Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. CHAPTER 4 Understanding International Business

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-2 Explain how free trade agreements assist world trade Describe the rise of international business and identify the major world marketplaces 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 Learning Objectives

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-3 More Learning Objectives Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure Describe some of the ways in which social, cultural, economic, legal, and political differences act as barriers to international trade

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-4 The Global Marketplace Total volume of world trade is around $8 trillion annually Globalization the world is becoming a single large market an interconnected system

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-5 Imports Products purchased in Canada which are manufactured and shipped in from other countries

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-6 Exports Products made in Canada which are purchased by consumers in other countries

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-7 Trade Agreements General Agreement on Tariffs and Trade The North American Free Trade Agreement European Union Free Trade in the Americas ASEAN Free Trade Agreement Asia-Pacific Economic Cooperation Economic Community of Central African States Gulf Cooperation Council

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-8 European Union Reduces tariffs on products traded within the union Imposes higher tariffs on products coming in from outside of the union Imposes limiting quotas on products coming in from outside of the union

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 4-9 North American Free Trade Agreement Came into effect in 1994 Goal to remove tariffs and other trade barriers among Canada, the United States and Mexico

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Consumers’ Fears of Free Trade Job losses Market flooded with goods produced in low-wage countries like Mexico Loss of control over environmental standards US takeover of Canada’s natural resources Loss of Canadian cultural sovereignty

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Consumer Support for Free Trade Access to lucrative US markets for Canadian exporters Increased jobs due to increased exports Environment is not covered or threatened by free trade agreements No evidence of dumping of US or cheaply produced products in Canadian markets as a result of free trade

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Competitive Advantage Absolute advantage a country can produce a product at a lower cost and/or higher quality than any other country Comparative advantage a country can produce certain items more cheaply than it can other items

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc National Competitive Advantage Four conditions are required for a country to have a national competitive advantage

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Imports < Exports = Trade Surplus (Favourable) Exports < Imports = Trade Deficit (Unfavourable) Balance of Trade

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Balance of Payments Difference between cash flowing into the country and out of the country Cash flow in exports, foreign tourist spending in Canada, foreign investments in Canada, earnings from Canadian investments outside of Canada Cash flow out imports, Canadian tourist spending outside of Canada, foreign aid, military expenditure outside of Canada, Canadian investments outside of Canada, earnings of foreign investments in Canada

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Foreign Exchange Rate Ratio of the currency of one nation to the currency of another nation When the value of the Canadian dollar depreciates exports increase and imports cost more When the value of the Canadian dollar appreciates exports decrease and imports cost less

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Deciding To Pursue International Markets

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Importing or Exporting via Independent Agent Licensing Agreements Establishing a Branch Office Choosing a Strategic Alliance Multinational Firm Levels of Involvement in International Markets

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Multinationals Multinational firms enjoy a worldwide presence, allowing them to benefit from favourable exchange rates, technology and expertise Many multinationals provide needed jobs, prosperity, technology, and growth to developing nations Multinationals are often criticized for taking resources out of the country, and not doing enough to develop local labour markets

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Foreign legal requirement Increased sales due to local presence Ease of handling a large foreign business base Why Have a Branch Office?

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Strategic Alliances Strategic alliance “joint venture” or “partnership” between two independently owned firms May be mandated in some nations Useful if a firm lacks an intimate knowledge of the culture and business environment in the foreign nation

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc CompanyRevenue (Billions) General Motors of Canada Ltd. Ford Motor Co. of Canada Ltd. Daimler/Chrysler Canada Inc. Imperial Oil Ltd. Honda Canada Costco Wholesale Canada Shell Canada Ltd Sears Canada Inc.. Canada Safeway Ltd. IBM Canada $ Top Ten Foreign Controlled Companies in Canada

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Barriers to Trade Social and Cultural Differences Economic Differences Legal and Political Differences Quotas/Tariffs/Subsidies Local Content Laws Business Practice Laws

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Social & Cultural Differences Language Population demographics Shopping habits Religious differences Social beliefs

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Economic Differences The role of government in the economy Planned vs. Market economies capitalist socialist communist

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Quotas, Tariffs, & Subsidies Embargo forbidding export/import from a nation (US vs. Cuba) Quota limitations on importation of a product class Subsidy government financial assistance for domestic firms Tariff: a tax on imported goods Protectionist measure to protect domestic producers Raises government revenues as well

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Local Content Requires that at least part of the product be made in the export (foreign) country (may result in joint venture) Includes the practice of Canadian provinces buying from their own companies before going outside of the province

Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc Business Practices Bribes seen as “gratuities” to government officials in some nations Dumping the practice of selling goods abroad for less than a firm charges in its home market, is illegal in most nations Cartels associations of producers created to control supply and demand (OPEC)