Competing in Global Environments: Chapter Three

CHAPTER THREE
Competing in Global Environments
BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

Oxford Fajar Sdn. Bhd. (008974-T), 2012
All Rights Reserved

3 1
FUNDAMENTALS OF
INTERNATIONAL TRADE
International trade refers to transactions made

between countries.
Simply, it is the export of goods and services

among nations.
Basis of international trade no single nation can
produce all the goods and services that are needed

by the society.

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3 2
ADVANTAGES OF
INTERNATIONAL TRADE
Increase in the countrys total output.

Aggressive competition among businesses results
in lower prices of goods and services.
Greater variety of goods and services for

consumers to choose.
Increase efficiency in local production to match

with the quality of imported products.
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3 3
ADVANTAGES OF
INTERNATIONAL TRADE (cont.)
It promotes businesses to specialize and reap

economies of scale.
It enables countries to produce what they can

and buy the rest from trading partners in a
mutually beneficial exchange.

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3 4
HOW DOES A NATION KNOW

WHAT TO PRODUCE AND WHAT
GOODS TO TRADE FOR?
Understanding the theories of:
Absolute advantage
Comparative advantage

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3 5
ABSOLUTE ADVANTAGE
A nation is said to have an absolute advantage in

the production of a good if it can produce more
efficiently than all other countries.
It therefore has a pure monopoly in the

production of a particular product.

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3 6
ABSOLUTE ADVANTAGE (cont.)
Absolute = Virtual Monopoly

South Africa
Other
countries of
the World
Output per
Unit of Input
Diamond Production
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3 7
THEORY OF COMPARATIVE
ADVANTAGE
Propounded by David Ricardo in the late 18th

century.
This theory supported the idea of free economic

exchange and explains gains from specialization.

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3 8
COMPARATIVE ADVANTAGE
A country should sell to other countries those

products that it produces most effectively and
efficiently, and should buy from other countries
those products that it cannot produce as
effectively and efficiently.

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3 9
COMPARATIVE ADVANTAGE
(cont.)
Malaysia
Japan
Japan
Malaysia
Output per
Unit of Input
Electrical goods
Cars
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3 10
MEASURING INTERNATIONAL
TRADE
Balance of trade the ratio of total value of

exports to imports.
If exports are more than imports, there is
favourable balance of trade or trade surplus.
If imports are more than exports, the nation is said

to have unfavourable balance of trade or trade
deficit.

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3 11
BALANCE OF TRADEMALAYSIA
JANDEC 2007
(RM billion)
Total exports
55.1
Total imports
46.0
------------------------------------Balance of trade * + 9.1
* Favourable balance of trade
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3 12
BALANCE OF TRADEMALAYSIA
JANOCT 2011
(RM billion)
Total exports
63.6
Total imports
50.3
------------------------------------Balance of trade * + 13. 3
* Favourable balance of trade
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3 13
MEASURING INTERNATIONAL
TRADE (cont.)
Balance of payments the difference between

money flowing into the country and money
flowing out of the country over a specified
period of time.
Malaysias balance of payments divided into

two major accounts:
current or goods and services account
capital and financial account.

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3 14
LIMITATIONS OF INTERNATIONAL
TRADE
The danger of economic specialization

Economic and political interdependence
among trading partners.

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3 15
TRADE PROTECTIONISM
Government policies implemented to restrict
foreign competition from affecting local industries

apart from fulfilling other social interests.
They may come in many forms, as follows:
Tariffs or taxes
Quotas
Embargoes
Subsidies and grants
Restrictive import standards and licenses
Preferential treatment

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3 16
WHY DO NATIONS ADOPT

PROTECTIONIST POLICIES?
To protect industries in infancy

To diversify the economy
To correct a temporary unfavourable balance of
payment position
To protect declining industries

To prevent dumping (the export of goods in large
quantities at substantially lower prices compared
with home-produced goods)

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3 17
FREE TRADE
The movement of goods and services amongst

nations without political or economic barriers.
In simple terms, do away with protectionist

policies.

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3 18
THE CONCEPT OF GLOBALIZATION
The global economic integration of many national

economies into one global economy.
To globalize means to develop business, society, etc so

as to make international influence or action possible.
Global trade enables countries to produce what they

can and buy the rest in a mutually beneficial exchange
relationship.
This happens through the process of free trade or trade

liberalization.
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3 19
TRADE LIBERALIZATION
Loosen or remove restrictions on trade.

Market liberalization initiatives:
Free trade areas (FTAs) Bilateral
Regional, e.g. ASEAN AFTA
Multilateral WTO ( whole world)
153 member countries.

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3 20
WHY DO WE NEED TO
LIBERALIZE TRADE?
To support globalization, the global economic
integration of many economies into one global

economy.
To globalize means to develop business, society,
etc. so as to make international influence or action

possible over the world.

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3 21
WHY DO WE NEED TO
LIBERALIZE TRADE? (cont.)
Global trade enables countries to produce what

they can and buy the rest in a mutually beneficial
exchange relationship.
This happens through the process of free trade;

trade without imposing restrictions.

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3 22
WHY DO WE NEED TO GLOBALIZE

IN THE FIRST PLACE?
Economists believe that the world will be able

to enjoy greater levels of output and higher
standards of living.
Free trade promotes competition.

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3 23
WHY DO WE NEED TO GLOBALIZE

IN THE FIRST PLACE? (cont.)
Consequently, resources will be more

efficiently allocated and mobilized to the
places which can best produce goods and
services at the lowest cost.
Consumers enjoy lower prices.

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3 24
EMERGENCE OF TRADING BLOCKS

IN THE GLOBAL ENVIRONMENT
While free trade is promoted in the world of

today, in reality nations group together to form
trading blocks.
They trade among themselves and regard their

trading block as one huge market.

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3 25
TRADING BLOCKS
Organizations of nations that remove trade
barriers among member nations to promote free

trade among them.
This limits foreign competition since member
nations co-operate among themselves to promote

mutual trading benefits.

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3 26
FOUR MOST POWERFUL

TRADING BLOCKS
The European Union (EU)

The North American Free Trade Agreement
(NAFTA)
The Association of South East Asian Nations
(ASEAN)
South Americas MERCOSUR

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3 27
WORLD TRADE ORGANIZATION

(WTO)
Formed on 1 January 1995 to replace GATT (1947)

with the following objectives:
To reduce trade barriers.
To eliminate discrimination in international trade.
To prevent the establishment of further trade barriers.
To consult one another for unilateral benefits.

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3 28

(WTO) (cont.)
An organization consisting of member countries

Currently 153 members
Goal help producers of goods and services,
exporters, and importers conduct their business

Make rules on trade between nations
Agreement is legally binding
negotiated and agreed on by members
Main function to ensure that trade flows as
smoothly, predictably and freely as possible.

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(WTO) (cont.)
Targets:
Liberalization schedule:
Developed countries2010
Developing countries2020

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STRATEGIES TO PENETRATE
THE GLOBAL MARKET
Importing and
exporting
Licensing
Joint ventures
Foreign direct
Investment
Franchising
Strategic alliances
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3 31
MALAYSIA AND ITS EXTERNAL

TRADE

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MALAYSIA AND ITS EXTERNAL

TRADE (cont.)
One of the worlds 20 largest trading nations.

According to AT Kearney/Foreign Policy
Globalization index, Malaysia is ranked the 19th most

globalized nation in the world.
The World Bank has ranked Malaysia as the 24th
nation in terms of ease of doing business.
Malaysias open policy to international trade.
Importance of international trade to the Malaysian
economy.

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3 33
MALAYSIA: BALANCE OF TRADE
Malaysia has continuously recorded a

commendable or positive trade balance since 2000
(the beginning of the millennium) when global free
trade was promoted through the WTO.
The February 2011 Malaysia External Statistics

Report stated that it was the 160th consecutive
month of trade surplus since November 1997.

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3 34
MALAYSIA: BALANCE OF TRADE,

20002011 (RM BILLION)

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3 35
MAJOR EXPORTS OF MALAYSIA,

2007
Electrical and electronic goods (44.1% of total

exports).
Palm oil and palm oil-based products (7.4%),
crude petroleum (5.3%), liquefied natural gas

(4.3%), timber and timber-based products (3.8%)
and petroleum products (3.2%).

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3 36
MAJOR IMPORTS OF MALAYSIA,

2007
Three main categories:

Intermediate goods (70.9% of total
imports)
Capital goods (13.9%)
Consumption goods (5.7%)

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MAJOR EXPORTS OF MALAYSIA,

2011
Electrical and electronic goods (37.5% of total

exports).
Palm oil and palm oil-based products (10.6%),

liquefied natural gas (6.5%), petroleum
products (5.8%), crude petroleum (4.4%) and
timber-based products (2.3%).

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3 38
MAJOR IMPORTS OF MALAYSIA,

2011
Electronics
Machinery
Petroleum products
Plastics
Vehicles
Iron and steel products
Chemicals

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3 39
MALAYSIA: EXPORT PARTNERS,

2011
Malaysias Export Partners

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3 40
MALAYSIA: IMPORT PARTNERS,

2011
Malaysias Import Partners

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3 41
MALAYSIA TRADING PARTNERS,

2006
Export destinationsASEAN, USA, EU, The

Peoples Republic of China, Japan and
Hong Kong together accounted for 79.8%
of total exports in April 2006.
Import sourcesASEAN, Japan, USA, EU,

China, Korea, Taiwan and West Asia.

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3 42
MALAYSIAS TOP FIVE TRADING

PARTNERS IN 2007
The United States of America

The Republic of Singapore
The European Union
Japan
The Peoples Republic of China

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3 43
MALAYSIAS TOP TEN TRADING

PARTNERS IN 2011
The Republic of
Singapore
The Peoples Republic
of China
Japan
The European Union
The United States of
America
Thailand
The Republic of

Indonesia
The Republic of
Korea
Taiwan
Hong Kong
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3 44
MALAYSIASTATUS OF MARKET
LIBERALIZATION AND
GLOBALIZATION
Being a member of the WTO, Malaysia has been

supportive in promoting global trade.
Being a member of ASEAN, free trade
agreements (FTAs) have been jointly negotiated

with China, Japan, the Republic of Korea, India,
Australia and New Zealand.

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3 45
LIBERALIZATION AND
GLOBALIZATION (cont.)
Bilateral agreements are being negotiated with

Japan, Pakistan, Chile and New Zealand.
Malaysia has also negotiated other trading
agreements to facilitate global trade, including

TPSOIC, PTA among D8 and GSTP.

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3 46
LIBERALIZATION AND
GLOBALIZATION (cont.)
Through the ASEAN Economic Community
(AEC), there will be a single market and

production base with free flow of goods and
services, investments, skilled labour and free flow
of capital.
Malaysia will be directly involved in this initiative,

being a strong member of ASEAN.
Currently, Malaysia is in the midst of negotiating

free trade agreements with Turkey, India, the US
and Australia.

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3 47
FINAL WORDS
As a member of WTO, Malaysia will continue to

liberalize its international trade in support of
globalization.
Global trade has so far benefited Malaysia, as seen

by the positive balance of trade and balance of
payments.

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3 48
FINAL WORDS (cont.)
Many local companies are expanding their

business in ASEAN, China as well as OIC
nations to tap the huge market potential.
Global trade will certainly continue to be a

main feature in the Malaysian economic
scenario.

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3 49

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CHAPTER THREE

Competing in Global Environments

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

International trade refers to transactions made

Simply, it is the export of goods and services

Basis of international trade no single nation can

produce all the goods and services that are needed

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

Increase in the countrys total output.

Greater variety of goods and services for

Increase efficiency in local production to match

All Rights Reserved

It promotes businesses to specialize and reap

It enables countries to produce what they can

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

HOW DOES A NATION KNOW

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

A nation is said to have an absolute advantage in

It therefore has a pure monopoly in the

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

ABSOLUTE ADVANTAGE (cont.)

Absolute = Virtual Monopoly

All Rights Reserved

Propounded by David Ricardo in the late 18th

This theory supported the idea of free economic

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

A country should sell to other countries those

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

Balance of trade the ratio of total value of

If exports are more than imports, there is

favourable balance of trade or trade surplus.

If imports are more than exports, the nation is said

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

All Rights Reserved

All Rights Reserved

Balance of payments the difference between

Malaysias balance of payments divided into

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

The danger of economic specialization

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

Government policies implemented to restrict

foreign competition from affecting local industries

They may come in many forms, as follows:

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

WHY DO NATIONS ADOPT

To protect industries in infancy

To protect declining industries

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)

All Rights Reserved

The movement of goods and services amongst

In simple terms, do away with protectionist

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition)