Chapter 3 Doing Business in Global Markets The Dynamic Global Market Importing buying products from another country US is largest importing nation in the world Exporting selling products to another country US is the 2nd largest exporting country behind Germany Why Trade with Other Nations Free trade the movement of goods and services among nations without political or economic barriers 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 and efficiently o US has comparative advantage in producing software and engineering services 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 few instances of this in global markets today Getting Involved in Global Trade There is global job potential with small businesses Getting started globally is often a matter of observing being determined and taking risks Two key indicators of measuring global trade o Balance of trade the total value of a nation s exports compared to its imports measured over a particular period Favorable balance trade surplus occurs when the value of a country s exports exceeds that of its imports Unfavorable balance trade deficit occurs when the value of a country s imports exceeds that of its exports o 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 Favorable more money flowing in the country than out Unfavorable more money leaving the country US in a trade deficit Highest US trade deficit is with China Dumping selling products in a foreign country at lower prices than those charged in the producing country unfair practice o Used to reduce surplus products in foreign markets or to gain a foothold in a new market Strategies for Reaching Global Markets Key strategies from least amount of commitment control risk and profit potential to most licensing exporting franchising contract manufacturing international joint ventures and strategic alliances foreign direct investment 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 a royalty o Benefits the firm can gain revenues it would not otherwise have generated in its home market foreign licensees often must purchase start up supplies materials and consulting services from the licensing firm licensors spend little no money to product and market their products o Problems a firm must grant licensing rights to its product for an extended period 20 years or longer licensing firm is actually selling its expertise Exporting o Export Assistance Centers EAC s provide hands on exporting assistance and trade finance support for small and medium size businesses that wish to directly export goods and services o Export trading companies indirect exporting through these specialists Franchising o Contractual agreement whereby someone with a good idea for a business sells others the right 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 o Allows a company to experiment in a new market without incurring heavy start up costs such as building a manufacturing plant o If the brand name becomes a success the company has penetrated a new market with relatively low risk o A firm can also use this to temporarily meet an unexpected increase in orders while labor costs are low Joint venture a partnership in which two or more companies often from different countries join to undertake a major product o Often mandated by governments o Benefits shared technology and risk shared marketing and management expertise entry into markets where foreign companies are often not allowed unless goods are produced locally o Problems one partner can learn the other s technology and practices and then use what it learned to its own advantage a shared technology may become obsolete or the joint venture may become too large to be flexible Strategic alliance a long term partnership between two or more companies established to help each company build competitive market advantages o Don t share costs risks management or profits like joint ventures o Strategic alliance provide broad access to markets capital and technical expertise o Can effectively link firms from different countries and firms of different sizes due to its flexibility Foreign direct investment FDI the buying of permanent property and businesses in foreign nations o Foreign subsidy a company owned in a foreign country by another company called the parent company most common form of a FDI must observe laws in both countries Advantage company maintains complete control over any technology or expertise it may possess Disadvantage company s need to commit funds and technology within foreign boundaries if a relationship with the foreign countries falters then the firm s assets could be expropriated taken over by the foreign government o Multinational corporation an organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management o Sovereign wealth funds SWFs investment funds controlled by governments holding large stakes in foreign companies one of the fastest growing forms of FDI Forces Affecting Trading in Global Markets Sociocultural forces by a specific group of ppl o Religion important Economic and financial forces o Culture refers to the set of values beliefs rules and institutions held o US dollar is considered dominant and stable currency but it doesn t always retain the same market value o Exchange rate the value of one nation s currency relative to the currencies of other countries o High value of the dollar means a dollar is trading for more foreign currency than previously therefore foreign products become cheaper b c it takes fewer dollars to buy them but US goods become more expensive o Low value of the dollar means a dollar is traded for less foreign currency
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