AFM131 Study Guide - Midterm Guide: Canadian Confederation, Mixed Economy, Financial Accounting
SchoolUniversity of Waterloo
DepartmentAccounting & Financial Management
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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
·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
b. Unfavourable balance of trade/trade deficit - When the value of a country’s imports exceeds its
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
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Canada’s Priority Markets
·Emerging economies are enjoying high growth rates, rapid increases in their living standards, and a rising
·These emerging economies are the results of new ways of communicating, organizing, and working due to
Strategies For Reaching Global Markets
·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,
·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 – 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 – A foreign country’s production of private-label goods to which a domestic
company then attaches its brand name or trademark (also called outsourcing)
oEnables a company to experiment in a new market without incurring heavy start-up costs such as a
oIf 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 –
oShared technology and risk
oShared marketing and management expertise
oEntry into markets where foreign companies are often not allowed unless goods are produced
oShared 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
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Foreign Direct Investment
·Foreign Direct Investment – buying permanent property and businesses in foreign nations
oProvides benefits to Canadian firms through the transfer of knowledge,
technology and skills, and increased trade related to investment.
oCompared to how much money foreign creditors owe to a nation and
the value of what a nation owns in other countries.
oThe 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
oOperate 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
oTypically extremely large corporations, but not all large firms involved
in global business are multinationals.
oOnly firms that have “manufacturing capacity” or some other physical
presence in a different nations can truly be called multinational.
·The word culture refers to the set of values, beliefs, rules, and institutions held by a specific group of
·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
·An attitude that one’s own culture is superior to all others is known as ethnocentricity
·Successful companies develop goods and services accordingly
·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
oThis 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
oDue 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
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