NOTES OF CHAPTER 3_ BUSINESS IN A BORDERLESS WORLD (2).pdf

NOTES OF CHAPTER 3: BUSINESS IN A BORDERLESS WORLD LO 3-1 Summary: International business involves the buying, selling, and trading of goods across national borders. Advances in technology and a reduction in political barriers have facilitated global trade. Majo...

NOTES OF CHAPTER 3: BUSINESS IN A BORDERLESS WORLD LO 3-1 Summary: International business involves the buying, selling, and trading of goods across national borders. Advances in technology and a reduction in political barriers have facilitated global trade. Major companies like Starbucks, Amazon, and McDonald's successfully operate across different markets worldwide, contributing to their growth. However, firms must navigate various ethical and logistical challenges due to diverse consumer needs and regulations in different countries. WHY NATIONS TRADE ### Summary: Nations trade internationally to obtain resources that are unavailable domestically or are too expensive. The concept of **absolute advantage** refers to a nation's ability to produce a good at a lower cost than others. In contrast, **comparative advantage** occurs when a country specializes in producing goods at a lower opportunity cost compared to other nations. For example, Canada leverages its agricultural capabilities, while countries like India and Ireland focus on services like call centers due to their unique skills. ### Summary: Outsourcing refers to the practice of transferring manufacturing and other tasks to countries where labor and supplies are cheaper. This practice has sparked controversy, particularly as many jobs have shifted overseas for cost savings. Canada has become a prominent outsourcing destination for the United States due to its geographic proximity, a well-educated workforce, and similarities in law, language, and business culture. TRADE BETWEEN COUNTRIES ### Summary: Trade between countries involves the exchange of goods and services through exporting and importing. Canada exports approximately $550 billion in goods and services, including machinery and services, while it also imports a similar amount of goods, resulting in a trade balance that fluctuates annually. The data shows that Canada imports more than it exports, leading to a trade deficit. BALANCE OF TRADE ### Summary: Canada has a trade deficit, which means it imports more than it exports. This deficit reflects the difference between the values of a nation's imports and exports. For example, Canada had a trade deficit of $375 billion in 2020. Trade balances can indicate economic conditions, influencing business decisions and jobs. The table outlines Canada's principal trading partners, highlighting countries with which Canada has trade deficits and surpluses, such as the U.S. and China. The concept of the balance of payments further supports understanding how money flows in and out of a country. LO 3-2: INTERNATIONAL TRADE BARRIERS ECONOMIC BARRIERS ECONOMIC DEVELOPMENT ### Summary: Economic development varies among nations, with industrialized or economically advanced countries exhibiting higher standards of living and income levels. In contrast, less developed countries (LDCs) often lack essential infrastructure, hindering their ability to improve citizens' living standards. A country's level of development is determined by its infrastructure, which includes necessary systems like transportation, communication, and utilities. For LDCs, investments are crucial, as they may need to compensate for inadequate technology and resources.  EXCHANGE RATES ### Summary: The exchange rate is the value at which one nation's currency can be exchanged for another. Exchange rates play a critical role in international trade, affecting the costs of imports and exports. A stronger Canadian dollar makes imports cheaper and exports more expensive for foreign buyers. Governments may sometimes intentionally devalue their currency to lower the cost of exports, potentially boosting tourism and making local goods more attractive to international markets. ETHICAL, LEGAL, AND POLITICAL BARRIERS LAWS AND REGULATIONS ### Summary: Canada has various laws and regulations that govern its firms engaged in international trade, including international agreements that establish guidelines between Canadian and foreign companies. Understanding the laws of other nations is crucial for Canadian businesses, as these laws can differ significantly. Countries like China and Hong Kong face challenges regarding counterfeit goods, impacting their economies and international reputation. Businesses must navigate intellectual property protections to avoid counterfeiting risks and ensure product quality. TARIFFS AND TRADE RESTRICTIONS ### Summary An import tariff is a tax imposed by a government on imported goods. It can be fixed or vary based on the item. These tariffs aim to protect domestic industries by making imported products more expensive. Countries may use tariffs for political reasons as well as economic ones. In recent years, trade relations between nations, such as during the COVID-19 pandemic, have influenced the implementation and impact of tariffs. ### Summary Critics of protective tariffs argue that they hinder free trade and competition, leading to higher prices for consumers. Protective tariffs can insulate domestic industries but restrict efficient foreign competition. Exchange controls may prevent currency exchange required for international trade, making it difficult for businesses to procure necessary goods. Quotas limit the quantity of specific products allowed for importation, providing a method for governments to control the influx of goods. An embargo is a complete ban on trade with a specific country for political reasons. Additionally, dumping occurs when a company sells products below their cost to gain market share, often leading to unfair competition and higher prices for consumers when the market stabilizes. POLITICAL BARRIERS ### Summary Political barriers can significantly impact international trade. Nations facing political issues, such as Cuba, Iran, Syria, and North Korea, may encounter swift economic sanctions and restrictions. Political instability in various regions can disrupt trade and force businesses to reconsider or exit foreign markets. Additionally, natural disasters can damage the reliability of trade. The formation of cartels, like OPEC, occurs when countries unite to control prices and supply, affecting global trade dynamics. SOCIAL AND CULTURAL BARRIERS ### Summary Many businesses involved in international trade underestimate the significance of social and cultural differences, which can pose serious challenges. For instance, Starbucks learned about cultural preferences when it faced difficulties entering the Italian market, where coffee culture is deeply rooted. To adapt, they modified their approach by creating products tailored for local consumers. Additionally, companies may also struggle with language barriers, as illustrated by Electrolux's marketing slogan that failed in the U.S. market due to cultural interpretations. Understanding these social nuances is essential for success in global business. ### Summary Certain hand gestures may be perceived as rude or inappropriate in different countries, impacting business and social interactions. For instance, gestures that are innocent in one culture can have offensive meanings in another, highlighting the importance of cultural sensitivity. Advertising efforts may also require adaptations; for instance, brands like Dolce & Gabbana have altered campaigns based on local contexts. Countries like the United Kingdom or Brazil might interpret gestures like "thumbs up" or "backward peace sign" differently, underscoring the need for awareness in global business. Miscommunication can lead to misunderstandings and hurt feelings, so it's essential for companies to navigate these cultural differences carefully. TECHNOLOGICAL BARRIERS Summary Technological barriers in developing countries are increasingly viewed as opportunities by marketers. Countries like India, China, and certain African nations, with limited technological infrastructure, offer potential markets for innovations, particularly in mobile communication. Citizens in these areas are accessing technology directly through cell phones. While there are opportunities for growth, these markets also attract increased competition, exemplified by leading PC companies like Lenovo, Hewlett- Packard, Dell, and Acer from Asia. Meanwhile, companies like Apple have expanded their market beyond traditional computers to include tablets, highlighting the evolving nature of product life cycles. ### Summary: The text discusses how technological barriers, often viewed as challenges, can be seen as opportunities for marketers. Companies are targeting nations like India and China, where limited telecommunications infrastructure exists, to promote innovations like cell phones. Additionally, it highlights competition among major PC manufacturers, predominantly from Asian countries, and notes that Apple Inc. has begun to enter the market for traditional personal computers. LO 3-3: TRADE AGREEMENTS, ALLIANCES, AND ORGANIZATIONS THE WORLD TRADE ORGANIZATION (WTO) ### Summary: The World Trade Organization (WTO) was established to regulate international trade, particularly through agreements that reduce trade barriers and promote fair competition. It originated in the 1930s during the Great Depression and was formally created in 1995. The WTO oversees agreements between member nations aimed at regulating trade-related issues, handling disputes, and facilitating negotiations. The organization plays a crucial role in addressing broader challenges related to global commerce, including the impacts of the COVID-19 pandemic. THE CANADA-UNITED STATES-MEXICO AGREEMENT (CUSMA) ### Summary: The Canada-United States-Mexico Agreement (CUSMA) replaced the North American Free Trade Agreement (NAFTA) in 2020. CUSMA focuses on various sectors, particularly automobiles, dairy, and digital trade. Notably, it mandates that 75% of auto content must be made in North America to qualify for tariff-free trade. The agreement also includes provisions for increased access to Canada’s dairy market, along with measures to protect intellectual property. The deal is intended to promote trade and enhance economic cooperation among Canada, the United States, and Mexico. ### Summary: The Canada-United States-Mexico Agreement (CUSMA) replaced the North American Free Trade Agreement (NAFTA) in 1994. CUSMA primarily affects trade between Canada, the U.S., and Mexico, focusing on various sectors including auto manufacturing. Key provisions include changes in rules of origin for auto parts, reduced tariff rates, and requirements for increased wages for car manufacturers in North America. The agreement facilitates fair competition and emphasizes the importance of addressing trade imbalances, with Canada and the U.S. having significant trade relationships. THE EUROPEAN UNION (EU) ### Summary: The European Union (EU), originally known as the European Community, was established in 1958 to promote trade among its member states. The initial members included Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. The Euro, introduced in 1993, replaced national currencies for many EU countries, providing a unified monetary policy. The organization also aims to eliminate barriers to trade and services, enhance regional cooperation, and improve economic conditions. Additionally, the EU has made strides in areas like consumer protection and data regulation, with the GDPR being a significant law affecting businesses and consumers within the EU. ASIA-PACIFIC ECONOMIC COOPERATION (APEC) ### Summary: The Asia-Pacific Economic Cooperation (APEC) was established in 1989 to enhance economic and technical cooperation among its member economies, initially comprising 12 countries, including Australia, Brunei, Indonesia, Japan, and the United States. APEC focuses on promoting free trade and investment, which significantly contributes to the region's economy, representing around 60% of global GDP. Over time, the initiative has grown to include 21 members. APEC encourages collaboration to adapt to global business trends and improve practices. Notably, China, with its large economy, is a key player, alongside other growing economies such as Vietnam and Mexico. ### Summary: China has become the world's largest emitter of greenhouse gases and a significant importer of goods, as its industrial growth has led to increased pollution. Efforts to lead in green initiatives and renewable energy are underway, but challenges remain due to heavy government involvement and competition within the private sector. Additionally, countries like Thailand, Singapore, Taiwan, Vietnam, and Hong Kong have emerged as important players in major financial markets. Vietnam, in particular, is gaining traction as a destination for businesses looking to expand, attributed to its growing labor force and favorable conditions. ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN) ### Summary: The Association of Southeast Asian Nations (ASEAN) was established in 1967 to promote trade and economic integration among its member countries, which include Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Indonesia, Myanmar, and Cambodia. ASEAN represents a market of approximately 650 million people with a combined GDP of $2.5 trillion. The organization faces challenges in achieving unity due to differing political structures among its members, which range from democracies to constitutional monarchies. Conflicts have arisen within the region, prompting ASEAN to seek solutions reminiscent of those used by the European Union after its own conflicts. WORLD BANK ### Summary: The World Bank was established in 1946 by industrialized nations to provide loans to underdeveloped and developing countries. It assists in financing projects, including those related to infrastructure, healthcare, and education. The World Bank, along with other multilateral development banks, serves as a major source of advice and aid for developing nations. Associated organizations, the International Development Association and the International Finance Corporation, focus on providing support for businesses and member countries. During the COVID-19 pandemic, the World Bank also responded by facilitating access to vaccines and economic support.  INTERNATIONAL MONETARY FUND ### Summary: The International Monetary Fund (IMF) was established in 1947 to promote trade among nations by reducing trade barriers and enhancing international cooperation. It provides short-term loans to countries facing balance-of-payments difficulties. The IMF aims to help stabilize financial crises and offers guidance on economic policy to member nations that are unable to repay their debts. Acting like an international bank, the IMF is a critical resource for countries in financial trouble, helping to develop economic outlooks and policy strategies. GETTING INVOLVED IN INTERNATIONAL BUSINESS LO 3-4 SUMMARIZE THE DIFFERENT LEVELS OF ORGANIZATIONAL INVOLVEMENT IN INTERNATIONAL TRADE Here are the main points from the text: * **Involvement in International Trade**: + Businesses can engage in international trade at various levels, from small firms to large multinational corporations. * **Examples**: + A small Kenya firm exports products, while a multinational like Shell Oil sells globally. * **Degree of Commitment**: + The level of resources and effort required increases with the degree of involvement in international trade. * **Business Activities**: + Activities include exporting and importing, licensing and franchising, joint ventures, direct investment, and operating multinational corporations. EXPORTING AND IMPORTING The text discusses how businesses often enter international trade by importing goods from other countries for their own operations. For example, a grocery store chain might import bananas from Honduras and coffee from Colombia. Canada is highlighted as the third largest exporter globally. The passage emphasizes that established exporters, like Canada, enable businesses of all sizes to engage in international markets, offering significant growth opportunities in foreign markets, as seen in companies like Heinz that expand their exports to countries such as Mexico and those in the Middle East. The text explains that exporting can involve countertrade agreements, where goods are exchanged rather than using traditional currency. This method is particularly common among Western companies and Eastern European nations, with a notable percentage of international trade agreements featuring such arrangements. When a company cannot export goods directly, it may choose to work through intermediaries. Export agents facilitate the process but may charge fees and vary in reliability. An advantage of trading through an agent is that companies can access foreign markets without needing to establish a local presence. However, a drawback is the potential additional costs and dependency on the agent's reliability and effectiveness in the local market. TRADING COMPANIES A trading company buys and sells goods between countries, facilitating international trade by linking sellers and buyers. In Canada, notable trading companies include the Canadian Commercial Corporation (CCC), which promotes trade for Canadian industries, and Export Development Canada (EDC), which helps expand international business opportunities for Canadian exporters. LICENSING AND FRANCHISING Licensing is an arrangement where one company (the licensor) permits another (the licensee) to use its brand, products, or resources for a fee. Companies like Coca-Cola and PepsiCo use licensing to expand their market presence, especially overseas. Franchising is a similar model where a franchisee agrees to operate a business using the franchisor's brand and systems in exchange for fees. Examples of global franchises include Subway, McDonald's, and Pizza Hut. Licensing and franchising allow companies to enter international markets without substantial financial investment or logistical challenges related to overseas operations. They help establish a product's presence in foreign markets but require oversight to ensure quality standards are maintained. If a licensee or franchisee fails to uphold quality, it can negatively impact the brand's image. CONTRACT MANUFACTURING Contract manufacturing involves a company hiring a foreign firm to produce a specified volume of its products according to certain specifications, with the final product branded under the domestic company's name. Foxconn Technology Group in Taiwan is noted as the largest electronic contract manufacturer, producing products for major clients like Sony, Apple, and Nintendo, and is also recognized as the largest iPhone assembler. OUTSOURCING Outsourcing involves transferring tasks, such as manufacturing or customer service, to countries with lower labor costs. While many companies have outsourced jobs to places like India and Mexico, concerns have emerged regarding job loss in Canada. Some firms are now focusing on reshoring tasks, especially after the COVID-19 pandemic, to mitigate risks like shipping delays and dependence on foreign suppliers. For instance, in March 2020, Canada increased domestic production capabilities for personal protective equipment (PPE), reaching 70% self-sufficiency by October 2020. OFFSHORING Offshoring involves relocating a company's business process to another country while retaining control over the operations, unlike outsourcing. Companies may offshore for various reasons, such as lower labor costs or to utilize time zone differences for round-the-clock services. Some institutions offshoring may open centers in other countries, like banks establishing delivery centers abroad, because offshoring is considered an extension of the company. JOINT VENTURES AND ALLIANCES Joint Venture: A partnership between two or more companies to achieve a specific business goal, sharing risks and rewards. This strategy allows companies to enter new markets, access new technology, or increase capacity while maintaining control. Strategic alliances are collaborative agreements between companies to achieve business objectives, such as increasing competitiveness or accessing new technologies. They allow companies to share resources, reduce risks, and leverage each other's strengths. Examples include Apple-IBM, Microsoft-Nokia, and Ford-VW partnerships. Many countries, especially less developed ones, restrict foreign direct investment, prompting companies to engage in joint ventures to enter new markets. A joint venture enables firms to share resources and expertise, as seen with Ford and Toyota's collaboration. Additionally, strategic alliances, where businesses partner for competitive advantages, are becoming common in industries like automotive and technology. An example is the partnership between LinkedIn and Ernst & Young to enhance service offerings. DIRECT INVESTMENT Companies seeking significant control and willing to invest substantial resources in international business may pursue direct investment, which involves establishing new facilities or acquiring existing operations in foreign countries. The highest level of international involvement is through multinational corporations (MNCs), like IBM or ExxonMobil, which operate on a global scale without being limited to one specific region. Multinational corporations (MNCs) often possess more assets than the countries in which they operate. For example, Nestlé, based in Switzerland, runs over 400 factories worldwide and generates revenue across various regions, while the Royal Dutch Shell Group is a significant global oil producer with major offices in The Hague and London. Other notable multinational corporations (MNCs) include BASF, British Petroleum, Mitsubishi, Siemens, Toyota, and Unilever. These companies have faced criticism from anti-globalization activists who argue that MNCs widen the gap between rich and poor, misuse resources, and exploit labor in developing countries while harming their natural environments. INTERNATIONAL BUSINESS STRATEGIES LO 3-5 CONTRAST TWO BASIC STRATEGIES USED IN INTERNATIONAL BUSINESS DEVELOPING STRATEGIES Companies engaging in international business often employ a multinational strategy, customizing their products and marketing to fit local cultural and regional differences. For instance, McDonald's in India offers vegetarian options to cater to local dietary preferences. Similarly, manufacturers of soap and detergent adapt their products to suit local washing habits, while Colgate-Palmolive has created a hand-powered washing machine for households in less-developed countries lacking electricity. Even when products are standardized, advertising must be adapted to suit local languages and cultural nuances. For instance, Mars has been active in the Chinese pet food market for over two decades with brands like Royal Canin and Whiskas. U.S.-based Mars enjoys a competitive advantage in China due to concerns about the safety of locally produced pet food. Increasingly, companies are shifting from a customization strategy to a global strategy, or globalization, which involves standardizing products (and, as much as possible, their promotion and distribution) for the whole world, as if it were a single entity. Examples include globalized products like clothing, movies, and cosmetics. Social media platforms play a crucial role in helping brands connect with their global customers, with companies like Adèle, Fashion Nova, Huda Beauty, and Victoria's Secret ranking as some of the most engaging brands on social media. Before expanding internationally, companies need to conduct environmental analyses to assess potential opportunities and challenges in new markets. This helps them develop appropriate business strategies. Some firms utilize local managers for insights and quicker adaptation to changes in the market. By balancing a global perspective with local awareness, companies can adjust their strategies to meet local needs and regulations effectively. MANAGING THE CHALLENGES OF GLOBAL BUSINESS As noted in this chapter, managers face challenges related to international trade and are advised to leverage resources like the Canadian Trade Commissioner Service and organizations such as the Canadian Commercial Corporation (CCC) and Export Development Canada (EDC) for support. These entities assist businesses, especially small and medium-sized ones, with financing, insurance, and understanding internationalization processes. Careful market assessment and strategic adaptation are crucial for success in global markets, making global awareness important for contemporary businesses. Here are the main points from the text: **International Business** International business involves buying, selling, and trading goods across national borders. Advances in technology and reduction in political barriers have facilitated global trade. Major companies like Starbucks, Amazon, and McDonald's operate across different markets worldwide. **Why Nations Trade** Nations trade internationally to obtain resources that are unavailable domestically or too expensive. Absolute advantage refers to a nation's ability to produce a good at a lower cost than others. Comparative advantage occurs when a country specializes in producing goods at a lower opportunity cost compared to other nations. **Outsourcing** Outsourcing refers to the practice of transferring manufacturing and other tasks to countries where labor and supplies are cheaper. Canada has become a prominent outsourcing destination for the United States due to its proximity, skilled workforce, and similar business culture. **Trade Between Countries** Trade between countries involves the exchange of goods and services through exporting and importing. Canada exports approximately $550 billion in goods and services, while importing a similar amount. Canada has a trade deficit, which means it imports more than it exports. **Balance of Trade** The balance of trade is the difference between a nation's exports and imports. A trade deficit reflects the difference between the values of a nation's imports and exports. Canada's trade deficit was $37.5 billion in 2020. Balance of payments is the difference between the flow of money into and out of a country. **Balance of Payments** The difference between the flow of money into and out of a country. * **Components**: Includes trade balance, foreign investments, military expenditures, and money spent by tourists. * **Trade Surplus**: A country with a trade surplus has a favorable balance of payments, receiving more money from trade than it spends. * **Trade Deficit**: A trade deficit occurs when more money flows out of the country than comes in, potentially leading to decreased production and higher unemployment. **International Trade Barriers** **Economic Barriers** * **Economic Development**: Economic development varies among nations, with industrialized countries having higher standards of living and income levels. Less developed countries (LDCs) often lack essential infrastructure, hindering their ability to improve citizens' living standards. A country's level of development is determined by its infrastructure (e.g. transportation, communication, utilities). Investments are crucial for LDCs to compensate for inadequate technology and resources. * **Exchange Rates**: The exchange rate is the value at which one nation's currency can be exchanged for another. Exchange rates affect the costs of imports and exports in international trade. A stronger Canadian dollar makes imports cheaper and exports more expensive for foreign buyers. Governments may intentionally devalue their currency to boost tourism and make local goods more attractive to international markets. ** Ethical, Legal, and Political Barriers** **Laws and Regulations** * **International Trade Laws**: Canada has various laws and regulations governing international trade, including international agreements between Canadian and foreign companies. Understanding the laws of other nations is crucial for Canadian businesses, as they can differ significantly. Countries like China and Hong Kong face challenges with counterfeit goods, impacting their economies and international reputation. Businesses must navigate intellectual property protections to avoid counterfeiting risks and ensure product quality. **Tariffs and Trade Restrictions** * **Import Tariffs**: A tax imposed by a government on imported goods, aiming to protect domestic industries by making imported products more expensive. Tariffs can be fixed or vary based on the item, and can be used for political or economic reasons. * **Criticisms of Protective Tariffs**: Restricting free trade and competition, leading to higher prices for consumers. Can insulate domestic industries but restrict efficient foreign competition. * **Other Trade Restrictions**: Exchange controls: prevent currency exchange required for international trade. Quotas: limit the quantity of specific products allowed for importation. Embargo: a complete ban on trade with a specific country for political reasons. Dumping: selling products below cost to gain market share, leading to unfair competition and higher prices for consumers. **Social and Cultural Barriers** * **Cultural Preferences**: Businesses often underestimate the importance of cultural differences in international trade, leading to challenges. Examples: Starbucks adapted to Italy's strong coffee culture, and Electrolux's marketing slogan failed in the US due to cultural misinterpretation. * **Language Barriers**: Language differences can impact business and social interactions. Companies must be aware of cultural nuances to avoid misunderstandings and hurt feelings. * **Nonverbal Communication**: Hand gestures can have different meanings in different cultures, leading to unintended offense. Examples: "thumbs up" or "backward peace sign" can be misinterpreted in countries like the UK or Brazil. Advertising efforts must be adapted to local contexts to avoid miscommunication. **Technological Barriers** * **Opportunities for Marketers**: Technological barriers in developing countries are viewed as opportunities by marketers. * **Targeting Emerging Markets**: Countries like India, China, and certain African nations with limited technological infrastructure offer potential markets for innovations. Mobile communication is a key area of growth, with citizens in these areas accessing technology directly through cell phones. * **Competition Among PC Manufacturers**: Leading PC companies like Lenovo, Hewlett-Packard, Dell, and Acer from Asia are competing for market share. Apple has expanded its market beyond traditional computers to include tablets, illustrating the evolving nature of product life cycles. **Trade Agreements, Alliances, and Organizations** The World Trade Organization (WTO) regulates international trade, promotes fair competition, and addresses global commerce challenges. The Canada-United States-Mexico Agreement (CUSMA) focuses on trade between Canada, the US, and Mexico, covering sectors like auto manufacturing and dairy. The European Union (EU) promotes trade among its member states, eliminates barriers to trade and services, and improves economic conditions. Asia-Pacific Economic Cooperation (APEC) promotes free trade and investment among its member economies. The Association of Southeast Asian Nations (ASEAN) promotes trade and economic integration among its member countries.  The World Bank provides loans to underdeveloped and developing countries to finance projects and support businesses. The International Monetary Fund (IMF) provides short-term loans to countries facing balance-of-payments difficulties and offers guidance on economic policy.