Chapter 6 Business Organization and Finance

Primary Industries Fish, fur and lumber in 16 th -18 th centuries Fish, fur and lumber in 16 th -18 th centuries British and French controlled sale of our good abroad British and French controlled sale of our good abroad Canada a market for European manufactured goods Canada a market for European manufactured goods Increased settlement led to iron, nickel, gold and other metal production Increased settlement led to iron, nickel, gold and other metal production Increased labour and capital led to developing local manufacturing Increased labour and capital led to developing local manufacturing

Secondary Industries Industrial revolution in Britain (1780) led to fast steam-powered trains and ships Industrial revolution in Britain (1780) led to fast steam-powered trains and ships Manufacturing and distribution increased in mid 1800s Manufacturing and distribution increased in mid 1800s Post 1867 saw protective taxes called tariffs to develop local industries Post 1867 saw protective taxes called tariffs to develop local industries Transcontinental railway, coal-powered steam generators and hydroelectricity provide cheap power Transcontinental railway, coal-powered steam generators and hydroelectricity provide cheap power

Service Industries Surplus of production workers led to warehousing and transportation services Surplus of production workers led to warehousing and transportation services Primary and secondary industries continued to develop through mid 20 th century Primary and secondary industries continued to develop through mid 20 th century Canada still dependent on foreign market for foodstuff, raw materials and some manufactured goods Canada still dependent on foreign market for foodstuff, raw materials and some manufactured goods Service industry develop in support Service industry develop in support

High Tech Industries Canada a major exporter Canada a major exporter of fiber optics of fiber optics nuclear power generation nuclear power generation satellite technology satellite technology telecommunications telecommunications

Sole Proprietorship One owner firm One owner firm Advantage Advantage Control over decision-making Control over decision-making Disadvantages Disadvantages Unlimited liability (business debts are personal debts) Unlimited liability (business debts are personal debts) Harder to raise capital Harder to raise capital No one to rely on No one to rely on Progressive tax system Progressive tax system

Partnerships Two or more owners Two or more owners May be “limited” which reduces liabilty May be “limited” which reduces liabilty Advantages Advantages Pooling of talent and capital Pooling of talent and capital Few legal obstacles Few legal obstacles Sharing of risk Sharing of risk Disadvantages Disadvantages Joint liability Joint liability Disagreements Disagreements

Corporation Recognized as a legal entity Recognized as a legal entity Raise capital through sale of shares Raise capital through sale of shares Articles of incorporation Articles of incorporation Advantages Advantages Profits distributed through dividends Profits distributed through dividends Limited liability Limited liability Easier to raise capital Easier to raise capital Disadvantages Disadvantages Cost to start Cost to start Regulations (articles, board, annual meetings) Regulations (articles, board, annual meetings) Management decisions may conflict with owners Management decisions may conflict with owners

Co-operative Member owned and operated Member owned and operated My have limited liability My have limited liability E.g., credit unions, food stores E.g., credit unions, food stores Advantages Advantages Lower prices for members Lower prices for members One vote means continued existence in the event of death One vote means continued existence in the event of death Profits paid, called patronage refunds Profits paid, called patronage refundsDisadvantages conflicting ideas conflicting ideas Unpaid officers not most talented Unpaid officers not most talented Only raise capital through existing members Only raise capital through existing members Only do business with members Only do business with members

Government Enterprise Government-run firms Government-run firms Crown corporation run like public or private corporations but gov’t major shareholder Crown corporation run like public or private corporations but gov’t major shareholder Often seen in public utilities, liquor, housing and transit Often seen in public utilities, liquor, housing and transit Some are “natural” monopolies Some are “natural” monopolies Hotly debated Hotly debated

Non-profit and Charitable Organizations Government registered Government registered Not for profit Not for profit Income tax exempt Income tax exempt

Big Business Horizontal Integration: buying similar firms Horizontal Integration: buying similar firms Save on duplicate costs Save on duplicate costs Merge Research and Development Merge Research and Development Synergies from individual specialties Synergies from individual specialties Vertical Integration: buying suppliers Vertical Integration: buying suppliers Economies of scale lowers costs Economies of scale lowers costs Guarantee supply Guarantee supply

Big Business Issues Corporate alliance for mutual benefits, e.g., Microsoft and NBC Corporate alliance for mutual benefits, e.g., Microsoft and NBC Corporate concentration: few firms dominate an industry, e.g., Rogers, Shaw, Cogeco in cable Corporate concentration: few firms dominate an industry, e.g., Rogers, Shaw, Cogeco in cable Corporate Conglomerate: through strategic ownership/control (50% + 1) of shares one company controls many Corporate Conglomerate: through strategic ownership/control (50% + 1) of shares one company controls many Multinational corporations (MNCs) move resources to and from many countries for self- interest Multinational corporations (MNCs) move resources to and from many countries for self- interest

Raising Capital Bonds – fixed amount owing with interest Bonds – fixed amount owing with interest Value varies inversely with prevailing interest rates Value varies inversely with prevailing interest rates Can be traded Can be traded Bank Loans Bank Loans Re-invest profits Re-invest profits Stocks – represents ownership in firm Stocks – represents ownership in firm Reflects all past performance and future expectations of firm Reflects all past performance and future expectations of firm Common stock represents ownership Common stock represents ownership Preferred stock gives regular dividends Preferred stock gives regular dividends Traded on major stock markets, e.g., TSX Traded on major stock markets, e.g., TSX

Investment Terms Bull Market – general increase in share prices representing good economy Bull Market – general increase in share prices representing good economy Bear Market – decrease in share price Bear Market – decrease in share price Mutual Fund – pool of shares of many companies allowing less risk for investor Mutual Fund – pool of shares of many companies allowing less risk for investor Commodities – trading of securities representing raw or semi-processed goods Commodities – trading of securities representing raw or semi-processed goods Options – contracts for block of shares expiring at specific dates Options – contracts for block of shares expiring at specific dates

Size of Business Firms 2.2 million firms in Canada 2.2 million firms in Canada Small Business Small Business Fewer than 100 employees Fewer than 100 employees Fewer than 50 if service Fewer than 50 if service Less than $ in sales Less than $ in sales Medium if employees Medium if employees Large if greater than 500 employees Large if greater than 500 employees

GDP and Firms Source: Statistics Canada, Business Register, June 2005; National Income and Expenditure Accounts 2005; Estimates of Population by Age and Sex for Canada, the Provinces and the Territories, June 2005.

Goods vs. Service Firms

Firm Size by Number of Employees

Start ups and Exits

Earnings

Hours Worked

Business Statistics Small businesses contribute 25% of GDP Small businesses contribute 25% of GDP 15% of all workers self-employed 15% of all workers self-employed Small, Medium and Large business take turns leading in job creation Small, Medium and Large business take turns leading in job creation Bankruptcies averaged per year since 1992 Bankruptcies averaged per year since 1992 Max of in 1996 Max of in 1996 Only 8100 in 2004 Only 8100 in 2004