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Competing in Global Markets

Chapter 4

Why Nations Trade

• Boosts economic growth by providing a market for its products and access to needed resources

• Expands markets

• More efficient production and distribution systems

• Less reliance on 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.

• Decisions to operate abroad depend upon availability, price, and quality of:

– Labor– Natural resources– Capital– Entrepreneurship

• Companies can spread risk throughout nations

International Sources

of

Factors of Production

Absolute advantage: the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than all its competitors, using the same amount of resources.

Example

Considering that labor and material costs are all equivalent, Country C has the absolute advantage over both Country B and Country A because it can produce the most parts per hour at the same cost as other nations. 

Absolute and

Comparative

Advantage

Comparative advantage: Country can supply a product more efficiently and at lower cost than it can supply other goods, compared with another country.

Example: Pakistan can produce 4,000 yards of textile per day or 1 ton of chocolate per day.Belgium can produce 1,000 yards of textile a day or 4 tons of chocolate per day.

Conclusion:Pakistan has a comparative advantage in producing textiles.Belgium has a comparative advantage in chocolate.

Absolute and

Comparative

Advantage

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

**For the period July 2010 to June 2011, Bangladesh’s balance of trade was $ -7328 million i.e. we imported more than we exported.

**For the period July 2010 to June 2011, Bangladesh’s balance of payment was $ -635 million i.e. we paid more than we received.

Barriers to

International Trade

The barriers to trade range from specific rules and laws to implicit barriers like language and values.

• Language: Potential problems include mistranslation, inappropriate messaging, lack of understanding of local customs and differences in taste.

Social and

Cultural

DifferencesValues 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.

e.g. - Pepsi attempted a Chinese translation of “Come Alive, You’re in the Pepsi Generation” that read to Chinese customers as “Pepsi Brings Your Ancestors Back from the Dead.”

- KFC’s patented slogan “Finger-Lickin’ Good” was understood in Japanese as “Bite Your Fingers Off.”

Touching People on Top of Their Heads is an Invasive Gesture in Buddhist Countries

Thumbs Up Gesture is Common in the West, But Could Cause Offense in Other Countries

Some other examples of

social and cultural

differences

Economic

Differences

• Infrastructure: Basic systems of communication (telecommunications, television, radio and print media), transportation (roads and highways, railroads, airports), energy facilities (power plants, gas and electric utilities), and financial systems (banks, financial institutions and financial markets).

• Currency Conversion and Shifts: Fluctuating values can make pricing in local currencies difficult and affect decisions about market desirability and investment opportunities.

• Political Climate

– Stability is a key consideration.

• Legal Environment

– Local law

– International regulations

– Foreign country’s law

• International Regulations

– Treaties between and among countries.

– Tariffs are taxes charged on imported goods.

– Enforcement problems, as with piracy

Political and Legal

Differences

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. Quota prevents dumping. 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.

Types of Trade

Restrictions

What foreign market(s) will the company enter?

Analysis of local demand, availability of resources

Existing and potential competition, tariff rates, currency stability, investment barriers

What expenditures are required to enter a new market?

Going Global

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 &

Franchising

• Countertrade – international transactions that do not involve currency payments but use bartering.

• Franchising – a contractual agreement where a local entity gains rights to sell the franchisor’s product under that company’s brand name if it agrees to the related operating requirements. Transcom Bangladesh is the franchise partner of KFC and Pizza Hut.

• Foreign licensing agreement one firm allows another to produce or sell its product, or use its trademark, patent or manufacturing processes, in a specific geographical area, in return for a royalty fee.

• Subcontracting involves hiring local firms to distribute, produce or sell goods and services.

Basic difference between

franchising and licensing

The biggest difference is the cost of establishing and operating the business.

In a licensing arrangement, you have more freedom in the operation of your business than with a franchising situation, but also more responsibility.

Franchising allows the franchisor (parent company) more control over how the franchisee operates business.

The franchisor usually continues to support the operation of the franchisee’s business by providing advertising, accounting, training, and related services.

Offshoring & Direct

Investment

• The relocation of business processes to a lower-cost overseas location is offshoring.

• The ultimate level of global involvement is direct investment– Directly operating production and marketing in foreign country.– Acquisition– Joint Ventures

Multinational corporation (MNC) An organization with significant foreign operations and marketing activities outside its home country.

Multinational

Corporations

Chevron (Petroleum Industry)

Grameenphone Ltd (Concern of Telenor, Telecommunication industry)

Unilever Bangladesh (FMCG)

Standard Chartered Bank (Banking Industry)

HSBC(Banking Industry)

Citi NA (Citi Group, Banking Industry)

Siemens (Electronics)

Nokia Siemens (Joint Venture of Nokia and Siemens)

Ericsson(Telecom service industry)

British American Tobacco (Cigarette)

Nestle Bangladesh (FMCG)

Mobil (Petroleum Industry)

List of some MNCs in

Bangladesh

Global Business (standardization) Strategies

• Firm sells same product in essentially the same manner throughout the world.

• A global marketing perspective can be appropriate for some goods and services and certain market segments that are common to many nations. This approach works well for products with nearly universal appeal and for luxury items such as jewelry.

Multidomestic (adaptation) Business Strategies

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

Developing a

Strategy for

International Business