Flashcards in chapter 17 Deck (37):
An unprecedented opportunity
as access to tech skyrockets, trade barriers fall, individual economies around the world have become more interdependent than before. tightly woven global economy marked by competition and huge shifting ops. potential for canadian business is huge. a look at population trends validates the global business opp, especially in developing nations w more than 34 mil people. canada accounts for a small percentage of the worlds pop. billions of people live beyond, all potential customers for our firms. even through growth rates in many high pop countries are strong, most of the nations remain behind NA in terms of develpt and prosperity, posing challenges for foreign firms. the issue is likely to become more severe in the wake of the recent global economic crisis. note that even though NA consumers have money, china and india rep a bigger opportunity in terms of size and economic growth. growing number of ppl with cellphones offers an indicator of econ growth. cel peneration in india and china is skyrocketing. china boasts worlds largest base of cell users. indias 2nd...
cellphones in many countries arent just being used for communications. in india where ppl don't have bank accounts, they can use their cellphones as an electronic payment system. in other countries, cellphones are allowing ppl have access to internet for first time.
key reasons for and against international trade
access to factors of production
benefits include better access to factors of production, reduced risk, inflow of new ideas.
access to factors of production: international trade offers a valuable opp for individual firms to capitalize on factors that arent in the right amount for right price in each country. india, china, philipppines attract multi bil dollar investments bc of their large cohort of tech skilled uni grads who work for 1/5th of the pay compared to canadians. russia and opec nations offer a rich supply of oil, and canada boasts an abundant supply of timber. canada offers plentiful capital which is less available in other parts of the world. international trade helps even out some of the resource imbalance among nations.
cont ^ for and against int. trade
inflow of innovation
Reduced risk:global trade reduces dependence on 1 economy, lowering economic risk for multinational firms. when the japanese economy entered a slump in the 1990s, sony and toyota thrived through focus on other markets. word of caution: as national economies continue to integrate, an economic meltdown in one part of the world can have a far reaching impact. ex after the banking crisis in us, nations around the world experienced economic repercussions along with the US.
Inflow of innovation: international trade can also offer companies an invaluable source of new ideas. japan is far ahead regarding cell service. japanese cell extras include games, ring tones....set tstandard for cell service around the world. in europe consumers are seeking to bring a top quality pub experience into their homes with professional quality beer taps. companies with a presence in foreign markets experience budding trends like this firsthand, giving them a jump into other markets around the world.
disadvantages for int trade
loss of jobs
loss of industries
increase in foreign ownership
loss of jobs: when trade opens up across borders, manufacturing jobs move to the country with the lowest paid workers. this means higher paying manufacturing jobs from one country will move to another. this movement could result in a high number of unemployed workers who worked in those industries.
loss of industries: in some cases, entire industries will move to countries with lower paid workers. could have a significant impact on the supply of products in those countries where the jobs have moved from.
increase in foreign ownership: for countries that have a high amount of natural resources, free trade could lead to a large number of domestic resource companies being purchased by individuals or companies from other countries. some argue that this foreign ownership could affect the national security of a country.
opp cost: the opp of giving up the second best choices when making a decision.
industries tend to succeed on a worldwide basis in countries that enjoy a competitive advantage. when a country produces more of one good, it must produce less of another. the value of the second best choice-value of production that a country gives up in order to produce the first product-represents the opp cost of producing the first product.
Absolute advantage: the benefit a country has in a given industry when it can produce ore of a product than other nations using the same amount of resources. chine for ex has an abs advantage in terms of clothing production rel to canada. having an abs advantage isnt always enough. unless they face major trade barriers, the industries in any country tend to produce products for which they have a
competitive advantage-meaning they tend to turn out these goods that have the lowest opp cost compared to other countries. canada boasts a comparative advantage vs most countries in nautral resources, germany has a comparitve advantage in the production of high performance cars and south korea enjoys a comparative advantage in electronics.
Comparative advantage: the benefit a country has in a given industry if it can make products at a lower opp cost than other countries.
Michael porter model
1. Power of suppliers:
number of suppliers
buyers switching costs
ability to substitute
-->are there a sufficient number of suppliers for the industry?
2. power of buyers:
number of buyers
switching costs to use another product or supplier
threat of backward integration
do the buyers have bargaining power? is there enough info available for buyers to make informed decisions?
3. threat of new entrants: threat of new comp barriers to entry
economies of scale
access to distribution channels
buyers switching costs
is there a long learning curve? are there high investment requirements or economies of scale related to the industry that would make it difficult for new companies to start up?
4. threat of substitute products
cost of switching
buyers willingness to substitute
Are there subs available? are there high switching costs associated with the product?
5. degree of rivalry/competitive rivalry
number of competitors
significance of competition eg size
cost for buyers to go to the competition
the above 4 factors influence the degree of rivalry within an industry. the level of rivalry within an industry can affect the growth of the industry.
keep in mind comparative advantage seldom remains static. as tech changes and the workforce evolves (through factors such as education and experience) nations may gain or lose comparative advantage in various industries. china and india for ex are both seeking to build a comparative advantage vs other nations in tech production by investing their infrastructure and institutions of higher education.
Global trade-taking measure
global trade was significantly affected by financial crisis in 2009. by the end of 10 trade was showing slow recover but 11 it slowed again. slowing of global trade in 20111 was caused by a number of factors including high debt levels and high unemployment levels in some countries. nautral disasters and issues relating to national budgets also contributed to slower world trade during 2011. measuring the impact of international trade on individual nations requires a clear understanding of balance of trade, balance of payments and exchange rates
balance of trade
Balance of trade is a basic measure of the difference between a nations exports and imports. if the total value of exports is higher than the total value of imports the country has a trade surplus. if the total value of imports is higher than the total value of exports, the country has a trade deficit.
balance of trade includes value of both goods and services and incorporates trade with all foreign nations. trade deficit signals the wealth of an economy that can afford to buy huge amts of foreign products, a large deficit can be destabilizing. it indicates after all that as goods and services flow into a nation, money flows out. a challenge with regard to long term economic health.
Balance of payments
balance of payments surplus
balance of payments deficits
balance of payments is a measure of the total flow of money into or out of a country. balance of trade plays a central role in determining the balance of payments. balance of payments also includes other financial flows like foreign borrowing and lending, foreign payments and receips, foriegn investments. one major area that has become increasingly important to the balance of payments is service imports and exports. a major contributor to service imports and exports is tourism. ca travelling abroad means money leaving canada and tourists visiting canada means money flowing in.
balance of payments surplus means that more money flows in than out, while a balance of payments deficit means more money flows out than in.
balance of payments typically corresponds to balance of trade bc it is the largest component.
see page 248
exchange rates measure the value of one nations currency relative to the currency of other nations. while the exchange rate doesn't currently measure global commerce it has an influence on how global trade impacts individual nations and their trading partners. the exchange rate of a given currency must be expressed in terms of another currency.
a complete evaluation of global trade must also consider exchanges that don't involve money. a large chunk of international commerce involves the barter of products for products rather than for currency. companies typically engage in countertrade to meet needs of customers that don't have access to hard currency or credit, usually in dvlping countries. individual countertrade agreements range from simple barter to a complex web of exchanges that end up meeting the needs of multiple parties. if done poorly, countertrading can be a confusing nightmare for everyone involved. done well its a powerful tool for gaining customers and products that wouldn't otherwise be available.
Seizing the opportunity: strategies for reaching global markets
while international trade can offer new profit streams and lower costs, it also introduces higher level of risk and complexity to running a business.
firms ready to tap the opp have a number of options on how to move forward. one way is seek foreign suppliers through outsourcing and importing. another is exporting,licensing,franchising, direct investment. these fall in a spectrum from low cost low control to high cost high control
companies that choose to export products to a foreign country spend less to enter that market than companies that choose to build their own factories. but companies that build their own factories have more control than exporters over how their business unfolds. profit opp risk which vary along cost and control also play a critical role in how firms approach international markets.
smaller firms tend to begin w exporting and move along the spectrum as the business develops. larger firms may jump straight to the strategies that give them more control over their operations. large firms are also likely to use a number of diff approaches in diff countries, depending on the goals of the firm and the structure of the foreign market. regardless of the specific strategy, most large companies like general electric, nike disney both outsource w foreign suppliers and sell their products to foreign markets.
market dev options
lower risk less control: exporting-->licensing
higher risk more control: direct inv--> franchising
foreign outsourcing and importing
foreign outsourcing (also contract manufacturing) means contracting with foreign suppliers to produce products, usually at a fraction of the cost of domestic production. ex gap relies on a netowrk of manufactureres in 50 diff countries mostly in less dvlpd parts of the world. apple depends on firms in china and taiwan to produce ipod...
countless small companies contract w foreign manufactueres also. key benefit is dramatically lower wages. drives down cost of production as well.
while foreign outsourcing lowers cost, also involves risk. quality control requires detailed specifications to ensure company gets what it needs. another key risk involves social responsibility. a firm that contracts w foreign producers has an obligation to ensure those factories adhere to ethical standards. deciding what those standards should be is often tricky bc diff cultures, expectations, laws in diff countries. policing the factories on an ongoing basis can be harder than determing standards. companies that don't get it right face the threat of consumer backlash in NA and europe. this has ben an issue with products produced in china. in the last few years product defects forced NA firmst to recall a host of chinese produced toys-ex toy trains painted w toxic paint...
Importing means buying products from overseas that have already been produced rather than contracting with overseas manufacturers to produce special orders. imported products don't carry the brand name of the importer, but they also don't carry as much risk. canada controls the importing of some products. some of the products canada includes on its controlled list are some agricultural products, firearms, lumber..pier 1 imports has built a powerful brand around the importing concept, creating stores that give the customer the sense of a global shopping trip without the cost or hassle of leaving the country.
exporting is the most basic level of international market development. it means producing products domestically and selling them abroad. exporting represents a strong opp for small and mid sized companies. it's basic but not easy. exporters must negotiate documentation requirements, shipping standards, content regulations, packaging requirements..etc
finding the right distributor is also a challenge. canada business network a wing of gov of canada offers companies guidance through the export process providing advice and connections. gov is motivated to provide export assistance bc higher exports help the balance of trade, strengthening the economy by keeping more money in the country.
Foreign licensing and foreign franchising
Foreign licensing involves a domestic firm granting a foreign firm the rights to produce and market its product or use its trademark/patent rights in a defined geographic area. the company that offers the license receives a fee from the company that buys the rights/licensee. this approach allows firms to expand into foreign markets w litle or no investment and helps circumvent gov restrictions on importing in closed markets. maintaining control of licensees can be a challenge. licensors also run risk that unethical licensees become competitors using info they gained from the licensing agreement. foreign licensing is especially common in the food and beverage industry. most high profile examples are coke and pepsi which grant licenses to foreign bottlers all over the world.
Foreign franchising is a specialized type of licensing. a firm that expands through foreign franchising, called a franchisor, offers other businesses or franchisees the right to produce and market its products if the franchisees agrees to specific operating requirements-a complete package of how to do business. franchisors also offer their franchisees management guidance, marketing support and even financing. in return franchisees pay a start up fee and an ongoing percentage of sales to the franchisor. a key difference between franchising and licensing is that franchisees take over the identity of the franchisor. a mcdonalds franchise in paris is clearly mcdonalds, not a pierres baguette outlet that also carries mcdonalds products.
foreign direct investment
direct investment in foreign production and marketing facilities represents the deepest level of global involvement. the cost is high, but companies with direct investments have more control over how their business operates in a given country. the high dollar commitment also reps significant risk if the business doesn't go well.most direct inv takes form of acquiring foreign firms or developing new facilities from the ground up. another increasingly pop approach is strategic alliances or partnerships that allow multiple firms to share risks and resources for mutual benefit.
foreign acquisitions enable companies to gain a foothold quickly in new markets.
-->when firms either acquire foreign firms or develop new facilities from the ground up in foreign countries also called foreign direct investment.
cont foreign direct investment
developing new facilities from scratch-offshoring-=most costly form of direct investment. also involves significant risk. benefits include complete control over how the facility develops and potential for high profits which makes the approach attractive for corps that can afford it.
Joint ventures involve 2 or more companies joining forces-sharing resources, risks, profits but not merging companies to pursue specific opportunities.
a formal long term agreement is usually called a partnership (voluntary agreement under which people act as co owners of a business for profit) while a less formal encompassing agreement is usually called a strategic alliance.
joint ventures are a popular, controversial means of entering foreign markets. often a foreign company connects w a local firm to ease its way into market. in malaysia they require that foreign investors have local partners.
recent research finds joint ventures between multinational firms and domestic partners can be more costly and less rewarding than they appear. the research suggests joint ventures make sense only in countries that require local political and cultural knowledge as a core element of doing business.
strategic alliance-agreement between 2 or more firms to jointly pursue a specific opp without actually merging their businesses. strategic alliances typically involve less formal, less encompassing agreements than partnerships.
Barriers to international trade
differences among countries in language, attitudes, values. some specific elements that impact business include non verbal communication, forms of address, attitudes toward punctuality, religious celebrations and customs, business practices, expectations regarding meals and gifts. understanding and responding to sociocultural factors are vital for firms operating in multiple countries. bc the differences are often subtle they can undermine relationships without anyone realizing. best way to avoid problems is conduct consumer research, cultivate first hand knowledge, practice extreme sensitivity. the payoff can be a sharp competitive edge. ex hyundai does well in india bc it has custom features that reflect indian culture like elevated rooflines to provide more headroom for turban wearing motorists.
barriers to international trade
crucial to understand and evaluate local economic conditions. key factors to consider include population, per capita income, economic growth rate, currency exchange rate, stage of economic development. low scores for any of these don't mean lack of opp. some of todays best opps are in places with low per capita income.
effectively serving less developed markets requires innovation and efficiency. emerging consumers often need diff product features and almost always need lower costs. ck prahalad believes forward thinking companies can make a profit in developing countries if they make advanced tech affordable. many markets are so large that high volume sales can make up for low profit margins. overall the profit potential is clear and growing. as consumers in developing countries continue to gain income, companies that established their brands early will have a critical edge over firms that enter the market after them.
another key economic difference to be considered
infrastructure- a countrys physical facilities that support economic activity.
-transportation (roads, airports, railroads, prots)
-communication (tv, radio, internet, cell coverage)
-energy (utilities, power plants)
-finance (banking and credit)
the level of infrastructure can vary dramatically among countries.
Political and legal differences
->laws and regulations
political regimes differ around the world, policies have a dramatic impact on business. specific laws and regulations that govs create around business are often less obvious yet can rep a significant barrier to international trade. to compete effectively and reduce risk managers must evaluate the factors and make plans to respond now and as they change.
Laws and regulations. international businesses must comply w international legal standards, laws of their own countries and host countries. can be challenging because developing countries change business regulations with little notice and little publicity. justice system is also another challenge with regard to legal enforcement of ownership and contract rights. a look at the world bank "doing business" rankings reveals some high growth markets have plenty of room to improve in that area.
the key benefit of an effective legal system is that it reduces risk for both domestic and foreign businesses.
bribery is also major issues throughout the world. while bribery and corruption are technically illegal, they're often accepted as a standard way of doing business. regardless, canadian corporations and citizens are subject to canadian authorities for offering bribes in any nation.
canada ranked #13l starting a new business took an average of 1 procedure and 5 days.
political and legal differences
the political climate of any country influences whether the nation is attractive to foreign business. stability is crucial. a country subject to strife from civil war, riots, or other violence creates huge additional risk for foreign businesses. but figuring out how to operate in an unstable env like russia, bolivia or middle east can give early movers an advantage.
political and legal differences
international trade restrictions
national govs also have the power to erect barriers to the international business through a variety of international trade restrictions. the arguments for and against trade restrictions-also called protectionism, are summarized in exhibit (page 254)
note that most economists find the reasons to eliminate trade restrictions much more compelling than the reasons to create them.
protectionism-national policies designed to restrict international trade, usually with goal of protecting domestic businesses.
different forms of trade restrictions
tariffs and quotas
Tariffs are taxes levied against imports. govs tend to use protective tariffs to shelter fledgling industries that couldn't compete w/out help or to shelter industries that are crucial to domestic economy. in canada tariffs are administered by foreign affairs and international trade canada through the export and import controls bureau. an import control list identifies those products subject to import restrictions.
quotas: limitations on the amount of specific products that may be imported from certain countries during a given period of time.
cont of different forms of trade restrictions
voluntary export restraints
VERs: limitations on the amount of specific products that one nation will export to another nation. although the gov of the exporting country typically imposes vers, they do so out of fear that the importing country would impose more onerous restrictions. vers often aren't voluntary as the name suggests. the US insisted on vers w japanese auto exports in early 1980s many economists believe ultimately precipitated the decline of the us auto industry.
Embargo: total ban on international trade of a certain item or a total halt in trade with a particular nation. the intention of most embargoes is to pressure the targeted country to change political policies or to protect national security. us embargo against trade w cuba.
embargos, vers, quotas are relatively rare compared to tariffs. tariffs are falling to new lows. as tariffs decrease, some nations are seeking to control imports through non tariff barriers such as:
requiring red tape intensive import licenses for certain categories
establishing a non standard packaging requirement for certain products
offering less favourable exchange rates to certain importers
establishing standards on how certain products are produced or grown
promoting a buy national consumer attitude among local people
non tariff barriers tend to be effective bc complaints about them can be hard to prove and easy to counter.
free trade-the movement gains momentum
potentially the most dramatic change in the world economy has been the global move towards free trade-unrestricted movement of goods and service across international borders. even though complete free trade isn't a reality, the emergence of regional trading blocs, common markets, international trade agreements has moved the world economy closer to that goal.
GATT and WTO
GATT: the general agreement on tariffs and trade-is an international trade accord designed to encourage worldwide trade among its members. established in 1948 by 23 nations-gatts undergone many revisions. most significant took steps to slash avg tariffs by 30% and reduce other trade barriers among the 125 nations that signed. stemmed form uruguay round of negotiations in 1986-1994.
that round also created the WTO-a permanent global institution to promote international trade and settle international trade disputes. the wto monitors provisions of the gatt agreements, promotes further reduction of trade barriers, mediates disputes among members. the decisions of the WTO are binding, meaning all parties involved in the disputes must comply to maintain good standing in the organization.
ministers of WTO meet every 2 years to adress current world trade issues. as economy shifts toward services as opposed to goods, wto meetings followed suit. controlling rampant piracy of intellectual property is a key concern for developed countries. for less dvlpd countries, agricultural subsidies are a central issue because these may unfairly distort agricultural prices worldwide.
the broader agenda and individual decisions of WTO have become controversial. advocates for less developed nations are concerned that free trade clears the path for multinational corps to push local businesses into economic fialure. a local food stand wouldn't stand a chance next to a mcdonalds. if the food stand closes, the community has gained inexpensive burgers, but the entrepreneur has lost a livelihood and the community has lost a livelihood that contributes to its unique culture. other opponents of wto worry that acceleration of global trade encourages dvlping countries to fight laws that protect the env and workers rights for fear of losing their low cost advantage on the world market. the concerns have sparked significant protests during past few meetings of wto ministers, and the outcry may well grow louder as developing nations gain economic clout.
Established in the aftermath of WW2-its an international cooperative of 187 countries working together to reduce poverty in the developing world. it influences the global economy by providing financial and technical advice to the governments of developing countries for projects in a range of areas including infrastructure, communications, health and education. the financial assistance usually comes in form of low interest loans. to secure a loan the borrowing nation must often agree to conditions that can involve rather arduous economic reform.
world bank sees international trade as a vital tool to decrease poverty. encourages aid recipients to reduce trade barriers. also promotes trade by working w aid recipient govs to strengthen court systems, build financial services, fight corruption. over the last decade the world bank has become controversial. critics suggest that in actual practice the world bank-contrary to its mission-undermines local economies by introducing deep pocketed, global competitors that drive smaller firms out of business. they claim ultimate result is lower standard of living for impoverished citizens. they're also accused of inadvertently lining the pockets of corrupt officials. other key concerns involve impact of world bank projects on the environment and on local working conditions.
IMF international monetary fund
similar to world bank
international organization accountable to the governments of its 187 member nations. the basic mission of imf is to promote international economic cooperation and stable growth. recently, funding from the member nations has been helping countries cope w fallout from the financial crisis. to acheive their goals they:
support stable exchange rates
facilitates a smooth system of international payments
encourages member nations to adopt sound economic policies
promote international trade
lend money to member nations to address economic problems
regardless of its importance, imf is typically a last resort to nations in trouble. critics have been accusing the imf of encouraging poor countries to borrow more money than they can ever pay back which cripples their economies long term creating more poverty.
the imf has responded to this by implementing a historic debt relief program for poor countries. under this program the imf has extended 100% debt forgiveness to 34 poor countreis, erasing 51 billion in debt. the managing director of the imf pointed out the canceled debt will allow the countries to increase spending in priority areas to reduce poverty and promote growth. the result should be a higher standard of living for some of the poorest people in the world.
Trading blocs and common markets
trading bloc: a group of countries that has reduced or even eliminated tariffs, allowing for the free flow of goods among the member of nations.
a common market goes even further than that-attempting to harmonize all trading rules.
a group of countries that has eliminated tariffs and harmonized trading rules to facilitate the free flow of goods among member nations.
North american free trade agreement is the treaty that created the free trading zone among canada, us, mexico. 1994-started eliminating trade barriers and investment restrictions over a 15 year period. despite predictions of canadian jobs flowing to mexico, the canadian economy has grown since implementation of NAFTA. american and mexican economies have also thrived (slowed during global economic crisis)
NAFTA critics pointed out US trade deficit w bot mexico and canada has skyrocketed. exports to both nations have increased, imports have grown faster, accounting for 32% of total us trade deficit and threatening long term health of american economy.
other criticism are increased pollution and worker abuse. companies that move their factories to mexico capitalize on lower costs take advantage of looser environmental and worker protection laws, creating ethical concerns. but the impact of nafta overall is tough to evaluate bc so many other variables affect all 3 economies.
worlds largest common market composed of 27 european nations.
overarching goal is to bolster europes trade position and increase its international political and economic power. to help make it happen, EU removed all trade restrictions among member nations and unified international trade rules allowing goods and people to move freely among EU countries and the rest of the world, giving member nations more clout as a bloc than each would have on its own. the most economically significant move was introducing the single currency the euro in 2002. out of the 15 eu members at the time 12 adopted the euro-except for uk, sweden, denmark. most economists anticipate the holdouts, plus the 12 newest membesr of eu will eventually adopt the euro creating a bolder presence on the world market. the eu also impacts the global economy with its leading edge approach to environmental protection, quality production, human rights.
eu has faced challenges caused by the global recession. during 2011 some of the eu nations faced debt crises threatning the stability of the eu and other financial markets as well. greece, ireland, portugal, italy faced financial problems requiring action by other eu countries. during this time some critics predicted the demise of EU. others predicted the challenges could result in a stronger union after controls were implemented to correct problems.
CKFTA: canada korea free trade agreements
CETA: comprehensive economic trade agreement
ca+eu: dairy farmers+cheese are nervous. european cheese dairy will star being here which is good for consumers and bad for canadian producers. harper said they'll try to help.