Chapter 4: International Business What Is International Business?

Chapter 4: International Business What Is International Business?
A domestic transaction is the selling of items produced in the same country. An international transaction is the selling of items produced in other countries. These items contribute to the global economy. Benefits for Business access to markets cheaper labour increased quality of goods increased quantity of goods access to resources International transactions (foreign trade) involve creating, shipping, and selling foods and services across national boarders. The global economy is the exchange of goods and services among people in different countries throughout the world.

Benefits for Business Access to Markets By trading abroad, Canadian businesses can gain access to markets that are 200 times larger than those at home. Customers in other parts of the world have different needs and wants. Businesses must make adaptations to their products and services to be successful in other countries. A global product is a standardized item that is offered in the same format in all countries. Cheaper Labour Lower prices as the result of cheap labour in other countries is the number one reason why consumers buy items made in different parts of the world. BENEFITS FOR BUSINESS? Access to Markets Examples of standardized, or global product are pencils, soccer balls, and cameras. Packages food items are not generally global products. Cheaper Labour Canadian businesses, in an attempt to lower costs of production, use cheap foreign labour to maximize profits.

Increased Quality of Goods International business can help producers improve the quality of the products they sell. Increased Quantity As long as a product has international appeal, so does the potential for increased sales. Access to Resources Connections to international markets provides businesses with increased access to the three types of economic resources: natural, human, and capital. BENEFITS FOR BUSINESS? Increased Quality of Goods Products such as luxury cars as parts manufactured in many different countries come together to form the finished product. Increased Quantity Companies may have to increase production to meet demand, this may means increased efficiency, longer hours of operation or the establishment of new facilities. Access to Resources Natural Resources: bamboo from China to make furniture Human Resources: cheap factory labour in India Capital Resources: specialized machinery made in Germany

The Five Ps of International Business All countries benefit when businesses produce specialized goods and services that appeal to consumers. International business provides increased markets for businesses and offers them a broader choice of products, services, and prices for its consumers. Product Price Proximity Preference Promotion THE FIVE Ps OF INTERNATIONAL BUSINESS As businesses expand internationally they create jobs at home and overseas. Knowledge that is exchanged, as a result of international business, it results in new approaches to production, marketing, and selling that benefits domestic consumers as well as producers. Political benefits also materialize, dialogue and understanding are improved and communication and respect are enhanced.

Product A country’s resources determine what goods and services it produces. Price The cost of producing goods and services varies from country to country. Sometimes it may be more profitable for Canadian businesses to produce products overseas and then ship them here to sell to consumers. Lower foreign wages, taxes, and material costs make it cheaper to produce products abroad rather than domestically. Proximity It may be more advantageous and profitable for some businesses to sell products and services to consumers near a neighbouring country’s border rather than to its domestic customers. For example, 80 percent of the Canadian population lives within 170 km of the American border. Therefore, many Canadian businesses trade extensively with Americans. The reverse is also true: Americans market many of their goods and services to Canada. THE FIVE Ps OF INTERNATIONAL BUSINESS Product Due to out geographical location and seasonal climate change Canada imports crops (such as citrus all year and strawberries in the winter) from other countries. Canada exports products such as timber and grain that we have an abundance of. Price Lower production costs may mean lower prices for consumers, causing increased units sold, therefore improved profits. Proximity Historically trade between countries was heavily dependant on proximity; the closer a business or individual that you traded with the greater an asset they were to you or your business.

Preference Consumers often purchase foreign goods and services based on their reputation and specialization, even though similar products are produced domestically. Two examples are Swiss watches and Belgium chocolates. Promotion Technology, especially the Internet, makes it easy for businesses to promote their products and services internationally. THE FIVE Ps OF INTERNATIONAL BUSINESS Preferences Some foreign products that Canadian consumers purchase due to preference are Belgian chocolate, Swiss watches, Australian wine, German cars, and Cuban cigars. Promotion Before global communication methods (such as satellite broadcasting and the Internet) businesses found it difficult to let others far away know about themselves. According to Interbrand Corp.’s website a business can develop a global brand name in three years by using the Internet. Easy promotion is an incentive for companies to create an international presence.

Costs of International Trade The hidden or social costs often associated with international trade include offshore outsourcing, human rights or labour abuses, and environmental degradation. Offshore Outsourcing Offshore outsourcing occurs when businesses decide to produce all or part of their goods in countries where labour costs are lower. Some advantages include proximity to natural resources, more efficient technology, indigenous innovation, and favorable tax structures. However, offshore outsourcing faces potential changes in the future as companies may turn to transnational corporations that operate in several countries to produce their goods and services. COSTS OF INTERNATIONAL TRADE Offshore Outsourcing Also, known as contracting out, offshore outsourcing is the practice of subcontracting work to other companies to lower costs or to focus on tasks done better. High-tech jobs and customer support services are commonly outsourced to India, China, and Costa Rica. Cost associated include salaries, benefits, training, and recruiting. Services (bookkeeping and accounting) can also be outsourced. Time differences allow work to be done overnight and submitted in the morning. Transnational (multinational) corporations operate in several nations.

Human Rights Issues and Labour Abuses Some workers in poor countries face labour exploitation, such as physical and sexual abuses, forced confinement, non-payment of wages, denial of food and health care, and excessive working hours. Child labour—the regular employment of boys and girls under the age of 16—is commonly practiced in poor countries where the workforce is often exploited. Environmental Degradation Sustainable development is the process of developing land, cities, businesses, and communities that meet the needs of the present generation without compromising those of the future. Environmental degradation is the consumption of natural resources, such as trees, water, earth, habitat, and air, faster that nature can replenish them. COSTS OF INTERNATIONAL TRADE Human Rights Issues and Labour Abuses Sometimes the Canadian company outsourcing is not aware to the abuses. The International Labour Organization (ILO) is the UN specialized agency that seeks the promotion of social justice and internationally recognized human rights. The ILO estimates that there are nearly child domestic workers in Indonesia. According to the the ILO girls under 16, doing housework and child care, is the largest category of child labour. Environmental Degradation Sometimes businesses ignore the damage growth causes in the name of business goals. Businesses should be aware of the impact that their procedures and policies have on the environment and invest in solutions.

Barriers to International Business The Canadian government uses barriers, often referred to a roadblocks, to help protect domestic businesses and consumers. Tariffs Tariffs, also called customs duties, are a form of tax on certain types of imports. Finished imported goods include tariffs, which increase their prices. Canadian products do not carry such tariffs, and, therefore, may be sold at lower prices. In an effort to protect their domestic industries, countries put up tariff barriers by increasing the cost of imported goods. BARRIERS TO INTERNATIONAL BUSINESS Canada prohibits the entry of goods such as illegal narcotics, certain weapons, and products made from endangered animals; print material that is obscene or that promotes hatred or treason. Goods coming into Canada have to inspected, accompanied by a valid permit, or have special packaging and labeling. The Canadian Food Inspection Agency tests of antibiotics, drugs, and hormones in meat, allergens and pesticides in good, and other threats to food safety. See Table 4.1, “Imported Goods That Require Permits, Inspection, or Special Packaging” on page 124. Tariffs Custom duties (tariffs) are an amount added by a country to the cost of an imported product. The duty is usually a percent of the price of the product, depending on the tariff of the country. Finance Canada monitors Canadian, and international, tariff polices to ensure the development of new polices that will best serve the Canadian economy. Effective January 1, 2005, the government eliminated tariffs on fibre, yarn, and textile inputs used by the apparel industry imports. This change saved the domestic industry more than $90 million.

Non-tariff Barriers Non-tariff barriers are controls or standards for the quality of imported goods set so high that foreign competitors cannot enter the market. Costs of Importing and Exporting The price of a product or service must take the landed cost into consideration. The landed cost is the actual cost of an imported purchased item, composed of the vendor cost, transportation charges, duties, taxes, broker fees, and any other charges. BARRIERS TO INTERNATIONAL BUSINESS Non-tariff Barriers Standards for safety and environmental controls can limit the competition because of the cost to comply. Another barrier is the requirement of an expensive licence to sell goods in the country’s market. Customs inspections at a country’s border can also impose barriers. Costs of Importing and Exporting Price is based on the cost of manufacturing, plus the costs of storage, marketing, shipping, advertising, overhead, and the profit margins. Some examples of import/export costs include airfreight, translator, interest charges, labeling costs, etc. A foreign purchase is not always a better deal than a domestic purchase.

Excise Taxes An excise tax is a tax on the manufacture, sale, or consumption of a particular product within a country. Currency Fluctuations Since currency rates fluctuate on a daily basis, an international purchase made on one day may cost less or more than another purchase on the following day. Shifting currency exchange rates vary as the economic strength of the two countries change on a daily or weekly basis. BARRIERS TO INTERNATIONAL BUSINESS Excise Taxes The Canadian government charges an excise tax of 10 cents per litre on gasoline ($4 billion per year) and provincial governments charge about 14.5 cents per litre. Excise taxes depend on the quantity or mass of an item. Excise taxes are used to raise money, sometimes to discourage purchase as in the case of tobacco (smoking), and to encourage consumers to buy Canadian. Currency Fluctuations Currency exchange rates have a big impact on doing business internationally.

Chapter 4: International Business Flow of Goods and Services
Imports, such as raw materials, processed material, semi-finished goods, and manufactured products, flow into Canada. Goods and materials also leave Canada as exports. Balance of Trade To maintain a healthy balance of trade, countries try to import the same total value of products that they export. An imbalance of the two results in the following: a trade deficit in which a country pays more for imports than it earns from exports a trade surplus in which a country earns more from exports than it pays for imports The importation of goods and materials provides, more or less, jobs for Canadians. See Figure 4.2, “Canadian Imports and Exports for 2005”, on page 129. BALANCE OF TRADE Countries usually try to reduce high trade deficits because it means money is flowing out and fewer jobs are being provided. A manufactured good surplus can be good because the domestic production process means more Canadian jobs. In 2005, Canada had a trade surplus of just under $65 billion; as a result of the $85 billion trade surplus with the U.S. that countered the $20 billion trade deficit from all other international trading.

Imports Five Ways to Offset the Risk of Importing Measure consumer interest. Use care when selecting foreign suppliers. Learn about a foreign partner’s culture. Carefully scrutinize the purchase agreement and then sign it. Check goods for quantity and quality upon arrival. Exports Direct exporting is exporting a product directly to an importer without using an intermediary. Indirect exporting is exporting a product to an intermediary who then conveys the product to the importer. Larger established companies usually use direct exporting while newer ones utilize indirect exporting. IMPORTS See figure 4.3, “Five Ways to Offset the Risks of Importing”, on page 130. EXPORTS Established companies usually export directly. Businesses that export directly often set up offices and sales staff in foreign countries or send a sales representative to the country. Many new companies use indirect exporting as they do not have the resources to establish abroad. Intermediaries are familiar with regulations, restrictions and culture. Intermediaries handle paperwork, collect money, and can assume risk. Some countries such as the Middle East, Central America, and Asia do not allow direct exporting, probably to create domestic jobs.

Offsetting Risks Exporters reduce risks by planning carefully. As part of their plan, they conduct market research to ensure that there are consumers for their goods and services. Canada’s Major Trading Partners Canada’s number one trade partner is the United States. Three major reasons for trading with the United States include low cost shipping due to proximity similar cultures (language, interests, product interest, and so on a market that is 10 timers larger than the domestic one EXPORTS Offsetting Risks Sources of information to reduce risk include: Foreign Affairs International Trade Canada Internet Asia Pacific Foundation of Canada Canadian Manufacturers and Exporters Canadian Association of Importers and Exporters Canadian Embassies See questions that embassy staff suggest foreign clients might ask, on page 131. CANADA’S MAJOR TRADING PARTNERS A Canadian product or service sold in both the Canadian and U.S. markets will be far more profitable than a product sold only in Canada. See Table 4.2, “Canada’s Top 10 Export & Import Markets by Country, 2005”, page 133.

Chapter 4: International Business Canada and International Trade Agreements
Two Main Advantages to Reducing Trade Barriers Domestic business can sell their products abroad at lower prices since duties are not added. Consumers have access to new foreign products that may result in lower costs and quality improvement of domestic products. Trade agreements between countries allow goods and service to flow more freely across boarders. World Trade Organization (WTO) In 1947, the General Agreement on Tariffs and Trade (GATT) was signed by 23 nations who were allies in World War II. The trade agreement came into effective in Eventually, GATT grew to 115 member states before it was replaced by the World Trade Organization (WTO) in Today the WTO is the principal international organization that deals with rules of trade between nations. Initial trade agreements usually start out dealing with importing and exporting. Agreements usually address tariff elimination or reduction, and processes for resolving disputes. Agreements should also include issues such as when and why people will be permitted to work across international boarders, qualifications needs, standards applied to their work, and how intellectual property will be protected. Intellectual property is a business’s trade secrets or the ideas or talent of its workforce. WORLD TRADE ORGANIZATION (WTO) An international organization was set up to help GATT negotiate trade deals, resolve problems, and collect data. An important WTO agreement is the 1995 General Agreement on Trade in Services (GATS) that sets guidelines for the trade of services (such as banking). The WTO governs about 97% of all world trade.

Chapter 4: International Business Canada and International Trade Agreements
North American Free Trade Agreement (NAFTA) Canada-U.S. Free Trade Agreement (FTA) came into effect in January 1989. In 1994, Mexico, the United States, and Canada formed the North American Free Trade Agreement (NAFTA). Other Free Trade Agreements Bilateral agreements involve Canada and one other country or group. A trading bloc is a group of countries that share trade interests. The Group of Eight (G8) The Group of Eight (G8) is an association of the world’s most powerful industrialized democracies. Meeting annually, the G8 deals with economic and political issues facing their own countries and those of the larger international community. Topics discussed include energy, employment, the environment, human rights, and arms control. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) Canada hoped to gain, with the FTA, stable access to U.S. markets, clarify government assistance to industry, ability of Canadian companies to bid on U.S. government contracts, and allow Canada an equal say in disputes. The U.S. wanted to clarify rules regarding services and intellectual property, reduce restrictions on investment in Canadian industries, and increase exports to Canada with the FTA. See Table 4.3, “Canada-U.S. Free Trade Agreement (FTA) (1989)”, on page 136. NAFTA created a continent-wide free-trade zone. Products made within the free-trade zone could be traded across the boarders without tariffs. Each day, Canada, U.S., and Mexico conduct nearly $1.7 billion in trilateral trade. See Table 4.4, “North American Free Trade Agreement (NAFTA) (1994)”, on page 136. OTHER FREE TRADE AGREEMENTS Canada has bilateral free trade agreements with Chile and Israel. Canada is negotiating agreements with Costa Rica and a trading bloc made up of Guatemala, El Salvador, Honduras, and Nicaragua. See Table 4.5, “Other Free Trade Agreements”, on page 138. THE GROUP OF EIGHT (G8) The G8 (1975) is made up of Britain, France, Germany, Italy, Canada, United States, Japan (original Group of Seven (G7)), and Russia (joined in 1998).

Chapter 4: International Business The Future of International Trade
The Asia-Pacific Economic Corporation (APEC) is an economic development organization formed in The Asia-Pacific market is the fastest growing trade group. European Union (EU) In 1993, the European Union (EU) united 12 member states into a true single market. Today the EU has 15 members and a population of more that 370 million people. Evolution of NAFTA If NAFTA becomes a single market, it could result in workers from the US, Canada, and Mexico moving freely between countries. APEC is based on consensus and voluntary participation. EUROPEAN UNION (EU) EU members in 1993 were Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom (UK). In 1993 Austria, Finland, and Sweden joined the EU. A single currency, the euro, is used by member countries except the UK and Denmark. The EU has its own elected government and citizens can move freely from one country to another. The EU members could be 28 countries by 2010. EVOLUTION OF NAFTA A single market would mean American and Mexican workers could vie for Canadian jobs in Canada. A single currency could also evolve.

Impact of Cultural Differences International trade depends on our response to and acceptance of cultural differences. Culture is the sum of a country’s way of life, beliefs, and customs. Dealing with People Conducting successful business in foreign countries involves learning what is important to their populations as well as its cultural nuances. Punctuality The value of punctuality depends on the cultures: some cultures value timeliness, some do not. It is important to understand this before visiting foreign countries. Other characteristics to recognize are working at an acceptable pace, having good manners, and learning to avoid waits and disappointments. Greetings Greeting someone can leave an important first impression. IMPACT OF CULTUREAL DIFFERENCES Culture influences what can and can not be done, of what is acceptable and unacceptable. Culture can be learned. Operating in different cultures requires research that looks at important social and environmental issues and demographic characteristics that shape the market. Greetings Handshakes are common in most countries, but they are not all done the same way. A single shake in France is acceptable. Eye contact is polite in most cultures, in some however averting your eyes is a sign of respect.

Nonverbal Communication Signals Nonverbal signals can convey more than words do. Good Manners In Canada, the United States, and some European countries, business is completed at a quick and efficient pace. Most other countries prefer to get to know people before any business is done. Decision Making In North America, decision making is typically top-down. In other cultures, decisions are made from the bottom up. Global Dependency Global dependency exists when customers in one country demand items that are created in another. IMPACT OF CULTUREAL DIFFERENCES Nonverbal Communication Signals Asian businesspeople often do not say “no”, they use body language especially to convey a negative response. People in Bulgaria say “yes” with a side-to-side shake of the head, while “no” is a nod up and down. The “okay” sign, is an offensive gesture in Brazil and the symbol for money in Japan. Proximity and touching are also communication signals interpreted differently from country to country. Good Manners Asian and Latin America are countries were the three Fs of business – family, friends, and favours, have a very strong influence on the business decisions people make. Decision Making Latin America uses the typical top-down approach. When many people, from the bottom up, are consulted decisions may take longer to make. GLOBAL DEPENDENCY Global communication (television, movies, satellite communications, and the Internet) aid in global awareness. Global dependency will increase, as communication technology advances.

Chapter 4: International Business What Is International Business?

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