Textbook Notes Detailed textbook notes, made for last minute exam cramming -- Missing only Ch. 10, 14, 15, and 17

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Accounting & Financial Management
AFM 131
Robert Sproule

Chapter 3: Competing in Global Markets Profile: Getting to know Lisa Oldman and Joy Rosen of Portfolio Entertainment Inc. - Export success -- strong relationships - Regularly keeping in touch with foreign clients and contacts - Up to date database to keep track of industry changes - Advertises in trade magazines -- meet new potential clients in international trade shows What is importing and exporting? - Importing -- buying goods and services from another country - Exporting -- selling goods and services to another country - Enhances quality of life for Canadians Why do nations trade with each other? - Not one country can produce all products wanted and needed by their people - Other nations who cannot produce products themselves look for ways to meet the needs of their people - Some nations have lots of natural resources but dont have a good background in technology -- ex. China - Some nations have the technological background but dont have the resources -- ex. Japan What is free trade? - Movement of goods and services among nations without political or economic obstruction - Pros: - Global market contains more than 6 billion potential customers - Productivity grows when countries produce when they have comparative advantage - Global competition and inexpensive imports keep prices low --no inflation - Inspires innovation for new products, keep firms competitive - Access to foreign investments -- interest rates low - Cons: - Domestic workers lose jobs - Workers forced to work for less or else they may face unemployment - Moving operations oversea causes competitive pressure - Domestic companies lose comparative advantage when competitors outsource What is comparative advantage? What is absolute advantage? - Comparative advantage -- sell to other countries products that it produces most effectively and efficiently and buy those that it cannot produce as effectively and efficiently - Absolute advantage -- has ability to produce particular good using fewer resources (lower cost) than another country What is used to measure effectiveness of global trade? - Balance of trade -- nations ratio of exports to imports - Favorable -- value of exports exceeds imports - Unfavorable balance of trade (trade deficit) -- value of imports exceeds exports - Balance of payments -- difference between money coming into a country from exports and money leaving country for imports, plus money flows coming into and out of country like tourism - Favorable -- more money flowing into country than flowing out of country Why are we so dependent on the United States? - Automotive Products Trade Agreement (1965) - North American Free Trade Agreement (1994) - 73% exports and 69% imports to and from the United States What are the key strategies used for reaching global markets? - Exporting - Establish relationship with foreign trading partners -- ask export-trading companies to establish - Export-trading companies matches buyers and sellers -- deals with foreign customs offices, documentation requirements... - Licensing - Firm (licensor) allows foreign company (licensee) to produce its product in exchange for fee (royalty) - Usually need to help set up production process - Provide aid in distribution, promotion, and consulting - Beneficial -- gain additional revenue, purchase start-up materials, licensors spend little or no money in producing and marketing their products - Franchising - Variation of licensing -- arrangement whereby someone with good idea for business sells rights to use business name and sell product to others in given territory (ex. Canadian Tire) - Need to adapt to country they serve -- preferences and cultural differences need to be considered - Contract manufacturing - Involves foreign companys production of private-label goods to which domestic company then attaches its own brand name or trademark - Ex. Dell is in contract with manufacturer in Taiwan and after puts their name on it - Allows experimentation in new market without heavy investments like setting up a manufacturing plant - Creating international joint ventures - Partnership in which two or more companies join to undertake a major project or to form a new company - Benefits -- shared technology, risk, marketing, management expertise, knowledge of local market; entry into markets where foreign companies are often not allowed - Drawbacks -- partner leaves after learning technology and practice; may become to large and inflexible - Strategic alliances - Long-term partnership between two or more companies established to help each company build competitive market advantages - Benefits -- access to markets, capital, technical expertise; link with firms of all sizes easily - Engaging in foreign investments - Buying permanent property and businesses in foreign nations - Benefits -- transfer of knowledge, technology and skills, increased trade related to investment - Contribute to productivity growth and competitiveness - Foreign subsidiary -- company that is owned in foreign country by another company (parent company) - Benefits -- company maintains complete control over any technology or expertise it possesses - Drawback -- parent company commits lots of funds and technology within foreign boundaries - Expropriation -- foreign government takeover firms assets What is a multinational organization? - Organization tat manufactures and markets products in many different countries - Considered to be multinational only if firms have manufacturing capacity or some other physical presence in different nations What factors affect trades in global markets? - Sociocultural forces - Culture -- set of values, beliefs, rules, and institutions held by a specific group of people - Ethnocentricity -- attitude that ones own culture is superior to all others - Different ways of conducting business -- ex. Canadians would say no whereas Japanese would say maybe instead of saying no directly - Religion has influence too - Never assume that what works in one country will work in another - Economic forces - The U.S. Dollar is considered to be stable and dominant - Exchange rate -- value of one nations currency relative to currencies of other countries - High value of dollar -- dollar would be traded for more foreign currency than normal, cheaper to buy - Low value of dollar -- dollar is traded for less foreign currency than normal, more expensive - Floating exchange rates -- global financial markets operate under a system - Currency float according to supply and demand in global market for currency - Devaluation -- lowering the value of a nations currency relative to other currencies - Bartering -- exchange of merchandise for other merchandise or service for other service with no money involved - Countertrading -- complex form of bartering in which several countries may be involved, each trading goods for goods or services for services - Legal and regulatory forces - In Canada -- federal, provincial, and municipal laws and regulations affect business practices heavily - In global markets -- no central system of law exists - Organization for Economic Co-operation and Development fight against corruption and bribery in foreign markets - Know local people -- can help you with connections, laws and regulations - Technological forces - Technological constraints make it difficult given nature of exportable product (ex. Canada uses 3 legged-plugs whereas China uses 2 legged-plugs) What is trade protectionism? - Greater barrier -- trade protectionism - The use of government regulations to limit the import of goods and services - Allows domestic producers to survive and grow -- producing more jobs - Dumping -- practice of selling products in foreign country at lower prices than those charged in producing country - Benefits foreign firms -- generate more sales by charger lower prices - Domestic producers do not benefit from this - Mercantilism -- economic principle that was for a nation to sell more goods to other nations than it bought from them, have more favorable balance of trade - Due to this, tariffs were introduced -- tax imposed on imports What are the two types of tariffs? - Protective tariff -- designed to raise the retail price of imported products so that domestic products will be more competitively priced - Revenue tariff -- designed to raise money for government
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