Chapter 3 Notes.docx

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Department
Accounting & Financial Management
Course
AFM 131
Professor
Robert Sproule
Semester
Fall

Description
Competing in Global Markets 10/11/2013 7:44:00 AM Learning Objectives 1 1. Describe the importance of global market and the roles of comparative advantage and absolute advantage in global trade 2. Explain the importance of importing and exporting and define key terms used in global business 3. Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets 4. Evaluate the forces that affect trading in global markets 5. Debate the advantages and disadvantages of trade protectionism, define tariff and non-tariff barriers and give examples of common markets 6. Discuss the changing landscape of the global market The Dynamic Global Market  Over 90% of companies doing business globally believe it’s important for their employees to have experience working in other countries  Canada is a market of more than 34.8 million people, whereas there are over 7 billion potential customers in independent countries that make up the global market  Both large and small companies continuously look for opportunities to grow their business  Canada is a large exporting nation  Competition is increasing in global markets Why Trade with Other Nations?  No country can produce all the products that its people want and need  Even if a country did become self sufficient, other nations would seek to trade with that country to meet the needs of their own people  Countries like Venezuela and Russian have an abundance of natural resources, where has Japan and Switzerland have sophisticated technology  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  This happens through free trade  Free trade is the movement of goods and services among nations without political or economic barriers The Theories of Comparative and Absolute Advantage  Exchanges between countries involve more than goods and services  Countries also exchange art, sports, cultural events, medical advances, space exploration, and labour  Comparative Advantage Theory 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 it cannot produce as effectively or efficiently  A country has absolute advantage if it has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries Getting Involved in Global Trade  Job potential may be with small businesses  Small businesses contribute more than 30% of Canada’s gross domestic product and employ approximately five million individuals (50 of the total labour force)  Important to observe and study global markets  If given opportunity, should travel to different countries to observe foreign cultures and lifestyles and see if doing business globally appeals Importing Goods and Services  The Canada Border Services Agency deals with importers across the whole range of goods and services that enter the country  These products are subject to compliance with certain conditions imposed by the federal and sometimes provincial governments Exporting Goods and Services  Almost any good/service that is used in Canada can be sold in other countries and often times the competition is not as intense for producers in global markets compared to home  Trade with other countries enhances the quality of life for Canadians and contributes to our country’s economic well-being  Exports counts for 1/3 of Canadian jobs  Canadian goods and services 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  Selling in global markets is not by any means easy  Adapting goods and services to specific global markets is potentially profitable but can be very difficult Measuring Global Trade  Two indicators are used to measure effectiveness of global trade: 1. Balance of Trade: a nation’s ratio of exports to imports 2. Trade Surplus: a favourable balance of trade, occurs when the value of the country’s exports exceeds that of it’s imports  Trade deficit: an unfavourable balance of trade, occurs when the value of a country’s imports exceeds that of its exports  In 2009 Canada registered its first trade deficit in 15 years  Balance of Payments is the difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows coming into or leaving a country from other factors such as tourism, foreign aid, military expenditures and foreign investment Trading in Global Markets: The Canadian Experience  Canada is dependent on one country, the United States Canada’s Priority Markets  Emerging economies are enjoying high growth rates, rapid increases in their living standards and rising global prominence  Priority Market: Association of South East Asian Nations, Australia, New Zealand, Brazil, China, Europe, Gulf Cooperation Council, India, Japan, Korea, Latin America, Caribbean, Mexico, Russia and the US  China and India are of particular interest as they are growing and emerging markets due to their size and economic transformation  Experts say US, China and India will be world’s largest economy by 2050  To encourage strong Canadian presence in the global marketplace, tax cuts, increased support for research and development and critical investments in infrastructure have occurred in Canada-US border crossings and Canada’s Asia-Pacific Gateway Strategies for Reaching Global Markets  Businesses use many different strategies to compete in global markets  Key strategies include listed in order of lowest risk to highest o Licensing o Exporting o Franchising o Contract Manufacturing o Creating international joint ventures and strategic alliances o Engaging in foreign direct investment Licensing  A firm (the licensor) may decide to compete in global market by licensing the right to manufacture its product or use its trademark to a foreign company (the licensee) for a fee (a royalty)  A licensing agreement can benefit a firm in several ways o Can gain revenues it would not otherwise have generated in its home market o Foreign licensees must often purchase start-up supplies, component materials and consulting services from the licensing firm  Licensors may also experience problems o Often, a firm must grant licensing rights to its product for an extended period, 20 years or longer Exporting  Often the first export sales occur as a result of unsolicited orders received  A company must develop some goals and some strategies for achieving those goals regardless of how it started exporting  An export-trading company not only matches buyers and sellers from different countries but also deals with: o Foreign customs offices o Documentation o Weights and measures conversions to ease process of entering global markets Franchising  Franchising is a contractual agreement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service in a given territory in a specified manner  Franchisors have to be careful to adapt their good/service in the countries they serve o Ex/ KFC first HK outlets failed within 2 years; chicken was too greasy and eating with fingers was too messy o Pizza Hut and Domino’s Pizza learned that preferences in pizza toppings differ globally Contract Manufacturing  Contract manufacturing involves a foreign company’s production of a private-label goods to which a domestic company then attaches its own brand name or trademark – falls under category of outsourcing  Contract manufacturing enables a company to experiment in a new market without incurring heavy start-up costs such as building a manufacturing plant  If the brand name becomes a success, the company has penetrated a new market with relatively low risk  A firm can also use contract manufacturing temporarily to meet an unexpected increase in orders and labour costs are often very low International Joint Ventures and Strategic Alliances  A joint venture is a partnership in which two or more companies (often from different countries) join to undertake a major project  The benefits of international joint ventures: 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  Drawbacks: o One partner can learn the other’s technology and practices and then use what it learned to its own advantage o Shared technology may become obsolete or the joint venture may become too large to be flexible as needed  Strategic alliance is a long-term partnership between two or more companies established to help each company build competitive market advantages  Unlike joint ventures, strategic alliances don’t share costs, risks, management or even profits  Strategic alliances can effectively link firms from different countries and firms of vastly different sizes due to their flexibility Foreign Direct Investment  Foreign direct investment (FDI) is buying permanent property and businesses in foreign nations  A foreign subsidiary is a company owned in a foreign country by another company (called the parent company) o The subsidiary operates like a domestic firm, with production, distribution, promotion, pricing and other business functions under the control of the subsidiary’s management o The subsidiary must observe the legal requirements of both the country where the parent firm is located (home country) and the foreign country where the subsidiary is located (host country)  Primary advantage of a subsidiary is that the company maintains complete control over any technology/expertise it may possess  Shortcoming is the need to commit funds and technology within foreign boundaries  If relationship with host country falter, the firms assets could be expropriated (taken over by the foreign government)  Nestle is a multinational corporation, one that manufactures and markets products in many different countries and has multinational stock ownership and management  Multinational corporations are typically extremely large corporations like Nestle but not all large global businesses are multinationals  A business could export everything it produces, deriving 100% of sales and profits globally and still not be a multinational corporation  Only firms that have manufacturing capacity or some other physical presence in different nations can be called multinational ex/ Magna International  Disadvantages to foreign investment: o Canada has been criticized for having a “branch plant economy,” which occurs when many subsidiaries are foreign companies and profits are returned to home country rather than reinvested in Canada Forces Affecting Trading in Global Markets  Hurdles to success are higher and more complex in global markets than domestic markets  Such hurdles include: o Sociocultural forces o Economic and financial forces o Legal forces o Physical and environmental forces Sociocultural Forces  Culture refers to the set of values, beliefs, rules and institutions held by a specific group of people  An attitude that one’s own culture is superior to all others is known as ethnocentricity  Different nations have very different ways of conducting business  Canadian businesses that wish to compete globally must adapt to those ways  In North America, we like to do things quickly, call each other by first names and try to get friendly even on first encounter  In Japan, China and other countries these actions would be considered surprising and even rude  Canadian negotiators will say no if they mean no, but Japanese negotiators usually say maybe when they mean no  Successful companies are those that can understand these differences and develop goods/services accordingly  The focus may be on a large global market or a smaller yet profitable global market  Understanding sociocultural differences is important when managing employees  In Latin American countries, workers believe that managers are placed in positions of authority to make decisions and be responsible for the well- being of their workers Economic and Financial Forces  Global financial markets unfortunately do not have a worldwide currency  Mexicans shop with pesos, South Koreans with won, Japanese with Yen and Canadians with dollars  Globally the US dollar is considered dominant and stable currency  However it doesn’t always retain the same market value  The exchange rate is the value of one nation’s currency relative to the currencies of other countries  A low value of the dollar means a dollar is traded for less foreign currency than normal  Changes in currency values cause many problems globally o Ex/ labour costs for multinational corporations like Bombardier can vary considerably as currency values shift, causing them to juggle production from one country to another  Devaluation is lowering the value of a nation’s currency relative to other currencies  Sometimes due to a nation’s weak currency, the only way to trade is bartering which is the exchange of merchandise for other merchandise or service for other service with no money involved  Countertrading is a complex form of bartering in which several countries may be involved, each trading goods for goods or services for services Legal Forces  In global markets, no central system of law exists, so different systems of laws may apply  This makes conducting global business difficult as business people navigate a sea of laws that are often inconsistent  Antitrust rules, labour relations, patents, copyrights, trade practices, taxes, child labour, product liability and other issues are governed differently country to country  The Organization for Economic Cooperation and Development (OECD) and Transparency International have led a global effort to fight corruption and bribery in foreign markets, with limited success  The cooperation and sponsorship of local business people can help a company penetrate the market and deal with laws and bureaucratic barriers in their country Physical and Environmental Forces  Certain technological forces can also have an important impact on a company’s ability to conduct business in global markets  In fact, technological constraints may make it difficult given the nature of exportable products o Ex/ houses in most developing countries do not have electrical systems that match those of Canadian homes, in kind or in capacity Trade Protectionism  Trade protectionism is the u
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