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Chapter 5

Chapter 5 Notes

Management (MGT)
Course Code
Chris Bovaird

of 3
Chapter 5 Understanding International Business Notes
The Rise of International Business
x globalization : the integration of markets globally
x imports : products that are made or grows abroad and sold in Canada
x exports : products made or grown in Canada that are sold abroad
The Contemporary Global Economy
x whereas in the past many nations followed strict policies to protect domestic business, today more and more countries are
aggressively encouraging international trade
x they are more 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 with local firms through various alliances
x similarly, as more and more industries and markets become global, firms that compete in them are also becoming global
x several forces have combined to spark and sustain globalization: for one thing, governments and businesses have simply become
more aware of the benefits of globalization to their countries and shareholders; for another, new technologies make international
travel, communication, and commerce increasingly easier, faster, and cheaper than ever before; finally, there are competitive
pressures: sometimes, a firm simply must enter foreign markets just to keep up with its competitors
The Major World Marketplaces
x the contemporary world economy revolves around three major marketplaces: North America, Europe, and Asia – Pacific
x these three geographic regions are home to most of the world’s largest economies, biggest multinational corporations, most
influential financial markets, and highest income consumers
x per capita income : the average income per person of a country
o High – income countries are those with per capita income greater than US $10 065. These include Canada, the US, most
countries in Europe, Australia, New Zealand, Japan, South Korea, Kuwait, the UAE, Israel, Singapore, and Taiwan. Hong
Kong, while technically no longer an independent nation, also falls into this category.
o Upper – middle – income countries are those with per capita income between US $3255 and US $10 065. This group
includes, among others the Czech Republic, Greece, Hungary, Poland, most countries comprising the former Soviet Bloc,
Turkey, Mexico, Argentina, and South Africa.
o Low middle – income countries are those with per capita income between US $825 and US $3255. Among the countries in
this group are Colombia, Guatemala, Samoa, and Thailand. Some of these, including China and India, have huge
populations and are seen as potentially attractive markets for international business.
o Low – income countries (often called developing countries) are those with annual per – capita income of less than US $825.
Due to low literacy rates, weak infrastructures, unstable governments, and related problems, these countries are less
attractive to international business. For example, the East African nation of Somalia is plagued by drought, civil war, and
starvation, and plays virtually no role in the world economy.
North America
x US dominates the NA business region; it is the single largest marketplace and enjoys the most stable economy in the world
x Canada also plays a major role in the international economy; and both are each other’s largest trading partners
x many US firms, such as GM and P & G, have maintained successful Canadian operations for years, and many Canadian firms,
such as Bombardier, Nortel Networks, and Alcan Aluminum, are also major international competitors
x Mexico has also become a major manufacturing center, especially along the southern US border, where cheap labour and low
transportation costs have encouraged many firms, from the US and other countries, to build manufacturing plants
x Western Europe, dominated by Germany, the UK, France, and Italy, has long been a mature but fragmented marketplace; but the
transformation of the EU in 1992 into a unified marketplace has further increased the region’s importance
x e-commerce and technology have also become increasingly important in this region
x Eastern Europe, once primarily communist, has also gained in importance, both as a marketplace and as a producer
Asia – Pacific
x Asia – Pacific consists of Japan, China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, the Philippines,
Australia, and New Zealand; Hong Kong may be included as a separate region; Vietnam is sometimes included
x fuelled by strong entries in the automobile, electronics, and banking industries, the economies of these countries grew rapidly in
the 1970s and 1980s; however, a currency crisis in the late 1990s generally slowed growth in virtually every country of AP
x technology promises to play an increasingly important role in this region, however, in Asia, the emergence of technology firms
has been hampered by a poorly developed electronic infrastructure, slower adoption of computers and IT, a higher percentage of
lower-income consumers, and the currency crisis
Forms of Competitive Advantage
Absolute Advantage
x absolute advantage : a nation’s ability to produce something more cheaply or better than any other country
Comparative Advantage
x comparative advantage : a nation’s ability to produce some products more cheaply or better than can others
National Competitive Advantage
x national competitive advantage : a country will be inclined to engage in international trade when factor conditions, demand
conditions, related and supporting industries, and strategies/structures/rivalries are favourable
1. Factor conditions are the factors of production.
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 cost reduction, product quality, higher
productivity, and innovative new products.
x international competitiveness : the ability of a country to generate more wealth than its competitors in world markets
Import Export Balances
Balance of Trade
x balance of trade : the difference in value between a country’s total exports and its total imports
x trade surplus : occurs when a country exports more than it imports
x trade deficit : occurs when a country imports more than it exports
Balance of Payments
x balance of payments : the difference between money flowing in and out of a country as a result of trade and other transactions
x the balance of trade of a nation comprises much of its balance of payments, however, other financial exchanges are also factors,
such as 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
x an unfavourable balance means that more money is flowing out than in
x for Canada to have a favourable balance of payments for a given year, the total of (a) our exports, (b) foreign tourist spending in
this country, (c) foreign investments here, and (d) earnings from overseas investments must be greater than the total of (a) our
imports, (b) Canadian tourist spending overseas, (c) our foreign aid grants, (d) our military spending money abroad, (e) the
investments made by Canadian firms abroad, and (f) the earnings of foreigners from their investments in Canada
Exchange Rates
x exchange rate :the ratio of one currency to another
x at the end of WWII, the major nations of the world agreed to establish fixed exchange rates
x under fixed exchange rates, the value of any country’s currency relative to that of another country remains constant
x today, however, floating exchange rates are the norm, and the value of one country’s currency relative to that of another country
varies with market conditions
x fluctuation in exchange rates can have an important impact on the balance of trade
x euro : a common currency shared among most of the members of the EU (including Denmark, Sweden, and the UK)
International Organizational Structures
Independent Agents
x independent agent : a foreign individual, or organization, who agrees to represent an exporter’s interests in foreign markets
x often act as sales representatives: they sell the exporter’s products, collect payment, and ensure that customers are satisfied
x often represent several firms at once and usually do not specialize in a particular product or market
Licensing Arrangements
x licensing arrangement : 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
Branch Offices
x branch office : a location that an exporting firm establishes in a foreign country in order to sell its products more effectively
x potential customers tend to feel more secure when a business has branch offices in their country
Strategic Alliances
x strategic alliance : enterprise in which 2 or more persons or companies temporarily join forces to undertake a particular project
Foreign Direct Investment
x foreign direct investment (FDI) : buying or establishing tangible assets in another country
Barriers to International Trade
Social and Cultural Differences
x language barriers can cause inappropriate naming of products; in addition, the physical stature of people in different countries
can make a difference; differences in the average age of the local population can also have ramifications for product
development and marketing
x countries with growing populations tend to have a high percentage of young people so electronics and fashionable clothing
would likely do well; on the other hand, countries with stable or declining populations tend to have more old people so generic
pharmaceuticals might be more successful in such markets
x knowledge of local dos and don’ts is important in international business activity
Economic Differences
x a foreign firm doing business in a command economy must understand the unfamiliar relationship of government to business,
including a host of idiosyncratic practices
Legal and Political Differences
Quotas, Tariffs, and Subsidies
x quota : a restriction by one nation on the total number of products of a certain type that can be imported from another nation
x embargo : a government order forbidding exportation and/or importation of a particular product
x tariff : a tax levied on imported products
x subsidy : a government payment to help domestic business compete with foreign firms
x protectionism : protecting domestic business at the expense of free market competition
Local – Content Laws
x local – content laws : laws requiring that products sold in a particular country be at least partly made in that country
Business – Practice Laws
x business – practice laws : laws or regulations governing business practices in given countries
x cartel : any association of producers whose purpose is to control the supply and price of a given product
x dumping : selling a product for less abroad than in the producing nation; illegal in Canada
Free Trade Agreements
The European Union (EU)
x European Union (EU) : agreement among major Western European nations to eliminate or make uniform most trade barriers
affecting group members
x the EU has eliminated most quotas and set uniform tariff levels on products imported and exported within their group
x the EU is the largest free marketplace in the world, and produces nearly one – quarter of global wealth
North American Free Trade Agreement
x North American Free Trade Agreement (NAFTA) : agreement to gradually eliminate tariffs and other trade barriers among the
US, Canada, and Mexico
x NAFTA has created a much more active North American market; direct foreign investment has increased in Canada; US imports
from (and exports to) Mexico have increased; Canada has become an exporting powerhouse
x trade between the US and Canada has risen sharply, and Canada enjoys a large trade surplus with the US
x before free trade, Canadian exports accounted for about one – quarter of GDP, but now exports account for about 40%; in the
manufacturing sector, 60% of output is now exported; Canada is the most trade-intensive country in the G8 group; 1 job in 3 is
now devoted to producing goods and services for export
Summary of Learning Objectives
1. Describe the rise of international business and identify the major world marketplaces. More and more business firms are
engaged in international business. The term globalization refers to the process by which the world economy is fast becoming a
single interdependent entity. The global economy is characterized by a rapid growth in the exchange of information and trade in
services. The three major marketplaces for international business are North America (the United States, Canada, and Mexico),
Western Europe (which is dominated by Germany, the United Kingdom, France, and Italy), and Asia – Pacific (where the
dominant country, Japan, is surrounded by such rapidly advancing nations such as South Korea, Taiwan, Hong Kong, and
2. Explain how different forms of competitive advantage, import – export balances, exchange rates, and foreign competition
determine the ways in which countries and businesses respond to the international environment. With an absolute
advantage, a country engages in international trade because it can produce a good or service more efficiently than any other
nation. But more often countries trade because they enjoy comparative advantages, that is, they can produce some items more
efficiently than they can produce other items. A country that exports more than it imports has a favourable balance of trade,
which a country that imports more than it exports has an unfavourable balance of trade. If the exchange rate decreases (the value
of the Canadian dollar falls), our exports become less expensive for other countries so they will buy more of what we produce.
The reverse happens if the value of the Canadian dollar increases. Changes in the exchange rate therefore have a strong impact
on our international competitiveness.
3. Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of
international involvement and international organizational structure. In deciding whether to do business internationally, a firm
must determine whether a market for its product exists abroad, and if so, whether the firm has the skills and knowledge to
manage such a business. It must also assess the business climates of other nations to ensure that they are conducive to
international operations. A firm must also decide on its level of international involvement.
4. Describe some of the ways in which social, cultural, economic, legal, and political differences act as barriers to
international trade. Social and cultural differences that can serve as barriers to trade include language, social values, and
traditional buying patterns. Differences in economic systems may force businesses to establish close relationships with foreign
governments before they are permitted to do business abroad. Quotas, tariffs, subsidies, and local – content laws offer protection
to local industries. Differences in business – practice laws can make standard business practices in one nation illegal in another.