L-4 Business Competition

COMPETING IN THE GLOBAL MARKETS

Economic interdependence is increasing throughout the world as companies seek additional markets for their goods and services and the most cost-effective locations for production facilities.  Businesses can no longer rely only on sales in domestic markets. Today, foreign sales are essential to US manufacturing, agricultural and service firms as sources of new markets and profit opportunities. The exports of a country are defined as domestically produced goods and services sold in markets in other countries. Imports are foreign-made products purchased by domestic consumers.

WHY NATIONS TRADE

As domestic markets mature and sales growth slows, companies in every industry recognize the increasing importance of efforts to develop business in other countries. Most companies recognize the importance of global markets.

Large populations, substantial resources and rising standards of living abroad are boosting interest in foreign markets. Similarly, the US market, with its highest purchasing power attracts thousands of foreign companies to its shores every year. International trade is vital to a nation because it boosts economic growth by providing a market for its products and access to needed resources.

International sources of factors of production:

Business decisions to operate abroad depend on the availability of the basic factors of production – availability, price and quality of labor, natural resources, capital, and entrepreneurship - in the foreign country. For example, India has a lot of qualified software engineers and computer scientists, and this has led to many US companies to set up operations in India, such as Oracle, who has set up a research facility. 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 demand may be strong in other countries.

Size of the International Marketplace:

Companies are attracted to countries with large population levels. However, people alone are not enough to create a market. Consumer demand also requires purchasing power. China is the most populous country in the world with 1.3 billion people, followed closely by India with more than 1 billion. However, India’s rate of growth in population means it will have almost 2 billion people in the future.

Though people in the developing nations have lower per-capita incomes than those in the highly developed economies, their huge populations do represent lucrative markets. In India and China for example, the middle class is estimated to be over 300 million people. Wealth distributions in developing countries are quite skewed with some very rich people, and a lot of very poor people. For example, India has some billionaires, but there are also many poor people. European countries, USA and Japan have the highest per-capita GDP in the world.

Major World Markets:

The major trading partners of USA are Canada and Mexico, as well as Japan, Germany and China. The major world markets are found in North America, Western Europe, the Pacific Rim and Latin America. For the 21st century there can also be more trading countries such as Turkey, Malaysia, India and Vietnam. The most globalised nation in the world is Ireland, a western European country, followed by Switzerland and Singapore.

Absolute and Comparative Advantage:

If a country can focus on producing what it does best, it can export surplus domestic output and buy foreign products that it lacks or cannot efficiently produce. The potential for foreign sales of a particular good or service depends largely on whether the country has an absolute advantage or 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. Oil producing countries have an absolute advantage in supplying petroleum products.

A country has a comparative advantage when it can supply a particular product more efficiently or cheaper than it can produce other goods, compared with the outputs of other countries. Japan, for example, has maintained a comparative advantage in producing electronics by preserving efficiency and technological expertise. By ensuring that its people are well educated, a nation can also develop a comparative advantage in providing skilled human resources.

MEASURING TRADE BETWEEN NATIONS

A nation’s balance of trade is the difference between its exports and imports. If a country exports more than it imports, it achieves a positive balance of trade, called a trade surplus. If it imports more than it exports, it produces a negative balance of trade, called a trade deficit. A nation’s balance of trade plays a central role in determining its balance of payments – the overall flow of money into or out of a country. Other factors also affect the balance of payments, including overseas loans and borrowing, international investments, profits from such investments, and foreign aid payments or receipts.

Examples of Monetary Inflows are payments for exports, expenditures by foreign travelers, income from foreign investments, investments from foreign sources, payments from foreign governments. Examples of monetary outflows are payments for imports, expenditures by residents traveling overseas, investments by residents in foreign securities and real estate and payments to foreign governments.

Monetary Inflows	Monetary Outflows
·        Payments received for exported goods and services	·        Payments for imported goods and services
·        Expenditures by foreign travelers	·        Expenditures by residents traveling outside the country
·        Income from foreign investments earned by domestic residents	·        Investments by residents in foreign securities and real estate
·        Investments from foreign sources	·        Payments to foreign governments
·        Payments from foreign governments

Major US exports and imports:

The US has combined exports and imports of over $2 trillion, the leading figure in the international trade of goods and services. However, imports far exceed exports and there is a big trade deficit. USA imports more goods than it exports. However, it exports more services than it imports. Examples of services are engineering, financial services, computing and entertainment. Examples include Citibank, Walt Disney and Federal Express.

Exchange Rates:

A nation’s exchange rate is the rate at which its currency can be exchanged for the currencies of other nations. Each currency’s exchange rate is usually quoted in terms of another currency, such as the number of euros per dollar. Currency values fluctuate, or ‘float’, depending on the supply and demand for each currency in the international market. In this system of ‘floating exchange rates’, currency traders create a market for the world’s currencies based on each country’s relative trade and investment prospects. In practice, however, currencies do not float in total freedom. National governments often intervene in the currency markets to adjust the exchange rates of their own currencies.

Sometimes, countries form currency blocs by linking their exchange rates to each other. Many governments practice protectionist policies that seek to guard their economies against trade imbalances. Sometimes, a country deliberately devalues their currency in order to increase exports and stimulate foreign investment. Devaluation describes a fall in a currency’s value relative to other currencies or to a fixed standard. This makes investing in that country cheaper, and foreign investment is boosted. For an individual business, the impact of currency devaluation depends on where that business buys its raw materials and where it sells its products. Exchange rate changes can quickly create – or wipe out – a competitive advantage, so they are important factors in decisions about whether to invest abroad.

Currencies that can be easily converted into other currencies are known as “hard currencies”. Currencies that are not easily converted are known as “soft currencies”.

Top 5 US Exports and Imports
Exports	Imports
Electrical machinery $89 b	Vehicles $157 b
Vehicles $57 b	Electrical machinery $85 b
Computers & Office equipment $49 b	Computers & Office equipment $75 b
Airplanes $48 b	Clothing $64 b
Power-generating machinery $36 b	Telecommunications equipment $63 b

BARRIERS TO INTERNATIONAL TRADE

There are many types of barriers to international trade, including social and cultural differences, economic differences or political and legal differences.

Social and Cultural Differences:

Social differences include language, customs and religion.

Understanding and respecting these differences are critical in the process leading to international business success. Businesspeople with knowledge of host countries’ cultures, languages, social values, and religious attitudes and practices are well equipped for the marketplace and the negotiating table. Acute sensitivity to such elements as local attitudes, forms of address, and expectations regarding dress, body language, and timeliness also helps them to win customers and achieve their business objectives.

English is the second most widely spoken language, after mandarin Chinese, followed by Hindi, Spanish, Russian and Arabic. Of course, English is the unofficial business language in the world.

Cultural sensitivity is very critical in cyberspace. Web site developers must be aware that visitors to a site may come from anywhere in the world. Some icons that seem friendly to US internet users may shock people from other countries.

A person making a high-five hand gesture would be insulting people in Greece; the same is true of making a circle with the thumb and index finger in Brazil and a two-fingered peace sign with the back of the hand facing out in Great Britain.

Even colors can pose problems. In Muslim countries, people view green as a sacred color, so a green background on a Web page would be inappropriate there. There are many differences in spiritual and religious values around the world.

In the US society places a higher value on business efficiency and low unemployment than European countries, where employee benefits are more valued. Marked differences exist in paid vacation time between America and Europe, where a minimum four week paid vacation requirement exists for full-time workers. In these countries, a US company that opens a manufacturing plant would not be able to hire any local employees without offering vacations in line with that nation’s business practices.

Economic Differences:

A country’s size, per-capita income, and stage of economic development are among the economic factors to consider when evaluating it as a candidate for an international business venture. The level of infrastructure should also be considered, which includes many things such as communication, transportation and energy facilities. Other factors include level of cell phone ownership and financial systems such as credit card acceptance levels. 

Political and Legal Differences:

Many political changes have taken place recently, such as the fall of Soviet Union. Since then, Russia has struggled to develop a new market structure and political processes.  Hong Kong has been integrated into China, without disturbing its economic system. Many western companies are investing in former communist countries.

The foreign corrupt practices act forbids US companies from bribing foreign officials, politicians or government representatives. Until recently, countries like France and Germany accepted the practice of bribery. However, recently, many countries signed the OECD (Organization for Economic Cooperation and Development) Anti-Bribery Convention. This agreement makes offering or paying bribes a criminal offense.

However, corruption continues to exist in many countries. Transparency international, a berlin-based organization, ranks countries on the basis of corruption. Less developed countries are generally the more corrupt.

International Regulations:

To regulate international commerce, many countries including USA have ratified treaties and signed agreements. The US has entered into friendship, commerce, and navigation treaties with other nations. Agreements include the right to conduct business in foreign markets. Other international business agreements involve product standards, patents, trademarks, reciprocal tax policies, export controls, international air travel, and international communications. In 2000, US congress granted China full trade relations with the US. A lack of international regulations or enforcement can generate its own set of problems such as piracy in China.

Types of Trade Restrictions:

Trade restrictions such as taxes on imports and complicated administrative procedures create additional barriers to international trade. They limit consumer choices while increasing the costs of foreign-made products. Trade restrictions are also imposed when a country fears security or jobs may be at risk. Most restrictions take the form of tariffs. In addition to tariffs, governments impose administrative barriers such as quotas, embargoes and exchange controls.

Taxes, surcharges, or duties on foreign products are referred to as tariffs. Governments assess two types of tariffs – revenue and protective tariffs – both of which increase the price of imported products for domestic buyers. 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.

Arguments for and against Trade Restrictions:
For	Against
Protect national defense and citizens’ health	Raise prices for consumers
Protect new or weak industries	Restrict consumer choices
Protect against ‘dumping’	Cause retaliation by other countries, which limits export opportunities for businesses
Protect domestic jobs	Loss of jobs from international business
Retaliate for trade restrictions by others	Cause inefficient allocations of international resources

Non-tariff barriers restrict imports in more subtle ways than tariffs. Quotas limit the amounts of particular products that countries can import during specified time periods. Limits may be set as quantities or cash values of the product. Quotas help to prevent dumping, a practice where a company sells products abroad at prices below its cost of production. Quotas can sometime help less developed countries enter developed markets as in the case of garments. Dumping benefits domestic consumers in the importing market, but it hurts domestic producers. An embargo imposes a total ban on importing a specified product or even a total halt to trading with a particular country. The US had an embargo on importing oil from Iraq for many years, which it lifted recently. Another form of administrative trade restrictions is exchange controls. The exchange control agency can allocate, expand, or restrict foreign exchange to satisfy national policy goals.

REDUCING BARRIERS TO INTERNATIONAL TRADE

Although tariffs and barriers restrict trade, overall the world is moving toward free trade. One type of federation is an economic community, such as the European Union.

Organizations promoting international trade:

The world trade organization (WTO) succeeded the general agreement on tariffs and trade (GATT). WTO has members from 145 plus countries and its decisions are binding on parties involved in a trade dispute. The WTO has become controversial recently as it issues decisions that have implications for working conditions in member countries. Trade unions in developed nations complain that the WTO’s support of free trade makes it easier to export manufacturing jobs to low-wage countries. Very little production of clothing remains in the USA and high-tech jobs are moving abroad as well.

Soon after the Second World War nations formed an organization to lend money to less developed countries in order to help them rebuild. The World Bank primarily funds infrastructure projects in developing countries in areas such as transportation, education and health care. It also imposes economic requirements on borrowing countries designed to build their economies. The World Bank has also come under fire for conditions that ultimately hurt the borrower nations, such as requirements to balance the budget by cutting vital social programs.

The international monetary fund (IMF) was created to promote trade. The IMF makes short-term loans to member nations that are unable to meet their budgetary expenses. The IMF can impose economic conditions such as requiring the country to curtail imports or devaluing its currency.

International Economic Communities:

International economic communities reduce trade barriers and promote regional economic integration. In simple form it is a free-trade area without tariffs or trade restrictions. The North American Free Trade Agreement (NAFTA) is a free trade area by USA, Canada and Mexico. This area has over 416 million people and over $12 trillion GDP. The US has by far the largest GDP of more than $10 trillion. Canada has a high per-capita GDP and is growing faster than USA. The US is Canada’s biggest trading partner. The US-Mexican border is home to 1,200 maquiladoras, foreign-owned businesses that manufacture products for export.

The European Union (EU) is the best example of a common market with 25 members, over 450 million people and a GDP over $12 trillion. The EU is removing barriers to free trade by standardizing regulations, duties and taxes. The EU has also introduced the Euro to replace national currencies to reduce the costs of currency exchange and to make it easier to trade with EU.

GOING GLOBAL

While expanding into overseas markets can increase profits and marketing opportunities, it also introduces new complexities to a firm’s business operations. The following key decisions have to be dealt with:

·        Determining which foreign markets to enter

·        Analysing expenditures required to enter a new market

·        Deciding the best way to organize the overseas operations

The choice of which markets to enter follows extensive research.

Levels of Involvement:

You must also decide on what level of involvement to follow. There are various levels of risk and control depending on what type of business strategy you undertake:

Low risk/control : exporting and importing

Moderate risk/control : contractual agreements like franchising, foreign licensing, and sub-contracting

High risk/control : Acquisitions, Joint Ventures, Overseas Divisions

For example, Yahoo used joint ventures to enter markets in Japan, Britain and Germany.

When a firm brings in goods produced abroad to sell domestically, it is an importer. Alternatively, companies are exporters when they produce – or purchase – goods at home and sell them in overseas markets. An importing or exporting strategy is the simplest form of international involvement, with the least risk and control.

Much of international trade involves payments in the form of local products, not currency. This is called counter trade or  barter trade. This  may be due to inadequate access to foreign currency, especially in less developed and isolated countries.

Contractual agreements are entered into by experienced firms including franchising, foreign licensing and subcontracting. 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 agreements. Examples of franchising are fast-food outlets at McDonalds, KFC or Pizza Hut, Hotels and ..

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. A licensing fee would be needed. In return, the firm gets a royalty or other compensation. The advantage is that the firm requires little investment.

The third type of contractual agreement is subcontracting. This involves hiring local companies to produce, distribute, or sell goods or services. One disadvantage of subcontracting is the inability to control their business practices.

The third level of involvement is international direct investment. This can take the form of an acquisition, where a company purchases another existing firm in the foreign country.  There can also be a merger between two firms. Joint ventures allow companies to share risks, costs, profits, and management responsibilities with one or more parties in foreign countries. In a joint venture, costs are shared and risks are reduced. Many joint ventures are formed to bid on government contracts, where one party has the required experience, and the other party has local expertise.

A Multinational corporation (MNC) is an organization with major foreign operations. Many MNCs believe foreign markets hold better growth prospects than home markets. Lower cost in developing countries has attracted investments by MNCs for production.

DEVELOPING A STRATEGY FOR INTERNATIONAL BUSINESS

Companies can have two main strategies. A global business strategy offers a standardized, worldwide product and selling it in essentially the same manner throughout a firm’s domestic and foreign markets. It has the advantage of economies of scale. One example of a company following this strategy is Sony.

A multi-domestic business strategy, in contrast, treats every national market in a different way. It develops products and marketing strategies that appeal to the customs, tastes and buying habits of particular national markets.