CHAPTER 3

Doing
Business in
Global
Markets

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

1. Discuss the importance of the global market

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.

4. Evaluate the forces that affect trading in global markets.

5. Discuss the changing landscape of the global market

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 3.1. BUSINESS in the LO 3-1

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 globalisation of business
• Infrastructures have been developed
• Trade barriers reduced
• Global market windows have opened
• Competition has intensified
• A number of companies well-known to us
are foreign owned
• A number of well-known companies
derive more than half of their revenues
from global operations
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 LO 3-1
IMPORTING and EXPORTING

• Importing -- Buying products

from another country.

• Exporting -- Selling products to

another country.

• competition among exporting nations

is intense. The United States is the
largest importing nation in the world
and is the third-largest exporting
nation, behind China and Germany.
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 LO 3-1
TRADING with OTHER NATIONS

• No nation, not even a technologically advanced one

like the United States, can produce all the products
its people want and need.

• 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. 3-6
 3.2. Globalisation
Can be a Threat and/or Opportunity?
Managing in a shrinking world is a real challenge
for many (most) managers.

“No company, whether it is the largest in the

country or a small suburban service company,
can be completely immune to the influence
of global competition.”(Karpin 1995)

But, don’t forget, it can be an opportunity too!

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 LO 3-1
PROS and CONS of FREE TRADE

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 TEST PREP

• What are two of the main arguments favoring the

expansion of businesses into global markets?

• Today, over 90% of companies doing business

globally believe it’s important for their employees
to have experience working in other countries.
• The global market is huge. There are over 7.1
billion potential customers in the 194 countries
that make up the global market.

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2. The theories of comparative and
absolute advantage

• Comparative advantage theory- a country should sell

to others the goods they produce the most effectively
and efficiently (U.S. has comparative advantage in
producing software development and engineering
services) and buy from others what the country can’t
produce as efficiently and effectively
• Absolute advantage- when a country can produce a
specific product more efficiently than all other
countries (global competition cause absolute
advantage to fade)

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3.3. KEY STRATEGIES for REACHING LO 3-3

GLOBAL MARKETS

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

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

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 LO 3-3
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).
• Examples: coca cola, disneyland parks,..

• 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.
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 LO 3-3
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).

• AstraZeneca: pledged the vaccine

would cost just a 3 - 4 USD per
dose and be sold without fee
• Pfizer’s: $18.40-$19.50 per dose.
• Moderna (United States): $37.
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 3.2. Getting involved in global trade

Importing Goods
and Services

Exporting Goods
and Services

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 3.2. Getting involved in global trade
Importing:
Take the examples Laptops, Mobile Phones, and Computers: Vietnam
of importing and imports a significant amount of electronic products,
primarily from China, South Korea, and Japan.
exporting goods Medicines and Health Products: Vietnam imports
and services in pharmaceutical products to meet healthcare demands,
Vietnam? especially from countries like India, the USA, and
EU nations.

Exporting:
Clothing and Apparel: One of the largest export sectors,
with products shipped to the USA, EU, and Japan.
Footwear: Vietnam is a major exporter of shoes and related
products.
Coffee: Vietnam is one of the world's largest coffee exporters
.Rice: A staple food product, with significant exports to
countries like the Philippines, China, and African nations.
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 LO 3-3
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.
• Yum! Brands, home of KFC, Taco Bell and Pizza Hut,
learned that food preferences differ all around the world.
Example of Franchising
McDonald's
•Franchisor: McDonald's Corporation
•Franchisee: An individual or group who purchases the rights
to open and operate a McDonald's restaurant.
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 What is franchise business
• https://www.youtube.com/watch?v=8UsT8OzfiVI
• https://www.youtube.com/watch?v=6fidL51oakg
• Questions
1. Who is Fíanchisoí and Fíanchisee
Franchisor:
Definition: The franchisor is the original business owner or the company that
owns the overarching brand, trademark, and business model.
Franchisee:
Definition: The franchisee is an individual or entity that purchases the right
to operate a business under the franchisor's brand and business model.

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What do franchise provide? And receive? Franchisors
Provide:
1.Brand and Trademark, Business Model, Training and
Support, Marketing, Product and Service Standards
2. Franchisors Receive: Franchise Fees, Royalties,
Advertising Fees, Compliance with Standards
What are the Advantages And Disadvantages Of A
franchise?
1. Advantages for the Franchisee:
Established Brand, Proven Business Model, Training and
Support, Marketing Assistance, Economies of Scale
2. Disadvantages for the Franchisee:
Initial and Ongoing Costs, Limited Flexibility,
Dependence on Franchisor, Contractual Obligations

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 LO 3-3
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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 LO 3-3
JOINT VENTURES

• 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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 LO 3-3
STRATEGIC ALLIANCES

• Strategic Alliance -- A long-term partnership

between two or more companies established to help
each company build competitive market advantages.

• They don’t typically

share costs, risks,
management or profits.

• Strategic alliances
provide broad access to
markets, capital and
technical expertise.
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 LO 3-3
FOREIGN DIRECT INVESTMENT

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

permanent property and businesses in foreign nations.
Ex: Swiss-based Nestle has many foreign subsidiaries

• 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. 3-22
 LO 3-3
MULTINATIONAL CORPORATIONS

• Multinational Corporation -- A company that

manufactures and markets products in many different
countries and has multinational stock ownership and
management. Ex: Walmart, Nestle, Toyota motor,
apple,…

• 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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 TEST PREP

• 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?
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3.4. Forces affecting trading in global
markets

Physical and
Sociocultural forces environmental
forces

Legal and regulatory

Economic and
forces
financial
forces

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 LO 3-4
CULTURAL DIFFERENCES

• 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

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 LO 3-4
EXCHANGE RATES

• 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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 DEVALUATION and LO 3-4

COUNTERTRADING

• 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.
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 LO 3-4
LEGAL and REGULATORY
FORCES
• 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.
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 LO 3-4
ENVIRONMENTAL FORCES

• 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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 TEST PREP

• 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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 LO 3-5
TRADE PROTECTIONISM

• 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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 LO 3-5
TARIFFS

• 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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 LO 3-5
IMPORT QUOTAS and EMBARGOS

• 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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 LO 3-5
WORLD TRADE ORGANIZATION

• 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.

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 COMMON LO 3-5

MARKETS

• 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.

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 LO 3-5
NAFTA and CAFTA

• 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.

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 LO 3-5
NAFTA OBJECTIVES

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.
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 NEW FREE LO 3-5

TRADE AGREEMENTS

• 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.

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 TEST PREP

• 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?

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 LO 3-6
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.
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 LO 3-6
OUTSOURCING

• 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.
• With the growth of global
markets, companies have
been shifting to offshore
outsourcing – outsourcing
with other countries.
Photo Credit: Vitor Lima

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 LO 3-6
OFFSHORE OUTSOURCING

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 LO 3-6
PLAN for YOUR GLOBAL CAREER

• Study foreign
languages.

• Learn about
foreign cultures.

• Take global
business courses.

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 MAKING YOUR OPERATION
YOUR VACATION

• 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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 TEST PREP

• 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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1. What are the opportunities and
threats of global trade to business
in Vietnam today?
2. What do you think
about the future of global trade?

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 GROUP WORK 0.2

GLOBAL TRADE IN
VIETNAM:
top 10 export products, top 10
imported products, …
Why we import?

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