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Chapter 5

Textbook Summary Chapter 5 Concise notes on chapter 5 of the textbook

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University of Toronto St. George
Rotman Commerce
John Oesch

RSM 100 Y1 Chapter 5 The Contemporary Global Economy Globalization: The integration of markets globally. Imports: Goods that are made abroad but sold domestically. Exports: Goods that are made domestically but sold abroad. International trade becoming INCREASINGLY CENTRAL. Reasons why: 1. Governments and businesses more aware of benefits of globalization 2. New technologies made international travel, communication and commerce, easier, faster and cheaper. 3. Competitive pressures. Reasons against: 1. Exploitation of workers in LDCs and bypass domestic environmental and tax regulations. 2. Loss of cultural heritages and benefits the rich more than the poor. 3. Any economic downfall would affect any interconnected economies if globalized. 1. The Major World Marketplaces Use of “per capita income” to divide countries into one of four groups. i. High-income Countries Annual “Per capita income” greater than US $11,115 ii. Upper-middle-income Countries Annual “Per capita income” between US $3595 and $11,115 iii. Low-middle-income Countries Annual “Per capita income” between US $905 and $3595 iv. Low-income Countries Annual “Per capita income” less than US $905. Due to low HDI, these countries are less attractive to international businesses. 1. Geographic Clusters There are THREE major marketplaces in the world. The THREE are generally upper-middle and high-income countries, as they include the world’s largest economies, biggest corporations, most influential financial markets and high- income consumers. 1. North America The United States of America is the single largest marketplace and has the most stable economy in the world. Canada also is quite a large economy. The US and Canada are each other’s trading partners. Mexico has also become a major part of the economy, where cheap labor and low transportation costs have attracted many international businesses. 2. Europe There are TWO DIVISIONS in Europe, WESTERN and EASTERN. Western is mostly Germany, Italy, France and the UK. Eastern has many international manufacturing facilities set up, but due to the government instability, the economic development in regions such as Russia and Bulgaria have been hampered and the recession exacerbated the situation. 3. Asia-Pacific Japan, Taiwan, China, Thailand, Korea, Indonesia, Singapore, Philippines and Australia. Strong entries in the automobile, electronics and banking industries. Major source of competition for North American firms. 2. Forms of Competitive Advantage There is trade in the global economy because no country can produce ALL necessary goods and services. Reasons for why countries engage in international trade are: 1. Absolute Advantage: When a country can produce a product a lot cheaper and of better quality than any other country. 2. Comparative Advantage When a country is able to produce some products cheaper and of better quality than it can other products. 3. National Competitive Advantage When the four conditions are favorable: i) Factor Conditions ii) Demand conditions iii) Related and Supporting Industries iv) Strategies, structures and rivalries They determine the environment. International Competitiveness: Ability of a country to generate more wealth than its competitors in world markets. 3. Import-Export Balances There are two measures in measuring the overall balance of imports and exports. 1. Balance of Trade Difference in value between a nation’s total export and total imports. A country that EXPORTS MORE has a TRADE SURPLUS. A country that IMPORTS MORE has a TRADE DEFICIT. 2. Balance of Payments Difference between money flow into the economy and out of the economy as a result of trade and other transactions. Not just trade, but money spent by tourists, money spent on foreign aid programs and money spent on buying and selling of currency on international money markets all affect balance of payments. An UNFAVORABLE SITUATION occurs when more money FLOWS OUT than into the economy. 4. Exchange Rates The RATE at which the CURRENCY of one nation can be exchanged for that of another. A currency is STRONG when there is HIGH DEMAND for the currency. Fixed Exchange Rate: A value of a currency is CONSTANT compared to another currency. Floating Exchange Rate: A value of a currency is based on MARKET CONDITIONS. Example: If the CANADIAN DOLLAR becomes STRONGER than the British Pound, the PRICES of CANADIAN PRODUCTS would RISE in ENGLAND and the PRICES of ENGLISH PRODUCTS will fall in CANADA. The English will buy FEWER Canadian goods and Canadians will buy MORE English goods. This will lead to a Canadian trade deficit in England. 1. Exchange Rates and Competition Companies with international operations must watch for currency rate fluctuations as that will affect overseas demand for their products. When a value of a country’s DOMESTIC currency rises (STRONGER), companies based there find it HARDER to EXPORT goods to foreign markets and it is EASIER for FOREIGN companies to enter local markets. It also makes it COST-EFFICIENT for DOMESTIC companies, to move facilities to lower-cost sites in foreign countries. When a value of a country’s DOMESTIC currency decreases (WEAKER), the opposite occurs. As the value of a country’s CURRENCY FALLS, it’s BALANCE OF TRADE should IMPROVE, because domestic companies should experience a BOOST of EXPORTS. There will also be a DECREASE in the INCENTIVES for foreign companies to sell products DOMESTICALLY. International Business Management The difficulty of international business management is that the business operates in several markets scattered around the world. It is therefore difficult to make decisions for the business. 1. Going International Gauging International Demand: A company must decide whether there is demand for their products abroad. The purpose of the products may also differ according to locations. Bicycles in China are transportation while in Canada they are recreational. Therefore, MARKET RESEARCH is KEY. Adapting to Customer Needs: 1. If there is demand, the business must then consider how to adapt the product to meet the special demands and expectations of the foreign customers. Examples: Movies must be translated. McDonald’s in France sell wine, beer in Germany and meatless sandwiches in India to meet local tastes and preferences. 2. Assessment of the business skills needed to operate in the foreign country is also needed. 2. Levels of Involvement in International Business 1. Exporters and Importers LOWEST level of involvement. Exporti
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