Chapter 4

Competing in World Markets

Learning Objectives

1 Explain the importance of international 4 Explain how international trade

business and the primary reasons nations organizations and economic
trade and discuss the concepts of communities reduce barriers to
absolute and comparative advantage in international trade.
international trade.
5 Compare the different levels of
2 Describe how nations measure involvement used by businesses
international trade and the significance of when entering global markets.
exchange rates.
6 Distinguish between a global
3 Identify the major barriers that confront business strategy and a
global businesses. multidomestic business strategy.
 Why Nations Trade

Boosts economic growth

Expands markets
More efficient production systems
Less reliance on the economies of home nations

Exports: Domestically produced goods and services

sold in markets in other countries.
Imports: Foreign-made products and services
purchased by domestic consumers.
International Sources of Factors
of Production
Decisions to operate abroad depend upon
availability, price, and quality of:
– Labor

– Natural resources

– Capital

– Entrepreneurship

Companies doing business overseas must make

strategic decisions.
Additional Environmental Factors
to which Companies are Exposed
New social and cultural factors
Economic and political environments
Legal restrictions

Companies can expand their markets, seek growth

opportunities in other nations, make their production
and distribution systems more efficient, and reduce
their dependence on the economies of their home
nations.
Population Size and Prosperity
Though developing nations generally have lower per capita
income, many have strong GDP growth rates and their huge
populations can be lucrative markets.
Top 10 Trading Partners with U.S.
Absolute and Comparative
Advantage
Absolute advantage: Country can maintain a
monopoly or produce at a lower cost than any
competitor.
Example: China’s domination of silk production for
centuries.

Comparative advantage: Country can supply a

product more efficiently and at lower cost than it can
supply other goods, compared with other countries.
Example: India’s combination of a highly educated
workforce and low wage scale in software development.
Measuring Trade Between
Nations
Balance of trade: Difference between a nation’s
imports and exports.
Balance of payments: Overall flow of money into or
out of a country.

Balance of payments surplus = more money into

country than out
Balance of payments deficit = more money out of
country than in
Major U.S. Exports and Imports
 U.S. demand for imported goods is partly a reflection of the nation’s prosperity and
diversity.
 U.S. imports more goods than it exports but exports more services than it imports.
 Exchange Rates

• the rate at which its currency can be exchanged for the

currencies of other nations.
• Foreign exchange rates are influenced by a number of
factors, including domestic economic and political
conditions, central bank intervention, balance-of-payments
position, and speculation over future currency values.
• Devaluation
drop in a currency’s value relative to other currencies
or to a fixed standard
Barriers to International Trade
 Social and Cultural Differences

 Language: Potential problems include mistranslation,

inappropriate messaging, lack of understanding of
local customs, and differences in taste.

 Values and Religious Attitudes: Differing values

about business efficiency, employment levels,
importance of regional differences, and religious
practices, holidays, and values about issues such as
interest-bearing loans.
 Economic Differences

 Infrastructure: Basic systems of communication,

transportation, energy facilities, and financial systems.

 Currency Conversion and Shifts: Fluctuating values

can make pricing in local currencies difficult and affect
decisions about market desirability and investment
opportunities.
 Political and Legal Differences
 Political Climate
 Stability is a key consideration.
 Legal Environment
 Law
 International regulations
 Country’s law
 International Regulations
 Treaties between nations.
 Tariffs are taxes charged on imported goods.
 Enforcement problems, as with piracy.
 Types of Trade Restrictions
 Tariffs - taxes, surcharges, or duties on foreign products.
 Tariffs generate income for the government.
 Protective tariffs raise prices of imported goods to level the
playing field for domestic competitors.
 Nontariff Barriers - also called administrative trade
barriers
 Quotas limit the amount of a product that can be imported
over a specified time period.
 Dumping is the act of selling a product abroad at a very low
price.
 An embargo imposes a total ban on importing a specified
product.
 Exchange controls through central banks or government
agencies regulate the buying and selling of currency to shape
foreign exchange in accordance with national policy.
 Reducing Barriers to Trade
 The world is moving toward more free trade.

 There are many communities and groups that

monitor and promote trade
 International Economic Communities reduce trade
barriers and promote regional economic
cooperation.
 Free-trade area: Members trade freely among selves without
tariffs or trade restrictions.
 Common market: Members bring all trade rules into agreement.
 Organizations Promoting Trade
 General Agreement on Tariffs and Trade
(GATT)
 Most industrialized nations found organization in 1947 to
reduce tariffs and relax quotas.
 The World Trade Organization succeeded GATT
 Representatives from 159 countries
 Reduce tariffs and promote trade
 World Bank
 Funds projects to build and expand infrastructure in
developing countries
 International Monetary Fund (IMF)
 Operates as lender to troubled nations in an effort to
promote trade
 International Economic
Communities
 North American Free Trade Agreement (NAFTA)
 World’s largest free-trade zone: United States, Canada, Mexico.
 U.S. and Canada are each other’s biggest trading partners.

 Central America-Dominican Republic Free Trade

Agreement (CAFTA)
 Free-trade zone among United States, Costa Rica, the Dominican
Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
 $33 billion traded annually between U.S. and these countries.

 European Union
 Best-known example of a common market.
 Goals include promoting economic and social progress, introducing
European citizenship as complement to national citizenship, and
giving EU a significant role in international affairs.
 Going Global
 Determining which
foreign market(s) to
enter
 Analyzing the
expenditures required to
enter a new market
 Deciding the best way to
organize the overseas
operations
International Trade Research
 Levels of Involvement
 Risk increases with the level of
involvement
 Many companies employ
multiple strategies
 Exporting and importing are
entry-level strategies
 Importing is the process of
bringing in goods produced
abroad.
 Exporting is the act of selling
your goods overseas.
 Countertrade and Franchising
 Countertrade – international
transactions that do not involve
currency payments but use bartering.
 Franchising – a contractual
agreement in which a local entity
gains rights to sell the franchisor’s
product in the foreign market.
 A foreign licensing agreement
allows a firm to produce or sell its
product.
 Subcontracting involves hiring local
firms to distribute, produce, or sell
goods and services.
 Offshoring and Direct Investment

 The relocation of business processes to a lower-cost

overseas location is offshoring.
 Not initiating business but gaining cost savings

 Extremely controversial

 The ultimate level of global involvement is direct

investment.
 Directly operating production and marketing in foreign
country
 Acquisition

 Joint ventures

 Overseas division
Multinational Corporations
 Multinational corporation (MNC) - An
organization with significant foreign operations
and marketing activities outside its home country.
 Developing a Strategy for
International Business

 Global Business (Standardization) Strategies

 Firm sells same product in essentially the same manner
throughout the world.
 Works well for products with nearly universal appeal.

 Multidomestic (Adaptation) Strategies

 Firm develops products and marketing strategies that
appeal to customs, tastes, and buying habits of
particular national markets.