Selling goods and services in foreign markets can generate increased sales, produce operational efficiencies, expose companies to new technologies, and provide greater consumer choices. But venturing abroad also exposes companies to many new challenges. For instance, each country has unique ways of doing business, which must be learned: Laws, customs, consumer preferences, ethical standards, labor skill, and political and economic stability vary from country to country, and all can affect a firm's international prospects. Furthermore, volatile currencies, international trade relationships, and the threat of terrorism can indeed make global expansion a risky proposition.
This graph shows some of the challenges U.S. and European senior officials say they face when managing across different countries. Companies must recognize and respect differences in language, social values, ideas of status, decision-making habits, attitudes toward time, use of space, body language, manners, and ethical standards. Otherwise such differences can lead to misunderstandings in international business relationships, particularly if differences in business practices also exist. Furthermore, companies that sell their products overseas must often adapt the products to meet the unique needs of international customers.
The best way to prepare yourself for doing business with people from another culture is to study that culture in advance. In addition to the suggestion that you learn about the culture, seasoned international businesspeople offer the following tips for improving intercultural communication: Be alert to the other person’s customs. Deal with the individual. Clarify your intent and meaning. Adapt your style to the other person’s. Show respect.
All U.S. companies that conduct business in other countries must be familiar with U.S. law, international law, and the laws of the specific countries where they plan to trade or do business. For example, all companies doing international business must comply with the 1978 Foreign Corrupt Practices Act. This U.S. law outlaws actions such as bribing government officials in other nations to approve deals. It does, however, allow certain payments, including small payments to officials for expediting routine government actions. Critics of this U.S. law complain that payoffs are a routine part of world trade, so forbidding U.S. companies to follow suit cripples their ability to compete. Others counter that U.S. exports haven't been affected by this law and that companies can conduct business abroad without violating antibribery rules. Regardless of whether they agree or disagree with the law, some companies have had to forgo opportunities as a result of it.
Importing , the buying of goods or services from a supplier in another country, and exporting , the selling of products outside the country in which they are produced, have existed for centuries. Licensing is another popular approach to international business. License agreements entitle one company to use some or all of another firm’s intellectual property (patents, trademarks, brand names, copyrights, or trade secrets) in return for a royalty payment. Some companies choose to expand into foreign markets by franchising their operation. By franchising its operations, a firm can minimize the costs and risks of global expansion and bypass certain trade restrictions. A strategic alliance is a long-term partnership between two or more companies to jointly develop, produce, or sell products in the global marketplace. To reach their individual but complimentary goals, the companies typically share ideas, expertise, resources, technologies, investment costs, risks, management, and profits. A joint venture is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Some multinational corporations increase their involvement in foreign countries by establishing foreign direct investment (FDI). That is, they either establish production and marketing facilities in the countries where they operate or purchase existing foreign firms.
Whether you’re exporting, licensing, or franchising your products in a foreign country, you must decide on an appropriate strategy for your products. For instance, you must decide whether to standardize the product, selling the same product everywhere in the world, or to customize the product to accommodate the lifestyles and habits of local target markets. Keep in mind that the degree of customization can vary. A company may change only the product’s name or packaging, or it can modify the product’s components, size, and functions. Of course, understanding a country’s culture and regulations helps a company make these important choices.
No single country has the resources to produce everything its citizens want or need. Businesses and countries specialize in the production of certain goods and engage in international trade to obtain raw materials and goods that are unavailable to them or too costly for them to produce. International trade has many benefits: It increases a country’s total output, it offers lower prices and greater variety to consumers, it subjects domestic oligopolies and monopolies to competition, and it allows companies to expand their markets and achieve cost, production, and distribution efficiencies, known as economies of scale.
How does a country know what to produce and what to trade for? In some cases the answer is easy: a nation may have an absolute advantage, which means it can produce a particular item more efficiently than all other nations, or it is virtually the only country producing that product. Absolute advantages rarely last, however, unless they are based on the availability of natural resources. In most cases, a country can produce many of the same items that other countries can produce. The comparative advantage theory explains how a country chooses which items to produce and which items to trade for. The theory states that a country should produce and sell to other countries those items it produces more efficiently or at a lower cost, and it should trade for those it can't produce as economically.
Two key measurements of a nation's level of international trade are the balance of trade and the balance of payments. The total value of a country's exports minus the total value of its imports, over some period of time, determines its balance of trade. In years when the value of goods and services exported by the United States exceeds the value of goods and services it imports, the U.S. balance of trade is said to be positive: People in other countries buy more goods and services from the United States than the United States buys from them, creating a trade surplus . Conversely, when the people of the United States buy more from foreign countries than the foreign countries buy from the United States, the U.S. balance of trade is said to be negative. That is, imports exceed exports, creating a trade deficit. The balance of payments is the broadest indicator of international trade. It is the total flow of money into the country minus the total flow of money out of the country over some period of time. The balance of payments includes the balance of trade plus the net dollars received and spent on foreign investment, military expenditures, tourism, foreign aid, and other international transactions.
One trend that economists watch very carefully is the level of a nation’s imports and exports. The United States imports more consumer goods than it exports.
The United States exports more services than it imports.
Even though international trade has many economic advantages, sometimes countries practice protectionism; that is, they restrict international trade for one reason or another. Tariffs are taxes, surcharges, or duties levied against imported goods. Quotas limit the amount of a particular good that countries can import during a year. In its most extreme form, a quota becomes an embargo, a complete ban on the import or export of certain products. Sanctions are politically motivated embargoes that revoke a country's normal trade relations status; they are often used as forceful alternatives short of war. In addition to restricting foreign trade, governments sometimes give their domestic producers a competitive edge by using these protectionist tactics: Countries can assist their domestic producers by establishing restrictive import standards, such as requiring special licenses for doing certain kinds of business and then making it difficult for foreign companies to obtain such a license. Rather than restrict imports, some countries subsidize domestic producers so that their prices can compete favorably in the global marketplace. The practice of selling large quantities of a product at a price lower than the cost of production or below what the company would charge in its home market is dumping.
The major trade agreements and organizations include the GATT, the WTO, the APEC, the IMF, and the World Bank. These agreements and organizations support the basic principles of free trade. The General Agreement on Tariffs and Trade (GATT) is a worldwide pact that was first established in the aftermath of World War II. In 1995 GATT established the World Trade Organization (WTO), which has replaced GATT as the world forum for trade negotiations. The World Trade Organization (WTO) is a permanent forum for negotiating, implementing, and monitoring international trade and mediating trade disputes among its 144 members. The Asia Pacific Economic Cooperation Council (APEC) is an organization of 18 countries that are making efforts to liberalize trade in the Pacific Rim (the land areas that surround the Pacific Ocean). Among the member nations are the United States, Japan, China, Mexico, Australia, South Korea, and Canada. The International Monetary Fund (IMF) was founded in 1945 and is now affiliated with the United Nations. Its primary function is to provide short-term loans to countries that are unable to meet their budgetary expenses. Officially known as the International Bank for Reconstruction and Development, the World Bank was founded to finance reconstruction after World War II. It now provides low-interest loans to developing nations for improvement of transportation, telecommunications, health, and education.
Trading blocs are another type of organization that promotes international trade. Trading blocs can be advantageous or disadvantageous in promoting world trade, depending on one's perspective. Some economists are apprehensive about the growing importance of regional trading blocs. They fear that the world is splitting into three camps, revolving around the Americas, Europe, and Asia. Any nation that does not fall into one of these economic regions could suffer, they say, because members of the trading blocs could place severe restrictions on trade with nonmember countries. The critics fear that overall world trade could decline as members become more protective of their own regions. As a result, consumers could find themselves with fewer choices, and many producers could lose sales in lucrative foreign markets. Others claim, however, that trading blocs could improve world trade. The growth of commerce and the availability of customers and suppliers within a trading bloc could be a boon to smaller or younger nations that are trying to build strong economies. The lack of trade barriers within the bloc could help member industries compete with producers in more developed nations, and, in some cases, member countries could reach a wider market than before. Close ties to more stable economies could help shield emerging nations from fluctuations in the global economy and could promote a greater sharing of knowledge and technology; thereby aiding future economic development.
The four most powerful trading blocs today are the Association of Southeast Asian Nations (ASEAN), South America's Mercosur, the North American Free Trade Agreement (NAFTA), and the European Union (EU), with the latter two being the largest and most powerful.
In 1994 the United States, Canada, and Mexico formed a powerful trading bloc, the North American Free Trade Agreement (NAFTA). The agreement paves the way for the free flow of goods, services, and capital within the bloc by eliminating all tariffs and quotas on trades between the three nations. So far the score card for NAFTA seems positive. It has been a huge success in promoting trade between the U.S. and its Mexican and Canadian neighbors. Canada and Mexico now send more than 85 percent of their exports to the U.S. and get a similar percentage of their imports from the United States. That mighty stream can total $2 billion a day. Fears that NAFTA would move U.S. jobs across the border have proved unfounded. Moreover, the impact of NAFTA on U.S. jobs has been relatively small. Ultimately, NAFTA's supporters would like to see the agreement expanded to include all of Central and South America—making it the largest free-trade zone on the planet.
One of the largest trading blocs is the European Union (EU), which combines 15 countries and more than 370 million people. Talks are under way to admit more countries, including the Czech Republic, Estonia, Hungary, Slovenia, and Poland. EU nations are working to eliminate hundreds of local regulations, variations in product standards, and protectionist measures that limit trade between member countries. Eliminating barriers enables the nations of the EU to function as a single market, with trade flowing between member countries as it does between states in the United States. Increasingly, the rules governing the food we eat, the software we use, and the cars we drive are set in Brussels, the unofficial capital of the European Union. The European Union, which regulates more frequently and more rigorously than the United States — especially when it comes to consumer protection — significantly impacts global product standards. When it comes to consumer or environmental protections, EU regulators believe it’s better to be safe than sorry. That approach evolved partly from a series of food scares in Europe over the past 10 to 14 years such as the mad-cow disease. It also reflects the fact that Europeans are more inclined than Americans to expect government to protect them.
In 1999, 11 of the 15 countries formed the economic and monetary union (EMU) and turned over control of their individual monetary policies to the newly created European Central Bank. With a combined population of about 376 million people, these 11 countries account for about 20 percent of the world's gross domestic product (GDP), making them world’s second largest economy. One of the driving forces behind the decision to join forces was the anticipated advantages these 11 countries would enjoy by creating a unified currency called the euro. European leaders believe it will build a bond among Europe’s cities and improve trade. Moreover, the euro could wipe out some $65 billion annually in currency exchange costs among participants and cut the middleman out of trillions of dollars' worth of foreign exchange transactions. U.S. businesses and travelers alone could save as much as 50 percent of the costs they now pay to convert dollars into multiple European currencies. And, with prices in these 11 nations now visible in one currency, consumers can compare prices on similar items whether they are sold in Lisbon or Vienna.
The number of yen, francs, or pounds that must be exchanged for every dollar, mark, or won is known as the exchange rate between currencies. Most international currencies operate under a floating exchange rate system; thus, a currency's value or price fluctuates in response to the forces of global supply and demand. Because supply and demand for a currency are always changing, the rate at which it is exchanged for other currencies may change a little each day. Even though most governments let the value of their currency respond to the forces of supply and demand, sometimes a government will intervene and adjust the exchange rate of its country's currency. Why would a government do this? One reason is to keep the price of a nation's goods and services more affordable in the global marketplace and to protect the nation's economy against trade imbalances. Another is to boost or slow down the country's economy. Devaluation, or the drop in the value of a nation's currency relative to the value of other currencies, can at times boost a country's economy because it makes the country's products and services more affordable in foreign markets while it increases the price of imports. Some countries fix, or peg, the value of their currencies to the value of more stable currencies, such as the dollar or the yen, instead of letting it float freely. Hong Kong, for example, pegs its currency to the U.S. dollar.
In the global marketplace, the problems of one country can greatly affect world economics. The September 11 terrorist attacks on the World Trade towers in New York city and the Pentagon in Washington D.C. were targeted at the American people and its free-market system, but economically the attacks knew no borders. When American’s stop buying—even if for only a short period of time—the world feels the impact. One of the more likely outcomes of the September 11 terrorist attacks is that world trade will face new obstacles. The war on terrorism has changed the rules of international travel with tighter security, longer delays at borders, cargo restrictions, and higher transport costs.
Business in Action Ch3
Competing in the Global Economy
The Global Business Environment Opportunities <ul><li>Growth Potential </li></ul><ul><li>Increased Sales </li></ul><ul><li>Operating Efficiencies </li></ul><ul><li>New Technologies </li></ul><ul><li>More Consumer Choices </li></ul>Challenges <ul><li>Laws and Customs </li></ul><ul><li>Consumer Preferences </li></ul><ul><li>Ethical Standards </li></ul><ul><li>Labor Skills </li></ul><ul><li>Politics and Economics </li></ul>
Cultural Differences In Global Business <ul><li>Consider the other person’s customs </li></ul><ul><li>Deal with the individual </li></ul><ul><li>Clarify your intent and meaning </li></ul><ul><li>Adapt your style to the other person </li></ul><ul><li>Show respect </li></ul>
Legal Differences In Global Business U.S. Laws International Laws Country-Specific Laws
International Business Activity Importing and Exporting Licensing and Franchising Strategic Alliances and Joint Ventures Direct Foreign Investment Ownership Financial Risk Low Low Low Low Low Low Moderate Moderate Moderate High High High Common Forms Levels of Commitment
International Product Strategies Standardization Customization
Why Do Nations Trade? Greater Total Output Wider Variety of Goods Expanded Markets Lower Prices Increased Local Competition Economies of Scale
Theories of Production and Trading Absolute Advantage Comparative Advantage
Measuring International Trade Balance of Trade Balance of Payments Surplus Deficit Cash Inflow Cash Outflow
U.S. Exports and Imports—Goods Exports Imports Foods, feeds, & beverages Industrial supplies & materials Machinery and transport equipment (except automotive) Automotive vehicles, engines, & parts Consumer goods (nonfood) (in $ billions) 0 50 100 150 200 250 300 350
U.S. Exports and Imports—Services (in $ billions) 0 10 20 30 40 50 60 70 80 90 100 Exports Imports Business, technical, professional Educational, financial, insurance, telecommunications Royalties & license fees Travel & passenger fares Freight & port services
Agreements and Organizations Promoting Free Trade <ul><li>General Agreement on Tariffs and Trade (GATT) </li></ul><ul><li>World Trade Organization (WTO) </li></ul><ul><li>Asia Pacific Economic Cooperation Council (APEC) </li></ul><ul><li>International Monetary Fund (IMF) </li></ul><ul><li>The World Bank </li></ul>
Trading Blocs Advantages <ul><li>Help smaller countries </li></ul><ul><li>Promote competition </li></ul><ul><li>Widen markets </li></ul><ul><li>Foster economic growth </li></ul>Disadvantages <ul><li>Economic isolation </li></ul><ul><li>Trade restrictions </li></ul><ul><li>Decline in world trade </li></ul><ul><li>Fewer choices </li></ul>
Global Trading Blocs European Union (EU) North American Free Trade Agreement (NAFTA) Association of Southeast Asian Nations (ASEAN) South America’s Mercosur Argentina Brazil Paraguay Uruguay Brunei Indonesia Philippines Singapore Thailand Canada Mexico United States Austria Belgium Finland France Germany Ireland Italy Luxembourg Netherlands Portugal Spain
North American Free Trade Agreement (NAFTA) United States Canada Mexico
The European Union Minimizing Establishing Local Regulations Variations in Product Standards Trade Protectionism Global Product Standards Consumer Protection Environmental Protection
Impact of the Euro Economic Impact Centralized Banking Foreign Exchange Costs Unified Currency
Foreign Exchange Rates and Currency Valuations Floating Exchange Rates Government Intervention Currency Devaluation Fixed Value System
Impact of Terrorism on Global Business Tighter Security More Delays Increased Costs Cargo Restrictions