Chapter 3

Business Management: A Malaysian Perspective Oxford University Press Malaysia, 2008
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CHAPTER THREE
Competing in Global Environments

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) Oxford Fajar Sdn. Bhd. (008974-T), 2012 All Rights Reserved
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LEARNING OUTCOMES
In this chapter, you will learn to: Define international trade, free trade, globalization and trade liberalization.
Highlight the differences between absolute advantage and comparative advantage, and explain how nations measure international trade. Explain why nations trade, and list the advantages and disadvantages of international trade.
BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) Oxford Fajar Sdn. Bhd. (008974-T), 2012
All Rights Reserved
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LEARNING OUTCOMES (cont.)
Define trade protectionism, and identify the tools used and explain the economic arguments behind the restricting of trade among nations. Explain the emergence of trading blocks and elaborate on the role of World Trade Organization (WTO) in promoting free trade. Identify six different strategies that may be taken to reach the global market.
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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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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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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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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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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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ABSOLUTE ADVANTAGE (cont.)
Absolute = Virtual Monopoly

South Africa Output per Unit of Input
Other countries of the World
Diamond Production
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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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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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COMPARATIVE ADVANTAGE (cont.)

Malaysia
Japan
Japan Output per Unit of Input Malaysia
Electrical goods
Cars
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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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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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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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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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LIMITATIONS OF INTERNATIONAL TRADE
The danger of economic specialization Economic and political interdependence

among trading partners.
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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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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
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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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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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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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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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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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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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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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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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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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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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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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WORLD TRADE ORGANIZATION (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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WORLD TRADE ORGANIZATION (WTO) (cont.)
Targets:
Liberalization schedule:
Developed countries2010 Developing countries2020
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STRATEGIES TO PENETRATE THE GLOBAL MARKET
Importing and
exporting
Joint ventures Foreign direct

Investment
Licensing Franchising
Strategic alliances
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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
Importance of international trade to the Malaysian

economy.
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.
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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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MALAYSIA: BALANCE OF TRADE, 20002011 (RM BILLION)
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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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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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MAJOR IMPORTS OF MALAYSIA, 2011
Electronics Machinery Petroleum products Plastics Vehicles Iron and steel products Chemicals
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MALAYSIA: EXPORT PARTNERS, 2011

Malaysias Export Partners
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MALAYSIA: IMPORT PARTNERS, 2011
Malaysias Export Partners
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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. China, Korea, Taiwan and West Asia.
Import sourcesASEAN, Japan, USA, EU,
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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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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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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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MALAYSIASTATUS OF MARKET 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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MALAYSIASTATUS OF MARKET 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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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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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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Business Management: A Malaysian Perspective Oxford University Press Malaysia, 2008

All Rights Reserved

Competing in Global Environments

All Rights Reserved

LEARNING OUTCOMES (cont.)

All Rights Reserved

FUNDAMENTALS OF INTERNATIONAL TRADE

International trade refers to transactions made

Simply, it is the export of goods and services

Basis of international trade no single nation can

All Rights Reserved

ADVANTAGES OF INTERNATIONAL TRADE

Increase in the countrys total output.

Greater variety of goods and services for

Increase efficiency in local production to match

ADVANTAGES OF INTERNATIONAL TRADE (cont.)

It promotes businesses to specialize and reap

It enables countries to produce what they can

All Rights Reserved

Understanding the theories of: Absolute advantage Comparative advantage

All Rights Reserved

A nation is said to have an absolute advantage in

It therefore has a pure monopoly in the

All Rights Reserved

ABSOLUTE ADVANTAGE (cont.)

Absolute = Virtual Monopoly

Other countries of the World

THEORY OF COMPARATIVE ADVANTAGE

Propounded by David Ricardo in the late 18th

This theory supported the idea of free economic

All Rights Reserved

All Rights Reserved

COMPARATIVE ADVANTAGE (cont.)

MEASURING INTERNATIONAL TRADE

Balance of trade the ratio of total value of

If exports are more than imports, there is

If imports are more than exports, the nation is said

All Rights Reserved

BALANCE OF TRADEMALAYSIA JANDEC 2007

All Rights Reserved

BALANCE OF TRADEMALAYSIA JANOCT 2011

All Rights Reserved

MEASURING INTERNATIONAL TRADE (cont.)

Balance of payments the difference between

Malaysias balance of payments divided into

LIMITATIONS OF INTERNATIONAL TRADE

The danger of economic specialization Economic and political interdependence

All Rights Reserved

Government policies implemented to restrict

They may come in many forms, as follows:

WHY DO NATIONS ADOPT PROTECTIONIST POLICIES?

To protect declining industries To prevent dumping

All Rights Reserved

The movement of goods and services amongst

In simple terms, do away with protectionist

All Rights Reserved

THE CONCEPT OF GLOBALIZATION

The global economic integration of many national

To globalize means to develop business, society, etc so

Global trade enables countries to produce what they

This happens through the process of free trade or trade

Loosen or remove restrictions on trade.

All Rights Reserved