IB Doing Business in Global Markets Lecture 3 PDF

3 Doing Business in Global Markets Sepideh Mahdikhani Dr. habil Madai Hajnalka Globalization The worldwide movement toward economic, financial, trade, and communications integration. Information technologies assist the whole process… Worldpopulation 01 Asia 60,2% 02...

3 Doing Business in Global Markets Sepideh Mahdikhani Dr. habil Madai Hajnalka Globalization The worldwide movement toward economic, financial, trade, and communications integration. Information technologies assist the whole process… Worldpopulation 01 Asia 60,2% 02 Africa 14,9% 03 Europe 10,7% 04 North America 7,4% 05 South America 6,3% 06 Australia 0,5%  Importing and exporting Importing: buying products Exporting: selling products to from another country. another country. Which one is better for a country? Why?  Infographic Style Which nation is the largest in Which nations are the largest in importing exporting? Based on the expert analysis and our database of 70+ Global industries, IBISWorld presents a list of the Biggest Exporting Industries Global in 2024 The 10 Global Biggest Exporting Industries Industry Exports for 2024 FREE TRADE: The movement of goods and services among nations without political or economic barriers.  The theories of comparative and absolute advantage Comparative advantage Absolute advantage theory states that a country Absolute advantage that exists should sell to other countries when a country has a those products that it monopoly on producing a produces most effectively and specific product or is able to efficiently, and buy from other produce it more efficiently than countries those products that it all other countries. cannot produce as effectively or efficiently. Opportunity cost = (Quantity of good A for Country X) / (Quantity of good B for Country X) Then, use the same formula to find the opportunity cost for another Country Y. Once you've identified the opportunity cost for each country, you can compare them to determine which country has a lower opportunity cost. This country has a comparative advantage over the other.  Examples COMPARATIVE ADVENTAGES ABSOLUTE ADVENTAGES A contemporary example: China's For example, if Canada can produce 100 comparative advantage with the United pounds of beef using two ranchers, while States is in the form of cheap labor. Argentina needs three ranchers to Chinese workers produce simple produce 100 pounds of beef, Canada has consumer goods at a much lower an absolute advantage over Argentina in opportunity cost. The United States' beef production. Absolute advantage can comparative advantage is in specialized, be the result of a country's natural capital-intensive labor. endowment. Example of Natural Monopoly Example of Geographic Monopoly One example of natural monopolistic markets is in the One historical example of a geographic monopoly is the rise of the De railroad industry. Because there are significant barriers to Beers diamond company. Founded in 1888 by Cecil Rhodes in South entry, it's easier for companies to historically have less Africa, De Beers Consolidated Mines Ltd. quickly gained control over competition. key diamond mines, particularly the renowned Kimberley Mine.3 Through strategic acquisitions and mergers, De Beers solidified its In the late 19th century, the Northern Pacific Railway dominance in diamond production in South Africa, ultimately obtaining a demonstrated characteristics of a monopoly by significant share of the world's diamond output. It's estimated De Beers manipulating pricing and stifling competition. The controlled somewhere around 90% of the world's diamond production Northern Pacific Railway had the ability to set and alter and distribution. rates without fear of competition, allowing it to shape the market to its advantage. Note that Northern Pacific was brought to court for "unreasonable restraints of trade". Example of Legal/Licensed Monopoly Monopolies are sometimes permitted to exist and even exclusively licensed Example of Technology Monopoly to provide services or products when it is seen as being in the best interest of consumers. A classic example of a technology monopoly is Microsoft's dominance in the personal computer operating system market. In Utilities, for example, maintain extensive infrastructures in order to provide the 1990s, Microsoft's Windows operating system became the essential services that must be reliably available to all consumers within standard for most PCs, creating a near-monopoly position. The their business areas. A competitor would not be permitted to tap into the ubiquity of Windows led to a dominant market share, and its water company's dam or the electricity company's grid. compatibility with a wide range of software and hardware made it challenging for alternative operating systems to gain traction.  Against Monopolies… Outlawed Monopolies Monopolies can be broken up by government action. At one time, the oil industry was monopolized by John D. Rockefeller's Standard Oil and the tobacco industry was operated by J.B. Duke's American Tobacco Co. Both companies fell victim to the 1890 Sherman Antitrust Act, which outlawed monopolistic practices.8 U.S. antitrust laws are used to prevent a company from using unfair business practices to maintain or Our Documents.gov. "Sherman Anti-Trust Act (1890)." expand a monopoly position. The most notorious breakup of a monopoly in modern American history occurred In 1982 with the breakup of the telecommunications company AT&T. Ma Bell, as it was then known, was the sole provider of landline telephone service to most of the U.S. It was forced to split into six regional subsidiaries, known as Baby Bells. In retrospect, the irrelevance of a monopoly on landline phone service could not have been anticipated.  Market structures Monopolistic competition, also called competitive market, where there is a large number of firms, each having a small proportion of the market share and slightly differentiated products. Oligopoly, in which a market is by a small number of firms that together control the majority of the market share. Duopoly, a special case of an oligopoly with two firms. Monopsony, when there is only one buyer in a market. Oligopsony, a market in which many sellers can be present but meet only a few buyers. Monopoly, in which there is only one provider of a product or service. Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms. Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.  https://www.simplilearn.com/market-structures-rar188-article In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services. A perfectly competitive market is composed of many firms, where no one firm has market control. In the real world, no market is purely monopolistic or perfectly competitive. Measuring Global balance of payments Trade balance of trade the total value of a nation's exports compared to its imports measured over a the difference between money coming into a country(from exports) and money leaving the country(for imports) plus money flows from particular period. other factors trade surplus trade deficit A favorable balance of trade; occurs An unfavorable balance of trade; when the value of a country's exports occurs when the value of a country's exceeds that of its imports. imports exceeds that of its exports. e.g.: The US imports most of its toys from China and so does the rest of the world. China now produces and exports 80% of the toys manufactured in the world. - What are the products do you use that are imported from China?  Reasons of concentration Concentration within an industry can be defined as the degree at which a small number of firms make up for the total production in the market. If the concentration is low, it simply means that top 'n' firms are not influencing the market production and the industry is considered to be highly competitive. When producers in competitive markets drive down profit margins and out-compete inefficient rivals, market concentration will rise and will likely correspond to lower prices and higher productivity growth. Why does concentration matter? Economists used to fear that if only a few companies sold an industry's product, those few would collude to raise prices. Wrote conservative economist George Stigler in a 1952 Fortune article titled "The Case against Big Business": "When a small number of firms control most or all of the output of an industry, they can individually and collectively profit more by cooperation than by competition.... These few companies, therefore, will usually cooperate."  Examples: Only ten companies, six from the United States and four from Europe, control most of the food chain. The companies Kraft, Coca-Cola, Nestle, P & G, Johnson & Johnson, Unilever, PepsiCo, General Mills, Kellogg’s and Mars are involved in almost all major brands of food and beverages that you see on the shelves of the supermarket.  Aims of dumping The primary purpose of dumping is to overcome competition, to generate a very Dumping rapid transfer of demand from one seller to another. In the medium and long term, the aim is to establish a monopoly. Consumers will continue to choose the brand that offers them the same products at substantially lower prices. definition Dumping is selling products in a foreign country at lower prices than those charged in the producing country. China, Brazil,Russia, etc. have been penalized for dumping steel in the USA Predatory pricing tactic Sometimes used to reduce surplus products in foreign markets To gain a foothold in a new market Some governments may offer financial incentives to certain industries to sell goods in global markets for less than they sell them at home.  Types of Dumping Predatory dumping: Malpractice Predatory dumping is considered unethical business practice. It occurs when a company is fully aware of what it is doing, and the objectives it pursues. A clear example is the barrage of Chinese products in multiple international markets, both through physical stores and portals and marketplaces such as AliExpress. The arrival of products at prices well below the cost value caused bankruptcy and the closure of multiple companies across various sectors. Due to its aggressive nature, this practice is usually carried out temporarily, then afterwards different price strategies are applied to maintain and retain customers. Furthermore, dumping is currently being pursued and condemned by various international control authorities, such as the European Commission. Other types of dumping Official dumping: Occurs when products have a tax exemption or subsidy that allows them to be sold at a much lower price. Although businesses’ profits may make minimal profits in this scenario, it enables them to start trading in new territories. An example of official dumping is the introduction of Spanish black olives into the American market. This situation has already caused the filing of several complaints due to prices that are only possible due to European Union subsidies. It is a legal and transparent process, but it creates problems for local companies. Social dumping: This type of dumping is very different from predatory dumping. In social dumping a law obliges brands and retailers to reduce the price of certain products as they are considered essential goods for citizens. This occurred with masks and antigen tests in various countries during the COVID-19 pandemic.  Licensing a firm(the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee(a royalty). Some examples of things that may be licensed include songs, sports team logos, intellectual property, software, and technology. Licensing agreements allow parties to control property and enter new markets without having to spend the money to do so. Advantages: The firm can gain revenues it would not otherwise have generated in its home markets. Foreign licensees often must purchase start-up supplies, materials, and consulting services from the licensing firm. Licensors spend little or no money to produce and market their products. Disadvantages: Firm must grant licensing rights to its product for an extended period. Trade secrets.  Licensing Examples of Licensed Products Example 1. IBM computers selling with Microsoft Windows. Example 2. Ralph Lauren allowing their brand to appear on other manufacturer's products. Example 3. Authors receive a fee from published books. Example 4. Radio stations pay for licenses to use songs. Example 5. Coca-Cola has licensed its brand to create products that cater to the local tastes and preferences of its consumers in different regions and markets. These products help Coca-Cola to adapt to the cultural and environmental factors that influence the consumer behavior and demand in these markets. 2024/10/3  Franchising is a contractual agreement whereby someone with a good idea for a business sells others the rights to use the business name and sell a product or service in a given territory in a specified manner. Franchising is an arrangement where franchisor (one party) grants or licenses some rights and authorities to franchisee (another party). Franchising is a well-known marketing strategy for business expansion. A contractual agreement takes place between Franchisor and Franchisee. Franchisor authorizes franchisee to sell their products, goods, services and give rights to use their trademark and brand name. And these franchisee acts like a dealer. Franchisors have to be careful to adapt their product or service to the countries they serve. Contract Manufacturing A foreign country’s production of private-label goods to which a domestic company then attaches its brand name or trademark. Enables a company to experiment in a new market without incurring heavy start-up costs such as building a manufacturing plant. A firm can also use contract manufacturing temporarily to meet an unexpected increase in orders, and, of course, labour costs often very low. Many industries use this process, especially the aerospace, defense, computer, semiconductor, energy, medical, food manufacturing, personal care, packaging, and automotive fields. Some types of contract manufacturing include CNC machining, complex assembly, aluminum die casting, grinding, broaching, gears, and forging. The pharmaceutical industry uses this process with CMs called contract manufacturing organizations, constituting a $14 billion business segment around 2022. In the semiconductor industry, this practice is called the foundry model. Contract manufacturing is specially prevalent in the electronics industry. (wikipedia) 2024/10/3  International joint ventures and strategic alliances A partnership in which two or more companies (often from different countries) join to undertake a major project. An international joint venture (IJV) occurs when two businesses based in two or more countries form a partnership. The benefits of international joint ventures: Shared technology and risk. Shared marketing and management expertise. Entry into markets where foreign companies are often not allowed unless goods are produced locally. The drawbacks of joint ventures: One partner can learn the other’s technology and business practices and then use what it has learned to its own advantage. A shared technology may become obsolete, or the joint venture may become too large to be as flexible as needed. Strategic alliance : A long-term partnership between two or more companies established to help each company build competitive market advantages.(unlike joint venture, strategic alliance do not share costs, risks, management, or even profits.)  International joint ventures and strategic alliances examples Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson and Japanese electronics manufacturer Sony to develop cellular devices. When two or more persons come together to form a partnership for the purpose of carrying out a project, this is called a joint venture. BMW needed a Chinese partner to manufacture cars in China due to local laws at the time. It therefore joined forces with the Brilliance Auto Group to create BMW Brilliance. China: many of the most well-known companies, such as McDonald's, Starbucks, and most recently the Chinese ride-sharing unicorn Didi Chuxing have all adopted a joint venture (JV) company structure in China. Examples of strategic alliances between big brands include Uber and Spotify, Starbucks and Target, Disney and Chevrolet, and Red Bull and GoPro. Small businesses can benefit from strategic alliances as well, as long as you're clear on your goals and have the resources to contribute in a mutual partnership. 2024/10/3  Foreign direct investment the buying of permanent property and businesses in foreign nations. The common form of FDI is a foreign subsidiary. Types: horizontal, vertical, conglomerate, and platform Subsidiary: operates like a domestic firm. Also must observe the legal requirements of both the country where the parent firm is located and the foreign country where the subsidiary is located. major advantage: the company maintains complete control over any technology or expertise it may possess. -major shortcoming: need to commit funds and technology within foreign boundaries. Multinational corporation: an organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management. Sovereign wealth funds(EWFs):investment funds controlled by governments holding large stakes in foreign companies. An example would be McDonald's investing in an Asian country to increase the number of stores in the region. Here, a business enters a foreign economy to strengthen a part of its supply chain without changing its business in any way. Main Forces in relation Global Market (PEST) 2024/10/3  Political:Legal and Regulatory Forces In any economy, the conduct and the direction of business are firmly tied to the legal and regulatory environment. In global markets, no central system of law exists. (antitrust rules, labour relations, patents, copyright, trade practices, taxes, product liability, child labour, prison labour, and other issues are governed differently country by country.) Foreign Corrupt Practices Act of 1978 can create competitive disadvantages. This law prohibits ”questionable” or ”dubious” payments to foreign officials to secure business contracts.  Economic and Finance Forces Exchange rate is the value of one nation’s currency relative to the currencies of other countries. (changes in a nation’s exchange rates have effects in global markets.) Floating exchange rate: means that currencies “float” in value according to the supply and demand for them in the global market for currency. ---labour costs for multinational corporations can very considerably as currency value shift, causing them to juggle production from one country to another. ---at times a nation’s government will intervene and readjust the value of its currency, often to export potential of its products. Countertrading is a complex form of bartering in which several countries each trade goods or services for other goods or services.  Sociocultural Forces The culture refers to the set of values, beliefs, rules, and institutions held by a specific group of people. Religion is an important part of any society’s culture and can have a significant impact on business operations. Sociocultural factors influence people's feelings, values, beliefs, behaviors, attitudes, and interactions. Examples include social classes, religious beliefs, wealth distribution, language, business practices, social values, customer preferences, social organization, and attitude towards work. Socio-cultural factors include consumers' lifestyles, buying habits, education, religion, beliefs, values, demographics, social classes, sexuality and attitudes. These factors determine the suitability of an organisation's products and services for its customers' needs. Technological: Physical and Environmental Forces Physical and Environmental Forces is certainly affect a company’s ability to conduct global business. Technological differences also influence the features of exportable products.  Protectionism Trade protectionism is an economic policy that imposes extremely high tariffs on imported products, restricts import quotas, or reduces imports in order to protect domestic industries from the pressure of foreign competition. It is the exact opposite of the free trade model, which exempts imported products from tariffs, allowing foreign products to integrate with the domestic market without burdening them with heavy taxes borne by domestic manufacturers. The benefits of protectionism Protect local industries, increase Citizens cannot enjoy their original rights. The reason why revenue for the government, and there is trade protection is because local products are not help the government solve part of as good as those from other places. the employment problem; It will also restrict the development of local industries, From the perspective of because the emergence of trade protection invisibly citizens, the unemployment reduces the competitive pressure of local industries, which rate will decrease and is not conducive to the overall progress of society. citizens' personal income will increase.  Tools of Protectionism 1 - Tariffs and import quotas are the most common types of protectionist policies. I A tariff is an excise tax levied on imported goods. Originally imposed to raise government revenue, modern tariffs are now used primarily to protect domestic producers and wage rates from lower-priced importers. An import quota is a limit on the volume of a good that may be legally imported, usually established through an import licensing regime. -Restrictions on foreign direct investment, such as restrictions on the acquisition of domestic firms by foreign investors. - Administrative barriers: Countries are sometimes accused of using their various administrative rules (e.g., regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports. - Anti-dumping legislation: "Dumping" is the practice of firms selling to export markets at lower prices than are charged in domestic markets. Supporters of anti-dumping laws argue that they prevent the import of cheaper foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters. - Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against imports. These subsidies are purported to "protect" local jobs and to help local firms adjust to the world markets.  Tools of Protectionism 2 - Export subsidies: Export subsidies are often used by governments to increase exports. Export subsidies have the opposite effect of export tariffs because exporters get payment, which is a percentage or proportion of the value of exported. Export subsidies I increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies. - Exchange rate control: A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will lead to higher inflation in the country in the long run, which will, in turn, raise the real cost of exports, and reduce the relative price of imports. - International patent systems: There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level. Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers "good citizenship" status despite 'de facto protectionism'. Peter Drahos explains that "States realized that patent systems could be used to cloak protectionist strategies. There were also reputational advantages for states to be seen to be sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive genius...knowing all the while that one's domestic intellectual property system was a handy protectionist weapon."  Tools of Protectionism 3 Political campaigns advocating domestic consumption (e.g. the "Buy American" campaign in the United States, which could be seen as an extra-legal promotion of protectionism.) I Preferential governmental spending, such as the Buy American Act, federal legislation which called upon the United States government to prefer US-made products in its purchases. In the modern trade arena, many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries' efforts in imposing their own labor or environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports is seen in this light. Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured items to high-cost producers with quotas from low- cost producers set to zero.[ https://en.wikipedia.org/wiki/Protectionism