Pre-Reading

Reading 4: Threats and Opportunities ^[1]

Threats and Opportunities in the Global Marketplace

To be successful in a foreign market, companies must fully understand the foreign environment in which they plan to operate. Political, cultural, and economic differences can both offer opportunities and cause problems in the global marketplace.

Political Considerations

We have already discussed how tariffs and other governmental actions threaten foreign producers. The political structure of a country may also jeopardize a foreign producer’s success in international trade.

Intense nationalism, for example, can lead to difficulties. Nationalism is the sense of national consciousness that boosts the culture and interests of one country over those of all other countries. Strongly nationalistic countries, such as Iran and New Guinea, often discourage investment by foreign companies. In other, less radical forms of nationalism, the government may take actions to hinder foreign operations. France, for example, requires pop music stations to play at least 40 percent of their songs in French. This law was enacted because the French love American rock and roll. Without enough airtime, the French music industry would suffer a further loss.

The political climate can be even more hostile. Governments occasionally expropriate a foreign company’s assets, taking ownership and compensating the former owners. Even worse is confiscation, when the owner receives no compensation. This happened during rebellions in several African nations during the 1990s and 2000s.

Cultural Differences

Central to any society is the common set of values shared by its citizens that determine what is socially acceptable. Culture underlies the family, educational system, religion, and social class system. Together these systems promote certain values. These values have a tremendous effect on people’s preferences and thus on how businesses market their products. For example, in South Korea, Walmart hosts a food competition with variations on a popular Korean dish, kimchee.

Language is another important aspect of culture. Marketers must take care in selecting product names and translating slogans and promotional messages so as not to convey the wrong meaning. For example, Mitsubishi Motors had to rename its Pajero model in Spanish-speaking countries because the term refers to a sexual activity. Toyota Motor’s MR2 model dropped the 2 in France because the combination sounds like a French swear word. The literal translation of Coca-Cola in Chinese characters means “bite the wax tadpole.” People certainly wouldn’t find the idea of biting a small frog-like animal appetizing. When American Airlines wanted to promote its new first-class seats in the Mexican market, it translated the “Fly in Leather” campaign literally, which meant “Fly Naked” in Spanish. In all these cases, companies had to adjust their marketing to match the local language.

Additionally, each country has its own customs and traditions that determine business practices and influence negotiations with foreign customers. For example, attempting to do business in Western Europe during the first two weeks in August is virtually impossible. Businesses close, and everyone goes on vacation at the same time. In many countries, personal relationships are more important than financial considerations. For instance, skipping social engagements in Mexico may lead to lost sales. Negotiations in Japan often include long evenings of dining, drinking, and entertaining; only after a close personal relationship has been formed do business negotiations begin. The table below presents some cultural dos and don’ts.

Economic Environment

The level of economic development varies considerably, ranging from countries where everyday survival is a struggle, such as Sudan and Eritrea, to countries that are highly developed, such as Switzerland and Japan. In general, complex, sophisticated industries are found in developed countries, and more basic industries are found in less developed nations. Average family incomes are higher in the more developed countries than in less developed markets. Larger incomes mean greater purchasing power and demand for consumer goods and services. It also means there is an increased need for the machinery and workers required to produce consumer goods.

Business opportunities are usually better in countries that have an economic infrastructure in place. Infrastructure consists of the basic institutions and public facilities upon which an economy’s development depends. When we think about how our own economy works, we tend to take our infrastructure for granted. It includes the money and banking system that provide the major investment loans to our nation’s businesses; the educational system that turns out the incredible varieties of skills; research institutions that actually run our nation’s production lines; the extensive transportation and communications systems—highways, railroads, airports, telephones, internet sites, postal systems, and television stations—that link almost every piece of our geography into one market; the energy system that powers our factories; and, of course, the market system itself, which brings our nation’s goods and services into our homes and businesses.

The Impact of Multinational Corporations

Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located are multinational corporations. Some corporations are so rich and have so many employees that they resemble small countries. For example, the sales of both Exxon and Walmart are larger than the GDP of all but a few nations in the world. Multinational companies are heavily engaged in international trade. The successful ones take political and cultural differences into account.

Many global brands sell much more outside the United States than at home. Coca-Cola, Philip Morris’s Marlboro brand, Pepsi, Kellogg, Pampers, Nescafe, and Gillette are examples. The 500 largest companies in the U.S., the Fortune 500, made over $1.5 trillion in profit in 2016. In slow-growing, developed economies like Europe and Japan, a weaker dollar helps, because it makes American products cheaper to sell into those markets, and profits earned in those markets bring more dollars back home. Meanwhile, emerging markets in Asia, Latin America, and Eastern Europe are growing steadily. General Electric expects 60 percent of its revenue growth to come from emerging markets over the next decade. Similarly, IBM had rapid sales growth in emerging markets such as Russia, India, and Brazil[15].

Despite the success of American multinationals abroad, there is some indication that preference for U.S. brands may be slipping. The table below shows some evidence for this by listing the largest multinational corporations in the world and their home country.

The Multinational Advantage

Large multinationals have several advantages over other companies. For instance, multinationals can often overcome international problems. Taiwan and South Korea have long had an embargo against Japanese cars for political reasons and to help domestic automakers. Yet Honda USA, a Japanese-owned company based in the United States, sends Accords to Taiwan and Korea. In another example, when the environmentally conscious Green movement in Europe challenged the biotechnology research conducted by BASF, a major German chemical and drug manufacturer, BASF moved its research to another country.

Another advantage for multinationals is their ability to sidestep regulatory problems. U.S. drugmaker SmithKline and Britain’s Beecham decided to merge in part so that they could avoid licensing and regulatory hassles in their largest markets. The merged company can say it’s an insider in both Europe and the United States. “When we go to Brussels, we’re a member state [of the European Union],” one executive explains. “And when we go to Washington, we’re an American company.”

Multinationals can also utilize new technology from around the world. In the United States, Xerox has introduced some 80 different office copiers that were designed and built by Fuji Xerox, its joint venture with a Japanese company. Versions of the super-concentrated laundry detergent that Procter & Gamble first formulated in Japan in response to a rival’s product are now being sold under the Ariel brand name in Europe and under the Cheer and Tide labels in the United States.

Also, consider Otis Elevator’s development of the Elevonic 411, an elevator that is programmed to send more cars to floors where demand is high. It was developed by six research centers in five countries. Otis’s group in Farmington, Connecticut, handled the systems integration, a Japanese group designed the special motor drives that make the elevators ride smoothly, a French group perfected the door systems, a German group handled the electronics, and a Spanish group took care of the small-geared components. Otis says the international effort saved more than $10 million in design costs and cut the process from four years to two.

Finally, multinationals can often save a lot in labor costs, even in highly unionized countries. For example, when Xerox started moving copier-rebuilding work to Mexico to take advantage of the lower wages, its union in Rochester, New York, objected because it saw that members’ jobs were at risk. Eventually, the union agreed to change work styles and to improve productivity to keep the jobs at home.