Module 2 Globalization.docx

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Accounting & Financial Management
AFM 131
Robert Sproule

1 Week 1 AFM 131 T HE D YNAMIC G LOBAL M ARKET - Global expansion is important for major Canadian companies‟ growth o Amongst 6.8 billion potential customers; 195 countries ex. Scotiabank‟s E-TRADE Canada from U.S. based parent E-TRADE Financial Coorporation: Lija Style Inc. 80% company sales are exports - Global operations must be reviewed to ensure profit is being made Auto industry hit hard due to: 1) Global trends 2) Increasing gas prices 3) Weakening demand for trucks and sport utility vehicles (SUVs) Exporting: selling goods and services to another country Importing: buying goods and services from another country Why Trade with other Nations? 1. No country can produce all products people want and need 2. If country was self-sufficient, other countries would want to trade with them to meet the needs of their own country 3. Some nations have abundance in natural resources and lack technological know-how (i.e. China and Russia) Others: Sophisticated technology with few natural resources (i.e. Japan and Switzerland) Global Trade: exchange of goods and services across national borders - Allows nation to product what it is most capable of producing - Buy what it needs from others Mutually beneficial exchange relationship. Free Trade: movement of goods and services among nations without political or economic obstruction/trade barriers 2 Week 1 AFM 131 COMPARATIVE and ABSOLUTE ADVANTAGE COMPARATIVE advantage theory  country should sell to other countries those products that it produces most effectively and efficiently  should buy from other countries products if cannot produce as effectively or efficiently o some countries still continue to sell products despite lack of comparative advantage  free movement of goods and services restricted (trade protectionism) from countries that can produce products at lower cost ABSOLUTE advantage theory  country has ability to produce particular good or service using fewer resources (therefore lower costs) than another country GETTING INVOLVED IN GLOBAL TRADE CANADA: small businesses account for 48% private labor force (85% exports)  getting involved through 1) Foreign Affairs and International Trade Canada 2) Export Development Canada (EDC) To globally get started: (R-O-D) 1. Observation – observe and study global markets: internet classmates 2. Determination – travel to observe foreign cultures and lifestyles 3. Risk – to see if global business appeals to you IMPORTING GOODS AND SERVICES Imports  16% of imports are services  65% are merchandise o machinery and equipment o industrial goods and materials Services o automotive products Merchandise EXPORTING GOODS AND SERVICES  global trade enhances quality of life for Canadians and contributes to our economy‟s well-being Exports Exports: o account for 1 in 5 jobs o generates 30 cents per dollar earned  sales abroad by affiliates are a means by which Canadian companies engage in international business o equivalent to 85% of value of exports of goods and Services Merchandise services – trade o largest of goods are: industrial goods and materials, machinery and equipment 3 Week 1 AFM 131 C ANADA ‟SM ERCHANDISE AND SERVICE TRADE Measuring Global trade Balance of trade: a nation‟s ratio of exports to imports i.e. exports : imports  favorable when exports exceed imports Since 1990: 7 categories resulted in surplus and remain in surplus  agricultural and fishing products  forestry  energy products Trade deficits - machinery - consumer goods Unfavorable balance of trade/TRADE DEFICIT: occurs when the value of a country‟s imports exceed that of its exports BALANCE OF PAYMENTS: the DIFFERENCE between MONEY coming INTO a country (from exports) and money LEAVING the country (from imports) PLUS money from other factors such as tourism, foreign aid, military expenditures, and foreign investments  Balance of payments must be favorable. TRADING IN GLOBAL MARKETS - most exports and imports of Canada are with the U.S. ~ 73.5% exports ~ 68.8% imports o due to agreements that take the course of several years  1965, Auto pact: Automotive products Trade Agreement reinforced by NAFTA (North Atlantic Free Trade Agreement) 4 Week 1 AFM 131 CANADAS PRIORITY MARKETS Emerging economies: countries with economies of high growth rates, rapid increase in living standards, rising global prominence Priority Markets where Canada has Greatest Potential Growth: 1. Association of SE Asian nations (Brunei, Darussalam, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand,Vietnam) 2. Australia and New Zealand 3. Brazil 4. China 5. Europe 6. Gulf cooperation Council (Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain, Oman) 7. India 8. Japan 9. Korea 10. Latin America and Caribbean 11. Mexico 12. Russia 13. U.S. To encourage stronger Canadian presence in global market 1. Tax cuts 2. Increased support for research and development 3. Critical investments in infrastructure at Canada-US border crossings and Canada’s Asia Pacific Gateway 5 Week 1 AFM 131 STRATEGIES FOR REACHING GLOBAL MARKETS EXPORTING Export trading companies: - matches buyers and sellers from different countries - deals with foreign customs, offices, documentation requirements, weights & measures - ease process of entering global markets - deal with getting paid (risky element of doing business globally) LICENSING – a firm (the licensor) allows a foreign company (licensee) to produce its product in exchange for a fee (royalty) - company generally sends company representatives to help set up production processes - also may help in distribution, promotion, consulting Benefits: Problems: - gain additional revenue - licensor/the firm may grant licensing licensees often must purchase start-up supplies, rights for an extended period of time component materials and consulting services - if remarkable growth and success in from the licensing firm foreign markets, bulk of revenues belong to licensee - licensing firm selling its expertise (licensee learns company‟s technology and secrets  break agreement and may produce similar product on its own may lose trade secrets and royalties FRANCHISING: variation of LICENSING is franchising - an agreement where someone with a good idea for business sells the rights to use business name and sell a product or service to others in a given territory. Precautions 1. Style of good or service n area location 2. Location of franchise 3. Targets preferences CONTRACT MANUFACTURING foreign country’s production of private-label goods to which a domestic company then attaches its brandname or trademark; also called outsourching  when a domestic company’s private label goods are produced at a foreign company - can also occur temporarily when company receives unexpected increase in orders - labor costs  low PROS: no heavy start-up costs if successful, company in new market with relatively LOW risk 6 Week 1 AFM 131 INTERNATIONAL JOINT VENTURES AND STRATEGIC ALLIANCES Joint Venture: partnership in which two or more companies (often from different countries) join to undertake a major project or to form a new company -used to make products better Benefits: 1. Shared technology and risks 2. Shared marketing and management expertise 3. Entry into markets where foreign companies are often not allowed unless goods are produced locally 4. Shared knowledge of the local market including local customs, government connections, access to local skilled labour and supplies, and awareness of domestic laws and regulations Drawbacks: 1. One partner can learn others technology and practices, the
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