Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada CHAPTER 5 Understanding International Business

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-2 Describe the rise of international business and identify the major world marketplaces Explain how different forms of competitive advantage, import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment Learning Objectives

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-3 More Learning Objectives Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure Describe some of the ways in which social, cultural, economic, legal, and political differences act as barriers to international trade Explain how free trade agreements assist world trade

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-4 The Rise of International Business Total volume of world trade  $8 trillion /yr Globalization  The integration of markets globally  The world is becoming a single interdependent system

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-5 Imports and Exports Imports  Products purchased in Canada which are manufactured and shipped in from other countries Exports  Products made in Canada which are purchased by consumers in other countries

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-6 Major World Marketplaces North America  US largest and most stable market  Our largest trading partner is US  Mexico exports increasing (esp. autos) Europe  Western and Eastern Asia-Pacific  esp. Japan and China

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-7 Competitive Advantage Absolute advantage  a country can produce something more cheaply or better than any other country Comparative advantage  a country can produce certain items more cheaply than it can other items International competitiveness  ability of a country to generate more wealth than others

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-8 Imports < Exports = Trade Surplus (Favourable) Imports > Exports = Trade Deficit (Unfavourable) Balance of Trade

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-9 Balance of Payments Cash flow in  exports  foreign tourist spending in Canada  foreign investments in Canada  earnings from Canadian investments outside of Canada Cash flow out  imports  Canadian tourist spending outside of Canada  Canadian investments outside of Canada  earnings of foreign investments in Canada  foreign aid, military expenditure outside of Canada Difference between cash flowing into the country and out of the country

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-10 Foreign Exchange Rate Ratio of one currency to another  “strong” Cdn $ when high demand for Canadian dollars and products  When the value of the Cdn $ depreciates  exports increase and imports cost more  When the value of the Cdn $ appreciates  exports decrease and imports cost less

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-11 Levels of Involvement in International Business Exporter (make in one country and sell to others) Importer (buy products in foreign markets for resale at home) International Firm (significant portion of business abroad and overseas facilities) Multinational Firm (assets and facilities in 2 or more foreign countries)

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-12 Multinational Firms Control assets, factories, mines, sales offices, and affiliates in two or more foreign countries  worldwide presence  favourable exchange rates, technology and expertise  provide needed jobs, prosperity, technology, and growth to developing nations  often criticized for taking resources out of the country, and not doing enough to develop local labour markets

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-13 Importing or Exporting via Independent Agent Licensing Arrangement Establishing a Branch Office Choosing a Strategic Alliance Foreign Direct Investment International Organizational Strategies

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-14 Established in foreign country Increased sales due to local presence More direct control May be a foreign legal requirement Why Have a Branch Office?

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-15 Strategic Alliances Strategic alliance  “joint venture” or “partnership” between two independently owned firms May be mandated in some nations Get knowledge and expertise of the foreign partner Greater control

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-16 CompanyRevenue (Billions) General Motors of Canada Ltd. Imperial Oil Ltd. Daimler/Chrysler Canada Inc. Shell Canada Ltd Ford Motor Co. of Canada Ltd. Wal-Mart Canada Corp. Honda Canada Inc. Ultramar Ltd. Costco Wholesale Canada McKesson Canada Corp. $ Top Ten Foreign Controlled Companies in Canada

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-17 Barriers to Trade Social and Cultural Differences Economic Differences Legal and Political Differences  Quotas/Tariffs/Subsidies  Local Content Laws  Business Practice Laws

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-18 Social & Cultural Differences Language Population demographics Shopping habits Religious differences Social beliefs

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-19 Economic Differences The role of government in the economy Planned vs. Market economies  capitalist  socialist  communist

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-20 Quotas, Tariffs, & Subsidies Quota  limitations on importation of a product class Embargo  forbidding export/import from a nation (US vs. Cuba) Tariff: a tax on imported goods  Protectionist measure to protect domestic producers  Raises government revenues as well Subsidy  government financial assistance for domestic firms Protectionism  Protecting domestic business at expense of free market

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-21 Local Content Laws Requires that at least part of the product be made in the export (foreign) country  may result in joint venture Canadian provinces may buy from their own companies before going to other provinces

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-22 Business Practices Bribes  seen as “gratuities” to government officials in some nations Dumping  the practice of selling goods abroad for less than a firm charges in its home market, is illegal in most nations Cartels  associations of producers created to control supply and demand (OPEC)

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-23 Overcoming Barriers to Trade General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) European Union (EU) The North American Free Trade Agreement (NAFTA) Other  South American Free Trade Area (SAFTA)  Americas Free Trade Area (AFTA)  ASEAN Free Trade Agreement  Asia-Pacific Economic Cooperation  Economic Community of Central African States  Gulf Cooperation Council

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-24 European Union (EU) Largest free marketplace in the world 25 countries, plus Eliminated quotas and set uniform tariffs within the union

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-25 World Trade Organization (WTO) Member nations negotiate trade agreements and resolve trade disputes  successor of GATT, but more power 140 countries, plus Agricultural subsidies controversial Some protest against trade liberalization

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-26 North American Free Trade Agreement Came into effect in 1994 Goal to remove tariffs and other trade barriers among Canada, the United States and Mexico

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-27 Consumers’ Fears of Free Trade Job losses Market flooded with goods produced in low-wage countries like Mexico Loss of control over environmental standards US takeover of Canada’s natural resources Loss of Canadian cultural sovereignty

Business, Sixth Canadian Edition, by Griffin, Ebert, and StarkeCopyright © 2008 Pearson Education Canada 5-28 Consumer Support for Free Trade Access to lucrative US markets for Canadian exporters Increased jobs due to increased exports Environment is not covered or threatened by free trade agreements Nothing threatening natural resources About trade, not cultural sovereignty