Chapter 03

Doing
Business in
Global
Markets

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Three
LEARNING GOALS

1. Discuss the importance of the global market and

the roles of comparative advantage and absolute
advantage in global trade.

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.

3-2
Chapter Three
LEARNING GOALS

4. Evaluate the forces that affect trading in global

markets.

5. Debate the advantages and disadvantages of trade

protectionism.

6. Discuss the changing landscape of the global

market and the issue of offshore outsourcing.

3-3
Profile
YANG LAN
Co-Founder and Chair of Sun Media Group

• China has the world’s largest

media market, but much
remains controlled by the state.
• Lan attracts 200 million daily
viewers and has interviewed
some of the world’s most
famous people.
• Lan used her media clout to
create a media empire, despite
struggles.
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Chapter Three
NAME that COMPANY

We franchise 37,000 of our KFC, Taco Bell and

Pizza Hut restaurants in 109 countries around
the world. We found in Japan that a favorite
pizza enjoyed by our patrons was topped with
squid and sweet mayonnaise. In China it’s a
must to serve a “dragon twister” with our
chicken.

Name that company!

3-5
The Dynamic
Global Market BUSINESS in the
LG1
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 Dynamic
Global Market WORLD POPULATION
LG1 by CONTINENT

3-7
The Dynamic
Global Market
IMPORTING and EXPORTING
LG1

• Importing -- Buying products

from another country.

• Exporting -- Selling products

to another country.

• The U.S. is the largest

importing and the third
largest exporting nation in the
world.

3-8
The Dynamic
Global Market PLEASURE DOING BUSINESS
Best Countries for Business
LG1

2010 Rank Country 2009 Rank

1 Denmark 1
2 Hong Kong 9
3 New Zealand 5
4 Canada 3
5 Singapore 4
6 Ireland 14
7 Sweden 7
8 Norway 10
9 United States 2
10 United Kingdom 6

Source: Forbes, September 27, 2010.

3-9
The Dynamic
Global Market CAN YOU SPARE a DIME?
Home Countries for Some of the World’s Billionaires
LG1

• U.S. – 412 billionaires

• China – 115 billionaires
• Russia – 101 billionaires
• India – 55 billionaires
• Germany – 52 billionaires
• U.K. – 32 billionaires
• Canada – 22 billionaires

Source: Forbes, www.forbes.com, June 2011.

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Why Trade With
Other Nations?
TRADING with OTHER NATIONS
LG1

• 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.

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Why Trade With
Other Nations? HOW EXPORTS
LG1 AFFECT the GDP

Source: Bloomberg Businessweek, November 22, 2011.

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Why Trade With
Other Nations? HOW EXPORTS
LG1 AFFECT the GDP

Source: Bloomberg Businessweek, November 22, 2011.

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Why Trade With
Other Nations? HOW EXPORTS
LG1 AFFECT the GDP

Source: Bloomberg Businessweek, November 22, 2011.

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Why Trade With
Other Nations? HOW FREE TRADE
LG1 BENEFITS the WORLD

Global trade has led the world in a new direction:

• Literacy rates worldwide have increased from
56% in 1950 to 89% in 2011.
• Life expectancy in less developed areas rose
from 40.9 years in 1950 to 69 years in 2011.

Source: The World Bank, June 2011.

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The Theories of
Comparative and
Absolute Advantage COMPARATIVE and ABSOLUTE
LG1 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.

3-16
Getting Involved
in Global Trade GOING GLOBAL with a
LG2
SMALL BUSINESS

• Small businesses may be the key in global job

growth.
• Only 1% of U.S. small businesses export, yet
they account for 30% of total U.S. exports.
• President Obama
wants small
businesses to help
double exports by
2015.

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Getting Involved
in Global Trade WHOM DOES the U.S. OWE?
Countries that Own the Most U.S. Debt
LG2

Source: HuffPost Business, March 2, 2011.

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 A SMALL BUSINESS
with a BIG VISION
(Spotlight on Small Business)

• Jordan Kassalow visited Mexico and saw how the

lack of eyeglasses affected the local workers.
• He founded VisionSpring, part charity and part
franchisor, with a partner.
• VisionSpring employs mostly women needing
additional income. They buy glasses from
VisionSpring and then sell them to locals.
• This gives eyesight to those who need it and
stimulates the local economy.
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Importing Goods
and Services GETTING INVOLVED in
LG2 IMPORTING

• Students attending
schools abroad tend to
notice products that
they’re used to are
unavailable in their new
country.
• By working with producers
in their native country,
some become importers
while still in school.
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Exporting Goods
and Services GETTING INVOLVED in
LG2 EXPORTING

• Exporting provides a
great boost to the U.S.
economy.
• It’s estimated every $1
billion in U.S. exports
generate over 7,000
U.S. jobs.

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Measuring
Global Trade
HOW to MEASURE GLOBAL TRADE
LG2

• Balance of Trade -- The total value of a nation’s

exports compared to its imports measured over a
particular period.

• Trade Surplus (Favorable) -- When the value of

a country’s exports is more than that of its imports.

• Trade Deficit (Unfavorable) -- When the value of

a country’s exports is less than that of its imports.

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Measuring
Global Trade BALANCE of PAYMENTS
LG2

• 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.

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Measuring
Global Trade
UNFAIR TRADE PRACTICES
LG2

• 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.

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Progress
Assessment
PROGRESS ASSESSMENT

• What are two of the main arguments favoring

the expansion of U.S. businesses into global
markets?
• What’s comparative advantage, and what are
some examples of this concept at work in global
markets?
• How are a nation’s balance of trade and
balance of payments determined?
• What’s meant by dumping in global trade?
3-25
Strategies for
Reaching Global
Markets KEY STRATEGIES for REACHING
LG3 GLOBAL MARKETS

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

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

3-26
Licensing
LICENSING
LG3

• 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.

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Exporting
EXPORT ASSISTANCE CENTERS
LG3 and EXPORT TRADING CENTERS

• 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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Franchising
FRANCHISING
LG3

• 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.
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Franchising
TIME to MAKE the DONUTS…
Dunkin’ Donuts Flavors in Taiwan
LG3

• Sweet Potato
• Honeydew Melon
• Green Apple
• Kiwi Fruit
• Mango
• Pineapple
•
Photo Courtesy of: Dennis Yang
Strawberry
• Corn Crumb Soft Rice Cake
Source: World Features Syndicate.

3-30
 GOLDEN ARCHES GLOWING
ACROSS the GLOBE
(Reaching Beyond Our Borders)
• McDonald’s has more than 32,000 restaurants in
over 117 countries.
• Maintains varying menus around the world due to
the different preferences of its customers.
• Attracts top-level college
graduates to be trained
for management spots.
• Only 8 of every 1,000
applicants actually
makes it into the
program!
3-31
Franchising
THAT’S at MCDONALD’S?
LG3

• 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.

Source: McDonalds, www.mcdonalds.com, June 2011.

3-32
Contract
Manufacturing 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.
3-33
International Joint
Ventures and
Strategic Alliances JOINT VENTURES
LG3

• 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.

3-34
International Joint
Ventures and
Strategic Alliances STRATEGIC ALLIANCES
LG3

• Strategic Alliance -- A long-term partnership

between two or more companies established to help
each company build competitive market advantages.
• Strategic alliances
don’t typically share
costs, risks,
management or profits.
• Strategic alliances
provide broad access
to markets, capital and
technical expertise.
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Foreign Direct
Investment FOREIGN DIRECT INVESTMENT
LG3

• 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.
3-36
Foreign Direct
Investment MULTINATIONAL CORPORATIONS
LG3

• 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.

3-37
Foreign Direct
Investment SOVEREIGN WEALTH FUNDS
LG3

• 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.
3-38
Progress
Assessment PROGRESS ASSESSMENT

• 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’s the key difference between a joint
venture and a strategic alliance?
• What makes a company a multinational
corporation?
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Forces Affecting
Trading in Global
Markets
FORCES AFFECTING
LG4 GLOBAL TRADE

• Sociocultural

• Economic and
Financial

• Legal and
Regulatory

• Physical and
Environmental

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Socio-cultural
Forces CULTURAL DIFFERENCES
LG4

• 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

3-41
Socio-
cultural
Forces
LOST in TRANSLATION
Advertisements Gone Wrong
LG4

• Braniff Airlines’ slogan "Fly in leather”

translated in Spanish as "Fly naked.”
• Siri, Apple’s new digital assistant on iPhone 4S,
is a common slang term for “butt” in Japanese.
• In Italy, Schweppes Tonic Water was mistaken
as Schweppes Toilet Water.
• Nokia’s line of Lumia phones is Spanish for
“prostitute.”

3-42
Socio-
cultural READY to TRAVEL ABROAD?
Forces
Know Your Cultural Differences
LG4

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

3-43
Socio-
cultural DO as the GERMANS…
Forces
How to Not Embarrass Yourself in Germany
LG4

• Always use titles like Doctor, Frau, or Herr.

• Always provide food and drinks for your birthday.
• Don’t remove your jacket until your host does.
• Wear conservative business attire, anything else is
considered sloppy.
• Never jaywalk.
• Always keep your hands on the table when eating.

3-44
Economic and
Financial Forces EXCHANGE RATES
LG4

• 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.
3-45
Economic and
Financial Forces DEVALUATION and
LG4
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.
3-46
Legal and
Regulatory
Forces LEGAL CONCERNS OVERSEAS
LG4

• 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.
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Physical and
Environmental
Forces
ENVIRONMENTAL FORCES
LG4

• 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.
3-48
Progress
Assessment
PROGRESS ASSESSMENT

• 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?

3-49
Trade
Protectionism TRADE PROTECTIONISM
LG5

• 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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Trade
Protectionism TARIFFS
LG5

• 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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Trade
Protectionism
IMPORT QUOTAS and EMBARGOS
LG5

• 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.

3-52
The World Trade
Organization
WORLD TRADE ORGANIZATION
LG5

• 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 153 member nations whose
purpose is to oversee cross-border trade issues and
global business practices.

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Common
Markets COMMON MARKETS
LG5

• 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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Common
Markets EU MEMBERS
LG5

3-55
The North
American and
Central American
Free Trade
Agreements
NAFTA
LG5

• North American Free Trade Agreement --

Ratified in 1994, created a free-trade area among
the United States, Canada and Mexico.
• NAFTA’s objectives are:
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.
3-56
The North
American and
Central American
Free Trade CAFTA
Agreements
LG5

• 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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The North
American and
Central American
Free Trade NEW FREE
Agreements
LG5 TRADE AGREEMENTS
• Today, free trade
agreements are being
negotiated with South
Korea, 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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Progress
Assessment
PROGRESS ASSESSMENT

• What are the advantages and disadvantages of

trade protectionism and of tariffs?

• What’s the primary purpose of the WTO?

• What’s the key objective of a common market

like the EU?

• Which three nations comprise NAFTA?

3-59
The Future of
Global Trade FUTURE of GLOBAL TRADE
LG6

• With over 1.3 billion people, China has

transformed the world economic map. Many
multinationals invest 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.

• Brazil is expected to be one of the wealthier

economies by 2030.
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The Challenge
of Offshore
Outsourcing OUTSOURCING
LG6

• 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 Courtesy of: Vitor Lima

3-61
 SEE the SIGHTS,
MEET the DOCTORS
(Making Ethical Decisions)

• 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?
3-62
Globalization
and Your Future
PLAN for YOUR GLOBAL CAREER
LG6

• Study foreign
languages.

• Learn about
foreign cultures.

• Take global
business courses.

3-63
Progress
Assessment
PROGRESS ASSESSMENT

• 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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