Chapter 3 - Global Markets Globalization & Challenges Affecting the Global Markets

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Accounting & Financial Management
AFM 131
Robert Sproule

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 PROS CONS - 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 payments - 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 dirty work - 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 management. Forces Affecting Trading in the
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