Quiz 5 Chapter 3 Competition among exporting nations is intense US is largest importing nation and third largest exporting nation China is number 1 and Germany is number 2 We have to trade because no one nation can make all the products the people want and need Global trade lets people make what they are most capable of producing and buy what it needs form others in a mutually beneficial exchange relationship This is called free trade Free trade 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 it produces most effectively and efficiently and buy the products it can t produce as effectively or efficiently from other countries U S comparative advantage in producing software and engineering services lacks C A in making shoes and coffee Absolute advantage if country has monopoly on producing certain product or can make it more efficiently than all other countries A A in natural resources doesn t last forever Ex South Africa used to have A A in diamond production but not any more GLOBAL COMPETITION CAUSES ABSOLUTE ADVANTAGE TO FADE Small businesses are big exporters too 30 of US exports are from small businesses Balance of trade total value of nations exports compared to imports over particular period Trade surplus occurs when exports imports Trade deficit imports exports In order to measure global trade rely on balance of trade and balance of payments Balance of payments difference between money coming in From exports and money leaving From imports money flows coming into or leaving a country form other factors like tourism foreign aid military expenditures and foreign investment Goal have more money flowing in that out aka this is a favorable balance of US runs highest trade deficit with China but still one of worlds largest exporting Dumping selling products in a foreign country at lower prices than those charged in the producing country Used to reduce surplus products in foreign markets or to gain foothold in a In order to reduce dumping the US requires foreign firms to price products 10 above overhead costs plus an 8 profit margin Key strategies for competing in global markets payments nations new market Licensing right to manufacture product or use its trademark to a foreign company for a fee Allows firms to gain revenues it wouldn t have gotten from home market Can be bad because if make a lot of money then bulk of money goes to Spend little or no money to produce or market products licensee Could break agreement by learning company secrets and starting company of own with similar product Exporting EAC gives assistance and trade finance support for small and medium sized businesses Export trading companies will assist in negotiating and establishing trading relationships Matches buyers and sellers and deals with foreign customs offices documentation weights and measure conversions all to ease process of entering global market Also assists with warehousing billing insuring Franchising contractual agreement where someone with a good business idea sells others the right to use the business name and sell a product or service in a given territory in a specific manner Contract manufacturing foreign company makes private label goods to which a domestic company attaches is own brand name or trademark Labor costs are low Outsourcing Joint venture partnership where two or more companies join to undertake a major project Often mandated by government Benefits shared technology and risk shared marketing and management expertise entry into markets where foreign companies aren t allowed unless goods are produced locally Disadvantages one partner can learn other s technology and business practices and use what it learns to it s advantage shared technology might become obsolete joint venture might become too large to be as flexible as needed Strategic alliance 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 access to markets capital and technical expertise Flexible can link firms from different countries and firms of different sizes Foreign direct investment buying permanent property and businesses in foreign nations Foreign subsidiary company owned in foreign country by another company called the parent company Subsidiary is like a domestic firm in its production distribution promotion pricing and other business functions Subsidiary has to keep track of legal requirements of parent country and foreign country Advantage company maintains complete control over any technology or expertise it might possess Disadvantage have to commit funds and technology within foreign boundaries Assets could be taken over by foreign government Multinational corporation manufactures and markets products in many different countries and has multinational stock ownership and management Extremely large corporations But still even if company exports 100 of the things it produces it might not be a multinational corporation Only firms that have manufacturing capacity in different nation can be called this Sovereign wealth funds investment funds controlled by governments holding large stakes in foreign companies Could be used for achieving geopolitical objectives gaining control of natural resources or getting sensitive technologies Can undermine management that they invest Creates a lot of jobs Forces affecting trading in global markets Sociocultural forces US hasn t adapted to metric systems Understanding the differences in values ethics and religion is important for managing employees Ex Muslims have to pray 5 times a day so much lower production expectations Economic and financial forces Some people can t afford such large quantities Differences in currency exchange rate varies a lot Exchange rate value of nations currency relative to currencies of other countries Devaluation lowers value of nation s currency relative to others Countertrading complex form of bartering where many countries trade goods or services for other goods or services Can avoid some financial problems Legal and regulatory forces Can t bribe people Physical and environmental forces Developing countries have primitive transportation and storage systems that you can t distribute internationally Technological differences can influence exportable products Harder for businesses who don t
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