CHAPTER 3

Doing
Business in
Global
Markets

McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
 Why Trade With Other Nations?
• No nation can produce all its needs.

• Countries with abundant natural

resources (like Venezuela or
Russia) need technological
resources from other countries
(like Japan).

• Mutually beneficial exchange.

Global trade allows countries to
produce what they make best
and buy what they need from
others.
 HOW FREE TRADE
BENEFITS the WORLD
Global trade has led the world in a new
direction:
Literacy rates worldwide have
increased from 56% in 1950 to 86% in
2015.
Life expectancy in less
developed areas rose from
40.9 years in 1950 to 70 years in 2015.
Source: CIA World Factbook (2015-12-31); Population Division of the Department of Economic and Social Affairs of the United
Nations Secretariat (2013).
 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.
 Theories of Advantage
Comparative
U. S. China

China
U. S.
Output per
Unit of Input

Software Clothing
According to Comparative Advantage, the U.S and
China should trade software and clothing with each
other.
 Theories of Advantage
Absolute = Virtual Monopoly

South Africa

Output per
Unit of Input
The Rest of
the World

Diamond Production

Note: Most Absolute Advantages do not last forever.

Comparative Advantage Theory Conclusions

➲ Not only do individual countries practice the concept of

Comparative Advantage, but also countries have come
together to form spheres of Comparative Advantage in the
world. The following slide shows some of the common
markets formed in the global economy. Where do you think
the next sphere will develop in the world?

➲ Comparative Advantage has allowed consumers in various

countries to enjoy certain products and increase their standard
of living. The following second slide shows the brand names
of common products you might use and who owns them.
Many products today are not totally made in a particular
country. For example, U.S. and Japanese cars both have
American and Japanese parts to provide the best car for
consumers in both countries.
SPHERES (COMMON MARKETS) OF COMPARATIVE
ADVANTAGE

1. (APEC) Asia-Pacific Economic Cooperation

2. (EU) Europe Union
3. (NAFTA) North American Free Trade Agreement
4. Mercosur (South America)
5. (COMESA) Common Market for Eastern & Southern
Africa
6. (CAFTA) Central American Free Trade Agreement –
2005
 Costa Rica, Dominican Republic, El Salvador,
Guatemala, Honduras, and Nicaragua
 FOREIGN OWNED
BRAND COUNTRY

Budweiser Belgium
Alka-Seltzer Germany
Good Humor Great Britain
7-Eleven Japan
Gerber Switzerland
Firestone Japan
Vaseline Great Britain
Frigidaire Sweden
Popsicle Great Britain
Holiday Inn Great Britain
Hellmann’s Great Britain
Purina Switzerland
Source: “Foreign-Owned America” by Daniel Bukszpan CNBC; “Ten Classic American Brands That Are Foreign-Owned”‘ by Frohlich and Sauter.
 HOW to MEASURE 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.
 BALANCE of PAYMENTS
• Balance of Payments -- The difference between
money coming into a country (from exports, tourism,
foreign investments) and money leaving the country
(from imports) plus other money flows.

• A favorable balance is when more

money flows into a country than out.

• An unfavorable balance is when

more money flows out of a country than
in.

• Note: It is okay to have an unfavorable balance of trade

as long as you have a positive balance of payments.
 UNFAIR TRADE PRACTICES
• 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.

• The U.S., Canada, and Korea were penalized

for dumping newsprint into China.
 KEY STRATEGIES for REACHING
GLOBAL MARKETS

International
Contract Foreign
Licensing Exporting Franchising Joint ventures
Manufacturing direct
and strategic
investment
alliances

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

 LICENSING
• 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.
• Examples: Disney & Coca-Cola
 EXPORTING
• Exporting -- Selling products to another country.

• The U.S. is the second

largest exporting nation in
the world.

• It’s estimated every $1

billion in U.S. exports
generate over 7,000 U.S.
jobs.
• Example: Exporting Champion spark plugs to Japan.
 FRANCHISING
• 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.

• KFC, Taco Bell, Pizza Hut, Dunkin’ Donuts, and

McDonald’s learned that food preferences differ
all around the world.
 TIME to MAKE the DONUTS…
Dunkin’ Donuts Flavors in Taiwan

• Sweet Potato
• Honeydew Melon
• Green Apple
• Kiwi Fruit
• Mango
• Pineapple Photo Credit: Dennis Yang

• Strawberry
• Corn Crumb Soft Rice Cake
Source: World Features Syndicate.
 McDonald’s International Menu
 Philippines McSpaghetti
 Germany McBeer
 Switzerland Vegi Mac
 Malaysia Sugar Cane Juice
 Netherlands Cappuccino Donuts
 Greece Shrimp & Spring Rolls
 India Big Mac???

Although McDonald’s does a good job adapting to

other cultures, it took them one year to understand why
the Big Mac was not selling well in India. Do you know
why?
 CONTRACT MANUFACTURING
• 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.

• Example: Flextronics of Singapore manufactures cell phones,

printers, and telecom equipment for many U.S. firms.
 JOINT VENTURES and STRATEGIC
ALLIANCE
• Joint Venture/Strategic Alliance -- A partnership with two or
more companies to share risks and rewards of starting a new
enterprise in a foreign country to build competitive market
advantages.

• The benefits are:

- Shared technology and risk.
- Shared marketing and management expertise.
- Entry into markets where foreign companies are often not
allowed unless goods are produced locally.

• Example: Hewlett-Packard with Hitachi created Samsung.

 FOREIGN DIRECT INVESTMENT
• Foreign Direct Investment (FDI) -- The buying of
permanent property and businesses in foreign nations.
‒ Advantage: Parent company maintains complete
control over its technology or expertise.
‒ Disadvantage: Must commit funds and technology
within foreign boundaries.

• Example: General Motors

owns Adam Opel in
Germany, Holden in
Australia, and GM Korea.
 FORCES AFFECTING GLOBAL TRADE
➲ Attitudes

➲ Cultural

‒ Language

‒ Manners

➲ Legal and Regulatory

➲ Exchange Rate
 Attitudes
Ethnocentricity: an attitude that your own
culture is superior to other cultures.

 Many foreign businesspeople are very

good at adapting to U.S. culture.

 U.S. businesspeople are one of the worst

in the world at adapting to other cultures.

 The next slide shows how bad the U.S. is

in adapting to global trade.
 Nations That Have Not Converted to
the Metric System

United
States
Liberia
Myanmar
(Burma)

Only three countries in the world do not use the metric system in
global trading. The U.S. is the only industrialized nation in the
world that does not use the metric system. Burma plans to use the
metric system in the near future.
 CULTURAL DIFFERENCES
• To be involved in global trade, you must be
aware of the cultural differences among nations.

• “Knowing the meaning of body signals in other

cultures is imperative to the success of doing
business outside of the United States.”

SOURCE: Robert E. Daemmrich/Tony Tone Images

 LANGUAGE
Advertisements Gone Wrong

• 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.”
 MANNERS
Know Your Cultural Differences

• 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.
 MANNERS
Know Your Cultural Differences

• In Greece, “Yes” is indicated by tilting your head to

either side.

• Nodding the head up and down in Bulgaria means

No.

• Gesturing by forming an A-OK sign with your thumb

and forefinger is vulgar in Brazil, Russia,
Singapore,, and Paraguay.

• Pointing to yourself in Germany or Switzerland

insults the other person.
 LEGAL and REGULATORY FORCES
• There’s no global system of laws and 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. 60% of
the world considers bribery a legal way of doing
business.
 EXCHANGE RATE
• 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.
Effect of Exchange Rates on Value of the
Dollar
When Overseas In U.S., In U.S., Balance of
value of U.S. dollar foreign imported trade
dollar buys: dollars goods cost: tends to:
goes: buy:

DOWN LESS MORE MORE IMPROVE

UP MORE LESS LESS WORSEN

 APPLICATION OF THE EXCHANGE RATE
When applying the exchange rate, many people make the
mistake of using U.S. standards for other countries. The
following slide shows the average cost of a Big Mac in the
United States. Using the exchange rate, the table shows
what a Big Mac would cost in other countries based on the
U.S. dollar. So when people criticize U.S. companies for
paying slave wages in other countries, they are using U.S.
standards. However when you convert the U.S. amount into
the foreign country’s currency, the worker is making a good
wage. For example, a U.S. company is criticized for paying
Venezuela workers $10 (U.S.) a day. If a person was paid
$10 a day in the U.S., the person could
only buy 2 Big Macs. But if a person was
paid $10 in Venezuela, the person could
buy about 15 Big Macs. Get the point!
 Big Mac Prices
(2015)
Country In U.S. Dollars
United States $4.93
Malaysia $1.82
China $2.68
Russia $1.53
South Africa $1.77
India $1.90
Ukraine $1.54
Venezuela $0.66
Source: The Economist
PLAN for YOUR GLOBAL CAREER

• Study foreign
languages.

• Learn about foreign

cultures.

• Take global business

courses.

• Over 90% of companies doing business globally believe

it is important for employees to have international
experience.
What’s the Second Most Valuable Language of
Business Globally?

According to 1,000 Global Executives

1. Spanish 63%
2. Japanese 16%
3. Chinese 11%
4. German 4%
5. All Others 6%

SOURCE: Accountemps Poll

 FUTURE of GLOBAL TRADE
• 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.
 SELF CHECK

Answer the following questions

1. Redland is an extremely efficient producer of
tin. However, its climate and terrain makes it
difficult to produce corn. According to the
theory of comparative advantage, Redand
should

A. produce both tin and corn in order to remain

self-sufficient.
B. watch the global market to see which product is
bringing the highest price.
C. import the resources needed to produce corn.
D. concentrate its production on tin and buy corn
from someone else who is an efficient producer.
E. teach farmers how to grow corn.
2. Last year, the nation of Genovia
imported goods totaling $500 million
and exported goods totaling $386
million. Genovia experienced a(n)

A. unfavorable balance of trade.

B. favorable balance of trade.
C. trade surplus.
D. benefit from membership in a free
trade zone.
E. a problem with freight forwarders.
3. Which of these represent a partnership
between two or more companies to
help each firm build a competitive
market advantage in a foreign
country?

A. Multinational cooperative
B. Shared venture
C. Global franchise
D. Joint Venture
E. Countertrading
4. An example of ______ is when entering
a foreign market, MolsonCoors will
contract with a local firm to brew and
market its product Coors Light.

A. licensing
B. franchising
C. outsourcing
D. foreign subsidiaries
E. countertrading
5. An example of _______ is when Pepsi Cola
has entered into a contract with a South
African beverage business that calls for the
South African firm to produce and market
Pepsi Cola in South Africa. Pepsi will
receive a royalty on each case of soda sold.

A. licensing
B. a joint venture
C. a foreign subsidiary
D. contract manufacturing
E. countertrading
6. What protectionism method advocates
that a nation places a complete ban on
the import or export of certain
products?

A. Tariff
B. Absolute comparative advantage
C. Embargo
D. Import quota
E. Expropriation
7. All the following are correct statements about
the effect of the exchange rate on the value of
the U.S dollar EXCEPT:

A. When the value of the dollar goes down, the

dollar buys less overseas.
B. When the value of the dollar goes down,
imported goods cost more.
C. When the value of the dollar goes up,
balance of trade tends to improve.
D. When the value of the dollar goes up, the
foreign dollar buys less in the U.S.
E. When the value of the dollar goes up, the
dollar buys more overseas.
8. __________ is an attitude that your
own culture is superior to other
cultures.

A. Absolute Comparative Advantage

B. Dumping
C. Offshoring
D. Devaluation
E. Ethnocentricity
9. Which strategy has the least risk for
reaching global markets?

A. Joint Venture
B. Contract Manufacturing
C. Franchising
D. Exporting
E. Licensing
10. What sphere of comparative
advantage does the United States
belong to in the global economy?

A. APEC
B. NAFTA
C. EU
D. CAFTA
E. COMESA
 SELF CHECK ANSWERS
1. D
2. A
3. D
4. A
5. A
6. C
7. C
8. E
9. E
10. B