Business Ch. 1/2 test Flashcards
Business
its an organization that makes a good or service for exchange for money in order to make a profit
Domestic
domestic business makes most of its profit from within the country it’s based in
International
- economical system of transactions that are between businesses in different countries
- Any business that conducts transactions with another business outside its native country is an international business
- Can be government organizations, companies, or non-profits
Transaction
A business needs to make transactions, which are exchanges of goods that are valued
Trade
- In order to get the goods we do not have in exchange for the goods we do have
- Both parties expect to be better off
Interdependence
The reliance of people on each other for goods, services, or ideas
Trading partner
- a company, organization, or country that engages in business transactions with another entity, often through electronic data interchange (EDI) communication.
- This relationship can be internal, such as different departments within the same organization, or external, involving customers and clients who rely on EDI for exchanging information about their transactions.
- Trading partner agreements are contracts that outline the terms of trade, including responsibilities, involved parties, delivery and receipt of goods or information, and any associated duties or fees.
Imports
goods, services, or resources that are brought into one country from another for the purpose of trade. When a country imports something, it means that it is purchasing or receiving those items from a foreign country, usually to meet domestic demand or supply gaps
Exports
goods, services, or resources that are sent from one country to another for the purpose of trade. When a country exports something, it means that it is selling or sending those items abroad to be consumed, used, or sold in another country
GDP
monetary measure of the total market value of all final goods and services produced and rendered in a specific time period by a country or region. It is often used as a broad measure of economic performance and is the world’s most closely-watched economic indicator.
Balance of trade
The difference between a country’s exports and imports
Trade surplus and Trade Deficit
- A country that exports more goods and services than it imports has a trade surplus (it sells more than it buys)
- A country that imports more goods and services than it exports has a trade deficit (it buys more than it sells)
exports > imports = trade surplus
exports < imports = trade deficit
Domestic market
The customers of a business who live in the country where the business operates
Duty (tariff)
- The most common type of trade barrier
- Taxes or duties charged on imported products or services
- A tariff raises the cost of imported goods so that consumers will purchase locally manufactured products instead of imports
- The other advantage of tariffs for domestic governments is an increase in revenues.
Foreign direct investment (FDI)
- control some or all of a business’s operations
- FDI in Canada grown from just over $450 billion in 2009 to $825 billion in 2016 (non-Canadians invest in Canadian Businesses)
Portfolio investment
the purchase of stocks, bonds, and other financial instruments issued by Canadian firms
Branch plant
- a manufacturing facility or operation set up by a company in a location different from its main headquarters, often established in foreign countries.
- In Canada, branch plants are subsidiaries of companies based abroad, mostly in the U.S., and are used as a strategic tool by transnational corporations to maximize profits, avoid tariff fees, and encourage exports.
- These facilities help create job opportunities for locals, boost local economies, and contribute to overall economic recovery during post-war periods.
- However, there have been concerns about the impact of branch plants on local economies, including issues related to remittances to foreign owners, dependence on foreign corporate strategies, and the lack of resources for developing and selling products in export markets
Protectionism
an economic policy that aims to restrict imports through tariffs, quotas, and regulations in an effort to boost domestic industry
Globalization
The process whereby national or regional economies and cultures become integrated through new global communication technologies, foreign direct investment, international trade, immigration, and the flow of money
Populism
usually defined as an ideology with a concern for “the common” citizen at its core and often promotes protectionism
CETA (Comprehensive Economic and Trade Agreement)
- signed in 2017; will remove 99% of duties (taxes) on traded goods
- Canada-Korea Free Trade Agreement (CKFTA)
Capital Markets Terms
division of a bank that buys and sells stocks, bonds, and commodities – big money
global sourcing
process of buying equipment, capital goods, raw materials, or services from around the world
licensing agreement pros
- Clearly states rules and guidelines in order for both the licensor and licensee to follow them
- Makes things easier to avoid lawsuits and court fees
- Rightfully avoids anyone else using a trademark without permission
- Since both know the rules, there is still control that can be owned by both
exclusive distribution rights
- agreement where a supplier grants a single distributor the sole right to sell, distribute, or resell its products or services within a defined geographical area.
- This means the supplier cannot sell to other distributors in that territory, and the distributor cannot sell the supplier’s products to unauthorized retailers
Licensing agreement cons
- The reputation of either the licensor and the licensee can affect the other, thus causing problems socially. For example, tax fraud of either one can affect the other because of their reputation
- Without research, either one can end up in a contract with the other that they want to leave but is long
Franchise
business arrangement where a franchisee pays a franchisor for the right to use their business model, trademark, and intellectual property to sell products or services under the franchisor’s brand
Joint venture pros
- All parties involved can work with each other’s strengths while cancelling out weaknesses
- Most of the time there is a timeframe for a joint venture, meaning any tension can be dissolved with time. If parties cannot work well together, they can also break off the joint venture
- Both parties are more exposed to products and things in the market they didn’t have before. This helps to work with a larger scale and market
- Working toward a shared goal, both parties share the same risk and each will not face the consequences as big
Joint venture cons
- Both parties may have different management styles, causing tension and even having to break the joint venture. This also relates to decision making, as one party may not agree with the other
- An unbalanced joint venture can also cause problems. Although both parties must each benefit from the joint venture, a party that does not commit as much will cause problems
Foreign subsidiary pros
- The foreign subsidiary will always have some freedom with the operations of the entity since the parent company chose it since it knew what will happen to the future of the entity. This means that the foreign subsidiary can make the entity adapt to its own expectations
- A limited liability subsidiary can help the parent company to avoid risk. This is because any bad things that happen will not affect it, only the initial fees are required. This also helps to keep independence for both the foreign subsidiary and the parent company
- Reputation can be good since expanding internationally is seen as being successful
- International workers will increase, and more ideas can be introduced
Foreign subsidiary cons
- It’s a lot of money and effort to travel back and forth and to adjust to the other country’s management.
- Not only will the international business need money, but also an HR team and a legal team, in order to understand the other country’s rules
- Cultural differences between countries can make working together hard. While each has independence, there is still some levels of working together
- Things in a country that are popular and successful won’t necessarily be as successful in another country
Trade quota
A trade quota is a government-imposed limit on the amount of product that can be imported in a certain period of time. This protects domestic producers by limiting the amount of product imported and decreasing foreign competition. Example: Canadian products subject to U.S. quotas include beef, cotton, wool, and synthetic fibres.
Trade embargo
When a government imposes a trade embargo, it bans trade completely between two countries. Example: The strict rules the US has for doing business with Cuba are an examples of an embargo, and include a ban on finance, trade, and travel.
Trade sanctions
- Trade sanctions are often referred to as partial embargoes and may involve limiting trade of specific products or with specific companies or individuals.
- Example: Canada has restricted the exportation of certain products to North Korea (firearms, luxury goods, and aviation fuel, including rocket fuel). Canada has also restricted the importation of a variety of products including iron, coal, and gold.
- Trade embargoes and sanctions are intended to pressure foreign governments to change their policies or to improve their human rights records
Exchange rate
The exchange rate is the amount of currency in relation to the currency of another country. The Canadian dollar is often quoted with respect to the U.S. dollar, the euro, or the British pound
Floating rate
Canada has a floating rate which means our exchange rate changes with respect to other currencies
Terms of trade
The greater a country’s exports in comparison to its imports, the greater the demand for its currency. The more favourable the terms of trade (the comparison of exports to imports), the higher the currency exchange rate.
Currency revaluation
occurs when demand is greater than supply and the value of the Canadian dollar increase.
Currency devaluation
occurs when supply is greater than demand and the value of the Canadian dollar decreases.
Inflation
the rate at which the price of goods and services is rising and the buying power of the dollar is falling. A low inflation rate causes investors to prefer the Canadian dollar because of the stability of prices
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
Currency speculating
- Currency speculating involves buying, holding, or selling foreign currency in anticipation of its value changing. It is done to profit from the fluctuations in its price.
- i.e. Planning a trip to Florida and you hear the CAD is going down, what would you do?
Five ways a business can be considered an international business
- Export to businesses in another country.
e.g., Canada Goose - Import from businesses in another country.
E.g., Canadian Tire - Invest in businesses in another country.
e.g., Fiat merger with Chrysler - Own a retail or distribution outlet in another country.
e.g., Amazon - Own a manufacturing plant in another country.
e.g., Magna
Trade with India
- major centre for outsourcing, services and manufacturing
- one of the world’s fastest-growing economies
- Free trade agreement is being discussed
- Lucrative Domestic Market (the in-country market)
Trade with Mexico
- One of Canada’s top 5 trading partners thanks to NAFTA (North American Free Trade Agreement) which ended in 2020 when United States-Mexico-Canada Agreement (USMCA) came into effect
- Canada has an increasing trade deficit with Mexico, importing from Mexico far more than it exports.
- CUSMA
Trade with South America
- Trade with Brazil is strong
- Canada looking at a free trade agreement with Brazil through the Mercosur regional trading bloc (Argentina, Brazil, Paraguay and Uruguay)
- Trade with Venezuela has plummeted given the state of the economy there.
- Free trade agreements with both Chile and Colombia
Steady growth in both economies
Trade with emerging markets: middle east
- Several problems in the Middle East restrict the trade Canadian businesses can do in this region. (desert – crops; parts not yet industrialized; conflicts; volatility of the oil market)
Trade with emerging markets: Africa
- Strong relationships with South Africa and Morocco in particular.
- Many countries in Africa face what is known as the “natural resources curse,” whereby a country focuses all of its energies on a single industry and neglects the other major sectors.
- As a result, the country becomes dependent on the price of that particular resource, and the economy becomes unstable. (oil, diamonds, timber)
Positive effects of globalization
Outsourcing – cheaper raw materials and labour
Lower prices – increased competition
Decrease in poverty – providing jobs
Innovation – exchange technological know-how
Optimal use of resources – comparative advantage
Better jobs – increase education and skill level
Increased capital flow – borrow $ from financial institutions in other countries
Negative effects of globalization
Lost jobs – due to outsourcing
Fear of job loss – to countries with cheaper labour sources
Loss of Canadian productivity – lose comparative advantages
Exploitation of cheap labour – substandard conditions
Increased pollution – limited pollution regulations/cut costs
Spread of disease – travellers
Increase in income gap – erosion of the “middle class”
Influence of multinationals on governments – Powerful MNCs can manipulate global politics
Advantages of international trade
- Product Diversity: IB provides the opportunity to choose from an assortment of styles, models and prices ranges for a variety of products
- Lower Prices: workers in many developing countries are paid lower wages; the companies that employ them can spend significant less money on wages by operating factories in those countries rather than Canada
- Access to New Markets: If a Canadian company were to make a product or provide a service that the people in another country, (such as the US or China) liked, the company’s sales would grow incredibly
- New Process and Technologies: Canadian businesses can research other firms around the world that may have more modern, more efficient, or more economical machinery for their business
- Cultural Development: IB fosters exchange of culture and ideas between countries and promotes diversity (ex. music, food)
Disadvantages of international trade
- Loss of Culture and Identity: Influence of particularly American culture changes the cultural landscape. MAPL system in place to protect and promote the Canadian music industry
- Increased Foreign Ownership of Companies in Canada Issues to consider as result: Job loss, Revenues leave Canada to pay head-office costs, Research and development challenges (home country), Reduced exports (service Canadian market), Economic destabilizations (global marketplace)
Reasons Canada trades
- Company growth
- Entry into new markets
- Expanded customer base
- Increased profits
- Access to inexpensive supplies
- Lower labour costs
- Access to financing
How does international business help/hurt Canadians?
- Helps Canadians have wider access to goods and services, and also creates job opportunities
- Hurts Canadians by increased international ownership of Canadian businesses, which makes Canadians lose ownership of key industries
Canada’s top 2 import/export countries
- United States is the largest trading partner with Canada
- China is the largest trading partner in Asia with Canada (after China is Japan)
Canada’s banking industry
- Thanks to regulations in Canada’s banking system (as well as their larger size and greater reserves), banks in Canada were not as badly affected by the 2008 recession
- The “big 6” banks: Royal Bank of Canada (RBC), TD Canada Trust, CIBC, National Bank, BMO, and Scotiabank
Foreign Portfolio Investment
Type of international business
- Many Canadians invest in businesses by purchasing stocks, bonds, and financial instruments to increase their wealth or save for retirement.
- Some of these investments are made outside of Canada. Foreign portfolio investments are made because investors look for dividends – the interest that can be gained on these investments.
- One way to invest is through money markets, where investments are short term and are considered safe and liquid (easily converted into cash).
- Another form of foreign portfolio investment is made through capital markets. Individuals can invest in capital markets by directly purchasing stocks on international stock markets such as the New York or Tokyo stock exchanges (NYSE or TSE).
- One reason that Canadians invest outside of Canada is because it allows them to diversify, or spread out, their investments, which is less risky than investing in just one area.
- Another reason is that many foreign investments provide greater rates of return. Great returns can be found in emerging markets such as China, Brazil, and India, which are experiencing strong economic growth (but can also be risky)
Importing
Type of international business
- Bringing products or services into a country. These goods and/or services may be intended for use by another business or for resale.
- Business-to-Business (B2B) importing is common in Canada. Many Canadian manufacturers import products to use in their factories, while other companies purchase finished goods.
- This is referred to as global sourcing, which is the process of buying equipment, capital goods, raw materials, or services from around the world.
- Companies use global sourcing because it: keeps costs down, improves quality, allows access to new technologies
- Companies may also import products that they want to resell
- Examples: Canadian Tire imports BBQs made in the US, The Bay imports clothing from Italy, Best Buy imports TVs from Japan.
- Services can also be imported
- Examples: Call centres located throughout the world answer calls from Canadians who have questions about their computers and appliances.
- Sykes Assistance Services (a global outsources of digital marketing and customer services) provides healthcare, financial, and automotive services for Canadians.
- Canada imports a variety of products, primarily from the US, China and Mexico (machinery and equipment, motor vehicles and parts, oil, chemicals, electricity, and consumer goods)
Exporting
Type of international business
- Companies outside of Canada purchase Canadian goods and services. Just like imports, exports may be B2B or for resale.
- Example: Magna is a leading global producer of automotive parts (headquarters: Aurora, Ontario).
- Canada also exports services (example: TeleTech is a multinational company with Canadian headquarters in Montreal: consulting services and call centres for companies all around the world)
- Canada exports a variety of goods and services, primarily to the US, China and the UK.
- Top exports include motor vehicles and parts, industrial machinery, aircrafts, telecommunications equipment, chemicals, plastics, fertilizers, wood pulp, timber, crude petroleum, natural gas, electricity, and aluminum.
- Exporting is critical to Canada’s economic success. More than 30% of our GDP is exported.
Licensing Agreement
Type of international business
- A licensing agreement gives a company permission to use a product, service, brand name, or patent in exchange for a fee or royalty.
- Example: Walt Disney granting McDonalds a license for McDonald’s to co-brand McDonald’s Happy Meals with a Disney trademarked character
- Canadians are impacted by licensing agreements when watching Netflix. Americans have access to more than 3 times the Netflix content as do Canadians. (approximately 10,000 vs 3,600 titles
Exclusive distribution rights
- Another form of licensing agreement which allow a company to be the only distributor of a product in a geographic area or in a specific country.
- Example: When iPhone first entered the Canadian market, Rogers Communications had the only technology that would support the iPhone, and it had exclusive Canadian rights to sell it. Subscribers had to use a Rogers plan if they wanted to use an iPhone. Eventually, all providers obtained the necessary technology and entered the market as well.
- Licensing agreements have little risk, but the monetary gain is also limited.
Franchising
Type of international business
- An agreement to use a company’s name, services, products, and marketing. The franchisee signs a contract and agrees to follow all the franchisor’s (the parent company’s) rules.
- For a fee, the franchisor provides service support in financing, operations, human resources, marketing, advertising, quality control, and other areas.
- Examples: Foreign Owned in Canada: Wendy’s, McDonald’s, Subway Canadian Owned: Boston Pizza, Second Cup, Kernels Popcorn
Joint ventures
Type of international business
- A common type of international business used to establish a presence in a foreign country.
- Occurs when two businesses, one of which is usually located in a foreign country, form a new company with shared ownership.
- One main reason companies create a joint venture is to be allowed into a country.
- Example: In Cuba, more than 60 Canadian companies do business. Most of these joint ventures are in the mining industry, as well as travel and food (for example Delta Hotels and Resorts, Sunwing, Air Transat, and Pizza Nova)
Foreign subsidiaries
Type of international business
- Often referred to as a ”wholly owned subsidiary”
- A foreign subsidiary exists when a parent company allows a branch of its company, in another country, to be run as an independent entity.
- Example: Toyota has traditionally been a successful foreign subsidiary in Canada through Toyota Motor Manufacturing Canada (TMMC), which operates in Cambridge and Woodstock, Ontario.
- This subsidiary has many advantages for Toyota. It saves on distribution costs because the plant is closer to Toyota’s North American customers, and it provides access to a well-educated workforce. These factors help to increase profitability. Canada also gains: employs more than 8,000 people.
Losers of tariffs
- International producers: their goods are more expensive
- Consumers: the price of goods is increased and they are forced to pay more
- International employees: lose on job opportunities
Winners of tariffs
- Domestic governments: collect the additional taxes
- Domestic producers: their goods are competitively priced
- Domestic employees: get to keep their jobs
Pros/cons of foreign investments
- Many laws in Canada influence the rules and regulations around foreign investment. The law with the greatest impact is the Investment Canada Act. Its purpose is to ensure that all foreign investments are reviewed to determine how they will benefit Canada.
- World Trade Organization (WTO): The WTO oversees the rules of global trade of which Canada is a member
- The Investment Canada Act, the Bank Act, the Transportation Act, the Broadcasting Act, and the Telecommunications Act all limit the amount of foreign ownership in each of these sections.
Factors affecting exchange rate
Economic Conditions in Canada
A variety of economic conditions affect the value of the Canadian dollar:
- Inflation: the rate at which the price of goods and services is rising and the buying power of the dollar is falling. A low inflation rate causes investors to prefer the Canadian dollar because of the stability of prices.
- Unemployment: the number of Canadians without jobs. A low unemployment rate signals a stable, healthy economy, causing the Canadian dollar to rise
- Gross Domestic Product (GDP): the value of all finished goods and services produced by a country in a specific time period. A stable or rising GDP similarly indicates a healthy economy, causing the Canadian dollar to rise.
- Interest rate: The rate charged to those who borrow money. A country with higher interest rates in comparison to other countries attracts foreign investors. Higher interest rates in Canada increase the foreign demand for our dollar, which causes the dollar’s value to rise.
- Trading Between Countries: the more favourable the terms of trade (comparison of exports to imports), the higher the currency exchange rate
- 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
Currency fluctations
Currency fluctuations are a barrier to international trade because of the uncertainty they create in trying to price goods and services accurately.
Winners of Currency fluctations
- Exporters: International businesses want to buy Canadian goods when the CAD is low
- Canadian tourism: since the CAD is low, international tourists visit Canada more often
- Canadian Retail: Since the US is more than the CAD than normal, Canadian customers will be shocked and will want to buy from Canadian retailers
Losers of Currency fluctations
- Importers: More expensive to import and sell products in Canada
- Canadian Travelers: More expensive to travel to the US for pleasure or business
- Major sports teams
Trade barriers
Governments set up rules and regulations to:
- protect local businesses
- generate revenue
- protect citizens from harmful products
However, many of these regulations discourage international trade
- This shielding against foreign competition is called protectionism
- Trade barriers exist when countries have different standards for the way products are used or how they perform.
- Standards (in areas such as environmental protection, voltage in electronic devices, and health and safety) can become trade barriers when countries have different criteria for what is acceptable.
- While most electrical products require socket converters for use in different countries, other technology like USB—the Universal Serial Bus—is, as its name suggests, a global standard for charging a variety of mobile devices.
- Time Zones: Time zones are another barrier to international trade. The international business world is open 24 hours a day. One of the major reasons for this is an improvement in communication technology. Emails and texts can be sent, and phone and conference calls made easily, almost anywhere in the world.
