AFM 131 Midterm#1 Review.doc

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Accounting & Financial Management
AFM 131
Robert Sproule

Unit 1 Globalization The Dynamic Global Market: · Major Canadian companies cite global expansion as a link to its future growth · Less than 74% of the world’s population lives in developing areas where technology, education, and per capita income still lags behind developed nations (ex. Canada) Exporting – Selling goods and services to another country Importing – Buying goods and services from another country Why Trade with Other Nations? · No country can produce all of the products that its people want and need · Global trade enables a nation to produce what is most capable of producing and to buy what it needs from others in a mutually beneficial exchange relationship Free Trade – Movement of goods and services among nations without political or economic obstruction The Theories of Comparative and Absolute Advantage · Global trade is the exchange of goods and services across national borders Comparative Advantage Theory – A country should sell to other countries those products that it produces most effectively and efficiently, and buy from countries those products that it cannot produce as effectively or efficiently Absolute Advantage – When a country has the ability to produce a particular good or service using fewer resources than another country Getting Involved in Global Trade • Real Job potential is not in large firms (Sony, IBM), but rather small businesses. • Small businesses account for 48 percent of private labour face and 85 percent of exports • With government agency support, small businesses are becoming more involved in Global Markets Importing Goods and Services • Merchandise Trade = machinery, equipment, industrial goods and materials represent a large portion of imports. Exporting Goods and Services · You can sell just about any good or service that is used in Canada to other countries · Less competition for producers in global markets than locally · Canada produces vast quantities of products to export regardless of its population · Trade with other countries enhances the quality of life for Canadians and contributes to our countries economic well-being · Services can be exported · Selling in global markets is not easy · Profitable but can be very difficult Measuring Global Trade Key Indicators – 1. The balance of trade – a nations ratio of exports to imports a. Favourable balance of trade/trade surplus – When the value of a country’s exports exceeds that of its imports b. Unfavourable balance of trade/trade deficit - When the value of a country’s imports exceeds its exports c. Canada has favourable balance of trade,(agricultural and fishing products, forestry, and energy products) have posted trade surpluses and remain to today. 2. The balance of payments - the difference between money coming into a country (from exports) and the money leaving the country (from imports) PLUS money flows coming into or leaving a country (tourism, military expenditures, foreign investment). Goal: have more money flowing into the country than flowing out of the country Canada’s Priority Markets · Emerging economies are enjoying high growth rates, rapid increases in their living standards, and a rising global prominence · These emerging economies are the results of new ways of communicating, organizing, and working due to technological advances Strategies For Reaching Global Markets Exporting · Success in exporting often leads to licensing with a foreign company to produce the product locally to better serve the local market · First export sales occur as a result of unsolicited orders received · An export-trading company not only matches buyers and sellers from different countries but also provides needed services to ease the process of entering global markets (dealing with foreign offices, documentation) Licencing · A firm may decide to compete in a global market by licensing the right to manufacture its product or use its trademark to a foreign company · Through licensing, an organization can gain additional revenues from a product that it normally would not have generated in its home market · Foreign licenses must often purchase start-up supplies, component materials, and consulting services from the licensing firm · Licensors spend little to no money to produce and market their products Franchising · Franchising – an arrangement where someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory. · Variation of licensing · Franchise units - Canadian Tire, Molly Maid, Boston Pizza Contract Manufacturing · Contract Manufacturing – A foreign country’s production of private-label goods to which a domestic company then attaches its brand name or trademark (also called outsourcing) o Enables a company to experiment in a new market without incurring heavy start-up costs such as a manufacturing plant o If brand name becomes success, the company has penetrated a new market with low risk International Joint Ventures and Strategic Alliances · Joint Venture – A partnership where 2 or more companies join to form a new company - Can be mandated by governments Benefits of Joint Venture – o Shared technology and risk o Shared marketing and management expertise o Entry into markets where foreign companies are often not allowed unless goods are produced locally o Shared knowledge of the local market, including local customers, government connections, access to local skilled labour and supplies, and awareness of domestic laws and regulations. · Strategic Alliance – A long-term partnership between 2 or more companies established to help each company build competitive market advantages - They do not involve sharing costs, risks, management, or even profits like Joint ventures do Foreign Direct Investment · Foreign Direct Investment – buying permanent property and businesses in foreign nations o Provides benefits to Canadian firms through the transfer of knowledge, technology and skills, and increased trade related to investment. o Compared to how much money foreign creditors owe to a nation and the value of what a nation owns in other countries. o The higher the foreign direct investment of a nation, the more the other nations perceive that country as a strong economic leader · Foreign Subsidiary – A company owned in a foreign country by a parent company o Operate much like a domestic firm, with production, distribution, promotion, pricing, and other business functions under the control of the foreign subsidiarys management. · Expropriation – When the foreign government takes over a firms assets · Multinational Corporation – An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management o Typically extremely large corporations, but not all large firms involved in global business are multinationals. o Only firms that have “manufacturing capacity” or some other physical presence in a different nations can truly be called multinational. Sociocultural Forces · The word culture refers to the set of values, beliefs, rules, and institutions held by a specific group of people · If you hope to get involved in global trade, its critical to be aware of the cultural differences among nations · Successful companies are those that can understand differences in cultures and religions and develop goods and services accordingly · Sociocultural differences is also important when managing employees · Religion is an important part of any society’s culture and can have a significant impact on business operations · An attitude that one’s own culture is superior to all others is known as ethnocentricity · Successful companies develop goods and services accordingly Economic Forces · Global financial markets do not have a worldwide currency · Exchange Rate – The value of one nation’s currency relative to the currencies of other countries · A high value of the dollar means that a dollar would be traded for more foreign currency than normal · A low value of the dollar means that a dollar is traded for less foreign currency than normal · Global financial markets operate under a system called floating exchange rates in which currencies “float” according to the supply and demand in the global market for currency o This supply and demand is created by global currency traders, who develop a market for a nation’s currency based on the perceived trade and investment potential of a company · Devaluation – Lowering the value of a nation’s currency relative to other currencies o Due to a nation’s weak currency, the only possibility of trade in many developing nation is through on of its oldest forms: Bartering, which is the exchange of merchandise for other merchandise or service for other service with no money involved. · Counter trading – A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services · Trading products for products helps businesses avoid financial problems and currency constraints · Legal and Regulatory Forces · Bribery is not considered legal in Canada · In Canada, federal, provincial, and municipal laws and regulations heavily affect business practises. · In global markets, no central system of law exists, so several groups of laws and regulations apply · Canadian businesses are required to follow Canadian laws and regulations in conducting business globally. · To be successful in global markets, its useful to contact local business people in the host countries and gain their co-operation and sponsorship o Local business people are familiar with laws and regulations that could have an important impact on a foreign firms business in their country · To be successful in global business, it’s often useful to contact local business people in the host countries and gain their co-operation and sponsorship Technological Forces · Important impact on a company’s ability to conduct business in global markets · May make it difficult given the nature of exportable products · Computers and internet usage are rare in developing countries which makes business difficult Trade Protectionism • Much greater barrier to global trade · Trade Protectionism – The use of government regulations to limit the import of goods and services · Supporters of this believe that it allows domestic producers to survive and grow, producing more jobs. · Those against it argue that it not only impedes global trade, but that it also adds millions of dollars to the price of products, costing consumers billions of dollars · Dumping – Selling products in a foreign country at lower prices than those charged in the producing country o Generates more sales by intentionally charging lower prices o Benefits foreign firms for it generates more sales by intentionally charging lower prices. o Benefits purchasers for they can buy products at a lower price o Usually leads to a lower share of the market (bad) · Tariff – A tax imposed on imports o Protective tariffs – (import taxes) are designed to raise the retail price of imported products so that domestic products will be more competitively prices. They are meant to save jobs for domestic workers and to keep industries from closing down entirely because of foreign competition o Revenue tariffs – are designed to raise money for the government and are commonly used by developing countries to help infant industries compete in global markets o Non-tariff Barriers - not as specific or formal as tariffs, import quotas, and embargoes but can be as detrimental. Other barriers include safety, health, and labelling standards. · Import Quota – Limits the number of products in certain categories that a nation can import · Embargo – Ban on the import or export of a certain product or the stopping of all trade with a particular country The GATT and the WTO · General Agreement on Tariffs and Trade (GATT) – Established an international forum for negotiating mutual reductions in trade restrictions o Countries agreed to negotiate to create monetary and trade agreements that facilitate the exchange of goods, services, ideas and cultural programs. · World Trade Organization (WTO) – Mediates future trade disputes o Legal and regulatory problems often impede trade expansion o Independent entity and its purpose is to oversee cross-border trade issues and global business practices among those nations The IMF and the World Bank · International Monetary Fund (IMF) – International bank supported by its members that usually makes short-terms loans to countries experiencing problems with their balance of trade. o Objectives: To promote exchange stability, maintain orderly exchange arrangements, avoid competitive currency depreciation, establish a multilateral system of payments, eliminate exchange restrictions, and create standby reserves o The IMF makes long-term loans at low interest rates to the worlds most destitute nations to help them strengthen their economies. · The World Bank aka International Bank for Reconstruction and Development – An autonomous United Nations agency that borrows money from the more prosperous countries and lends it to less-developed countries to develop their infrastructure Producers’ Cartels · Producers’ Cartels – Organizations of commodity producing countries that are formed to stabilize or increase prices to optimize overall profits in the long run Common Markets · Common Market – A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange among member countries. 2 examples are: o The North American Free Trade Agreement (NAFTA) - agreement that crated a free-trade area among Canada, The U.S, and Mexico. · NAFTA was driven by the desire of Mexico to have greater access to the US market. · The objectives of NAFTA were to: Eliminate trade barriers and facilitate cross-border movement of goods and services among the three countries Promote conditions of fair competition in this free-trade area Increase investment opportunities in the territories of the three nations Provide effective protection and enforcement of intellectual property rights (patents, copyrights) in each nations territory Establish a framework for further regional trade co-operation Improve working conditions in Canada · NAFTA was driven by the desire of Mexico to have greater access to the US market o The European Union (EU) - Group of 27 nations, located primarily in Europe. · The EU is the world’s biggest trading power and member nations see this economic integration as the major way to compete for global business. · Globally, The euro is certainly a worthy challenger to the U.S dollar’s dominance in global markets due to the economic strength and size of the EU. Chapter 4: Globalization HOW GOVERNMENT AFFECTS BUSINESS Summary - Six categories of ways the government affects businesses:  Crown Corporations (Hundreds of these companies, sometimes compete with for-profit businesses)  Laws and Regulations (Includes taxation and consumer protections and ranges to environmental controls, working conditions, and labour-management relations)  Taxation and Financial Policies (Taxes are collected by all levels of government- income taxes, GST, sales taxes, property taxes. Taxes are changed by the government to achieve certain goals  fiscal policy)  Government Expenditures (The government pays money out to Canadians. Businesses benefit when Canadians spend this money. These packages are provided by all levels of government to achieve incentives. These pay out includes tax reductions, grants, loans, and loan guarantees)  Purchasing Policies (The government is the biggest buyer of ordinary supplies, services and materials and so has a big effect on certain businesses and the economy based on their purchasing policies)  Services ( Include direct and indirect activities ex. Helping companies go global, bringing companies to Canada, training/retraining workforce, providing statistic services through Statistics Canada) GOVERNMENT INVOLVEMENT IN THE ECONOMY Key Terms National Policy: Government directive that placed high tariffs on imports from the United States to protect Canadian manufacturing, which had higher costs Summary - Canada has a mixed economy  Decisions for how resources are used by made by the government and the market - All countries’ governments are involved in the economy (but to different extents) - History behind Canada’s government’s involvement in economy  Canada became a country in 1867  Initially federal government had the power to “regulate trade and commerce”  After Western provinces joined, needed a way to connect the country  Trading was most in north to south patterns (most people lived by the US border)  US has a bigger population and was developing more quickly so provided goods Canada would not be able to get otherwise  Sir John A. Macdonald because of this developed National Policy (definition above)  Canadian government began to think about building a railroad to connect country CROWN CORPORATIONS Key Terms Crown Corporation: A company that is owned by the federal or provincial government Summary - Crown corporations are an important role in the Canadian government - Created to:  Provide services that were not being provided previously (ex. Air Canada)  Bail major industries out (ex. Canadian National Railway)  Provide services not previously available (ex. Bank of Canada)  Each province has a variety of crown corporations (usually own province’s electric companies) Financial Role of Two Special Provincial Crown Corporations Summary - Two special provincial crown corporations: Albert Heritage Savings Trust Funds and Caisse de depot et placement de Quebec (Quebec Deposit and Investment Fund) - Albert Heritage Savings Trust Funds  Makes decision that benefit Alberta  Resulted from economy prospering after oil boom (government used part of oil royalty revenue to start fund - Quebec Deposit and Investment Fund  Established to handle funds collected by Quebec Pension Plan (also handles other Quebec government funds and is used to guide economic development in Quebec)  One of largest pools of funds in North America The Role for Government Key Terms Privatization: The process of governments selling Crown Corporations Summary - Post 1990s, provincial and federal government have been trying to reduce the role of government in the economy - Former large corporations were sold and privatized( definition above) such as Teleglobe Canada, Air Canada, CNR - Regulated industries (ex. Airlines, oil and gas, and trucking) were partially and fully deregulated - Provincial governments also began to privatize and deregulate - Municipal governments are looking to also privatize sections like water systems, garbage collection and cleaning - Government agencies are always trying to lower costs and improve efficiency LAWS AND REGULATIONS Summary - Laws and regulations are created by politicians elected by Canadians - Political parties can have a great effect on the business environment - Some political parties think that the government should have more say in businesses while others believe that government intervention is best - The British North America, 1867 (BNA Act) gives the power to make laws - It created the Canadian Confederation and set the legal ground rules for Canada - 1982, BNA Act was entrenched into the new Constitution and became the Constitution Act, 1867 - Laws come from:  The Constitution  Precedents established by judges  Provincial and federal statues  Federal and provincial administrative agencies - Each province has a legislature to deal with local matters - Parliament in Ottawa makes laws for all of Canada - The Constitution outlines the powers exercised by the federal and provincial government though if there is conflict, federal powers prevail Federal Government Responsibilities Summary - The federal government is responsible for issues affecting citizens across Canada - While its primary responsibility is to ensure and support the country’s economic performance, other responsibilities include:  Trade regulations (Interprovincial and international)  Incorporation of federal companies  Taxation ( both direct and indirect)  The banking and monetary system  National defence  Unemployment  Immigration  Criminal law  Fisheries - The federal government also presides over industries like aeronautics, shipping, railways, telecommunications, and atomic energy - While there are trade agreements, governments can come up with new policies to create trade barriers - The federal government can lobby against these barriers, but other governments can also request the same of Canada - The Competition Bureau listens and sometimes reviews and investigates business and consumer complaints to ensure fair competition - Industry Canada administrates laws affecting businesses and consumers such as the Competition Act - Competition Act:  Ensures that the mergers of large corporations does not restrict competition  Ensures that fair competition exists among businesses  Covers laws concerning discriminatory pricing, price fixing, misleading advertising and the refusal to deal with certain companies  ex. 2008, Competition Bureau of Canada laid charges against 11 gas companies and 13 individuals associated with them for conspiring to fix prices in 4 Quebec municipalities  ex. Competition Bureau of Canada is reviewing a proposed search engine partnership between Yahoo and Google about concerns with rising costs for Canadian companies that advertise online Marketing Boards Key Terms Marketing Boards: Organizations that control the supply or pricing of certain agricultural products in Canada Summary - Marketing boards (definition above) often control trade - Meant to give stability to the economy in a usual sensitive area - Farmers are affected greatly by conditions that are unique to them and largely affect their business and food supply (ex. Weather and disease) - In Canada this greatly affected grain farmers as when export more wheat than consumed - These exports are affected by other grain exporting countries (ex. Australia, US, Argentina) and the demand of importers like China and Russia - In order for importers to import these goods, sometimes exporting governments grant them substantial loans with favourable conditions - As Canada is a major exporter of agricultural goods, Canada’s international markets have a huge impact on the economy - When farmers are doing good, the spend more (ex. buy new equipment) and even effect communities and transportation and when they suffer, other sectors are hurt as well - To help these unusual conditions, there are six government agencies set up to control wheat and barley, dairy products, and poultry (Canadian Wheat Board, Canadian Dairy Commission, Canadian Egg Marketing Agency, Chicken Farmers of Canada, Canadian Turkey Market Agency and Canadian Broiler Hatching Egg Marketing Agency) - All these agencies except for the Canadian Wheat Board control the amount of production for all the products underneath them by giving quotas and setting prices for their provinces - The Canadian System of Marketing Boards do not allow normal competitive conditions to operate in this field - Some think that it distorts the whole industry, while others think that raise Canadian consumer prices while others argue that other countries such as the US have their own systems that have the same effects) - If the World Trade Organization eliminates these trade barriers as it wants to, things will change drastically (ex. limited protection for domestic markets, reduced tariffs, etc.) and the market will have a greater impact on prices and production Provincial Government Responsibilities Summary - Each province has its own government and each territory is governed federally - Provincial governments are responsible for:  Regulation of provincial trade and commerce  Natural resources within their boundaries  Direct taxation for provincial purposes  Incorporation of provincial companies  Licensing for revenue purposes  The administration of justice  Health and social services  Municipal affairs  Property law  Labour law  Education - Both federal and provincial governments share costs of hospital insurance and Medicare - Technically, federal government is responsible for health care, the provinces must implement these policies and there must be cooperation between the two groups Education Summary - Both the federal and provincial governments run their own student loan programs - The federal government plans to phase out interest and other debt relief options for borrowers under the Canada Student Loans Program - Under the new program, the Repayment Assistance Plan (RAP) payments will be aimed at income and no payments on federal loans will be required for those who have a gross annual income of $20 000 or less - Those not eligible will be able to apply to extend their repayment period to reduce their monthly loans - Newfoundland and Labrador are also trying to improve their post-secondary education plans - They are the first province to eliminate interest on student loans and extending a long running freeze on tuition fees Municipal Government Responsibilities Summary - Municipal governments (cities, towns, villages, counties, districts, and metropolitan regions) are set up by the provincial legislatures - They government over the province they operate in - They play a role in consumer protection ex. Have rules and regulation for any establishments that serve food - There are other laws like these (called zoning laws) concerning noise, odours, signs, etc. that effect neighbourhoods - Certain zones are restricted to residences while other permit only quiet businesses to operate - Other zoning requirements included height restrictions for buildings, and how far building must be set from the road and speed limits set by municipal or provincial authorities - All businesses must obtain a municipal licence to operate so that they can be tracked by the appropriate department and it can be made sure that they are following regulations TAXATION AND FINANCIAL POLICIES Summary - Governments redistribute wealth through taxes - Revenue collected helps governments to discharge their legal obligations - This revenue is used to pay for public services ( ex. Fire, police and libraries) as well as paying debt and funding government operations and programs - Sin taxes are used to discourage people for buying certain products (ex. Alcohol and cigarettes) - Tax credits are an amount that can be deducted from a tax bill and are used to encourage businesses to hire new employees or buy new equipment - Taxes are charged from many sources - Income (personal and business), sales and property are bases for tax revenues Stabilizing the Economy through Fiscal Policy Key Terms Fiscal Policy: The federal government’s effort to keep the economy stable by increasing or decreasing taxes or government spending Deficit: Occurs when a government spends over and above the amount it gathers in taxes for a specific period of time (usually a fiscal year) Summary - The first part of fiscal policy (definition above) includes taxation - Higher taxes rate slow down the economy because the take money away from the private sector and sent to the government - High taxes discourage small business ownership because they decrease the profit that can be made - Low tax rates give the economy a boost - The government can use taxes to move the economy in a certain direction (Lower taxes stimulate economy, higher taxes cool it down) - Federal and provincial governments use fiscal policy to stimulate certain geographic and industrial areas (ex. They offer special tax credits to companies that open plants in high unemployment areas) - All companies that invest in certain activities considered desirable by the government receive tax credits to reduce income taxes paid - Many of these programs have been scaled back or eliminated because of budget constraints - The other half of fiscal policy is government spending - The government spends money in areas including social programs, highways, the environment, etc. - One way to lessen deficit (definition above) is to cut government spending - This is hard to do though because each year provinces and territories request increased transfer payments, funds for unexpected situations (ex. floods), and pressure from international bodies (ex. peacekeeping) The National Debt (Federal Debt) Key Terms National/Federal Debt: The accumulation of government surpluses and deficits over time Surplus: An excess of revenues over expenditures Summary - For many years the Canadian government has spent more than it has received in revenues - To decrease the federal debt, the Canadian government began to cut back on health care, education and welfare and lay off thousands of people, etc. - The reductions began Canada’s slow recovery - These cuts however inflicted hardships on many people (ex. more people seeking food) - A lower debt means that less money will have to go towards paying off the national debt and outstanding interest - By not having to pay as much towards these debts, they can put money towards other things such as social programs or lowering taxes - A lower debt also makes Canada a more attractive country to invest in - Employers like well-funded social programs because there is less chance of employees asking for an increase in benefits - A lower debt means that in time of crisis (ex. SARS) the government has more funds to help the crisis - Surpluses (definition above) results in a reduction in national debt - As debt decreases, annual interest rate also decreases The Federal Budget Key Terms Federal Budget: A comprehensive report that reveals government financial policies for the upcoming year Summary - Late February the federal financial minister releases the federal budget - Outlines the amount of revenue expected to be collected, changes in income taxes and other taxes, and whether a surplus of deficit is expected - Also answers questions about where money will be spent and whether taxes will increase or decrease - The budget is reviewed by businesses, consumers, and other countries - Reflects revenues, and expenditures that took place in the last year - Things outlined in the budget are not necessarily permanent; if a new political party comes into power, then it might choose to reverse the budget decisions and release its own - Provincial governments also have financial budgets Using Monetary Policy to Keep the Economy Growing Key Terms Monetary Policy: The management of the money supply and interest rates Summary - The Bank of Canada lends the federal government money to spend when it spends more money than it collects in taxes - The Bank of Canada administrates day to day monetary policy (definition above) - When the economy is booming the Bank of Canada raises interest rates to control inflation (money is more expensive to borrow; businesses borrow less and the economy slows down as people spend less over everything) - When the economy is bad, the Bank of Canada lowers interest rates to encourage business to borrow more and for the economy to improve - The Bank of Canada also control money supply - The more money made available to business people and others, the faster the economy grows - To slow the economy the Bank of Canada lowers the money supply The Subprime Mortgage Crisis Summary - Subprime mortgage loans are targeted at people who can’t qualify for normal mortgages - Usually their credit isn’t good enough or they do not have a credit history - Some of the mortgages were interest only loans and lower in cost because no principal was being paid down - These loans had very low rate initially but over time they began much higher and people could not afford to pay for it - When housing prices started to fall, they also could not sell the homes and the fallout lead to decreasing home sale and prices and rising foreclosure - This led to bailouts in the US, that hoped to stabilize the economy but did not - Bailouts followed in England, Germany, France and Spain - Canada did not have as high default rates as in the US, but had trouble borrowing money because of the situations in other countries - The credit squeeze made the stock market crash and fear rose of a global meltdown - The federal government took over $25 billion worth of bank held mortgages to ease the growing liquidity problems faced by the country’s financial institutions - To further stimulate the economy and encourage banks to continue lending money the Bank continue to lower rates GOVERNMENT EXPENDITURES Summary - Canadian governments provide billions of dollars to individuals (ex. Employment insurance, old age pension, welfare, workers’ compensation, etc.) - This gives Canadians more purchasing powers and creates an efficient market for businesses - When people spend money many Canadian employees and companies
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