1. Competing in World Markets4
Chapter
Competing in World Markets

2. Learning Objectives
LO 4.1 Explain the importance of international business and the primary reasons nations trade, and discuss the concepts of absolute and comparative advantage in international trade.
LO 4.2 Describe how nations measure international trade and the significance of exchange rates.
LO 4.3 Identify the major barriers that confront global businesses.
LO 4.4 Explain how international trade organizations and economic communities reduce barriers to international trade.
LO 4.5 Compare the different levels of involvement used by businesses when entering global markets.
LO 4.6 Distinguish between a global business strategy and a multidomestic business strategy.

3. Why Nations Trade Boosts economic growth Expands markets
More efficient production systems
Less reliance on the economies of home nations
Exports: Domestically produced goods and services sold in other countries
Imports: Foreign goods and services purchased by domestic customers
International trade is beneficial for the economy and individual businesses because it boosts economic growth. Importing and exporting are the most common ways in which businesses act globally, but there are other investments that businesses can make globally that will be discussed later in the lecture.
Lecture Enhancer: What risks result from global economic interdependence?

4. International Sources of Factors of Production
Decisions to operate abroad depend upon availability, price, and quality of:
Labour
Natural resources
Capital
Entrepreneurship
Companies doing business overseas must
make strategic decisions.
Companies can spread their investment risk by “going global” (e.g., taking advantage of other nations’ different business cycle stages or different phases of product development). Businesses are looking globally for factors of production, as well as labour and customers.

5. Additional Environmental Factors to which Companies are Exposed
New social and cultural practices
Economic and political environments
Legal restrictions
Companies can expand their markets, seek growth opportunities in other nations, make their production and distribution systems more efficient, and reduce their dependence on the economies of their home nations.
Businesses face different or new environmental factors when “going global,” including different customer needs, wants, tastes, and preferences. There are many opportunities companies can take advantage of by increasing their global business.
Class Activity: Ask international students and students who have travelled internationally about the differences they have seen in products such as Coca-Cola and McDonald’s in other countries.

6. Size of the International Marketplace
As developing nations expand into the global marketplace, opportunities grow.
Many developing countries have posted high growth rates of annual GDP. Until the economic slowdown, U.S. and Canadian GDP rates grew at an annual rate of about 4 percent.
In less developed countries, GDP growth rates were greater; China averaged 10.1% and India averaged 7.5%.
Current GDP data
Discuss the size of the world and specific markets as opportunities to any businesses (specifically discuss the size of and changes in the Indian and Chinese markets). Note that the combination of size and wealth attracts businesses. Also note the growing middle class in both China and India, whose current GDP growth is outpacing that of the United States (third-ranked in population size). Visit the link to view detailed economic statistics for each nation.
Class Activity: Ask students to provide examples of goods they have purchased that were made in other countries.

7. The World’s Top 10 Nations
Though developing nations generally have lower per capita income, many have strong GDP growth rates, and their huge populations can be lucrative markets.
The growth of GDP in developing nations is a big opportunity for businesses. People alone are not enough to create a market. Many of the most populous countries have low GDP. But the GDP of many developing countries is growing significantly; China and India are good examples of countries with expanding economies and rising standards of living.
Lecture Enhancer: Choose one developing nation and discuss the goods and services that might be involved with Canadian trade.

8. Absolute and Comparative Advantage
A country has an absolute advantage in making a product when it has a monopoly on making that product or when it can produce the product at a lower cost than any other country.
Example: China’s domination of silk production for centuries
A nation can develop a comparative advantage when it can supply its products more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries.
Example: India’s combination of a highly educated workforce and low wage scale in software development
Absolute advantages are rare in modern times. Climate differences can provide advantages (e.g., saffron growth in Spain). Many advantages today may be technological (e.g., Indian software development; its opposite time zone from North America allows for production to continue outside of traditional business hours).

9. Test Your Knowledge
Why does Spain have an near absolute advantage in growing saffron?
a. Spain has some of the lowest labour rates in the world so the time-consuming harvesting process is less expensive.
b. Treaties limit which country can produce saffron.
c. The spice is relatively inexpensive, so other countries are not interested in growing it.
d. Saffron thrives in Spain’s climate, and soil but does not do as well elsewhere.
The type of competition in an industry is important to note. It dictates the ease of doing business in that industry.

10. Test Your Knowledge
Why does Spain have an near absolute advantage in growing saffron?
a. Spain has some of the lowest labour rates in the world so the time-consuming harvesting process is less expensive.
b. Treaties limit which country can produce saffron.
c. The spice is relatively inexpensive, so other countries are not interested in growing it.
d. Saffron thrives in Spain’s climate, and soil but does not do as well elsewhere.
Answer: D

11. Measuring Trade Between Nations
Balance of trade: The difference between a nation’s exports and imports
Balance of payments: The overall money flows into or out of a country
Balance-of-payments surplus = more money into a country than out of it
Balance-of-payments deficit = more money out of a country than into it
The United States has run a trade deficit every year since Although the U.S. is a top exporter, the U.S. imports a wide range of products. The measurement of trade allows nations to review the inflows and outflows of trade. Balance of trade determines the balance of payments. Other factors also affect the balance of payments, including overseas loans and borrowing, international investments, profits from such investments, and foreign aid payments.

12. Test Your Knowledge
The difference between a nation’s imports and its exports is called the
a. balance of trade
b. exchange rate
c. balance of payments
d. budget deficit

13. Test Your Knowledge
The difference between a nation’s imports and its exports is called the
a. balance of trade
b. exchange rate
c. balance of payments
d. budget deficit
Answer: A

14. Exchange Rates Currency rates are influenced by:
Domestic economic and political conditions
Central bank intervention
Balance-of-payments position
Speculation over future currency values
Values fluctuate, or “float,” depending on supply and demand.
National governments can deliberately influence exchange rates.
Business transactions are usually conducted in the currency of the region where they happen.
Rates can quickly create or wipe out competitive advantages.
The exchange rate is the value of one nation’s currency compared with the currencies of other nations. The euro, Japanese yen, and U.S. dollar are easily converted currencies, or “hard currencies.” Foreign currency is the world’s biggest market, with daily volume of about $1.5 trillion. Some governments take steps to devalue their currency (a reduction in a
currency’s value in terms of other currencies or in terms of a fixed standard). Currency rates and changes are a large part of doing business globally. Click on the link to see up-to-date currency exchange rates.

15. Barriers to International Trade
The barriers to trade range from specific rules and laws to implicit barriers like language and values.
Lecture Enhancer: Choose one of the four barriers and discuss how it affects trade between Canada and another country.

16. Social and Cultural Differences
Language: Potential problems include mistranslation, inappropriate messaging, lack of understanding of local customs, and differences in taste.
Values and Religious Attitudes: Differing values about business efficiency, employment levels, importance of regional differences, and religious practices, holidays, and values about issues such as interest-bearing loans.
Though English is the second most widely spoken language in the world, language and attitudes can serve as barriers to doing business. Communication barriers are greater than simple translation. Values and religious attitudes affect the types of products/services that consumers want and their attitudes toward consumerism.
Lecture Enhancer: Can you think of another culture’s tradition or social norm that Canadians need to be sensitive to when doing business in that culture?
Lecture Enhancer: Give an example of a gift that has a specific symbolic meaning within North American culture.
Class Activity: Lead a discussion about products sold within Canada and the United States that vary significantly by region, and the reasons why the products vary.

17. Economic Differences
Infrastructure: The basic systems of a country’s communication, transportation, and energy facilities
Currency Conversion and Shifts: Fluctuating values can make pricing in local currencies difficult, and affect decisions about market desirability and investment opportunities.
Devalued currency can make a market less attractive for exports but more attractive for investments because payment in local currency is a relative bargain. Furthermore, bad roads and limited access to the Internet can cause problems with shipping and communication. Financial systems also provide a type of infrastructure for businesses and affect commerce. Do buyers have widespread access to cheques, credit cards, and debit cards, as well as electronic systems for processing payments? Implicit economic differences can cause huge problems.

18. Political and Legal Differences
Political Climate
Stability is a key consideration
Legal Environment
Canadian law
International regulations
Country’s law in which trade is planned
Climate of corruption (see Canada Takes Aim At Foreign Corruption)
International Regulations
Treaties between Canada and other nations
Tariffs: Taxes imposed on imported goods
Enforcement issues
In some cases like counterfeits and intellectual property, the enforcement of international regulations along with the climate of corruption can be key issues for doing business abroad. Canada’s Corruption of Foreign Public Officials Act (CFPOA) and the American Foreign Corrupt Practices Act (FCPA) make it illegal for companies to bribe foreign officials, political
candidates, and government representatives. Canada, the United States, the United Kingdom, France, Germany, and 35 other countries have signed the Organisation for Economic
Co-operation and Development’s Anti-Bribery Convention. Many police forces do not actively enforce this law, but this agreement makes offering or paying bribes a criminal offence. It also ends the tax deduction for bribes.
The growth of online business has introduced new elements to the legal climate of international business. Patents, brand names, trademarks, copyrights, and other intellectual property are difficult to police.
Class Activity: Discuss the recent difficulties Google has faced doing business in China.

19. Test Your Knowledge
Trade restrictions create what kind of barrier to international trade?
a. Legal and political
b. Economic
c. Social
d. Cultural

20. Test Your Knowledge
Trade restrictions create what kind of barrier to international trade?
a. Legal and political
b. Economic
c. Social
d. Cultural
Answer: A

21. Corruption in Business and Government
Transparency International produces an annual corruption index for businesspeople and the general public.
Click on Transparency International to view and discuss the Corruption Perceptions Index (Denmark/Finland/New Zealand first, Somalia last, Canada #9).
Lecture Enhancer: Which countries seem to have the most corruption?

22. Types of Trade Restrictions
Tariffs: taxes, surcharges, or duties on foreign products
Revenue tariffs generate income for the government.
Protective tariffs raise prices of imported goods to level the playing field for domestic competitors.
Nontariff barriers: also called administrative trade barriers
Quota: A limit set on the amounts of particular products that can be imported
Dumping: Selling products in other countries at prices below production costs or below typical prices in the home market
Embargo: A total ban on importing specific products or a total stop to trading with a particular country
Exchange control: a restriction on important certain products or a restriction against certain companies to reduce trade and the spending of foreign currency
In accordance with national policy, through central banks or government
Many of the restrictions exist to protect domestic/local businesses. As a member of a trade organization like the World Trade Organization (WTO), however, countries agree to reduce and restrict barriers.

23. Reducing Barriers to Trade
The world is moving toward more free trade.
There are many communities and groups that monitor and promote trade.
International economic communities reduce trade barriers and promote regional economic cooperation.
Free-trade area: Members trade freely among selves without tariffs or trade restrictions.
Customs union: Establishes a uniform tariff structure for members’ trade with nonmembers.
Common market (or economic union): Members bring all trade rules into agreement.
There are many groups and organizations that have been developed to promote more free trade. What are some advantages to free global trade? What are some disadvantages?

24. Organizations Promoting Trade
General Agreement on Tariffs and Trade (GATT)
Major industrialized nations found this multinational organization in 1947 to reduce tariffs and relax import quotas.
The World Trade Organization succeeded GATT
Representatives from 157 countries
Monitors GATT agreements and mediates international trade disputes
World Bank
Funds projects to build and expand infrastructure in developing countries
International Monetary Fund (IMF)
Operates as lender to troubled nations in an effort to promote trade
The WTO and trade in general have become controversial, as issues like domestic jobs and worker’s rights in countries like China continue to erupt. Discuss the differences between fair trade and free trade. Click on the links to review the various organizations.
Class Activity: Ask the class why a set of rules such as GATT is needed to provide a foundation for international trade.

25. International Economic Communities
North American Free Trade Agreement (NAFTA)
World’s largest free-trade zone: Canada, United States, Mexico
U.S. and Canada are each other’s biggest trading partners.
Central America-Dominican Republic Free Trade Agreement (CAFTA-DR)
Free-trade area among United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
European Union
Best-known example of a common market; 27 member countries.
Goals include promoting economic and social progress, introducing European citizenship as complement to national citizenship, and giving EU a significant role in international affairs.
Click each of the organizations to view its website for more details. Highlight the European Union and how the consolidation of currency and collaboration is changing the continent.
Lecture Enhancer: What concerns might member countries have about new countries joining the EU?

26. Going Global Determining which foreign market(s) to enter
Analyzing the expenditures required to enter a new market
Deciding the best way to organize the overseas operations
CIA World Factbook
Click the CIA World Factbook link, and review a few countries to note the differences regarding economies and GDP. Business professionals must think and plan about going global and clearly understand the market/country they are entering.
Class Activity: Lead a discussion of the factors contributing to the recent tension between the more prosperous European countries and the so-called “PIGS” (Portugal, Ireland, Iceland, Greece, and Spain) members of the EU.

27. International Trade Research Resources on the Internet
With the growth of globalization, there are many resources available to aid professionals who are looking to go global.
Lecture Enhancer: Looking at this table (Table 4.2 in the textbook), which site do you think would be the most objective?

28. Levels of Involvement Risk increases with the level of involvement
Many companies employ multiple strategies
Exporting and importing are entry-level strategies
Importing is the process of bringing in goods produced abroad
Exporting is the act of selling home goods overseas
Risk (and potentially return) increases with the level of involvement that a business chooses. Importing and exporting are entry-level strategies to going global. Many companies actually employ multiple international strategies.

29. Countertrade and Franchising
Countertrade: A barter agreement whereby trade between two or more nations involves payment made in the form of local products instead of currency
Franchising: A contract-based agreement in which a franchisee can produce and/or sell the franchisor’s products under that company’s brand name if the franchisee agrees to the operating terms and requirements
Companies should be very clear regarding contractual agreements with local parties. Franchising globally has the same basics as franchising in Canada. Franchising is another key reason to understand international contractual agreements.
Lecture Enhancer: What issues might present a barrier to the success of a franchise in a foreign country?

30. Countertrade and Franchising
Foreign licensing agreement: An international agreement in which one firm allows another firm to produce or sell its product, or use its trademark, patent, or manufacturing processes, in a specific geographical area, in return for royalties or other compensation
Subcontracting: An agreement that involves hiring other companies to produce, distribute, or sell goods and services

31. Offshoring and International Direct Investment
The relocation of business processes to lower-cost overseas locations
Not initiating business but gaining cost savings to stay competitive
Extremely controversial
The ultimate level of global involvement is direct investment
Directly operating production and marketing in a foreign country
Acquisition (purchase firm from host country)
Joint venture (partnership between companies)
Overseas division (set up offices overseas)
Highlight the controversies related to offshoring. Growing competition and the goal to drive down costs has increased offshoring, and the trend is not slowing.
Discuss the differences between acquisition (e.g., Target’s acquisition of Canadian retailer Zellers), joint ventures, and overseas divisions, which are all ways to employ direct investment. Click on the link to discuss foreign direct investment.
Class Activity: What countries attract little international direct investment because of political instability, crime, war, or disease?

32. Developing a Strategy for International Business
Global business (standardization) strategies
Firm sells same product in essentially the same manner throughout the world.
Works well for products with nearly universal appeal.
Multidomestic (adaptation) strategies
Firm develops products and marketing strategies that appeal to customs, tastes, and buying habits of particular national markets.
Managers must first evaluate their corporate objectives, organizational strengths and weaknesses, and strategies for product development and marketing to develop a framework for international business. Discuss a company/product example of each of these strategies in class.
Lecture Enhancer: Give an example of a Canadian or U.S. company that uses a multidomestic business strategy.

33. The World’s Top 10 Leading Companies
Multinational corporation (MNC): A firm with many operations and marketing activities outside its home country
Discuss these multinational corporations, and see if any operate in your area.