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CHAPTER 3 © Corbis / Jupiterimages Competing in the Global Marketplace The Future of Business The Essentials 4th Edition Gitman & McDaniel Chapter 3 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved Prepared by Deborah Baker CHAPTER 3 Learning Goals 1 Why is global trade important to the United States and how is it measured? 2 Why do nations trade? 3 What are the barriers to international trade? 4 How do governments and institutions foster world trade? 2 5 What are international economic communities? 6 How do companies enter the global marketplace? 7 What threats and opportunities exist in the global marketplace? 8 What are the advantages of multinational corporations? 9 What are the trends in the global marketplace? CHAPTER 3 Learning Goals (continued) 3 Global Trade in the United States 1 1 Why is global trade important to the United States and how is it measured? 4 Global Vision Recognizing and reacting to international business opportunities Being aware of threats from foreign competitors Effectively using international distribution networks 1 5 The Importance of Global Business to the U.S. 1 U.S. exports a fifth of industrial production and a third of its farm products One of every five jobs in U.S. is supported by exports A third of U.S. corporate profits is from international trade and foreign investment Exports accounted for almost 25 percent of U.S. economic growth 6 Measuring Trade Between Nations exports Goods and services produced in one country and sold to other countries. imports Goods and services that are bought from other countries. 1 7 Measuring Trade Between Nations 1 balance of trade The difference between the value of a country’s exports and the value of its imports during a specific time. balance of payments A summary of a country’s international financial transactions showing the difference between the country’s payments to and its receipts from other countries. floating exchange rate A system in which prices of currencies move up and down based upon the demand for and supply of the various currencies. 8 CONCEPT check What is global vision, and why is it important? What impact does international trade have on the U.S. economy? Explain the impact of a currency devaluation. 1 9 Why Nations Trade 2 2 Why do nations trade? 10 Demographic Factors absolute advantage A country can produce and sell products at a lower cost and is the only provider of a product comparative advantage A country should specialize in the products that it can produce most readily and cheaply, and trade those for goods that foreign countries can produce most readily and cheaply 2 11 The Fear of Trade and Globalization outsourcing Sending work functions to another country resulting in domestic workers losing their jobs. 2 12 Benefits of Globalization Productivity grows more quickly when countries produce goods and services in which they have a comparative advantage. Global competition and cheap imports keep prices down An open economy spurs innovation The U.S. buys $2 trillion a year from other countries Prices for many heavily traded goods have fallen Income from U.S. foreign subsidiaries is over $200 billion a year 2 13 CONCEPT check Describe the policy of free trade and its relationship to comparative advantage. Why do people fear globalization? What are the benefits of globalization? 2 14 Barriers to Trade 3 3 What are the barriers to international trade? 15 Barriers to Trade Natural Barriers Tariff Barriers Nontariff Barriers 3 16 For and Against Tariffs For Tariffs Protect infant industries Against Tariffs Discourage free trade Raise prices Protect American jobs Aid in military preparedness 3 17 Nontariff Barriers 1. Import quotas 2. Embargos 3. Buy-National Regulations 4. Exchange Controls 3 18 CONCEPT check Discuss the concept of natural trade barriers. Describe several tariff and nontariff barriers to trade. 3 19 Fostering Global Trade 4 4 How do governments and institutions foster world trade? 20 Fostering Global Trade Antidumping Laws The Uruguay Round and the WTO The World Bank and International Monetary Fund 4 21 Antidumping Laws dumping The practice of charging a lower price for a product in foreign markets than in the firm’s home market. 4 22 The Uruguay Round and the WTO The Uruguay Round A 1994 agreement to lower trade barriers worldwide. World Trade Organization (WTO) An organization established by the Uruguay Round in 1994 to oversee international trade, reduce trade barriers, and resolve disputes among member nations. 4 23 The World Bank and International Monetary Fund The World Bank An international bank that offers low-interest loans, as well as advice and information, to developing nations. International Monetary Fund (IMF) An international organization, founded in 1945, that promotes trade, makes short-term loans to member nations, and acts as a lender of last resort for troubled nations. 4 24 CONCEPT check Describe the purpose and role of the WTO. What are the roles of the World Bank and the IMF in world trade? 4 25 International Economic Communities 5 5 What are international economic communities? 26 International Economic Communities preferential tariff A tariff that is lower for some nations than for others. free-trade zone An area where the nations allow free, or almost free, trade among each other while imposing tariffs on goods of nations outside the zone. 5 27 International Economic Communities North American Free Trade Agreement Central America Free Trade Agreement The European Union 5 28 CONCEPT check Explain the pros and cons of NAFTA. What is the European Union? Will it ever be a United States of Europe? 5 29 Participating in the Global Marketplace 6 6 How do companies enter the global marketplace? 30 Why Go Global? Earn additional profits Leverage a unique product or technological advantage Possess exclusive market information Saturated domestic markets and excess capacity Potential for cost savings 6 31 Entering the Global Marketplace 6 Export Sell domestically produced products to buyers in other countries. Licensing Legal process allowing use of manufacturing/patents/knowledge. Contract Manufacturing Private-label manufacturing by a foreign country Joint Venture Domestic firm buys/joins a foreign company to create new entity. Direct Investment Active ownership of a foreign company/manufacturing facility. 32 Entering the Global Marketplace countertrade A form of international trade in which part or all of the payment for goods and services is in the form of other goods and services. 6 33 CONCEPT check Discuss several ways that a company can enter international trade. Explain the concept of countertrade. 6 34 Threats and Opportunities in the Global Marketplace 7 7 What threats and opportunities exist in the global marketplace? 35 Political Considerations nationalism A sense of national consciousness that boosts the culture and interests of one country over those of all other countries. In a hostile climate, a government may expropriate or confiscate a foreign company’s assets. 7 36 Economic Environment Infrastructure 7 Money and banking Education Transportation Communications Energy Market system 37 CONCEPT check Explain how political factors can affect international trade. Describe several cultural factors that a company involved in international trade should consider. How can economic conditions affect trade opportunities? 7 38 Impact of Multinational Corporations 8 8 What are the advantages of multinational corporations? 39 The Impact of Multinational Corporations multinational corporations Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located. 8 40 The Multinational Advantage 8 Overcome trade problems Sidestep regulatory problems Shift production from one plant to another Tap new technology from around the world Save in labor costs 41 CONCEPT check What is a multinational corporation? What are the advantages of multinationals? 8 42 Trends in Global Competition 9 9 What are the trends in the global marketplace? 43 CONCEPT check What trends will foster continued growth in world trade? Describe some of the ways businesses can take advantage of these trends to “go global.” 9 44