Chapter 3 1 Dynamic Global Market a Important for employees to have experience working in other countries i 6 7 billion potential customers in 194 countries b Importing Buying products from another country i U S is the largest importing nation in the world c Exporting Selling products to another country i U S is second largest exporting nation in the world behind Germany and just ahead of China 2 Why Trade with Other Nations a Even when countries are self sufficient other nations seek to trade with it to meet the needs of their own no country can every fully produce all the products that people want need b Enables a nation to produce what it is most capable of producing and buy what it needs from others in a mutually beneficial exchange relationship i Free Trade Movement of goods and services among nations without political or economic barriers ii Comparative Advantage Theory A country should sell to other countries those products it produces most effectively and efficiently and buy from other countries those products it cannot produce as effectively or efficiently iii Absolute Advantage If the country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries 1 Advantage in natural resources does not last forever decreased by global 3 Getting Involved in Global Trade competition a Real global potential may be with small businesses small businesses in the U S account for almost half of private sector commerce but only about 30 of small businesses export b Getting started globally is a matter of observing being determined and taking risks c Balance of Trade Total value of a nation s exports compared to its imports measured over a particular period i Trade Surplus Value of countries exports exceeds its imports ii Trade Deficit Value of a countries imports exceeds its exports d Balance Payments Difference between money coming into a country from exports and money leaving the country from imports plus money flows coming into or leaving a country from other factors such as tourism foreign aid military expenditures etc e Dumping Selling products in foreign countries at lower prices than those charged in the producing company i Reduces surpluses and gains foothold on products 4 Strategies for Reaching Global Markets exchange for a fee royalty a Licensing Firms licensors allow a foreign company the licensee to produce its product in i Licensor may work with licensee in areas such as distribution promotion and consulting ii Advantages Gain revenues from other markets gain revenue from start up fees spending little or no money to produce and market products in other markets iii Disadvantages Bulk of profits belong to licensee licensee can break agreement and create similar products b Exporting EAC s or Export Assisting Centers provide hands on exporting assistance and trade finance support for small and medium sized businesses that wish to directly export goods and services i Export trading companies assist in negotiating and establishing trading relationships c Franchising Must adapt their product or services to the countries they serve d Contract Manufacturing A foreign company produces private label goods to which a domestic company then attaches its own brand name or trademark i Advantages Enables a company to experiment in a new market w o incurring heavy e Joint Venture A partnership in which two or more companies often from different companies start up costs relatively low risk join to undertake a major project i Advantages Shared technology risk shared marketing management expertise entry into markets where foreign companies are often not allowed unless products are produced locally ii Disadvantages Too large to be flexible partners can learn technology take products elsewhere iii Strategic Alliance Long term partnership between two or more companies established to help each company build competitive market advantages 1 Don t share costs risks management or even profits f Foreign Direct Investment FDI Buying of permanent property and businesses in foreign nations the parent company i Foreign Subsidiary A company owned in a foreign country by another company called ii Multinational Corporation One that manufactures and markets products in many different countries and has multinational stock ownership and management 1 Must have manufacturing capacity in order to be fully multinational iii Sovereign Wealth Funds SWF Investment funds controlled by governments holding large stakes in foreign companies 5 Forces Affecting Trading in Global Markets a Socio Cultural Forces Set of values beliefs rules and institutions held by a specific group of i Includes social structures religion manners and customs etc b Economic Financial Forces i Exchange Rate The value of one nation s currency relative to the currencies of other people countries 1 High value of a dollar A dollar is trading more foreign currency than previously foreign products become cheaper ii Devaluation Lowers the value of a nation s currency relative to others iii Countertrading Complex form of bartering in which several countries each trade goods or services for other goods or services c Legal Regulatory Forces No central system of law exists d Physical Environmental Forces 6 Trade Protectionism Huge barrier to global trade a Trade Protectionism Use of government regulations to limit the import of goods and services i Allows domestic producers to survive and grow creating more jobs b Tariffs Taxes on imports i Protective Tariffs Raise the retail price of imported products so that domestic goods are more competitively priced ii Revenue Tariffs Raise money for the gov t c Import Quota Limits the number of products in certain categories a nation can import d Embargo Complete ban on the import or export of a certain product or stopping of all trade with a particular country e General Agreement of Tariffs Trade GATT Global forum for reducing trade restrictions on goods services ideas and cultural programs f World Trade Organization WTO Mediates trade disputes among nations g Common Market A regional group of countries with a common external tariff no internal tariffs and coordinated laws to facilitate exchange among members AKA trading bloc h North American Free Trade Agreement NAFTA Created a free trade area among the U S Canada and Mexico i Eliminate trade barriers and facilitate cross border movement of goods and services ii Promote conditions of fair competition iii Increase
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