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Doing Business in

Global Markets

Chapter Three

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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*Profile

• First female foreign trade minister of the United Arab Emirates (UAE).

• Adapts her personal communication processes to match the culture of the people with whom she is interacting.

SHEIKA LUBNA AL-QUASIMIForeign Trade Minister of the UAE

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*The Dynamic Global Market

• Over 90% of companies doing business globally believe it is important for employees to have international experience.

• U.S. organizations (like UPS, the NFL and the NBA) are also expanding abroad.

BUSINESS in the GLOBAL MARKET

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Disney

• Let’s check out how Disney does things overseas.

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*The Dynamic Global Market

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WORLD POPULATION by CONTINENT

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*The Dynamic Global Market

• Importing -- Buying products from another country.

• Exporting -- Selling products to another country.

• The U.S. is the largest importing and the second largest exporting nation in the world.

IMPORTING and EXPORTING

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Source: World Features Syndicate and Interbrand.com.

• U.S. – 51 brands

• Germany – 9 brands

• Japan – 8 brands

• France – 8 brands

• U.K. – 6 brands

• Switzerland – 5 brands

The Dynamic Global MarketWHERE ARE THEY FROM?

Countries of Origin for World’s Most Powerful BrandsLG1

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Source: Forbes, www.forbes.com, March 30, 2009.

• U.S. – 359 billionaires

• Germany – 54 billionaires

• Russia – 32 billionaires

• China – 28 billionaires

• India – 24 billionaires

• U.K. – 25 billionaires

• Canada – 20 billionaires

The Dynamic Global Market

CAN YOU SPARE a DIME?Home Countries for Some of the World’s Billionaires

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*Why Trade With Other Nations?

• 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.

TRADING with OTHER NATIONSLG1

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Source: The Progressive Policy Institute, World Health Organization .

Global trade has led the world in a new direction:

• Literacy rates worldwide have increased from 56% in 1950 to 84% in 2006.

• Life expectancy in less developed areas rose from 40.9 years in 1950 to 70.1 years in 2006.

HOW FREE TRADE BENEFITS the WORLD

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Why Trade With Other Nations?

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*The Theories of Comparative and Absolute 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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COMPARATIVE and ABSOLUTE ADVANTAGE

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*Getting Involved in Global Trade

• Small businesses may be the key in global job growth.

• They make up almost half of the private sector.

• Only 30% of small businesses export.

• By 2018, it’s expected half of small businesses will export.

GOING GLOBAL with a SMALL BUSINESS

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Source: Investor’s Business Daily, www.investors.com, June 30, 2008.

Getting Involved in Global TradeWHERE DO THEY INVEST?

Leading Destinations for Foreign InvestorsLG2

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Source: U.S. Dept. of Treasury, www.treas.gov, January 31, 2009.

Getting Involved in Global TradeWHO DOES the U.S. OWE?

Countries that Own the Most U.S. DebtLG2

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*Importing Goods and Services

• Starbucks CEO, Howard Shultz, found his importing opportunity in Italy. He transformed a coffee shop in Seattle to mimic the European cafes.

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GETTING INVOLVED in GLOBAL TRADE

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*Exporting Goods and Services

• Exporting provides a great boost to the U.S. economy.

• It’s estimated every $1 billion in U.S. exports generate over 20,000 U.S. jobs.

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GETTING INVOLVED in EXPORTING

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• MFG.com is an online exchange for manufacturers and suppliers.

• Growing numbers of Chinese manufacturers began visiting the site.

• MFG staff had to learn about the Chinese business culture.

• China now accounts for 11% of MFG.com’s revenue.

FINDING CRACKS in the GREAT WALL

(Spotlight on Small Business)

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*Measuring Global Trade

• Balance of Trade -- The total value of a nation’s exports compared to its imports measured over time.

• Trade Surplus -- When the value of a country’s exports is more than that of its imports.

• Trade Deficit -- When the value of a country’s exports is less than that of its imports.

HOW to MEASURE GLOBAL TRADELG2

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*Measuring Global Trade

• 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.

BALANCE of PAYMENTS

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*Measuring Global Trade

• 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.

UNFAIR TRADE PRACTICES LG2

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*Strategies for Reaching Global Markets

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

Licensing Exporting FranchisingContract

Manufacturing

International joint ventures and strategic

alliances

Foreign direct

investment

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KEY STRATEGIES for REACHING GLOBAL MARKETS

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*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).

• 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.

LICENSING

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*Exporting

• 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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EXPORT ASSISTANCE CENTERS and EXPORT TRADING CENTERS

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*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.

• Pizza Hut and Dominos learned that pizza topping preferences differ all around the world.

FRANCHISING

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*Franchising

Source: World Features Syndicate.

• Sweet Potato• Honeydew Melon• Corn Crumb Soft Rice Cake• Green Apple• Kiwi Fruit• Mango• Pineapple• Strawberry

TIME to MAKE the DONUTS…Dunkin’ Donuts Flavors in Taiwan

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• McDonald’s has more than 31,000 restaurants in over 118 countries.

• Maintains varying menus around the world due to the different preferences of its customers.

• Responds to challenges by funding research and adding healthier options.

The SUN NEVER SETS on MICKEY D’S

(Reaching Beyond Our Borders)

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*Franchising

Source: McDonalds, www.mcdonalds.com, March 2009.

• 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.

THAT’S at MCDONALD’S?

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*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.

CONTRACT MANUFACTURING

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*International Joint Ventures and Strategic Alliance

• 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.

JOINT VENTURES

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*International Joint Ventures and Strategic Alliance

• Strategic Alliance -- A long-term partnership between two or more companies established to help each company build competitive market advantages.

• Unlike joint ventures, strategic alliances don’t typically share costs, risks, management or profits.

• Strategic alliances provide broad access to markets, capital and technical expertise.

STRATEGIC ALLIANCES

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*Foreign Direct Investment

• Foreign Direct Investment (FDI) -- The buying of permanent property and businesses in foreign nations.

• 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.

FOREIGN DIRECT INVESTMENTLG3

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*Foreign Direct Investment

• 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.

MULTINATIONAL CORPORATIONSLG3

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*Foreign Direct Investment

SOVEREIGN WEALTH FUNDS

• Sovereign Wealth Funds (SWFs) -- Investment funds controlled by governments holding large stakes in foreign companies.

• The size of the funds and the fact that they are government-owned make some fear they might be used for:- Geopolitical objectives.- Gaining control of strategic natural resources.- Obtaining sensitive technologies.- Undermining the management of the companies in

which they invest.

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*Forces Affecting Trading in Global Markets

• Sociocultural

• Economic and Financial

• Legal and Regulatory

• Physical and Environmental

FORCES AFFECTING GLOBAL TRADE

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Activity

• Evaluating Global Expansion

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*Socio-cultural Forces

• 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

CULTURAL DIFFERENCES

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*Socio-culturalForces

• Braniff Airlines’ slogan "Fly in leather” translated in Spanish as "Fly naked.”

• Gerber used their U.S. label – a cute baby – on African products. They found out that labels on African products picture what’s inside the package.

• In Italy, Schweppes Tonic Water was mistaken as Schweppes Toilet Water.

LOST in TRANSLATIONAdvertisements Gone Wrong

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*Socio-culturalForces

READY to TRAVEL ABROAD?Know Your Cultural Differences

• 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 their soul is kept.

• In Brazil, your meeting may not start on time because punctuality isn’t important to the culture.

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*Economic and Financial Forces

• 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.

EXCHANGE RATES

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Handout

• Foreign Etiquette Tips

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*Economic and Financial Forces

• 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.

DEVALUATION and COUNTERTRADING

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*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.

• The Organization for Economic Cooperation and Development (OECD) and Transparency International fight to end corruption and bribery in foreign markets and have had limited success.

LEGAL CONCERNS OVERSEASLG4

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*Physical and 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.

ENVIRONMENTAL FORCES

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*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.

TRADE PROTECTIONISM

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*Trade Protectionism

• Tariffs -- Taxes on imports.

• Two kinds of tariffs:- Protective – Raise the

retail price of imports so domestic goods are competitively priced.

- Revenue – Raise money for governments.

TARIFFS

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*Trade Protectionism

• 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. embargo against Cuba.

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*The World Trade Organization

• General Agreement on Tariffs and Trade -- 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 152 member nations whose purpose is to oversee cross-border trade issues and global business practices.

WORLD TRADE ORGANIZATIONLG5

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*Common 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 and the ASEAN are common markets.

COMMON MARKETS

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*The North American and Central American Free Trade Agreements

• North American Free Trade Agreement -- Ratified in 1994, created a free-trade area among the United States, Canada and Mexico.

• NAFTA’s objectives are:- Eliminate trade barriers and facilitate cross-border

movement of goods and services.- Promote conditions of fair competition.- Increase investment opportunities.- Provide effective protection and enforcement of

intellectual property rights.- Establish a framework for further regional trade

cooperation.- Improve working conditions in North America.

NAFTA

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*The North American and Central American Free Trade Agreements

CAFTA

Central American Free Trade Agreement -- Passed in 2005, created a free-trade zone with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua.

• Free traders hope CAFTA will lead to the creation of a Free Trade Area of the Americas (FTAA).

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*The Future of Global Trade

• China is the largest global consumer of steel, copper, coal and cement and second only to the U.S. in the consumption of oil.

• Multinationals are investing heavily in China.

• India has seen huge growth in information technology, pharmaceuticals and biotechnology.

• Russia is a large oil producing country with many multinationals interested in developing there.

FUTURE of GLOBAL TRADE

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*The Challenge of Offshore Outsourcing

• Outsourcing -- Purchasing goods and services from sources outside a firm rather than providing them within the company.

• 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.

OUTSOURCING

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Source: Investor’s Business Daily, www.ibd.com, December 1, 2008.

The Challenge of Offshore Outsourcing

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*Globalization and Your Future

• Study foreign languages• Learn about foreign cultures• Take global business courses.

PLAN for YOUR GLOBAL CAREERLG6

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Case Study

• Let’s Talk about GAP

Test #1

• Chapter 1, 2, 3 • 100 points total for test. • This is an open-notes test. You can use one page of

notes (8 ½ x 11) hand written on both sides. • You will have your regular class time to complete the

test. • It is 50 questions – Multiple Choice and T/F (2 points

each)• I will also give you information on your business plan

on test day.