Chapter 4 Competing in Global Market Course: BUS 101 Lecturer: Aunima Nazmun Nahar (NNA) Overview • • • • • • Why nations trade Absolute and comparative advantage Barriers to international trades Types of trade restriction Going global Developing a strategy for international business Why nations trade 1. International Factors of Production: Business decisions to operate abroad depend on the basic factors of production in the foreign country. These are▫ Availability, price, and quality of labor: Example: RMG in BD ▫ Natural resources: Example: Diamond in South Africa or Oil in Saudi Arabia ▫ Capital. Example: India, UK, US Why nations trade (cont) 2. Diversifying Risk: Trading with other countries also allows a company to spread risk because different nations may be at different stages of the business cycle or in different phases of development. If demand falls off in one country, the company may still enjoy strong demand in other nations. • Example: Nandos in BD vs Nandos in UK, Pizza hut in India vs Pizza hut in BD Why nations trade (cont) 3. Size of the International Marketplace: As developing nations expand their involvement in global business, the potential for reaching new groups of customers dramatically increases. on the other hand developed nations (US or UK) expand their business to the developing nation due to the huge population (India, China) and the GDP growth rate (Malaysia) in those countries Absolute and Comparative Advantage • A country has an absolute advantage in making a product for which it can maintain a monopoly or that it can produce at a lower cost than any competitor. ▫ Absolute advantages are rare these days. But some countries manage to approximate absolute advantages in some products. Climate differences can give some nations or regions an advantage in growing certain plants. Saffron is cultivated primarily in Spain, where the plant thrives in its soil and climate. Absolute and Comparative Advantage • A nation can develop a comparative advantage in a product if it can supply it more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries ▫ Software development in India due to high educational skill and low salary demand by them ▫ RMG sector by China and India due to low labor cost Barriers to International Trade 1. Social and Cultural Differences: ▫ ▫ ▫ ▫ Language: China, Thailand Culture: in Mexico yellow flower can’t be given in any special occasion as a gift coz it’s used in funeral Value: European society values employee benefits more than US society. They provide a four weeks of paid vacation for employees whereas US doesn’t provide it in the first year Religious attitude: Islamic Banking system in BD Barriers to International Trade (cont) 2. Economic differences: Business opportunities are flourishing in densely populated countries such as China and India, as local consumers eagerly buy Western products. Although such prospects might tempt American firms, managers must first consider the economic factors before trading with those countries. The key economic factors are: a) Infrastructure b) Currency conversion and shifts Barriers to International Trade (cont) a) Infrastructure: refers to basic systems of communication (telecommunications, television, radio, and print media), transportation (roads and highways, railroads, and airports), and energy facilities (power plants and gas and electric utilities). The Internet and technology use can also be considered part of infrastructure. Example: Ethiopia doesn’t accept any debit or credit card which is a drawback in trading with this country. Power problem in BD Barriers to International Trade (cont) b) Currency Conversion and Shifts: Shifts in exchange rates can also influence the attractiveness of various business decisions. A devalued currency may make a nation less desirable as an export destination because of reduced demand in that market. However, devaluation can make the nation desirable as an investment opportunity because investments there will be a bargain in terms of the investor’s currency. Example: RMG in BD Barriers to International Trade (cont) 3. Political and Legal Differences: ▫ Political Climate: The current RMG sector in Bangladesh ▫ Legal Environment: The Foreign Corrupt Practices Act forbids U.S. companies from bribing. Still, corruption creates a difficult obstacle for Americans who want to do business in many foreign countries. Chinese pay huilu, and Russians rely on vzyatka. In the Middle East, palms are greased with baksheesh. ▫ Lack of International Regulations: Software piracy in Asia voids the intellectual property rights laws and regulations enforced by the World Trade Organization (WTO) Types of Trade Restrictions • Tariffs: Taxes, surcharges, or duties on foreign products are referred to as tariffs. Two types: revenue and protective tariffs ▫ The purpose of revenue tariffs generate is to income for the government ▫ The sole purpose of a protective tariff is to raise the retail price of imported products to match or exceed the prices of similar products manufactured in the home country. Types of Trade Restrictions • Nontariff Barriers: ▫ Quotas limit the amounts of particular products that countries can import during specified time periods. ▫ An embargo imposes a total ban on importing a specified product or even a total halt to trading with a particular country. 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 Going Global • Levels of Involvement: After a firm has completed its research and decided to do business overseas, it can choose one or more strategies: 1. Exporting or importing 2. Entering into contractual agreements: a) franchising, b) Licensing c) subcontracting deals 3. Off shoring 4. Direct investment in the foreign 1. Importers and Exporters ▫ When a firm brings in goods produced abroad to sell domestically, it is an importer. ▫ Conversely, companies are exporters when they produce or purchase goods at home and sell them in overseas markets ▫ The most basic level of international involvement ▫ Least risk and Least control ▫ Two types of exporting: Direct and Indirect exporting ▫ A company engages in indirect exporting when it manufactures a product that becomes part of another product that is sold in foreign markets. ▫ direct exporting occurs when a company seeks to sell its own products in markets outside its own country 2. Contractual Agreements: a) A franchise is a contractual agreement in which a wholesaler or retailer (the franchisee) gains the right to sell the franchisor’s products under that company’s brand name if it agrees to the related operating requirements. The franchisee can also receive marketing, management and business services from the franchisor. E.g. Pizza Hut b) In a 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, the firm gets a royalty or other compensation. E.g. Coca cola c) Subcontracting involves hiring local companies to produce, distribute, or sell goods or services. It allows a foreign firm to take advantage of the subcontractor’s expertise in local culture, contacts, and regulations. 3. Off-shoring or the relocation of business processes to a lower-cost location overseas. ▫ E.g. China for product off-shoring and India for service off-shoring 4. International Direct Investment: a) Acquisition: When a company purchases another existing firm in the host country. Facebook acquired Whats app b) Joint ventures allow companies to share risks, costs, profits, and management responsibilities with one or more host country nationals. Lafarge-Surma Lotus-Tesco Developing a Strategy for International Business 1. Global business (or standardization) strategy; where a firm sells the same product in essentially the same manner throughout the world 2. Multi-domestic business strategy: developing and marketing products to serve different needs and tastes of separate national markets.