Chapter 3 - Exploring Global Business Flashcards
4 Drivers of Globalizaition
-Currency
-Traders
-Communications
-Transportation
Absolute Advantage:
the ability to produce a specific product more efficiently than any other country.
ex. Canada with agriculture because of its natural resources.
Comparative Advantage:
the ability to produce a specific product more efficiently than any other product.
ex. may have the advantage to energy and agriculture, but are restricted to industries that require a steady warm climate.
Exporting
the selling and shipping of raw materials or products to other countries
○ Canada highly contributes to the technology sector. The aerospace contributes approximately $25 billion to our GDP and employs around 213,000 Canadians.
Benefits of International Trade
- Benefit 1: Increased Jobs & Income
Without exporting, there is a limited number of customers. - Benefit 2: Access to Resources
○ Importing: the buying of raw materials or product from other countries.
○ Without importing: there would be shortages in key natural resources. - Benefit 3: Lower Prices
○ Without importing, prices are driven by the local costs of production - Benefit 4: More Choice for Consumers
○ Without importing, there is a limited selection of products. - Benefit 5: Most Valuable Use of a Country’s Resources
Without importing, resources are spent making lower-value goods.
Foreign-Exchange Control
a restriction on the amount of a particular foreign currency that can be purchased or sold.
Currency Devaluation:
a drop in the value of one country’s currency relative to other currencies.
Currency Exchange-Rate:
the value of one currency in the relation to another.
Types of Trade Restrictions
- Tariffs: tax on a particular foreign product being imported into a country often used interchangeably with customs or import duty.
○ Revenue Tariffs: imposed solely to generate income for the government.
○ Protective Tariffs: imposed to protect a domestic industry from competition by keeping the price of competing imports level with or higher than the price of similar domestic products. - Quotas: limit on the amount of a particular good that may be imported into a country during a given period of time.
- These barriers are meant to create opportunities for domestic companies to grow within a protected domestic environment but this can also mean sacrificing innovations to improve operations from foreign competition.
- Embargo (another trade barrier): complete halt to trading with a particular country or in a particular product.
○ Ex. Canada doesn’t allow the sale of military exports that would threaten peace, security, or stability in any region of the world.
§ Currently, Canada has import embargoes against Iran and North Korea.
Cultural barriers is also a type of trade restriction that is often overlooked.
Reason for Trade Restrictions
-To protect new or weak industries
-To protect domestic jobs
-To protect the health of citizens
-To retaliate for another country’s trade restrictions
-To protect national security
Critics say that restrictions have both immediate and long-term consequences for trade restrictions.
○ Higher prices for customers
○ Restriction of customer choices
○ Misallocation of resources to weak or dying industries
Increased hostility between countries
Why is all trade no considered “free trade” and not all are benefitting from this increase in globalization?
○ National Rivalries: nations compete with each other economically, politically, and sometimes militarily.
§ A small trade dispute can lead to an all-out trade war through raising tariffs as well.
○ Economic Instability: even developed nations can become unstable possibly through war, social and political change, resource shortages. Which can create economic crisis.
○ Lack of Economic Development: some nations are not active participants in the global economy because they lack basic resources for building a sustainable economy of their own.
Could be from lack of natural resources, skilled labour, or even basic infrastructure (highways, railroads, ports).
These factors can disrupt the growth of international trade and possibly the economic progress of global economy. These organizations address these issues:
- World Trade Organization (WTO): powerful successor to the General Agreement on Tariffs and Trade (GATT) that incorporates trade in goods, services, and ideas.
- International Monetary Fund (IMF): an international bank that makes short-term loans to developing countries experiencing balance-of-payment deficits.
- World Bank: the most familiar type of multilateral development bank; provides low-interest loans, interest-free credit, and grants to developing countries.
Economic Community:
an organization of countries formed to promote the free movement of resources and products among its members (also referred to as regional economic integration).
Can be founded on a simple trade agreement between countries. Aka “Regional Economic Integration.”
Critics of CUSMA say:
- Hurts workers by lowering labour standards.
- Undermines national sovereignty and independence.
- Does not address environmental issues.
- Hurts agricultural sector.
- Can potentially decrease Canadian trade deficit. When the value of our imports exceeds out exports.
Proponents of CUSMA say:
- Contributes to increase of trade and investment
- Benefits companies
- Results in increased sales, partnerships, opportunities.
- Create high-paying export-related jobs.
Results in better prices and selection in goods.
Exporting and Importing (Lower Control, Lower Risk)
Importing and exporting raises two-sided issue: the exporter would like to be paid before shipping the merchandise, while the importer would prefer to know that is has received shipment before releasing funds.
§ The solution would be to use a mutually trusted go-between who can ensure payment is held until merchandise is delivered according to contract’s terms.
- Letter of Credit: document issued by a bank on request of an importer stating that the bank will pay an amount of money to a stated beneficiary.
- Bill of Lading: document issued by a transport carrier to an exporter to prove that merchandise has been shipped.
- Draft: document issued by the exporter's bank, ordering the importer's bank to pay the merchandise, thus guaranteeing payment once accepted by the importer's bank.
Contractual Agreements (More Control, More Risk)
- Licensing: contractual agreement when one company permits the other to produce and market its product, use its brand name in return for royalty or other compensation.
§ Ex. Yoplait yogurt is a French brand licensed for production in Canada. It maintains that appealing French image and in return Canadian producer pays the French company a licensing fee and percentage of income from sales of that product.
§ Philip Morris licenced Labatt Brewing Company to produce Miller High Life in Canada. - Franchising: similar to licensing but the contract may include provisions for how the entire business is to be operated.
- Subcontracting: aka “Contract Manufacturing,” is used to specify the duties of the partnering company. When they export, they can include sales and distribution responsibilities. When importing, it could include manufacturing specifications and delivery requirements.
International Direct Investment (Most Control, Most Risk)
- International Direct Investment: method for entering international business that provides complete control over operations. Options for international direct investment include acquisitions, joint ventures, and creation of totally owned facilities in foreign markets.
- Strategic Alliances: aka “Strategic Partnership,” is a partnership formed to cooperate in manufacturing, development, sales, or other business activities while each party maintains independence.
- Joint Venture: the creation of a separate company that will be run jointly by partnering companies. Partnerships formed to achieve a specific goal or to operate for a certain period of time.
□ Provides: market knowledge and access, reduced risk, and control over product attributes. - Acquisition: purchase of an existing company (in a foreign country).
Ex. Marriott International purchased British Columbia-based Delta Hotels and Resorts to have more presence in Canada.
