What is global marketing? How does it differ from regular marketing?

Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. One difference between "regular" marketing and "global" marketing is the scope of activities. Marketing activities center on an organizations efforts to satisfy customer wants and needs with products and services that offer competitive value. The marketing mix (product, price, place, and promotion) comprises a contemporary marketers primary tools. Marketing is a universal discipline as applicable in Argentina as it is in Zimbabwe. An organization that engages in global marketing focuses it resources and competencies on global market opportunities and threats. A fundamental difference between regular marketing and global marketing is the scope of activities. Global marketing may also take the form of a diversification strategy in which a company creates new products or services and introduces them into new geographical markets. Companies that engage in global marketing frequently encounter unique or unfamiliar features in specific countries or regions of the world. Global Marketing: What it is and what it isnt The discipline of marketing is universal. It is natural, however, that marketing practices will vary from country to country, for the simple reason that the countries and peoples of the world are different. A successful marketing approach in one country may not necessarily succeed in another. To what extent marketing plans and programs can extend worldwide and to what extent they must be adapted is one of the important tasks of the global marketing manager. The way a company addresses this task is a reflection of its global marketing strategy (GMS). What are the two core issues of a firms GMS?

Just as in single-country marketing, choosing a target market and developing a marketing mix are the two core issues of a firms GMS a) Global market participation the extent to which a company has operations in major world markets. b) Standardization versus adaptation the extent to which each marketing mix element can be standardized (used the same way) or must be adapted (used in different ways) in different country markets.

c) Concentration of marketing activities the extent to which activities related to the marketing mix (such as pricing decisions) are performed in one or only a few country locations. d) Coordination of marketing activities the extent to which marketing activities related to the mix are planned and executed interdependently around the globe. e) Integration of competitive moves the extent to which a firms competitive marketing tactics in different parts of the world are interdependent. GMS should enhance the firms performance on a worldwide basis. Some brands are found in virtually every county of the world. Coke is an example. However, companies that engage in global marketing do not necessarily have to be in every country. The recorded music market is an example 12 countries make up 70 percent of sales. Global marketing does mean widening business horizons to encompass the world in scanning for opportunities and threats. What countries make up BRIC?

The four emerging markets of Brazil, Russia, India, and China represent significant growth opportunities. They are known as BRIC. The issue of standardization versus adaption has been at the center of a long-standing controversy among both academicians and business practitioners. Much of the controversy dates back to the days of Theodore Levitts (1983) homogenized global market. Levitt envisioned a global community where standardized, high-quality world products would be marketed in a standardized manner. The homogenized global market view didnt work. Even those companies that have become global successes have not done so through total standardization of the product. Global marketing made Coke a worldwide success. However, that success was not based on a total standardization of marketing mix elements. Coca-Cola succeeded through the application of global localization. What does the term global localization mean?

Global localization: Think globally, act locally. Global marketing may include a combination of standard and nonstandard approaches. Global marketing requires marketers to think and act in a way that is both global and local by responding to similarities and differences in world markets. The particular approach to global marketing that a company employs will depend on industry conditions and it sources of competitive advantage.

For example, McDonalds global marketing strategy is based on a combination of global and local marketing mix elements. a) For example, Harley-Davidsons competitive advantage is based in part on Made in the USA. Moving production to a low-wage country would tarnish its image. b) Toyotas success in the US has come through its ability to transfer world-class manufacturing skills to America and advertising that the Camry is Made in the USA by Americans. c) Several hundred Gap stores are located outside of the U.S.

The Importance of Global Marketing The largest single marketing in the world in terms of national income is The United States, representing roughly 25 percent of the total world market for all products and services. U.S. companies that wish to achieve maximum growth potential must go global because 75 percent of the world market potential is outside of their home country. Non-US companies have an even greater incentive to go global; their potential markets include the 300 million people in the US. For example: Japan is the second largest market on the planet (by dollar value), yet the market outside of Japan accounts for 85 percent of the world potential for Japanese companies. Even though Germany is the largest single country market in Europe, 94 percent of the world market potential for German companies is outside of Germany. The companies that survive and prosper in the 21st Century will be global enterprises. Less fortunate companies will be absorbed by their more dynamic competitors or simple cease to exist. What are the four global management orientations?

The world view of a companys personnel can be described as ethnocentric, polycentric, regiocentric, and geocentric. Describe each of these orientations.

Orientation Details Ethnocentric: a) A person who assumes that his/her home country is superior to the rest of the world. b) Associated with national arrogance or feelings of national superiority. c) At some companies, the ethnocentric orientation means that opportunities outside of the home country are routinely ignored (domestic companies).

d) Ethnocentric companies that conduct business outside their home country are known as international companies they believe products that succeed in the home country are superior. e) Leads to a standardized or extension approach the belief that products can be sold everywhere without adaptation. f) Foreign operations or markets are viewed as inferior or subordinate to the home market. g) Headquarters knowledge is applied everywhere; local knowledge is viewed as unnecessary. Polycentric: a) The opposite view of ethnocentrism. b) The belief that each country in which you do business is unique. c) This assumption allows each subsidiary to develop its own unique marketing strategies in order to succeed. d) The term multinational company is often used to describe such a structure. e) Leads to a localized or adaptation view that assumes products MUST be adapted to succeed. Regiocentric: a) The region becomes the relevant geographic unit. b) Managements goal is to develop a regional integrated strategy (e.g. NAFTA or the EU). c) May be viewed as a variant of the multinational view (polycentric). Geocentric: a) Views the entire world as a potential market and strives to develop integrated global strategies. b) These companies are known as global or transnational companies. c) Serves world markets from a single country or sources globally for the purposes of focusing on select country markets. d) Tend to maintain their association with a particular headquarters country. (HarleyDavidson and Waterford serve world markets from the US and Ireland, respectively.) e) Transnational companies serve global markets and utilize global supply chains. f) Transnational companies both serve global markets and utilize global supply chains and often have a blurring of national identity. A true transnational would be stateless. (Toyota and Honda are examples of companies that exhibit key characteristics of transnationality g) A key factor that distinguishes global and transnational companies from international or multinational companies is mind-set: At global and transnational companies, decisions regarding extension and adaptation are not based on assumptions but rather on made on the basis of ongoing research into market needs and wants. h) It is a synthesis of ethnocentrism and polycentrism it is a world view. i) Seeks to build a global strategy that is responsive to local needs and wants. The ethnocentric company is centralized in it marketing management; the polycentric company is decentralized; and the regiocentric and geocentric companies are integrated on a regional and global scale, respectively. What is the key global challenge facing organizational leaders today?

The key challenge facing organizational leaders today is managing a companys evolution beyond an ethnocentric, polycentric, or regiocentric orientation to a geocentric one.

Forces Affecting Global Integration and Global Marketing The remarkable growth of the global economy over the past 65 years has been shaped by the dynamic interplay of various driving and restraining forces. Regional economic agreements, converging market needs and wants, technology advances, and pressures to cut costs, pressures to improve quality, improvements in communications and transportation technology, global economic growth, and opportunities for leverage all represent important driving forces.

Multilateral Trade Agreements NAFTA (North American Free Trade Agreement) has expanded trade among the US, Mexico, and Canada. GATT (General Agreement on Tariffs and Trade) has created the WTO (World Trade Organization) to promote and protect free trade. EU (European Union) is lowering boundaries to trade within the region.

Converging Market Needs and Wants and the Information Revolution A person studying markets around the world will discover cultural universals as well as differences. Most global markets to not exist in nature marketing efforts must create them. (For example, no one needs soft drinks.) Evidence is mounting that consumer needs and wants around the world are converging today as never before. This creates an opportunity for global marketing. Multinational companies pursuing a strategy of product adaptation run the risk of falling victim to global competitors that have recognized opportunities to serve global customers. The information revolution is one reason for the trend toward convergence. Thanks to satellite dishes and globe-spanning TV networks (CNN and MTV), it seems as though almost everyone has the opportunity to compare their lives against everyone elses. The Internet is an even stronger driving force. When a company establishes a presence on the Internet, it is automatically a global company. Transportation and Communication Improvements Time and cost barriers associated with distance have fallen tremendously over the past 100 years.

The jet airplane revolutionized communication by making it possible for people to travel around the world in less than 48 hours. In 1970, 75 million passengers traveled internationally. By 2003, that figure rose to almost 540 million. The newest communication technologies, such as e-mail, video teleconferencing, and Wi-Fi, means that managers, executives, and customers can link up electronically from virtually any part of the globe without traveling at all. A similar revolution is occurring in transportation technology. The costs associated with physical distribution in both money and time have been greatly reduced.

Product Development Costs The pressure for globalization is intense when new products require major investment and long period of development time. The pharmaceutical industry provides a good example of this driving force. Today, the process of developing a new drug and bringing it to market can span 14 years and exceed $400 million. Such cost must be recovered globally because no single national market is likely to be large enough to support investments of this size. Global companies are said to raise the bar for all competitors in an industry. Why?

Global companies raise the bar for all competitors in an industry. When a global company establishes a benchmark for quality, competitors must quickly make their own improvement and come up to par. (The US auto manufacturers are an example.)

Quality Global marketing strategies can generate greater revenue and greater operating margins, which, in turn, support design and manufacturing quality.

World Economic Trends Economic growth has been a driving force in the expansion of the international economy and the growth of global marketing for three reasons. a) Economic growth in key developing countries has created market opportunities that provide a major incentive for companies to expand globally.

b) Economic growth has reduced resistance that might otherwise have developed in response to the entry of foreign firms into domestic economies. (When a country such as China experiences rapid economic growth, policy makers are more likely to look favorably on outsiders.) c) The worldwide movement toward free markets, deregulation, and privatization is the third driving force. (Telephone company privatization is an example.)

Leverage What does leverage mean?

Leverage means some type of advantage that a company enjoys by virtue of the fact that it has experience in more than one country. Leverage allows a company to conserve resources when pursuing opportunities in new geographical markets. What are the four types of leverage that exist?

Four important types of leverage exist: 1) Experience Transfers A global company can leverage its experience in any market in the world by drawing on management practices, strategies, products, advertising appeals, or sales or promotional ideas that have been market-tested in one country and applied to another. 2) Scale Economies The global company can take advantage of its greater manufacturing volume to obtain traditional scale advantages. Finished products can be manufactured by combining components manufactured in scale-efficient plants in different countries. 3) Resource Utilization A global company has the ability to scan the entire world to identify people, money, and raw materials that will enable it to compete most effectively in world markets. 4) Global Strategy The global companys greatest advantage is its global strategy. A global strategy is built on an information system that scans the world business environment to identify opportunities, trends, threats, and resources. A global strategy is a design to create a winning strategy on a global scale. Note: A global strategy is NO guarantee of ongoing organizational success. Restraining Factors Despite the impact of the driving forces previously discussed, several restraining forces may slow a companys efforts to engage in global marketing. Luckily, in todays world the driving forces predominate over the restraining forces. That is why the importance of global marketing is steadily growing.

Describe the most important restraining factors.

Important restraining forces include: a) Management Myopia and Organizational Culture Management may simply ignore opportunities to pursue global marketing. A company that is ethnocentric (or nearsighted) will not expand geographically. Myopia is a recipe for market disaster if headquarters attempts to dictate when it should listen. Successful global marketing requires a strong local team on the ground to provide information about local markets. b) National Controls Every country protects the commercial interests of local businesses by maintaining control over market access and entry in both low- and high-tech industries. Today, tariff barriers have been largely removed in high-income countries. Still, nontariff barriers (NTBs), such as Buy American campaigns, make it difficult for companies to gain access to local markets. c) Opposition to Globalization To many people, globalization represents a threat. Globaphobia is used to describe an attitude of hostility toward trade agreements or global brands. Opponents of globalization include labor unions, university students and nongovernmental organizations (NGOs).

THE WORLD ECONOMY: AN OVERVIEW What is the most fundamental change in the world economy since WWII?

The world economy has changed dramatically since World War II. Perhaps the most fundamental change is the emergence of global markets; responding to new opportunities, global competitors have displaced or absorbed local ones. The integration of the world economy has increased significantly. Economic integration was 10 percent at the beginning of the 20th century; today, it is approximately 50 percent. In what areas of the world is global integration most striking?

Integration is particularly striking in the two regions of the European Union (EU) and the North American Free Trade Area. For example, the worlds largest automakers have, for the most part, evolved into global companies. During the past two decades, the world economic environment has become increasingly dynamic; change has been dramatic and far-reaching. To achieve success, executives and marketers must take into account the following new realities: a) Capital movements have replaced trade as the driving force of the world economy. Global capital movements far exceed the dollar volume of global trade. b) Productivity has become uncoupled from employment. The second change concerns the relationship between productivity and employment. To illustrate this relationship, it is necessary to review some basic macroeconomics. Gross domestic product (GDP) , a measure of a nations economic activity, is calculated by adding consumer spending (C), investment spending, (I), government purchases,(G), and net exports (NX): C+I+G+NX = GDP Economic growth, as measured by GDP, reflects increases in a nations productivity. a) The world economy dominates the scene; individual country economies play a subordinate role. b) The struggle between capitalism and socialism is largely over. The Cold War is over; communism is not an effective economic system. c) Finally, the growth of the personal computer and the advent of the Internet have diminished the importance of national boundaries. ECONOMIC SYSTEMS What are the four main types of global economic systems?

Traditionally, there are four main types of economic systems: market capitalism, centrally planned socialism, centrally planned capitalism, and market socialism. Upon what is this classification scheme based?

This classification was based on the dominant method of resource allocation (market versus command) and the dominant form of resource ownership (private versus state) (see Figure 2-1). Alternatively, more robust descriptive criteria include the following: Type of economy Type of government Trade and capital flows The commanding heights Services provided by the state and funded through taxes Markets

Market Capitalism Define Market Capitalism.

Market capitalism is an economic system in which individuals and firms allocate resources, and production resources are privately owned. Consumers decide what goods they desire, and firms decide how much to produce; the states role is to promote competition (see Table 2 -1). Market capitalism is practiced worldwide, especially in North America and Western Europe, but all market-oriented economies do not function in the same manner. The U.S. is distinguished by its competitive wild free-for-all and decentralized initiative whereas Japan is a tightly run, highly regulated economic system that is market oriented.

Centrally-Planned Socialism What is Centrally-Planned Socialism? At the opposite end of the spectrum is Centrally-planned socialism. Centrally-planned socialism gives the state broad powers to serve the public as it sees fit. State planners make top-down decisions about the goods and services produced and in what quantities; consumers spend money on what is available. Government ownership of industries and individual enterprises is characteristic. Demand exceeds supply, and there is little reliance on product differentiation, advertising, or promotion. To eliminate exploitation by intermediaries, the government controls distribution.

Because of market capitalisms superiority, many socialist countries have adopted it; the ideology developed by Marx and perpetuated by Lenin has been resoundingly refuted. For decades, the economies of China, the former Soviet Union, and India functioned according to the tenets of centrally planned socialism. All three countries are now engaged in economic reforms characterized, in varying proportions, by increased reliance on market allocation and private ownership.

Centrally-Planned Capitalism and Market Socialism In reality, market capitalism and centrally-planned socialism do not exist in pure form. Command and market resource allocation are practiced simultaneously, as are private and state resource ownership. The role of government in modern market economies varies widely. Define Centrally-Planned Capitalism and Market Socialism.

Centrally-planned capitalism is an economic system in which command resource allocation is used extensively in an environment of private resource ownership (e.g., Sweden). Market socialism permits market allocation policies within an overall environment of state ownership (e.g., China gives freedom to businesses/individuals to operate in a market system). Market reforms and nascent capitalism in many parts of the world are creating opportunities for large-scale investments by global companies. For example, Coca-Cola returned to India in 1994, two decades after being forced out by the government. A new law allowing 100 percent foreign ownership of enterprises helped pave the way. The Heritage Foundation, a conservative think tank, classifies economies according to the degree of economic freedom enjoyed. The variables considered in compiling the rankings include: trade policy taxation policy government consumption of economic output monetary policy capital flows foreign investment banking policy wage and price controls property rights regulations the black market The rankings form a continuum from free to repressed. Hong Kong and Singapore are ranked first and second in terms of economic freedom; Cuba, Laos, and North Korea are ranked lowest .

STAGES OF ECONOMIC DEVELOPMENT At any point in time, individual country markets are at different stages of economic development. The World Bank has developed a four-category classification system that uses per capita gross national income (GNI) as a base. Although the income definition for each of the stages is arbitrary, countries within a given category generally have a number of characteristics in common. What are the BRIC countries?

Today, global attention is focused on opportunities in Brazil, Russia, India and China (collectively known as BRIC). For each of the stages of economic development, special attention is given to the BRIC countries.

Low-Income Countries Low-income countries have a GNI per capita of less than $936. The general characteristics shared by countries at this income level are: limited industrialization and a high percentage of the population engaged in agriculture and subsistence farming high birth rates low literacy rates heavy reliance on foreign aid political instability and unrest concentration in Africa south of the Sahara

Approximately 40 percent of the worlds population is included in this group. Typically, these countries provided limited investment opportunities. However, there are exceptions; for example, in Bangladesh, where per capita GNP is approximately $450, the garment industry has enjoyed burgeoning exports. The newly independent countries of the former Soviet Union present an interesting situation: Income is declining, and there is considerable economic hardship. The potential for disruption is, therefore, high. India is the sole low-income county in the BRIC group. In the 1990s India faced high inflation and low foreign exchange reserves. Leaders opened Indias economy to trade and investment and dramatically improved market opportunities.

Lower-Middle-Income Countries Define the least-developed countries

The United Nations designates fifty countries in the bottom ranks of the low-income category as least-developed countries (LDCs). The term is sometimes used to indicate a contrast with developing (i.e., upper ranks of lowincome plus lower-middle and upper-middle-income) countries and developed (high-income) countries. What is the income level of the lower-middle-income countries?

Lower-middle-income countries are those with a GNI per capita between $936 and $3,705. Consumer markets in these countries are expanding rapidly. Countries such as China and Thailand represent an increasing competitive threat as they mobilize their relatively cheap labor forces to serve target markets in the rest of the world. The developing countries in the lower-middle-income category have a major competitive advantage in mature, standardized, labor-intensive industries such as making toys and textiles. Which of the BRIC nations are in the lower-middle-income category?

China and Brazil are the BRIC nations in the lower-middle-income category. China represents the largest single destination for foreign investment in the developing world. Despite ongoing market reforms, Chinese society does not have democratic foundations. Although China has joined the World Trade Organization, trading partners are still concerned about human rights, protection of intellectual property rights, and other issues.

Upper-Middle-Income Countries Upper-Middle-Income countries are also known as what?

Upper-middle-income countries, also known as industrializing or developing countries are those with GNP per capita ranging from $3,706 to $11,455. Russia and Brazil, with per capita GNI of $5,770 and $4,710, respectively, are the tow BRIC nations that currently fall into the upper-middle-income category. The percentage of population engaged in agriculture has dropped sharply as people move to the industrial sector and the degree of urbanization increases.

What are NIEs?

Upper-middle-income countries that achieve the highest rates of economic growth are sometimes referred to as newly industrializing economies (NIEs).

Marketing Opportunities in LDCs and Developing Countries Despite many problems in LDCs and developing countries, it is possible to nurture long-term market opportunities. Although Nike sells only a small portion of its output in China, it clearly has the future in mind when it refers to China as a two-billion-foot market. What are the basic misconceptions about countries at the bottom of the pyramid that must be corrected?

Prahalad and Hammond have identified several assumptions and misconceptions about the bottom of the pyramid (BOP) that need to be corrected: Mistaken assumption #1: The poor have no money.

The aggregate buying power of poor communities can be substantial. In rural Bangladesh, for example, villagers spend considerable sums to use village phones operated by local entrepreneurs. Mistaken assumption #2: The poor are too concerned with fulfilling basic needs to waste money on non-essential goods. Consumers who are too poor to purchase a house do buy luxury items such as television sets and gas stoves to improve their lives. Mistaken assumption #3: The goods sold in developing markets are so inexpensive that there is no room for a new market entrant to make a profit.

In reality, because the poor often pay higher prices for many goods, there is an opportunity for efficient competitors to realize attractive margins by offering quality and low prices. Mistaken assumption #4: People in BOP markets cannot use advanced technology.

Residents of rural areas can and do quickly learn to use cell phones, PCs, and similar devices. Mistaken assumption #5: Global companies that target BOP markets will be criticized for exploiting the poor.

The informal economies in many poor countries are highly exploitative. A global company offering basic goods and services that improve a countrys standard of living can earn a reasonable return while benefiting society. One of marketings roles in developing countries is to focus resources on the task of creating and delivering products that are best suited to local needs and incomes. Marketing can be the link that relates resources to opportunity and facilitates need satisfaction on the consumer's terms. Some believe marketing is relevant only in affluent, industrialized countries. The argument: In less-developed countries the major problem is the allocation of scarce resources toward obvious production needs. Efforts should focus on production and how to increase output, not on customer needs and wants. The converse argument: The role of marketing to identify peoples needs and wants and to focus individual and organizational efforts to respond to these needs and wants is the same in all countries, irrespective of level of economic development.

When global marketers respond to the needs of rural residents in emerging markets such as China and India, they are also more likely to gain all-important government support and approval. For example, Nestle introduced Pure Life bottled water in Pakistan and the brand has captured 50 percent of the market. Coca-Cola recently began to address dietary and health needs in lowincome countries by developing Vitango, a beverage product that can help fight anemia, blindness, and other ailments related to malnutrition. There is also an opportunity to help developing countries join the Internet economy. At the Massachusetts Institute of Technologys Media Lab, a project called One Laptop per Child has the goal of developing a laptop computer that governments in developing countries can buy for $100.

High-Income Countries High-Income countries are those countries with a GDP of at least how much?

These are advanced, developed, industrialized, or postindustrial countries, having a per capita GNP of $11,456 or higher. They have reached their present income level through sustained economic growth. The phrase postindustrial countries describes the United States, Sweden, Japan, and other advanced, high-income societies. Opportunities in a postindustrial society depend on new products and innovations because ownership levels for basic products are high.

Organizations face difficulty in expanding shares in existing markets, but they can create new markets. What countries make up the Group of Seven?

Among high-income countries, the U.S., Japan, Germany, France, Britain, Canada, and Italy form the Group of Seven (G-7) to steer the global economy to prosperity and stability. What country was added to the G-7 to form the G-8?

Starting in the mid-1990s, Russia began attending the G-7 summit meetings. In 1998, Russia became a full participant, giving rise to the new Group of Eight (G-8). Another institution of high-income countries is the Organization for Economic Cooperation and Development (OECD). The 30 OECD nations believe in market-allocation economic systems and pluralistic democracy; the organization has been described as an economic thinktank and a rich-mans club. Evidence of the increasing importance of the BRIC group is the fact that China, India, Brazil, and Russia have all formally announced their intention to join the OECD.

The Triad What three economic centers make up the Triad?

In his book Triad Power, Ohmae argued that successful global companies had to be equally strong in the dominant economic centers of Japan, Western Europe, and the United States. These three regions, called the Triad, represented the dominant centers of the world and the location of nearly 75 percent of world income, as measured by GNP. The expanded Triad includes the entire Pacific region, Canada and Mexico; and the boundary in Europe is moving eastward.

Marketing Implications of the Stages of Development The stages of economic development can serve as a guide to marketers in evaluating product saturation levels, the percentage of potential buyers or households who own a product. In countries with low per capita income, product saturation levels are low (e.g., ownership of telephones in India is only about 20 percent of the population). In China, saturation levels of private motor vehicles and personal computers are very low only about one car or light truck for every 43,000 people, and one PC for every 6,000. Compare this to the EU, with a ratio of 34 PCs per 100 people.

BALANCE OF PAYMENTS What is the balance of payments?

The balance of payments is a record of all economic transactions between the residents of a country and the world. It is divided into the current and capital accounts. What is the current account?

The current account is a measure that includes trade in merchandise and services, plus certain categories of financial transfers such as humanitarian aid. Define a trade deficit. Define a trade surplus. A country with a negative current account balance has a trade deficit; that is, the outflow of money to pay for imports exceeds the inflows of money for sales of exports A country with a positive current account balance has a trade surplus. What is the capital account?

The capital account is a record of all long-term direct investment, portfolio investment, and other short- and long-term capital flows. The minus signs indicate outflows of cash, payment for (for example, Table 2-5, line 2 shows an outflow of $1.97 trillion in 2007, that represents payment for U.S. merchandise imports). A country accumulates reserves when the net of its current and capital account transactions shows a surplus; it gives up reserves when the net shows a deficit. The United States regularly posts a deficit in both the current account and the trade balance of goods. A close examination of Table 2-5 reveals that the United States regularly posts deficts in both the current account and the trade balance in goods. Overall, the U.S. post balance of payments deficits while important trading partners, such as China, have surpluses. TRADE IN MERCHANDISE AND SERVICES Thanks in part to the achievements of GATT and the WTO, world merchandise trade has grown at a faster rate than world production since the end of World War II. According to figures compiled by the World Trade Organization, the dollar value of world trade in 2007 totaled $13.9 trillion.

In 2003, Germany surpassed the United States as the worlds top merchandise exporter. Exports generate 40 percent of Germanys gross domestic product, and 9 million jobs are export related. Chinas third place in the export ranking underscores its role as an export powerhouse.(Table 27). Chinese exports to the United States have surged since China joined the World Trade Organization in 2001; in fact, policymakers in Washington are pressuring Beijing to boost the value of the yuan in an effort to stem the tide of imports. The European Union is treated as a single entity with import and exports that exclude intraregional trade among the 25 countries that were EU members at the end of 2006. It shows that the EU is the #1 exporter and importer of world merchandise in 2006. The fastest-growing sector of world trade is trade in services. Services include travel and entertainment; education; business services such as engineering, accounting, and legal services; and payments of royalties and license fees. U.S. services exports in 2007 totaled $500 billion. This represents more than one-third of total U.S. exports. The U.S. services surplus (service exports minus imports) stood at $119 billion. OVERVIEW OF INTERNATIONAL FINANCE Foreign exchange makes it possible for a company in one country to conduct business in other countries with different currencies. What two basic markets make up the foreign exchange market?

The foreign exchange market consists of a buyers market and a sellers market where currencies are traded for both spot and future delivery on a continuous basis. What is the difference between the spot market and the forward market?

The spot market is for immediate delivery; the market for future delivery is called the forward market. Who are the participants in this market? 1. A countrys central bank can buy and sell currencies in the foreign exchange market and government securities in an effort to influence exchange rates. 2. Some of the trading in the foreign exchange market takes the form of transactions needed to settle accounts for the global trade in goods and services. (For example, because Porsche is a German company, the dollars spent on Porsche automobiles by American car buyers must be converted to euros.) 3. Currency speculators also participate in the foreign exchange market. What is devaluation?

What is revaluation?

Devaluation can result from government action that mandates a reduction in the value of the local currency against other currencies. The opposite is revaluation. In 2005, the Chinese government responded to pressure from its trading partners by adopting a policy of revaluation to strengthen the yuan against the dollar and other currencies. A stronger yuan would make Chinas exports to the United States more expensive while making U.S. exports to China less expensive.

Purchasing Power Parity Given that currencies fluctuate in value, a reasonable question to ask is whether a given currency is over- or undervalued compared with another. What is the Big Mac Index?

One way to answer the question is to compare world prices for a single well-known product: McDonald's Big Mac hamburger. The so-called Big Mac Index is a quick and dirty way of determining which of the world's currencies are too weak or strong. The underlying assumption is that the price of a Big Mac in any world currency should, after being converted to dollars, equal the price of a Big Mac in the United States. A countrys currency would be overvalued if the Big Mac price (converted to $) is higher than the U.S. price. Conversely, a countrys currency would be undervalued if the converted Big Mac price is lower than the U.S. price. Economists use the concept of purchasing power parity (PPP) when adjusting national income data to improve comparability.

Economic Exposure What is economic exposure?

Economic exposure reflects the impact of currency fluctuations on a companys financial performance. Economic exposure can occur when a companys business transactions result in sales or purchases denominated in foreign currencies.

Managing Exchange Rate Exposure Forecasting exchange rate movements is a major challenge. Over the years, the search for ways of managing cash flows to eliminate or reduce exchange rate risks has resulted in the development of numerous techniques and financial strategies.

Hedging exchange rate exposure involves establishing an offsetting currency position such that the loss or gain of one currency position is offset by a corresponding gain or loss in some other currency. External hedging methods for managing both transaction and translation exposure require companies to participate in the foreign currency market. Specific hedging tools include forward contracts and currency options. Internal hedging methods include price adjustment clauses and intra-corporate borrowing or lending in foreign currencies. The forward market is a mechanism for buying and selling currencies at a preset price for future delivery. In some situations companies are not certain about the future foreign currency cash inflow or outflow. In such an instance, forward contracts are not the appropriate hedging tool. A foreign currency option is best for such situations. What is a put option? What is a call option?

A put option gives the buyer the right, not the obligation, to sell a specified number of foreign currency units at a fixed price, up to the option's expiration date. Conversely, a call option is the right, but not the obligation, to buy the foreign currency.

THE WORLD TRADE ORGANIZATION AND GATT What is GATT?

The General Agreement on Tariffs and Trade (GATT) was treaty among nations whose governments agreed to promoted trade among members. GATT was intended to be a multilateral, global initiative which liberalized world trade and handled 300 disputes over fifty years; however, GATT lacked enforcement power. The successor to GATT, the World Trade Organization (WTO), born in 1995, provides a forum for trade-related negotiations among its 150 members and mediates trade disputes. The Dispute Settlement Body (DSB) mediates complaints concerning unfair trade barriers; during a 60-day consultation period, parties engage in good-faith negotiations (see Table 3 -1). Failing that, the DSB convenes a panel and acts on the panels recommendations; if after due process, the losing party violates WTO rules, the WTO can impose trade sanctions. WTO trade ministers meet annually to work on improving world trade, but politicians in many countries resist the WTOs plans to move swiftly in removing trade barriers. The current round of WTO negotiations began in 2001; the talks collapsed in 2005, and attempts to revive them in 2006 were not successful. PREFERENTIAL TRADE AGREEMENTS The GATT treaty promotes free trade on a global basis; in addition, countries in each of the world's regions are seeking to liberalize trade within their regions. What is a preferential trade agreement?

A preferential trade agreement is a mechanism that confers special treatment on select trading partners. By favoring certain countries, such agreements frequently discriminate against others.

Free Trade Area How is a free trade area formed?

A free trade area (FTA) is formed when two or more countries agree to eliminate tariffs and other barriers that restrict trade. A free trade area comes into being when trading partners successfully negotiate a free trade agreement (also abbreviated FTA), the ultimate goal of which is zero duties on goods that cross borders between the partners.

Rules of origin are used to discourage the importation of goods into the member country with the lowest external tariff for transshipment to one or more FTA members with higher external tariffs. To date, dozens of free trade agreements, many of them bilateral, have been successfully negotiated.

Customs Unions A customs union represents the logical evolution of a free trade area. In addition to eliminating internal barriers to trade, members of a customs union agree to the establishment of common external tariffs (CETs). Some of the customs unions discussed in this chapter are the Andean Community, the Central American Integration System (SICA), Mercosur, and CARICOM.

Common Market A common market is the next level of economic integration. In addition to the removal of internal barriers to trade and the establishment of common external tariffs, the common market allows for free movement of factors of production, including labor and capital.

Economic Union An economic union builds upon the elimination of the internal tariff barriers, the establishment of common external barriers, and the free flow of factors. It seeks to coordinate and harmonize economic and social policy within the union to facilitate the free flow of capital, labor, goods, and services from country to country. The full evolution of an economic union would involve what?

The full evolution of an economic union would involve the creation of a unified central bank, the use of a single currency, and common policies on agriculture, social services and welfare, regional development, transport, taxation, competition, and mergers. A true economic union requires extensive political unity, which makes it similar to a nation. The further integration of nations that were members of fully developed economic unions would be the formation of a central government that would bring together independent political states into a single political framework.

The European Union is approaching its target of completing most of the steps required to become a full economic union. NORTH AMERICA North America, which includes Canada, the United States, and Mexico, comprises a distinctive regional market. The U.S. has more industry leaders than any other nation, dominating the computer, software, aerospace, entertainment, medical equipment, and jet engine industry sectors. In what year did CFTA formally come into existence?

The U.S.-Canada Free Trade Area (CFTA) came into existence in 1989, resulting in over $400 billion per year trade between the two countries. Who are the top three trading partners of the U.S.?

Canada is the number one trading partner of the U.S.; Mexico is second, and China ranks third. American companies have more invested in Canada than in any other country. The North American Free Trade Agreement (NAFTA) became effective in 1994; the result is a free trade area with a combined population of 430 million and a total GNP of roughly $14 trillion. Why does NAFTA create a free trade area as opposed to a customs union or a common market?

The governments of all three nations pledge to promote economic growth through tariff elimination and expanded trade and investment. At present, however, there are no common external tariffs nor have restrictions on labor and other factor movements been eliminated. Illegal immigration from Mexico remains a contentious issue. NAFTA allows for discretionary protectionism (e.g., California avocado growers won protection, allowing Mexican avocados into the U.S. during the winter only in the northeast at a quota).

LATIN AMERICA: SICA, Andean Community, Mercosur, CARICOM

Global corporations see import liberalization, prospects for lower tariffs within sub-regional trading groups, and the potential for more efficient production. Many envision a free trade area throughout the hemisphere. What are the most important trading arrangements in Latin America?

Important trading arrangements include: Central American Integration System (SICA) Andean Community The Common Market of the South (Mercosur) The Caribbean Community and Common Market (CARICOM).

Central American Integration System Central America is trying to revive its common market, which originally had five members: What countries originally comprised the Central American Integration System? El Salvador Honduras Guatemala Nicaragua Costa Rica

In 1997, with Panama as a member, the group changed its name to the Central American Integration System (SICA). (Table 3-5 shows the income and population data in the region). Common rules of origin allow for freer movement of goods among SICA countries which agreed to a common external tariff of 5 to 20 percent for most goods by the mid-1990s. Still, attempts to achieve integration are uncoordinated, inefficient, and costly (e.g., there are still tariffs on imports of products sugar, coffee, and alcoholic beverages.)

Andean Community The Andean Community was formed in 1969 to accelerate development of member states through economic and social integration. What countries make up the Andean Community?

The member countries of the Andean Community are: Bolivia Colombia Ecuador

Peru Venezuela

Members lowered tariffs on intra-group trade and decided what products each country should produce. Foreign goods and companies were kept out as much as possible. A sub-regional free trade zone was formed, abolishing foreign exchange, financial and fiscal incentives, and export subsidies by 1992. Common external tariffs were established. While Peru has one of the fastest-growing economies in the region, Ecuador has experienced years of economic and political instability. How have rural residents and the urban poor viewed the progress of the Andean Community?

Overall, rural residents and the urban poor in the region have become frustrated and impatient with the lack of progress.

Common Market of the South (Mercosur) March 2006 marked the fifteen anniversary of the signing of the Asuncin Treaty. What countries were the original members of Mercosur?

The treaty signified the agreement by the governments of Argentina, Brazil, Paraguay, and Uruguay. Internal tariffs were eliminated, and common external tariffs of up to 20 percent were established; in theory goods, services, and factors of production will move freely. Until this goal is achieved, Mercosur will operate as a customs union. Trade among member nations peaked at $20 billion in 1998. A major impediment to further integration is the lack of economic and political discipline and responsibility a situation reflected in the volatile currencies of Mercosur countries. Argentina provides a case study in how a country can emerge from an economic crisis as a stronger global competitor. In 2002, Argentina devalued its currency by 29 percent for exports and capital transactions. Why was Chile not allowed to become a full member of Mercosur?

In 1996, Chile became an associate member of Mercosur; policymakers blocked full membership because Chile had lower external tariffs that the rest of Mercosur. Chile had been negotiating for inclusion in NAFTA; however, after Mexicos deficit with the U.S. became a trade surplus, U.S. interest in expanding NAFTA cooled. Chiles export-driven success makes it a role model for the rest of Latin America as well as Central and Eastern Europe. Bolivia, Colombia, Ecuador, and Peru are associate members of Mercosur, because they recently agreed to merge with the Andean Community. The EU is Mercosurs number-one trading partner. What country is the newest member of Mercosur?

Venezuela became a full Mercosur member in 2006. Flush with revenues from oil exports, Venezuela is expected to have a positive impact on regional integration.

Caribbean Community and Common Market (CARICOM) Who are the member countries of CARICOM?

CARICOM was formed in 1973 with the following member states: Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica Montserrat St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Trinidad and Tobago

The population of the entire 15-member CARICOM is about 15 million; disparate levels of economic development can be seen by comparing GNP per capita in Antigua and Haiti What does CARICOM have as its main objective?

To date, CARICOM's main objective has been to achieve a deepening of economic integration by means of a Caribbean common market. However, CARICOM was largely stagnant during its first two decades of existence. In 1998, leaders agreed to establish an economic union with a common currency. A recent study of the issue has suggested, however, that the limited extent of intra-regional trade would limit the potential gains from lower transaction costs. English-speaking CARICOM members defend their privileged position with the U.S. (e.g., Guatemala). As of 2000, the Caribbean Basin Trade Partnership Act exempts textile and apparel exports from the Caribbean to the U.S. from duties and tariffs.

Current Trade-Related Issues One of the biggest issues pertaining to trade is the Free Trade Area of the Americas. Many Latin American countriesBrazil in particularare frustrated by Americas broken promises. As a result, Brazil and Mercosur advocate slower three-stage negotiations to include: discussions on customs forms and deregulation; dispute settlement and rules of origin; and tariffs. ASIA-PACIFIC: The Association of Southeast Asian Nations (ASEAN) The Association of Southeast Asian Nations (ASEAN) was established in 1967 as an organization for economic, political, social, and cultural cooperation among its member countries. Who were the original members of ASEAN?

The original six members of ASEAN were: Brunei Indonesia Malaysia the Philippines Singapore Thailand What was the first Communist nation to join ASEAN?

Vietnam became the first Communist nation in the group when it was admitted to ASEAN in July 1995. Cambodia and Laos were admitted at the organization's thirtieth anniversary meeting in July 1997.

Burma (known as Myanmar by the ruling military junta) joined in 1998. Who are ASEANs top three trading partners?

Individually and collectively, ASEAN countries are active in regional and global trade. ASEAN's top trading partners include the United States ($52.8 billion in 2002 exports), the European Union ($48 billion in exports), and China ($23 billion). In 1994, economic ministers from the member nations agreed to implement an ASEAN Free Trade Area (AFTA) by 2003, 5 years earlier than previously discussed. What is ASEAN plus three? What countries were added to result in ASEAN plus six?

Recently, Japan, China, and Korea were informally added to the member roster; some observers called this configuration ASEAN plus three. When the roster expanded again to include Australia, New Zealand, and India, it was dubbed ASEAN plus six. In fewer than three decades, Singapore has transformed itself from a British colony to a vibrant, 240-square-mile industrial power. Singapore has an extremely efficient infrastructure the Port of Singapore is the world's secondlargest container port (Hong Kong's ranks first) and a standard of living second in the region only to Japans. Singapore accounts for more than one-third of U.S. trading activities with ASEAN countries.

Marketing Issues in the Asia-Pacific Rim Mastering the Japanese market takes flexibility, ambition, and a long-term commitment. Japan has changed from being a closed market to one thats just tough, with barriers in attitudes and laws. Japan requires top-quality products and services, tailored to local tastes. Countless visits and socializing with distributors are necessary to build trust, and marketers must master the keiretsu system of tightly knit corporate alliances. WESTERN, CENTRAL, AND EASTERN EUROPE The countries of Western Europe are among the most prosperous in the world. Entering the first decade of the twenty-first century, the governments of Western Europe have achieved unprecedented levels of economic integration.

The European Union (EU) The EU began in 1958 with the Treaty of Rome and original members Belgium, France, Holland, Italy, Luxembourg, and West Germany. In 1973, Great Britain, Denmark, and Ireland were admitted, followed by Greece in 1981 and Spain and Portugal in 1986. The objective is to harmonize national laws and regulations so that goods, services, people, and eventually money can flow freely across national boundaries. The EU encourages a community-wide labor pool and establishes rules of competition patterned after U.S. antitrust law. Improvements to highway and rail networks are underway. Finland, Sweden, and Austria joined in 1995 Cyprus, the Czech Republic, Estonia, Hungary, Poland, Latvia, Lithuania, Malta, the Slovak Republic, and Slovenia became full EU members on May 1, 2004. Bulgaria and Romania joined in 2007. Today, the 27 nations of the EU represent 490 million people and a combined GNI of $15.0 trillion. The 1991 Maastricht Treaty prepared the transition to an economic and monetary union (EMU) with a European central bank and a new currency, the euro. The euro brings the benefits of eliminating currency conversion costs and exchange rate uncertainty. In 2002, euro coins and paper money were issued to replace national currencies such as the French franc.

Marketing Issues in the European Union The business environment in Europe has undergone considerable transformation since 1992, with significant implications for all elements of the marketing mix. Marketing mix issues must be addressed in Europe's single market (e.g., content and other product standards that varied among nations must be harmonized). Harmonization means that content and other product standards that varied among nations have been brought into alignment. Direct comparability of prices in the euro zone forces companies to review pricing policies; the marketing challenge is to develop strategies to take advantage of a large, wealthy market. The enlargement of the EU will further impact marketing strategies and harmonized laws; food safety laws in the EU are different form those in Central European countries.

Because they are in transition, the markets of Central and Eastern Europe present interesting opportunities and challenges. Global companies view the region as an important new source of growth, and the first country to penetrate a country market often emerges as an industry leader. What has been the favored mode of entry?

Exporting has been a favorite entry mode, but direct investment is on the rise; low wage rates, below Spain and Greece, make this region attractive for low-cost manufacturing. For consumer products, distribution is a critical marketing mix element because availability is key to sales; studies show that consumers and businesses are embracing global brands. A study found a high degree of standardization of marketing program elements; the core product and brand elements were largely unchanged from those used in Western Europe.

THE MIDDLE EAST What countries comprise the Middle East?

The Middle East includes 16 countries: Afghanistan Cyprus Bahrain Egypt Iran Iraq Israel Jordan Kuwait Lebanon Oman Qatar Saudi Arabia Syria The United Arab Emirates Yemen The majority is Arab, a large percentage Persian, and a small percentage Jews. The population is 95 percent Muslim and 5 percent Christian and Jewish.

Despite apparent homogeneity, Middle Eastern countries fall into all categories of the index of economic freedom from mostly free (Bahrain, Kuwait, Saudi Arabia, United Arab Emirates) to repressed (Iran and, until the 2003 regime change, Iraq). The Middle East lacks a single societal type with a typical belief, behavior, and tradition; each major city has many social groups, different in religion, social class, education, and wealth. The price of oil drives business. Bahrain, Iraq, Iran, Kuwait, Oman, Qatar, and Saudi Arabia hold significant world oil reserves which have widened the gap between rich and poor nations. Disparities contribute to political and social instability. Saudi Arabia is the main market in the region, with 25 percent of the worlds known oil reserves. During the Persian Gulf War against Iraq, Gulf Arabs broke unwritten rules including accepting help from the U.S., an ally of Israel. Anti-Americanism flared in 2003 during the invasion of Iraq to remove Saddam Hussein from power. Having returned sovereignty to Iraq in June 2004, Americans remain in Iraq.

Cooperation Council for the Arab States of the Gulf The Gulf Cooperation Council (GCC) was established in 1981. The six gulf countries hold about 45 percent of the worlds known oil reserves, but production is only about 18 percent of world oil output. Saudi Arabia and other Middle Eastern countries post account deficits because they import most goods and services and depend on oil revenues to pay for imports. The organization provides coordination, integration and cooperation in all economic, social, and cultural affairs. Committees coordinate trade development, industrial strategy, agricultural policy, and uniform petroleum policies and prices. Goals include establishing an Arab Common Market and increasing trade ties with Asia.

In 1989, two other organizations were formed. Morocco, Algeria, Mauritania, Tunisia, and Libya formed the Arab Maghreb Union (AMU). Egypt, Iraq, Jordan, and North Yemen created the Arab Cooperation Council (ACC). Many Arabs see their regional groups as economic communities to foster the development of inter-Arab trade and investment.

Marketing Issues in the Middle East Connection is a key word in conducting business in the Middle East; developing relationships with key business and government figures are likely to cut through red tape. Bargaining is culturally ingrained, and business people should be prepared for haggling; establishing personal trust, mutual trust, and respect are essential. Decisions are not made by correspondence or telephone. The Arab businessperson does business with the individual, not the company. Women are not part of the business or entertainment scene for traditional Muslim Arabs.

AFRICA It is not really possible to treat Africa as a single economic unit. What are the three unique regions of Africa?

The 54 nations on the continent can be divided into three distinct areas: the Republic of South Africa, North Africa, and sub-Saharan or Black Africa

With 1.3 percent of the world's wealth and 11.5 percent of its population, Africa is a developing region with an average per capita income of less than $600. The Arabs living in North Africa are differentiated politically and economically. The six northern nations are richer and more developed, and severalnotably Libya, Algeria, and Egypt benefit from large oil resources. For what does the acronym Mena stand?

The Middle East and North Africa are viewed as a regional entity Mena; the economies of non-oil, emerging Mena (Jordan, Lebanon, Morocco, Tunisia) have performed best.

Economic Community of West African States (ECOWAS) ECOWAS was established in 1975 to promote trade, cooperation, and self-reliance in West Africa: Benin Burkina Faso Cape Verde, The Gambia, Ghana Guinea Guinea-Bissau Ivory Coast Liberia Mali Mauritania Niger Nigeria Senegal Sierra Leone Togo In 1980, members established a free trade area for unprocessed agricultural products and handicrafts. By 1990, tariffs on twenty-five items had been eliminated, with measures taken to create a single monetary zone by 1994. Still, economic development has occurred unevenly in the region.

East African Cooperation In 1996, Kenya, Uganda, and Tanzania established a mechanism to promote free trade and economic integration. Tariff issues and a customs union are being explored. Development of regional tourism and energy projects are underway.

South African Development Community (SADC) SADC promotes trade, cooperation, and economic integration; members include: Angola Botswana Democratic Republic of Congo Lesotho Malawi Mauritius Mozambique

Namibia South Africa Seychelles Swaziland Tanzania Zambia, Zimbabwe

The goal is a fully developed customs union. South Africa joined the community in 1994, and represents 75 percent of regional income and 86 percent of intraregional exports South Africa has explored the formation of a free trade area with the EU. South Africa, Botswana, Lesotho, Namibia, and Swaziland belong to the Southern African Customs Union (SACU).

Marketing Issues in Africa In 2000, President George W. Bush signed the African Growth and Opportunities Act (AGOA) into law. Created with the theme of Trade Not Aid, the law is designed to support African nations that make significant progress toward economic liberalization. AGOA also represents a formal step toward a U.S. Africa free trade zone.