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York University
Administrative Studies
ADMS 1000
Peter Modir

Adms1000 Chapter 6 Globalization: process involving the integration of world economies, process that is expanding the degree and forms of cross border transactions, growth in direct foreign investment in regions across the world, shift towards increasing economic interdependence Pull factors: reasons a business would gain from entering the international context  Potential for sales growth: potential for increased sales, reducing the negative effects of domestic downturns in demand for the businesses’ products of service ( i.e. Avon faced declining sales because more women started working away from home so their marketing channel (door to door) sales failed)  Obtaining needed resources: businesses engage in global business activity in order to obtain resources that are either unavailable or too costly within the domestic border or achieve higher rates of return on their investments largely due to lower labour costs  Reduce trade barriers & increased democracy Push factors: forces that acts upon all businesses to create an environment where competing successfully means competing globally  The force of competition: domestic economies are being filled with foreign competitors so business may be forced to go global or some business go global in response to competitor’s actions. Also, business may go global after domestic competitors go global. First mover advantage: underscores the benefits of being among the first to establish strong positions in important world markets  Shift toward democracy: the shift towards democracy among many societies that were formerly economically and politically repressed has contributed to the creation of new market opportunities, for example there have been a great interest in foreign investment in china since its move towards privatization ( reduction in government ownership)  Reduction in trade barriers: most powerful source of influence encouraging increased international business is the reduction in trade and investment restrictions ( i.e. NAFTA)  Improvement in technology: innovations in information technology and advances in transportation have made it increasingly easy to transfer information, services, products, capital and human resources around the world. Electronic commerce or e-commerce is free from government control and this flexibility has contributed to virtual global organization. Virtual organizations exists at global level where geographical source of products or services and location of workforce are unimportant Channels of global business activity  Exporting and importing: selling our goods or services to other countries or purchasing good or services from foreign countries for resale to Canadians. service export or import of service such as banking, insurance or management services which can be performed at an international level. Another type of service export or import can involve the use of a company’s assets, including things like patents, trademarks, copyrights or expertise.( from 2000 to 2008 Canada went from net exporter of auto and parts to net importer of autos and parts and oil and gas replaced auto and parts)  Outsourcing/Offshoring: outsourcing involves hiring external organizations to conduct work in certain functions of the company for example payroll, accounting and legal work can be assigned to outsourced staff, the organization will retain its core functions. I.e. Nike’s footwear are produced by other developing countries and they focus on marketing side of the business. Countries can be contracted for the production of finished goods or component parts and these good or parts can be imported to home country or to other countries for further assembly or sale. Companies outsource because they enjoy cost savings on application development and gain access to staff with specialize skills that they lack internally, also outsourcing firms offer quality results and fast. The cons of outsourcing are workers in home country get laid off, more higher paying jobs are lost. Some people say that outsourcing is good because offshoring is a step in the direction of global justice because why should rich countries have all the good jobs  Licensing and Franchising arrangements: licensing agreement is an arrangement whereby the owner of the product or process is paid a fee or royalty from another company in return for granting permission to produce or distribute the product or process. Companies that don’t wish to set up actual production or marketing operations overseas can let the foreign business conduct these activities and simply collect royalties. Licensing and franchising are relatively lower risk forms of global business. Franchising involves drafting a contract between a supplier (franchiser) and a dealer (franchisee) that specifies how the suppliers’ product or service will be sold.  Foreign direct investment (FDI): FDI involves the purchase of physical assets or an amount of ownership in the company from another country in order to gain a measure of management control. A direct investment can be done through acquisition of an already existing business in the host country or through a start-up build from scratch. Why would business wish to engage in FDI? Controlling companies can obtain access to a larger market or needed resources. Earlier in the process of globalization, FDI was a substitute t trade; companies would directly invest in countries where they need to secure their source of raw material or to manufacture their products inside in domestic market and thereby avoid tariffs or other import barriers. These days, one-third of trade is conducted between members of organization (parent company and its subsidiary). For example, foreign subsidiary may require resources or supplies from the home country and will import them. Although FDI increases in a country, employment level does not necessarily rises.  Joint ventures, strategic alliances: a joint venture (or strategic network) involves an arrangement between two or more companies from different countries to produce a product or service together or to collaborate in the research, development or marketing of this product or service. These organizations develop an arrangement whereby they share managerial control over a specific venture such as seeking to develop new technology, gaining access to new marker etc. strategic alliances aim to: extend or enhance competencies of the businesses involved, obtain access to expertise of another organization and generate new market opportunities for all parties involved. Joint ventures largely fail due to inability of partners to find a proper fit with regard to their approaches and managerial style. A typical arrangement between MNC and a local partner facilitates MNC’s quick entry into new foreign market.  Mergers and acquisitions: a Canadian owned company could merge with foreign owned company and create a new jointly owned enterprise that operates in at least two countries. Factors that generate the drive to merge may include: goal of obtaining new markets in the business and effort to obtain new knowledge and expertise in an industry as well as achieve economies of scale (higher output lowers the cost per unit).  Establishment of subsidiaries: a business may choose to maintain total control of its product or services by either establishing a wholly owned subsidiary or by purchasing an existing firm in the host country. These acquisitions allow efficient entry into market with already known products and distributing networks. Why establish subsidiary or acquire firms? If foreign country is a high source of sales for the enterprise, it makes sense to establish a presence in that country in order to be more responsive to local consumer needs. Beside other risks there is much more stake when company has invested in a wholly owned subsidiary: they have invested time, effort and expense to create this operation. Also, subsidiary may face the threat of political instability or adverse environments. Multinational corporations (MNCs): a global business that engages directly in some form of international business activity including such activities as exporting, importing or international production or a business that have direct investments in at least two different countries. MNCs are business enterprises that control assets, factories etc. operated either as branch offices or affiliates in 2 or more foreign countries. ( may also be referred as global companies or MNEs (enterprises because they can possess partnership status), 600 largest MNCs account for one quarter of the activity in world’s economies. Globally integrated companies: companies that integrate their geographically diverse operation through decisions centralized at head office. Thus, all areas might be given the task of developing and selling single global product or each region is contributing to the manufacturing of a certain product (I.e. Hp, Nestle) Multi-domestic company: company that permits its geographically diverse components to operate relatively autonomously (Coca-Cola, Ikea) Most MNCs have headquarters in developed counties (the home country) and maintain branch plant or subsidiaries in two or more foreign counties (the host countries). Canada’s well known MNCs are Beta Corp which operates footwear manufacturing and distribution facilities in 60 countries and Bombardier Inc. which has operations that include transportation equipment and aircraft production. MNCs can also be referred as borderless corporations or transnational corporations because they ignore international boundaries and set up business just about anywhere. These corporations do not claim any specific nationality but gear their planning and decision making to global market. Often, company has international ownership and international management. Borderless companies are very mobile across borders with regards to the transfer of financial capital, materials and other resources. Decision making is local and decentralized so their focus is in addressing the local needs of market within which they operate. Borderless companies are increasing due to reduction in trade barriers. Potential benefits of MNCs: economic development through employment, brings management expertise, introduces new technology and relevant training, encourages international trade, brings countries together, supports global co-operations Potential threats of MNCs: no commitment to host country, mobile profit (can be transferred to other countries), power held in home country such as R & D, possibility of monopolizing the host country. International trade: purchase, sale or exchange of good or services across countries. It has encouraged the development of free trade agreements. The logic of trade: each country can specialize or focus on producing goods or services on which it maintain an absolute advantage and simply trade with other countries to obtain goods or services that are requires but not produces by domestic suppliers. Mercantilism: trade theory in which a country’s wealth is maximize through trade surplus. Government would intervene to ensure trade surplus by imposing tariffs, quotas or by banning some foreign imported commodities. Government would also subsidize domestic industries in order to encourage growth in their exports. Also, mercantilist nations had colonies from whom they get inexpensive raw materials and then sell them final goods for very high prices. (Japan is considered mercantilism nation) Trade protectionism: protecting a country’s domestic economy and businesses through restrictions on imports. Why might imports be a threat? Low-priced foreidng goods could compete with good already produced here and can take business away from domestic suppliers which could result in loss of sales and jobs for domestic industries which cannot compete with low priced foreign imports. Also, a country can have a negative balance of trade or trade deficit which often results in more money flowing out of the county than flowing in. Tariff: a tax placed on goods entering a country. These tariffs raise the price of imported products in order to ensure that they are not less expensive than domestically produces goods. Thus, domestic consumers buy less of these foreign imports because they are more expensive. Quota: limit the amount of products that can be imported so domestic producers retain an adequate share of consumer demand for this product. Problems with mercantilism and protectionism: mercantilism assumes that trade involves a zero- sum gain that is world’s wealth is fixed so there is drive to minimize imports and maximize exports but this creates a one way street of trade because mercantilism countries aim to maximize the good/services it sells to other countries yet it expects to restrict the goods/services that the same country attempts to sell to it. In the past, colonies that receive little payment for their raw materials exports could not accumulate enough wealth to afford the high priced imports that the mercantilists offered. Promoting international trade => General agreement on tariffs and trade (GATT in 1948): agreement among 100 countries to reduce the level of tariffs in a worldwide basis) World trade organization (WTO in 1955): develop and administer agreed upon rules of world trade and discourage protectionist laws that restrict international trade International monetary funds (IMF): established after world war 2 to provide short term assistance in form of low interest loans to counties conducting international trade and in need to financial assistance The World Bank: established after World War 2 to provide long term loans to countries for economic development projects, borrow funds from developed countries and lend to underdeveloped countries nations with low interest. Regional economic integration: means bringing different countries closer together by the reduction or elimination of obstacles to the international movement of capital, labour and products and services, in order to maximize the benefits of international; trade with regards to greater availability of products, lower prices and increased efficiency. Regional trading bloc: a collection of countries within such an integrated region. Different levels of regional integration=> 1. Free trade area: involves the removal of tariffs and non-tariff trade barriers such as subsidy and quotas in international trade in goods and services among the members’ countries. Greater member independence with regards to how it will deal with non-members. Examples of this form include NAFTA and APEC 2. Custom union: similar to free trade area but with less member autonomy with regard to such issues as how it chooses to deal with non-members, common trade policy regarding non- members. Examples of this form include MERCOSUR custom union which is a major trade group in South America 3. Common market: build on previous two forms of integration but with free flow of capital and labour across member countries, more difficult to achieve. Example include European Union 4. Economic union: builds on previous three forms of integration but involves a coordination of economic policies among the member countries such as harmonization of fiscal policy, monetary and tax policies and includes common currency. Member countries have less autonomy. Example include European Union European Union: common market with a single currency, a free flow of money, people, product and services within it member countries (27 countries). One of Canada’s most important trading partners (5 of Canada’s top ten export markets are in EU). Common market: group of countries who remove all tariffs and non-tariff barriers to trade Asian Trade bloc: Singapore, Hong Kong, Taiwan, South Korea and japan ASEAN (the association of south East Asian nations: established in 1967, members include Singapore, Malaysia, Indonesia, Thailand etc. APEC (Asia pacific economic corporation): formed in 1989, include Canada, US, japan, and china. It’s important for Canada, because it expands trade opportunities. NAFTA: establishes in 1994, aim to reduce and eliminate tariff barriers on almost all goods and service between Canada, US and Mexico, further facilitating cross country investments, rules regarding government subsidies, common rules for health and safety and environment, aimed to produce a common market among the members NAFTA’s impact on trade: Pros: increase level of trade between Canada and the US, transform all three economies Cons: trade important largely due to Canada’s low dollar, while the quantity of Canada-US trade has improved, but Canada is still exporting raw materials, due to NAFTA we are too dependent on trade with US and we should expand trade with other nations NAFTA’s impact on employment and business Pros: foreign competition forces domestic business to improve their operations and their products and services and abort inefficient operations and focus on commodities and services in which they have comparative advantage Cons: many Canadian manufacturers cannot compete with us imports and go out of business, jobs are lost due to US companies shutting down subsidiaries in Canada and importing goods to Canada, many manufacturing jobs are lost to Mexico because of cheap labour and low priced goods in Mexico NAFTA’s impact on Canadian culture: Pros: Canadian cultural exports exceed $4.5 billion and more royalty money is coming into Canada Cons: may destroy Canadian culture, and Canada may become subsidiary of US NAFTA’s impact on competiveness and Canadian consumers: Pros: business become more competitive, consumers have more choices and low prices, Canadian companies can get resources from US for cheap and forces Canada to recognize and manage relationships with US Cons: no increase in productivity and no reduction in productivity gap between Canada and US Chapter 7 Business enterprise system: what goods and services are produced and distributed to society and how these goods and services are produced and distributes to society Capitalism economy’s fundamental principles: 1. Right of the individual: individuals have right to pursue their own self-interest, which includes seeking to make profit from business enterprises. In Canada there are limits placed on individual’s right to pursue their self-interest i.e. government guidelines regarding job candidate selection criteria 2. Rights of private property: individuals have right to own land, labour and capital. In Canada, taxation is an approach to redistribute the wealth among all citizens. Natural resources in Canada are still retained by governments 3. Competition: sufficient competition among business enterprises ensures that business provides goods and services required by society at fair cost 4. The role of government: minimal interference in the business enterprise system Government as guardian of society Collecting tax from businesses: two forms of tax: revenue tax (individual tax, corporate income tax, property tax and sales tax), regulatory tax or restrictive tax (excise tax on tobacco and alcohol and tariffs and duties). Revenue tax are collected in order to help fund government services and programs Acting as business owner: establishes crown corporations. Why establish crown corporations? 1. to implant public policy that includes protecting or safeguarding national interests: such as air Canada which helps facilitate government policy in the area of cross-Canada transportation. 2. To protect industries deemed to be vital to the economy: such as Canadian radio broadcasting which is exposed to US 3. To provide special services that could not be otherwise be made available by private business: such as Canada post 4. To nationalize industries that were considered monopolies including the generation and distributing of electricity: companies did not have enough capital to do business but government did Regulating the business sector: imposing constraints that are intended to modify economic behaviour in private sector, ie. Energy, health and safety, food, consumer protection Imperfect competition: occurs when there may be insufficient competition to ensure optimal goods and services. Government intervention in order to ensure the best and most efficient use of resources to generate optimal mix products and services for consumers at fair prices (i.e. regulations on used cars at retailer shops, avoiding monopolies) The public interest: central objective of government regulations to protect the public interest, limitation imposed on business such as restrictions on foreign ownership in telecommunication industry and fair pricing Government as guardian to the private business sector Government assistance to private business: incentives programs to encourage managers to conduct business in a manner desired by the government such as locating in underdeveloped area in order to create new employment opportunities. Bailouts: government assistance given to prevent an organization or industry from financial collapse. Bailouts in form of one time financial assistance or a loan or loan guarantee. Opponents of bailouts: government should not bailout companies because if the companies are not doing well, it should be allowed to fail, bailout destroy jobs overall. The bailout in one industry may lead other industries to request bailouts. Supporters of bailouts: bailouts are necessary when there are up and downs in economy, bailouts protect jobs in bad times. Subsidies: government assistance by with cash payments, low-interest loans or reduced taxes in order to help domestic industries compete foreign businesses whether in home country or through exports. Pros: helps to protect and provide Canadian jobs, ensure provision o
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