AFM 131 - Chapter 3 globalization notes

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Accounting & Financial Management
AFM 131
Robert Sproule

AFM 131 - Chapter 3 Competing in Global Markets The Dynamic Global Market • 91% of companies doing business globally believe its important to send employees on assignments in other countries • Canada is a market of more than 32 million people, but there are more than 6 billion potential customers in the 193 countries to make up global market • 75% of world’s population lives in developing areas where technology, education, and per capita income still lag considerably behind Canada • Businesses trying to grow company  restructuring plan would focus on cutting capacity in the mature domestic market and focus on international market • Small businesses also looking to branch out • Companies continuously review their global operations to ensure profit made, otherwise plants close down • Canada large exporting nation. Exporting aggressive business, up against other countries o Exporting: selling products to another country o Importing: buying products from another country Why Trade with Other Nations? • No country can produce all products that its people want and need • Second even if a country did become self sufficient, other nations would seek trade to maintain their people’s needs • Some nations have abundance of resources and lack of technological know-how (e.g. Russia and China), while others have sophisticated technology but few resources (e.g. Japan and Switzerland) • Global trade enables and nation to produce what it is most capable of producing and to buy what it needs from others in a mutually beneficial exchange relationship • Process of Free Trade: movement of goods and services among nations without political or economic trade barriers/obstructions Pros for free trade Cons - global market contains more than 6 - domestic workers (particularly in billion potential customers for goods manufacturing-based jobs) can lose their and services jobs due to increased imports or - productivity grows when countries production shifts to low-wage global produce goods and services in which markets they have a comparative advantage - workers may be forced to accept pay cuts - global competition and less costly from employers, who threaten to move to imports keep prices down, so inflation low wage global market does not curtail economic growth - move operations overseas because of - free trade inspires innovation for new intense competitive pressure meaning products and keeps firms competitively loss of service jobs and more white collar challenged jobs - uninterrupted flow of capital gives - domestic companies lose comparative countries access to foreign advantage when competitors build investments, which helps keep interest advanced operations in low wage rates low markets Theories of Comparative and Absolute Advantage • Global trade is the exchange of goods and services across national boarders, but now also exchange art, sports, cultural events, medical advances, exploration, labour • Comparative Advantage theory: states that a country should sell to other countries those products that it produces most effectively and efficiently and buy from other countries those products that it cannot produce as effective or efficiently o Japan has ability with cars and electronics, and Canada has advantage with forestry, aluminum etc. Countries still decide to produce even if they lack the comparative advantage. To do so they restrict imports (protectionism) to reduce competing products from countries that can produce at a cheaper price • Absolute Advantage: the advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. (e.g. Zambia has an absolute advantage over many countries in production of copper due to its copper ore reserves) Getting Involved in the Global Trade • Global business job potentials lie in the small companies • In Canada, small businesses account for 49% of the total private labour force and 16% of them export • Government agencies International Trade Canada and Export Development Canada (EDC) help small businesses become more involved with global markets • Need to observe and study the global market, and need to opportunity to travel and see the way different countries operate (culture and lifestyle), also need determination and risk Importing Goods and Services • Merchandise trade come in 3 categories: machinery and equipment, automotive products, industrial goods and materials • Merchandise trade represents 69% of imports • If imports keep increasing how will it affect our standard of living/quality of life Exporting Goods and Services • Can sell any goods or services used in Canada to any other country • Often competition will not be as intense for producers in global markets as it is at home • Commercial services reflected largest category of service trade exports • Machinery and automotive products largest categories in merchandise trade • Canada produce vast quantities of products, and rank high in terms of exporting nations • Exporting enhances a country’s quality of life and economic well-being • Exporting accounts for 37.7% of Canada’s GDP and affects every 1 in 3 jobs, creating 10000 jobs • Selling in global markets not easy, must adapt to products in specific global markets can be difficult Measuring Global Trade • Balance of trade: nation’s ratio of exports to imports o Favourable balance of trade (trade surplus) occurs when exports exceeds the imports (case for Canada) o Unfavourable balance of trade (trade deficit) occurs when imports exceeds exports o Prefer to export rather than import, can make money • Balance of payments: difference between money coming into a country (from exports) and money leaving the country (for exports) plus money flows coming into or leaving a country from other factors (e.g. tourism, foreign aid, military expenditures, and foreign investments) o Goal is to have a favourable balance of payments (higher inflow) Trading in Global Markets: The Canadian Experience • Canada highly dependent on the US (84% of exports to them, 57% imports from them) • No other modern industrialized country is so dependent on one country like us • Largely export automotive products due to Auto Pact (1965) and now NAFTA (1994) • Auto industry crucial to Canadian economy, eighth largest vehicle producer in the world, biggest contributor to manufacturing GDP, and largest manufacturing employer • 13 assembly plants, 540 parts manufacturers, thousands of dealerships, and other related industries  affects 1 in every 7 jobs • Canadian auto industry shrinking due to plants closing to US because cheaper labour and financial incentives, Canadian government must be more aggressive and involved to attract auto investments • Another major sector for exports is natural resources (energy, forestry, agriculture, fishing) representing 34% of exports • Canada 9 on largest countries export of world merchandise trade st nd rd o Germany 1 and US 2 , China 3 Emerging Markets Strategy for Canada • Canada’s Minster of state (New and Emerging Markets) has mandate to raise Canada’s profile in expanding and dynamic markets; branding st Canada as 21 century economy and partner by choice • Federal governments focus on China, India and Brazil due to rapid size and growth of economy, but need to recognize Russia, Arabian Peninsula, Southeast Asia • Focus on limited resources in markets where greatest benefit achieved, can then open in China, India and Brazil, but also any market that opens up • China is world’s fastest growing major economy, and Canada’s second largest trading partner o Exports: wood pulp, organic chemicals, machinery, fertilizer, mineral ores o Imports: machinery, electrical machinery, toys, sporting equipment, furniture, bedding • China and Hong Kong leading source of immigrants Strategies for Reaching Global Markets • Key strategies include exporting, licensing, franchising, contract manufacturing, creating international joint ventures and strategic alliances, creating foreign subsidiaries, and engaging in foreign direct investment (amount of commitment, risk, control and potential profit from least to most) • Exporting: simplest way to go international is to export, starts from unsolicited orders are received o Canadian companies often don’t want to go through trouble establish foreign trading relationships o Export-trading companies are available to step in and negotiate and establish the trading relationships desired o Exporting-trading companies link countries together and also ease the process of entering global market (e.g. foreign customs office, documentation requirements etc.) o Also help exporters with key and risky elements of going global • Licensing: a global strategy in which a firm (licensor) allows a foreign company (licensee) to produce its product in exchange for a fee (royalty). o Allowing other foreign companies to use trademark (e.g. mickey mouse) o Representatives will help licensee with distribution, promotion, consulting o Can gain revenues would not normally gain, enter global market as a licensing agreement - e.g. Oriental Land Company has licensing agreements with Walt Disney Company, Oriental Land owns and operates Tokyo Disneyland and Disney Sea Park, under agreement, Disney collects management and consulting fees o Licensors spend little or no money to produce and market product, all out of licensee’s pocket o If product grows, licensors does not see the money, or the licensee specializes in the product and begins to produce their own line as a competitor • Franchising: arrangement whereby someone with sells the rights to use the business name and sell the product or service to others in a given territory (e.g. Canadian Tire, Boston Pizza) o Franchisors need to adapt their products to the citizens’ wants of that country o E.g. KFC in Hong Kong failed  too greasy for the people, McDonald’s opened in suburbs like in N.A.  found Dutch live in city, Pizza Hut made one size fits all pizza, and kept same toppings  German’s like small individual pizzas, Japanese wanted mayo and squid • Contract Manufacturing: A foreign country’s production of private- label goods to which a domestic company then attaches its brand name or trademark (outsourcing) o E.g. produce Nike shoes in 700 different factories around world o Makes experimenting in a new market cheap without incurring heavy start up costs (manufacturing plants), labour costs are very low • International Joint Ventures and Strategic Alliances: o Joint Venture: partnership in which two or more companies (often of different countries) join to undertake a major project or form a new company  Mandated by governments such as China, as a condition of doing business in the country. Hard to gain entry in
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