Purina, Chef America

(maker of Hot Pockets) and Dreyer’s Ice Cream

in the United States as well as Perrier in France.

The company employs over 328,000 people and

has operations in almost every country in the

world.

Name that company!

BUSINESS in the

GLOBAL MARKET

3-6

LO 3-1

• 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.

WORLD POPULATION

by CONTINENT

3-7

LO 3-1

WORLD POPULATION

GROWTH

3-8

LO 3-1

IMPORTING and EXPORTING

3-9

LO 3-1

• Importing -- Buying products

from another country.

• Exporting -- Selling products

to another country.

• The U.S. is the largest

importing and the second

largest exporting nation in the

world.

Source: Forbes, www.forbes.com, accessed November 2014.

PLEASURE DOING BUSINESSBest Countries for Business

3-10

2013 Rank Country 2012 Rank

1 Ireland -

2 New Zealand -

3 Hong Kong -

4 Denmark -

5 Sweden 3

6 Finland 2

7 Singapore 1

8 Canada -

9 Norway -

10 Netherlands -

LO 3-1

Source: Forbes, www.forbes.com, accessed November 2014.

CAN YOU SPARE a DIME?Home Countries for Some of the World’s Billionaires

3-11

LO 3-1

• U.S. – 516 billionaires

• China – 136 billionaires

• Russia – 88 billionaires

• Germany – 82 billionaires

• India – 54 billionaires

• U.K. – 43 billionaires

• Hong Kong – 41 billionaires

TRADING with OTHER NATIONS

3-12

LO 3-1

• 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.

PROS and CONS of FREE TRADE

3-13

LO 3-1

COMPARATIVE and ABSOLUTE

ADVANTAGE

3-14

LO 3-1

• 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.

GOING GLOBAL with a

SMALL BUSINESS

3-15

LO 3-2

• 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.

Source: Max Fisher, Washington Post, www.washingtonpost.com, accessed November 2014.

WHOM DOES the U.S. OWE?Countries that Own the Most U.S. Debt

3-16

LO 3-2

GETTING INVOLVED in

IMPORTING

3-17

LO 3-2

• 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

EXPORTING

3-18

LO 3-2

• 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.

HOW to MEASURE GLOBAL TRADE

3-19

LO 3-2

• 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.

BALANCE of PAYMENTS

3-20

LO 3-2

• 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.

UNFAIR TRADE PRACTICES

3-21

LO 3-2

• 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.

LARGEST EXPORTING NATIONS

and TRADE PARTNERS

3-22

LO 3-2

TEST PREP

3-23

• What are two of the main arguments favoring the

expansion of U.S. businesses into global

markets?

• What is comparative advantage, and what are

some examples of this concept at work in the

United States?

• How are a nation’s balance of trade and balance

of payments determined?

• What is meant by dumping in global trade?

Least Amount of commitment, control, risk and profit potential Most

Licensing Exporting FranchisingContract

Manufacturing

International

joint ventures

and strategic

alliances

Foreign

direct

investment

KEY STRATEGIES for REACHING

GLOBAL MARKETS

3-24

LO 3-3

LICENSING

3-25

LO 3-3

• Licensing -- When a firm (licensor) provides the

right to manufacture its product or use its trademark

to a foreign company (licensee) for a fee (royalty).

• Licensing can benefit a firm by:

- Gaining revenues it wouldn’t have otherwise

generated.

- Spending little or no money to produce or market

their products.

EXPORT ASSISTANCE CENTERS

and EXPORT TRADING CENTERS

3-26

LO 3-3

• 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.

FRANCHISING

3-27

LO 3-3

• Franchising -- A contractual agreement whereby

someone with a good idea for a business sells others

the rights to use the name and sell a product/service

in a given area.

• Franchisors need to be careful to adapt their

product to the countries they serve.

• Yum! Brands, home of KFC, Taco Bell and Pizza

Hut, learned that food preferences differ all

around the world.

Source: World Features Syndicate.

TIME to MAKE the DONUTS…Dunkin’ Donuts Flavors in Taiwan

3-28

Photo Credit: Dennis Yang

LO 3-3

• Sweet Potato

• Honeydew Melon

• Green Apple

• Kiwi Fruit

• Mango

• Pineapple

• Strawberry

• Corn Crumb Soft Rice Cake

• McDonald’s has more than 34,000 restaurants in

over 118 countries.

• Maintains varying menus around the world due to

the different preferences of its customers.

MCDONALD’S:

OVER 100 CULTURES SERVED

3-29

• Attracts top-level college

graduates to be trained

for management spots.

• Only 8 of every 1,000

applicants actually makes

it into the program!

Source: McDonalds, www.mcdonalds.com, accessed November 2014.

THAT’S at MCDONALD’S?

3-30

• Malaysia: Bubur Ayam McD – Chicken strips in porridge with onions, ginger, and shallots.

• Egypt: Mcarabia – Grilled chicken with tehina sauces, lettuce, tomato and onion on Arabic bread.

• Japan: Teritama – Teriyaki burger topped with an egg.

• Germany: Want a beer with your burger? You can order one in the German stores.

• Israel: Operates using Kosher kitchens.

CONTRACT MANUFACTURING

3-31

LO 3-3

• Contract Manufacturing -- A foreign company

produces private-label goods to which a domestic

company then attaches its own brand name or

trademark. A form of outsourcing.

• Contract manufacturing can be used to:

- Allow a company to experiment in a new market without

incurring heavy start-up costs such as building a

manufacturing plant.

- Temporarily meet an unexpected increase in orders.

JOINT VENTURES

3-32

LO 3-3

• Joint Venture -- A partnership in which two or more

companies join to undertake a major project.

• The benefits of joint ventures:

- Shared technology and risk.

- Shared marketing and management expertise.

- Entry into markets where foreign companies are often not

allowed unless goods are produced locally.

• Strategic Alliance -- A long-term partnership

between two or more companies established to help

each company build competitive market advantages.

STRATEGIC ALLIANCES

3-33

LO 3-3

• They don’t typically

share costs, risks,

management or profits.

• Strategic alliances

provide broad access to

markets, capital and

technical expertise.

FOREIGN DIRECT INVESTMENT

3-34

LO 3-3

• Foreign Direct Investment (FDI) -- The buying of

permanent property and businesses in foreign nations.

• Foreign Subsidiary -- A company owned in a foreign

country by another company called the parent company.

The most common form of FDI.

- Primary Advantage: Parent

company maintains complete

control over its technology or

expertise.

- Primary Disadvantage: Must

commit funds and technology

within foreign boundaries.

BUYING AMERICAN?

3-35

LO 3-3

ModelState(s)

manufacturing

% of American

parts

Toyota Camry Kentucky & Indiana 75%

Honda Accord Ohio 70%

Chevrolet Malibu Kansas & Michigan 66%

Nissan Altima Tennessee 60%

Ford Fusion Michigan 30%

MULTINATIONAL CORPORATIONS

3-36

LO 3-3

• 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.

LARGEST MULTINATIONAL

CORPORATIONS

3-37

LO 3-3

Company Home Country

1 Royal Dutch Shell Netherlands

2 Walmart Stores United States

3 ExxonMobil United States

4 Sinopec Group China

5 China National Petroleum China

6 BP United Kingdom

7 State Grid China

8 Toyota Motor Japan

9 Japan Post Holdings Japan

10 Chevron United States

SOVEREIGN WEALTH FUNDS

3-38

LO 3-3

• Sovereign Wealth Funds (SWFs) -- Funds

controlled by governments holding investment 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.

TEST PREP

3-39

• What are the advantages of using licensing as a

method of entry in global markets? What are the

disadvantages?

• What services are usually provided by an export-

trading company?

• What is the key difference between a joint venture

and a strategic alliance?

• What makes a company a multinational

corporation?

FORCES AFFECTING GLOBAL TRADE

3-40

LO 3-4

• Sociocultural

• Economic and

Financial

• Legal and

Regulatory

• Physical and

Environmental

CULTURAL DIFFERENCES

3-41

LO 3-4

• To be involved in global trade, you must be aware

of the cultural differences among nations

including:- Social Structures

- Religion

- Manners

- Values

- Language

- Personal Communication

LOST in TRANSLATIONAdvertisements Gone Wrong

3-42

LO 3-4

• Braniff Airlines’ slogan "Fly in leather”translated in Spanish as "Fly naked.”

• Siri, Apple’s digital assistant on iPhone, is a

common slang term for “butt” in Japanese.

• In Italy, Schweppes Tonic Water was mistaken

as Schweppes Toilet Water.

• Nokia’s line of Lumia phones is Spanish for

“prostitute.”

FROM SETTING PICKS to

PICKING GRAPES

3-43

• When Yao Ming was

facing retirement, he

moved on to other ventures.

• Yao has set himself apart

from others by opening

high-end winery.

• His cheapest bottles go for

about $87!

READY to TRAVEL ABROAD?Know Your Cultural Differences

3-44

LO 3-4

• In Turkey, it’s rude to cross your arms while facing

someone.

• In many Middle Eastern countries, you shouldn’t eat

or shake hands with the left hand because it is

considered unclean.

• In India, you should never pat anyone’s head. It’s

where one’s soul is kept.

• In Brazil, your meeting may not start on time because

punctuality isn’t important to the culture.

DO as the GERMANS…How to Not Embarrass Yourself in Germany

3-45

LO 3-4

• Always use titles like Doctor, Frau, or Herr.

• Always provide food and drinks for your birthday.

• Don’t remove your jacket until your host does.

• Wear conservative business attire, anything else is

considered sloppy.

• Never jaywalk.

• Always keep your hands on the table when eating.

EXCHANGE RATES

3-46

LO 3-4

• 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.

DEVALUATION and

COUNTERTRADING

3-47

LO 3-4

• 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.

LEGAL and

REGULATORY FORCES

3-48

LO 3-4

• There’s no global system of laws.

• Laws may be inconsistent.

• U.S. businesses must follow U.S. laws while

conducting global business.

• Organization for Economic Cooperation and

Development and Transparency International fight

to end corruption and bribery in foreign markets

and have had limited success.

ENVIRONMENTAL FORCES

3-49

LO 3-4

• 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.

TEST PREP

3-50

• What are four major hurdles to successful global

trade?

• What does ethnocentricity mean and how can it

affect global success?

• How would a low value of the dollar affect U.S.

exports?

• What does the Foreign Corrupt Practices Act

prohibit?

TRADE PROTECTIONISM

3-51

LO 3-5

• 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.

TARIFFS

3-52

LO 3-5

• 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.

IMPORT QUOTAS and EMBARGOS

3-53

LO 3-5

• 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.

WORLD TRADE ORGANIZATION

3-54

LO 3-5

• 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 159 member nations whose

purpose is to oversee cross-border trade issues and

global business practices.

COMMON MARKETS

3-55

LO 3-5

• 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.

EU MEMBERS

3-56

LO 3-5

NAFTA and CAFTA

3-57

LO 3-5

• 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 OBJECTIVES

3-58

LO 3-5

1) Eliminate trade barriers and facilitate cross-

border movement of goods and services.

2) Promote conditions of fair competition.

3) Increase investment opportunities.

4) Provide effective protection and enforcement of

intellectual property rights.

5) Establish a framework for further regional trade

cooperation.

6) Improve working conditions in North America.

NEW FREE

TRADE AGREEMENTS

3-59

LO 3-5

• Today, free trade

agreements are being

negotiated Colombia

and Panama.

• The U.S. is considering

an agreement with a

nine-nation free trade

bloc called the Trans-

Pacific Partnership.

TEST PREP

3-60

• What are the advantages and disadvantages of

trade protectionism and of tariffs?

• What is the primary purpose of the WTO?

• What is the key objective of a common market like

the EU?

• Which three nations comprise NAFTA?

FUTURE of GLOBAL TRADE

3-61

LO 3-6

• Brazil is expected to be one of the wealthier

economies by 2030.

• Russia is a large oil producing country with many

multinationals interested in developing there.

• India has seen huge growth in information

technology, pharmaceuticals and biotechnology.

• With over 1.3 billion people, China has

transformed the world economic map. Many

multinationals invest heavily in China.

OUTSOURCING

3-62

• With the growth of global

markets, companies have

been shifting to offshore

outsourcing – outsourcing

with other countries.Photo Credit: Vitor Lima

LO 3-6

• 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.

OFFSHORE OUTSOURCING

3-63

LO 3-6

PLAN for YOUR GLOBAL CAREER

3-64

LO 3-6

• Study foreign

languages.

• Learn about

foreign cultures.

• Take global

business courses.

MAKING YOUR OPERATION

YOUR VACATION

3-65

• Some insurance companies

encourage patients to seek

medical care in foreign

countries.

• Procedures are cheaper and

involve top-flight doctors at

state-of-the-art facilities.

• Would it be ethical to force

patients to travel to other

countries to save money?

Source: AARP Magazine, November 2014.

COSTS of MEDICAL

PROCEDURES ABROAD

3-66

AngioplastyGastric

Bypass

Heart

Bypass

Hip

Replacement

Nose

Job

Tummy

Tuck

United

States$47,000 $18,000 $88,000 $33,000 $6,200 $6,400

United

Kingdom$8,000 $16,500 $13,921 $23,500 $3,500 $4,810

Mexico $15,000 $13,800 $37,800 $11,500 $2,800 $3,000

India $11,000 $6,800 $14,400 $8,000 $2,800 $2,900

Costa

Rica$13,000 $11,200 $31,500 $14,500 $3,400 $5,300

TEST PREP

3-67

• What are the major threats to doing business in

global markets?

• What key challenges must India and Russia face

before becoming global economic leaders?

• What does the acronym BRIC stand for?

• What are the two primary concerns about offshore

outsourcing?