Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc CHAPTER 2: Trade in the Modern World

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Key Terms  importing  global sourcing  exporting  value added  licensing agreement  exclusive distribution rights  franchise  joint venture  foreign subsidiary  protectionism  trade quotas  trade embargo  trade sanctions  exchange rate  floating rate  currency revaluation  currency devaluation  terms of trade  hard currencies  soft currencies  currency speculating

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Chapter Objectives By the time you finish this chapter, you should be able to:  Identify the types of international businesses  Describe the impact technology has had on the international business environment  Identify the factors that affect foreign exchange rates  Explain how changes in the value of the Canadian dollar can affect business opportunities  Identify the types of products that trade freely into and out of Canada and those that are restricted in their movement  Identify and locate on a map Canada’s major trading partners

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Reasons that Canada trades:  Company growth  Entry into new markets  Expanded customer base  Increased profits  Access to inexpensive supplies  Lower labour costs  Access to financing © iStockphoto.com

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Foreign portfolio investment  Investment in businesses located outside of Canada through stocks, bonds, and financial instruments  Allows Canadians to spread out their investments, which is less risky than investing in just one area  Also provides greater choice and opportunity

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Importing To bring products or services into a country, for use by another business or for resale. The majority of the goods that Canada imports come from the United States. Global sourcing The process of a company buying equipment, capital goods, raw materials, or services from around the world. © iStockphoto.com

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Exporting To send goods or services to another country, for use by a business or for resale. The majority of goods that Canada exports go to the United States.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Value added The amount of worth that is added to a product at each stage of processing. It is the difference between the cost of the raw materials and the finished goods.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Photos: © iStockphoto.com

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Licensing agreement An agreement that grants permission to a company to use a product, service, brand name, or patent in exchange for a fee or royalty. Exclusive distribution rights A form of licensing agreement that grants a company the right to be the only distributor of a product in a specific geographic area or country.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Franchise An agreement granted to an individual or group by a company to use that company’s name, services, products, and marketing. For a fee, the franchisor provides support to the franchisee in the areas of financing, operations, human resources, marketing, advertising, quality control, etc.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Joint venture A common type of international business, in which a new company with shared ownership is formed by two businesses, one of which is usually located in the country where the new company is established.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. International Business Practices Foreign subsidiaries Often referred to as a wholly owned subsidiary, a branch of a company that is run as an independent entity in a country outside of the one in which the parent company is located. The parent company often sets financial targets, and allows the subsidiary to manage its own day-to- day operations as long as those targets are being met.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Trade Barriers Tariffs Tariffs, the most common type of trade barrier, are taxes or duties put on imported products or services. Tariffs raise the cost of imports, so that locally manufactured products are less expensive and more appealing to consumers.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Trade Barriers

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Trade Barriers Protectionism The theory or practice of shielding domestic industries from foreign competition, often through trade barriers such as tariffs.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Trade Barriers Trade quotas A government-imposed limit on the amount of product that can be imported in a certain period of time. Trade embargo A government-imposed ban on trade of a specific product or with a specific country, often declared to pressure foreign governments to change their policies. Trade sanctions Economic action taken by a country to coerce another to conform to an international agreement or norms of conduct.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Trade Barriers Foreign investment restrictions  Canadian law with the greatest impact is the Investments Canada Act  Ensures that all foreign investments are reviewed to determine how they will benefit Canada

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Trade Barriers Standards  Countries have different standards for products in areas such as environmental protection, voltage, and health and safety  The ISO (International Organization for Standardization) is a network of standardization groups from over 170 countries established to set quality regulations

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Exchange rate The amount of one country’s currency in relation to the currency of another country. The Canadian dollar (CAD) is most often quoted against the U.S. dollar (USD) because the two countries are the largest trading partners in the world.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Winners of a High Canadian Dollar  Importers  Canadian travellers  Major league sports teams in Canada © iStockphoto.com

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Losers of a High Canadian Dollar  Exporters  Canadian tourism  Canadian retailers

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Floating rate An exchange rate that is not fixed in relation to other currencies. The price at which currency with a floating rate is bought and sold fluctuates according to supply and demand.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Currency revaluation The increase in value of a currency because the demand for that particular currency is greater than the supply. Currency devaluation The decrease in value of a currency because the supply of that particular currency is greater than the demand for it.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Factors Affecting the Exchange Rate  Economic conditions in Canada—inflation rate, unemployment rate, GDP, interest rates  Trading between countries—the more favourable the terms of trade (comparison of exports to imports), the higher the currency exchange  Politics—political tension and instability or the threat of terrorism decreases the demand for a currency  Psychological factors—historical significance and stability change the way currencies are viewed

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Hard currencies Stable currencies, such as the euro, and the U.S. and Canadian dollars, which are easily converted to other currencies on the world exchange markets. Soft currencies A currency belonging to a country with an economy that is small, weak, or that fluctuates often, and is difficult to convert into other currencies, such as the Russian ruble or the Chinese yuan.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Currency Fluctuations Currency speculating Buying, holding, or selling foreign currency in anticipation of its value changing in order to profit from fluctuations in the price of currency. Used under license from Shutterstock, Inc.

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Time Zones  Communication technology allows the world of international business to operate twenty-four hours a day  Certain methods of communication can be used at any time ( ); other methods (telephone) require knowledge of time zones  Some methods offer immediate feedback and interaction; others do not

Chapter 2: TRADE IN THE MODERN WORLD Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc. Time Zones Used under license from Shutterstock, Inc.