I The Dynamic Global Market importing buying products from another country exporting selling products to another country U S is largest importing nation 3rd largest exporting nation behind China and Germany Why Trade With Other Nations global trade enables nation to produce what is is most capable of producing and buy what it needs from others in a mutually beneficial exchange relationship through process called free trade the movement of goods and services among nations without political or economic barriers A The Theories of Comparative and Absolute Advantage comparative advantage theory theory that 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 effectively or efficiently U S has comparative advantage in producing goods and services like software and engineering serves but lacks in growing coffee or making shoes 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 absolute advantage in natural resources does not last forever other countries II Getting Involved in Global Trade In U S only 1 of 29 million small businesses export yet they account for about 30 of the total U S exports A Importing Goods and Services B Exporting Goods and Services C Measuring Global Trade nations rely on balance of trade and balance of payments to measure global trade 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 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 feign investment U S is one of the world s largest exporting nations even though the U S exports a much lower percentage of its products than other countries dumping selling products n a foreign country at lower prices than those charged in the producing country U S laws require firms to price their products to include 10 overhead costs plus an 8 profit margin III Strategies for Reaching GLobal Markets A Licensing B Exporting goods and services establishing trading relationships C Franchising territory in a specified manner D Contract Manufacturing licensing a global strategy in which a firm the licensor allows a foreign company the licensee to produce its produce in exchange for a fee a royalty If product experiences remarkable growth bulk of revenue belongs to licensee Also licensing firm is selling its expertise Exporting Assistance Centers EACs provide exporting assistance and trade finance support for small medium sized businesses that wish to directly export indirect exporting can be made through specialists called export trading companies or export management companies that assist in negotiating and contractual agreement whereby someone with a good idea for a business sells others the rights to use the business name and sell a product service in a given contract manufacturing a foreign country s production of private label goods tow which a domestic company then attaches its brand name or trademark part of enables company to experiment in a new market without incurring heavy start up costs like building a manufacturing plant the broad category of outsourcing Can also be used to mer an unexpected increase in orders Considered outsourcing joint venture a partnership in which two or more companies often from different countries join to undertake a major project E International Joint Ventures and Strategic Alliances Often mandated by governments benefits of international joint ventures 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 a long term partnership between two or more companies established to help each company build competitive market advantages Don t share costs risks management or even profits Provide broad access to markets capital and technical expertise F Foreign Direct Investment foreign direct investment FDI the buying of permanent property and businesses in foreign nations most common form is a foreign subsidiary a company owned in a foreign country by another company called the parent company subsidiary also must observe the legal requirements of both the country where the parent firm is located the home country and the foreign country where the subsidiary is located the host country subsidiary maintains complete control over any technology or expertise it may possess but needs to commit funds and technology within foreign boundaries firm s assets can by expropriated taken over by the foreign gov t multinational management multinational corporation an organization that manufactures and markets products in many different countries and has multinational stock ownership and 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 government holding large stakes in foreign companies some fear they may be used for geopolitical objectives gaining control of strategic natural resources or obtaining sensitive technologies Could also undermine management of companies in which they invest Others see them as a vote of confidence in U S economy and as a way to create thousands of U S jobs IV Forces Affecting Trading In Global Markets A Sociocultural Forces culture the set of values beliefs rules and institutions held by a specific group of people ethnocentricity an attitude that your own culture is superior to other cultures Religion Never assume what works in one country will work in another B 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 a dollar is trading for more foreign currency than previously foreign products cheaper U S products more expensive low value of the dollar a dollar is traded for less foreign currency foreign products more expensive U S