RSM 100 Y1
RSM 100 Y1 Chapter 5 The Contemporary Global Economy Globalization: The integration of markets globally. Imports: Goods that are made abroad but sold domestically. Exports: Goods that are made domestically but sold abroad. International trade becoming INCREASINGLY CENTRAL. Reasons why: 1. Governments and businesses more aware of benefits of globalization 2. New technologies made international travel, communication and commerce, easier, faster and cheaper. 3. Competitive pressures. Reasons against: 1. Exploitation of workers in LDCs and bypass domestic environmental and tax regulations. 2. Loss of cultural heritages and benefits the rich more than the poor. 3. Any economic downfall would affect any interconnected economies if globalized. 1. The Major World Marketplaces Use of “per capita income” to divide countries into one of four groups. i. High-income Countries Annual “Per capita income” greater than US $11,115 ii. Upper-middle-income Countries Annual “Per capita income” between US $3595 and $11,115 iii. Low-middle-income Countries Annual “Per capita income” between US $905 and $3595 iv. Low-income Countries Annual “Per capita income” less than US $905. Due to low HDI, these countries are less attractive to international businesses.
1. Geographic Clusters There are THREE major marketplaces in the world. The THREE are generally upper-middle and high-income countries, as they include the world’s largest economies, biggest corporations, most influential financial markets and highincome consumers. 1. North America The United States of America is the single largest marketplace and has the most stable economy in the world. Canada also is quite a large economy. The US and Canada are each other’s trading partners. Mexico has also become a major part of the economy, where cheap labor and low transportation costs have attracted many international businesses. 2. Europe There are TWO DIVISIONS in Europe, WESTERN and EASTERN. Western is mostly Germany, Italy, France and the UK. Eastern has many international manufacturing facilities set up, but due to the government instability, the economic development in regions such as Russia and Bulgaria have been hampered and the recession exacerbated the situation. 3. Asia-Pacific Japan, Taiwan, China, Thailand, Korea, Indonesia, Singapore, Philippines and Australia. Strong entries in the automobile, electronics and banking industries. Major source of competition for North American firms.
2. Forms of Competitive Advantage There is trade in the global economy because no country can produce ALL necessary goods and services. Reasons for why countries engage in international trade are: 1. Absolute Advantage: When a country can produce a product a lot cheaper and of better quality than any other country. 2. Comparative Advantage When a country is able to produce some products cheaper and of better quality than it can other products. 3. National Competitive Advantage When the four conditions are favorable: i) Factor Conditions ii) Demand conditions iii) Related and Supporting Industries iv) Strategies, structures and rivalries
They determine the environment. International Competitiveness: Ability of a country to generate more wealth than its competitors in world markets.
3. Import-Export Balances There are two measures in measuring the overall balance of imports and exports. 1. Balance of Trade Difference in value between a nation’s total export and total imports. A country that EXPORTS MORE has a TRADE SURPLUS. A country that IMPORTS MORE has a TRADE DEFICIT. 2. Balance of Payments Difference between money flow into the economy and out of the economy as a result of trade and other transactions. Not just trade, but money spent by tourists, money spent on foreign aid programs and money spent on buying and selling of currency on international money markets all affect balance of payments. An UNFAVORABLE SITUATION occurs when more money FLOWS OUT than into the economy. 4. Exchange Rates The RATE at which the CURRENCY of one nation can be exchanged for that of another. A currency is STRONG when there is HIGH DEMAND for the currency. Fixed Exchange Rate: A value of a currency is CONSTANT compared to another currency. Floating Exchange Rate: A value of a currency is based on MARKET CONDITIONS. Example: If the CANADIAN DOLLAR becomes STRONGER than the British Pound, the PRICES of CANADIAN PRODUCTS would RISE in ENGLAND and the PRICES of ENGLISH PRODUCTS will fall in CANADA. The English will buy FEWER Canadian goods and Canadians will buy MORE English goods. This will lead to a Canadian trade deficit in England. 1. Exchange Rates and Competition Companies with international operations must watch for currency rate fluctuations as that will affect overseas demand for their products. When a value of a country’s DOMESTIC currency rises (STRONGER), companies based there find it HARDER to EXPORT goods to foreign markets and it is EASIER for FOREIGN companies to enter local markets. It also makes it COST-EFFICIENT for DOMESTIC companies, to move facilities to lower-cost sites in foreign countries.
When a value of a country’s DOMESTIC currency decreases (WEAKER), the opposite occurs. As the value of a country’s CURRENCY FALLS, it’s BALANCE OF TRADE should IMPROVE, because domestic companies should experience a BOOST of EXPORTS. There will also be a DECREASE in the INCENTIVES for foreign companies to sell products DOMESTICALLY.
International Business Management The difficulty of international business management is that the business operates in several markets scattered around the world. It is therefore difficult to make decisions for the business. 1. Going International Gauging International Demand: A company must decide whether there is demand for their products abroad. The purpose of the products may also differ according to locations. Bicycles in China are transportation while in Canada they are recreational. Therefore, MARKET RESEARCH is KEY. Adapting to Customer Needs: 1. If there is demand, the business must then consider how to adapt the product to meet the special demands and expectations of the foreign customers. Examples: Movies must be translated. McDonald’s in France sell wine, beer in Germany and meatless sandwiches in India to meet local tastes and preferences. 2. Assessment of the business skills needed to operate in the foreign country is also needed. 2. Levels of Involvement in International Business 1. Exporters and Importers LOWEST level of involvement. Exporting and Importing can help the country learn about global businesses. Exporting can be essential when countries depend on revenues from their exports. 2. International Firms These firms conduct a SIGNIFICANT portion of its business ABROAD and maintains manufacturing facilities overseas. 3. Multinational Firms These firms control assets, factories, mines, sales offices and affiliates in two or more foreign countries.
3. International Organizational Structures 1. Independent Agents Foreign individual or organization that agrees to represent an exporter’s interests in foreign markets. They act as sales representatives as they sell the exporter’s products, collect payment and ensure that customers are satisfied. They usually represent several firms at once. 2. Licensing Agreements An arrangement by an owner of a product allows another foreign businesses to manufacture or market the product in their foreign markets. In return, there is usually a fee or a royalty. Franchising is another form of licensing agreements. 3. Branch Offices Instead of forming relationships with foreign firms, firms may send their own men abroad to the branch offices, a location that an exporting firm establishes in a foreign country to sell its products more effectively. It helps to give the firm a public presence. World Product Mandating: When a business operates branches, plants or subsidiaries in several countries, it may assign to one plane or subsidiary the responsibility for researching, developing, manufacturing and marketing one product or line of products. 4. Strategic Alliances When a company finds a partner in a foreign country. Each party agrees to invest resources and capital for mutual benefit. The profits made from selling the product is divided between the alliances. Strategic Alliances give firms greater control over their foreign activities than independent agents and licensing arrangements. Most importantly, the firms in the alliances can share their knowledge and expertise to each other. 5. Foreign Direct Investment Buying or establishing tangible assets in a foreign country. Foreigners may take over domestic businesses. Headquarters and head offices will be moved to foreign lands if business is taken over, meanings that major decisions will be made overseas and not domestically. There will be large job losses in Canada if businesses are taken over by foreign firms. Limitations on foreign direct investment can shield companies from competition and make them less efficient.
Barriers to International Trade 1. Social and Cultural Differences Businesses need to understand the social and cultural norms of the foreign land they plan to operate in. a) There are LANGUAGE BARRIERS (causing inappropriate naming of brands). b) There are differences in PHYSICAL STATURES of people (causing clothes sizes to change). c) There are differences in AVERAGE AGE of a population (causing marketing of certain products ineffective). For example: electronics to an old age demographic is ineffective. d) There are differences in ATTITUDES. Shopping in Europe is a daily activity, whereas in Canada, it is a weekly activity. e) There are TRADITIONAL CUSTOMS. Crossing legs, showing the soles of feet and tapping fingers on the table may be seen as inappropriate in certain countries while in others, they are perfectly acceptable. 2. Economic Differences Due to differences in the economic system (Price, Command, Mixed), the firms must understand the roles of the government in the market. 3. Legal and Political Differences Protectionism: The act of protecting the domestic business at the expense of free market competition. a) Quotas A restriction by one nation on the total number of products that can be imported from another country. b) Embargos The complete restriction by one nation on the total number of products that can be imported from another country. c) Tariffs Taxes placed on imported goods. d) Subsidies Government payment made to domestic firms to help them compete with foreign firms. When subsidies are paid, there may be a surplus of supply in the world market and the price will decrease, which leads to less revenue for the producers.
Local-Content Laws A law that states that products sold in a particular country must be at least partly produced in that country. This is to ensure that the profit made will go to some of the people who live there. Business-Practice Laws A law that regulates business practices within their jurisdictions. Problems: a)
Corruption: Many firms pay bribes to government officials to ease out on the business-practice laws.
b)
Cartel: Association of producers whose purpose s to control the supply and price of a commodity.
c)
Dumping: Selling of a product abroad for less than the domestic price. Dumping harms the domestic economy of the foreign land.
4. Overcoming Barriers to Trade a) General Agreement on Tariffs and Trade (GATT) Purpose is to reduce or eliminate trade barriers such as protectionist measures. It did so by agreeing to protect domestic industries within agreed limitations. b) World Trade Organization (WTO) This group PROMOTES trade by encouraging fair trade policies, REDUCE trade BARRIERS through multilateral negotiations, and ESTABLISH fair PROCEDURES for resolving disputes. c) The European Union (EU) Originally called the Common Market. They have eliminated most quotas and have set uniform tariff levels on products imported and exported within the EU. d) The North American Free Trade Agreement (NAFTA) They remove tariffs and other trade barriers among Canada, the US and Mexico. NAFTA created a more active North American market. FDI increased in Canada. US Imports from and Exports to Mexico have increased. Canada became a major exporter. US and Canada have become trade partners and currently has a large trade surplus with the US. There are PROBLEMS: DELAYS at the BORDERS.
e) Other Free Trade Agreement in the Americas 1. Mercosur: Argentina, Brazil, Uruguay, Paraguay. Tariffs were eliminated on 80% of the goods between the 4 countries. 2. SAFTA: An extension of Mercosur. South American Free Trade Agreement. They want to achieve AFTA (Americas Free Trade Agreement). 3. Andean Pact (Bolivia, Ecuador, Colombia, Peru, Venezuela) 4. Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua) 5. G-3 Group (Colombia, Mexico, Venezuela) 6. Caribbean Common Market f) Free Trade Agreements Elsewhere 1. 2. 3. 4.
Association of Southeast Asian Nations (ASEAN) Asia-Pacific Economic Cooperation Economic Community of Central African States Gulf Cooperation Council
1. Geographic Clusters There are THREE major marketplaces in the world. The THREE are generally upper-middle and high-income countries, as they include the world’s largest economies, biggest corporations, most influential financial markets and highincome consumers. 1. North America The United States of America is the single largest marketplace and has the most stable economy in the world. Canada also is quite a large economy. The US and Canada are each other’s trading partners. Mexico has also become a major part of the economy, where cheap labor and low transportation costs have attracted many international businesses. 2. Europe There are TWO DIVISIONS in Europe, WESTERN and EASTERN. Western is mostly Germany, Italy, France and the UK. Eastern has many international manufacturing facilities set up, but due to the government instability, the economic development in regions such as Russia and Bulgaria have been hampered and the recession exacerbated the situation. 3. Asia-Pacific Japan, Taiwan, China, Thailand, Korea, Indonesia, Singapore, Philippines and Australia. Strong entries in the automobile, electronics and banking industries. Major source of competition for North American firms.
2. Forms of Competitive Advantage There is trade in the global economy because no country can produce ALL necessary goods and services. Reasons for why countries engage in international trade are: 1. Absolute Advantage: When a country can produce a product a lot cheaper and of better quality than any other country. 2. Comparative Advantage When a country is able to produce some products cheaper and of better quality than it can other products. 3. National Competitive Advantage When the four conditions are favorable: i) Factor Conditions ii) Demand conditions iii) Related and Supporting Industries iv) Strategies, structures and rivalries
They determine the environment. International Competitiveness: Ability of a country to generate more wealth than its competitors in world markets.
3. Import-Export Balances There are two measures in measuring the overall balance of imports and exports. 1. Balance of Trade Difference in value between a nation’s total export and total imports. A country that EXPORTS MORE has a TRADE SURPLUS. A country that IMPORTS MORE has a TRADE DEFICIT. 2. Balance of Payments Difference between money flow into the economy and out of the economy as a result of trade and other transactions. Not just trade, but money spent by tourists, money spent on foreign aid programs and money spent on buying and selling of currency on international money markets all affect balance of payments. An UNFAVORABLE SITUATION occurs when more money FLOWS OUT than into the economy. 4. Exchange Rates The RATE at which the CURRENCY of one nation can be exchanged for that of another. A currency is STRONG when there is HIGH DEMAND for the currency. Fixed Exchange Rate: A value of a currency is CONSTANT compared to another currency. Floating Exchange Rate: A value of a currency is based on MARKET CONDITIONS. Example: If the CANADIAN DOLLAR becomes STRONGER than the British Pound, the PRICES of CANADIAN PRODUCTS would RISE in ENGLAND and the PRICES of ENGLISH PRODUCTS will fall in CANADA. The English will buy FEWER Canadian goods and Canadians will buy MORE English goods. This will lead to a Canadian trade deficit in England. 1. Exchange Rates and Competition Companies with international operations must watch for currency rate fluctuations as that will affect overseas demand for their products. When a value of a country’s DOMESTIC currency rises (STRONGER), companies based there find it HARDER to EXPORT goods to foreign markets and it is EASIER for FOREIGN companies to enter local markets. It also makes it COST-EFFICIENT for DOMESTIC companies, to move facilities to lower-cost sites in foreign countries.
When a value of a country’s DOMESTIC currency decreases (WEAKER), the opposite occurs. As the value of a country’s CURRENCY FALLS, it’s BALANCE OF TRADE should IMPROVE, because domestic companies should experience a BOOST of EXPORTS. There will also be a DECREASE in the INCENTIVES for foreign companies to sell products DOMESTICALLY.
International Business Management The difficulty of international business management is that the business operates in several markets scattered around the world. It is therefore difficult to make decisions for the business. 1. Going International Gauging International Demand: A company must decide whether there is demand for their products abroad. The purpose of the products may also differ according to locations. Bicycles in China are transportation while in Canada they are recreational. Therefore, MARKET RESEARCH is KEY. Adapting to Customer Needs: 1. If there is demand, the business must then consider how to adapt the product to meet the special demands and expectations of the foreign customers. Examples: Movies must be translated. McDonald’s in France sell wine, beer in Germany and meatless sandwiches in India to meet local tastes and preferences. 2. Assessment of the business skills needed to operate in the foreign country is also needed. 2. Levels of Involvement in International Business 1. Exporters and Importers LOWEST level of involvement. Exporting and Importing can help the country learn about global businesses. Exporting can be essential when countries depend on revenues from their exports. 2. International Firms These firms conduct a SIGNIFICANT portion of its business ABROAD and maintains manufacturing facilities overseas. 3. Multinational Firms These firms control assets, factories, mines, sales offices and affiliates in two or more foreign countries.
3. International Organizational Structures 1. Independent Agents Foreign individual or organization that agrees to represent an exporter’s interests in foreign markets. They act as sales representatives as they sell the exporter’s products, collect payment and ensure that customers are satisfied. They usually represent several firms at once. 2. Licensing Agreements An arrangement by an owner of a product allows another foreign businesses to manufacture or market the product in their foreign markets. In return, there is usually a fee or a royalty. Franchising is another form of licensing agreements. 3. Branch Offices Instead of forming relationships with foreign firms, firms may send their own men abroad to the branch offices, a location that an exporting firm establishes in a foreign country to sell its products more effectively. It helps to give the firm a public presence. World Product Mandating: When a business operates branches, plants or subsidiaries in several countries, it may assign to one plane or subsidiary the responsibility for researching, developing, manufacturing and marketing one product or line of products. 4. Strategic Alliances When a company finds a partner in a foreign country. Each party agrees to invest resources and capital for mutual benefit. The profits made from selling the product is divided between the alliances. Strategic Alliances give firms greater control over their foreign activities than independent agents and licensing arrangements. Most importantly, the firms in the alliances can share their knowledge and expertise to each other. 5. Foreign Direct Investment Buying or establishing tangible assets in a foreign country. Foreigners may take over domestic businesses. Headquarters and head offices will be moved to foreign lands if business is taken over, meanings that major decisions will be made overseas and not domestically. There will be large job losses in Canada if businesses are taken over by foreign firms. Limitations on foreign direct investment can shield companies from competition and make them less efficient.
Barriers to International Trade 1. Social and Cultural Differences Businesses need to understand the social and cultural norms of the foreign land they plan to operate in. a) There are LANGUAGE BARRIERS (causing inappropriate naming of brands). b) There are differences in PHYSICAL STATURES of people (causing clothes sizes to change). c) There are differences in AVERAGE AGE of a population (causing marketing of certain products ineffective). For example: electronics to an old age demographic is ineffective. d) There are differences in ATTITUDES. Shopping in Europe is a daily activity, whereas in Canada, it is a weekly activity. e) There are TRADITIONAL CUSTOMS. Crossing legs, showing the soles of feet and tapping fingers on the table may be seen as inappropriate in certain countries while in others, they are perfectly acceptable. 2. Economic Differences Due to differences in the economic system (Price, Command, Mixed), the firms must understand the roles of the government in the market. 3. Legal and Political Differences Protectionism: The act of protecting the domestic business at the expense of free market competition. a) Quotas A restriction by one nation on the total number of products that can be imported from another country. b) Embargos The complete restriction by one nation on the total number of products that can be imported from another country. c) Tariffs Taxes placed on imported goods. d) Subsidies Government payment made to domestic firms to help them compete with foreign firms. When subsidies are paid, there may be a surplus of supply in the world market and the price will decrease, which leads to less revenue for the producers.
Local-Content Laws A law that states that products sold in a particular country must be at least partly produced in that country. This is to ensure that the profit made will go to some of the people who live there. Business-Practice Laws A law that regulates business practices within their jurisdictions. Problems: a)
Corruption: Many firms pay bribes to government officials to ease out on the business-practice laws.
b)
Cartel: Association of producers whose purpose s to control the supply and price of a commodity.
c)
Dumping: Selling of a product abroad for less than the domestic price. Dumping harms the domestic economy of the foreign land.
4. Overcoming Barriers to Trade a) General Agreement on Tariffs and Trade (GATT) Purpose is to reduce or eliminate trade barriers such as protectionist measures. It did so by agreeing to protect domestic industries within agreed limitations. b) World Trade Organization (WTO) This group PROMOTES trade by encouraging fair trade policies, REDUCE trade BARRIERS through multilateral negotiations, and ESTABLISH fair PROCEDURES for resolving disputes. c) The European Union (EU) Originally called the Common Market. They have eliminated most quotas and have set uniform tariff levels on products imported and exported within the EU. d) The North American Free Trade Agreement (NAFTA) They remove tariffs and other trade barriers among Canada, the US and Mexico. NAFTA created a more active North American market. FDI increased in Canada. US Imports from and Exports to Mexico have increased. Canada became a major exporter. US and Canada have become trade partners and currently has a large trade surplus with the US. There are PROBLEMS: DELAYS at the BORDERS.
e) Other Free Trade Agreement in the Americas 1. Mercosur: Argentina, Brazil, Uruguay, Paraguay. Tariffs were eliminated on 80% of the goods between the 4 countries. 2. SAFTA: An extension of Mercosur. South American Free Trade Agreement. They want to achieve AFTA (Americas Free Trade Agreement). 3. Andean Pact (Bolivia, Ecuador, Colombia, Peru, Venezuela) 4. Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua) 5. G-3 Group (Colombia, Mexico, Venezuela) 6. Caribbean Common Market f) Free Trade Agreements Elsewhere 1. 2. 3. 4.
Association of Southeast Asian Nations (ASEAN) Asia-Pacific Economic Cooperation Economic Community of Central African States Gulf Cooperation Council
