BMGT Chapter 3 Notes
BMGT Chapter 3 Notes BMGT110F
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This 5 page Class Notes was uploaded by Lucy Notetaker on Saturday September 10, 2016. The Class Notes belongs to BMGT110F at University of Maryland taught by Richard Hutchins in Fall 2016. Since its upload, it has received 65 views. For similar materials see Introduction to the Business Value Chain in Business at University of Maryland.
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Date Created: 09/10/16
BMGT 110 Chapter 3: Global Markets Intro: You don’t have to be in international business to read this chapter. The US has about 317 million people. Lots of potential customers, right? Wrong, the world has 7.1 billion people. Leaving the country with a business can make good sales turn into great sales. Importing: buying products from another country Exporting: selling products to another country - A catchy way to remember this is “in” and “im” both start with I and sound the same, so importing is goods coming in. Then exporting has “ex” just like exit. Goods are exiting the country - The US is the top importing country and second largest exporting country (China beat us) Why Trade? - Easy answer- everyone has different strengths, so trade gives everyone what they don’t have Free Trade: the movement of goods and services among nations without political or economic barriers - There are some pros and cons. The benefits: More customers, productivity grows; global competition brings inflation down, foreign investments and more innovation. The negatives: domestic workers can lose jobs, increased outsourcing, domestic economies can be hurt Advantages Comparative Advantage Theory: it states that a country should sell what they produce the most effectively and buy from other countries what they can’t produce as effectively Absolute Advantage: when a country produces a specific product more efficiently than everyone else (global competition makes it so this is rare and doesn’t last long) - A good example of this is siblings. One sibling gets the singing gene the other is an amazing soccer player. They can teach the other the skill they excel in and learn the skill they don’t know. That’s comparative advantage. Well every now and then there is the flawless sister that does everything and is talented in everything. That would be absolute advantage. Getting Involved - You can be global even if you are in a small business, rather than a firm. - Anything can be imported and exported and sold Measuring Global Trade - Be warned, lots of terms coming up. Two key indicators of global trade- Balance of trade and balance of payments. Balance of Trade: total value of nations exports compared to imports over a specific period of time - Trade Surplus: When the value of exports exceeds imports (the company is making money with sales) - Trade Deficit: When the value of imports exceeds exports (this is unfavorable) Balance of Payments: The difference between money coming into the country and leaving the country plus money flow from other factors (like tourism) - You always want more money flowing in than flowing out Dumping: an unfair practice in global trade where a company sells a product in a foreign country for lower than what it charges in the producing country - So say we make cars and sell them to Americans for 20 thousand dollars, but we have a bunch of extras so we sell them in Italy for 10 thousand dollars. Reaching Global Markets - Many different strategies, in order from least to most risk… licensing, exporting, franchising, contract manufacturing, international joint ventures, and foreign direct investment Licensing: A global strategy in which the licensor allows the licensee to produce a product in exchange for a fee or royalty - Benefits: More revenues for firm and little to no money comes from the firm to produce and market products - Negatives: Most of the revenue goes to licensee, agreement can be broken and licensee can produce similar product Exporting: Export Assistance Centers (EAC’s) provide support to small and medium size businesses so that they can export to the right places. Franchising: a contract agreement when someone with a business idea sells others the rights to use the business name and sell a product in a given territory and in a specific way. - Ever eat at a foreign McDonalds. You notice how some of the menu items change to fit the taste of locals. That is global franchising. - Or even better, American Chinese food. China may place a Chinese restaurant in the US and have American’s run it, yet they tailor food to American ideals of Chinese food. Contract Manufacturing: A foreign company produces private label goods in which a domestic company then attaches its brand name to it (part of outsourcing). - Allows a company to experiment in a new market without heavy start up costs, more production, lower labor costs - Example: Nike manufacturing their shoes in a foreign country, but the shoemaker could have been private before Nike came along International Joint Ventures: A partnership in which two or more companies join for a major project (it has great benefits, which are listed below) 1. Shared technology and risk 2. Shared marketing and management expertise 3. Entry into market where foreign companies are often not allowed unless goods are produced locally - Two heads are better than 1 premise Strategic Alliance: a long-term partnership between two or more companies established to help each company build competitive market advantages - They don’t share costs, management or profits - More of an alliance or support system - Okay so extended metaphor time. Joint Ventures sound a lot like group projects. Two people get together and they have to make a volcano out of sandpaper. Sometimes having a partner is great. They can go out and get supplies while you start making some sketches of the design on loose-leaf. But sometimes you are stuck with the biggest nightmare of a partner ever and instead of just them being punished for bad work, you’re punished too because you’re in a joint venture. Next time your professor says group project, you enter a shared alliance with your best friend. You know you guys get along and rather than splitting the grade you just help each other get the best individual grade that you can receive. Foreign Direct Investment: The buying of permanent property and businesses in foreign nations Foreign Subsidiary: the most common form of FDI where a company owned in a foreign country by a parent company. The parent company manages everything and must abide by domestic and foreign rules - An issue is if tension increases with other country then assets could be expropriated (taken over) by host country Multinational Corporation: An organization that manufactures and markets products in many different countries and has multinational stock ownership and management - IMPORTANT: to be multinational you must have physical presence in another nation (manufacturing or managing) not just exporting to them Sovereign Wealth Funds: Investment funds controlled by governments holding investment stakes in foreign companies - They tend to be very rich and can help the US economy in recession times What Factors Affect Global Trade? Sociocultural Forces: Around the world people have different cultures (values, beliefs, religions). Sometimes a slogan might not translate well in another language. Let’s say a tea company wants to sell its teapots in a Buddhist town in Vietnam. They make a design that has Buddha’s head as the teapot cover. In Buddhism it’s not right to touch the Buddha’s head so this teapot would not sell well in this culture. Economic and Financial Forces: Countries have different incomes and currencies, which must be accounted for Exchange Rate: The value of one nation’s currency relative to the currencies of another country - A high value of the dollar- a dollar trades for more than a foreign currency (peso), a US produced good would be expensive - A low value of the dollar- a dollar trades for less than the currency (euro)- a US produced good would become cheaper to foreign buyers - The currencies will “float” or change depending on supply and demand Devaluation: lowering the value of a nation’s currency relative to other currencies, sometimes it goes so low the country turns to bartering Countertrading: A complex form of bartering which multiple countries trade goods for services or vice versa. - This is a horribly outdated example, but the Triangle Trade would be an example of this Legal and Regulatory Forces: Because multiple countries are involved, multiple laws are involved. A business must look at laws in the US and in the foreign country. *There is still a lot of corruption Physical and Environmental Forces: Different countries have different resources; some may lack certain things in the environment to support a certain business. Let’s say a company has sights set on an amazing new software program in Haiti. Well, the percentage of people who own laptops/computers in Haiti is quite low, so that might not be the best move. Trade Protectionism Trade Protectionism: the use of government regulations to limit the import of goods and services - This protects domestic jobs and limits foreign competition Tariffs: a tax imposed on imports - Protective tariffs: raise the retail price of imported products to match domestic competition - Revenue tariffs: designed to raise money for the government Import Quota: limits the number of products in certain categories that a nation can import - Some examples are sugar and high powered weapons (I know, that escalated quickly) Embargo: A complete ban on the import or export of a certain product or stopping trade with another country altogether - Side note: I feel all of these terms taking me back to my days of AP US history. Like the Embargo of 1807 against the British and French because we got mad, but didn’t actually want to fight a war. - There is also something called non tariff barriers which are far less formal, one could be longer paperwork for imports so it makes them a burden to bring in The World Trade Organization General Agreement on Tariffs and Trade: We somehow got leaders from 23 nations to agree. Just kidding…basically this established an international forum for negotiating mutual reductions in trade restrictions. - In 1986 in Uruguay 124 nations agreed to lower tariffs by 38% - Also in Uruguay the World Trade Organization was founded (seriously we need to start making all major decisions there because stuff gets done in Uruguay) World Trade Organization: The international organization that replaces GATT and it is meant to mediate trade disputes between nations - Good in theory, but lots of issues are unsolved Common Markets Common Market: A regional group of countries that have a common external tariff, no internal tariffs and coordinated laws. Also called a trading bloc…example European Union. North American Free Trade Agreement (NAFTA): hotly debated, agreement that created free trade among the US, Canada and Mexico. - Didn’t really hurt us or help us much, all that fuss for nothing - The objectives were 1. Eliminate trade barriers 2. Promote fair competition 3. Increase investments 4. Provide protection of property rights 5. Framework for regional trade 6. Improve North American working conditions - Still debated, there are pros and cons like any economic issue So please go start travelling the world and bringing your ideas to all the nations. The world is your oyster, go open it up (is that even how that metaphor goes?). Hopefully your grade on the midterm is out of this world! (Because you outsourced it to space). Okay I really need to stop, hopefully these notes help you guys out.
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