Chapter 9 Flashcards
What is Globalization?
A process involving:
the integration of national economies.
the generation of a single world economic system.
the expansion of the degree and forms of cross-border transactions.
the growth in direct foreign investment
in regions across the world.
the shift toward increasing economic
interdependence.
Sources Encouraging Global Business Activity
Pull Factors
- Potential for Sales Growth
- Obtaining Needed Resources
GOING GLOBAL
Push Factors
- The force of competition
- Shift toward Democracy
- Reduction in Trade Barriers
- Improvements in Technology
pull factors
certainly, businesses may want to increase sales, and expand into new markets. This can help businesses grow. A business, however, may also need resources (that is, raw materials) in order to produce goods and services. Certainly, as China and India’s economies grow, Canada can trade its natural resources and develop stronger economic relationships with these countries.
Pull factors are more internal motivating factors for a business to go global.
Push factors
on the other hand, are more the external environmental factors pushing businesses to compete globally. The force of competition is one reason.
Channels of Global Business Activity
- Exporting and Importing
2.Outsourcing/Offshoring
3.Licensing and Franchising Arrangements
- Direct Investment in Foreign Operations - Foreign direct investment (FDI)
- Joint Ventures and Strategic Alliances
6.Mergers and Acquisitions
7.Establishment of Subsidiaries
Exporting and Importing
Businesses that engage in international trade are more likely to be involved in importing and exporting than in any other type of global business activity. While there are about 30 million potential customers within our Canadian borders, there are over 6 billion potential customers across the world, increasing by about 95 million people annually. Many Canadian businesses have taken advantage of the benefits of exporting. Canada exports over 40% of our production, making us a major trading nation.
Outsourcing and Offshoring
- As you may recall, outsourcing involves hiring external organizations to conduct work in certain functions of the company. So, for example, payroll, accounting, and legal work can be assigned to outsourced staff.
Licensing and Franchising Arrangements
The licensing agreement is an arrangement whereby the owner of a product or process is paid a fee or royalty from another company in return for granting them permission to produce or distribute the product or process.
Direct Investment in Foreign Operations - Foreign direct investment (FDI)
involves the purchase of physical assets or an amount of share ownership in a company from another country to gain a measure of management control. Foreign direct investment in Canada is the second highest in the G7 as a share of GDP.
Joint Ventures and Strategic Alliances
A joint venture involves an arrangement between two or more companies from different countries to produce a product or service together, or to collaborate in the research, development, or marketing of a product or service. This relationship has also been referred to as a strategic alliance.
Mergers and Acquisitions
A Canadian-owned company could actually merge with a foreign-owned company and create a new jointly owned enterprise that operates in at least two countries. This is called a merger. Why do such mergers occur? A number of factors typically generate the drive to merge, including the goal of obtaining new markets for the business and the desire to obtain new knowledge and expertise in an industry. The notion of achieving economics of scale in production may also influence the decision to merge.
Establishment of Subsidiaries
Another well-known type of global business activity is the creation of subsidiaries or branch operations in foreign countries through which the enterprises can produce or market goods and services. What are the benefits of such types of global arrangements?
global business
is a business that engages directly in some form of international business activity, including such activities as exporting, importing, or international production.
multinational corporation (MNC).
A business that has direct investments (whether in the form of marketing or manufacturing facilities) in at least two different countries
The Multinational Corporation Benefits:
- Encourage economic development.
- Offer management expertise.
- Introduce new technologies.
- Provide financial support
- Create employment.
- Encourage international trade.
- Bring countries closer together.
- Facilitate global cooperation.
The Multinational Corporation Risks:
- MNCs have no allegiance to the host country.
- Profits are returned to the home country.
- Decision-making can be highly centralized.
- MNCs can be difficult to control.
4 aspects International Trade
The logic of trade
Mercantilism
Trade protectionism
Promoting
international trade
The Logic of Trade
One fundamental argument is that since some countries can produce certain goods or services more efficiently than others, global efficiency and hence wealth can be improved through free trade.
Free trade
is based on the objective of open markets, where a level playing field is created for businesses in one country to compete fairly against businesses in other countries for the sale of their products or services. The aim reflects the fundamental principles of comparative advantage. Each country expects to take advantage of each other’s strengths, and thereby be permitted to focus on their own strengths.
Mercantilism
The trade theory underlying economic thinking from the period ranging from about 1500 to 1800 was referred to as mercantilism. Specifically, the fundamental view was that a country’s wealth depended on its holdings of treasure, typically in the form of gold. Mercantilism, essentially, is the economic policy of accumulating this financial wealth through trade surpluses.
Trade surpluses
come about when a country’s exports exceed its imports. Typically, the governments would also subsidize domestic industries to encourage growth in their exports. Trade between mercantilist countries and their colonies resulted in large profits, given that the colonies typically were paid little for their raw materials but were forced to pay high prices to purchase the final Products. Japan has often been viewed as a mercantilist country because of its typically high trade surplus with a number of industrial nations, including the United States.
Trade Protectionism
Essentially, trade protectionism is about protecting a country’s domestic economy and businesses through restriction on imports.
Why might imports be a threat to a country’s businesses and economy?
Low-priced foreign goods that enter the country could compete with goods already produced here and, in effect, take business away from domestic producers. The ultimate consequence may be loss of sales and loss of jobs for domestic industries that are unable to compete with these lower-priced imports.
trade deficit
often results in more money flowing out of the country (to buy the imported goods) than flowing in (for our exports).
import quota
limits the amount of a product that can be imported. The reasons for this restriction are the same: to help ensure that domestic producers retain an adequate share of consumer demand for this product.
What’s Wrong with Mercantilism and Protectionism?
The practice creates a “one-way street” of trade, so to speak. That is, a mercantilist country aims to maximize the goods and services it sells to other countries, yet it expects to restrict the goods and services that these same countries attempt to sell to it.
Promoting International Trade
Whether it is tariffs or quotas or other forms of protectionism, we have seen a gradual lifting of trade restrictions as part of the wave of globalization. Most countries are endeavouring to eliminate trade barriers altogether. There are different forms of regional economic integration.
Regional Economic Integration
- Free trade area
- Customs union
- Common market
- Economic union
Free trade area
This form of economic integration involves the removal of tariffs and nontariff trade barriers (that is, subsidies and quotas) on international trade in goods and services among the member countries. Given that this form involves the lowest degree of regional economic integration, there is greater member autonomy with regard to such issues as how it chooses to deal with nonmembers.
Customs union
This form of economic integration involves the removal of trade barriers on international trade in goods and services among the member countries. However, given that this form involves a somewhat greater degree of economic integration, there is less member autonomy with regard to such issues as how it chooses to deal with nonmembers and what types of barriers it should construct against nonmember countries.
Common market
This form of economic integration builds on the elements of the two previous forms, including the removal of trade barriers and the implementation of a common trade policy regarding nonmembers. Given the requirement of cooperation in economic and labour policy, this level of economic integration is more difficult to achieve than the previous two levels.
Economic Union
This form of economic integration builds on the previous three forms and, in addition, involves a coordination of economic policies among the member countries. It requires a higher level of integration than a common market because it involves the harmonization of fiscal, monetary, and tax policies.
Other trading
-European union
-Asian Trading bloc
Asean
Apec
-NAFTA
NAFTA
- Culture
- Consumers
- Trade
- Employment
- Business
North American Free Trade Agreement (NAFTA):
Advantages:
- increases in trade and exports.
- increases in GDP.
- creates synergies between 3 countries that “go beyond economic prosperity.”
- foreign competition forces domestic companies to improve products, processes and customer service to be more competitive.
- forces countries to reduce/abolish inefficient operations and to direct efforts where they can obtain a competitive advantage.
- Canadian culture is supported (eg. music royalties).
- more choice of goods/services.
- less expensive goods/services..
- less (or no) taxes/tariffs on imported goods.
- allows a free and open market.
North American Free Trade Agreement (NAFTA):
Disadvantages:
- increases in foreign imports, competing with Canadian goods.
- increases in trade only due to Canadian low dollar, not NAFTA.
- Canada still trades mainly raw materials/natural resources, not technology-based exports.
- too dependent on trade with U.S.; still need to improve trade with other nations globally.
- Canadian companies cannot compete against U.S. and other larger international companies.
- Jobs are being lost to Mexico where there are cheaper wages.
- Canadians lose jobs when U.S. companies decide to shut down in Canada and now just ship goods directly from the U.S. across the border tariff-free.
- American companies will focus on “American” culture, and will indirectly discourage Canadian culture by having a dominant presence.
- Canada will become an “economic subsidiary” of the U.S.
- NAFTA has not caused an increase in productivity.
