3

Chapter

Doing Business in
Global Markets /
International
Business

1
 Why Trade with Other Nations?
• Global trade is big business today and is becoming
increasingly important in today’s world.
• There are several reasons why countries trade with other
countries:
No country can produce all the required products/services
by itself
Other countries will seek for opportunities to trade with
your country
Having natural resources is not enough to become
self-sufficient
Having only technical expertise is also not enough
• Some nations like China, Russia have an abundance of raw
materials but not the technological advancement, whereas
others like Japan, Switzerland have advanced technology but
few natural resources. 2
Russia-Ukraine War: How it might affect you
personally ?

3
Common Forms of Doing
International Business
• Export: Producing the product at home
country and selling it to other countries.
For example: Bangladesh exports jute,
tea, shrimps, ready-made garments etc.

• Import: Buying products from another

country. For example: Bangladesh imports
car, gold, air crafts etc.

4
 Free Trade

• Trade relations enable each nation to produce what

it is most capable of producing and to buy what it
needs from other nations in a mutually beneficial
exchange relationships.
• Free trade is the movement of goods and services
among nations without political or economic trade
barriers.
• Free trade has both advantages and disadvantages,
as shown in the next two slides.

5
 Free Trade
• Advantages of Free Trade:
❑ The global market consists of 6 billion potential
customers of goods and services.
❑ Productivity grows when countries produce goods
and services in which they have a comparative
advantage.
❑ Global competition and less costly imports keep
prices down, so inflation does not hamper economic
growth.
❑ Free trade inspires innovation of new products as
firms stay competitively challenged.
6
 Free Trade
• Disadvantages of Free Trade
❑ Domestic workers can lose their jobs due to increased
imports or shifts in production to the low-wage global
markets.
❑ Workers in high- wage countries may be forced to accept
pay cuts from employers , who can threaten to move their
jobs to lower-cost markets.
❑ Domestic countries can lose their competitive advantage
when competitors build production facilities in low-wage
countries.

7
 Comparative Advantage
▪ The guiding principle that supported the idea of free
trade or free economic exchange is that of the theory of
Comparative Advantage.
▪ The theory of Comparative Advantage states that a
country should sell to other countries those products that
it produces most effectively and efficiently; and buy from
other countries those products that it cannot produce as
efficiently or effectively as the buyer country.
▪ For instance, the United States or Japan being very
technologically advanced nations have a comparative
advantage in producing goods like computer chips,
mobile sets and other software programs; but they do not
have a comparative advantage over products like coffee,
tea which nations like Columbia or India have.
8
 Absolute Advantage
• Absolute advantage is the advantage that
exists when a country has a monopoly on
producing a specific product or is able to
produce it more efficiently than all other
countries.
• For instance, South Africa once had an
absolute advantage in production of
diamonds.

9
 Absolute Advantage
• Simple example of absolute advantage

✔ In this example, Brazil has an absolute advantage in producing

bananas (8 to 1).
✔ The US has an absolute advantage in producing cars (5 to 2)

10
 Measuring Global Trade
• Nations follow two key indicators to measure the effectiveness
of their global trade. The two key indicators are:
❑ Balance of trade which refers to the nation’s ratio of exports
to imports. A favorable balance of trade, occurs when a
country’s exports exceeds that of its imports. This situation is
also known as trade surplus. An unfavorable balance of
trade occurs when a country’s imports exceeds that of its
exports. This situation is known as trade deficit.
❑ Balance of payment- is the difference between money
coming into a country from exports and money leaving the
country from imports plus money flows coming or leaving
into the country from factors as tourism, foreign aid, abroad
education, foreign investment and so on. A favorable
balance of payment occurs when more money flows into
the country than flowing out of the country; and unfavorable
balance of payment occurs when more money flows out of
the country than flowing in the country.
11
 Measuring Global Trade
• Balance of Trade -- The total value of a nation’s exports compared to
its imports measured over time.

• Balance of Payments: It is the difference between money coming

into a country (from exports) and money leaving the country (for
imports) from factors such as tourism, foreign aid, military expenditure
and foreign investment.

• Trade Surplus – Exports > Imports.

• Trade Deficit – Exports < Imports.

• Dumping: Selling products in a foreign country at lower prices than

those charged in the producing country. China and Russia used to
dump steel in United States.
Debtor nation vs. Creditor nation

▪ A debtor nation is a country that owes more

money to other nations than other nations owe to
it.
▪ A creditor nation, on the other hand, is a nation
to whom other nations owe more money than it
owes to other nations.
▪ For example, if Japan loans Sri Lanka $1 million,
Sri Lanka is the debtor nation and Japan is the
creditor nation.
13
 Dumping
▪ In supporting free trade, a country needs to ensure that
global trade is conducted fairly.
▪ To ensure fairness, countries enforce laws to prohibit
unfair practices such as dumping.
▪ Dumping refers to the practice of selling products in a
foreign country at lower prices than those charged in the
producing country.
▪ Firms use the tactic of dumping for the following two
reasons:
– Reduce surplus products in foreign markets
– Gain a foothold in a new market by offering products
for lower prices than domestic competitors do.
▪ For instance, Japan and Russia were accused of
dumping steel in the United States.
14
Strategies for Reaching Global Markets
There are several ways in which an organization can
participate in global trade. The strategies that are used are
as follows:
Exporting
Importing
Licensing
Franchising
Contract Manufacturing
Joint Venture
Strategic Alliance
Multinational Corporation
Foreign Direct Investment (FDI)
Foreign Subsidiary
15
Strategies for Reaching Global Markets
• Exporting – is selling products in another
country.
• Competition that is faced in exporting is very
intense.
• For instance, Bangladeshi garments factory
producer exporting garments to the United
States, and other European nations.
• Importing – is buying products from another
country.

16
Strategies for Reaching Global Markets
• Licensing – Licensing is a global strategy in which a firm (the
licensor) allows a foreign company (the licensee) to produce its
product or use its trademark in exchange for a fee (royalty).
• A company with an interest in licensing needs to send company
representatives to the foreign producer to help set up the
production process. The licensor may also have to assist the
licensee in areas such as distribution, promotion, and consulting.
• Examples are Coca-Cola, Disneyland.
• A licensing agreement can be beneficial for a firm for two
reasons:
– A firm can gain additional revenues from a product that it
would not have generated in its home market.
– Foreign licensees often must purchase start-up supplies,
component materials and other services from the licensor.
– Licensors spend little or no money to produce and market
their products in the foreign market.

17
Strategies for Reaching Global Markets
• Drawbacks for entering into licensing:
– The licensor firm must grant the licensing rights to its
products for an extended period, as long as 20 years or
even more. If a product experiences growth and success
in the foreign market, all the revenues earned belong to
the licensee.
– Also licensing firms actually sells its expertise in a
product area. When a foreign licensee learns the
company’s technology and other product secrets, it may
break the agreement and begin to produce a similar
product of its own; in which case the licensing form not
only loses its trade secrets but its royalty as well.

18
Strategies for Reaching Global Markets
• Franchising – refers to an arrangement whereby
someone with a good idea for a business sells the rights
to use the business name and sell a product or a service
to others in a given territory.
• Examples of franchisors include McDonalds, KFC, Pizza
Hut.
• Franchisors need to be careful to adapt the product or
service to the countries they serve.
• Examples of some failures of franchising agreements
are:
– KFC’s franchising agreement in Hong Kong failed
because people of Hong Kong found it too greasy .
– Pizza Hut entered the German market with the
concept of large pizzas preferred in the US but soon
found that Germans like small individual pizzas.
19
Strategies for Reaching Global Markets
• Contract Manufacturing – refers to a foreign
country’s production of private-label goods to which a
domestic company then attaches its own brand name or
trademark. This practice is also known as outsourcing.
• For instance, Dell Computer contracts with Quanta
Computer of Taiwan to make PCs on which it then puts
the Dell brand name.
• Well-known brand names like Levi-Strauss and Nike also
practice contract manufacturing.
• A company can use contract manufacturing temporarily
to meet an unexpected increase in orders.

20
Strategies for Reaching Global Markets
• International Joint Ventures and Strategic
Alliances – A joint venture is a partnership in which
two or more companies (often from different countries)
join to undertake a major project.
• Companies that participate in joint ventures grow much
faster than their counterparts who do not do so.
• Joint ventures are sometimes mandated by governments
as a condition for foreign firms to do business in their
country. For instance, countries like China allow a
foreign firm gain entry into the country by forming joint
venture with a Chinese firm.
• For instance, Volkswagen and General Motors entered
into joint ventures with Shanghai Automotive Industrial
Corporation – China’s largest domestic car company – to
build cars in China. 21
Strategies for Reaching Global Markets
• The benefits of international joint ventures are:
– Shared technology
– Shared marketing and management expertise
– Entry into a market where foreign companies are
often not allowed unless their goods are produced
locally.
– Shared risk.
• Drawbacks of joint venture –
– One partner can learn the other’s technology and
practices, and then form a company of its own.
– It also allows for less flexibility.
22
Strategies for Reaching Global Markets
• Strategic Alliance – refers to a long-term partnership
between two or more companies established to help
each other build competitive market advantages.
Such alliances can help each other by providing
access to markets, capital and technical expertise.
• The way strategic alliances differ from joint ventures
is that unlike joint ventures, strategic alliances do not
typically share costs, risks, management or profits.
Such alliance will provide broader access to market,
capital, and technical expertise.

The deal between Starbucks and Barnes & Noble is a classic example of a
strategic alliance. Starbucks brews the coffee. Barnes & Noble stocks the
books. Both companies do what they do best while sharing the costs of space
to the benefit of both companies. 23
Strategies for Reaching Global Markets
• Foreign Subsidiaries – A foreign subsidiary is a company
that is owned in a foreign country by another company (called
the parent company). Such a subsidiary would operate much
like a foreign firm with the production, distribution, promotion,
pricing and other business functions under the control of
foreign subsidiary’s management.
• The country where the parent firm is located is called the home
country and the foreign country where the subsidiary is located
is known as the host country.
• The major advantage of a subsidiary is that the company
maintains complete control over any technology or expertise
that it may possess.
• The major drawback is that the company is committing a large
amount of funds and technology within foreign boundaries. If
relations with the host country weaken, the firm’s assets could
be taken over by the foreign government; such a takeover is
known as expropriation (taken over by the foreign
government).
24
Strategies for Reaching Global Markets
• Example of a parent companies having foreign
subsidiaries is Nestle.
• Nestle is an example of a Multinational company.
• A multinational company is an organization that
manufactures and markets products in many
different countries and has multinational stock
ownership and multinational management.
• Examples of multinational corporations are
Wal-Mart, Exxon Mobil, Toyota Motor, Ford Motor.

25
Strategies for Reaching Global Markets
▪ Foreign direct investment (FDI) refers to the
buying of permanent property and businesses in
foreign nations.
▪ High amount of FDI in a nations is not
necessarily a bad sign. The amount of foreign
direct investment in a nation means that other
nations perceive the country as a strong
economic leader.

26
 Factors Affecting Trade in Global
Market
• The major factors that affect trading in
global markets include:
❑ Socio cultural Forces
❑ Economic and Financial Forces
❑ Legal and Regulatory Forces
❑ Physical and Environmental Forces.

27
 Factors Affecting Trade in Global
Market
• Sociocultural forces – When companies involve in
global trade, it is necessary to be aware of the cultural
differences between nations. Different nations have
different ways of conducting business. Companies need
to be sensitive to the culture of the nation it is trading
with.

• Culture refers to the set of values, beliefs, rules held by a

specific group of people.

• For instance, when Coca-Cola packaged their product in

Saudi Arabia with the Saudi flags design, the Arabians
were offended since the Saudi flag contained a passage
from Quran and the Arabians did not want their holy writ
to be thrown away with the packaging.
28
 Factors Affecting Trade in Global
Market
• Economic and Financial Forces- Poor economic conditions
can pose as a challenge to global trade.
• Even though a nation has a huge population, yet if it is not
financially stable then its huge population do not have the
purchasing power and hence are not potential customers.
• We can see this in the example of India versus the United
States. India has a population of over 1 billion and the United
States has a population of 290 million? Which do you think will
have a larger customer group for the product of Coca-Cola?
• In one year, Indians consume only three soft drinks per
person, whereas an American consumes 50 plus gallons per
person.

29
 Factors Affecting Trade in Global
Market
• Economic and Financial Forces - Changes in a nation’s
exchange rates or currency fluctuations have important
implications in global markets. Changes in currency values
can cause many problems globally. Currency valuation
problems are specially prevalent in the developing countries
where financial situation is not stable.
• Due to such currency valuation problems, some developing
nations still practice the oldest forms of trade, also known as
bartering which is the exchange of product for product or
service for service, with no money involved.

• Countertrading is a complex form of trading in which several

countries may be involved, each trading goods for goods or
services for services.

30
 Factors Affecting Trade in Global
Market
• For instance, a developing country like Honduras might want
to purchase some vehicles from an American car company in
exchange for Honduras tea. But the American car company
might not want Honduras tea, instead it might want computer
accessories. So in this situation, the countries find another
country which wants Honduras tea and can also provide them
with computer accessories, say India. Then the three
countries enter into a countertrade agreement, whereby the
American car company trade some vehicles to Honduras, and
Honduras trades tea to India, and India trades computer
accessories to Honduras, who in turn trades it to the American
car company.

31
 Factors Affecting Trade in Global
Market
• Legal and Regulatory Forces – Government laws and
regulations heavily impact business practices.

• No central system of law exists in the global market which

makes it more difficult to conduct business.

• Legal issues that are dealt differently from country to country

include issues such as antitrust laws, labor relations, child
labor, prison labor and so on.

• American businesspeople are required to follow U.S laws

and regulation to conduct business globally. The Foreign
Corrupt Practices Act prohibits American businesspeople to
bribe foreign officials to secure business contract. This
creates competitive disadvantage for the American
entrepreneurs because in some developing countries, bribery
is the only way to secure a business contract.
32
 Factors Affecting Trade in
Global Market
• Physical and Environmental Forces – Physical
and Environmental forces has an important impact
on a company’s ability to conduct businesses in
global markets.

• Technological constraints may make it difficult or at

times impossible to build a large global market. For
instance, the transportation and storage systems in
some developing countries are so bad that
distributions of products such as food is impossible.

33
 Trade Protectionism
• Trade protectionism is the use of government
regulations to limit the import of goods and services.
Supporters of trade protectionism believe that it allows
domestic producers to survive and grow, producing more
jobs.

• In the 17th and 18thcentury businesspeople advocated an

economic principle called mercantilism. The idea of
mercantilism was for a nation to sell more goods to other
nations than other nations bought from it. To make this
idea a success, governments started charging a tariff ,
which is a tax on imports, to make imported goods more
expensive.

34
 Trade Protectionism
▪ Tariff – There are two kinds of tariff:
❑ Protective Tariff
❑ Revenue Tariff
▪ Protective tariffs are designed to raise the price of
imported products so that domestic products are more
competitively priced. These tariffs are meant to save the
domestic industries from foreign competition which in
turn saves jobs.
▪ Revenue tariffs are designed to raise money for the
government. Revenue tariffs are used by governments to
help infant industry compete in global market. Infant
industries consist of new companies in the early stages
of growth.

35
 Trade Protectionism
• Import Quota – An import quota limits the
number of products in certain categories that a
nation can import.
• An embargo is a complete ban on the import or
export of a certain product or stopping all trade
with a particular country. Political disagreements
cause many countries to establish embargoes.

36
 GATT
• General Agreement on Tariffs and Trade
• In 1948, leaders from 23 nations initiated
this forum.
• It supports the reduction of trade
restrictions on goods and services.

37
 WTO
World Trade Organization
Established after the Uruguay Round of
‘GATT’
Headquarter is in Geneva, with 152 member
nations.
WTO is the international organization that
replaced the GATT and was assigned the duty
to mediate trade disputes among nations.

38
 Common Markets
• The Common Market is regional group of
countries that have a common external
tariff, no internal tariffs, and a
coordination of laws to facilitate
exchange; also called a trading bloc.
– The European Union (EU)
– Association of Southeast Asian Nations
(ASEAN)
– NAFTA

39
Common Markets

40