1. Copyright © 2006 Pearson Education Canada Inc. 5-1 Chapter 5 Understanding International Business

2. Copyright © 2006 Pearson Education Canada Inc. 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

3. Copyright © 2006 Pearson Education Canada Inc. 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

4. Copyright © 2006 Pearson Education Canada Inc. 5-4 The Rise of International Business Total volume of world trade is around $8 trillion annually Globalization The integration of markets globally the world is becoming a single large market an interconnected system

5. Copyright © 2006 Pearson Education Canada Inc. 5-5 Imports/Exports Imports Products that are made or grown abroad and sold in Canada Exports Products made or grown in Canada that are sold abroad

6. Copyright © 2006 Pearson Education Canada Inc. 5-6 Major World Marketplaces High-income countries These include Canada, United States, Australia, Japan, and most of Western-Europe Middle-income countries These include Czech Republic, Hungary, Greece, Mexico, Taiwan, South Korea, and Poland Low-income countries These include China, and India

7. Copyright © 2006 Pearson Education Canada Inc. 5-7 Competitive Advantage Absolute advantage a nation’s ability to produce something more cheaply or better than any other country Comparative advantage a nation’s ability to produce some products more cheaply or better than it can others

8. Copyright © 2006 Pearson Education Canada Inc. 5-8 National Competitive Advantage Four conditions are required for a country to have a national competitive advantage

9. Copyright © 2006 Pearson Education Canada Inc. 5-9 Balance of Trade Difference between a countries total exports and its total imports Favourable Balance of trade  Exports>Imports Unfavourable Balance of trade  Imports>Exports

10. Copyright © 2006 Pearson Education Canada Inc. 5-10 Balance of Payments Difference between money flowing in to and out of the country as a result of trade and other transactions Cash flow in Exports, foreign tourist spending in Canada, foreign investments in Canada Cash flow out Imports, Canadian tourist spending outside of Canada, foreign aid, Canadian investments outside of Canada, earnings of foreign investments in Canada

11. Copyright © 2006 Pearson Education Canada Inc. 5-11 Foreign Exchange Rate Ratio of the currency of one nation to the currency of another nation When the value of the Canadian dollar depreciates Exports increase and imports cost more When the value of the Canadian dollar appreciates Exports decrease and imports cost less

12. Copyright © 2006 Pearson Education Canada Inc. 5-12

13. Copyright © 2006 Pearson Education Canada Inc. 5-13 Importing or Exporting via Independent Agent Licensing Agreements Establishing a Branch Office Choosing a Strategic Alliance Multinational Firm Levels of Involvement in International Markets

14. Copyright © 2006 Pearson Education Canada Inc. 5-14 Multinationals Multinational firms control assets, factories, mines, sales offices, and affiliates in two or more foreign countries Many multinationals provide needed jobs, prosperity, technology, and growth to developing nations

15. Copyright © 2006 Pearson Education Canada Inc. 5-15 Foreign legal requirement Increased sales due to local presence Ease of handling a large foreign business base Why Have a Branch Office?

16. Copyright © 2006 Pearson Education Canada Inc. 5-16 Strategic Alliances Strategic alliance “Joint venture” or “partnership” between two independently owned firms May be mandated in some nations Useful if a firm lacks an intimate knowledge of the culture and business environment in the foreign nation

17. Copyright © 2006 Pearson Education Canada Inc. 5-17 Company Revenue (Billions of $) General Motors of Canada Ltd. Ford Motor Co. of Canada Ltd. Imperial Oil Ltd. DaimlerChrysler Canada Honda Canada Shell Canada Ltd Costco Wholesale Canada Sears Canada Inc.. Canada Ultramar Canada Safeway 36.5 20.8 17.8 16.9 14.0 8.8 7.6 6.2 6.0 5.7 Top Ten Foreign Controlled Companies in Canada

18. Copyright © 2006 Pearson Education Canada Inc. 5-18 Barriers to Trade Social and cultural differences Economic differences Legal and political differences Quotas/tariffs/subsidies Local content laws Business practice laws

19. Copyright © 2006 Pearson Education Canada Inc. 5-19 Social & Cultural Differences Language Population demographics Shopping habits Religious differences Social beliefs

20. Copyright © 2006 Pearson Education Canada Inc. 5-20 Economic Differences The role of government in the economy Planned vs. Market economies Capitalist Socialist Communist

21. Copyright © 2006 Pearson Education Canada Inc. 5-21 Quotas, Tariffs, & Subsidies Embargo Forbidding export/import from a nation (US vs. Cuba) Quota Restrictions on number of products imported of a product class

22. Copyright © 2006 Pearson Education Canada Inc. 5-22 Quotas, Tariffs, & Subsidies Subsidy Government financial assistance for domestic firms to help compete with foreign firms Tariff: a tax on imported goods Revenue tariff  A tariff imposed solely to raise money for the government that imposes it Protectionist tariff  A tariff imposed in part to discourage imports of a particular product

23. Copyright © 2006 Pearson Education Canada Inc. 5-23 Local Content Laws requiring that products sold in a particular country be at least partly made in that country Includes the practice of Canadian provinces buying from their own companies before going outside of the province

24. Copyright © 2006 Pearson Education Canada Inc. 5-24 Business-Practice Laws Bribes Seen as “gratuities” to government officials in some nations Dumping Selling a product for less abroad than in a producing nation; illegal in Cartels Associations of producers created to control supply and demand for a given product (OPEC)

25. Copyright © 2006 Pearson Education Canada Inc. 5-25 Overcoming Barriers to Trade Trade Agreements Various free trade agreements have sparked international trade World Organizations Several world organizations exist to promote world trade

26. Copyright © 2006 Pearson Education Canada Inc. 5-26 Trade Agreements General Agreement on Tariffs and Trade The North American Free Trade Agreement European Union Free Trade in the Americas ASEAN Free Trade Agreement Asia-Pacific Economic Cooperation Economic Community of Central African States Gulf Cooperation Council

27. Copyright © 2006 Pearson Education Canada Inc. 5-27 North American Free Trade Agreement (NAFTA) Came into effect in 1994 Goal to remove tariffs and other trade barriers among Canada, the United States and Mexico

28. Copyright © 2006 Pearson Education Canada Inc. 5-28 European Union Reduces tariffs on products traded within the union Imposes higher tariffs on products coming in from outside of the union Imposes limiting quotas on products coming in from outside of the union

29. Copyright © 2006 Pearson Education Canada Inc. 5-29 World Organizations General Agreement on Tariffs and Trade (GATT) Signed after World War II Purpose to reduce or eliminate trade barriers such as quotas and tariffs World Trade Organization Successor to GATT Goal is trade liberalization

30. Copyright © 2006 Pearson Education Canada Inc. 5-30 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

31. Copyright © 2006 Pearson Education Canada Inc. 5-31 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 No evidence of dumping of US or cheaply produced products in Canadian markets as a result of free trade