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MGTA01H3 (583)
Chapter 5

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

CHAPTER 5: UNDERSTANDING INTERNATIONAL BUSINESS THE RISE OF INTERNATIONAL BUSINESS -total volume of world trade around $8 trillion each year -globalization: integration of markets globally -more and more firms engage in international business=world economy fast becoming single interdependent system -imports: products that are made or grown abroad and sold in Canada -exports: products made or grown in Canada that are sold abroad -success of many Canadian firms depends in large part on exports The Contemporary Global Economy -imports now represent only slightly higher proportion of GDP than they did 100 years ago -capital mobility (movement of money from country to country) about same as it was in 1914 -more countries freely opening their borders to foreign businesses, offering incentives for their own domestic businesses to expand internationally and making it easier for foreign firms to partner w/ local firms through various alliances -as more industries & markets become global, firms that compete in them also becoming global -forces to spark and sustain globalization: -governments and businesses become more aware of benefits of globalization to their countries and shareholders -new technologies (travel, communication, commerce) -competitive pressures (firm must enter foreign markets to keep up with competitors) The Major World Marketplaces -contemporary world economy revolves around 3 major marketplaces: North America, Europe, Asia-Pacific -these 3 are home to most of world’s largest economies, biggest multinational corporations, most influential financial markets and highest income consumers -per capita income: average income per person of a country -World Bank uses this as measure to divide counties into 1 of 4 groups: 1) High-income countries: per capital income greater than US $10, 065 2) Upper-middle-income countries: per capital income b/w US $3255 and $10 065 3) Low middle-income countries: per capita income b/w US $825 and $3255 -some of these have huge populations and seen as potentially attractive markets for international business 4) Low-income countries (developing countries): per capita income of less than US $825 -due to low literacy rates, weak infrastructures, unstable governments North America -US is single largest marketplace and enjoys most stable economy in world -US and Canada are each others’ largest trading partner -Mexico is a major manufacturing centre; where cheap labour and low transportation costs have encouraged many firms Europe -Western Europe (Germany, UK, France, Italy) has been mature but fragmented marketplace -major international firms (royal dutch/shell) headquartered in western Europer -Eastern Europe once primarily communist gained importance as marketplace and as producer -government instability has hampered economic development in this region Asia-Pacific -strong entries in automobile, electronics and banking industries -grew rapidly in 1970s and 1980s then currency crisis in late 1990s generally slowed growth in virtually every country of the region -Asia-Pacific is important force in world economy & major source of competition for North American firms rd -Chinese economy world’s 3 largest, behind US and Japan -emergence of technology firms has been hampered by poorly developed electronic infrastructure, slower adoption of computers and information technology, higher % of lower- income consumers and currency crisis -Association of Southeast Asian Nations (ASEANS) has GNP of approx $800 billion Forms of Competitive Advantage -no country can produce all the goods and services that its people need -countries tend to export products that they can produce better or less expensively than other countries using the proceeds to import products that they can’t produce as effectively -3 forms of advantages: Absolute Advantage -absolute advantage: exists when a country can produce something more cheaply and/or of higher quality than any other country -examples of true absolute advantages are rare…”absolute” advantage always relative Comparative Advantage -comparative advantage: when country can produce some goods more efficiently or better than other goods -ex. Canada has comparative advantage in farming while Korea has in electronics production National Competitive Advantage -model of why nations engage in international trade -national competitive advantage: derives from 4 conditions: 1) Factor conditions are factors of production 2) Demand conditions reflect large domestic consumer base that promotes strong demand for innovative products 3) Related and supporting industries: strong local or regional suppliers and/or industrial customers 4) Strategies, structures, and rivalries refer to firms and industries that stress cost reduction, product quality, higher productivity and innovative new products -these 4 attributes referred to as a national diamond -interaction of 4 elements determines enviro in which a nation’s firms compete -when all conditions exist, a nation will naturally be inclined to engage in international business -international competitiveness: ability of a country to generate more wealth than its competitors in world markets -Canada’s high taxes, regulated industries, and overly conservative capital market institutions were listed as reasons for lower rating in global competitiveness ranking Import-Export Balances -trading with other nations can pose problems if a country’s imports and exports don’t strike an acceptable balance Balance of Trade -balance of trade: is diff in value b/w its total exports and total imports -trade surplus: occurs when a country exports more than it imports -trade deficit: (or unfavourable balance of trade) when a country imports more than exports -US is largest trading partner Canada has and overall trade balance favourable b/c we export so much more to US than we import from them -Canada’s trade balance unfavourable with almost all other trading partners -Canada’s economic dependence on US growing and this leaves Canada vulnerable -our exports too focused on US Balance of Payments -balance of payments: diff b/w money flowing in to and out of a country as a result of trade and other transactions -unfavourable balance means that more money is flowing out than in -figure 5.4: requirements for Canada to have a favourable balance of payments Exchange Rates -balance of imports and exports b/w 2 countries is affected by rate of exchange b/w their currencies -exchange rate: rate at which the currency of one nation can be exchanged for that of another -at end of WWII, major nations of world agreed to establish fixed exchange rates -under fixed exchange rates, value of any country’s currency relative to that of another country remains constant -today, floating exchange rates are the norm and value of one country’s currency relative to that of another country varies with market conditions -when English citizens want to spend pounds to buy Canadian dollars (or goods), value of dollar relative to pound increases, or becomes “stronger”; demand for Canadian dollar is high -currency said to be “strong” when demand for it is high -also “strong” when there’s high demand for the goods manufactured at the expense of that currency -thus, value of dollar rises with demand for Canadian goods -exchange rates typically fluctuate by very small amounts on a daily basis -these fluctuations can have important impact on balance of trade -if Canadian dollar becomes stronger in relation to the British pound, the prices of all Canadian- made products would rise in England and the prices of all English-made products would fall in Canada -result: English buy fewer Canadian-made products and Canadians would be prompted to spend more on English-made products =Canadian trade deficit with England -euro: common currency shared among most of the members of the European Union (excluding Denmark, Sweden, and UK) Exchange Rates and Competition -exchange rate fluctuations affect overseas demand for products and can be major factor in international competition -when country’s domestic currency rises (becomes “stronger”), companies based there find it harder to export products to foreign markets & easier for foreign companies to enter local markets -also makes it more cost-efficient for domestic companies to move production operations to lower-cost sites in foreign countries
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