CH5 - The global context of business Flashcards
Globalization def
how trade and technology have made the world into a more connected and interdependent place
What sparked globalization (3)
- governments and businesses became more aware of the benefits of globalization to their countries and shareholders
- technology - communication, travel and commerce has become easier, faster and cheaper (+Internet, social media)
- cost of overseas calls and seaborne shipping costs per ton have both declined sharply over the past several decades
Criticism of globalization
businesses exploit workers in still-industrializing countries and avoid domestic environmental and tax regulations, globalization leads to the loss of cultural heritage and benefits the rich more than the poor
Distinguishing based of wealth (4)
1- High Income countries (Canada, US, most of Europe, etc.)
2- Upper-middle-income countries (China, Colombia, Lebanon, South Africa, etc.)
3- Low-middle-income countries (ex. Ukraine, Philippines, Algeria, Pakistan, Vietnam, etc.)
4- Low-income countries (ex. Malawi, Haiti, Togo, Afghanistan, etc.)
Major World Marketplaces
North America, Europe, Asia Pacific
BRICS
Brazil, Russia, India, China, South Africa (added later on)
- began to to act like a unit, holding unofficial summits and discussing common strategies
- countries have risen in international trade (Brazil - commodities, agriculture, Russia - energy, China - manufacturing, India - service providing)
- not relying on “old world” economies → have their own independent agenda
Forms of Competitive Advantage
Absolute Advantage and Comparative Advantage
Absolute Advantage
when a country can produce something more efficiently than any other country (larger output, fewer input)
Comparative Advantage
when a country can produce one good more efficiently than other goods (has a lower opportunity cost)
National Competitive Advantage (4 conditions)
- theory of national competitive advantage has become a more widely accepted model of why nations engage in international trade
- based on 4 conditions :
1) Factor : factors of production (labour, capital, natural resources etc.)
2) Demand : large domestic consumer base that promotes strong demand for innovative products
3) Related and supporting industries : strong local / regional suppliers or industrial customers
4) Strategies, structures and rivalries : firms that stress cost reduction, product quality, higher productivity, innovation
=> motivate companies to excel
Balance of Trade
Def = (for a country) the difference in value between its total exports and its total imports
- exports > imports = favourable balance of trade = surplus
- exports < imports = unfavourable balance of trade = deficit
Balance of Payments
Def = (for a country) it is the difference between money flowing into the country and money flowing out because of trade and other transactions = a record of all international economic transactions made by a country’s residents, including trade in goods and services, as well as financial capital and financial transfers.
-> Even if a country has a favourable balance of trade, it can still have an unfavourable balance of payments (more money flowing out than in)
How does money flow in / out of a country
Money flowing in - exports + foreign tourist spending + foreign investment + earnings from foreign investments
Money flowing out - imports, Canadian tourist spending overseas, foreign aid grants + military spending abroad + investments made by Canadian firms abroad + earnings of foreigners from investments in Canada
Exchange Rates
Def = rate at which the currency of one nation can be exchanged for another
- value of one country’s currency relative to another varies with market conditions
- value of a currency rises with the demand for that country’s goods
- most significant developments in foreign exchange has been the introduction of the euro (19/27 members of the EU)
What happens when the value of a currency rises/decreases ?
1) value of a currency rises = companies based in the country find it harder to export products to foreign market + easier for foreign companies to enter local markets
- more cost efficient for domestic companies to move production to lower-cost sites in foreign countries
2) value of a currency decreases = opposite happens
- balance of trade improves because domestic companies should experience a boost in exports
- decrease in the incentives for foreign companies to ship products into the domestic market
Levels of Involvement in International Business
1) Exporters and Importers
Exporter : makes a product in one country and distributes / sells in another
Importer : buys foreign products and imports for resale in home country
= lowest level of involvement (big and small firms)
2) International firm
Distributes product in multiple countries, but remains a domestic firm
3) Multinational Firm
No domestic vs. international divisions (headquarters location does not matter)
Foreign Direct Investment (FDI)
Def = buying or establishing tangible assets (e.g., a manufacturing plant) in another country
Concern - The most general fear is that such buyouts will damage the economy because head offices will move to foreign countries and major decisions will be made there, not in Canada.
Barriers to International Trade (5)
-> Social and Cultural Differences
-> Economic Differences
-> Legal and Political Differences
-> Business Practice Laws
-> Cartels and Dumping
Social and Cultural Differences as a barrier
-> if a firm does not adapt to social differences it will probably not be successful
-> language : can cause inappropriate naming of products, communication issues, average physical structure (shorter, slimmer etc.)
-> attitude and actions : some things can be considered as rude in other countries
Economic Differences as a barrier
-> different involvement of the government in firms (eg. manufacturing in France)
-> economic instability (ex. inflation)
Legal and Political Differences as a barrier
-> Quotas, Tariffs, and Subsidies
Quota : restricts the total number of certain products that can be imported into a country (as a result, raises the price) - embargo is completely forbidding
Tariff : tax on imported product - discourage the sale
Subsidy : government payment given to a domestic business to help it compete with foreign firms
-> Local-Content Laws
It requires products sold in a country to be at least partly made in that country (firms must invest directly
Cartels and Dumping as a barrier
Cartel : association of producers whose purpose is to control the supply and price of a commodity
Dumping : selling a product abroad for less than the comparable price charged in the home country
How to overcome barriers to trade (3)
-> General Agreements on Tariff and Trade
-> International Organization (WTO)
-> Unions / Agreements between specific countries
General Agreements on Tariff and Trade (GATT)
-> signed after WW2
-> purpose was to reduce / eliminate trade barriers
-> but not all countries complied e.g. USA
