Chapter 3: Globalization
Reading: Borderline Insanity
Video: Globalization Effects on the Global Poor
Purpose: Global businesses and its many challenges
- Global Trade: The exchange of goods and services across national borders
- Exporting: Selling goods and services to another country
- Importing: Buying goods and services from another country
Why Trade With Other Nations?
1. No country can produce all the products its people need and want
2. Even if a country was self-sufficient, other countries would still want to trade with that
country to meet the needs of their own people
3. Allows nations to produce what it is most capable of producing and buy what it needs
form others in a mutually beneficial exchange relationship. (Technology: China & Russia;
Natural Resources: Japan & Switzerland)
- Free Trade: is the movement of goods and services among nations without political or
economic trade barriers
- The global markets contain more than 6 - Domestic workers can lose their jobs
billions consumers for trade due to increased imports shifted to
- Productivity grows when country lower-waged global markets
produce goods and services with a - Workers can be forced to except pay
comparative advantage cuts
- Free trade inspires innovation for new - Moving operations overseas often
products and keeps firms competitively means the loss of service jobs and white
challenged collar jobs
Comparative and Absolute Advantages
1. Comparative Advantage: states that a country should sell to other countries the products
that it produces most effectively and efficiently, and buy from other countries the
products it cannot produce as effectively or efficiently.
2. Absolute Advantage: the ability to produce a particular good or service using fewer
resources (lower cost) than another country. Example: Zambia has an absolute advantage
over many countries in the production of copper due to its copper ore reserves.
Measuring Global Trade
Two key indicators measure the effectiveness of global trade: balance of trade & balance of
- Balance of Trade: is a nation’s ratio of exports and imports. A favorable balance of trade
occurs when the value of the country’s exports exceed their imports.
- Balance of Payments: is the difference between money coming into a country (from
exports) and money leaving the country (for imports) plus money coming into or leaving
the country from other factors such as tourism. A favorable balance of payments occurs
when more money is flowing in than out. Strategies for Reaching Global Markets
- Exporting: using exporting-trading companies can save a company from doing all the
- Licensing: strategy in which a firm gives the right to a foreign company to produce its
products in exchange for a fee (a royalty). The benefit of this is that the licensors receive a
lot of revenue.
- Franchising: someone with a good idea for a business sells the rights to use the business
name and sell a product or service to others in a given territory.
- Contract Manufacturing: a foreign country’s production of private-label goods to which
a domestic company then attaches its brand name or trademark; also called outsourcing.
Example: Dell computers contracts with Quanta Computer of Taiwan to make notebook
PCs, in which they put the Dell brand name.
- Joint Venture: a partnership in which two or more companies (often from different
countries) join to undertake a major project or to form a new company. A strategic
alliance is like venture, where a long-term partnership between two or more companies is
formed to help each company build competitive market advantage.
- Foreign Direct Investment: is buying permanent property and businesses in foreign
nations. Multinational corporation: an organization that manufactures and markets
products in many different countries and has multinational stock ownership and
Forces Affecting Trading in the