Chapter 03

Doing
Business in
Global
Markets

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
The Dynamic
Global Market
IMPORTING and EXPORTING
LG1

• Importing -- Buying products

from another country.

• Exporting -- Selling products

to another country.

• The U.S. is the largest

importing and the third
largest exporting nation in the
world.

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Why Trade With
Other Nations?
TRADING with OTHER NATIONS
LG1

• 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.

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Why Trade With
Other Nations? HOW FREE TRADE
LG1 BENEFITS the WORLD

Global trade has led the world in a new direction:

• Literacy rates worldwide have increased from
56% in 1950 to 89% in 2011.
• Life expectancy in less developed areas rose
from 40.9 years in 1950 to 69 years in 2011.

Source: The World Bank, June 2011.

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The Theories of
Comparative and
Absolute Advantage COMPARATIVE and ABSOLUTE
LG1 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.

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Importing Goods
and Services GETTING INVOLVED in
LG2 IMPORTING

• 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.
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Exporting Goods
and Services GETTING INVOLVED in
LG2 EXPORTING

• 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.

3-7
Measuring
Global Trade
HOW to MEASURE GLOBAL TRADE
LG2

• 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.

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Measuring
Global Trade BALANCE of PAYMENTS
LG2

• 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.

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Measuring
Global Trade
UNFAIR TRADE PRACTICES
LG2

• 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.

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Strategies for
Reaching Global
Markets KEY STRATEGIES for REACHING
LG3 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

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Licensing
LICENSING
LG3

• 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.

3-12
Exporting
EXPORT ASSISTANCE CENTERS
LG3 and EXPORT TRADING CENTERS

• 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.
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Franchising
FRANCHISING
LG3

• 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.
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Franchising
TIME to MAKE the DONUTS…
Dunkin’ Donuts Flavors in Taiwan
LG3

• Sweet Potato
• Honeydew Melon
• Green Apple
• Kiwi Fruit
• Mango
• Pineapple
•
Photo Courtesy of: Dennis Yang
Strawberry
• Corn Crumb Soft Rice Cake
Source: World Features Syndicate.

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 GOLDEN ARCHES GLOWING
ACROSS the GLOBE
(Reaching Beyond Our Borders)
• McDonald’s has more than 32,000 restaurants in
over 117 countries.
• Maintains varying menus around the world due to
the different preferences of its customers.
• Attracts top-level college
graduates to be trained
for management spots.
• Only 8 of every 1,000
applicants actually
makes it into the
program!
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Franchising
THAT’S at MCDONALD’S?
LG3

• 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.

Source: McDonalds, www.mcdonalds.com, June 2011.

3-17
Contract
Manufacturing 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.
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International Joint
Ventures and
Strategic Alliances JOINT VENTURES
LG3

• 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.

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International Joint
Ventures and
Strategic Alliances STRATEGIC ALLIANCES
LG3

• Strategic Alliance -- A long-term partnership

between two or more companies established to help
each company build competitive market advantages.
• Strategic alliances
don’t typically share
costs, risks,
management or profits.
• Strategic alliances
provide broad access
to markets, capital and
technical expertise.
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Foreign Direct
Investment FOREIGN DIRECT INVESTMENT
LG3

• 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.
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Foreign Direct
Investment MULTINATIONAL CORPORATIONS
LG3

• 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.

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Forces Affecting
Trading in Global
Markets
FORCES AFFECTING
LG4 GLOBAL TRADE

• Sociocultural

• Economic and
Financial

• Legal and
Regulatory

• Physical and
Environmental

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Socio-cultural
Forces CULTURAL DIFFERENCES
LG4

• 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

3-24
Socio-
cultural
Forces
LOST in TRANSLATION
Advertisements Gone Wrong
LG4

• Braniff Airlines’ slogan "Fly in leather”

translated in Spanish as "Fly naked.”
• Siri, Apple’s new digital assistant on iPhone 4S,
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.”

3-25
Socio-
cultural READY to TRAVEL ABROAD?
Forces
Know Your Cultural Differences
LG4

• 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.

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Economic and
Financial Forces EXCHANGE RATES
LG4

• 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.
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Legal and
Regulatory
Forces LEGAL CONCERNS OVERSEAS
LG4

• There’s no global system of laws.

• Laws may be inconsistent.

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

conducting global business.

• The Organization for Economic Cooperation and

Development (OECD) and Transparency
International fight to end corruption and bribery
in foreign markets and have had limited
success.
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Physical and
Environmental
Forces
ENVIRONMENTAL FORCES
LG4

• 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.
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Trade
Protectionism TRADE PROTECTIONISM
LG5

• 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.
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Trade
Protectionism TARIFFS
LG5

• 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.
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Trade
Protectionism
IMPORT QUOTAS and EMBARGOS
LG5

• 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.

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