© 2009 South-Western, a division of Cengage Learning 1

Chapter 3: THE WORLD MARKETPLACE

Business without Borders

© 2009 South-Western, a division of Cengage Learning2

LOOKING AHEAD

• Why should today’s managers think globally?

• What opportunities exist in the world economy for businesses?

• Why do nations trade?

• How do we measure trade?

• How do companies reach global markets?

• What are the barriers to international trade?

• What are the benefits and criticisms of the free trade movement?

© 2009 South-Western, a division of Cengage Learning3

With technology and telecommunications booming, and trade barriers falling, the

economic boundaries between nations have

begun to blur.

AN UNPRECEDENTED OPPORTUNITY

TRADITIONAL CAPITALISM

• You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

AN AMERICAN CORPORATION

• You have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

 

A FRENCH CORPORATION

• You have two cows. You go on strike because you want three cows.

 

A JAPANESE CORPORATION

• You have no cows. You create clever cow cartoon images called Cowkimon and market them worldwide.

 © 2009 South-Western, a division of Cengage Learning

4

 A GERMAN CORPORATION

• You have two cows. You reengineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION

• You have two cows, but you don’t know where they are. You break for lunch.

A RUSSIAN CORPORATION

• You have 2 cows. You count them and learn you have 5 cows. You count them again and learn you have 42 cows. You count them again and learn you have 12 cows. You stop counting cows and open another bottle of vodka.

 

© 2009 South-Western, a division of Cengage Learning5

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WORLDWIDE ECONOMIC GROWTH

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GLOBAL TRADE: TAKING MEASURE

• Balance of Trade– Trade Deficit– Trade Surplus

• Balance of Payments– Balance of Payments Deficit– Balance of Payments Surplus

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FREE TRADE: THE MOVEMENT GAINS MOMENTUM

There has been a global move toward free trade – the

unrestricted movement of good and services across

borders.

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MULTINATIONAL FIRMS

Shell Oil

Michelin Tires

Jaguar Automobiles

Nokia Cell Phones

Nestle Quick

Netherlands/England

France

United States

Finland

Switzerland

Columbia Records Japan/Germany

Do you know where the firm that ultimately owns each brand is headquartered?

© 2009 South-Western, a division of Cengage Learning10

GATT AND WORLD TRADE ORGANIZATION (WTO)

• General Agreement on Tariffs & Trade (GATT)– Established in 1948– Now encompasses 125 nations– Slashed tariffs by about 30%

• World Trade Organization (WTO)– Promote International Trade– Settle Trade Disputes

© 2009 South-Western, a division of Cengage Learning11

FREE TRADE

• The World Bank– 184 Member Countries– Reduce World Poverty in Developing World– Influence Global Economy– Provide Financial Assistance

• Low interest loans

• The International Monetary Fund– Support Stable Exchange Rates– Facilitate International Payments– Adopt Economic Policies– Promote Trade

© 2009 South-Western, a division of Cengage Learning12

TRADING BLOCS/COMMON MARKETS

• Groups of Countries promoting the free flow of goods and services

• The North American Free Trade Agreement (NAFTA)– The largest trading bloc– US, Canada, Mexico

• European Union (EU)– The largest common market

© 2009 South-Western, a division of Cengage Learning13

KEY REASONS FOR INTERNATIONAL TRADE

• Access to Factors of Production

• Reduced Economic Risk

• Innovation

• Competitive Advantage

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COMPETITIVE ADVANTAGE

A country has an absolute advantage when

It can produce more of a good than other nations, using the same amount

of resources.

Comparativeadvantage - thebenefit a country

has in a given industry if it can make products at a

lower opportunityCost.

Opportunity cost –The cost of giving up the second-best choice when making a

decision.

Melora

© 2009 South-Western, a division of Cengage Learning15

Typing – better than anyone else in her village- $20 per hour produces 100 pages

Surgery – better than anyone else in her village- $150 per hour

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© 2009 South-Western, a division of Cengage Learning17

STRATEGIES FOR FINDING GLOBAL SUPPLIERS

Foreign Outsourcing/Contract Manufacturing – contracting with

Foreign suppliers to produce products, usually at a fraction of

the domestic cost.

Importing – buying products that have been produced or grown in

foreign nations.

© 2009 South-Western, a division of Cengage Learning18

FOREIGN INVESTMENT RISK

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STRATEGIES FOR REACHING GLOBAL MARKETS

• Licensing– Authority given by domestic firm for rights

to produce/market its product and use trademarks/patents.

• Franchising– Offering businesses in other countries the

right to produce and market products under its operating requirements.

• Direct Investment– Firms acquire businesses or develop new

facilities in foreign countries.

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BARRIERS TO INTERNATIONAL TRADE

• Sociocultural Differences

• Economic Differences

• Political & Legal Differences

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SOCIAL/CULTURAL DIFFERENCES

• Nonverbal Communication• Forms of Address• Attitudes toward punctuality• Religious Celebrations• Business Practice/Gifts

Think beyond the obvious differences.

Social/cultural differences can rapidly undermine business relationships.

© 2009 South-Western, a division of Cengage Learning22

OOPS: TRANSLATION GAFFS

• “It takes a virile man to make a chicken affectionate”– Perdue Farms slogan “It takes a tough man to make a chicken

tender” translation in Mexico.

• Irish Manure Liquor, Silver Dung Rolls Royce? – Several foreign companies have introduced products in

Germany with the word “mist” which roughly translates into “dung” or “manure”

• “Nothing sucks like an Electrolux”– Electrolux, a Swedish maker vacuum cleaners, introduced their

vacuums in the U.S. with a literal translation of their slogan.

What do women want?

• American women want convenience

• Italian women want cleaning strength

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ECONOMIC DIFFERENCES

• Exchange Rates

• Population

• Per Capita Income

• Infrastructure– Transportation– Communication– Energy Finance

Can you profitably provide your product or

service to meet the needs of the market?

© 2009 South-Western, a division of Cengage Learning25

THE MANY NAMES OF MONEY

China

England

European Union

India

Iran

Israel

Japan

Mexico

South Africa

South Korea

Yuan

Pound

Euro

Rupee

Rial

Shekel

Yen

Peso

Rand

Won

Exchange rates as of 9/10/2008 - 8:44:39 AM

CurrencyIn US Dollar (Per one foreign currency unit)

Per US Dollar

Brazilian Real 0.56117 1.78200

Japanese Yen 0.00927 107.84000

Mexican Peso 0.09452 10.57970

Canadian Dollar 0.93197 1.07300

Chinese Yuan 0.14632 6.83450

Euro 1.40331 0.71260

Indian Rupee 0.02206 45.32800

Swiss Franc 0.88051 1.13570

© 2009 South-Western, a division of Cengage Learning26

© 2009 South-Western, a division of Cengage Learning27

EXCHANGE RATES: WHO BENEFITS?

STRONG DOLLAR VS EURO:(Example: $1.00 = 1.20 euros)

WEAK DOLLAR VS. EURO:(Example: $1.00 = .60 euros)

U.S. travelers to Europe European travelers to U.S.

American firms with European operations

European firms with American operations

European exporters American exporters

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POLITICAL & LEGAL DIFFERENCES

• Political regimes differ around the world• Legal Differences

– Lack of Enforcement– Bribery

• Political Climate– Stability– Violence

• Piracy and intellectual property is a problem in several foreign nations

© 2009 South-Western, a division of Cengage Learning29

PROTECTIONISM

Reasons to Create Trade Restrictions

Reasons to Eliminate Trade Restrictions

Protect domestic industry Reduce prices and increase choices for consumers

Protect domestic jobs in key industries

Increase domestic jobs

Retaliate against countries who have engaged in unfair trade

practices

Build exporting opportunities

Pressure other countries Use world resources more efficiently

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TRADE RESTRICTIONS

• Tariffs

• Quotas

• Voluntary Export Restrictions

• Embargo

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THE SLEEPING DRAGON AWAKES

• In one generation, per capita income in China has tripled

• 300 million have been pulled from poverty

• China ranks 3rd in international commerce

• China will play a pivotal role in shaping the world economy

• video

After years closed off from the world, China is experiencing economic growth of approximately 10% per year

• http://www.pbs.org/newshour/bb/asia/jan-june07/china_06-25.html

• Video

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© 2009 South-Western, a division of Cengage Learning33

GLOBAL EMPLOYMENT

““

A new study suggests that 2.3 million service jobs will have moved from the

United States to other countries by 2008, up from 900,000 as of 2003.

© 2009 South-Western, a division of Cengage Learning34

LOOKING BACK

• What barriers and opportunities are fueling the growth of the global economy?

• What are strategies for reaching global markets?

• How do we measure trade?

• Discuss barriers to international trade?

• What are strategies for promoting free trade?

• What are the benefits and criticisms of free trade?

© 2009 South-Western, a division of Cengage Learning35

REVERSE BRAIN DRAIN

• Many talented immigrants are moving home to take advantage of new economic opportunities.

• US companies can cut costs by sourcing employees from overseas.

• But is America losing potential innovators such as Sergey Brin, founder of Google?