Computing in global markets assessing the global conditions Chapter 4 ITB.ppt
- 1. Chapter 4 Competing in Global Market Assessing the Global conditions
- 2. The Learning Goals of this chapter are to: • Explain the motives for U.S. firms to engage in international business. • Describe how firms conduct international business. • Explain how barriers to international business have been reduced and describe the barriers that remain. • Explain how foreign characteristics can influence a firm’s international business.
- 3. 1. Explain the motives for U.S. firms to engage in international business. • How International Business Can Enhance Performance? • International business can enhance a firm’s performance by increasing its revenue or reducing its expenses. Result leads to higher profits for the firm. There are various motives for international business, and each of them allows the firm to benefit in a manner that can enhance its performance. • Some of the more common motives to conduct international business are: • Attract foreign demand • Capitalize on technology • Use inexpensive resources • Diversify internationally
- 6. The motivation of firms to attract foreign demand is summarized in a recent annual report of Procter & Gamble (P&G):
- 7. In a recent National Small Business poll conducted for the NFIB Research Foundation, the owners of small businesses that conduct international business were asked about their strategy for generating sales in foreign countries. Their responses are shown below:
- 8. They were also asked where they generated most of their international sales in the last three years. Their responses are shown below:
- 9. • Many U.S. firms have established new businesses in the so-called developing countries (such as those in Latin America), which have relatively low levels of technology. • Ford Motor Company and General Motors have attempted to capitalize on their technological advantages by establishing plants in developing countries throughout Asia, Latin America, and eastern Europe. • IBM is doing business with the Chinese government to capitalize on its technology. • Amazon.com capitalize on its technology advantage by expanding in foreign countries where technology is not as advanced.
- 12. • When all the assets of a firm are designed to generate sales of a specific product in one country, the profits of the firm are normally unstable. This instability is due to the firm’s exposure to changes within its industry or within the economy. U.S. firms that conduct international business are affected less by U.S. economic conditions. • For example, the demand for PepsiCo’s products in Mexico might decline if the Mexican economy is weak, but at the same time economic growth in Brazil, the Netherlands, and Spain might result in a higher overall demand for PepsiCo’s products
- 14. Decision Making: Using International Business to Reduce Expenses • Victory Company produces computer games and sells them in the United States. Its major concern is the high cost of producing the computer chips that it uses in the computer games. None of the U.S. chip manufacturers can produce the chips at a lower cost, so Victory Company contacts a supplier in China and describes the types of computer chips that it needs. The supplier offers to produce and transport computer chips to Victory Company for a price that is 30 percent below Victory’s prevailing cost of producing its own chips. By shifting its production of chips to China, Victory Company is able to reduce its production expenses and compete more effectively in the computer game industry. • 1. Explain why Victory Company can obtain the chips from the supplier in China at a lower price than a U.S. supplier would charge. • 2. Explain how a tax on the computer chips imported from China could affect Victory’s profits.
- 15. Answers • The cost of labor in China is very low, which results in a lower cost of producing many types of products and • A tariff on chips from China would raise the price that Victory Company would have to pay for the chips. Thus, Victory’s cost of obtaining the chips would increase and its profits would decrease.
- 16. • Firm may use various methods to conduct international business. The more common methods of conducting international business that a firm should consider are: • Importing • Exporting • Direct foreign investment (DFI) • Outsourcing • Strategic alliances
- 17. • Importing involves the purchase of foreign products or services. For example, some U.S. consumers purchase foreign automobiles, clothing, cameras, and other products from firms in foreign countries. Many U.S. firms import materials or supplies that are used to produce products. Even if these firms sell the products locally, they can benefit from international business. They import foreign supplies that are less expensive or of a higher quality than alternative U.S. supplies.
- 18. • Factors That Influence the Degree of Importing • Tariff: A tax on imported products. The tax is normally paid directly by the importer, who typically passes the tax on to consumers by charging a higher price for the product. • Quota: A limit on the amounts of specific products that can be imported • China has a quota on Cambodian rice exports of 300,000 tons per years. • Pakistan is importing 2.6 million tons wheat from Russia (Federal minister for National food security and research)
- 19. • Exporting is the sale of products or services (called exports) to purchasers residing in other countries. Many firms, such as DuPont, Intel, and Zenith, use exporting as a means of selling products in foreign markets
- 20. Import-Export Balances • Balance of Trade: The level of exports minus the level of imports • Trade Deficits: the amount by which imports exceed exports • A negative balance of trade is referred to as a trade deficit and means that the United States is importing (purchasing) more products and services from foreign countries than it is selling to foreign countries.
- 24. • Although DFI can often be feasible, firms should conduct a thorough analysis of the costs and benefits before investing. Once funds are spent on DFI, the decision cannot easily be reversed because the foreign facilities would have to be sold at a loss in most cases.
- 25. • Many U.S. businesses outsource some of their production to companies such as this one in New Delhi, India. • Firms commonly outsource some of their services to foreign countries as a means of using cheaper labor
- 27. • Another type of alliance is an international licensing agreement, in which a firm allows a foreign company (called the “licensee”) to produce its products according to specific instructions. • The foreign firm is given the technology to produce the products. As the foreign firm sells the products, it channels a portion of revenue to the licensing firm. The advantage of licensing is that the firm is able to sell its product in foreign markets without the costs involved in exporting or direct foreign investment.
- 28. 3. Barriers to International Business • Explain how barriers to international business have been reduced and describe the barriers that remain. • The barriers to international business have been reduced over time through various free trade agreements and the formation of free trade zones such as the European Union. The following are some examples of how barriers have been reduced.
- 29. Barriers to International Business • NAFTA: As a result of the North American Free Trade Agreement (NAFTA) of 1993, trade barriers between the United States, Mexico, and Canada were eliminated. • This is the largest free trade agreement in the world having a combined domestic product of $20 trillion. • In recent years, the benefits and drawbacks of this trade agreement have come to light. This agreement keeps grocery prices lower in the United States because of its tariff-free imports from Mexico. Trade and economic growth have also increased as a result of the treaty. • On the downside, many manufacturing jobs from the U.S. were sent to Mexico. American workers that kept these industry jobs faced reduced wages, while many workers in Mexico have been exploited.
- 30. Barriers to International Business • GATT, the General Agreement on Tariffs and Trade (1947), by 23 countries, called for the reduction or elimination of trade restrictions like quotas, tariffs on specified imported products across 117 countries. It led to the creation of the World Trade Organization (WTO) 1995, which now has 164 member countries. This accord has enabled firms to more easily export their products to other countries. • https:// www.wto.org/english/thewto_e/whatis_e/inbrief_ e/inbr_e.htm
- 31. Barriers to International Business • A number of basic principles form the foundation of the GATT including: --"trade without discrimination" is embodied in the famous phrase "most- favored-nation," meaning that each GATT country must be treated equally by all contracting parties; • --"protection through tariffs" as opposed to other measures such as quotas where protection of domestic industries is necessary; • --"a stable basis for trade" through tariff schedules which list the level of tariffs on particular items; • --settlement of disputes through consultation
- 32. Barriers to International Business • US-Chile Free trade agreement: In June 2003, the United States and Chile signed a free trade agreement to remove tariffs on more than 90 percent of the products that are sent between the two countries. • European Union: During the 1980s and 1990s, the countries in the European Union agreed to eliminate many trade barriers. By 2002, most of these countries had also adopted the euro as their currency. This has made it easier for firms in one European country to export their products to firms in other European countries because the importers and exporters now use the same currency and thus no longer face the costs and risks associated with exchanging currencies
- 33. Remaining Barriers • Barriers Used to Protect Local Firms • Dumping: selling products in a foreign country at a price below the cost of producing those products. Or exports a product at lower price than in the exporters domestic market. • In economics, it is a kind of injuring pricing.
- 34. Remaining Barriers • Examples: • Chinese firm sells a mobile in U.S for $200, but in China for $350. production cost is $250. such tactic could disrupt U.S mobile industry. • Foreign firms receive subsidies from their government that enable them to be more competitive and therefore can afford to sell their product at a price that is lower than their expenses • Anti dumping duty is a tariff that a domestic government imposes on foreign imports.
- 35. 4. Explain how foreign characteristics can influence a firm’s international business • When a firm engages in international business, it must consider the following characteristics of foreign countries: • Culture • Economic system • Economic conditions • Exchange rates • Political risk and regulations
- 36. CULTURE • For example, McDonald’s sells vegetable burgers instead of beef in India. • PepsiCo (owner of Frito Lay snack foods) sells Cheetos without cheese in China because Chinese consumers dislike cheese.
- 37. CULTURE • Language is another important aspect of culture. Marketers must take care in selecting product names and translating slogans and promotional messages so as not to convey the wrong meaning. For example, Mitsubishi Motors had to rename its Pajero model in Spanish-speaking countries because the term refers to a sexual activity. • The literal translation of Coca-Cola in Chinese characters means “bite the wax tadpole.
- 38. Nonverbal Communications in Different Cultures:
- 40. Economic system • A firm must recognize the type of economic system used in any country where it considers doing business. • A country’s economic system reflects the degree of government ownership of businesses and intervention in business. • A U.S. firm will normally prefer countries that do not have excessive government intervention.
- 41. Economic Condition • To predict demand for its product in a foreign country, a firm must attempt to forecast the economic conditions in that country. • Do study from book
- 42. Exchange rates • Countries generally have their own currency. The United States uses dollars ($), the United Kingdom uses British pounds (£), Canada uses Canadian dollars (C$), and Japan uses Japanese yen (¥). As mentioned earlier, 12 European countries adopted the euro (€) as their currency. Exchange rates between the U.S. dollar and any currency fluctuate over time. • When the dollar weakens, foreign currencies strengthen; thus, U.S. firms need more dollars to purchase a given amount of foreign supplies.
- 43. Political risk and regulations • Political problems between two governments may cause consumers to react negatively against the firms because of their country of origin. • During the war in Iraq in 2003, anti American protests against the war in the Middle East and other countries forced some U.S. based multinational corporations to temporarily shut down their operations in some countries
- 45. How the concepts affect business performance
Editor's Notes
- #7: National Federation of Independent Business is an association of small businesses in the United States
- #11: In 2018, manufacturing labor costs in China were estimated to be 5.51 U.S. dollars per hour. 4.45 U.S. dollars per hour in Mexico, and 2.73 U.S. dollars in Vietnam. In U.S 25.93 USD/Hour in January of 2023
- #12: A U.S. firm’s overall performance may be more stable if it sells its product in various countries so that its business is not influenced solely by the economic conditions in a single country.
- #18: Electrical equipment, iron and steel, vegetable oils, plastics, fuel, chemicals
- #19: We are exporting Rice, mangoes, oranges, cotton, football, leather goods
- #20: In simple terms, a trade deficit means a country is buying more goods and services than it is selling.
- #21: Ford motor subsidiaries are Ford Argentina, Australia, Brazil, Canada, Germany, Italy, India, Japan,
- #25: Company hire a third party to perform tasks. Like for advertising, collecting data, developing websites. Book keeping, recruitment,