BUSN 1200 - Chapter 5 PDF

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BUSN 1200Chapter 5 – The Global Context of BusinessThe Contemporary Global Economy: The world volume is large and growing. It is important to understand the potential of the global economy and its effects on Canada’s economy. Our economy is becoming less fragmented and more of a single market networ...

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BUSN 1200 Chapter 5 – The Global Context of Business The Contemporary Global Economy: The world volume is large and growing. It is important to understand the potential of the global economy and its effects on Canada’s economy. Our economy is becoming less fragmented and more of a single market network. This means that it is important for firms to have a presence beyond Canadian borders. Canada, itself, is a small and limited market. The real rewards for Canadian businesses likely lie outside the nation.  Total volume of world trade  $19 trillion/year  Globalization – the integration of markets globally – the world is becoming a single interdependent system  Imports - products purchased in Canada that are manufactured in other countries  Exports - products made in Canada that are purchased by consumers in other countries  Major World Marketplaces o North America  Canada’s largest trading partner is the United States  trade with Mexico is increasing o Europe  traditional view (West vs. East)  emerging view (North vs. South) o Pacific/Asia  Japan, China, and India Distinctions Based On Wealth The World Bank, an agency of the United Nations, uses per-capita income, average income per person, to make distinctions among countries. Its current classification method consists of four different categories of countries: 1) High-income countries - Annual per-capita income greater than US$12,746. They include Canada, the United States, most countries in Europe, Australia, Japan, South Korea, Israel, Kuwait, the United Arab Emirates, and Oman. 2) Upper-middle-income countries - Annual per-capita income between US$4,126 and US$12,745. This group includes China, Colombia, Lebanon, Turkey, Argentina, and South Africa. 3) Low-middle-income countries - Annual per-capita income between US$1,046 and US$4,125. This group includes Ukraine, Philippines, Armenia, Guatemala, and Vietnam. 4) Low-income countries (often called developing countries) - Annual per-capita income of US$1045 or less. Malawi, Bangladesh, Haiti, and Afghanistan are among the countries in this group. Due to low literacy rates, weak infrastructures, unstable governments, and related problems, these countries are less attractive for international business.

Emerging Markets: Other important emerging markets include:  South Korea  Thailand  Indonesia  Ukraine Forms of Competitive Advantage: Countries seldom produce everything needed or wanted by their people. Therefore, some foreign trade is required.  Absolute Advantage - a country can produce something more efficiently than any other country.  Comparative Advantage - a country can produce certain items more efficiently (cheaper) than it can other items. Canada has an absolute advantage when it comes to natural resources such as lumber or diamonds. An example of its comparative advantage is the tech sector (we have a well-educated population skilled with technology).  In more recent years, the theory of national competitive advantage has become a more widely accepted model of why nations engage in international trade. National competitive advantage is based on four conditions: o Factor conditions are the factors of production that we identified in Chapter 1 (labour, capital, entrepreneurs, natural resources, and information). o Demand conditions reflect a large domestic consumer base that promotes strong demand for innovative products. o Related and supporting industries include strong local or regional suppliers and/or industrial customers. o Strategies, structures, and rivalries refer to firms and industries that stress cost reduction, product quality, higher productivity, and inno- vative new products.  Balance of Trade - the difference in value between total exports and total imports o Trade Surplus - exports exceed imports the nation has a trade surplus which is a positive thing. This way, trade brings additional revenues (net) into the nation. o Trade Deficit - If imports exceed exports the nation has a trade deficit. This means that more revenues are leaving the nation than are coming in via trade. This is a negative thing. o In 2009, Canada had a negative balance of trade. This continued for several years until it eventually balanced out.  Balance of Payments - the flow of money into or out of a country o cash flow in  exports  foreign tourist spending in Canada  foreign investments in Canada  earnings from investments outside of Canada o cash flow out

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imports Canadian tourist spending overseas foreign aid grants military spending abroad Canadian investment abroad earnings from foreign investment in Canada

Foreign Exchange Rate - Ratio of one currency to another.  A country’s currency is strong when demand for their products and service is high.  When a currency depreciates, exports tend to increase while imports decrease.  When a currency appreciates, exports tend to decrease while imports increase. The standard currency to which most other currencies are compared is the US dollar. Usually, Canada’s currency is weaker than the USD but there have been a few exceptions. For example, remember 2008 to about 2010? Again, this doesn’t happen often. The previous time this happened was about 1975! International Business Management:

This flow chart shows the questions, answers and decisions that need to be made as to whether to go international or not. When businesses go international, depending on the product or service, it may require adjustments to make it more appealing to the population of the other country. McDonald’s is a good example. In Germany, it sells a bratwurst burger. In Russia, it offers McShrimp.

International Organizational Approaches: There are several ways of entering markets.  Exporting and importing may simply involve the use of intermediaries, independent agents which are based in the host country to work in concert with the Canadian exporting firm.  A licensing agreement allows the exporter to let foreign-based firms produce, sell or distribute the product. In return, the exporting firm receives a royalty fee based on sales volume. This saves the exporter the time and money of having to establish a manufacturing/marketing firm in the foreign nation.  A subsidiary is a firm which is based in the foreign country, but wholly owned by the domestic firm which is exporting to that country. World product mandating occurs when the foreign subsidiary is given responsibility for research, development and/or manufacturing a product line.  Strategic alliances (joint ventures) involve partnerships between domestic exporters and foreign-based firms. They work together to design, produce, distribute and/or market a product in the foreign nation.  Foreign Direct Investment is buying or establishing tangible assets in another country

Why have an Independent Agent?  Local individual or organization who represents exporter’s interests  Often sells products, collects payments, and ensures customer satisfaction  Understands the language, culture, and market

Why create a licensing arrangement?

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Exporter gives a foreign company the exclusive right to manufacture or sell its product for a royalty or fee Franchising is a special form of a licensing arrangement

Why build a Branch Office?  Establish presence in foreign country  Increased sales due to local presence  More direct control  May be a foreign legal requirement Why form a Strategic Alliance?  May be mandated in some nations o In some cases foreign nations do not allow foreigners to own property. This requires that firms who desire a higher level of involvement than using independent agents or licensing to enter into a partnership with a locally based firm.  Get knowledge and expertise of the foreign partner  Greater control Why choose Foreign Direct Investment?  Companies buy or establish tangible assets in a foreign country (location benefits)  Brings foreign investment to local economy  Provides local employment Recently there has been controversy about foreign nationals buying Canadian companies. The major concern is this may damage the Canadian economy as head offices may be moved out of Canada and therefore the decision-making will move as well. This may lead to unfavorable decisions for Canadian companies and therefore its workers. Barriers to International Trade:  Social and cultural differences o Language o Population Demographics o Religious Differences o Social Beliefs o Shopping Habits  Economic differences o The role of government in the economy o Planned vs. market economies  capitalist  socialist  communist  Legal and Political Differences o Legal and Political Differences

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Quotas • • •

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limitations on importation of a product class embargo-forbidding export/import from a nation United States vs. Cuba

Tariffs • a tax on imported goods • raises government revenues as well Subsidy - government financial assistance for domestic firms Protectionism - protects local business at the expense of free market competition Local-Content Laws - requires that at least part of the product be made in the foreign country (possible joint venture) Business Practices • Bribes - seen as “gratuities” to officials in some nations • Dumping - selling goods abroad for less than a firm charges at home; illegal in most nations • Cartels - associations of producers created to control supply and demand (e.g., OPEC)

Overcoming Barriers to Trade:  General Agreement on Tariffs and Trade (GATT)  World Trade Organization (WTO) o 153 member nations o Negotiate trade agreements and resolve trade disputes o Successor of GATT, but more power o Agricultural subsidies controversial o Many people protest against trade liberalization  European Union (EU) o Largest free marketplace in the world o 28 countries, plus more waiting to join o Eliminated most quotas and set uniform tariffs within the union o Introduced new currency in 1999 (euro) which has been adopted by many but not all EU countries  The North American Free Trade Agreement (NAFTA) United States-Mexico-Canada Agreement (USMCA) o Previously, there was the Canada-US Free Trade Agreement (signed in 1989) that only included Canada and US o NAFTA came into effect in 1994 and includes US, Canada and Mexico o Resulted in huge trade increase for Canada, especially with the US (over 80% of our exports go the US). About 40% of Canada’s GDP is exported (was only about 25% before NAFTA). o In 2018, re-negotiated and re-named under Trump administration. o Benefits of USMCA for Canada

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 Increased access to huge market  Increased production to sell to this market  Increased employment  Increased discretionary spending and standard of living  Increased choice in products and services for Canadian consumers o Disadvantages of USMCA for Canada  More competition from US and Mexican producers  Loss of jobs in some industries  Pollution and environmental concerns  Loss of Canadian identity  Loss of control over Canada’s natural resources  Taking advantage of cheap labour Other Free Trade Agreements (e.g., TPP, CETA, ASEAN, Mercosur) o The Trans-Pacific Partnership (TPP)  Originally 12 states: Canada, U.S, Australia, Brunei Darussalam, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore & Vietnam.  The U.S. walked away in 2016; now known as the (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) o Canada–European Union Comprehensive Economic and Trade Agreement (CETA)  The 28 member EU states account for 500 million people  98 percent of Canadian goods are now duty-free in the EU (only 25 percent were duty free before the deal)

Midterm exam notes: Term exam 1 will be in Course Content section of blackboard. Will have 50 to 55 MCQs. There will be 5 options in each MCQ. The time limit will be 50-55 minutes. But Lisa will confirm it later via email. There will be a practice exam in blackboard under course content....