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Chapter 3 Doing Business in a Global Market

Chapter 3 Doing Business in a Global Market. Did You Know?. World Trade. Importing Buying products from entities in other countries Exporting Selling products to entities in other countries Trick question: Do we import or export Nissan vehicles?. *. The Dynamic Global Market. *. LG1.

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Chapter 3 Doing Business in a Global Market

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  1. Chapter 3Doing Business in a Global Market Did You Know?

  2. World Trade • Importing • Buying products from entities in other countries • Exporting • Selling products to entities in other countries • Trick question: Do we import or export Nissan vehicles?

  3. * The Dynamic Global Market * LG1 WORLD POPULATION by CONTINENT 3-3

  4. Theory of Free Trade • Nations trade with each other without political or economic barriers, such as: • Embargos • Tariffs • Quotas • Punitive standards • Anti-dumping and other legislation • Great because of new customers, more competition • Bad comes with lower wages and standards. • Dumping can occur: • A competitor charges below production costs or below what it charges in its own country to attract customers.

  5. National Advantage • Comparative advantage • Some nations can produce things more efficiently or effectively than others; that is, they give up less to produce. • Nations should produce the things that they can produce while sacrificing less than other nations. • Absolute advantage • Happens when a nation produces something more efficiently or effectively than anyone else. • Can happen because of natural resources. • Doesn’t mean, though, that the nation should produce that product to the detriment of others.

  6. * The Dynamic Global Market * LG1 WHERE ARE THEY FROM?Countries of Origin for World’s Most Powerful Brands • U.S. – 51 brands • Germany – 9 brands • Japan – 8 brands • France – 8 brands • U.K. – 6 brands • Switzerland – 5 brands Source: World Features Syndicate and Interbrand.com. 3-6

  7. * The Dynamic Global Market * LG1 CAN YOU SPARE a DIME?Home Countries for Some of the World’s Billionaires • U.S. – 359 billionaires • Germany – 54 billionaires • Russia – 32 billionaires • China – 28 billionaires • India – 24 billionaires • U.K. – 25 billionaires • Canada – 20 billionaires Source: Forbes, www.forbes.com, March 30, 2009. 3-7

  8. Balance of Trade and Payments • Balance of trade • Exports - imports • Many feel that a trade deficit is unfavorable and shows national production weakness • Balance of payments • Money flowing in-money flowing out • The U.S. has found itself in a trade deficit, but a favorable balance of payments.

  9. * Why Trade With Other Nations? * LG1 HOW FREE TRADE BENEFITS the WORLD • 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. Source: The Progressive Policy Institute, World Health Organization . 3-9

  10. Review Questions • Does the U.S. import more goods or export more goods? • Why might this actually be O.K.? • What does it mean for one nation to have a comparative advantage? • If one nation can produce a product more efficiently than other nations, must it put all of its efforts into that product? Why? • What is dumping? Why does it happen?

  11. * Getting Involved in Global Trade * LG2 WHO DOES the U.S. OWE?Countries that Own the Most U.S. Debt Source: U.S. Dept. of Treasury, www.treas.gov, January 31, 2009. 3-11

  12. * Strategies for Reaching Global Markets * LG3 KEY STRATEGIES for REACHING GLOBAL MARKETS International joint ventures and strategic alliances Foreign direct investment Contract Manufacturing Licensing Exporting Franchising Least Amount of commitment, control, risk and profit potential Most 3-12

  13. Market Entry Strategies • Licensing • Allowing a foreign firm to manufacture your product or use your trademarks • They pay you a royalty • Franchising • a business sells others the rights to use the name and sell a product/service in a given area. Domino’s Pizza • Exporting • Selling a product, sometimes through an intermediary, in a foreign market

  14. * Franchising * LG3 TIME to MAKE the DONUTS…Dunkin’ Donuts Flavors in Taiwan • Sweet Potato • Honeydew Melon • Corn Crumb Soft Rice Cake • Green Apple • Kiwi Fruit • Mango • Pineapple • Strawberry Source: World Features Syndicate. 3-14

  15. Market Entry Strategies • Contract manufacturing • A foreign company produces private-label goods to which a domestic company then attaches its own brand name or trademark. • Strategic alliances • Long-term, mutually beneficial partnerships • Joint ventures • New company created by partners • Joint Venture: • A partnership in which two or more companies join to undertake a major project. • By definition, two companies form a new company for that project.

  16. * Franchising * LG3 • Malaysia: BuburAyamMcD– 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? Source: McDonalds, www.mcdonalds.com, March 2009. 3-16

  17. Review Questions • How is contract manufacturing different from licensing? • Which one would be called “outsourcing?” • How can strategic alliances be used to ease entry into a foreign market? What could be gained? • How can exporting be made simple?

  18. Foreign Direct Investment • Setting up shop in a foreign country • The buying of permanent property and businesses in foreign nations. • Offices • Manufacturing • Taxes paid to that country • Expropriation (seizure of assets) • Also called a greenfield venture • Highest level of risk due to investment

  19. Forces Impacting Multinational Firms Multinational Corporation -- A company that manufactures and markets products in many different countries and has multinational stock ownership and management. • Ethnocentrism • Protectionism • Cultural differences • So many economies dependent on each other • Exchange rates • Differences in politics and laws from country to country

  20. * Economic and Financial Forces * LG4 EXCHANGE RATES • 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. 3-20

  21. * Trade Protectionism * LG5 TARIFFS • 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. 3-21

  22. * Trade Protectionism * LG5 IMPORT QUOTAS and EMBARGOS • 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. 3-22

  23. Who’s In Charge of This? • In short? No one. • However, the World Trade Organization was formed in 1995 to mediate national trade disputes based on some common principles of fairness. • Some countries form common markets or trade alliances to improve their positions in the global market (EU, NAFTA, Mercosur, ASEAN).

  24. Review Questions • What is the most risky, most expensive, most strategically intense form of entry into a foreign market called? Another name? • Give one example of how a cultural difference could adversely affect a business deal. • How can exchange rates erase a company’s profit margin overnight?

  25. Review Questions • Why does it make sense to trade heavily within one’s own trade alliance? • Why would we want to expand NAFTA to include South and Central America?

  26. Is Outsourcing an Issue We Should Be Afraid Of? • Not if you believe in the power of the market to stabilize itself. • The U.S. has lost jobs to other countries; HOWEVER • Those jobs have been made up in other sectors • We continue to innovate to make better jobs for our citizens than those that we are losing. • Outsourcing has lowered our companies’ cost structures. • If you believe that survival of the fittest is an appropriate philosophy for a society, then outsourcing is not something to be afraid of.

  27. * * NAFTA or SHAFTA?(Legal Briefcase) • The U.S. trade deficit with Mexico has increased. • There are positives though: • Trade with Canada and Mexico has nearly tripled since 1994. • Though manufacturing jobs are down, output has increased 54% in the U.S. • Though NAFTA has not delivered on all promises, it isn’t the major cause of our nation’s current economic state. 3-27

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