Chapter 03

Doing
Business in
Global
Markets

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Three
LEARNING GOALS

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.

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Chapter Three
LEARNING GOALS

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.

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Profile
YANG LAN
Co-Founder and Chair of Sun Media Group

• China has the world’s largest

media market, but much
remains controlled by the state.
• Lan attracts 200 million daily
viewers and has interviewed
some of the world’s most
famous people.
• Lan used her media clout to
create a media empire, despite
struggles.
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Chapter Three
NAME that COMPANY

We franchise 37,000 of our KFC, Taco Bell and

Pizza Hut restaurants in 109 countries around
the world. We found in Japan that a favorite
pizza enjoyed by our patrons was topped with
squid and sweet mayonnaise. In China it’s a
must to serve a “dragon twister” with our
chicken.

Name that company!

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The Dynamic
Global Market BUSINESS in the
LG1
GLOBAL MARKET

• 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.
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The Dynamic
Global Market WORLD POPULATION
LG1 by CONTINENT

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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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The Dynamic
Global Market PLEASURE DOING BUSINESS
Best Countries for Business
LG1

Source: Forbes, September 27, 2010.

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The Dynamic
Global Market CAN YOU SPARE a DIME?
Home Countries for Some of the World’s Billionaires
LG1

• U.S. – 412 billionaires

• China – 115 billionaires
• Russia – 101 billionaires
• India – 55 billionaires
• Germany – 52 billionaires
• U.K. – 32 billionaires
• Canada – 22 billionaires

Source: Forbes, www.forbes.com, June 2011.

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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 EXPORTS
LG1 AFFECT the GDP

Source: Bloomberg Businessweek, November 22, 2011.

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Why Trade With
Other Nations? HOW EXPORTS
LG1 AFFECT the GDP

Source: Bloomberg Businessweek, November 22, 2011.

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Why Trade With
Other Nations? HOW EXPORTS
LG1 AFFECT the GDP

Source: Bloomberg Businessweek, November 22, 2011.

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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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Getting Involved
in Global Trade GOING GLOBAL with a
LG2
SMALL BUSINESS
• 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.
• President Obama
wants small
businesses to help
double exports by
2015.

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Getting Involved
in Global Trade WHOM DOES the U.S. OWE?
Countries that Own the Most U.S. Debt
LG2

Source: HuffPost Business, March 2, 2011.

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 A SMALL BUSINESS
with a BIG VISION
(Spotlight on Small Business)

• Jordan Kassalow visited Mexico and saw how the

lack of eyeglasses affected the local workers.
• He founded VisionSpring, part charity and part
franchisor, with a partner.
• VisionSpring employs mostly women needing
additional income. They buy glasses from
VisionSpring and then sell them to locals.
• This gives eyesight to those who need it and
stimulates the local economy.
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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.

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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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Progress
Assessment
PROGRESS ASSESSMENT

• What are two of the main arguments favoring

the expansion of U.S. businesses into global
markets?
• What’s comparative advantage, and what are
some examples of this concept at work in global
markets?
• How are a nation’s balance of trade and balance
of payments determined?
• What’s meant by dumping in global trade?
3-25
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

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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
• Strawberry
Photo Courtesy of: Dennis Yang

• 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.

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Contract
Manufacturing CONTRACT MANUFACTURING

3-33
International Joint
Ventures and
Strategic Alliances JOINT VENTURES
LG3

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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.

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Foreign Direct
Investment FOREIGN DIRECT INVESTMENT
LG3

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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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Foreign Direct
Investment SOVEREIGN WEALTH FUNDS
LG3

3-38
Progress
Assessment PROGRESS ASSESSMENT

• 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’s the key difference between a joint venture
and a strategic alliance?
• What makes a company a multinational
corporation?
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Forces Affecting
Trading in Global
Markets
LG4

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Socio-cultural
Forces CULTURAL DIFFERENCES
LG4

3-41
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.”

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Socio-cultural
Forces READY to TRAVEL ABROAD?
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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Socio-cultural
Forces DO as the GERMANS…
How to Not Embarrass Yourself in Germany
LG4

• 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.

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Economic and
Financial Forces EXCHANGE RATES
LG4

3-45
Economic and
Financial Forces DEVALUATION and
LG4
COUNTERTRADING

3-46
Legal and
Regulatory
Forces LEGAL CONCERNS OVERSEAS
LG4

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Physical and
Environmental
Forces
ENVIRONMENTAL FORCES
LG4

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Progress
Assessment
PROGRESS ASSESSMENT

• 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?

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Trade
Protectionism TRADE PROTECTIONISM
LG5

3-50
Trade
Protectionism TARIFFS
LG5

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Trade
Protectionism
IMPORT QUOTAS and EMBARGOS
LG5

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The World Trade
Organization
WORLD TRADE ORGANIZATION
LG5

3-53
Common
Markets COMMON MARKETS
LG5

3-54
Common
Markets EU MEMBERS
LG5

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The North
American and
Central American
Free Trade
Agreements
NAFTA
LG5

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The North
American and
Central American
Free Trade CAFTA
Agreements
LG5

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The North
American and
Central American
Free Trade NEW FREE
Agreements
LG5 TRADE AGREEMENTS

3-58
Progress
Assessment
PROGRESS ASSESSMENT

• What are the advantages and disadvantages of

trade protectionism and of tariffs?

• What’s the primary purpose of the WTO?

• What’s the key objective of a common market like

the EU?

• Which three nations comprise NAFTA?

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The Future of
Global Trade FUTURE of GLOBAL TRADE
LG6

3-60
The Challenge
of Offshore
Outsourcing OUTSOURCING
LG6

Photo Courtesy of: Vitor Lima

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 SEE the SIGHTS,
MEET the DOCTORS
(Making Ethical Decisions)

• 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?
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Globalization
and Your Future

LG6

3-63
Progress
Assessment
PROGRESS ASSESSMENT

• 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?

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