COMMERCE 1E03 Chapter Notes - Chapter 3: Foreign Direct Investment, Contract Manufacturer, Joint Venture
3 May 2018
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Chapter 3Competing in Global Markets
Global Competitiveness touches us all
o The economic welfare of our nation is significantly affected by the degree to which those
in other nations buy our products, invest in our country and lend us funds as we require
them
o When we sell products to other nations, jobs are created and incomes are earned. When
investment comes to Canada, businesses expand and improve, technology is developed
applied, and jobs can be created (imports and exports)
o Our ability to borrow and the interest rate we will have to pay will depend on the
confidence foreign lenders have in our economy
LO1: The Dynamic Global Market
o Globalization is the development of an increasingly integrated global economy marked
especially by free trade, free flow of Capital and the tapping of cheaper foreign labour
markets
o Canadian companies both large and small continuously look for opportunities to grow
their businesses
o Companies continuously review their global operations to ensure that they are operating
at a profit
o The global market is truly dynamic, and progressive companies continuously scan the
business environment to ensure that they take advantage of the opportunities and
minimize the impact of threats
Exporting: Selling products to another country
Importing: Buying products from another country
o As competition in global markets increases, the demand for students with training in
global businesses is almost certain to grow.
• BRIC : Brazil, Russia, India and China
Why Trade with other Nations
o No country can produce all the goods its population wants and needs
Free trade : is the movements of goods and services among nations without political of economic
barriers
o Pros
• Global Market contains more than 7 billion potential customers for goods and
services
• Productivity improves when countries produce goods and services in which they
have a comparative advantage
• Global competition and less-costly imports keep prices down, so inflation does
not curtail economic growth
o Cons
• Domestic workers can lose their job because of imports or production shifts
• Workers may be forced to accept pay cuts
• Movement of operation overseas due to intense competitive pressure
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The Theories of Comparative and Absolute Advantage
Comparative Advantage Theory : A theory that states that a country should sell to other countries
those products that it produces most effectively and efficiently and buy from other countries
those products that it cannot produce as effectively or efficiently trade
o Ex. Canada has a comparative advantage in aluminum and other minerals
o this theory does not work so neatly because certain countries decide to produce their own
agriculture or industries
Absolute Advantage : The advantage that exists when a country has a monopoly of producing a
specific product or is able to produce it more efficiently that other countries
o Examples are rare as few countries are sole suppliers and/or changing economies wipe
out production advantages quickly
o Country has to be a monopoly or producing a specific product or is able to produce it
more efficiently than all other countries
LO2: Getting Involved in Global Trade
o Small businesses contribute between 25-41% of to Canada’s GDP and employ
approximately 7 million individuals
o Small businesses account for 90% of Canadian exporters
o Getting started Globally is based on observation, determination and risk
Importing Goods & Services
o These products are subject to compliance with certain conditions imposed by the federal
and sometimes, provincial governments, some of the conditions may include:
1. Is the article prohibited entry into Canada
2. Is the article allowed to be imported only under the authority of an import permit?
Ex. textiles, clothing, steel, wheat, barley, certain farm products
3. Is the article subject to some other federally-imposed condition? Ex. goods for
retail sale have to comply with labelling laws
4. Is the article subject to some privately-certified standard? Ex. all electrical
appliances & equipment must be certified by a recognized certification body
before they can be sold in Canada
5. Is there a provincial rule to comply with? Ex. imports of liquor, wine and beer
require prior authorization from the appropriate liquor commission
Exporting Goods & Services
o Exports alone account for 1/3 Canadian jobs
o Canadian g&s can be sold abroad directly as an export from a Canadian company or they
can be sold indirectly via a foreign-located subsidiary of a Canadian company
Measuring Global Trade
o Balance of Trade: is a nations ratio of exports to imports
o Trade Surplus: A favorable balance of trade; occurs when the value of a country’s
exports exceeds that of its imports
o Trade Deficit: An unfavorable balance of trade; occurs when the value of a country’s
imports exceeds that of its exports
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o Balance of payments: The difference between money coming into a country (from
exports) and money leaving a country (for imports) plus money flows from other factors
such as tourism, foreign aid, military expenditures and foreign investments
LO3: Strategies for Reaching Global Markets
o Strategies used to compete in global markets. Each strategy provides opportunities for
becoming involved in global markets, as well as specific commitments and risks
o 1. Licensing -A firm (the licensor) allows a foreign company (the licensee) to produce its
product in exchange for a fee (royalty)
o Advantages
▪ The firm can gain revenue that it would not have gained from home
market
▪ Foreign licensees must purchase start-up supplies, component materials
and consulting services from the licensing firms
▪ Licensors spend little or no money to produce and market their product;
from the licensees pockets
o Disadvantages
▪ Locked into contracts
▪ Licensee may break contract and begin to produce a similar product
o 2. Exporting- Manufacture product in domestic market and export it for sale in foreign
markets
o Determine if the following are imports or exports **Follow the money**
▪ Cdn. Taxi driver- foreign manager = export money entering the country
▪ Cdn. Vacations in Cuba = Imports Money is leaving the country
▪ Cdn. Produced TV shows is broadcasted England = Export money is
entering the country
▪ Cdn. Has camera repaired in Portugal = Imports Money is leaving the
country
o 3. Franchising- An arrangement whereby 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
o Popular domestically and internationally
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