Chapter 3: Global Business Flashcards
What is Global business
enxompasses all activities that involve exchanges across national boundaries
When is a company a global business
when they are involved in exchanges across national boundaries/ inputs or exports
How does global business benefit customers
more choices, lower prices, access to new experieinces
what two environments of global business are connected
political and economic
What is a trade imbalance
when there is an uneven amount of the good being sold and good being recieved
what are trade imbalances a result of?
government policies in foreign country and domestic country
why are some countries better to provide some good than others
becuase of manay reasons, such as labour supply, nat res, or cultural norms
absolute advnatage
the ability to produce a specific product more efficiently than other country, LOSE LESS RESOURCES TO PRODUCE IT
What does canada have abs adv in?
wheat and agro products, softwood and mining
Comparative advantage
ability to produce a specfici product more EFFICIENTLY than other product
comp adv vs abs adv sgma
ability to prod a product better than any other product
ability to prod a prodcut better than any other country
Exporting
the act of selling/shipping goods to other countries
bombardier and boeing
aircraft companies
benefit of exporting
more jobs
more income
benefit of exporting: more jobs, more money q:
without exporting, the only consumers are domestic, when market is also intenrational A LOT MORE DEMAND so a lot more supply!
more jobs=more money
two countries known for exporting
china: the worlds factory bc labour is cheap
brazil: abundant nat res and gives to resource less
canadas goal by 2025
expnd exports by 50%
what does exporting protect against
when there is only a domestic market for a product, then any instabiltiy cnan wreak havoc!!!! exporting creates more demand consistently
importing
buying goods from other countries and shipping them domestically
why would we import?
to access goods we are unable to accesss because lack of nat res
benefits of importing
-lower prices
-more choice
-more valuable use of a countries resources
Importing benefit: lower prices
without importing: prices determined by lcal cost of production
with importing: access to lower prices goods bc cost of labour is cheap elsehwere
WHAT DOES IMPROTING BENEFIT NOW APPLY TO!!!!!
SERVICE INDUSTRICES, bc now educated and skilled professionals world wide
canadians go to mexico fro health care chcaeaper
importing benefit: more choice for consumers
without importing: select amount of products
with importing: unlimited!!1 each country has unique goods
imoirting benefit: most val use of country’s resources
wihtout importing: resources used to produce lower val goods that are necessity
WITH importing: same resources used to produce highest value goods bc lowest covered already!!
what did we have before currency, issue?
barter! trade only happened with exchanging goods
issue: products have to be equali n value, exchange only occurs when parties need each other’s product simultaneously
How do diff countries regulat exchanigng currrencies
FOREIGN EXCHANGE CONTROL
FOREIGN EXCHANGE CONTROL:
restriction on the amount of a particular foreign currency that can be purchased or sold!
benefit of foreing excahnge contrrol:
you limit the amount of foreign currency that improteres in canada can obtain
which limits the amount importers can purchase with the currency
this limits imports from the country whos foreign exchange is being controlled
what are exchange rates determined by
number of factors related to each coutnry’s economy
interest rates
inflation
econ strength
# imports nd exporta
what is key to international trade!
currency exchange!!
how much fluctuations do exchange rates face
small fluctiations, but once in a while very big
EXPLAIN: is it good if canadas dollar is weaker than the usa
YES! this increases exports as people buy from canada and import to the usa (they promote jobs and income in canada)
Currency devaluation
when a country intentioanlly devalues currency to attract international buyers and investors!
they hope to increase exports and increase jobs and incoems!!
country a wants something from coutnry b
A currency is 2: 1 B currency
canada $2=1 euro
what happens to Country A consumers when new exchange rate is ? what about country b?
1:1
$1=1 euro
good for country a becuase now can buy the goods they want for less
bad for country b because when they wanted a good from country a, they would pay half the actual price of the good because currency is stronger, but now they must pay double the amount!!
when currency devlaution happens?
when currency increases in valuation?
higher exports
less epxorts
IMPORTANT TO KNOW THIS CONCENT
when currency devlaution happens?
when currency increases in valuation?
higher exports
less epxorts
why restrict intl businesss
types of trade restrictions
is free trade increasing
yes
balance of trade
this is the goal of many countries!!! this is why they export
VALUE OF EXPORTS- VAL OF IMPORTS
positive trade balance
negative trade balance
TRADE SURPLUS!! (E>I)
-good bc more epxorts more money moroe jobs
tRADE DEFICT (I>E)
-good for intl business and conusmers
balance of payments
total flow of money into a country minues the total fow of money out of the country (quarter or year)
MONEY IN-MONEY OUT
Pitfalls of global market
politics, cultural diff, eocnomic environmtnet
who carries out intl trade
governmetns and businesses
Two trade restrcition
tariff
quota
tariff
tax on imported good
makes price of imported good higher, then customers buy less of this good bc consumers buy chepaer domestic goods
tariff benefits
-dom producers like it bc there goods sell more
-consuemrs hate it bc less choice
-intl business hate
-govt like bc more tax rev
tariff-customs/ import duty
the tax on any foreign product entering the country
qUOTA
Limited amount of the good allowed to enter the country
raises the price of the foregin good
Who benefits with the quota
Consumers sad less choice
Dom producers happy
Govt dont make revenue
Intl producers sad
obstaxles for foreign competiiton
tariff and quotas!
tariff vs qutoa
tariff: make foreign good expensive
wuota: expenisve+limits amount avaiable in cuontry
how do tariffs.quotas harm dom sproducser
because no need to innovate and/or imporve their operations with froeign compeititon
import duty cnaada ex
chielan tomatoes, tomatoes dried and pckacged, ketchup and salsa
two tariff types
revenue tarrigg: imposed to generate income for govt
protective tarriff: imposed to protetc a dom industry from comp by keping price of competing imports level with or higher than the price of a smiliar domestic product, bc fewer sold at increased price, fewer imported
protective tariff
imposed to protetc a dom industry from comp by keping price of competing imports level with or higher than the price of a smiliar domestic product, bc fewer sold at increased price, fewer imported
Embargo
another trade barrier
complete halt of trading to a country. or of a good
cnaad doesnot allow sale of military exports that would threaten peace
embargo problems
diff to enfornce
black market for certain goods
political weapon
final trade restriction
cultural barriers
can stop acceptance of product from another country,
reasons for trade restrictions
1) to protect new/wea kindustries
2)protect dom jobs
3)protect healht of citizens
4)retailiate for other trade restrcitons
5) protect nat security
effect of trade restrictions
1) HIGHER PRICES
2) LESS CHOICES
3) HOSTILITY BW COUNTRYES
4) allocating valr esources to dying industries
why do not all countries benefit form globalization
BIG
1) national rivalries: bc nations compete eocnomically, poltiically, militarily! this can create trade wars with allies and enemeies
2)economic instability: when naitons experience war social political change resource shortages, can create economic instability, THIS INSTABILITY MAKES FOREING INVESTMENT LOW, currency vals low, no eocn growth
3) LACk of econ dev: lack basic reosurces for building sustaibile economy!!
-alck of nat res, skilled resources, infrastructre like highways!
3 orgs that adress econ global issues
wto
wb
imf
WTO
aims to open markets and trade barriers, provides permannet formu for trade negotiations and mediate disputes
mediates tariffs
IMF
concerned with eocn stability! bc econ instabiltiy can ruin global economy!
ADVISES GOVTS AND CENTRAL BANKS ON ECON ISSUES!!! lends money to eocn in crises (lender of last resort)
promtoes ecchange rate stability by helping coutnries better manage economies!! reduce povety
WB
seeks to help coutnries build a viable economy and reduce poverty
low interest loans and grants!
further supports investments in dev countries such as education ehalth infrastructure and agriculture!!!
wb focuses on reliving febt of dev countries!!!1!
economic community
organization of countries formed to promote the free movement of reosurces and products among memebrs
ecowas eu apec cusma
what is eocn community founded on
free movment of reosurces and products among memebrs
eu
free commerce on the continet
collective economy is larger than usa and 3x japan
cusma
important bc 75% epxorts go to usa and mexico
apec
asia paciifc eocnomic cooperation
china russia usa canada australia
40% of world pop
critics of cusma say
1) hurt workers by eroding labour standards and lower wages
2) undermines nat soveriegnty independepnace
3) environmental issues
4) hurts agro sectors in usa and canada
5 )can protenntial create trade deifcit (i>e)
pros of cusma
1) trade and iventment
2) benefits all
3) increased sales pattnerships and job oppos
4) high paying exprot related jobs
5) results in ebtte prices andselection in consumer goods
is global integration of the rise
yea it increases prospetiy
what does most intl trade happen between
business and consumers not necessarily coutnries themselves
how deos trade take place
when company wants to enter a market either as buyer or seller
1- exporting and improting
exporting and importing- entering market
lower control lower risk
company may manufacture products domestically and export them for sale in foreign markets!!!
or company may imports products manufactured by pthers
why is exporting and importing lower riks and lwoer control
lower risk: company exporting has more customers, company importing has more can offer more choices/lower prices
lower control:
-of the partenring compnaies in another country; if you are exporting good you dont know how it will be marketed/represented/
-SOLUTION: Open up a branch in foreign country and do it but expensive
-Importers loss of control: you are limited to the products osld by the factories in other countries, no control of quality or manufacturing scheidule
importing exportting 2 sided issue
EXPORTER wants ot be paid before shipping
IMPORTER wants merch before paying
solution: go to a mutially trusted in-between: local domestic bank involved in intl business to control shipping and payment until transaction documentation is complete
-> they give letter of credit in intl business transactions (importer bank forwards letter of credit to the exporters bank, and then exporters bank can go ahead with the shipment bc money has been recieved)
->the carrier transporting the merchandise provides the exproter with a bill of landing, which is a doc issued byt rasport carrier to exporter to prove that merch ahs been shipped
->……………………………
Importing and exporting raises a two-sided issue: The exporter would like to be paid before shipping the merchandise, whereas the importer would prefer to know that it has received the shipment before releasing any funds. Neither side wants to take the risk of fulfilling its part of the deal only to discover later that the other side has not. The solution is for both parties to use a mutually trusted go-between who can ensure that the payment is held until the merchandise is in fact delivered according to the terms of the sales contract. The go-betweens are usually local, domestic banks involved in international business that will control the shipping and payment documents until the transaction is complete. A common form of payment for international business transactions is called a letter of credit. The importer’s bank forwards the letter of credit to the exporter’s bank, which also normally deals in international transactions. The exporter’s bank then notifies the exporter that a letter of credit has been received in its name, and the exporter can go ahead with the shipment. The carrier transporting the merchandise provides the exporter with a bill of lading, which is a document issued by a transport carrier to an exporter to prove that merchandise has been shipped. The exporter signs over title to the merchandise (now in transit) to its bank by delivering signed copies of the bill of lading and the letter of credit. In exchange, the exporter issues a draft from the bank. The draft, bill of lading, and letter of credit are sent from the exporter’s bank to the importer’s bank. Acceptance by the importer’s bank leads to return of the draft and its sale by the exporter to its bank, meaning that the exporter receives cash and the bank assumes the risk of collecting the funds from the foreign bank. The importer is obliged to pay its bank on delivery of the merchandise, and the deal is complete.
Importing and exporting raises a two-sided issue: The exporter would like to be paid before shipping the merchandise, whereas the importer would prefer to know that it has received the shipment before releasing any funds. Neither side wants to take the risk of fulfilling its part of the deal only to discover later that the other side has not. The solution is for both parties to use a mutually trusted go-between who can ensure that the payment is held until the merchandise is in fact delivered according to the terms of the sales contract. The go-betweens are usually local, domestic banks involved in international business that will control the shipping and payment documents until the transaction is complete. A common form of payment for international business transactions is called a letter of credit. The importer’s bank forwards the letter of credit to the exporter’s bank, which also normally deals in international transactions. The exporter’s bank then notifies the exporter that a letter of credit has been received in its name, and the exporter can go ahead with the shipment. The carrier transporting the merchandise provides the exporter with a bill of lading, which is a document issued by a transport carrier to an exporter to prove that merchandise has been shipped. The exporter signs over title to the merchandise (now in transit) to its bank by delivering signed copies of the bill of lading and the letter of credit. In exchange, the exporter issues a draft from the bank. The draft, bill of lading, and letter of credit are sent from the exporter’s bank to the importer’s bank. Acceptance by the importer’s bank leads to return of the draft and its sale by the exporter to its bank, meaning that the exporter receives cash and the bank assumes the risk of collecting the funds from the foreign bank. The importer is obliged to pay its bank on delivery of the merchandise, and the deal is complete.
contractual agreement
more control MORE RISK
downside of pure ex/imp can be overcome with contractual involvement with intl partners!!
-Licensing franchising subcontracting
DANGER: brand could be damanged if the foeing company doesnt repp product well, also enforcing internaitla contracts related to business performacnes is diifucltand costly
licensing
one company licensor permits another licensee to produce and market its product and use brand name in return for royalty.money
YOPLAIT: french brand licensed to canadian producers (producers get profit off the brand, yoplait gets roalyties)
licensign helps small manufacturers wanting to launch a well known domestic brand internationally!!! SIMPLe to expand into foering market with vriutally no investment!!!!
dangeR: if licensee does not mantain the licensors poruct standards than image ruined
FRANCHISIGN
similar to licensign but contractual agreemtn may incldue provisions for how the enture business should be operated! inclduing use of company marketing materials, purchase agreement, and pentalies for bad eprformacnes
subcontracting
CONTRACT MANUAFACTURING
use of contractual agreements to specficiy the duties of the partnering company,
when exporting: include sales and dist resposintilies for tcompanies that purchase your goods for sale in foregin markets
when impritng: this could be manufacturing specification and delivery requirments for manufactirign when you are sourcing product
internaitonal direct inevsmtne
most control most risk
when company has ambitious goals for entering internaitonal busienss!
most ocntrol: bc your money
most irsk: bc you have to invest tons of money!
when do companies pursue idi
when they have the most knowledge about gorefing foreign market
why do countries want international presence
lower exposure
lower operating costs
closer to fop
Strateigc alliance
when two+ companies form to create a comp adv on a worldwide basis!!!
this is growing in auto and computer industriess
a partnership formed to cooperate in manufacturing, development, sales, or other business activities while each party maintains its independence
joint venutre
most common form of strategic alliance in canada
partnership formed to achieve a specific goal or to operate for a specific period of time. It involves the creation of a separate company that will be operated jointly by the partnering companies. A joint venture with an established company in a foreign country provides immediate market knowledge and access, reduced risk, and control over product attributes. However, joint-venture agreements established across national borders can become extremely complex, and as a result they generally require a very high level of commitment from all the parties involved.
Thus, individual companies that lack the internal resources essential for international success may seek to collaborate with other companies. An example of such an alliance was the joint venture New United Motor Manufacturing, Inc. (NUMMI), formed by Toyota and General Motors to make the automobiles of both companies. This enterprise united the quality engineering of Japanese cars with the marketing expertise and market access of General Motors.
Thus, individual companies that lack the internal resources essential for international success may seek to collaborate with other companies. An example of such an alliance was the joint venture New United Motor Manufacturing, Inc. (NUMMI), formed by Toyota and General Motors to make the automobiles of both companies. This enterprise united the quality engineering of Japanese cars with the marketing expertise and market access of General Motors.
At a still deeper level of involvement in international business, a company may develop (build) totally owned facilities (that is, its own production and marketing facilities in one or more foreign nations). This direct investment provides complete control over operations, but it carries a greater risk than the joint venture. The company is really establishing a subsidiary in a foreign country. Most companies do so only after they have acquired some knowledge of the host country’s markets.
At a still deeper level of involvement in international business, a company may develop (build) totally owned facilities (that is, its own production and marketing facilities in one or more foreign nations). This direct investment provides complete control over operations, but it carries a greater risk than the joint venture. The company is really establishing a subsidiary in a foreign country. Most companies do so only after they have acquired some knowledge of the host country’s markets.
Regardless of the method a company chooses to enter into foreign markets, it potentially can improve not only the financial performance of the Canadian company, but also the economy of the other country. For example, the emerging Asian markets of China and India have welcomed foreign investment in the manufacturing and technology industries. China’s exports have boomed, largely thanks to foreign investment. China continues to lift restrictions on certain forms of foreign investment. Manufacturing companies are lured by low labour costs; big manufacturers have surged into China to expand their production base and push down prices globally. Now manufacturers of all sizes are trying to reduce costs in Canada or to outsource more frequently in cheaper locales.
Regardless of the method a company chooses to enter into foreign markets, it potentially can improve not only the financial performance of the Canadian company, but also the economy of the other country. For example, the emerging Asian markets of China and India have welcomed foreign investment in the manufacturing and technology industries. China’s exports have boomed, largely thanks to foreign investment. China continues to lift restrictions on certain forms of foreign investment. Manufacturing companies are lured by low labour costs; big manufacturers have surged into China to expand their production base and push down prices globally. Now manufacturers of all sizes are trying to reduce costs in Canada or to outsource more frequently in cheaper locales.
With this increase in economic activity in Asia, especially in the manufacturing sector, one of the most important factors of production is natural resources (specifically oil and gas). Acquisitions, joint ventures, and partnerships between Asian companies and Canadian producers are becoming routine so that Asia can secure a low-risk and predictable source of energy.
With this increase in economic activity in Asia, especially in the manufacturing sector, one of the most important factors of production is natural resources (specifically oil and gas). Acquisitions, joint ventures, and partnerships between Asian companies and Canadian producers are becoming routine so that Asia can secure a low-risk and predictable source of energy.
Methods range from those that carry low risk and a low degree of control to those that carry high risk and a high degree of control. The decision about which international business method to use will depend on the company’s goals, risk tolerance, and level of commitment to pursuing opportunities in global business.
Methods range from those that carry low risk and a low degree of control to those that carry high risk and a high degree of control. The decision about which international business method to use will depend on the company’s goals, risk tolerance, and level of commitment to pursuing opportunities in global business.
IMF vs world bank
IMF: macroeconomic financial stability, financiall realtions
WB: long term econ dev and poverty reduction
