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Forces that Affect Trade in Global Markets

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  • 0:04 The Complexity of the…
  • 1:05 Sociocultural
  • 2:35 Political and Legal Forces
  • 3:56 Economic and Financial Forces
  • 5:31 Physical and Environmental
  • 6:52 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
The global marketplace is diverse. While diversity provides opportunity, it also provides challenges. In this lesson, you'll learn about the forces that affect trade in the global market. You'll also have a chance to take a short quiz after the lesson.

The Complexity of the Global Market

Meet Chester. He's the president of a large multinational conglomerate that owns several different corporations offering products and services, including insurance, financial services, consumer electronics, computers, aerospace, defense contracting and even agriculture. Chester's company operates or conducts business on every continent on the globe except Antarctica. Chester's company exports to over 100 different countries.

Needless to say, Chester's job is complicated due to the diversity of his company's business enterprises and the diversity of the locations where it conducts business. In fact, when interacting with the global market, Chester and other participants must contend with different types of forces that change depending upon circumstance and location. These forces include sociocultural, political, legal, economic, physical and environmental.

Sociocultural

Different cultures have different views on time, space, material goods, personal relationships and agreements. Edward T. Hall called these behaviors 'silent languages.' We can refer to them as 'sociocultural forces.'

Some cultures demand punctuality, while others don't view deadlines as strict but rather as fluid. The distance people stand from each other varies from culture to culture. Some cultures place a high value on the possession of material goods, while others are not so concerned with possessions. Members of some cultures easily establish relationships, but they tend to be weak and transitory, while in other countries, establishing relationships is harder, but they are more durable.

Cultures also vary on how they reach agreement and express dissent. Some cultures base agreement on relationships, while others on contract. Some cultures have no problem voicing dissent, while others try to avoid direct confrontation.

Why is this important in the global market? Chester, and other market participants, must contend with differences in societies and their cultures. How business is conducted in one place may not work in another, and consumer preferences are as diverse as the countries in which consumers live. Knowing the culture helps market participants conduct economic activities more easily and efficiently.

Political and Legal Forces

Chester's company must contend with different political and legal environments. Some countries are more hostile to free trade, while other countries are more open. The political environment in a country may compel its government to erect trade barriers to protect domestic businesses. Typical trade barriers include tariffs that are taxes on imports and import quotas that limit the number of imports permitted during a specific period of time. Tariffs and import quotas make it harder for Chester's company to export goods into a foreign market and be competitive with the domestic competition.

Moreover, some countries may not protect contract rights and private property rights as well as others. In fact, some countries may not allow foreigners, like Chester's company, to own real estate. Some countries will impose special licenses and other requirements upon foreign businesses as well. Additionally, Chester's company will have to contend with different labor laws, tax laws, environmental laws and other laws and regulations in each country it conducts operations or business. Finally, some court systems may not provide the same level of protection that a person or business is afforded in their home jurisdictions.

Economic and Financial Forces

Economic conditions and even economic systems vary greatly around the world. Let's start with economic systems. An economic system is the manner in which a country determines how resources are allocated and distributed in the society.

Economic systems can generally be divided into command and market systems. In a command system, the state owns most resources and makes most economic decisions regarding allocation, production and distribution. In a market system, private individuals own most of the resources, and individuals in the marketplace make most of the economic decisions. Chester's company will have a much easier time working within a market-based system than a command system. In fact, some command-based economies may be practically closed to his company.

Chester's company must also contend with differing economic conditions in each country and region in which it operates and conducts business. Some countries may be experiencing high rates of inflation or unemployment. The currency exchange rate, which is the value of one currency expressed in terms of the value of another currency, can also have a tremendous effect on the costs of the goods Chester's company exports into a foreign market. The overall economic health of a country will play an important role in determining whether a company will make an investment in the foreign market or even attempt to market its goods and services in the foreign market.

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