1 Chapter 4: International Business 1. What Is International Business? A domestic transaction is the...

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Chapter 4: International Business1. What Is International Business?

A domestic transaction is the selling of items produced in the same country.

An international transaction is the selling of items produced in other countries. These items contribute to the global economy.

Benefits for Business• access to markets• cheaper labour• increased quality of goods• increased quantity of goods• access to resources

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Chapter 4: International BusinessWhat Is International Business?A. Benefits for Business

1.Access to MarketsBy trading abroad, Canadian businesses can gain access to markets that are 200 times larger than those at home.

Customers in other parts of the world have different needs and wants. Businesses must make adaptations to their products and services to be successful in other countries.

A global product is a standardized item that is offered in the same format in all countries.

2.Cheaper LabourLower prices as the result of cheap labour in other countries is the number one reason why consumers buy items made in different parts of the world.

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Chapter 4: International BusinessWhat Is International Business?

4.Increased Quality of GoodsInternational business can help producers improve the quality of the products they sell.

5.Increased Quantity As long as a product has international appeal, so does the potential for increased sales.

6.Access to ResourcesConnections to international markets provides businesses with increased access to the three types of economic resources: natural, human, and capital.

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The Five Ps of International Business

All countries benefit when businesses produce specialized goods and services that appeal to consumers.

International business provides increased markets for businesses and offers them a broader choice of products, services, and prices for its consumers.

The Five Ps of International Business1. Product2. Price3. Proximity4. Preference5. Promotion

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ProductA country’s resources determine what goods and services it produces.

PriceThe cost of producing goods and services varies from country to country. Sometimes it may be more profitable for Canadian businesses to produce products overseas and then ship them here to sell to consumers. Lower foreign wages, taxes, and material costs make it cheaper to produce products abroad rather than domestically.

ProximityIt may be more advantageous and profitable for some businesses to sell products and services to consumers near a neighbouring country’s border rather than to its domestic customers. For example, 80 percent of the Canadian population lives within 170 km of the American border. Therefore, many Canadian businesses trade extensively with Americans. The reverse is also true: Americans market many of their goods and services to Canada.

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PreferenceConsumers often purchase foreign goods and services based on their reputation and specialization, even though similar products are produced domestically. Two examples are Swiss watches and Belgium chocolates.

PromotionTechnology, especially the Internet, makes it easyfor businesses to promote their products and services internationally.

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B. Costs of International Trade

The hidden or social costs often associated with international trade include offshore outsourcing, human rights or labour abuses, and environmental degradation.

1. Offshore OutsourcingOffshore outsourcing occurs when businesses decide to produce all or part of their goods in countries where labour costs are lower. Some advantages include proximity to natural resources, more efficient technology, indigenous innovation, and favorable tax structures.

However, offshore outsourcing faces potential changes in the future as companies may turn to transnational corporations that operate in several countries to produce their goods and services.

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2. Human Rights Issues and Labour AbusesSome workers in poor countries face labour exploitation, such as physical and sexual abuses, forced confinement, non-payment of wages, denial of food and health care, and excessive working hours. Child labour—the regular employment of boys and girls under the age of 16—is commonly practiced in poor countries where the workforce is often exploited.

3. Environmental DegradationSustainable development is the process of developing land, cities, businesses, and communities that meet the needs of the present generation without compromising those of the future.

Environmental degradation is the consumption of natural resources, such as trees, water, earth, habitat, and air, faster that nature can replenish them.

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C. Barriers to International BusinessThe Canadian government uses barriers, often referred to a roadblocks, to help protect domestic businesses and consumers.

1. TariffsTariffs, also called customs duties, are a form of tax on certain types of imports. Finished imported goods include tariffs, which increase their prices. Canadian products do not carry such tariffs, and, therefore, may be sold at lower prices. In an effort to protect their domestic industries, countries put up tariff barriers by increasing the cost of imported goods.

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2. Non-tariff BarriersNon-tariff barriers are controls or standards for the quality of imported goods set so high that foreign competitors cannot enter the market.

3. Costs of Importing and ExportingThe price of a product or service must take the landed cost into consideration. The landed cost is the actual cost of an imported purchased item, composed of the vendor cost, transportation charges, duties, taxes, broker fees, and any other charges.

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Excise TaxesAn excise tax is a tax on the manufacture, sale, or consumption of a particular product within a country.

Currency Fluctuations Since currency rates fluctuate on a daily basis, an international purchase made on one day may cost less or more than another purchase on the following day. Shifting currency exchange rates vary as the economic strength of the two countries change on a daily or weekly basis.

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Chapter 4: International Business2. Flow of Goods and Services

Imports, such as raw materials, processed material, semi-finished goods, and manufactured products, flow into Canada. Goods and materials also leave Canada as exports.

Balance of Trade To maintain a healthy balance of trade, countries try to import the same total value of products that they export. An imbalance of the two results in the following:

• a trade deficit in which a country pays more for imports than it earns from exports

• a trade surplus in which a country earns more from exports than it pays for imports

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Chapter 4: International BusinessFlow of Goods and Services

ImportsFive Ways to Offset the Risk of Importing

1. Measure consumer interest.2. Use care when selecting foreign suppliers.3. Learn about a foreign partner’s culture.4. Carefully scrutinize the purchase agreement and then sign it.5. Check goods for quantity and quality upon arrival.

ExportsDirect exporting is exporting a product directly to an importer without using an intermediary. Indirect exporting is exporting a product to an intermediary who then conveys the product to the importer. Larger established companies usually use direct exporting while newer ones utilize indirect exporting.

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Chapter 4: International BusinessFlow of Goods and Services

Offsetting RisksExporters reduce risks by planning carefully. As part of their plan,they conduct market research to ensure that there are consumers for their goods and services.

Canada’s Major Trading PartnersCanada’s number one trade partner is the United States.Three major reasons for trading with the United States include

1. low cost shipping due to proximity2. similar cultures (language, interests, product interest, and so on3. a market that is 10 timers larger than the domestic one

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Chapter 4: International Business3. Canada and International Trade Agreements

Two Main Advantages to Reducing Trade Barriers1. Domestic business can sell their products abroad at lower prices

since duties are not added.2. Consumers have access to new foreign products that may result

in lower costs and quality improvement of domestic products.

Trade agreements between countries allow goods and service to flow more freely across boarders.

World Trade Organization (WTO)In 1947, the General Agreement on Tariffs and Trade (GATT) was signed by 23 nations who were allies in World War II. The trade agreement came into effective in 1948. Eventually, GATT grew to 115 member states before it was replaced by the World Trade Organization (WTO) in 1995. Today the WTO is the principal international organization that deals with rules of trade between nations.

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Chapter 4: International BusinessCanada and International Trade Agreements

North American Free Trade Agreement (NAFTA)Canada-U.S. Free Trade Agreement (FTA) came into effect in January1989. In 1994, Mexico, the United States, and Canada formed theNorth American Free Trade Agreement (NAFTA).

Other Free Trade AgreementsBilateral agreements involve Canada and one other country or group.A trading bloc is a group of countries that share trade interests.

The Group of Eight (G8)The Group of Eight (G8) is an association of the world’s most powerfulindustrialized democracies. Meeting annually, the G8 deals with economicand political issues facing their own countries and those of the largerinternational community. Topics discussed include energy, employment,the environment, human rights, and arms control.

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Chapter 4: International BusinessThe Future of International Trade

APECThe Asia-Pacific Economic Cooperation (APEC) is an economic development organization formed in 1889. The Asia-Pacific market is the fastest growing trade group.

European Union (EU)In 1993, the European Union (EU) united 12 member states into a true single market. Today the EU has 15 members and a population of more that 370 million people.

Evolution of NAFTAIf NAFTA becomes a single market, it could result in workers from the US, Canada, and Mexico moving freely between countries.

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Impact of Cultural DifferencesInternational trade depends on our response to and acceptance of cultural differences. Culture is the sum of a country’s way of life,beliefs, and customs.

Dealing with PeopleConducting successful business in foreign countries involves learningwhat is important to their populations as well as its cultural nuances. PunctualityThe value of punctuality depends on the cultures: some cultures value timeliness, some do not. It is important to understand this before visiting foreign countries. Other characteristics to recognize are working at an acceptable pace, having good manners, and learning to avoid waits and disappointments.

Greetings Greeting someone can leave an important first impression.

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Nonverbal Communication SignalsNonverbal signals can convey more than words do.

Good MannersIn Canada, the United States, and some European countries, business is completed at a quick and efficient pace. Most other countries prefer to get to know people before any business is done.

Decision MakingIn North America, decision making is typically top-down. In other cultures, decisions are made from the bottom up.

Global DependencyGlobal dependency exists when customers in one country demand items that are created in another.

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