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RSM100Y1 (431)
Chapter 4

RSM100Y1 Chapter 4 Notes

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University of Toronto St. George
Rotman Commerce
Michael Khan

RSM100Y1 Textbook Notes Chapter 4  Economic interdependence is increasing throughout the world as companies look for new markets for their goods and services and the most cost-effective locations to set up factories.  Exports: domestically produced goods and services sold in other countries.  Imports: foreign goods and services purchased by domestic customers.  Canadian ethorts/imports make up about 30% of Canadian GDP. o 10 largest exporter. o Exports/imports worth +$400 billion each.  Companies that do business with other countries need to work with new social and cultural practices, different economic and political environments, and legal restrictions. o Must also adapt business plans to work with the markets in other countries.  Firms that do business in other countries take advantage of large populations, healthy resources, and rising standards of living abroad that increase foreign interests in their goods/services. o The Canadian market’s high purchasing power attracts foreign companies here.  Trading with other countries increases economic growth in two ways: o By providing a new market for products o By providing access to needed resources.  Companies can: o Expand their markets o Seek growth opportunities in other nations o Make their production and distribution systems more efficient o Reduce their dependence on the economies of their home nations  Business decisions to operate abroad depend on the basic factors of production in the other country: o The availability, price, and quality of labour, natural resources, capital, and entrepreneurship.  Trading with other countries also allows a company to spread risk. o Other countries may be at different stages of the business cycle or in different phases of development (i.e. low demand at home but high demand abroad).  Companies are also attracted to international business because of the sixe of the global marketplace. o World population is approx. 7 billion.  Only 1:6 people live in a well-developed nation. o By expanding, companies can reach new groups of customers.  Firms looking for new revenue are usually attracted to giant markets such as:  China o 1.3 billion people. o GDP growth rate at about 10.1%  India o 1.2 billion people. o GDP growth rate at about 7.5%.  U.S./Canadian GDP rates grew at an annual rate of about 4% (prior to ’08 recession).  People in the developing nations have lower per-capita incomes than people in the highly developed economies of NA and Western Europe. o The higher-income group (despite being a small percentage of a countries population), represent an important and growing market.  Firms that expand into developing countries want to benefit from local sales as a result of expanding economies and rising standards of living.  Reasons for the strong trade between U.S. and Canada: o Both countries are similar in their social and cultural values (if buyers are found in one country, buyers will be found in the other). o Majority of Canada’s population lives along the border.  Easier to transport goods and to communicate (helps develop the cross-border trade).  Much of Canada’s trade with the U.S. is resource based.  Since few countries can produce all the goods/services they need, countries will trade globally. o The country will produce what it does best and sell the extra output and buy foreign products that it doesn’t have or cannot produce efficiently.  The foreign sales of a product depend on whether the country has: o An absolute advantage  When a country has a monopoly on making a product or when it can produce the product at a lower cost than any other country.  Climate differences can give some nations or regions an advantage in growing certain plants (i.e. saffron).  Examples:  China; silk production  Spain; saffron (extracted from crocus flowers) o A comparative advantage  When a country can supply its products more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries.  A nation can also develop a comparative advantage in HR by ensuring that its people are well educated (i.e. India and technology).  Examples:  China; textiles  India; tech support  Two ideas that help us understand what the trade inflows and outflows mean for a country are: o Balance of trade  The difference between a nation’s exports and imports (X – I).  Exports > Imports; positive balance of trade called a trade surplus.  Canada runs a trade surplus with the U.S. and a trade deficit with other trading partners (China particularly).  Exports < Imports; negative balance of trade called a trade deficit.  U.S. has had a trade deficit every year since 1976 (despite being one of the world’s top exporters). o Balance of payments  The overall flow of money into or out of a country.  Affected by:  Balance of trade  Overseas loans and borrowing  International investments  Profits from international investments  Foreign aid payments  Calculated as monetary inflows – monetary outflows.  Inflows > Outflows; positive balance of payments called a balance-of-payments surplus.  Inflows < Outflows; negative balance of payments called a balance-of-payments deficit.  Global economy’s GDP is +$74 trillion. o $1.3 trillion from Canada. o $14.7 trillion from the U.S.  Canada’s top exports in 2010 were: o Industrial goods and materials ($95 billion)  Increased 55% from 2000-2010. o Energy products ($93 billion)  Increased 72% from 2000-2010.  Caused by increased export quantities and the dramatic increase in market prices for oil. o Machinery and equipment ($69 billion)  Decreased 28% from 2000-2010.  Caused by growing sales by foreign companies.  Canada’s top imports in 2010 were: o Machinery and equipment ($113 billion) o Industrial goods and materials ($85 billion) o Automotive products ($68 billion)  U.S. has combined exports and imports of about $2.5 trillion.  U.S. exporters sell +$507 billion in services annually.  U.S. annual imports are nearing $2 trillion (world’s leading importer).  China and Japan have huge trade deficits due to NA’s strong demand for foreign-made goods.  Exchange rate: the value of one country’s currency in terms of the currencies of other countries.  Foreign exchange rates are affected by: o Economic and political conditions o Actions by the central bank o Balance-of-payments position o Speculation over future currency values.  Currency values fluctuate (“float”) depending on the supply and demand for each currency n the world market (floating exchange rates). o Currency traders create a market for the world’s currencies based on each country’s trade and the likelihood of investments. o They don’t float in total freedom (national governments can often step in to change their exchange rates).  Nations can also affect exchange rates by: o Forming currency blocs by linking their exchange rates to each other. o Practising protectionist policies that try to protect their economies against trade imbalances (i.e. devaluating their currency which increases exports and encourages foreign investment).  Devaluation: a reduction in a currency’s value in terms of other currencies or in terms of a fixed standard. o I.e. Brazil did this and experienced major foreign investment.  For an individual business, the impact of currency devaluation depends on where the business buys its materials and where it sells its products. o Business transactions usually use the currency of the country where the transactions take place.  Exchange rates can quickly create (or destroy) a competitive advantage.  Exchange rates are important factors when investors decide whether to invest in other countries.  Hard currencies: currencies that easily convert into other currencies.  Soft currencies: currencies that are hard to convert into other currencies. o When exporters trade with these nation’s, they prefer to barter with goods (i.e. oil, timber etc.) and then sell off the goods received for hard currencies.  The foreign currency market is the largest financial market in the world (daily volume of + US$3 trillion). o About 10x the size of all the world’s stock markets combined.  The foreign exchange market is the most liquid and most efficient financial market in the world.  International companies face: o The need to follow a variety of laws in the countries in which they operate  I.e. Australia and New Zealand set rules for hours and days retailers can open. o The need to exchange currencies o The need to adapt product offerings to suit different tastes in other countries o Social and cultural differences o Economic barriers o Legal and political barriers  To be successful in global markets, companies and their managers need to understand not only how these barriers affect international trade but also how to overcome them.  The social and cultural differences among nations range from language and customs to educational background and religious holidays. o Understanding and respecting these differences are important for international business success. o Businesspeople can win customers and meet their business goals by being sensitive to local views, to how people like to be addressed, and to suitable ways of dressing, using body language, and being on time or late.  I.e. Chinese students at Xiamen University learn golf along with studying business and law (since many business deals are made on the golf course). o Understanding a business colleague’s primary language can make the difference between closing an international business transaction and losing the sale.  Company workers in foreign markets not only must choose the correct and suitable words but also need to translate the words S correctly so they say what they want to say.  Some firms rename their products or rewrite slogans for foreign markets. o Companies may make mistakes by presenting messages using unsuitable media, overlooking local customs and regulations, or LANGUAGEIER ignoring differences in taste.  Creates an importance to carefully plan how a website will look. Most Spoken  I.e. a high-five hand signal would be insulting to people Languages in Greece. 1. Mandarin o Gift-giving traditions use the language of symbolism. Chinese  I.e. certain items are associated with negative thoughts. 2. English o People in different countries do not always share the same values or religious feelings.  I.e. NA society places a higher value on business efficiency and lower unemployment than European society. o In Ontario, the Employment Standards Act states that every employee is entitled to 2 weeks of vacation after working for a 12-month vacation entitlement period.  In EU, employees are given a minimum paid vacation of 4 weeks/year.  When a Canadian company open a factory in an EU country, it can hire local employees only if it offers vacation time as set by that nation’s practices. o NA culture values national unity and accepts regional differences (Canada and U.S. are seen as separate national markets).  European countries that are part of the EU are trying to create a similar marketplace. BARRo A consumer from Britain has different value from an Italian consumer. VALUES ANDITUDES  Activities need to adapt to address the differences of consumer values. o Businesspeople must also learn to be sensitive to the major religions in countries where they operate.  I.e. being aware of major holidays, diets, religious cycles etc.  Examples: o Islam’s month-long observance of Ramadan o Muslim’s do not drink alcohol and pork is seen as unclean.  Economic differences such as a nation’s size, its per-capita income, and its stage of economic development are important to consider when deciding whether a country is right for an international business venture. o Businesses that compete in world markets need to think about the host country’s economic measures.  Infrastructure: the basic systems of a country’s communication, transportation, and energy facilities.  I.e. India’s rapidly growing aviation infrastructure. o The need for 400 new airports, 3,000 new planes etc.  Financial systems provide a type of infrastructure for businesses. o I.e. buyers in Canada have access to cheques, credit cards, and debit cards, and to the electronic systems needed to process these DIFFERENCES IN payments. Io Foreign currency fluctuations may mean more problems for global businesses:  I.e. difficulty in pricing items in the local currency.  Devaluation can also make a nation less desirable to export to because of reduced demand in that country.  Can make the nation desirable for investment (buying power of the investor’s currency will be greater). CURRENCYAND SHIFTS COVELegal and political differences can also act as barriers. o Managers in international businesses need to be familiar with the legislation that affects their industries.  Some countries have trade restrictions; others have rules stating how foreign companies can operate. o In any international business investment, an important factor is the stability of the political situation. o Some nations sometimes pass laws to protect their own interest, sometimes at the expense of foreign businesses. CLIMATEPolitical structure changes almost always bring changes in the legal POLITICAL environment. o When doing business internationally, managers must be familiar with three dimensions of the legal environment:  Canadian law  I.e. the Corruption of Foreign Public Officials Act (CFPOA).  International regulations  Laws of the countries in which they plan to trade o Corruption is a major issue internationally.  The Organization for Economic Co-operation and Development’s Anti-Bribery Convention: signed by 40 countries making the offering or paying of bribes a criminal LEGAL offence. o Corruption Perceptions Index: computed by Transparency ENVIRONMENTernational that rates the degree of corruption observed by businesspeople and the general public. o The growth of online business has introduced new elements to the legal situation of international business.  Patents, brand names, trademarks, copyrights, and other intellectual property are difficult to keep watch over, given the availability of info on the Internet. o To make international commerce more standard, Canada and many other countries have treaties and signed agreements that describe the expected conduct of international business and protect some of its activities.  Canada has entered into many friendship, commerce, and navigation treaties with other nations. o International business agreements can involve:  The right to conduct business in the agreement partner’s home market  Product standards  Patents  Trademarks  Tax policies  Export controls REGULATIONS INTERNATIONAL  International air travel  International communications o The use and protection of water supplies is the one area with no international regulation.  IBM initiative to provide water-management tools and methods. o Many rules affect the actions of managers that do business in international markets.  Examples:  Worldwide producers and marketers must keep required minimum levels of quality in all countries where they operate.  There are numerous local regulations that have to be followed. o I.e. what is/isn’t allowed to be depicted in advertisements.  Trade restrictions include taxes on imports and complicated administrative procedures. o They may limit the products and services available to consumers and can increase the costs of foreign-made products. o They are used to:  Protect citizen’s security, health, and jobs  I.e. banning imports of food contaminated with insecticides.  Protect a country’s own security  I.e. limiting exports of strategic and defence-related goods to unfriendly countries.  Promote trade with certain countries  Protect countries from unfair competition o Most take the form of tariffs.  Tariff: taxes imposed on imported goods.  Two types of tariffs:  Revenue tariffs o Generate income for the government.  I.e. limits on how much you can spend when you cross the Canadian border into the U.S.  Protective tariffs o Purpose is to raise the retail price of imported products to match or top the prices of similar products made in the home country.  Try to limit imports and give local competitors an equal chance to succeed.  Tariffs do not always have the desired effect. o Administrative trade barriers are also called nontariff trade barriers.  They restrict imports without using the strict rules that tariffs use.  They can be in the form of:  Quotas on imports o Quota: a limit set on the amounts of particular products that can be imported. o They can be set as quantities (i.e. x bushels of wheat) or as values (i.e. $x worth of cigarettes)
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