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RSM100Y1 (431)
Chapter 4

Chapter 4.docx

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Rotman Commerce
Michael Khan

Chapter 4 – Kayla Seto Inside Business: PotashCorp: Genesis for Economic Development  Generates wealth by creating commodities for Canadians and international customers (i.e. oil, natural gas, gold, etc) o Resources that businesses need to make their outputs Chapter 4 Overview  International trade = future success  Companies LF> new markets for their goods/services o Also LF> cost-effective factory locations  Business cannot rely on domestic sales alone o Other country = new market/profit opportunities  Export; domestically produced goods sold in foreign countries  Import; foreign products purchased by domestic customers  Canadian Ethorts + Imports = ~30% of GDP o 10 largest exporter o E/I worth more than $400 bil each  International business/trade: o Must work w/ new social/cultural practices o Different economic/political environment o Must change business plans to fit those requirements of different countries WHY NATIONS TRADE  Important for financial success (expanding into other countries) o iTD Bank bought Ameritrade in 2006 o Bombardier sells jet aircrafts around the world o Takes advantage of large population, healthy resources, etc o Increases economic growth by providing:  New market for products  Access to needed resources International Sources of Factors of Production  Operating abroad depend on: availability, price, quality of labour, natural resources, capital, and entrepreneurship [FACTORS OF PRODUCTION] o i.e. India -> many qualified computer scientists = many firms set operations here to take advantage, some outsourced to India (IT and Customer Service jobs)  allows to spread risk b/c different nations = different part of business cycle (demand might be different) Size of the International Marketplace  World population = ~7 bil, w/ 1/6 in well-developed countries  Developed nations = lower birthrate = not so developed -> higher population  Increases chances of reaching new group of customers o China/India = large populations  Canada ranked 36 in population rankings, 11 on GDP / capita  Developing nations = lower GDP / capita Chapter 4 – Kayla Seto o Despite low income, huge population, still profitable markets for some companies  Want to benefit from local sales b/c of expanding economies o Wal-Mart has expanded into China – Brazil, becoming a global company  Canada’s trade tied w US , and vice versa o Similar social/cultural views o Closeness helps for transportation, communication, cross border trade Absolute and Comparative Advantage  Few countries can produce all goods/services they need o trading helps meet demand for goods/services  countries can focus on what they do best, export, then import  foreign sales depend on whether it has absolute or comparative adv  absolute advantage: when it has a monopoly over making product or produce product at a lower cost than others (RARE NOW)  comparative advantage: when it can supply products more efficiently and @ lower price than it can supply other goods, compared w outputs of other countries MEASURING TRADE BETWEEN NATIONS  Balance of trade and balance of payments o Helps understanding of trade inflow/outflow o Important note -> exchange rate between countries o Balance of trades: Nation’s exports – imports  Exports > imports = trade surplus  Imports > exports = trade deficit o Balance of payments: overall $ flow into/out of country  Affected by oversea loans, borrowing, international investment, profits from it, foreign aid payments  Monetary Inflow – Monetary outflow  + = balance of payments surplus  - = balance of payments deficit Major Canadian Exports and Imports  Global economy > $74 tril total GDP o Canada’s: 1.3 tr , US: 14.7 tr  Energy product exports => + 72% since 2000  Import: Canada’s top = Machinery and Equipment, Industrial goods and materials, and automotive products,. o Net exporter of energy, but also increased imports of energy  US leads world in international trade of goods/services o Exports + imports = 2.5 til $ o Ranges from machinery and vehicles to crude oil and chemicals o Reflects America’s ability to produce wide range of products for the world consumption o Imports > exports  US Services; sells > $507 bil in services annually o Most come from travel/tourism – foreign nationals visiting US Chapter 4 – Kayla Seto o Exports include; business and technical services (engineering, financial services, computing, legal services, entertainment)  US demands foreign made goods, from clothing to consumer electronics (shoes huge trade deficits with two nations that export most consumer goods to North America – China and Japan) Exchange Rates  Value of country’s currency in terms of other currencies  Important economic measure  Factors that affect foreign exchange rates: o Economic/political conditions, actions by central bank, balance of payments, position, speculation over future currency values o Can fluctuate or “float” depending on supply/demand o Floating exchange rates: currency trades create market for world’s currencies based on each country’s trade and likelihood of investments  National government often step in to change exchange rate  Nations can link exchange rates together, or plan o Devalue currency = increase exports and encourage foreign investment  Devaluation: reduction in currency’s value in terms of other currencies or fixed standard o Effects on individual businesses:  Depends on where it buys materials and sells products  Usually uses currency of where it takes place  Exchange rate changes can create/destroy competitive advantage o Important factor to investor when deciding to invest  Hard currencies: currencies that easily convert into other currencies o Euro, US, Yen  Soft currencies: Opposite of above o Russian ruble, many central European o Exporters who trade with these prefer to barter (accept payment not in cash but in goods; oil, commodities, etc)  Foreign currency market = largest financial market in world BARRIERS TO INTERNATIONAL TRADE  Some countries have rules of when retailers can be open  International companies must comply to sets of laws/exchange currencies  Might need to change product to suit needs better o i.e Oreo cookies less sweet in China  social/cultural differences, economic barriers, and legal/political barriers (languages, values, regulations, restrictions) o some are easy to deal w/, but some affect whole business strategy Social and Cultural Differences  Ranges from language and customs  education background and religious holidays  Understanding/respecting == important for success  Can win clients and meet business goals by being aware of local views Chapter 4 – Kayla Seto o i.e. Chinese students learn golf, because some business deals are made on a golf course  LANGUAGE o English: 2 most widely spoken language in world st o Mandarin Chinese = 1 o Understanding primary language can make a difference o Websites have to also be “internationally” friendly  i.e. white is the colour of death, 4 is unlucky number o hand gestures also!!!  VALUES AND RELIGIOUS ATTITUDES o Not everyone shares same values/religious attitudes o N. America  Business Efficiency and Lower Employment o Europe  Employee benefits more valued  i.e. more vacation time o N American culture values national unity and accepts regional differences o Business people must be sensitive to religious views (i.e. holidays, etc)  i.e. Gifting of Pig or Alcohol = Bad in Muslim people Economic Differences  N American business often does well in densely populated areas o China/India eager to buy western products o Must consider country size, per capita income, stage of economic development  Infrastructure; basic system of country’s communication, transportation, and energy facilities o i.e. TV, Radio, roads/highways, power plants, Internet o must be considered when thinking about country’s economic measures o financial systems provides type of infrastructure  i.e. Canada business’ accept whole range of payment – cheques, credit card, etc… Many African countries (local businesses) don’t accept credit card  Currency Conversion and Shifts o Rapid unexpected changers = difficulty pricing items in local $ o Can also affect business decisions o Devalued $ may make nation less desirable to export to  But can also be desirable as investment opportunity Political and Legal Differences  i.e. China government strict about Internet usage o uses censorship o many Chinese websites trying to register overseas to avoid  managers in international business must be familiar o general trade restrictions, etc  Political Climate o Stability of political situation o Host nations often pass laws to protect own interests  Even at cost of foreign business Chapter 4 – Kayla Seto o Change in political structure = change in legal environment  Legal Environment o Must be familiar with Canadian Law, international regulations and laws of country in which they plan to trade w/  Some laws protects right of foreign country to compete in Canada o Canada’s Corruption of Foreign Public Officials Act (CFPOA)  American Foreign Corrupt Practice Act ( FCPA)  Illegal for companies to bribe foreign officials, political candidates, government reps  Fines and jail time for managers  Organization for Economic Co-Operation and Development’s Anti-Bribery Convention (signed by many countries)  Ends tax reduction for bribes  Makes it a criminal offence o Corruption = international problem  Commonness of bribing + international rules against bribery -> difficult for Canadians who want to do business in foreign countries o Growth of online business introduced new elements  Hard to keep watch (patents trademarks, copyrights, etc)  Availability of information over Internet  Some countries have laws against obtaining things o International Regulations  International commerce standardized: Canada + other countries have treaties/signed agreements on expected conduct of international business  Canada has entered Friendship, commerce, and navigation treaties w other nations  Describes many aspects of international business relations (i.e. right to conduct business in treaty partner’s home market)  China X US trade relations  Each side agreed on something (i.e. lower taxes, have business access, etc)  Worldwide products = must meet min req for quality  And numerous local regulations Types of Trade Restrictions  Ex. Traxes on imports, complicated admin procedures  Additional barriers to additional business x.x  May limit goods/services to consumers, increase costs of foreign g/s  May limit exports of strategic/defense related goods  May be made
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