Chapter 3: Doing Business in Local Markets

importing

buying products from another country

exporting

selling products to another country

Which countries are the largest in importing and exporting?

The United States and China

free-trade

the movement of goods and services among nations without political or economic barriers

What are the advantages to free-trade?

• The global market contains over 7.9 billion potential customers for goods and services.

• Productivity grows when countries produce goods and services in which they have a comparative advantage.

• Global competition and less-costly imports keep prices down, so inflation does not curtail economic growth.

• Free trade inspires innovation for new products and keeps firms competitively challenged.

• Uninterrupted flow of capital gives countries access to foreign investments, which help keep interest rates low.

What are the disadvantages to free-trade?

• Domestic workers (particularly in Jobs that are manufacturing based) can lose their jobs due to increased imports or production shifts to low-wage global markets.

• Workers may be forced to accept pay cuts from employers, who can threaten to move their jobs to lower-cost global markets.

• Moving operations overseas because of intense competitive pressure often means the loss of service jobs and growing numbers of white-collar jobs.

• Domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries.

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

absolute advantage

a country can produce a specific product more efficiently than all other countries

Is absolute advantage permanent?

no, global competition can cause this to fade

What key indicators are used to measure global trade?

balance of trade and balance of payments

balance of trade

the total of value of a nation’s exports compared to its imported measured over a particular period

trade surplus

when the value of a country’s exports exceeds that of its imports; good

trade deficit

when the value of a country’s exports is less than that of its imports; bad

balance of payments

the difference between money coming into a country (exports) and money leaving the country (imports) plus money flows coming into or leaving a country from other factors such as tourism, foreign aid, military expenditures, and foreign investment

What is goal to the balance of payments?

to have more money flowing into the country than out

Which country has the highest trade deficit?

China

dumping

selling products in a foreign country at lower prices than those charged in the producing country

What are the key business strategies?

licensing, exporting, franchising, contract manufacturing, international joint ventures and strategic alliances, foreign subsidiaries, and foreign direct investment

licensing

the right to manufacture its product or use its trademark to a foreign company for a fee (a royalty)

How does the firm benefit from licensing?

• can gain revenue that may not have been gained if done in its home market

• less money used to produce and market

franchising

a contractual agreement where someone sells the right to an idea to others in order to sell in a given territory in a specified manner

contract manufacturing

a foreign company produces private-label good to which a domestic company then attaches its own brand name or trademark; can fall under outsourcing

joint venture

a partnership in which two or more companies join to undertake a major project

What are the benefits to international joint ventures?

• shared technology and risk

• shared marketing and management expertise

• entry into markets where foreign companies are often not allowed unless goods are produced locally

What are the drawbacks to a join venture?

• one partner can use the technology and business practices from the other partner for its own advantage

• shared technology may become obsolete

• may become too large to be as flexible as needed

strategic alliance

a long-term partnership between two or more companies established to help each company build competitive market advantages

foreign direct investment (FDI)

the buying of permeant property and businesses in foreign nations

foreign subsidiary

a company owned in a foreign country (host country) by another company (parent company) in the country where the other company is located (home country)

What is the primary advantage of a subsidiary?

the company maintains complete control over any technology or expertise it may possess

What is the major drawback of a subsidiary?

the need to commit funds and technology within foreign boundaries and assets being expropriated (or, taken over by the foreign government)

multinational corporation

a corporation that manufactures and markets products in many different countries and has multinational stock ownership and management

sovereign wealth funds (SWFs)

investment funds controlled by governments holding investment stakes in foreign companies, real estate, and other investments

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

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

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

batering

the exchange of merchandise for merchandise or service for service with no money traded

countertrading

a complex form of bartering in which several countries each trade goods or services for other goods or services

The Foreign Corrupt Practices Act of 1978

A law that prohibits questionable or dubious payments to foreign officials to secure business contracts

trade protectionism

the use of government regulations to limit the import of goods and services

mercantilism

an idea of a nation to sell more goods to other nationas than it bought from them

tariffs

taxes on imports

protective tariffs

raise the retail price of imported products so that domestic goods are more competitively priced

infant industries

companies in the early stages of growth

revenue tariffs

taxes designed to raise money for the government; paid for by the importer

import quota

limiter on the number of products in certain categories a nation can import

embargo

a complete ban on the import or export of a certain product; stopping of all trade with a particular country

General Agreement on Tariffs and Trade (GATT)

a global forum for reducing trade restrictions on goods, services, ideas, and cultural programs

World Trade Organization (WTO)

an international organization that replaced the General Agreement on Tariffs and Trade, that was meant to mediate trade disputes among nations

common market/trading bloc

a regional group of countries with a common external tariffs, no internal tariffs, and coordinated laws to facilitate exchange among members

North American Free Trade Agreement (NAFTA)

1. eliminate trade barriers and facilitate cross-border movement of goods and services

2. promote conditions of fair conpeitions

3. increase investment opportunites

4. provide effective protection and enforcment of inetllectual property rights (patents and copyrights)

5. establish a framework for further regional trade cooperation

6. improve working condition in North America, particularly in Mexico

United States-Mexico-Canada Agreement (USMCA)

1. creating a more level playing field for U.S workers including improved rules for automobiles, trucks, and other products

2. providing benefits to American farmers, ranchers, and other agribusiness by modernizing and strengthening food and agricultural trade in North America

3. supporting a modern economy through new protections for U.S. intellectual property and opportunities for trade in U.S. services

4. introducing new rules covering digital trade, anticorruption, and good regulatory practices

Central American Free Trade Agreement (CAFTA)

A free trade agreement among the following countries: Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua

offshore outsourcing

the process whereby one firm contracts with other companies abroad to do some or all of its functions

What are the pros of offshore outsourcing?

1. less-strategic tasks can be outsourced globally so that companies can focus on areas in which they can excel and grow

2. outsourced work allows companies to create efficiencies that in fact let them hire more workers

3. consumers benefits from lower prices generated by effective use of global resources and less developed nations grow, thus fueling global economic growth

What are the cons of offshore outsourcing?

1. jobs may be lost permanently and wages fall due to low-cost competition offshore

2. offshore outsourcing may reduce product quality and can therefore cause permanent damage to a company’s reputation

3. communication among company members, with suppliers, and with customers becomes much more difficult