AFM 131 - Chap 3 Notes.docx

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University of Waterloo
Accounting & Financial Management
AFM 131
Robert Sproule

AFM131 Chapter 3 Notes: The Dynamic Global Market: - Canada is a market of more than 33.6 million people, but there are almost 6.8 billion potential customers in the 195 countries that make up the global market - Canadian companies continuously look for opportunities to grow their business - Canada is a large exporting nation - 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 the products that its people want and need - Even if it is self sufficient, other nations would seek to trade with that country to meet needs of own people - Some nations have abundance of natural resources and lack of technology and some nations have vice versa - Happens through process of free trade: movement of goods and services among nations without political or economic trade barriers p.72 pros and cons of free trade 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 that it cannot produce as effectively or efficiently Absolute Advantage: exists when a country has the ability to produce a particular good or service using fewer resources (and therefore at a lower cost) than another country You can import and export just about anything. Canada’s Merchandise and Service Trade, 2008 chart p.74. Balance of Trade: A nation’s ratio of exports to imports - Favourable: export > imports Unfavourable: imports > exports Balance of Payments: The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment - Favourable when more money flows in Strategies for Reaching Global Markets - Exporting: simplest way of going international is to export goods and services, export-trading companies help negotiate and establish trading relationships desired - Licensing: a global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty). Can gain additional revenues from a product that it normally would not have generated in its home market, also licensors spend little or no money to produce and market their products. However licensees can learn their trade tricks and make their own products instead - Franchising: an arrangement whereby someone with a good idea for a business sells the right to use the business name and sell a product or service to others in a given territory. Eg. KFC, mcdonalds, pizza hut - Contract Manufacturing: A foreign country’s production of private-label goods to which a domestic company then attaches its brand nae or trademark; also called outsourcing - Joint Venture: a partnership in which 2 or more companies (often from different countries) join to undertake a major project or to form a new company. Pros: shared technology and risk, shared marketing and management expertise, entry into markets where foreign companies are often not allowed, shared knowledge of the local market, access to local skilled labour and supplies. Cons: one partner can learn the other’s technology and practices and go off and use what has been learned - Strategic Alliance: a long-term partnership between 2 or more companies established to help each company build competitive market advantages - Foreign Direct Investment: buying permanent property and businesses in foreign nations. The amount of foreign direct investment in a country means that
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