Chapter 3 Doing Business in Global Markets Importing buying products from another country Exporting selling products to another country Free trade the movement of goods and services among nations without political or economic barriers Comparative advantage theory states that a country should sell to other countries those products that it produces most effectively and efficiently and buy from other countries those products that it cannot produce as efficiently Absolute advantage the advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries Balance of trade the total value of a nation s exports compared to its imports measured over a particular period Trade surplus a favorable balance of trade occurs when the value of a country s exports exceeds that of its imports Trade deficit an unfavorable balance of trade occurs when the value of a country s imports exceeds that of its exports The United States is one of the world s largest exporting nations however it exports a much lower percentage of its products than Japan and Germany Balance of payments the difference between money coming into a country from exports and money leaving the country from imports plus money flows from other factors such as tourism foreign aid military expenditures and foreign investment Dumping selling products in a foreign country at lower prices than those charged in the producing country Licensing a global strategy in which a firm the licensor allows a foreign company the licensee to produce its product in exchange for a fee royalty A licensing agreement can benefit a firm in several ways First the firm can gain revenues it would not have otherwise generated in its home market Also foreign licensees often purchase start up supplies materials and consulting services from the licensing firm Licensors also spend little or no money to produce and market their products To meet increasing global competition the U S Department of Commerce created Export Assistance Centers EACs which provide hands on exporting assistance and trade finance support for small and medium sized businesses that wish to directly export goods and services U S firms that are still hesitant can engage in indirect exporting through specialists called export trading companies that assist in negotiating and establishing trading relationships deals with customs offices documentation and measures conversions to ease the process of entering global markets Franchising contractual agreement whereby someone with a good idea for a business sells others the rights to use the business name and sell a product or service in a given territory in a specified manner Contract manufacturing a foreign country s production of private label goods to which a domestic company then attaches its brand name or trademark part of the broad category of outsourcing Contract manufacturing enables a company to experiment in a new market without incurring heavy start up costs such as building a manufacturing plan Joint venture a partnership in which two or more companies often from different countries join to undertake a major project the benefits are 1 Shared technology and risk 2 Shared marketing and management expertise 3 Entry into markets where foreign companies are often not allowed unless goods are produced locally Strategic alliance long term partnership between two or more companies established to help each company build competitive market advantages 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 subsidiary also must observe the legal requirements of both the country where the parent firm is located called the home country and the foreign country where the subsidiary is located call the host country Expropriated taken over by the foreign government Multinational corporation an organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management Only firms that have manufacturing capacity or some other physical presence in different nations can truly be called multinational Sovereign wealth funds SWFs investment funds controlled by governments holding large stakes in foreign companies A sound philosophy is never assume what works in one country will work in another Exchange rate the value of one nation s currency relative to the currencies of other countries High value of the dollar a dollar is trading for more foreign currency than previously Low value of the dollar a dollar is traded for less foreign currency foreign goods become more expensive because it takes more dollars to buys them but U S goods become cheaper to foreign buyers because it takes less foreign currency to buy them Floating exchange rates currencies float in value according to the supply and demand for them in the global market for currency Devaluation lowering the value of a nation s currency relative to other currencies Countertrading a complex form of bartering in which several countries may be involved each trading goods for goods or services for services Physical and environmental forces certainly affect a company s ability to conduct global business Trade protectionism the use of government regulations to limit the import of goods and services Business economics and politics have always been closely linked Economics was once referred to as a political economy indicating the close ties between politics government and economics In the 17th and 18th centuries businesspeople and government leader endorsed an economic policy called mercantilism the idea was for a nation to sell more goods to other nations than it bought from them that is to have a favorable balance of trade Tariff tax imposed on imports Protective tariffs import taxes that raise the retail price of imported products so that domestic goods are more competitively priced Revenue tariffs designed to raise money for the government Import quota a limit on the number of products in certain categories that 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 Nontariff barriers not as specific or formal as tariffs import quotas and embargoes but can be as detrimental for free trade General Agreement on Tariffs and Trade GATT a
View Full Document
Unlocking...