apter
Competing in Global
Markets
Explain how international trade
organizations and economic
Explain international business and communities reduce barriers to
1 why nations trade. international trade.
Discuss types of advantage in Compare the different levels of
international trade. involvement used by
businesses when entering global
3 Describe measurements of
markets.
international trade and exchange 7 Distinguish between a
rates.
global business strategy
Identify the major barriers that
and a multidomestic
confront global businesses. business strategy.
Exports Domestically prodt1ced goods a11d services sold in 1narkets i11
otl1er cou11tries.
Imports Foreign-1nade prodt1cts a11d services pt1rcl1ased by domestic
co11su1ners.
WHY NATIONS TRADE
''They Said
• Boosts eco11omic gro,vtl1by providi11g access to
It''nation was ever
"No
ne,v 1narkets a11d needed resources. ruined by trade."
-Beniamin Franklin
• More efficie11tprodt1ctio11syste1ns.
(1706-1790)
• Less relia11ce 011 eco11omies of ho1ne 11atio11s. American statesman
and philosopher
International Sources of Factors of Production
• Decisio11s to operate abroad depe11d 011 availability, price, a11d quality of
• Labor
• Natl1ral resources
• Capital
• E11trepre11el1rsl1ip
• Allows a co1npa11y to spread risk throl1ghol1t 11ations i11 differe11t stages of
tl1e bl1siness cycle or develop1ne11t.
Size of the International Marketplace
• World pop11latio11 = 7 billion
• 011e i11 five people live i11 relativelyvvell-developed -
-- co1111tries.
• Sl1are orf o r l d ' s pop11latio11 i11less-developed
co1111tries will grow in co1ni11g years.
• Pop11latio11 size is no g11ara11tee of prosperity.
• Tho11gh developi11g natio11s generally l1ave lovver per capita i11come,
1na11y l1ave stro11g GDP grovvi11 rates a11d tl1eir l1uge pop11latio11s
ca11 be lucrative1narkets.
Absolute and Comparative Advantage
• Absolute advantage Cou11try can1nai11tai11 a 1no11opoly or produce at a lovver
cost tha11a11y co1npetitor.
• Exa1nple: Cl1i11a 's do1ni11atio11 of silk productio11 for ce11tl1ries.
• Rare tl1ese days, 1nostly tied to cli1nate adva11tages for grovvi11g
ce1tai11crops.
• Coniparative ctdvantage Cou11try ca11 supply a prodl1ct more efficie11tly and
at lower cost tha11 it ca11Sllpply otl1er goods, co1npared with otl1er
cou11tries.
•Exa1nple: India's combinatio11of a l1igl1ly edl1cated 1orkforce a11d low
wage scale.
MEASURING TRADE BETWEEN
NATIONS
Balance of trade Differe11ce betvveen a 11atio11's i1npo1is and expo1ts.
Balance of payments Overall flow of 1no11ey into or out of a cou11try.
Major U.S. Exports and Imports
• U.S. leads world, expo1is a11d i1npo1ts a1ml1a1ly total $3 trillio11.
• U.S. i1npo1is 1nore goods tl1an expo1is; expo1is 1nore services tl1an
i1npo1is.
Exchange Rates
Exchange rate Value of one 11atio11's cm1·ency relative to the cl111·e11cies of
otl1er 11ations.
• Values fll1ctl1ate, or "float," depe11di11g 011 Sllpply and de1na11d for eacl1cl111·e11cy
i11 tl1e inte111atio11al1narket.
• Natio11al gove1111nents deliberately infll1e11ce excl1ange rates
• Busi11ess transactio11s llSllally condl1cted in Cl111·e11cy of tl1e regio11 wl1ere
they l1appen.
• Rates can ql1ickly create or vvipe Ollt competitive advantage.
• Hard currencies Cl111·e11cies tl1at o ri1ers ca11easily co11ve1t into otl1er
Cl111·e11cies.
• Foreig11 Cl111·ency 1narket is vvorld's biggest, witl1 daily vollnne of $1.5
trillio11, 50
ti1nes tl1e size of all equity1narkets pllt togetl1er.
BARRIERS TO INTERNATIONAL
TRADE
Social and Cultural Differences
Language Potential proble1ns incll1de 1nistra11slation,
i11appropriate1nessaging, lack of l111derstandi11g of local cl1sto1ns a11d
differe11ces i11 taste.
Values and Religious Attitudes Differing values about bl1siness efficie11cy,
e1nployme11t levels, impo1ta11ce of regional differences, a11d religious practices,
l1olidays, and values about issl1es sucl1 as i11terest-bearingloa11s.
Economic Differences
Infrastructure Basic syste1ns of co1n1nu11ication, transpo1iatio11,energy facilities,
and fi11a11cial syste1ns.
Currency Conversion and Shifts Fluct11ating values can 1nake prici11g i11
local c1111·e11cies difficult a11d affect decisions abo11t 1narket desirability and
invest1nent oppo1i1111ities.
Political and Legal Differences
Political Climate Stability is a key consideration.
Legal Environment Three di1nensions: U.S. law, i11te111atio11al reg1ilatio11s, laws
of tl1e co11ntries wl1ere tl1ey plan to trade. Co11uptio11 ca11be a11i1npo1ia11t
iss11e.
International Regulations Friendship, conimerce, and navigation
trectties betwee11 U.S. and otl1er 11atio11s.
Types of Trade Restrictions
Tariffs Taxes, sl1rcl1arges, or dl1ties 011 foreign prodl1cts.
• Revenue tariffs ge11erate i11come for the gove1111ne11t.
•Protective tariffs raise prices of i1npo1ied goods to level the playi11g field
for do1nestic co1npetitors.
Nontariff Barriers Also called administrative trade barriers
•Quotas limit the amol1nt of a prodl1ct tl1at ca11 be i1npo1ted over a
specified ti1ne period.
•A11 embargo i1nposes a total ba11 011 i1npo1ti11g a specified product or
all trading witl1 a pa1ticl1lar coln1try.
•Exchange controls tlu·ol1gl1 ce11tral ba11ks or gove11unent
agencies regulate tl1e bl1yi11g a11d selli11g of cln1·e11cy to shape
foreig11 excl1ange in accordance witl111atio11al policy.
REDUCING BARRIERS TO
INTERNATIONAL TRADE
Organizations Promoting International Trade
• General Agreement on Tariffs and Trade (G.t\.TT) sponsored 11egotiatio11s to
reduce vvorldvvide barriers to trade.
• Fol1nded 1947
•Urugl1ay Rol1nd of negotiatio11s Cllt average tariffs by one-tl1ird, or
$700 billio11.
• Led to tl1e establislunent of tl1e World Trade Organization.
World Trade Organization r,.,1011itors GAIT agree1nents.
• 1491ne1nber cou11tries
• Began 1no11itori11g GAIT agree1nents in 1995
World Bank Le11ds 1no11ey to less-developed and developi11g cou11tries.
• Fl1nds projects tl1at build or expand infrastructl1re.
• Provides assistance a11d advice.
International Monetary FundPro1notes trade tlu·ougl1 fi11ancial
cooperatio11.
• Makes sl101t-te11n loa11s to me1nber11atio11s to meet expenses.
• Operates as le11der of last reso1t for trot1bled 11atio11s.
International Economic Communities
• Reduce trade ba11·iers and pro1note regio11al eco1101nic cooperatio11.
•Free-trc1de arec1 Me1nbers trade freely a1no11g selves without tariffs or trade
restrictio11s.
•Custonis union Establisl1es a l111ifo11n tariff structl1re for 1ne1nbers' trade
vvitl1 1101nnembers.
• Coninion nictrket Me1nbers bri11g all trade rules i11to agree1ne11t.
NAFTA (1994)
• \Vorld's largest free-trade zo11e: U11ited States, Ca11ada, Mexico.
• Combi11ed populatio11: 435 million
• Total GDP: 11early $14 trillio11
• U.S. a11d Ca11ada are eacl1other's biggest trading pa1i11ers.
CAFTA (2005)
• Free-trade zo11e a1nong U11ited States, Costa Rica, the Do1ninica11 Republic, El
Salvador, Gl1atemala, Hondl1ras, and Nicaragl1a.
• Total GDP: 11early $14 trillio11
• $33 billion traded a1u1l1ally betvveen U.S. a11d these col1ntries.
European Union
• Best-kt1owi1exa1nple of a co1n1no111narket.
• Co1nbi11ed population: 450 1nillio11people in 25 coln1tries
• Total GDP: $12 trillio11
• Goals i11clude pro1noti11g ec.011omic a11d social progress,
i11troduci11g El1ropean citizensl1ip as co1nple1nent to11ational
citizensl1ip, a11d givi11g EU a sig11ifica11t role i11i11te111atio11al
affairs.
GOING GLOBAL
• Three key decisio11s for companies co11sideri11g goi11g global:
• \Vl1at foreig111narket(s) vvill tl1e co1npany enter?
• \Vhat expe11ditures are req11ired to e11ter a ne'A' 1narket?
• \Vhat is tl1e best vvay to orga11ize overseas operatio11s?
Levels of Involvement
Importers and Exporters Most basic level of i11te111atio11al i11volvement, with
tl1e least risk a11d co11trol.
Countertrade Pay1nents 1nade i11 the fo11n of local prod11cts, not c1111·ency.
Contractual Agreements Ofte11 come after a compa11y l1as so1ne experie11ce
i11 inte111atio11alsales. I11cll1de franchisi11g, foreig11licensing, a11d
Sl1bcontracti11g.
Franchising Co11tractl1al agree1ne11t in wl1icl1 a ,vl1olesaler or a retailer gains
tl1e rigl1t to sell the fra11cl1isors' products ltnder tl1at co1npa11ies brand 11a1ne
i11 exchange for agreei11g to related operati11g requireme11ts.
Offshoring Relocatio11of busi11ess processes to lovver-cost locatio11overseas.
International Direct Investment I11cll1des establislune11t of 1na11l1factl1ri11g
facilities, opening of an overseas division, a11d acql1isition of a11existi11g
fi11n i11 tl1e l1ost col111try.
•Joint ventures Allovv co1npanies to sl1are risks, costs, profits, a11d
1na11age1ne11t respo11sibilitywith 011e or 1nore host col111try
11atio11als.
From Multinational Corporation to Global
Business
Multinational corporation (MNC) At1 orga11izatio11,vith sig11ifica11t
foreig11
operatio11s and 1narketi11g activities ot1tside its ho1ne o'
2::
cot111try. C
D
The World'$ Leoding Companie$ (Based on a Combined Ranking for Soles, Profits, A=ts, and .Morl<et
Value)
Rank and Company Busnou C:0..nlTy of Origin
1. Citigroup Banking United Slat••
2. GeMrol Eloctrlc Conglom11<alo United Stale$
3. Bonk ol Amerlco Banking Uniled Slates
4. Amoricon lnlomotlonol Group Insurance United Slatos
5. HSSC Group Banking Unllod
Kingdom
6. Exxon Mobil 011and gas United Slatos
7 . Royol Dulch/Sholl Group 011and gas Netherlands
8. BP (Brittsh Polroloum) Oil and gas Unilod
Kingdom
9. JPMorgan Choso financialSll<vicos United SlatO$
I 0. USS"Tho World'$ Leading
Sour<e: financialServices
Forb . Aj)ril 18, 2005, pp. Swllzarland
Componios; I6411.
DEVELOPING A STRATEGY FOR
INTERNATIONAL BUSINESS
Global Business Strategies
• Fi11n sells sa1ne product i11 esse11tially the sa1ne 1nam1er tlu·ol1gl1ol1t the world.
• \Vorks ,vell for products vvith 11early u11iversal appeal and lllXltry ite1ns.
Multidomestic Business Strategies
• Fi11n develops prodl1cts a11d 1narketi11g strategies tl1at appeal to Cl1sto1ns,
tastes, and buyi11g habits of pa1ticular national markets.
•Exa1nple: Spinach, egg, and to1nato soup 011 the1ne11l1 i11
KFC's menll in Chi11a.
