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Chapter 5

Chapters 5, 18


Department
Rotman Commerce
Course Code
RSM100Y1
Professor
Michael Szlachta
Chapter
5

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Chapter 5 t Understanding International Business
Globalization is when more and more firms begin to engage in international business, thus
making the world economy single interdependent system. Governments and businesses have
become aware of the benefits of globalization for their countries and stockholders. New
technology also have made international travel, communication and commerce; easier, faster
and cheaper. Globalization is not without its critics, who charge that it allows businesses to
exploit workers in less developed nations and bypass domestic environmental and tax
regulations
An absolute advantage ]v]}v[]o]Ç}produce a good more cheaply and better than any
other country (e.g. Canadian timber, Saudi oil, Brazilian coffee beans). A comparative
advantage ]v]}v[]o]Ç}produce a good more cheaply or better than others. For
example, if a business in a given country can make computers more efficiency than it can make
automobiles, the business has a comparative advantage in making computers.
National Competitive Advantage: A country will be inclined to engage in international
businesses when 4 certain conditions are favourable;
- Factor conditions - factors of production; labour, capital, entrepreneurs and natural
resources
- Demand conditions - must contain large domestic consumer base that promotes strong
demand for innovative products
- Related and supporting industries - includes strong local or regional suppliers and/or
industrial customers
- Strategies, structures, and rivalries t firms that stress cost reduction, product quality,
higher productivity and innovative new products
When the following conditions are met a nation will naturally engage in international business
}µvÇ[balance of trade is the difference in the total Àoµ}(v]}v[ total exports and
imports. The balance of payments is the flow of money into and out of a country. For example,
this can include the money spent by tourist, money spent or received in exchanging currency,
export/import, and earnings from foreign investments.
Exchange Rates and Competition
Companies participating in international trade must watch exchange rate fluctuations closely
because changes can affect the overall demand overseas for their product and can be a major
factor ]v]vv]}vo}u]]}vXtZv}µvÇ[µvÇ]U}uv](]v]u}
difficult to export their products to the foreign market, and it becomes easier for foreign
companies to enter the local market. This usually makes larger domestic companies to move
their production operations to lower-cost sites in foreign countries.
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A multinational firm }v}oU(}]U}((]UY]vÁ}}u}(}]Pv}µv]
A business should only consider going international after assessing several factors that should
]v(vZµ]v[]]}vV
- /Z]vv]}vouv(}Z(]u[}µM
- Can the product be modified to fit a foreign market?
- Is the foreign business climate suited to imports?
- Does the firm have or can it get the necessary skills and knowledge to do business
abroad?
Levels of Involvement in International Business
Exporting and importing represent the lowest level of involvement in international operations.
An exporter firm makes products in one country and sells it in the foreign market, while an
importer buys products from the foreign market and sells them in its home country
An international firm is the next level of involvement. Once firms gain enough success and
experience as importers and exporter, they become international firms; a company that
conducts a significant portion of its business abroad and maintains manufacturing facilities
overseas
International Organization Structures
An independent agent is a foreign individual that will revvÆ}[]v]vZ
foreign market. They sell the exporters product, collect payment and make sure the customer is
satisfied
Licensing arrangement are made by an owner of a product, thus allowing another business to
produce and market the product for a fee or royalty
Branch offices are a location that an exporting firm will establish in a foreign country. Branch
offices allow companies to sell their products more effectively, by giving companies a more
visible public presence, thus making potential customer feel more secure. When a company
decides to put one location in charge of research, developing, manufacturing, and marketing
one product t this is called world product mandating
Foreign Direct Investment (FDI) is when firms buy or establish tangible assets in another
country. Investment Canada was created in 1985 to replace FIRA, designated to attract foreign
investment in Canada
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Is FDI hurting the Canadian economy?
Recently FDI has caused many issues for Canadian businesses. FDI can damage the Canadian
economy in many different ways. For example, buyouts of Canadian firms will cause the head
offices to be moved into the foreign countries and major decision will be made there. Another
concern is that when foreign takeover will lead to massive amount of job losses in Canada.
Many experts also believe that limitation on the foreign involvement in Canada can essentially
shield companies from competition and make them less efficient
Barriers to International Trade
Many factors can make international trade very difficult. For example;
Social and cultural differences can cause problems such as; language barriers, differences in
average age can affect the demand market, and business behavioural differs from country to
country
Economic differences can also cause issues in foreign trade. A foreign firm doing business in a
command economy must understand the unfamiliar relationship between the government and
business
Legal and political differences are related to the structure of the economic system in different
countries. These issues include tariffs and quotas, local-content laws and business-practise law.
Many countries consisting of free markets economies often use some form of quota and/or
tariff that can affect the price and quantities of foreign-made products in those nations. A
quota restricts the total number of certain products that can be imported into a country. The
ultimate form of a quota is an embargo: a government forbidding exportation and/or
importation of a product (or even all products) of a certain country. Tariffs are taxes charged
for imported products. A revenue tariff is made strictly to raise money for the government, but
most tariffs in effect today are protectionist tariffs, which are meant to discourage the
importation of a certain product. A subsidy is a government payment to help domestic business
compete with foreign firms. If a government hands out subsidy to one of its domestic
industries, it can have a negative effect on producers in other countries
- Protectionism t the practise of protecting domestic business at the expense of free
market competition. Supporters argue that tariffs and quotas protect domestic firms
and jobs, by being able to protect new industries until they are ready to go
international. On the other side, opponents of protectionism note that it reduces
competition and drives up prices for consumers. They also note that although jobs in
one industry will be loss, jobs in other countries would expand
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