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AFM131 Lecture Notes - Automotive Products, Comparative Advantage, Free Trade

Accounting & Financial Management
Course Code
Robert Sproule

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AFM 131
Robert Sproule
Fall 2010
Part 1 Business Trends: Cultivating a Business in Diverse Global Environment
Chapter 3 Competing in Global Markets
The Dynamic Global Market
- Canada is a large exporting nation. Exporting = selling goods and services. Importing = buying goods and
- Reasons to trade:
1) no country (even technologically advanced ones) can produce all of the products that its people want and need
2) even if a country did become self-sufficient, other nations would seek to trade with that country to meet the
needs of their own people
3) some nations have an abundance of natural resources and a lack of technological know-how and vice versa
- Global trade = enables a nation to produce what it is capable and buy what is needed in a mutually beneficial
exchange relationship
- Free trade = the movement of goods and services among nations without political and economic obstruction
- Comparative advantage theory = suggested by David Ricardo in the early 19th centrury
- 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
effectively or efficiently
- Absolute advantage = when a country has the ability to produce a particular good/service using fewer
- trade with other countries permit specialization, which allows resources to be used more productively
Getting Involved In Global Trade
- in Canada, small businesses account for 48% of the total private labour force and about 85% of exports
- with the help of the gov’t, smaller businesses get more involved in global market
- getting started = observation, determination, and risk
- 6 billion potential customers
- Domestic workers can lose their job =
increased imports or production shifts to low-
wage global markets
- Productivity grows when countries are
producing at their comparative advantage
- Workers = forced to accept pay cuts
- Competition & less-costly imports keep prices
down, so inflation does not affect economic
- Moving operations overseas = intense
competitive pressure
- Loss of service jobs and white-collar jobs
- Inspires innovation
- Lost of comparative advantage for local
companies = when competitors can produce
high quality product with low prices
- Uninterrupted flow of capital = access to
foreign investments = keeps interest rates low

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AFM 131
Robert Sproule
Fall 2010
- import (65%) categories include: machinery and equipment, industrial goods and materials, automotive
- often, the competition is not nearly as intense for the producers in global markets as it is at home
- trade is important = it enhances the quality of life for Canadians and contributes to our country’s economic well-
- sales abroad = Canadian businesses getting engaged in international business
- goods always exceeds services in terms of trading
- in measuring the effectiveness of global trade, use two indicators: balance of trade and balance of payments
- balance of trade: is a nation’s ratio of exports to imports
- when the value of the country’s exports > imports = favourable balance/trade surplus
- frequent trade surpluses = agricultural, fishing products, forestry, energy products
- frequent trade deficits = machinery and consumer goods
- when the value of the country’s export < imports = unfavourable balance of trade/trade deficit
- Balance of payments: difference between money coming into a country(from export) and money leaving the
country (for import) plus money flows from other factors such as tourism, foreign aid, military expenditures,
and foreign investment
- Ranked eleventh in the world as both exporter and importer in world merchandise trade
- We are dependent on the U.S. (73% of our exports and 69% of import is with the U.S.)
- Trade in automotive products, starting with 1965 Automotive Products Trade Agreement, aka the Auto Pact
- Reinforced by the North American Free Trade Agreement (NAFTA)
- The new ways of communicating, organizing, and working are inviting the most remote countries around the
- Emerging economies = high growth rates, rapid increases in their living standards, and a rising global
prominence = getting into these markets is crucial
- Potential partners for growth = the Association of South East Asian Nations, Australia and New Zealand, Brazil,
China, Europe, Gulf, Cooperation Council, India, Japan, Korea, Latin America and the Caribbean, Mexico,
Russia, and the U.S..
- China and India are particular interest as they are growing and emerging markets due to their size and
economic transformation
- Steps to encourage Canadian participation include tax cuts, increased support in research and development,
and critical investments in infrastructure
Strategies For Reaching Global Markets
- Ways to compete in global market = exporting, licensing, franchising, contract manufacturing, creating internal
joint ventures, strategic alliances, and engaging in foreign direct investment
- Each strategies come with commitments and risks
- Simplest way of going international
- Often the first export sales occur as a result of unsolicited orders received
- A company must develop some goals and strategies for achieving for achieving those goals
- Some firms may be reluctant to go through the trouble of establishing foreign relationships

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AFM 131
Robert Sproule
Fall 2010
- So specialists called exporting-trading companies are available to step in and negotiate and establish the
trading relationship
- Export-trading company not only matches buyers and sellers from different countries
- Help exporters with a key and risky element of doing business globally: getting paid
- Success in exporting often leads to licensing with a foreign company to produce the product locally to better
serve the local market
- A firm (the licensor) may decide to compete in a global market by licensing the right to manufacture its
product/use its trademark to a foreign company (the licensee) for a fee (a royalty)
- A company rep is necessary to help set up with production process
- Need to work in distribution, promotion, and consulting
- A licensing agreement can be beneficial to a firm in several different ways:
1) An organization can gain additional revenues from a product that it normally would not have generated in
its home market
2) Licensors can earn extra fees from licensees for start-up supplies, component materials, and consulting fees
3) Licensors spend little or no money to produce and market their products
- Companies such as Disney, Coca-cola, and PepsiCo have been making profit from these methods
- Licensing agreements are usually long term service contract
- Sometimes the licensing company can collect management and consulting fees
- Free advertisement for licensors since all the expenses are paid by the licensees
- Licensors may face some problems as well:
1) A firm must grant licensing rights to its product for an extended period, maybe 20 years +
2) If the product experiences remarkable growth & success; the revenue goes to the licensees
3) There is a risk of licensees breaking agreements and stealing the technology/product secrets
- Belongs to a variation of licensing
- An arrangement whereby someone with a good idea for a business sells the rights to use the business name and
sell a product/service to others in a given territory
- For example, Canadian Tire, Boston Pizza, Japan Camera—in many categories of business
- Popular both domestically and internationally
- Franchisors have to be careful to adapt their good/service in the countries they serve
Contract manufacturing
- Involves a foreign company’s production of private-label goods to which a domestic company then attaches its
own brand name or trademark
- For example, Dell computer contracts with Quanta Computer of Taiwan to make notebook PCs
- Nike with 700 contract factories around the world that manufacture footwear and apparel
- Enables a company to experiment in a new market without incurring heavy start-up costs
- If the brand name becomes a success, the company has entered a new market with low risk
- Temporarily meeting an unexpected increase of orders
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