Chapter+03+Lecture

Learning Objectives

• Learning Objective 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.

• Learning Objective 2: Explain the importance of importing and exporting, and understand key terms used in global business.

• Learning Objective 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations.

• Learning Objective 4: Evaluate the forces that affect trading in world markets.

• Learning Objective 5: Debate the advantages and disadvantages of trade protectionism.

• Learning Objective 6: Discuss the changing landscape of the global market and the issue of offshore outsourcing.

I. The Dynamic Global Market

A. The Importance of International Markets

• The U.S. population is 328 million, while the global population is 7.7 billion, representing a vast potential customer base.

• U.S. consumers engage in significant trade, purchasing billions in goods from countries like Canada, Mexico, and China.

• Companies such as UPS, Starbucks, and various sports leagues operate in international markets.

B. U.S. Position in Global Trade

• The U.S. is the second largest exporting nation and the largest importer worldwide.

  • Importing: Buying products from another country.

  • Exporting: Selling products to another country.

  • Competition: The U.S. faces intense competition from global players.

C. Purpose of Chapter

• This chapter explores the potential and challenges of international business.

II. Why Trade with Other Nations?

A. Reasons for International Trade

1. Nations cannot produce all products needed by their populations.

2. Countries seek trade to fulfill their needs.

3. Mutually Beneficial Exchange:

   • Countries may have abundant resources without technology or vice versa.

   • Trade allows nations to produce specialties and meet demands through exchange.

4. Free Trade: Movement of goods and services among nations without barriers.

B. Theories of Comparative and Absolute Advantage

1. Global exchanges include not just goods but also services, art, and sports.

2. Comparative Advantage Theory: Nations should sell products they can produce most efficiently.

   • The U.S. has a comparative advantage in many goods but not in everything (e.g., coffee).

3. Absolute Advantage: A country's ability to produce a product more efficiently than others, though it's rare today.

III. Getting Involved in Global Trade

A. Small Businesses and Global Trade

• Small businesses contribute about a third of U.S. exports, yet only 1% of small businesses engage in international trade.

• Entry into global trade requires determination and willingness to take risks.

B. Importing Goods and Services

1. Observations from students abroad reveal products unavailable in the U.S. that can be imported profitably.

2. Example: Howard Schultz's introduction of neighborly coffee bars as Starbucks.

C. Exporting Goods and Services

1. Almost any U.S. product can find a market internationally.

2. Less competition abroad can make exporting attractive.

3. Example: exporting snowplows to Saudi Arabia for sand removal during storms.

D. Measuring Global Trade

1. Balance of Trade: Value of exports vs. imports over time.

   • Trade Surplus: More exports than imports.

   • Trade Deficit: More imports than exports.

2. Balance of Payments: Difference between money coming in from exports and going out for imports, including tourism and investments.

   • A favorable balance indicates more inflow than outflow.

3. The U.S. has had a trade deficit since 1975, exporting less of its products than other countries.

4. Laws exist to promote fairness in global trade, such as restrictions against dumping.

IV. Strategies for Reaching Global Markets

A. Participation Methods in Global Trade

• Various strategies help organizations participate in global trade.

B. Licensing

1. Involves granting a foreign company the right to produce a product in exchange for royalty fees.

2. Advantages: Generates revenue with minimal cost to the licensor.

3. Problems: Lengthy agreements can lead to loss of revenue to licensees.

C. Exporting

1. The U.S. Department of Commerce supports exporting through assistance centers.

2. Export-Trading Companies: Facilitate international buyer-seller matches.

D. Franchising

1. Companies can sell the rights to use their name and business model.

2. Failure to adapt can hinder success, as seen with Domino's preference for pizza toppings in Japan.

E. Contract Manufacturing

1. Engaging foreign production while using domestic branding (outsourcing).

2. Cost-effective experimentation in new markets.

F. Joint Ventures and Strategic Alliances

1. A partnership to undertake significant projects can share resources and mitigate risks.

2. Strategic Alliances can offer more flexibility and varied partnerships.

G. Foreign Direct Investment (FDI)

1. FDI entails acquiring permanent assets in foreign countries.

2. Foreign Subsidiaries: Owned by parent companies, offering complete control; subject to host country regulations.

3. Multinational Corporations (MNCs) operate across many countries, requiring multinational oversight.

4. Sovereign-wealth funds (SWFs): Government-managed funds investing in foreign entities, raising geopolitical concerns.

V. Forces Affecting Trading in Global Markets

A. Challenges in Global Business

• Engaging in business globally requires addressing sociocultural variations and economic conditions.

B. Sociocultural Forces

1. Culture: Involves values, beliefs, rules, and institutions among groups.

2. American executives may struggle to adapt and have been criticized for ethnocentrism.

3. Religion can critically impact business relations.

C. Economic and Financial Forces

1. Global conditions can render some opportunities unviable.

2. Exchange Rate: Value fluctuation affects import/export economics.

3. Devaluation: Currency decreases in value, impacting trade dynamics and leading to bartering in less developed economies.

VI. Trade Protectionism

A. Overview of Trade Protectionism

1. It employs regulations to protect domestic industries.

2. Advocates argue it maintains jobs and shields budding industries.

3. Mercantilism: Economic principle emphasizing surplus through exports.

4. Tariffs: Taxes on imports to make foreign goods less competitive.

   • Protective Tariffs: Shield domestic industries.

   • Revenue Tariffs: Generate government funds.

B. The World Trade Organization (WTO)

1. Established from GATT to mediate trade disputes and enforce regulations.

2. Although it has not resolved all issues, its role remains critical.

C. Common Markets

1. Regional trading groups reduce trade barriers and standardize regulations.

2. Notable examples include the EU, MERCOSUR, and ASEAN, each promoting regional economic collaboration.

VII. The Future of Global Trade

A. Market Opportunities

1. Advanced communication has widened access to markets, notably in China.

2. Concerns about political systems, human rights, and other issues remain.

B. Offshore Outsourcing Challenges

1. Outsourcing: Utilizing external resources for services; involves risks and benefits differing across markets.

2. The trend in offshore outsourcing may threaten domestic job sectors.

C. Globalization and Preparation

1. Future students are encouraged to become fluent in global interactions through language and cultural studies.