Introducing the Contemporary Business World PartOne Chapter Four Understanding International Business
Learning Objectives • Describe the increase in international business • Identify major global markets • Define the following and describe their effects on the business environment: • competitive advantage • import/export balance • exchange rates • foreign competition © 2003 Pearson Education Canada Inc.
More Learning Objectives • Describe the following market decisions: • international involvement levels • international organization structure • Describe social, cultural, economic, legal and political barriers to trade • Explain the benefits of free trade agreements • Understand Canada’s trade challenges © 2003 Pearson Education Canada Inc.
The Global Marketplace • Total volume of world trade is $8 trillion annually • Globalization is occurring: the world is becoming a single large market - an interconnected system © 2003 Pearson Education Canada Inc.
Imports • Products purchased in Canada which are shipped in from other countries where they are manufactured © 2003 Pearson Education Canada Inc.
Exports • Products made in Canada which are purchased by consumers in other countries © 2003 Pearson Education Canada Inc.
Major Global Markets • North America • Asia-Pacific • Western Europe © 2003 Pearson Education Canada Inc.
Competitive Advantage • the ability of an entity to do something better than another entity • absolute advantage: a country can produce something less expensively than any other nation • comparative advantage: a country can produce an item more cheaply than it can other items © 2003 Pearson Education Canada Inc.
Balance of Trade • Balance of trade: • The difference between the total value of exports and the total value of imports Imports<Exports=TradeSurplus (Favourable) Exports <Imports=TradeDeficit (Unfavourable) © 2003 Pearson Education Canada Inc.
Balance of Payments • Difference between cash flowing in to the country and out of the country, including: • Cash flow in includes: exports, foreign tourist spending in Canada, foreign investments in Canada, earnings from Canadian investments outside of Canada • Cash flow out includes: imports, Canadian tourist spending outside of Canada, foreign aid, military expenditure outside of Canada, Canadian investments outside of Canada, earnings of foreign investments in Canada © 2003 Pearson Education Canada Inc.
Foreign Exchange Rate • ratio of the currency of one nation to the currency of another nation (eg: how many Canadian dollars does it take to buy American dollars? • if Canadian dollar is cheaper: exports increase and imports cost more • if Canadian dollar is more expensive: exports decrease and imports cost less • fluctuations of the dollar can have profound effects on the economy © 2003 Pearson Education Canada Inc.
Deciding to Go International • Is there international demand for the firm’s product? • Can the product be modified to fit a foreign market? • Is the foreign business climate suited to exports? • Does the firm have (or can it get) the necessary skills and knowledge to do business abroad? If No: Stay Domestic Is Yes: Go International © 2003 Pearson Education Canada Inc.
Levels of Involvement in International Business • Export via Intermediaries • Independent Agent • Licensing/Royalty Arrangements • Branch Office & World Product Mandating • Strategic Alliance/Joint Venture • International Firm • Multinational Firm • Foreign Direct Investment Less Involved More Involved © 2003 Pearson Education Canada Inc.
A strategic alliance is a “joint venture” or “partnership” between two independently owned firms May be mandated in some nations Useful if a firm lacks knowledge of the culture and business environment in the foreign nation Why Use Strategic Alliances? © 2003 Pearson Education Canada Inc.
Multinationals • Multinational firms enjoy worldwide presence allowing them to benefit from favourable exchange rates, technology and expertise • Many multinationals provide needed jobs, prosperity, technology and growth to developing nations • Multinationals are often criticized for taking resources out of the country, and not doing enough to develop local labour markets © 2003 Pearson Education Canada Inc.
Barriers to Trade • Social and Cultural Differences • Economic Differences • Legal and Political Differences • Quotas/Tariffs/Subsidies • Local Content Laws • Business Practices © 2003 Pearson Education Canada Inc.
Social & Cultural Differences • language • population demographics • shopping habits • religious differences • social beliefs © 2003 Pearson Education Canada Inc.
Economic Differences • the role of government in the economy: • command vs. market economies • capitalist • socialist • communist © 2003 Pearson Education Canada Inc.
Quotas, Tariffs & Subsidies • embargo: forbidding export/import from a nation (eg: US vs. Cuba) • quota: limitations on importation of a product class (eg: cars, motorcycles) • subsidy: government financial assistance for domestic firms • tariff: a tax on imported goods • protectionist: to protect sale of domestic goods • revenue: to raise funds for government use © 2003 Pearson Education Canada Inc.
Local Content • requires that at least part of the product be made on foreign soil (may result in joint venture) • includes the practice of Canadian provinces to buy from their own companies before going outside of the province © 2003 Pearson Education Canada Inc.
Business Practices • bribes are seen as “gratuities” to government officials in some nations • “dumping”, the practice of selling goods abroad for less than one can in the domestic market, is illegal in most nations • “cartels” are associations of producers with the sole purpose of controlling supply and demand (eg: OPEC for petroleum-producing nations) which can often drive up prices (are not illegal and control many industries - oil, diamonds) © 2003 Pearson Education Canada Inc.
Trade Agreements • Working to overcome trade barriers: • General Agreement on Tariffs and Trade (GATT) • The North American Free Trade Agreement (NAFTA) • European Union (EU) • Canada-US Free Trade Agreement (FTA) © 2003 Pearson Education Canada Inc.
General Agreement on Tariffs and Trade • Signed after WWII by 92 countries • Has effectively reduced tariffs by 5% • Not all signatories comply with GATT, including the US and certain European Union nations © 2003 Pearson Education Canada Inc.
European Union • Reduces tariffs on products traded within the union • Imposes higher tariffs on products coming in from outside of the union • Imposes limiting quotas on products coming in from outside of the union © 2003 Pearson Education Canada Inc.
Canada-US Free Trade Agreement • Signed in 1989 • Goal to gradually eliminate tariffs on goods moving between Canada and the US © 2003 Pearson Education Canada Inc.
North American Free Trade Agreement (1994) • Free trade area for Canada, US and Mexico • Trade between Canada and the US has risen by 37% since 1994 • Canada has a $22 Billion (Cdn.) trade surplus with the US • Exports account for about 40% of the GDP, up 15% from pre-NAFTA trade • Canada is the most intensive trading country in the G7 (1 out of every 3 jobs is dependent on export trade) © 2003 Pearson Education Canada Inc.
Other Free Trade Agreements in the Americas • Negotiations under consideration: • Mercosur (in effect since 1995): • Argentina, Brazil, Uruguay, Paraguay • Eliminating tariffs between nations • SAFTA (proposed): • Expansion of Mercosur to include all of South America (South American Free Trade Agreement) • AFTA (potential): • Expansion of SAFTA to include NAFTA © 2003 Pearson Education Canada Inc.