Politics Flashcards
What are the different elements of the political factor?
- Laws, regulations
- Taxes
- Trade agreements or conditions
- Political system
- Political stability
What is the significance of the political factor?
- Ensures protection of customers
- Provides support/protection to domestic businesses
- Creates opportunities in foreign markets
Explain how the government can act like a customer
They need paper, computers, furniture, vehicles for the police, and weapons for the army, which they need to purchase from businesses
Is the government a good customer to have? Why?
Yes and no: they are a good customer because of their size, but because of that they also have a lot of negotiating power
Explain how the government can act like a competitor by giving some examples
The government provides some services that are also provided by other businesses. Eg. The LCBO competes against other sellers of marijuana, Canada Post competes against FedEx, and CBC competes against other media/radio stations
Is the government a good competitor to have? Why?
They are not a good competitors because:
- they are very big and have many resources
- they make the rules that businesses have to follow
- they don’t need to earn a profit
- they are a known entity
Explain how the government can act like a taxation agent. Why do they collect taxes?
Tax is collected by all three types of government because that’s where government gets is revenue
What are the three different types of taxes?
- Progressive
- Regressive
- Restrictive
Describe what a progressive tax is. Give an example
The more money you make, the more you pay in taxes. the first dollars you earn are tax free, but after the limit the tax rate jumps up from different levels. As you progress to different levels, you pay a higher percentage of your income in taxes. Eg. income tax
Describe what a regressive tax is. Give an example
Proportionally, a regressive tax takes more of your income when you have a lower income than a higher income. Eg. sales tax
Describe what a restrictive tax is. Give an example
A restrictive tax is meant to influence consumer habits by taxing things that are “bad”, like cigarettes, gasoline, and liquor
Explain how the government can act like a provider of incentives and financial assistance
- The government provides subsidies, tax breaks, research funding, and support services for both small and large businesses - The government also provides bail outs by “saving” companies who are going bankrupts by lending or giving them money (Eg. banks, automobile industry)
Explain how the government can act like a provider of services
The government provides public services like roads or the army
Why does the government provide some public services?
Either it’s a bad choice for a for-profit to run them (like the army, police, education and health care (because it’s expensive) or fire department), or they wouldn’t exist if they were dependent on for-profits
Explain how the government can act like a regulator / law maker
They regulate business activity to make sure that businesses are following the law, and they influence technology standards (like the CRTC: regulates online services for TV, radio, and frequency)
Why does the government act like a regulator/law maker?
- Promotes competition
- Promotes innovation
- Protects customers
- Achieves social goals
- Protects the environment
How does the government promote competition by being a regulator?
The government want’s to encourage competition, but they also want to make sure people are following the rules. The Competition Act ensures that little companies are not crushed by big businesses
How does the government promote innovation by being a regulator?
Innovation drives the economy forward and gives the country opportunities to be internationally competitive. The government wants to promote continuous improvement by protecting intellectually property rights like patents, copyright, and trademarks
How does the government protect customers by being a regulator? Give an example
The Hazardous Products Act specifies what rules businesses must follow when dealing with toxic chemicals/materials
How does the government achieve social goals by being a regulator?
The government makes education accessible, even beyond high school, through loans and OSAP. They also heavily subsidize health care to help people stay healthy
How does the government protect the environment by being a regulator?
The government helps to protect natural marginal stakeholders such as the environment through acts like the Canada Water Act, and the Fisheries Act. If you break the law, the government can become an unsupportive stakeholder
Does the Banking Act create an opportunity or a threat?
To become a new bank, you need approval/a charter from the government, which is a very high barrier to entry; if the government changes that law, the barriers to entry will go down. For new banks, changing the Bank Act is an opportunity, but for established banks it will be a threat
How does the government influence social factors?
They try to influence social values by making laws (legal drinking age, no smoking indoors, etc.)
What actions/decisions can the government make that will affect a firm’s ability to achieve financial performance?
If the government increases income tax, people will have less disposable income and will buy fewer goods, causing revenue to go down and financial performance will decline
What actions/decisions can the government make that will affect a firm’s ability to meet customer needs?
If the government decides to stop trade with the US, they will no longer be able to provide goods from American companies and customers will not be able to access some of the goods they want
What actions/decisions can the government make that will affect a firm’s ability to build quality products and services?
The government sets the rules and regulations surrounding product safety, and they affect what standards products have to meet
What actions/decisions can the government make that will affect a firm’s ability to encourage innovation and creativity?
They protect intellectual property through patents, copyrights, and trademarks
What actions/decisions can the government make that will affect a firm’s ability to gain employee commitment?
If the government reduces unemployment benefits, people will be more committed to keeping their job and staying with your company. If the government increases minimum wage, people will be more inclined to work longer hours because they can benefit from it
What actions/decisions can the government make that will affect a firm’s ability to create a distinct competitive advantage?
If it becomes easier for competitors to imitate companies and their products it is much more difficult to create a competitive advantage
What are intellectual property rights?
Legal rights that result from intellectual activity in the industrial, scientific, literary, and artistic fields. They grant exclusive rights to the creator
What are the most common types of intellectual property rights?
Patents, copyrights, and trademarks
Why does the government enforce intellectual property rights?
It creates incentives for people to innovate by allowing them to benefit from their ideas. If people spend a lot of time and money to create something that is unique, they want to be able to be rewarded for it; if someone can use your idea without doing any work, they won’t put in the effort
What is a trademark? What is its purpose?
Words, designs, symbols, shapes, or a combination that is used to identify the goods or services of one person or organization
How long is a trademark protected? Under what legislation?
15 years; Trade-marks Act
Why are trademarks important?
- They establish and protect a business’s reputation and brand, which is one of the most difficult assets to build
- They facilitate licensing a business’s trademark; you can give someone else the opportunity to put your trademark on something they produce so they benefit from the reputation of your product, but you also benefit from royalties
What is a copyright? What is its purpose?
A copyright can be applied to any original literary, dramatic, musical, or artistic work, and the copyright covers form in which the idea is expressed, NOT the idea
Who owns a copyright?
The creator owns the copyright, unless they have been hired by a company to create something: then it belongs to the business
How long is a copyright protected? Does it need to be registered?
Copyrights are protected for the duration of the creator’s life, plus 50 years. After that, it becomes public domain. Things do not have to be registered to be subject to copyright, but there is stronger protection if you do register it
Why would people want copyrights?
- To receive credit for their work
2. To receive royalties for their work
What is a patent? What is its purpose?
Patents are government grants that give their inventors exclusive rights to their inventions
What are the requirements in order to patent a product?
The product must be new (first in the world), useful (functional and operative), and show ingenuity (is not obvious to someone skilled in that area). The product could be a product, a composition, an apparatus, a process (like a treatment/chemistry process), or an improvement on any of these (like the slippery coating on pills that makes them easy to swallow)
How long is a patent protected? Does it need to be registered?
A patent is protected for 20 years, but the details of the patent are disclosed after 18 months. Their inventors have to submit an application for a patent, which is reviewed by patent officers
Why do people want patents?
- They provide protection for the owner so that the owner can benefit from their invention
- They can license/receive royalties
- They provide valuable information and inspiration for further research and innovation (the details are disclosed to the public after 18 months
Why would a company not patent their product? Give an example
A company might not want to share the details of their product with the world, so instead they have their producers sign non-disclosure agreements (Eg. Coca-Cola)
How do businesses influence government?
The decisions made by governments are conscious decisions made by a relatively small group of people whose opinions can be swayed by lobbying, collaborating/input, and advertising
How can businesses influence the government by lobbying?
Big businesses can hire a lobbyist to represent them and talk to government officials on their behalf
How can businesses influence the government through collaboration/input?
The government is a mixed blessing stakeholder, and they can become very unsupportive. Companies often choose to collaborate with the government, letting them participate in the decisions of their business so that the government will be more favourable of the decisions they are making
How can businesses influence the government through advertising?
Advertising is an indirect way for companies to influence the government. Big corporations can influence voters and what voters want from the government, and they can influence the government through their voters
What are the three forms of ownership?
- Sole proprietorship
- Partnership
- Corporation
What should businesses think about when they are deciding what form of ownership they want to take?
- How many owners am I interested in having (more ownership = less influence, more resources)?
- If the company has losses, do I want to be able to protect my personal income?
- What are the tax implications?
What is the difference between public and private corporations?
Public: Anyone can be an owner by buying shares on the stock market; no one can stop you from being an owner
Private: You can be more picky about who is an owner and how many owners there are
Describe the ownership of a sole proprietorship
A businesses that is owned and operated by the one person
What is the relationship between a business and its owner in a sole proprietorship?
The business and the owner are considered one entity in the eyes of the law. The owner only files one tax return for the business and their personal income
What are some characteristics of a sole proprietorship?
- Ease of formation (very easy to form)
- Few regulations
- Complete control over profits and decisions
- Government support and advice (for free)
- Taxed as personal income (advantage if business has losses: will deduct from personal income and will be taxed on the net result)
- Difficult to obtain outside financing (small and one owner: you have to offer the bank personal collateral)
- Lack of continuity/difficult transfer of ownership (change of ownership = business has ceased to exist: you have to re-register the business)
- Unlimited liability (“my” assets and “business” assets are the same)
Describe the ownership of a partnership
A business that is owned by two or more owners, up to 50
What is the relationship between a business and its owner in a partnership?
The business and its owners are considered one legal entity
What are some characteristics of a partnership?
- Ease of formation
- More managerial and financial resources compared to sole proprietorship (more owners = different skills, more resources)
- Lack of continuity, difficult to transfer ownership (change of ownership = business has ceased to exist: you have to re-register the business)
- Difficult to obtain outside financing (easier than sole proprietorship because there are more people who can ensure the loan)
- Taxed as personal income (advantage if business has losses, but you divide the losses before you report them)
- Shared profits and decisions (may lead to conflict)
- Unlimited liability (“our” assets and “business” assets are the same)
What are the two types of partnerships?
- General partnership
2. Limited partnership
What are some characteristics of a general partnership?
All partners have joint and several liability, and their personal and business assets and considered one entity
What is joint liability?
When all the owners share liability
What is several liability?
When one owner is liable for the entire business. If one owner isn’t pulling their weight in the company the other owners have to cover their costs or their work
What are some characteristics of a limited partnership?
If you are a limited partner, you can only lose up to your investment (personal assets and business assets are separate). However, limited partners cannot be active in management or in the decision making process. In a business, there has to be at least one general partner that can take the loss if the liabilities cannot be covered
Describe the ownership of a corporation
There is an potentially infinite number of owners
What is the relationship between a business and its owner in a corporation?
The business is considered a separate entity from its owners and shareholders
What are the three types of corporations?
Public, private, and crown
Describe a public corporation
Anyone from the public can become an owner of the company buy buying shares of the company
Describe a private corporation
In order to purchase shares of a private corporation, you have to know someone or have a way into the business because the owners have control over who else becomes an owner
How are the interests of a corporation’s shareholders represented?
The shareholders elect a board of directors to represent their interests and supervise management by looking at strategies, decisions, and what direction the company will take
What are the two types of directors?
Inside directors and outside directors
Describe what an inside director is and give some examples
A director that is on the board of a company but also an employee of that company. Eg. chief executive officer, vice-president of marketing, unions
Describe what an outside director is and give some examples
Individuals who are on the board but are not employed by the corporation; they are completely independent and have no self-interest in the company. They are not suppliers or competitors; could be a government representative or someone with industry knowledge
Describe the ownership of a private corporation
The shares are not publicly traded, and there are less than 50 shareholders
What is the relationship between a business and its owner in a private corporation?
Owners and businesses are considered separate entities
What are the characteristics of a private corporation?
- Relatively flat tax rates, low than public corporation and individual tax rates
- Potential for limited liability if personal assets are not used as collateral
- Continuity, ease of transferring ownership
- Up to 49 shareholders
- Double taxation
- Moderate complexity of formation
- Relatively low regulation
- Retention for privacy
Explain how private corporations have relatively flax tax rates
Tax rates are much lower than those individuals pay on their income tax
When does it make sense to incorporate a business?
When the business is making a profit and you intend to use that profit in the business instead of for personal reasons, you should incorporate because you are lowering your tax rate
Explain how private corporations have limited liability
Because the business and personal assets are separate, the government cannot come after the owner’s personal assets to cover costs. The only exception is if you take out a loan to grow your business and use your personal assets as collateral
Explain how private corporations have continuity and ease of transferring ownership
Whenever one of the partners of a corporation changes, the business continues to exist because the business and individuals are separate. They do not need to re-register as a business, and transferring ownership is much easier
Explain how private corporations have the potential for double taxation
After taxes, the corporation’s net income would go into retained earnings instead of to the owners. However, if the company decides to give some of the earnings to the owners that are not employed by the business in the form of dividends. Owners have to declare this on their income tax, and it is taxed again
Explain how private corporations have moderate complexity of formation
It would still be possible to figure out how to form a private corporation on your own, but it would take longer and cost some money
Explain how private corporations have relatively low regulation
Because they tend to be small businesses, the government wants to promote their growth
Explain how private corporations have retention of privacy
It is similar to sole proprietorship because you only need to tell your financial statements to yourself and the other partners and have no obligation to tell the public about your financial statements
Describe the ownership of a public corporation
There are several owners and their shares are publicly available
What is the relationship between a business and its owner in a public corporation?
The business and its owners are considered separate entities
What are the characteristics of a public corporation?
- Flax tax rates (lower than individual tax rates)
- Limited liability
- Continuity, ease of transferring ownership
- Ease of raising money, unlimited shareholders
- Double taxation
- Cost and complexity of formation
- Regulation
- Lack of secrecy
Explain how public corporations have flax tax rates
Tax rates are much lower than those individuals pay on their income tax
Why would a business choose to go public?
So that they have access to the public and can raise lots of money to grow the business through equity financing
Explain how public corporations have limited liability
The owners are limited only by what they paid for their share of the company: they can lost up to what they paid
Explain how public corporations have continuity and ease of transferring ownership
Whenever one of the partners of a corporation changes, the business continues to exist because the business and individuals are separate and do not need to reapply, and there are no restrictions on who can buy new shares, so there is an infinite amount of potential owners
Explain how public corporations have an ease of raising money through having unlimited shareholders
There are no restrictions on the number of shareholders a public corporation can have, so they can continue raising money from their shareholders indefinitely
Explain how public corporations have the potential for double taxation
After taxes, the corporation’s net income would go into retained earnings instead of to the owners. However, if the company decides to give some of the earnings to the owners that are not employed by the business in the form of dividends. Owners have to declare this on their income tax, and it is taxed again
Explain how public corporations and costly and complex to form
They are more costly to form than any other form of corporation. In order to form a public corporation, the owners have to go to the fourth pillar (securities banking)
Explain how public corporations have to pass a lot of regulation
The regulation is complicated and time-consuming because they are often big corporations and affect a lot of shareholders, and therefore could create a big financial impact
Explain how public corporations have a lack of secrecy
They have to share their financial statements with the public
What is internationalization?
When a company decides to go internationally with their operations
What is globalization?
The idea that the world is becoming a single interdependent system
What is are the driving forces behind globalization and the fact that more and more businesses and going international?
- Greater awareness of potential benefits of going internationally: businesses can source from different countries to find the cheapest suppliers, and both supplier power and buyer power goes down
- Technology makes it easier, faster, and cheaper: it’s easier to source and share information around the world to attract new customers and suppliers
- Competitive pressure: to achieve economies of scale by finding cheaper sources and new niches of customers, businesses choose to look beyond their borders
How are different marketplaces categorized?
- By income: high income, middle income (upper middle and lower middle), and low income
- By geographic clusters: North America, Europe, Pacific Asia
What is an example of a high income country?
Canada, the United States, Europe, Australia, Japan, South Korea, Israel, Kuwait, the Unit Arab Emirates, and Oman
What is an example of an upper-middle income country?
China, Colombia, Lebanon, Turkey, Argentina, and South Africa
What is an example of a lower-middle income country?
Albania, Armenia, Guatemala, Vietnam
What is an example of a low income country?
Bangladesh, Ethiopia, Haiti, Afghanistan
What are the three questions that businesses need to ask when deciding to go international?
- Should we go international?
- What are the barriers we might encounter?
- What are some strategies we can use to overcome those barriers?
What are the four questions that businesses need to ask when deciding whether or not they should go international?
- Is there demand for our product? (eg. environment-related products)
- Can the product be modified to fit a foreign market? (labels, sizing, etc.)
- Is the foreign business climate suited to imports? (Do the people want to buy things from other countries?)
- Does the firm have or can it get the necessary skills and knowledge to do business?
What are the political barriers to international trade?
Quotas (quantity limit on imports), tariffs (tax on imports), and subsidies (tax benefit or money that government pays to domestic producers)
Why does the government implement quotas, tariffs, and subsidies?
Domestic producers create jobs and innovation directly within the country, as well as improve the economic well-being and health of the country
What are three ways in which political barriers are emphasized?
- Protectionism
- Local content laws
- Business practice laws
What is protectionism? What is its effect on importing businesses?
A negative attitude around buying foreign goods: will limit the sales that importing countries can make because people don’t want to buy their products
What are local content laws? What are their effects on importing businesses?
Laws that specify what amount of a good must be produced domestically, so importing countries have to produce at least some of their inputs in their home country so they can’t avoid paying tariffs
What are business practice laws? What are their effects on importing businesses?
There are two types of business practice laws:
Cartels: when companies get together and fix prices or supply amounts in order to reduce competition (this is illegal in everything expect oil production)
Dumping: when companies sell their products in a foreign market below cost in order to drive out domestic competition.
These business practice laws protect local businesses
What are the economic barriers to international trade?
Exchange rates
What are the social and cultural barriers to international trade? Give an example
Importing businesses have to adapt to local customer needs and tastes. Eg. BigMacs have different sauces in different countries around the world compared to Canada; KitKats are made of slightly different chocolate in the United States than in Canada
What are the technological barriers to international trade?
There are two types of technological barriers:
Intellectual property laws: they do not cover you internationally, so businesses might have to apply for a patent in that country, or they might be in violation of an already-existing patent
Technology standards / formats: technology has to be compatible with the existing technology in the country (eg. the outlet power and the shape of the plug are different in Europe than in Canada)
How does the government try to overcome international trade barriers?
They try to negotiate better trade terms through different trade agreements like the GATT and the WTO
What are some differences between the European Union and the NAFTA?
EU: 28 members that have the same currency, and their citizens can move across country borders easily, even working and living in different countries
NAFTA: 3 members that have different currencies, and their citizens have to show ID when travelling across country borders and have work visas to work in the other countries
What are the five ways that companies can enter foreign industries?
- Licensing
- Hire local agents
- Set up branch/sales office
- Alliance with local firm
- Establish foreign subsidiary
What is licensing? What are its limitations?
When you let another company use your label or your product and they pay you royalties for using it. This is only effective if you have a strong reputation that people will be willing to pay for
Does licensing overcome political barriers?
Yes: you are not subject to quotas or tariffs, as you are not importing your product to that country
Does licensing overcome economic barriers?
Yes: you are not subject to exchange rates because you are not physically shipping your product
Does licensing overcome social barriers?
Yes: you are benefitting from their understanding and their place in the other country, and they would not use your license if they did not think see an opportunity in the market
Does licensing overcome technological barriers?
Uncertain: depends on the nature of the patent and of the product itself. You may have to change your produce to meet patents laws or to be compatible with other technology
What is the capital requirement of licensing?
Low: you don’t need to purchase any building space or hire anyone
What happens to your marketing control when you license your product?
You will lose some of your marketing control because you have very little control over the market and how the product is marketing, or at what price they sell the product
What is a benefit of licensing?
Licensing is the cheapest way to go international because you don’t need to hire anyone or set up shop anywhere
What does it mean to hire local agents?
Contracting someone who is going to sell your product on your behalf
Does hiring a local agent help you overcome political barriers?
No: you are still producing in your home country and selling/shipping it to another country, and therefore, you are still susceptible to tariffs and quotas. However, it may help you navigate the administrative side as you are getting permission to sell in the foreign market
Does hiring a local agent help you overcome economic barriers?
No: you are still shipping your product from your home country to another country, and you need to sell it in the foreign currency
Does hiring a local agent help you overcome social and cultural barriers?
Yes: the agent understands social values and customs
Does hiring a local agent help you overcome technological barriers?
Uncertain: depends on whether your product is technology based and whether it is compatible with other local technology products. The agents can provide limited insight on what needs to change, but cannot tell you how to change it
What is the capital requirement of hiring agents?
Low: you only need enough money capital to hire the agent
What is a benefit of hiring local agents?
You gain local marketing know-how; the information they share with you through your interactions with them can be used in the future to market your product
What does it mean to set up a branch or sales office?
Rent facilities in the international company set up an office space
Does setting up a local branch help with political barriers?
No: you are still shipping your product across the border
Does setting up a local branch help with economic barriers?
No: you are still shipping your product across the border and selling it in another currency
Does setting up a local branch help with social barriers?
Uncertain: it depends on whether you hire local workers and local management. If you only send managers from your home country, they will not know the culture and will not market efficiently. If you send some management from your home country and hire some locals, you will better understand what those customers want, what it will take to sell to them, and what the distribution network is like
Does setting up a local branch help with technological barriers?
Uncertain: if your product is not compatible with local technology, it is up to you to make your product compatible
What is the capital requirement of setting up a local branch?
Low-moderate: you are now obtaining physical offices and storefronts, and hiring people full time, and are responsible for paying rents and salaries
What is a benefit of setting up a local branch?
You gain marketing control: your employees are completely dedicated to your company, and you have control over the message you send about your product in advertising, how it’s sold, and at what price
What do you need in order to be able to set up a local branch?
- Physical space and money to rent/purchase the space
- Human resources from both your home country and the local country
- The capabilities to operate and market in the foreign country (understand what kinds of ads will be well-received)
What does it mean to set up an alliance with a local firm?
It depends a lot on how you set the partnership up and how closely the two companies are connected
Does setting up an alliance with a local firm help overcome political barriers?
Uncertain: maybe, it depends on who is manufacturing the product. Will most likely help with administrative work in getting permits to sell in that country
Does setting up an alliance with a local firm help overcome economic barriers?
Uncertain: if the other country will produce the product on your behalf then you are producing in the same currency as it is being sold
Does setting up an alliance with a local firm help overcome social and cultural barriers?
Yes: the allied firm already has the local know-how, resources, and connections within the foreign industry
Does setting up an alliance with a local firm help overcome technological barriers?
Uncertain: depends on the extend to which compatibility is an issue and to what extent your product needs to be modified. The other company could help you with modifying the product because they are in the same industry
What is the capital requirement of setting up an alliance with a local firm?
Moderate: now you are working to maintain a relationship and look after another service/product in addition to your own. You need to honour your commitment to help out the other firm, so you need more human resources and more management resources. You also need to make sure that they are doing a good job and not stealing all of your knowledge
What is the main question that businesses need to ask when considering forming an alliance with a local firm?
Is this partnership going to work? : are your approaches to teamwork compatible? are your objectives the same? is the organizational structure the same?
What does it mean to establish a foreign subsidiary?
When you go into that market and set up your own operations from scratch by hiring your own people, setting up distribution control, and setting up your own marketing
Does establishing a foreign subsidiary help overcome political barriers?
Yes: you are now on the foreign company’s side of the market and it’s to their benefit to see you succeed
Does establishing a foreign subsidiary help overcome economic barriers?
Yes: you are producing and selling in the foreign market, so you don’t need to worry about exchange rates
Does establishing a foreign subsidiary help overcome social and cultural barriers?
Uncertain: it depends on who you hire. If you hire a lot of local employees who have social expertise, you will be able to market effectively and produce products that customers will want
Does establishing a foreign subsidiary help overcome technological barriers?
Uncertain: depends on the extent to which you have to adjust your technology
What is the capital requirement of establishing a foreign subsidiary?
High: you are setting up your own offices and production facilities, and hiring all of your own employees
What is the main question that businesses need to ask when considering establishing a foreign subsidiary?
Will it be approved? Some governments will not let other companies set up foreign subsidiaries inside their borders, either to help protect the local producers or because of political differences (they want the earnings put back into that country)
How do businesses choose how they want to expand internationally and enter foreign markets?
They should look at the Diamond-E and think about the different factors. Do they have enough resources to establish a foreign subsidiary? Do they have the capital? Do they have the market know-how? How much risk do they want to take?
