Chapter 1: Understanding the Canadian Business System
The Concept of Business and Profit
=> Business: An organization that produces or sells goods or services in an effort to make a
=> Revenues: The money a business earns selling its products and services.
=> Expenses: The money a business spends producing its goods and services, and generally
running the business.
=> Profit: The money that remains (if any) after a business’s expenses are subtracted from its
Economic Systems around the World
=> Economic System: The way in which a nation allocates its resources among its citizens.
=> Factors of production: The resources used to produce goods and services: labour, capital,
entrepreneurs and natural resources.
=> Labour: Also referred to as human resources, labour is the mental and physical capabilities
of people. An example can be seen in a major corporation.All members of the corporation who
contribute to running and maintaining the business, its liabilities and assets are forms of labour.
=> Capital: The funds used to operate an enterprise.Amajor source of capital for small
businesses is personal investments, which can come from individual entrepreneurs, from partners
who start businesses together or from investors who buy stock.Another form of capital can be
the revenue that enters the business once it successful enters the economic market.
=> Natural resources: Items used in the production of goods and services in their natural state,
including land, water, mineral deposits and trees. Once just limited to resources that could only
be produced in nature, it now relates to include all physical resources.
=> Entrepreneurs: The people who accept the opportunities and risks involved in creating and
operating businesses.An example can be seen in the establishment of Facebook, by Mark
Zuckerburg, who had the technical skills to understand the benefits of connecting to the Internet,
and realized the potential behind network connections between its users. The entrepreneur is able
to identify unmet consumer needs, such as advertising and selling a good or service. The
entrepreneur is able to spot a promising opportunity and develop a good plan for capitalizing on
=> Information resources: information such as market forecasts, economic data, and
specialized knowledge of employees that is used to a business and that helps it achieve its goals.
=> Command economy: an economic system in which government controls all or most factors
of production and makes all or most production decisions.
=> Market economy:An economic system in which individuals control all or most factors of
production and make all or most production decisions.
=> Mixed market economy:An economic system with elements of both market and command
=> Privatization: the process of converting government enterprises into privately owned
companies. => Deregulation: reduction in the number of laws affecting business activity.
- two basic forms of command economies are communism and socialism
- originally proposed by Karl Marx, communism is a system in which the government owns and
operates all sources of production.
- Marx envisioned a society in which individuals would ultimately contribute according to their
abilities and receive economic benefits according to their needs.
- he also expected government ownership of production factors to be only temporary
- once society has matured, government would “wither away” and the workers would gain direct
- less extensive command economic system than communism
- socialism owns and operates only selected major industries
- smaller businesses such as clothing stores and restaurants may be privately owned
- workers in socialist countries are usually allowed to choose their occupations
- despite this, a large population generally works for the government
- a kind of market economy offering private ownership of the factors of production and of profits
from business activity
- it is referred to as a political basis of market processes, which sanctions the private ownership
of the factors of production
- encourages entrepreneurship by offering profits as an incentive
Interactions between Business and Government
How the government influences business:
Government as customer:
- government purchases thousands of different products and services from business firms
- the government is also the largest purchaser of advertising
- many businesses depend on government purchases, if not for their survival, at least for a certain
level of prosperity.
Government as competitor:
- the government competes with other business as Crown corporations, which are accountable to
a minister of Parliament for their conduct
- Crown corporations exist at both the federal and provincial level, and account for a significant
and wide variety of economic activity in Canada
Government as regulator:
- government regulates business through many administrative boards, tribunals or commission.
- at the federal level, examples include the Canadian Radio-Television and Telecommunications Commission (CRTC), which issues and renews broadcast licenses, the Canadian Transport
Commission (CTC) which makes decisions about route and rate applications for commercial air
and railway companies, and the Canadian Wheat Board, which regulates the price of wheat.
- at the provincial level, provincial boards and commissions regulate business through their
- other several important reason for government regulation on businesses include:
=> protecting competition
=> protecting consumers
=> achieving social goals
=> protecting the environment
Government as taxation agent:
- revenue taxes are taxes whose purpose is to fund government services and programs
- progressive taxes are levied on a higher rates on higher income tax payers, and at lower rate on
lower income tax payers
- regressive taxes are levied at the same rate, regardless of person’s income (fixed rate)
- restrictive taxes levied to control certain activities that legislators believe should be controlled
(examples include alcohol, tobacco and gasoline)
Government as provider of incentives:
- government offers incentive programs in order to stimulate the economy (Hyundai Motors
received $6.4 million to build a production facility, and an additional $682,000 in order to train
- government also offers services through government organizations (Stats Canada, which
provides data on Canadian economy)
Government as provider of essential services:
- the federal government provides highways, the postal service, the Royal Mint, military forces
and statistical data which helps businesses in decision making.
The Canadian Market Economy
Demand and Supply in a Market Economy:
=> Demand: the willingness and ability of buyers to purchase a product or service
=> Supply: the willingness and ability of producers to offer a good or service for sale
=> Law of Demand: buyers will purchase(demand) more of a product as its price drops and less
of a product as its price increases.
=> Law of Supply: producers will offer (supply) more of a product for sale as its price rises and
less as its price drops.
=> Demand and Supply schedule: assessement of the relationships between different levels of
demand and supply at different price levels.
=> Demand curve: a graph showing how many units will be demanded at different prices
=> Supply curve: a graph showing how many units will be supplied at different prices. => Equilbrium price: the price where demand is equal to supply.
=> Surplus: when quantity supplied exceeds quantity demanded.
=> Shortage: when quantity demanded exceeds quantity supplied.
Private Enterprise and Competition of a Market Economy
- an economic system characterized by private property rights, freedom of choice, profits and
- private property is the ownership of resources used to create wealth in the hands of individuals
- freedom of choice is the option of selling labour to any desired employer. Producer are allowed
to decide what products to produce, and whom to hire.
- the lure of profits leads some people to abandon the security of working for someone else and
to assume the risks of entrepreneurship.
- basically motivates businesses to operate efficiently
- forces businesses to make their products better or cheaper
Degrees of Competition
- the products of each firm are identical ( farms producing milk)
- both buyers and sellers know the prices that others are paying and receiving
- it is easy to enter or leave the market
- prices are set by supply and demand
- fewer sellers than perfect competition, but still many buyers (many small clothing stores
compete successfully with large apparel retailers)
- sellers try to differentiate their products from their competitors
- the businesses may be large or small, but it is easy to enter or leave the market
- a small number of very large firms
- difficult to enter or exit the industry
- each firm has a lot of influence over the price
- market has only one producer
- the firm has complete control over the price
- natural monopolies can most efficiently supply the most products or services in the industry Chapter 2: Understanding the Environments of Business
=> external environment: everything outside an organization that might affect it.
=> economic environment: conditions of the economic organization in which the organization
=> business cycle: pattern of short term ups and downs (expansions and contractions) in an
=> recession: period during which aggregate output, measured by real GDP, declines.
=> aggregate output: total quantity of goods and services produced by an economic system
during a given period.
=> standard of living: total quantity and quality of goods and services that a country’s citizens
can purchase with the currency in their economic system.
=> purchasing power parity (PPP): is the principle that exchange rates are set so that the
prices of similar products in different countries are about the same.
=> productivity: measure of economic growth that compares how much a system produces with
the resources needed to produce it.
=> national debt: the total amount of money that the government owes its creditors.
=> budget deficit: the result of the government spending more in one year than it takes in during
Gross Domestic Product (GDP):
- total value of all goods and services produced within a given period by a national economy
through domestic factors of production.
- If GDP goes up, the country experiences economic growth.
- The value of products and services produced by foreign firms in Canada is also included in
-GDP is the more preferred method of calculating national income and output.
- real growth rate of GDP ( the growth rate of GDP adjusted for inflation and changes in the
value of the country’s accuracy) is what counts.
- since growth depends on output increasing at a faster rate than population, if the growth rate of
GDP exceeds the rate of population growth, then the standard of life is improving.
- GDP per capita means GDP per person and is determined by dividing total GDP by total
population of a country, and is considered to be a better measure of economic well-being than
- real GDP means that the GDP has been calculated to account for changes in currency values
and price changes.
- nominal GDP means that GDP is measured in current dollars or with all components measured
at current prices
Gross National Product (GNP):
- total value of all goods and services produced by a national economy within a given period, regardless of where the factors of productions are located.
- therefore, value of the goods and services produced in a Canadian firm located in the U.S is
included in the GNP, but not the GDP.
Genuine Process Indicator (GPI):
- a measure of assessing economic activity, established by the organization, Redefining Progress,
which treats activities which can harm the environment or quality of life as costs and gives them
- New GPI measures show that while GDP has been going up since the 1970’s, GPI has been
Balance of trade:
- is the economic value of all the products that a country exports minus the economic value of its
- a positive balance of trade results when a country exports (sells to other countries) more than it
imports (buys from other countries).
- a negative balance of trade results when a country imports (buys from other countries) more
than it imports (sells to other countries). This is referred to as a trade deficit.
- a trade deficit negatively affects economic growth because the money that flows out of a
country can’t be used to invest in productive enterprises, either at home or overseas.
=> stability: condition in which the amount of money available in an economic system and the
quantity of goods and services produced in it are growing at about the same rate.
=> consumer price index (CPI): measure of the prices of typical products purchased by
consumers living in urban areas.
=> deflation: a period of generally falling prices, may fall due to increased industrial
productivity and that cost savings can be passed on to consumers (good), or that consumers have
high levels of debt, and therefore are unwilling to buy very much (bad).
- the occurrence of widespread price increases throughout an economic system.
- the threat to stability can be seen in gradual steps
- first increased availability of money causes more desires to spend, yet the quantity of goods
available for purchase remains the same
- as consumers compete with one another to buy available products, prices of these products
begin to rise
- before long, high prices will erase the increase in the amount of money injected into the
- purchasing power declines as a result
- is the level of joblessness among people actively seeking work - various types of unemployment:
=> frictional unemployment (people out of work while temporarily seeking a new job)
=> cyclical unemployment (people out of work due to the seasonal nature of their jobs)
=> structural unemployment (people are unemployed because they lack the skills needed to
perform available jobs)
- while unemployment is low, there is a shortage of labour available for businesses.
- as these businesses compete with one another for the available supply of labour, they raise the
wages that they are willing to pay.
- because high labour costs eats into profit margins, businesses raise the price of their products
- thus, although consumers have more money to inject into the economy, this increase is soon
erased by higher prices
- wage rates get too high, business will respond by hiring fewer workers and unemployment will
- however demand may decline because unemployed workers don’t purchase it
- because of reduced sales, companies may further cut back on hiring and unemployment will go
- if the government tries to correct this situation by injecting more money into the economic
system, by cutting taxes or spending more money
- prices in general may go up because of increased consumer demand, but then inflation sets in,
and purchasing power declines.
Managing the Canadian Economy
=> fiscal policies: policies by means of which governments collect and spend revenues
=> stabilization policy: government policy embracing both fiscal and monetary policies, whose
goal is to smooth out fluctuations in output and unemployment and to stabilize prices.
- policies by means of which governments collect and spend revenues.
- the government can influence the ability and willingness of banks throughout the country to
- can also influence the supply of money by prompting interest rates to go up or down.
- the power of the Bank of Canada to make changes in the supply of money is the centrepiece of
the Canadian government’s monetary policy.
- higher interest rates make money more expensive to borrow and thereby reduce spending by
both those who produce goods and services and by those who buy those goods and supply.
- when banks restrict money supply, the practise is referred to as a tight monetary policy.
- lower interest rates make money less expensive to borrow and then increase spending by both
those who produce goods and services and by the consumers who buy those goods and services.
- when the banks loosen money supply (thus stimulating the economy), the practise is referred to
as an easy monetary policy. The Business Environment
=> rivalry among existing competitors:
- amount of rivalry between companies varies between industries
- rivalry can be seen in activities like intense price competitions, elaborate advertising campaigns
and an increased emphasis on customer service.
- an example can be seen in the increased rivalries between several Canadian accounting firms,
which initially began as low-key competition
- responses established by these firms include increased attempts to attain more market power,
cutting costs, making pricing deals with clients and trying to find ways to differentiate
themselves from their competitors.
=> threat of potential entrants:
- when new competitors enter an industry, they may cause big changes.
- an example can be seen in Microsoft’s introduction of Encyclopaedia Encarta, which caused the
sales of hard-cover encyclopaedias such as Britannica to drop sharply.
- if it is easy for new competitors to enter a market, competition will likely be intense and the
industry will not be very attractive.
- the amount of bargaining power suppliers have in relation to buyers helps determine how
competitive an industry is.
- when there are only a few suppliers in an industry, they tend to have great bargaining power.
- the power of suppliers is influenced by the number of substitute products that are preferable
(example: products that perform the same or similar functions)
- when there are few substitute products, suppliers obviously have more power.
- when there are only a few buyers and many suppliers, the buyers have a great deal of
- an example can be seen in Wal-Mart, which can be seen as a buyer that has a high level of
bargaining power in order to pressure its sellers to lower their prices.
- when there are more substitute goods, the industry becomes more competitive.
Emerging Challenges and Opportunities in the Business Environment
=> core competency: skills and resources with which an organization competes best and creates
the most value for owners
=> outsourcing: the strategy of paying suppliers and distribute to perform certain business
processes or to provide needed materials or services.
Redrawing Corporate Boundaries
=> acquisition: one firm buys another firm and absorbs it into its operations. => merger: the union of two companies to form a single new business.
=> horizontal merger: a merger of two firms that have been previously been direct competitors
in the same industry.
=> vertical merger: a merger of two firms that had previously had a buyer-seller relationship.
=> conglomerate merger: a merger of two firms in completely unrelated businesses.
=> friendly takeover: an acquisition in which the management of the acquired company
welcomes the firm’s buyout by another company.
=> hostile takeover: an acquisition in which the management of the acquired company fights
the firm’s buyout by another company.
=> divestiture: occurs when a company sells part of its existing business operations to another
=> spinoff: strategy of setting up one or more corporate units as new independent corporations.
=> strategic alliance: an enterprise in which two or more persons or companies temporarily join
forces to undertake a particular project.
=> subsidiary corporation: a corporation that is owned by another corporation
=> parent corporation: a corporation that owns a subsidiary.
Chapter 3: Understanding Entrepreneurship, Small Business and New Venture Creation
The Links among Small Businesses, New Venture Creation and Entrepreneurship
=> small business: an owner managed business with less than 100 employees. Small business are
usually independently owned and influenced by unpredictable market forces.
=> new venture/firm: a recently formed commercial organization that provides goods and/or
services for sale.
- the process of identifying an opportunity in the marketplace and accessing the resources needed
to capitalize on it.
- entrepreneurs are people who recognize and seize opportunities
- a required characteristic of an entrepreneur is the ability to use personal attributes such as
creativity to adjust to unpredictable market environments.
- entrepreneurship occurs in a wide variety of contexts: in firms that are new or old, large or
small, firms with rapid or slow growth, in non-profit organizations and in the public sector.
- intrapreneurs are people who exhibit entrepreneurial characteristics and create something new
within an existing large firm or organization.
- key difference between intrapreneurs and entrepreneurs is that intraprenuers do not need to
worry about obtaining resources, as they are already provided by their employers.
- characteristics of an entrepreneur: commitment, determination, perseverance, drive to achieve,
opportunity orientation, initiative and responsibility, persistent problem solving, internal focus of
control, tolerance for ambiguity, calculated risk taking, integrity and reliability, tolerance for
failure, high energy level, creativity and innovativeness, vision, self confidence and optimism,
independence, team building, resourcefulness, flexibility, positive response to challenges, dynamism, perceptiveness, positive attitude, ability to get along with people, responsiveness to
suggestions and criticism, profit orientation, motivation to excel, courage, capacity to inspire,
intelligence, health, energy and emotional stability values, adaptability
The Role of Small and New Businesses in the Canadian Economy
=> private sector: the part of the economy that is made up of companies and organizations that
are not owned or controlled by the government.
The Entrepreneurial Process:
- the typical generation of ideas involves abandoning traditional assumptions about how ideas
work and how they ought to be, and trying to see what others do not.
- most new ventures do not emerge from a deliberate search for viable business ideas.
- the majority originated from events related to work and everyday life.
- in fact, work experience is the most common source of source of ideas, accounting for 45-85%
of those generated.
- as an employee, the prospective entrepreneur is familiar with the product or service, and the
customers, suppliers and competitors
- they are aware of marketplace needs, can relate those needs to personal capabilities and can
determine whether they are capable of producing those products or services that can fill the void.
- another source of venture ideas are a personal interest (16%) or hobby and a chance happening
that comes out unexpectedly (11%).
- entrepreneurs often generate many ideas and screening them is a key part of the entrepreneurial
=> The idea creates or adds value for the customer
- a product or service that creates a value is one that solves a significant problem or meets a
significant need in new or different ways.
=> The idea provides a competitive advantage that can be sustained
- a competitive advantage exists when potential customers see the product or service as better
than that of competitors
- sustaining a competitive advantage involves maintaining it in the face of competitor’s actions
or changes in the industry.
=> The idea is marketable and financially viable
- it is important to determine whether sales will lead to profit
- sales forecasts are an estimate of how much a product or service will be purchased by
prospective customers for a specific period of time, typically one year.
- if the venture is expected to make a profit quickly, its exit cost will be lower, making the idea
more attractive. Developing the Opportunity:
- as the “dead-end” venture ideas are weeded out, a clear notion of the business concept and an
entry strategy for pursuing it needs to be developed.
- as the process proceeds, the business concept often changes from what was originally
- some new ventures develop entirely new markets, products and sources of competitive
- once the needs of the marketplace and the economies of the business are better understood
- a franchise is an arrangement in which a buyer (franchisee) purchases the right to sell the
product or service of the seller (franchiser). Most fast food chains such as Burger King, Taco Bell
or Subways are good examples of franchises.
- a business plan is a document that describes the entrepreneur’s proposed business venture,
explains why it is an opportunity, and outlines its marketing plan, its operational and financial
details, and its manager skills and abilities.
- typically entrepreneurs acquire the various resources needed to make the venture a reality by
doing more with less.
- entrepreneurs make do with as few resources as possible and use other people’s resources
wherever and whenever they can.
- bootstrapping can also refer to the acquisition of other types of resources such as people, space,
equipment or materials that are loaned or provided free by customers or suppliers.
- there are two types of financing (debt and equity)
- debt financing refers to money that is borrowed.
- the borrower is obliged to repay the full amount of the loan in addition to interest charges on
- equity financing refers to money that the entrepreneur invests in a business in return for an
- Equity is more appropriate for starting a new venture.
- Most ventures prefer debt financing because they are reluctant to give up any financing to
- Collateral are assets owned by the business or by the individual that the borrower uses to
secure a loan or other credit
Two Sources of Debt Financing:
=> Financial Institutions:
- Commercial banks are the main source of debt financing for established small businesses
- it is usually difficult for a new business to borrow from a bank
- trade credit refers to when suppliers provide goods or services to the entrepreneur and bill them
later Common Sources of Equity Financing:
=> Personal savings:
- new venture founders draw heavily on their own finances to start the business
=> Love money:
- includes investments from friends, relatives and business associates
=> Private investors:
- also known as angels, they are well-off individuals who wish to expand their wealth by
investing their money in new ventures
=> Venture capitalists:
- investments come from professionally managed pools of investor money
- businesses may be owned by one person, but entrepreneurship is not a solo process.
- there are various stakeholders who provide resources to the venture including partners,
employees, customers, suppliers, professionals, consultants, government agencies, lenders,
shareholders and venture capitalists.
- sometimes ownership is shared with one or more of these stakeholders in order to acquire the
use of their resources.
- when ownership is shared, there are decisions to be made about who to share it with, how much
each shareholder will own, at what cost, and under what conditions.
- the form of legal organizations chosen affects whether ownership can be shared and whether
resources can be accessed.
- deciding whether to share ownership by forming a venture team involves considering whether
having a team is desirable or necessary, and whether the aim is to build a company with high
- whether a team is necessary depends on: the size and scope of the venture (how many people
does the venture require? Is it a one-person operation or does it need contributions from others?
Can people be hired to fill the key-roles as they are required?) and personal competency (What
are the talents, know-how, skills, track record, contacts and resources that the entrepreneur brings
to the venture? How do these match up with what the venture needs to succeed? If gaps are
identified, the entrepreneurs needs to decide what competencies are needed to complement his or
hers and when they are needed.)
- the nature of the team depends upon the match-up between the lead entrepreneur and the
opportunity, and how fast and aggressively he or she plans to proceed.
- the ideal team consists of people with complementary skills covering the key success area for
the business areas (for example, marketing, finance, production, etc).
- small founding teams tend to work better than big ones, and two-man groups are quite
Assessing the Fit Elements in the Entrepreneurial Process
The Entrepreneur- Opportunity Fit:
- the entrepreneur needs to decide whether the opportunity is something he or she can do and
wants to do.
- a realistic self assessment is important.
- prospective ventures that are of limited personal interest and requires skills and abilities that do not fit well with those of the entrepreneur should be eliminated.
- once the entrepreneur has chosen the opportunity he or she wants to pursue, the success of the
venture depends heavily upon the individual or individuals involved.
- no matter how good the product or service concept is, as the opportunity changes shape, it may
demand skills a single entrepreneurs lacks.
- this may prompt a decision to acquire the needed skills either by forming a team or by getting
The Opportunity- Resource Fit:
- assessing the opportunity-resource fit involves determining whether the resources needed to
capitalize on the opportunity can be acquired.
- as the opportunity changes shape, so will the resource requirements.
- when challenges and risks arise, the aim is to determine whether they can be resolved, and to
deal with them as quickly as possible
The Entrepreneur- Resource Fit:
- once the resource requirements of the venture have been determined, the entrepreneur needs to
assess whether he or she has the capacity to meet those requirements
Starting up a Small Business
Buying an Existing Business:
- most experts recommend buying an existing business because the odds of success are better
- an existing business has already proven its ability to attract customers
- it has also established relationships with lenders, suppliers, and other stakeholders.
- moreover, an existing track record gives potential buyers a much clearer picture of what to
expect than any estimate of a new business’s prospect.
- but an entrepreneur who buys someone else ‘s businesses may not be able to avoid certain
Taking over a Family Business:
- taking over family business poses both challenges and opportunities.
- on the positive side, a family business can provide otherwise unobtainable financial and
management resources because of the personal sacrifices of family members.
- family businesses often have a strong reputation or goodwill that can result in important
community and business relationships.
- as well, employee loyalty is often high, and an interested, unified family management and
shareholders group may emerge.
- on the other hand, major problems can also arise in family businesses.
- there may be disagreements over which family members assume control.
- if the parent sells his or her interest in the business, the price to be paid may be issue.
- the expectation of other family members may also be problematic.
- some family members may feel that they have a right to a job, promotion or impressive title
simply because they are part of the family.
- choosing an appropriate successor and ensuring that he or she receives adequate training is a
major problem for family businesses, as well as disagreements among family members about the future of the business.
Buying a Franchise:
- a franchising agreement stipulates the duties and responsibilities of the franchisee and the
- an example can be seen in the and type of amount and the amount paid by the franchisee to the
Success and Failure in Small Businesses
Reasons for Success:
=> Hard work, drive and dedication: Small business owners must be committed to succeeding
and be willing to put in the time and effort to make it happen. Long hours and few vacations
generally characterize the first few years of new business ownership.
=> Market demand for the product and service: Careful analysis of market conditions can
help small business people assess the probable reception of their product. If the area around a
college has only one pizza parlour, a new pizzeria is more likely to succeed than if there were
already 10 in operation.
=> Managerial competence: Successful small business people have a solid understanding of
how to manage a business. They may acquire competence through training (taking courses),
experience, or by using the expertise of others. Few however succeed alone or straight out of
university and/or college. Most spend time in successful companies or partner with others to
bring expertise to a new business.
=> Luck: Luck also plays a role in the success of some firms.
Reasons for Failure:
=> Managerial Incompetence or Inexperience: Some entrepreneurs put their faith in common
sense, overestimate their own managerial skills and believe that hard work alone ensures success.
If managers don’t know how to make basic business decisions or don’t understand basic
management principles, they aren’t likely to succeed in the long run.
=> Neglect: Some entrepreneurs try to launch ventures in their spare time and others devote only
a limited amount of time to new businesses. However starting a new business demands a large
amount of time commitment.
=> Weak Control System: Effective control systems keep a business on track and alert managers
to potential trouble. If your control systems don’t signal impending problems, you may be in
serious trouble before you spot more obvious difficulties.
=> Insufficient control: Some entrepreneurs are overly optimistic about how soon they’ll start
earning profits. In most cases, it takes months or even years.
Chapter 4: Understanding Legal forms of Business Orientation
=> a business owned and operated by one person Advantages of a Sole Proprietorship:
- freedom is considered to be the most important benefit of a sole proprietorship. Sole proprietors
answer to no one but themselves since they don’t share ownership.
- it is also easy to form.
- tax benefits are another attractive feature since the business and the proprietor are legally one
and the same.
Disadvantages of a Sole Proprietorship:
- unlimited liability is personal liability for all debts of the businesses.
- personally liable (responsible) for all debts incurred by the business
- if the business fails to generates enough cash, bills must be paid out of the owner’s pockets.
- another disadvantage is lack of continuity since the business legally dissolves if the owner dies.
- it is also dependent on the resources of one person whose managerial and financial limitations
may constrain the business.
- it is also harder to borrow money to start up or expand, as bankers fear that they might not be
able to recover the money.
=> a form of organization established when two or more persons agree to combine their
financial, management and technical abilities for the purpose of operating a business for profit.
=> general partnership: a type of partnership in which all partners are jointly liable for the
obligations of the business.
=> limited partnership: a type of partnership with at least one general partner (who has
unlimited liability) and one or more limited partners. The limited partners cannot participate in
the day-to-day management of the business or they risk the loss of their limited liability status.
=> general partners: partners who are actively involved in managing the firm and have
=> limited partners: partners who don’t participate actively in the business and whose liability
is limited to the amount they invested in the partnership.
Advantages of a Partnership:
- the ability to grow by adding talent and money
- somewhat easier to borrow funds than sole proprietorship
- inviting new partners is accomplished by having them invest money
- simple to organize, but are dependent on an agreement of some sort (oral, written or even
Disadvantages of a Partnership:
- unlimited liability since by law, each partner may be held personally liable for all debts
incurred in the name of the partnerships.
- if any partner incurs a debt, even if other partners know nothing about it, they are all liable if
the offending partner held responsible pays up.
-related drawback is difficulty of transferring ownership.
- no guidance in resolving conflicts Corporations
=> business that is a separate legal entity that is liable for its own debts and whose owner’s
liability is limited to their investment.
=> shareholders: persons who owns share in a corporation.
=> board of directors: a group of individuals elected by a firm’s shareholders and charged with
overseeing, and taking legal action responsibility for the corporation’s actions.
=> inside directors: members of a corporation’s board of directors who are also full-time
employees of the corporations.
=> outside directors: members of a corporation’s board of directors who are not employees of the
=> chief executive officer: the person responsible for the firm’s overall performance.
Types of Corporations:
=> public corporation: a business whose shares are widely held and available for sale to the
=> private corporation: a business whose shares are held by a small group of individuals and is
not usually available for the general public.
=> initial public offering (IPO): sale of shares in a company for the first time to the general
=> income trust: the income trust structure involves corporations distributing all or most of their
earnings to investors and thereby reduces the corporation’s income tax liability.
=> shares: a share of ownership in a corporation.
Advantages of a Corporation:
- limited liability, since the liability of the investors is limited to how much they have invested in
- continuity, since the corporation has a legal life independent of its founders, it can exist, in a
- increased chances of making money, by selling shares, and expanding the number of investors,
and the amount of available funds.
Disadvantages of a Corporation:
- cost is always high in order to set up a corporation
- also require legal help in meeting government regulations, due to far heavier regulations Chapter 5: Understanding International Business
=> globalization: the integration of markets globally
=> imports: products that are made or grown abroad and sold in Canada
=> exports: products made or grown in Canada that are sold abroad.
=> per capita income: the average income per person of a country
The Major World Marketplace:
- the contemporary world economy revolves around three major market-places: NorthAmerica,
Europe and Asia-Pacific.
- high income countries are countries with per capita income greater than US $10,065. The list
includes Canada, the U.S, most countries in Europe,Australia, Japan, South Korea, Kuwait, the
UnitedArab Emirates, Israel, Singapore, Hong Kong and Taiwan.
- upper-middle income countries are those with per capita between US $3255 and US $10, 065,
include the Czech Slovakia, Greece, Hungary, Poland, Turkey, most countries comprising the
former Soviet Bloc, Mexico,Argentina and SouthAfrica
- low middle income countries are those with per capita between U.S $825 and U.S $3255.
Among the countries in this group are Colombia, Guatemala, Samoa, and Thailand. Some of
these countries such as China and India possess high populations and are seen as potentially
attractive markets for international business.
- low income countries (called developing countries) are those with annual per-capita income of
less than US $825. Due to low literary rates, weak infrastructures, unstable governments and
related problems, these countries are less attractive to international businesses. For example, the
nation of Somalia is plagued by drought, civil war and starvation, and plays virtually no role in
the world economy.
Forms of Comparative Advantage
=> absolute advantage: a nation’s ability to produce something more cheaply or better than any
=> comparative advantage: a nation’s ability to produce some products better or more cheaply than it can others.
=> international competitiveness: the ability of a country to generate more wealth than its
competitors in world market.
- a country will be inclined to engage in international trade when factor conditions demand
conditions related to and supporting industries and strategies/structures/rivalries are favourable.
It is derived from four conditions.
- factor conditions are the factors of production identified in Chapter 1.
- demand conditions reflect a large domestic consumer base that promotes strong demand for
- related and supporting industries include strong local or regional suppliers and/or customers.
- strategies, structures and rivalries refer to firms and industries that stress cost reduction, product
quality, higher productivity and innovative new products.
=> exchange rates: the rate at which the currency of one nation can be exchanged for that of
=> euro: a common currency shared among most of the members of the European Union.
Exchange rates and competition:
- companies that conduct international operations must watch exchange rate fluctuations closely
because these changes affect overseas demand for their product and can be a major factor in
- in general, when the value of a country’s currency rate rises (becomes stronger), companies
based there find it harder to export products to foreign markets and easier for foreign markets to
enter local markets.
- it also makes it more cost-efficient for domestic companies to move production operations to
lower cost sites in foreign countries.
- the value of the country’s currency declines (becomes weaker), the opposite reaction occurs.
- as the value of a country’s currency falls, its balance of trade should improve because domestic
companies should experience a boost in exports.
- there should also be a corresponding decrease in the incentives for foreign companies to ship
products into the domestic market.
International Business Management