3 - Doing Business in Global Markets
The Dynamic Global Market and Why Nations Trade
While the United States represents a market of over 325 million people, there are more than 7.4
billion potential customers across the 196 countries that constitute the global market. This vast
potential is why over 90 percent of companies involved in global business believe it's crucial for
their employees to have international work experience.
Key terms in global business include importing, which is the practice of buying products from
another country, and exporting, which is selling products to another country. The United States
is the world's largest importing nation and the third-largest exporting nation.
No single nation can produce all the products its people want and need. Global trade allows a
nation to produce what it is most capable of producing and to buy what it needs from others in a
mutually beneficial exchange. This exchange is facilitated by free trade, the movement of goods
and services between nations without political or economic barriers.
Proponents of free trade argue that it increases global productivity, keeps prices down, inspires
innovation, and gives countries access to foreign investments. Conversely, opponents argue that
it can lead to the loss of domestic jobs, force pay cuts on workers, and cause domestic companies
to lose their competitive advantages to firms in low-wage countries.
The theories guiding free trade include:
• Comparative Advantage Theory: This theory, developed by economist David Ricardo, posits
that a country should sell the products it produces most effectively and efficiently to other
countries, and buy the products it cannot produce as effectively from other countries. For
instance, the United States has a comparative advantage in software development but imports
most of its coffee and shoes.
• Absolute Advantage: A country has an absolute advantage if it is the only source of a specific
product or can produce it more efficiently than any other country. However, due to global
competition, very few instances of absolute advantage exist today.
Getting Involved in and Measuring Global Trade
While large multinational corporations are often associated with global business, small
businesses play a significant role, accounting for about 30 percent of total U.S. exports. Success
often begins with observation and risk-taking, as demonstrated by Howard Schultz, who was
inspired by Italian coffee bars to transform Starbucks into a global brand.
Nations measure the effectiveness of their global trade using two key indicators:
, 1. Balance of Trade: This is the total value of a nation's exports compared to its imports over a
specific period. A trade surplus, or a favorable balance, occurs when exports exceed imports. A
trade deficit, or an unfavorable balance, occurs when imports exceed exports. The United States
has had a trade deficit since 1975, with the highest deficit being with China.
2. Balance of Payments: This is the difference between money flowing into a country (from
exports) and money flowing out (for imports), plus other money flows from factors like tourism,
foreign aid, and foreign investment. The goal is to have a favorable balance of payments, where
more money comes into the country than leaves it.
To ensure fair trade, countries prohibit practices like dumping, which is selling products in a
foreign country at lower prices than those charged in the producing country. This is often done to
reduce surplus products or gain a foothold in a new market.
Strategies for Reaching Global Markets
Companies use various strategies to enter global markets, each with a different level of
commitment, control, risk, and profit potential. These strategies range from lower-risk options
like licensing to higher-risk endeavors like foreign direct investment.
• Licensing: A firm (the licensor) allows a foreign company (the licensee) to produce its product
in exchange for a fee, known as a royalty. This allows a company to generate revenue without
investing heavily in production and marketing, but it risks the licensee stealing technology or
product secrets. Disney is one of the world's largest licensors.
• Exporting: Companies can get assistance from Export Assistance Centers (EACs) or use
export-trading companies that help negotiate trading relationships and handle customs and
documentation.
• Franchising: A contractual agreement where a franchisor sells the rights to use a business
name and sell a product to a franchisee in a specific territory. This is a popular global strategy,
but it requires careful adaptation to local tastes and customs. McDonald’s, for example, offers a
McNurnburger (bratwurst) in Germany and a meatless Big Mac in India to cater to local
preferences.
• Contract Manufacturing: A foreign company produces private-label goods to which a
domestic company attaches its brand name. This is a form of outsourcing that allows a firm to
test a new market with minimal initial investment. Nike uses over 800 contract factories to
manufacture all its footwear and apparel.
• International Joint Ventures and Strategic Alliances: A joint venture is a partnership
where two or more companies, often from different countries, undertake a major project, sharing
The Dynamic Global Market and Why Nations Trade
While the United States represents a market of over 325 million people, there are more than 7.4
billion potential customers across the 196 countries that constitute the global market. This vast
potential is why over 90 percent of companies involved in global business believe it's crucial for
their employees to have international work experience.
Key terms in global business include importing, which is the practice of buying products from
another country, and exporting, which is selling products to another country. The United States
is the world's largest importing nation and the third-largest exporting nation.
No single nation can produce all the products its people want and need. Global trade allows a
nation to produce what it is most capable of producing and to buy what it needs from others in a
mutually beneficial exchange. This exchange is facilitated by free trade, the movement of goods
and services between nations without political or economic barriers.
Proponents of free trade argue that it increases global productivity, keeps prices down, inspires
innovation, and gives countries access to foreign investments. Conversely, opponents argue that
it can lead to the loss of domestic jobs, force pay cuts on workers, and cause domestic companies
to lose their competitive advantages to firms in low-wage countries.
The theories guiding free trade include:
• Comparative Advantage Theory: This theory, developed by economist David Ricardo, posits
that a country should sell the products it produces most effectively and efficiently to other
countries, and buy the products it cannot produce as effectively from other countries. For
instance, the United States has a comparative advantage in software development but imports
most of its coffee and shoes.
• Absolute Advantage: A country has an absolute advantage if it is the only source of a specific
product or can produce it more efficiently than any other country. However, due to global
competition, very few instances of absolute advantage exist today.
Getting Involved in and Measuring Global Trade
While large multinational corporations are often associated with global business, small
businesses play a significant role, accounting for about 30 percent of total U.S. exports. Success
often begins with observation and risk-taking, as demonstrated by Howard Schultz, who was
inspired by Italian coffee bars to transform Starbucks into a global brand.
Nations measure the effectiveness of their global trade using two key indicators:
, 1. Balance of Trade: This is the total value of a nation's exports compared to its imports over a
specific period. A trade surplus, or a favorable balance, occurs when exports exceed imports. A
trade deficit, or an unfavorable balance, occurs when imports exceed exports. The United States
has had a trade deficit since 1975, with the highest deficit being with China.
2. Balance of Payments: This is the difference between money flowing into a country (from
exports) and money flowing out (for imports), plus other money flows from factors like tourism,
foreign aid, and foreign investment. The goal is to have a favorable balance of payments, where
more money comes into the country than leaves it.
To ensure fair trade, countries prohibit practices like dumping, which is selling products in a
foreign country at lower prices than those charged in the producing country. This is often done to
reduce surplus products or gain a foothold in a new market.
Strategies for Reaching Global Markets
Companies use various strategies to enter global markets, each with a different level of
commitment, control, risk, and profit potential. These strategies range from lower-risk options
like licensing to higher-risk endeavors like foreign direct investment.
• Licensing: A firm (the licensor) allows a foreign company (the licensee) to produce its product
in exchange for a fee, known as a royalty. This allows a company to generate revenue without
investing heavily in production and marketing, but it risks the licensee stealing technology or
product secrets. Disney is one of the world's largest licensors.
• Exporting: Companies can get assistance from Export Assistance Centers (EACs) or use
export-trading companies that help negotiate trading relationships and handle customs and
documentation.
• Franchising: A contractual agreement where a franchisor sells the rights to use a business
name and sell a product to a franchisee in a specific territory. This is a popular global strategy,
but it requires careful adaptation to local tastes and customs. McDonald’s, for example, offers a
McNurnburger (bratwurst) in Germany and a meatless Big Mac in India to cater to local
preferences.
• Contract Manufacturing: A foreign company produces private-label goods to which a
domestic company attaches its brand name. This is a form of outsourcing that allows a firm to
test a new market with minimal initial investment. Nike uses over 800 contract factories to
manufacture all its footwear and apparel.
• International Joint Ventures and Strategic Alliances: A joint venture is a partnership
where two or more companies, often from different countries, undertake a major project, sharing
