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Chapter 5

Chapter 5 Textbook Notes


Department
Management (MGT)
Course Code
MGTA01H3
Professor
Ingrid L.Stefanovic
Chapter
5

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MGTA03 / 01
Chapter 5: Understanding International Business
- Globalization is when the world economy is becoming a single interdependent system.
The integration of markets globally
- Imports are products made or grown abroad but sold in Canada (eg. shoe made in China)
- Exports are products made or grown in Canada that is then sold abroad
The Contemporary Global Economy
- International business is nothing new. In fact, trade between nations can be traced back as
far as 2000 BCE when North African tribes took dates and clothing to Assyria and
Babylonia in the Middle East and traded them for olive oil and spices
- MIT professor Paul Krugman states that we arHQRWLQDQH[WUHPHO\DFWLYH³JOREDO
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they did 100 years ago and that capital mobility (the movement of money from country to
country) is about the same as it was in 1914
- International trade has become more central in the fortunes of most nations of the world.
Countries are now encouraging international trade and there are incentives offered to
make their domestic business internationally
- As industries and market become global, firms compete in them are also becoming global
- Factors such as new technology which has made international travel, communication, and
commerce easier has sparked and sustain globalization
- Sometimes a firm must enter foreign markets in order to keep up with its competitors
The Major World Marketplaces
- North America, Europe, and Asia ± Pacific are the three major marketplaces in which the
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multinational corporations, most influential financial markets, and highest income
consumers
- The World Bank uses per capita income, the average income per person of a country, as
a measure to divide countries into one of four groups
o High ± income countries are those with per capita income greater than
U.S. $10 065. These countries include Canada, United States, most countries in
Europe, Australia, Japan, South Korea, Hong Kong, Singapore, Taiwan, Israel...
o Upper ± middle ± income countries are those with per capita income between U.S.
$3225 and U.S. $10 065. Countries include Greece, Poland, Mexico, South
Africa, Hungary, Turkey, Argentina, Czech Republic...
o Low middle ± income countries are those with per capita income between U.S.
$823 and U.S. $3225. Countries include Thailand, China, Colombia... These
countries have large populations and are seen as potentially attractive markets
o Low ± income countries (often called developing countries) are those with annual
per ± capita income of less than U.S. $825. An example is the East African nation
of Somalia. These countries are less attractive to international business because
they have weak infrastructures, unstable governments, and low literacy rates
North America
The Rise of International Business (pg. 67 ± 78)
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MGTA03 / 02
- The United States dominates the North American business region. It is the single largest
marketplace and enjoys the most stable economy in the world. Canada also plays a large
UROH&DQDGD¶VODUJHVW trading partner is the U.S.
- Mexico has also become a major manufacturing centre especially along the southern U.S.
border where there is cheap labour and low transportation costs. The auto industry is also
very active in Mexico where exports of automobiles increased $16.4 billion between the
years 1993 to 2001. Companies include: Nissan, General Motors, Volkswagen, Ford ...
Europe
- Europe has often been regarded as two regions ±Western Europe and Eastern Europe
- Western Europe (France, Italy, United Kingdom, and Germany) has long been a matured
but fragmented marketplace.
- After the transformation of the European Union (EU) in 1992, it has become a unified
workplace [Shell, Michelin, Siemens ... have their headquarters in Western Europe]
- Eastern Europe (Poland, Russia, Bulgaria ...) was once primarily communist but has gain
importance both as a marketplace and as a producer. [Suzuki, General Motors, Ford and
Volkswagen have built factories in Hungary]
Asia ± Pacific
- Asia ± Pacific consists of Japan, China, Thailand, Malaysia, Singapore etc...
- Fuelled by strong entries in the automobile, electronics, and banking industries, the
economies grew rapidly during the 1970s and 1980s but due to a currency crisis in the
late 1990s, this slowed growth in virtually every country of the region
- Aside from the currency issue, countries such as Japan (Toshiba, Toyota) dominates and
in South Korea (Samsung and Hyundai) dominates in the market place
- ,QGLFDWRUVVXJJHVWWKDWWKH&KLQHVHHFRQRP\LVQRZWKHZRUOG¶VWKLUGODUJHVt, behind the
United States and Japan
- In North America and Western Europe, technology promises to play an important role in
this region. However in Asia, due to poorly developed electronic infrastructure and
slower adoption of computers and information technology, the emergence of technology
is hampered
Forms of Competitive Advantage
- There are high levels of importing and exporting because countries tend to export
products or services that they can produce better or less expensively than other countries
and import when producing the good is ineffective
- Traditionally, economists focussed on absolute and comparative advantage to explain
international trade. A new perspective, national competitive advantage has also arise
Absolute Advantage
- An absolute advantage exists when a country can produce something more cheaply
and/or of better quality than any other country
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produce just as good of a quality as another nation with just as low prices
Comparative Advantage
- A country has a comparative advantage in goods that it can produce more efficiently or
better than other goods
- E.g. if a business in a nation produces computers more efficiently than automobiles, that
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National Competitive Advantage
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MGTA03 / 03
- In recent years, the theory of national competitive advantage has become a more widely
accepted model of why nations engage in international trade.
- National competitive advantage derives from four conditions:
o Factor conditions are the factors of production (e.g. labour and natural resources)
o Demand conditions reflect a large domestic consumer base that promotes strong
demand for innovative products
o Related and supporting industries include strong local or regional suppliers and /
or industrial customers
o Strategies, structures, and rivalries refer to firms and industries that stress cost
reduction, product quality, higher productivity and innovative new products
- These four conditions are commonly referred to as a national diamond
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firms compete: e.g. Japan automobile companies ± there is large demand for automobiles,
they have well ± oiled supplier networks, and competed with other domestic firms
- International competitiveness refers to the ability of a country to generate more wealth
than its competitors in world markets
- Each year, the World Economic Forum publishes a global competiveness ranking and
rankings are based on both hard economic data and on a poll of business leaders in many
countries. In 2006, the top three countries were Switzerland, Finland, and Sweden
- U.S. was ranked sixth and Canada was ranked sixteenth due to high taxes, regulated
industries, and overly conservative capital market institutions
Import ± Export Balances
- $OWKRXJKLQWHUQDWLRQDOWUDGHKDVPDQ\DGYDQWDJHVPDNLQJVXUHWKDWDFRXQWU\¶VLPSRUWV
and exports are an acceptable balance are important. In deciding whether an overall
balance exists, economists use two measures: balance of trade and balance of payments
Balance of Trade
- $QDWLRQ¶Vbalance of trade is the difference in value between its total exports and its
total imports
- A country that exports more than it imports has a favourable balance of trade, or trade
surplus
- Canada has a favourable balance of trade since we export so much more than we import
from the United States. In fact, Canada only has a favourable balance of trade with
United States and an unfavourable balance of trade with all the other trading partners
- A country that imports more than it exports has an unfavourable balance of trade, or
trade deficit (e.g. United States, imports much more than it exports)
- A study by the World Trade Organization (WTO) found that Canada is ever more
increasing dependant on the United States and this leaves Canada vulnerable.
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Balance of Payments
- The balance of payments refers to the difference between money flowing in to and out
of a country as a result of trade and other transactions
- Financial exchanges such as the amount of money we spend on imports and gain in
exports, money spent by tourists, money spent on foreign ± aid programs, and money
spent and received in the buying and selling of currency on international money markets
all affect the balance of payments
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