Copyright © 2006 Pearson Education Canada Inc. 5-1 Chapter 5 Understanding International Business.

5-1

Copyright © 2006 Pearson Education Canada Inc.

Chapter 5Chapter 5

UnderstandingInternational Business

5-2 Copyright © 2006 Pearson Education Canada Inc.

Describe the rise of international business and identify the major world marketplacesExplain how different forms of competitive advantage, import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment

Learning Objectives


More Learning Objectives

Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structureDescribe some of the ways in which social, cultural, economic, legal, and political differences act as barriers to international tradeExplain how free trade agreements assist world trade


The Rise of International Business

Total volume of world trade is around $8 trillion annuallyGlobalization The integration of markets globally the world is becoming a single large

market an interconnected system


Imports/Exports

Imports Products that are made or grown

abroad and sold in Canada

Exports Products made or grown in Canada

that are sold abroad


Major World Marketplaces

High-income countries These include Canada, United States,

Australia, Japan, and most of Western-Europe

Middle-income countries These include Czech Republic, Hungary,

Greece, Mexico, Taiwan, South Korea, and Poland

Low-income countries These include China, and India


Competitive Advantage

Absolute advantage a nation’s ability to produce something

more cheaply or better than any other country

Comparative advantage a nation’s ability to produce some

products more cheaply or better than it can others


National Competitive Advantage

Four conditions are required for a country to have a national competitive advantage


Balance of Trade

Difference between a countries total exports and its total imports Favourable Balance of trade

Exports>Imports Unfavourable Balance of trade

Imports>Exports


Balance of Payments

Difference between money flowing in to and out of the country as a result of trade and other transactions Cash flow in Exports, foreign tourist spending in Canada,

foreign investments in Canada

Cash flow out Imports, Canadian tourist spending outside

of Canada, foreign aid, Canadian investments outside of Canada, earnings of foreign investments in Canada


Foreign Exchange Rate

Ratio of the currency of one nation to the currency of another nationWhen the value of the Canadian dollar depreciates Exports increase and imports cost more

When the value of the Canadian dollar appreciates Exports decrease and imports cost less


Importing or Exporting via Independent Agent

Licensing Agreements

Establishing a Branch Office

Choosing a Strategic Alliance

Multinational Firm

Levels of Involvement in International Markets


Multinationals

Multinational firms control assets, factories, mines, sales offices, and affiliates in two or more foreign countriesMany multinationals provide needed jobs, prosperity, technology, and growth to developing nations


Foreign legal requirementIncreased sales due to local presenceEase of handling a large foreign business base

Why Have a Branch Office?


Strategic Alliances

Strategic alliance “Joint venture” or “partnership”

between two independently owned firms

May be mandated in some nationsUseful if a firm lacks an intimate knowledge of the culture and business environment in the foreign nation


Company Revenue (Billions of $)

General Motors of Canada Ltd.Ford Motor Co. of Canada Ltd.Imperial Oil Ltd.DaimlerChrysler CanadaHonda CanadaShell Canada Ltd Costco Wholesale CanadaSears Canada Inc..Canada UltramarCanada Safeway

36.520.817.816.914.08.87.66.26.05.7

Top Ten Foreign Controlled Companies in Canada


Barriers to Trade

Social and cultural differencesEconomic differencesLegal and political differences Quotas/tariffs/subsidies Local content laws Business practice laws


Social & Cultural Differences

LanguagePopulation demographicsShopping habitsReligious differencesSocial beliefs


Economic Differences

The role of government in the economyPlanned vs. Market economies Capitalist Socialist Communist


Quotas, Tariffs, & Subsidies

Embargo Forbidding export/import from a nation

(US vs. Cuba)

Quota Restrictions on number of products

imported of a product class


Quotas, Tariffs, & Subsidies

Subsidy Government financial assistance for domestic

firms to help compete with foreign firms

Tariff: a tax on imported goods Revenue tariff

A tariff imposed solely to raise money for the government that imposes it

Protectionist tariff A tariff imposed in part to discourage imports of a

particular product


Local Content

Laws requiring that products sold in a particular country be at least partly made in that countryIncludes the practice of Canadian provinces buying from their own companies before going outside of the province


Business-Practice Laws

Bribes Seen as “gratuities” to government officials

in some nations

Dumping Selling a product for less abroad than in a

producing nation; illegal in

Cartels Associations of producers created to control

supply and demand for a given product (OPEC)


Overcoming Barriers to Trade

Trade Agreements Various free trade agreements have

sparked international trade

World Organizations Several world organizations exist to

promote world trade


Trade Agreements

General Agreement on Tariffs and TradeThe North American Free Trade AgreementEuropean UnionFree Trade in the AmericasASEAN Free Trade AgreementAsia-Pacific Economic CooperationEconomic Community of Central African StatesGulf Cooperation Council


North American Free Trade Agreement (NAFTA)

Came into effect in 1994Goal to remove tariffs and other trade barriers among Canada, the United States and Mexico


European Union

Reduces tariffs on products traded within the unionImposes higher tariffs on products coming in from outside of the unionImposes limiting quotas on products coming in from outside of the union


World Organizations

General Agreement on Tariffs and Trade (GATT) Signed after World War II Purpose to reduce or eliminate trade

barriers such as quotas and tariffs

World Trade Organization Successor to GATT Goal is trade liberalization


Consumers’ Fears of Free Trade

Job lossesMarket flooded with goods produced in low-wage countries like MexicoLoss of control over environmental standardsUS takeover of Canada’s natural resourcesLoss of Canadian cultural sovereignty


Consumer Support for Free Trade

Access to lucrative US markets for Canadian exportersIncreased jobs due to increased exportsEnvironment is not covered or threatened by free trade agreementsNo evidence of dumping of US or cheaply produced products in Canadian markets as a result of free trade

Copyright © 2006 Pearson Education Canada Inc. 5-1 Chapter 5 Understanding International Business.

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