Competing in theCompeting in theGlobal MarketplaceGlobal MarketplaceCompeting in theCompeting in the

Global MarketplaceGlobal Marketplace

Chapter 3

Chapter 3 Learning GoalsChapter 3 Learning Goals

1. Why is global trade important to the United States?

2. How is global trade measured?3. Why do nations trade?4. What are the barriers to international trade?5. How do governments and institutions foster

world trade?6. What are international economic

communities?7. How do companies enter the global

marketplace?

Chapter 3 Learning GoalsChapter 3 Learning Goals

8. What threats and opportunities exist in the global marketplace?

9. What are the advantages of multinational corporations?

10. What are the trends in the global marketplace?

Learning Goal 1Learning Goal 1

• WWhy is global trade important to the United States?– Improves relations with friends and allies;

eases tensions among nations– Bolsters economies, raises people’s

standard of living, and improves quality of life– U.S. is the largest importer/exporter in the

world– One of 16 jobs in the U.S. is supported by

exports

Global VisionGlobal Vision::• responsiveness to international business

opportunities• awareness of threats from foreign competition• use international networks for production and

distribution– Coca-Cola derives 80% of its profits from overseas (Source:

Fortune, Sept. 28, 1998, p. 313)

Learning Goal 2Learning Goal 2

• HHow is global trade measured?– Balance of trade

• Difference in value between a country’s exports and its imports over some period

– Balance of payments• Difference between a country’s total payments to

other countries and its total receipts from other countries

– Exchange rate• Price of one country’s currency in terms of another

country’s currency

Measuring Trade Between NationsMeasuring Trade Between Nations

1.1. Exports and Imports

2.2. Balance of Trade– trade surplus vs. trade deficit

3.3. Balance of Payments– the difference between total payments to

other countries and total receipts from other countries

4.4. Changing Value of Currency

Trade Between US and ChinaTrade Between US and China

US Exports to China

0

1

2

3

4

1994 1995 1996 1997 1998

Bill

ions

of D

olla

rs

China Exports to US

0

1

2

3

4

1994 1995 1996 1997 1998

Bill

ions

of D

olla

rsAircraft & parts

Fertilizer

Communication Communication

Shoes

Baby carriage, toys, & sports

Source: Newsweek, Nov. 29, 1999, pp. 56-57

Learning Goal 3Learning Goal 3

• WWhy do nations trade?– Nations gain by trading– Principle of comparative advantage

• Each country should specialize in the goods it can produce most readily and cheaply

• Trade those goods for those that other countries can produce most readily and cheaply

• Results in more goods at lower prices

– Free trade allows trade among nations without government restrictions

Why Nations Trade:Why Nations Trade:1. Absolute advantageAbsolute advantage

– a country can sell a product at a lower price than any other country, or

– a country is the only country that can provide a given product

2. Comparative advantageComparative advantage– lower prices result from every country

specializing in products it can produce most readily and cheaply, trading them for products specialized in by other countries

Learning Goal 4Learning Goal 4

• WWhat are the barriers to international trade?– Three major barriers

• Natural barriers– Distance– Language

• Tariff barriers, or taxes on imported goods• Non-tariff barriers

– Import quotas– Embargoes– Buy-national and customs regulations– Exchange controls

Barriers to Global Trade:Barriers to Global Trade:1. Natural BarriersNatural Barriers

examples: distance, language2. Tariff BarriersTariff Barriers

– taxes on imported goods

3. Nontariff BarriersNontariff Barriers– import quotas– embargoes– buy-national regulations– custom regulations– exchange controls

Fostering Global Trade:Fostering Global Trade:

1. Anti-dumping lawsAnti-dumping laws– prevent charging lower price in foreign

markets than in home market for same product

2. Uruguay RoundUruguay Round– agreement signed in 1994 by 117 nations

to lower trade barriers

Learning Goal 5Learning Goal 5

• HHow do governments and institutions foster world trade?– World Trade Organization

• Has dramatically lowered trade barriers worldwide• Covers services, intellectual property rights, and

exchange controls

– World Bank• Makes loans to developing nations to help build

infrastructures

– International Monetary Fund• Makes loans to member nations that cannot meet

their budgetary expenses

Fostering Global Trade:Fostering Global Trade:

3. World Trade OrganizationWorld Trade Organization– provides lower trade barriers among

member nations, and helps resolve trade disputes

4. World Bank & International Monetary World Bank & International Monetary FundFund– lend money to developing nations and

troubled nations

10 Benefits of the WTO10 Benefits of the WTO

• Helps promote peace• Handles disputes constructively• Its rules increase efficiency• Its rules make functioning easier• Free trade cuts cost of living• Permits more choice of products• Trade raises incomes• Trade stimulates economic growth• Shields governments from lobbying• Encourages good government

Source: World Trade Organization: www.wto.org

Learning Goal 6Learning Goal 6

• WWhat are international economic communities?– Reduce trade barriers among themselves– Often establish common tariffs and other trade

barriers toward non-member countries– Best-known economic communities

• European Union• NAFTA• Mercosur

International Economic CommunitiesInternational Economic Communities

1. North American Free Trade AgreementNorth American Free Trade Agreement (NAFTA)– 1993 agreement creating free-trade zone

including Canada, Mexico, and United States

2. The European UnionThe European Union– organization of 15 European nations (as

of 1999) that fosters political and economic integration of Europe

– the eurodollar is a new currency to be distributed in 11 of the countries

Industries With High ExportIndustries With High ExportGrowth PotentialGrowth Potential

• Automobile parts & services

• Apparel

• Dental equipment

• Construction equipment

• Electronic components

• Toys & games

• Building products

• Industrial chemicalsSources: US Department of Commerce & North American Forum,

www.nafta.net

Learning Goal 7Learning Goal 7

• HHow do companies enter the global marketplace?– Exporting– Licensing– Contract manufacturing– Joint ventures– Direct investment

Participating inParticipating inthe Global Marketplacethe Global Marketplace

1.1. Exporting2. 2. Licensing

3. 3. Contract Manufacturing

4. 4. Joint Ventures

5. 5. Direct Foreign Investment

6. 6. Countertrade

• Nestle had a surplus of After Eight dinner mints packaged for Christmas

• Atwood Richards helped distribute the mints in Eastern Europe, a place where the packaging would appear to represent winter winter rather than ChristmasChristmas specifically

Countertrade ExampleCountertrade Example

Source: Atwood Richards, www.atwoodrichards.com

Learning Goal 8Learning Goal 8

• WWhat threats and opportunities exist in the global marketplace?– Government trade policies can be loose or

restrictive– Countries can be nationalistic– Governments can change– Products may fail due to lack of understanding

of the culture of the target country– Developing countries may lack an economic

infrastructure

Learning Goal 9Learning Goal 9

• WWhat are the advantages of multinational corporations?– Can sidestep restrictive trade and licensing

restrictions by having headquarters in more than one country

– Can move their operations from one country to the next based on more favorable economic conditions

– Can tap into a vast source of technological expertise by drawing upon the knowledge of a global workforce

Threats and OpportunitiesThreats and Opportunitiesin the Global Marketplacein the Global Marketplace

Threats:Threats:• intense nationalism

• language barriers

• cultural

misunderstanding

Opportunities:Opportunities:• ability to overcome trade

problems• can sidestep regulatory

problems• flexibility to shift

production as conditions change

• tap new technology from other countries

• save labor costs

Learning Goal 10Learning Goal 10

• WWhat are the trends in the global marketplace?– Firms will continue to seek opportunities

outside their country’s borders– When an organization enters a new global

market, competitors typically follow– Technological improvements in communication

and transportation will make it easier to sell and distribute products internationally

Trends Affecting Global Trade:Trends Affecting Global Trade:

1.1. Market ExpansionForecasting International has predicted that allall industries will go global (Source: HR News: The Society for Human Resource Management, Dec. 1999, p. 17)

2. 2. Resource Acquisition

3. 3. Competition

4.4. Technological Change

5.5. Government Actions