**DoingBusinessinGlobalMarketsChapterThreeCopyright?2010bytheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin**ProfileFirstfemaleforeigntradeministeroftheUnitedArabEmirates(UAE).Adaptsherpersonalcommunicationprocessestomatchthecultureofthepeoplewithwhomsheisinteracting.SHEIKALUBNAAL-QUASIMI

ForeignTradeMinisteroftheUAE3-2**TheDynamicGlobalMarketOver90%ofcompaniesdoingbusinessgloballybelieveitisimportantforemployeestohaveinternationalexperience.U.S.organizations(likeUPS,theNFLandtheNBA)arealsoexpandingabroad.BUSINESSinthe

GLOBALMARKETLG13-3**TheDynamicGlobalMarketLG1WORLDPOPULATION

byCONTINENT3-4**TheDynamicGlobalMarketImporting--Buyingproductsfromanothercountry.Exporting--Sellingproductstoanothercountry.TheU.S.isthelargestimportingandthesecondlargestexportingnationintheworld.IMPORTINGandEXPORTINGLG13-5**Source:WorldFeaturesSyndicateandI.U.S.–51brandsGermany–9brandsJapan–8brandsFrance–8brandsU.K.–6brandsSwitzerland–5brandsTheDynamicGlobalMarketWHEREARETHEYFROM?

CountriesofOriginforWorld’sMostPowerfulBrandsLG13-6**Source:Forbes,,March30,2009.U.S.–359billionairesGermany–54billionairesRussia–32billionairesChina–28billionairesIndia–24billionairesU.K.–25billionairesCanada–20billionairesTheDynamicGlobalMarketCANYOUSPAREaDIME?

HomeCountriesforSomeoftheWorld’sBillionairesLG13-7**WhyTradeWithOtherNations?Countrieswithabundantnaturalresources(likeVenezuelaorRussia)needtechnologicalresourcesfromothercountries(likeJapan).Globaltradeallowscountriestoproducewhattheymakebestandbuywhattheyneedfromothers.FreeTrade--Themovementofgoodsandservicesamongnationswithoutpoliticaloreconomicbarriers.TRADINGwithOTHERNATIONSLG13-8**Source:TheProgressivePolicyInstitute,WorldHealthOrganization.Globaltradehasledtheworldinanewdirection:Literacyratesworldwidehaveincreasedfrom56%in1950to84%in2006.Lifeexpectancyinlessdevelopedareasrosefrom40.9yearsin1950to70.1yearsin2006.HOWFREETRADE

BENEFITStheWORLDLG1WhyTradeWithOtherNations?3-9**TheTheoriesofComparativeandAbsoluteAdvantageComparativeAdvantage--Acountryshouldselltheproductsitproducesmostefficientlyandbuyfromothercountriestheproductsitcannotproduceasefficiently.AbsoluteAdvantage--Acountryhasamonopolyonproducingaspecificproductorisabletoproduceitmoreefficientlythanallothercountries.LG1COMPARATIVEandABSOLUTE

ADVANTAGE3-10**GettingInvolvedinGlobalTradeSmallbusinessesmaybethekeyinglobaljobgrowth.Theymakeupalmosthalfoftheprivatesector.Only30%ofsmallbusinessesexport.By2018,it’sexpectedhalfofsmallbusinesseswillexport.GOINGGLOBALwitha

SMALLBUSINESSLG23-11**Source:Investor’sBusinessDaily,,June30,2008.GettingInvolvedinGlobalTradeWHEREDOTHEYINVEST?

LeadingDestinationsforForeignInvestorsLG23-12**Source:U.S.Dept.ofTreasury,,January31,2009.GettingInvolvedinGlobalTradeWHODOEStheU.S.OWE?

CountriesthatOwntheMostU.S.DebtLG23-13**ImportingGoodsandServicesStarbucksCEO,HowardShultz,foundhisimportingopportunityinItaly.HetransformedacoffeeshopinSeattletomimictheEuropeancafes.LG2GETTINGINVOLVEDin

GLOBALTRADE3-14**ExportingGoodsandServicesExportingprovidesagreatboosttotheU.S.economy.It’sestimatedevery$1billioninU.S.exportsgenerateover20,000U.S.jobs.LG2GETTINGINVOLVEDin

EXPORTING3-15**MFG.comisanonlineexchangeformanufacturersandsuppliers.GrowingnumbersofChinesemanufacturersbeganvisitingthesite.MFGstaffhadtolearnabouttheChinesebusinessculture.Chinanowaccountsfor11%ofMFG.com’srevenue.FINDINGCRACKSinthe

GREATWALL

(SpotlightonSmallBusiness)3-16**MeasuringGlobalTradeBalanceofTrade--Thetotalvalueofanation’sexportscomparedtoitsimportsmeasuredovertime.TradeSurplus--Whenthevalueofacountry’sexportsismorethanthatofitsimports.TradeDeficit--Whenthevalueofacountry’sexportsislessthanthatofitsimports.HOWtoMEASUREGLOBALTRADELG23-17**MeasuringGlobalTradeBalanceofPayments--Thedifferencebetweenmoneycomingintoacountry(fromexports)andmoneyleavingthecountry(fromimports)plusothermoneyflows.Thegoalistohavemoremoneyflowingintoacountrythanout–afavorablebalance.Anunfavorablebalanceiswhenmoremoneyflowsoutofacountry.BALANCEofPAYMENTSLG23-18**MeasuringGlobalTradeDumping--Sellingproductsinaforeigncountryatlowerpricesthanthosechargedintheproducingcountry.Dumpingisprohibited.China,BrazilandRussiahavebeenpenalizedfordumpingsteelintheU.S.UNFAIRTRADEPRACTICESLG23-19**ProgressAssessmentWhataretwoofthemainargumentsfavoringtheexpansionofU.S.businessesintoglobalmarkets?What’scomparativeadvantage?Whataresomeexamplesofthisconceptatworkinglobalmarkets?Howareanation’sbalanceoftradeandbalanceofpaymentsdetermined?What’smeantbydumpinginglobaltrade?PROGRESSASSESSMENT3-20**StrategiesforReachingGlobalMarketsLeastAmountofcommitment,control,riskandprofitpotentialMostLicensingExportingFranchisingContractManufacturingInternationaljointventuresandstrategicalliancesForeigndirectinvestmentLG3KEYSTRATEGIESforREACHINGGLOBALMARKETS3-21**LicensingLicensing--Whenafirm(licensor)providestherighttomanufactureitsproductoruseitstrademarktoaforeigncompany(licensee)forafee(royalty).Licensingcanbenefitafirmby:Gainingrevenuesitwouldn’thaveotherwisegenerated.Spendinglittleornomoneytoproduceormarkettheirproducts.LICENSINGLG33-22**ExportingEACsprovidehands-onexportingassistanceandtrade-financesupportforsmallandmedium-sizedbusinessesthatwishtodirectlyexportgoodsandservices.ETCshelpcompaniesengageinindirectexportingby:Matchingbuyersandsellers.Dealingwithforeigncustomsoffices,documentation,andconversions.LG3EXPORTASSISTANCECENTERS

andEXPORTTRADINGCENTERS3-23**FranchisingFranchising--Acontractualagreementwherebysomeonewithagoodideaforabusinesssellsotherstherightstousethenameandsellaproduct/serviceinagivenarea.Franchisorsneedtobecarefultoadapttheirproducttothecountriestheyserve.PizzaHutandDominoslearnedthatpizzatoppingpreferencesdifferallaroundtheworld.FRANCHISINGLG33-24**FranchisingSource:WorldFeaturesSyndicate.SweetPotatoHoneydewMelonCornCrumbSoftRiceCakeGreenAppleKiwiFruitMangoPineappleStrawberryTIMEtoMAKEtheDONUTS…

Dunkin’DonutsFlavorsinTaiwanLG33-25**McDonald’shasmorethan33,000restaurantsinover129countries.Maintainsvaryingmenusaroundtheworldduetothedifferentpreferencesofitscustomers.Respondstochallengesbyfundingresearchandaddinghealthieroptions.TheSUNNEVERSETS

onMICKEYD’S

(ReachingBeyondOurBorders)3-26**FranchisingSource:McDonalds,,March2009.Malaysia:BuburAyamMcD–Chickenstripsinporridgewithonions,ginger,andshallots.Egypt:Mcarabia–Grilledchickenwithtehinasauces,lettuce,tomatoandoniononArabicbread.Japan:Teritama–Teriyakiburgertoppedwithanegg.Germany:Wantabeerwithyourburger?YoucanorderoneintheGermanstores.Israel:OperatesusingKosherkitchens.THAT’SatMCDONALD’S?LG33-27**ContractManufacturingContractManufacturing--Aforeigncompanyproducesprivate-labelgoodstowhichadomesticcompanythenattachesitsownbrandnameortrademark.Aformofoutsourcing.Contractmanufacturingcanbeusedto:Allowacompanytoexperimentinanewmarketwithoutincurringheavystart-upcostssuchasbuildingamanufacturingplant.Temporarilymeetanunexpectedincreaseinorders.CONTRACTMANUFACTURINGLG33-28**InternationalJointVenturesandStrategicAllianceJointVenture--Apartnershipinwhichtwoormorecompaniesjointoundertakeamajorproject.TheBenefitsofJointVentures:Sharedtechnologyandrisk.Sharedmarketingandmanagementexpertise.Entryintomarketswhereforeigncompaniesareoftennotallowedunlessgoodsareproducedlocally.JOINTVENTURESLG33-29**InternationalJointVenturesandStrategicAllianceStrategicAlliance--Along-termpartnershipbetweentwoormorecompaniesestablishedtohelpeachcompanybuildcompetitivemarketadvantages.Unlikejointventures,strategicalliancesdon’ttypicallysharecosts,risks,managementorprofits.Strategicalliancesprovidebroadaccesstomarkets,capitalandtechnicalexpertise.STRATEGICALLIANCESLG33-30**ForeignDirectInvestmentForeignDirectInvestment(FDI)--Thebuyingofpermanentpropertyandbusinessesinforeignnations.ForeignSubsidiary--Acompanyownedinaforeigncountrybyanothercompanycalledtheparentcompany.ThemostcommonformofFDI.PrimaryAdvantage:Parentcompanymaintainscompletecontroloveritstechnologyorexpertise.PrimaryDisadvantage:Mustcommitfundsandtechnologywithinforeignboundaries.FOREIGNDIRECTINVESTMENTLG33-31**ForeignDirectInvestmentMultinationalCorporation--Acompanythatmanufacturesandmarketsproductsinmanydifferentcountriesandhasmultinationalstockownershipandmanagement.Notalllargeglobalbusinessesaremultinational.Onlyfirmsthathavemanufacturingcapacityorsomeotherphysicalpresenceindifferentnationscantrulybemultinational.MULTINATIONALCORPORATIONSLG33-32**ForeignDirectInvestmentSOVEREIGNWEALTHFUNDSSovereignWealthFunds(SWFs)--Investmentfundscontrolledbygovernmentsholdinglargestakesinforeigncompanies.Thesizeofthefundsandthefactthattheyaregovernment-ownedmakesomefeartheymightbeusedfor:Geopoliticalobjectives.Gainingcontrolofstrategicnaturalresources.Obtainingsensitivetechnologies.Underminingthemanagementofthecompaniesinwhichtheyinvest.LG33-33**ProgressAssessmentWhataretheadvantagesofusinglicensingasamethodofentryinglobalmarkets?Whatarethedisadvantages?Whatservicesareusuallyprovidedbyanexport-tradingcompany?What’sthekeydifferencebetweenajointventureandastrategicalliance?Whatmakesacompanyamultinationalcorporation?PROGRESSASSESSMENT3-34**ForcesAffectingTradinginGlobalMarketsSocioculturalEconomicandFinancialLegalandRegulatoryPhysicalandEnvironmentalFORCESAFFECTING

GLOBALTRADELG43-35**Socio-culturalForcesTobeinvolvedinglobaltrade,youmustbeawareoftheculturaldifferencesamongnationsincluding:SocialStructuresReligionMannersValuesLanguagePersonal CommunicationCULTURALDIFFERENCESLG43-36**Socio-culturalForcesBraniffAirlines’slogan"Flyinleather”translatedinSpanishas"Flynaked.”GerberusedtheirU.S.label–acutebaby–onAfricanproducts.TheyfoundoutthatlabelsonAfricanproductspicturewhat’sinsidethepackage.InItaly,SchweppesTonicWaterwasmistakenasSchweppesToiletWater.LOSTinTRANSLATION

AdvertisementsGoneWrongLG43-37**Socio-culturalForcesREADYtoTRAVELABROAD?

KnowYourCulturalDifferencesInTurkey,it’srudetocrossyourarmswhilefacingsomeone.InmanyMiddleEasterncountries,youshouldn’teatorshakehandswiththelefthandbecauseitisconsideredunclean.InIndia,youshouldneverpatanyone’shead.It’swheretheirsouliskept.InBrazil,yourmeetingmaynotstartontimebecausepunctualityisn’timportanttotheculture.LG43-38**EconomicandFinancialForcesExchangeRate--Thevalueofonenation’scurrencyrelativetothecurrenciesofothercountries.Highvalueofthedollar–Dollaristradingformoreforeigncurrency;foreigngoodsarelessexpensive.Lowvalueofthedollar–Dollaristradingforlessforeigncurrency;foreigngoodsaremoreexpensive.Currenciesfloatinvaluedependingonthesupplyanddemandforthemintheglobalmarket.EXCHANGERATESLG43-39**EconomicandFinancialForcesDevaluation--Lowersthevalueofanation’scurrencyrelativetoothers.Countertrading--Complexformofbarteringinwhichseveralcountrieseachtradegoodsorservicesforothergoodsorservices.DEVALUATIONandCOUNTERTRADINGLG43-40**LegalandRegulatoryForcesThere’snoglobalsystemoflaws.Lawsmaybeinconsistent.U.S.businessesmustfollowU.S.lawswhileconductingglobalbusiness.TheOrganizationforEconomicCooperationandDevelopment(OECD)andTransparencyInternationalfighttoendcorruptionandbriberyinforeignmarketsandhavehadlimitedsuccess.LEGALCONCERNSOVERSEASLG43-41**PhysicalandEnvironmentalForcesDevelopingcountrieshavetransportationandstoragesystemsthatmakeinternationaldistributiondifficultorimpossible.Often,technologicalcapabilitiesarefarfromthoseintheU.S.whichmakeforatoughbusinessenvironment.ENVIRONMENTALFORCESLG43-42**ProgressAssessmentWhatarefourmajorhurdlestosuccessfulglobaltrade?Whatdoesethnocentricitymeanandhowcanitaffectglobalsuccess?HowwouldalowvalueofthedollaraffectU.S.exports?WhatdoestheForeignCorruptPracticesActprohibit?PROGRESSASSESSMENT3-43**TradeProtectionismTradeProtectionism--Theuseofgovernmentregulationstolimittheimportofgoodsandservices.Advocatesofprotectionismbelieveitallowsdomesticproducerstosurvive,growandproducejobs.TRADEPROTECTIONISMLG53-44**TradeProtectionismTariffs--Taxesonimports.Twokindsoftariffs:Protective–Raisetheretailpriceofimportssodomesticgoodsarecompetitivelypriced.Revenue–Raisemoneyforgovernments.TARIFFSLG53-45**TradeProtectionismImportQuota--Limitsthenumberofproductsincertaincategoriesanationcanimport.Embargo--Acompletebanontheimportorexportofacertainproductorthestoppingofalltradewithaparticularcountry.Politicaldisagreementscanleadtoembargos,liketheU.S.embargoagainstCuba.IMPORTQUOTASandEMBARGOSLG53-46**TheWorldTradeOrganizationGeneralAgreementonTariffsandTrade--Aglobalforumforreducingtraderestrictionsongoods,services,ideasandculturalproblems.WorldTradeOrganization(WTO)--HeadquarteredinGeneva,theWTOisanindependententityof152membernationswhosepurposeistooverseecross-bordertradeissuesandglobalbusinesspractices.WORLDTRADEORGANIZATIONLG53-47**CommonMarketsCommonMarket--Aregionalgroupofcountrieswithacommonexternaltariff,nointernaltariffsandcoordinatedlawstofacilitateexchangeamongmembers.TheEuropeanUnion(EU),MercosurandtheASEANarecommonmarkets.COMMONMARKETSLG53-48**TheNorthAmericanandCentralAmericanFreeTradeAgreementsNorthAmericanFreeTradeAgreement--Ratifiedin1994,createdafree-tradeareaamongtheUnitedStates,CanadaandMexico.NAFTA’sobjectivesare:Eliminatetradebarriersandfacilitatecross-bordermovementofgoodsandservices.Promoteconditionsoffaircompetition.Increaseinvestmentopportunities.Provideeffectiveprotectionandenforcementofintellectualpropertyrights.Establishaframeworkforfurtherregionaltradecooperation.ImproveworkingconditionsinNorthAmerica.NAFTALG53-49**TheNorthAmericanandCentralAmericanFreeTradeAgreementsCAFTACentralAmericanFreeTradeAgreement--Passedin2005,createdafree-tradezonewithCostaRica,DominicanRepublic,ElSalvador,Guatemala,HondurasandNicaragua.FreetradershopeCAFTAwillleadtothecreationofaFreeTradeAreaoftheAmericas(FTAA).LG53-50**TheU.S.tradedeficitwithMexicohasincreased.Therearepositivesthough:TradewithCanadaandMexicohasnearlytripledsince1994.Thoughmanufacturingjobsaredown,outputhasincreased54%intheU.S.ThoughNAFTAhasnotdeliveredonallpromises,itisn’tthemajorcauseofournation’scurrenteconomicstate.NAFTAorSHAFTA?

(LegalBriefcase)3-51**ProgressAssessmentWhataretheadvantagesanddisadvantagesoftradeprotectionismandoftariffs?What’stheprimarypurposeoftheWorldTradeOrganization(WTO)?What’sthekeyobjectiveofacommonmarketliketheEU?