3

Chapter

Doing Business
in Global Markets

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 Why Trade with Other Nations?
• Global trade is big business today and is becoming
increasingly important in today’s world.
• There several reasons why countries trade with other
countries:
 No country can produce all the required products/services
by itself
 Other countries will seek for opportunities to trade with
your country
 Having natural resources is not enough to become self-
sufficient
 Having only technical expertise is also not enough
• Some nations like China, Russia have an abundance of raw
materials but not the technological advancement, whereas
others like Japan, Switzerland have advanced technology but
few natural resources. 2
 Common Forms of Doing
International Business
• Export: Producing the product at home
country and selling it to other countries.
For example: Bangladesh exports jute,
tea, shrimps, ready-made garments etc.

• Import: Buying products from another

country. For example: Bangladesh imports
car, gold, air crafts etc.

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 Free Trade
• Trade relations enable each nation to produce what
it is most capable of producing and to buy what it
needs from other nations in a mutually beneficial
exchange relationships.
• Free trade is the movement of goods and services
among nations without political or economic trade
barriers.
• Free trade has both advantages and disadvantages,
as shown in the next two slides.

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Free Trade

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 Comparative Advantage
 The guiding principle that supported the idea of free
trade or free economic exchange is that of the theory of
Comparative Advantage.
 The theory of Comparative Advantage states that a
country should sell to other countries those products that
it produces most effectively and efficiently; and buy from
other countries those products that it cannot produce as
efficiently or effectively as the buyer country.
 For instance, the United States or Japan being very
technologically advanced nations have a comparative
advantage in producing goods like computer chips,
mobile sets and other software programs; but they do
not have a comparative advantage over products like
coffee, tea which nations like Columbia or India have.
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 Absolute Advantage
• Absolute advantage is the advantage that
exists when a country has a monopoly on
producing a specific product or is able to
produce it more efficiently than all other
countries.
• For instance, South Africa once had an
absolute advantage in production of
diamonds.

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 Absolute Advantage
• Simple example of absolute advantage

 In this example, Brazil has an absolute advantage in producing

bananas (8 to 1).
 The US has an absolute advantage in producing cars (5 to 2)

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 Measuring Global Trade
• Nations follow two key indicators to measure the effectiveness
of their global trade. The two key indicators are:
 Balance of trade which refers to the nation’s ratio of exports
to imports. A favorable balance of trade, occurs when a
country’s exports exceeds that of its imports. This situation is
also known as trade surplus. An unfavorable balance of
trade occurs when a country’s imports exceeds that of its
exports. This situation is known as trade deficit.
 Balance of payment- is the difference between money
coming into a country from exports and money leaving the
country from imports plus money flows coming or leaving
into the country from factors as tourism, foreign aid, abroad
education, foreign investment and so on. A favorable
balance of payment occurs when more money flows into the
country than flowing out of the country; and unfavorable
balance of payment occurs when more money flows out of
the country than flowing in the country.
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Debtor nation vs. Creditor nation

 A debtor nation is a country that owes

more money to other nations than other
nations owe to it.
 A creditor nation, on the other hand, is a
nation to whom other nations owe more
money than it owes to other nations.

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 Dumping
 In supporting free trade, a country needs to ensure that
global trade is conducted fairly.
 To ensure fairness, countries enforce laws to prohibit
unfair practices such as dumping.
 Dumping refers to the practice of selling products in a
foreign country at lower prices than those charged in the
producing country.
 Firms use the tactic of dumping for the following two
reasons:
– Reduce surplus products in foreign markets
– Gain a foothold in a new market by offering products
for lower prices than domestic competitors do.
 For instance, Japan and Russia were accused of
dumping steel in the United States.
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Strategies for Reaching Global Markets
 There are several ways in which an organization can
participate in global trade. The strategies that are used
are as follows:
 Exporting
 Importing
 Licensing
 Franchising
 Contract Manufacturing
 Joint Venture
 Strategic Alliance
 Multinational Corporation
 Foreign Direct Investment (FDI)
 Foreign Subsidiary
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Strategies for Reaching Global Markets

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 Factors Affecting Trade in Global
Market
• The major factors that affect trading in
global markets include:
 Socio cultural Forces
 Economic and Financial Forces
 Legal and Regulatory Forces
 Physical and Environmental Forces.

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 Trade Protectionism
• Trade protectionism is the use of government
regulations to limit the import of goods and services..
Supporters of trade protectionism believe that it allows
domestic producers to survive and grow, producing more
jobs.
• In the 17th and 18thcentury business people advocated an
economic principle called mercantilism. The idea of
mercantilism was for a nation to sell more goods to other
nations than other nations bought from it. To make this
idea a success, governments started charging a tariff ,
which is a tax on imports, to make imported goods more
expensive.

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 Trade Protectionism
 Tariff – There are two kinds of tariff –
 Protective Tariff
 Revenue Tariff

 Protective tariffs are designed to raise the price of

imported products so that domestic products are more
competitively priced. These tariffs are meant to save the
domestic industries from foreign competition which in
turn saves jobs.
 Revenue tariffs are designed to raise money for the
government. Revenue tariffs are used by governments to
help infant industry compete in global market. Infant
industries consist of new companies in the early stages
of growth.

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 Trade Protectionism
• Import Quota – An import quota limits the
number of products in certain categories
that a nation can import.
• An embargo is a complete ban on the
import or export of a certain product or
stopping all trade with a particular country.
Political disagreements cause many
countries to establish embargoes.

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 Common Markets
• The Common Market is regional group of
countries that have a common external
tariff, no internal tariffs, and a
coordination of laws to facilitate
exchange; also called a trading bloc.
– The European Union (EU)
– Association of Southeast Asian Nations
(ASEAN)
– NAFTA

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Common Markets

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