Textbook Notes (369,149)
Canada (162,420)
MGTA01H3 (583)
Chapter 5

Chapter 5 Notes.docx

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Management (MGT)
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Chris Bovaird

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Understanding International Business The Rise of International Business International Business: business activities that involve exchanges across national boundaries Globalization: the integration of markets globally. The world economy is fast becoming a 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 Open Economy: open to trade & open to the flow of goods and services across borders The Contemporary Global Economy Several forces have combined to spark and sustain globalization  Governments and businesses have become more aware of the benefits of globalization  New technologies make international travel, communication, and commerce increasingly easier, cheaper, and faster  Competitive pressures: sometimes a firm must enter foreign markets just to keep up with its competitors The Major World Marketplaces Per Capita Income: the average income per person in a country The World Bank, an agency of the United Nations, uses per capita income as a measure to divide countries into one of four groups: High-Income countries are those with per capita income greater than $10,065. High literacy rates, strong infrastructure, and stable and working governments Upper-Middle-Income Countries are those with per capita income between $3,255 – 10,065 Low Middle-Income Countries are those with per capita income between $825 – 3,255 Low-Income Countries (often called developing countries) are those with annual per-capita income of less than $825. This is due to low literacy rates, weak infrastructures, unstable governments, and related problems, which makes them less attractive for international business North America  America has the largest and most stable market place  Stable economy  US & Canada are the biggest trading partners  Mexico has cheap labour and transportation Europe  Mature but fragmented marketplace  Transformation of the European Union let to a unified marketplace which increased the regions importance  Ecommerce and technology is increasing 1  Eastern Europe, once primarily communists, gained importance as a marketplace and as a producer Asia-Pacific  Strong automobile, electronics, and banking industries  Major competition for North America  China is now the 3 largest economy, while Japan is 2nd  Technology is greatly increasing  Cheaper labour costs  Poorly developed electronic infrastructure, and low income consumers Forms of Absolute Competition Why do people import and export? Because NO COUNTRY can produce all the goods and services that its people need  Countries export products that they can produce better or less expensively than other countries, using the proceeds to import products that they cannot product effectively Absolute Advantage Absolute Advantage: a nation’s ability to produce something more cheaply or better than any other country  For example, Saudi oil or Canadian lumber Comparative Advantage Comparative Advantage: a nation’s ability to produce some products more cheaply or better than it can others For example, if businesses in a given country can make computers more efficiently than they can make automobiles, the nation’s firms have a comparative advantage in computer manufacturing Canada has a comparative advantage in faring, because of fertile land and temperate climate National Competitive Advantage A theory of why nations engage in international trade National Competitive Advantage: a country will be inclined to engage in international trade when factor conditions, demand conditions, related and supporting industires, and strategies/structures/rivalries are favourable Four conditions are: 1. Factor Conditions are the factors of production that we identified in chapter1. Labour, capital, natural resources, and entrepreneurs 2. Demand Conditions reflect a large domestic consumer base that promotes strong demand for innovative products 3. Related and Supporting Industries include strong local or regional suppliers and/or industrial customers 4. Strategies, Structures, and Rivalries refer to firms and industries that stress costs reduction, product quality, higher productivity, and innovative new products The interaction of the four elements determines the environment in which the nation’s compete 2 International Competitiveness: the ability of a country to generate more wealth that its competitors in world markets  Canada was ranked 16 due to its high taxes, regulated industries, and overly conservative capital market institutions Import – Export Business Although international trade involves many advantages, trading with other countries can pose of problem if the countries imports and exports don’t strike an acceptable balance Balance of Trade Balance of Trade: the difference in value between a country’s total exports and its total imports Trade Surplus: occurs when a country exports more than it imports Trade Deficit: occurs when a country imports more than it exports Balance of Payments Balance of Payments: the difference between money flowing in to and out of a country as a result of trade and other transactions  Examples include money spent by tourists, money spent on foreign-aid programs, and money spent and received in the buying and selling of currency An unfavourable balance means that more money is flowing out than in Exchange Rates The balance of imports and exports between two countries is affected by the rate of exchange between their currencies Exchange Rate: the rate at which one currency of one nation can be exchanged for that of another  In August 2003, the exchange rate between the Canadian dollar and the British pound was 1 to 2.26 o This means it costs $2.26 Canadian dollars to “buy” one British pound o Also means is costs only 0.44 of a British pound to “buy” one Canadian dollar After WWII, the major nations of the world agreed to establish fixed exchange rates Fixed Exchange Rates: the value of any country’s currency relative to that of another remains constant However, today, floating exchange rates are the norm Floating Exchange Rate: value of one country’s currency relative to that of another country varies with most sigmarket conditions  It is based on the demand for the currency or the demand for the goods manufactured at the expense of that country o For example, when many English citizens want to spend pounds to buy Canadian dollars to shop in Canada, the price of the Canadian $ will increase Fluctuations in exchange rates can have an important impact on the balance of trade 3  If the Canadian dollar becomes stronger in relations 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 Euro: a common currency shared among most of the members of the European Union  Most significant development in foreign exchange  Excludes Denmark, Sweden, and the United Kingdom Exchange Rates and Competition Companies that conduct international operations must watch exchange rate fluctuations closely because these changes can be a major factor in international competition Stronger Domestic Currency  Harder for domestic companies to export products to foreign markets  Easier for foreign markets to enter local markets  More cost-efficient for domestic companies to move production operations to lower-cost sites in foreign countries  Balance of trade should decline Weaker Domestic Currency  Easier for domestic companies to export products to foreign markets  Harder for foreign markets to enter local markets  Less cost-efficient for domestic companies to move production operations to lower-cost sites in foreign countries  Balance of trade should improve o Domestic companies will experience a boost in exports  Decrease in the incentives for foreign companies to ship products into the domestic products International Organizational Structures Different levels of involvement in international business require different kinds of organizational structures  For example, a structure that would help coordinate an exporter’s activities would be inadequate for the activities of a multinational firm Independent Agents Independent Agent: a foreign individual, or organization, who agrees to represent an exporter’s interests in foreign markets  They often act as sales representatives – they sell the exporters products, collect payment, and ensure that customers are satisfied  Often represent several firms at once and usually do not specialize in a particular product or market Licensing Arrangements 4 Licensing Arrangements: an arrangement by an owner of a process or product to allow another business to produce, distribute, or market it for a fee or royalty  Firms give individuals or companies in a foreign country the exclusive right to manufacture or market their products in that market  In return, the exporter typically receives a fee plus ongoing payments called royalties o Royalties are usually calculated as a percentage of the licence holder’s sales.  Franchising is a special form of licensing that is also growing in popularity Branch Offices Instead of developing relationships with foreign companies or independent agents, a firm may simply send some of its own managers to overseas branch offices Branch Offices: a location that an exporting firm establishes in a foreign country in order to sell its products more effectively  This gives it a more direct control compared to independent agents or licence holders  Branch companies also give a company a more visible public presence in foreign countries  Potential customers feel more secure when a business has branch offices in their country Strategic Alliance Strategic Alliance: an enterprise in which two or more persons or companies temporarily join forces to undertake a particular project In international business, it means that a company finds a partner in a foreign country where it would like to conduct business  In some strategic alliances, a new local corporation is created and each party to the strategic alliance then invests resources and capital in the business of the corporation
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