International Business PDF

International Business Defined “All the business transactions (exchanges of money) necessary for creating, shipping, and selling goods and services across national borders. Also referred to international trade or foreign trade” Wilson, Jack et al. The...

International Business Defined “All the business transactions (exchanges of money) necessary for creating, shipping, and selling goods and services across national borders. Also referred to international trade or foreign trade” Wilson, Jack et al. The World of Business (5th ed) Canada, Nelson, 2007  International Business Terminology Domestic Transaction Selling of goods produced in the same country. For example: You visit a store in your community (local store) and purchase a bicycle that has been manufactured in Canada. International Transaction Selling goods produced in another country. Involves creating, shipping, and selling goods and services across national borders. Also referred to as international trade or foreign trade. For example: You go to Canadian Tire and purchase a tool that was manufactured in China. Economy The financial health of a place Municipal – Ottawa’s economy Provincial – Ontario’s economy National – Canada’s economy Continental – North American economy Global – Global Economy  The health of an economy is generally determined/measured by looking at factors such as employment rates, interest rates, gross domestic product, trade deficits vs. surplus Imports A good or service brought into Canada from another country. (made in China) Exports A product or service produced in Canada and sold in another country.(made in Canada) Trade Deficit  When Canada imports more goods than it exports, we have what is called a Trade Deficit.  Imports > Exports = Trade Deficit Trade Surplus  When Canada exports more goods than it imports, we have a Trade Surplus.  Exports > Imports = Trade Surplus Which do you think is better for the Canadian economy?  Benefits To Businesses Participating in International Business 1. Access to many more markets 2. Access to cheaper labour 3. Increased quality or quantity of goods 4. Access to resources that may not be available at home. 1. Access To Markets Canada’s Population: Roughly 33,600,000 World Population: Roughly 6, 500,000,000 Conclusion: The Global market can reach roughly 200 times more consumers than simply just Canadian consumers.  Access To Markets Access to the global market does not guarantee bigger sales. Why? Companies must adapt their products and/or services to: 1. different needs, wants and preferences based on cultural differences and/or preferences 2. conform to different laws of various countries Global Product A standardized item that is offered in the same form in all countries in which it is sold. (i.e. pencils, soccer balls, cameras) 2. Cheaper Labour Businesses make profits when their sales are greater than their costs of running the business. Thus profits can increase even more by maintaining their sales level and decreasing their costs of running the business. The single largest expense of any business/organization is generally the labour (employees and management wages and salaries) If a company can produce its goods and/or services in another country where the labour laws allow businesses to pay employees less than they would be paid in Canada, they can reduce their costs of doing business substantially. In addition to helping increase profits, businesses can pass on those savings to consumers by reducing the price of the items. The cheaper an item is, perhaps the more the business will also sell. Cheaper Labour 3. Increased Quality of Goods THE BMW X5  Increased Quality of Goods The BMW X5  Its engine is assembled in Munich, Germany;  Shipped to the production plan in South Caroline, U.S.;  Magna Corporation in ON, Canada, manufacturers the rear-view mirror;  Leather seats come from South Africa;  Michelin tires are manufactured in France BMW wanted to create the best possible product for its consumers so it searched for the manufacturers that produced the best quality in its car components. 4. Increased Quantity Access to international markets may lead to an increase in demand of products thus increased quantities of goods sold. Results: Hours of operation may increase New production facilities may open and perhaps in other countries Increase in job opportunities  5. Access to Resources Natural Resource Since Bamboo is a scarce resource in Canada a furniture company making bamboo furniture will import (bring into the country) bamboo from another country. Human Resources A Canadian company which opens up a factory in China to take advantage of its cheaper labour costs Capital Resources A company that purchases a specialized piece of machinery needed for their plant that is only made in Japan.  The Five P’s of International Business 1. Product 2. Price 3. Proximity 4. Preference 5. Promotion  Product A country’s resources determine what goods and services it can produce. Examples: Canada buys citrus fruits from countries with warmer climates Canada’s large forests and wheat fields provide lumber and grain for countries that don’t have an abundance of these resources  Price Cost of producing goods and services varies from one country to another Costs usually include: wages, taxes and raw materials If a company can reduce its costs, then it can offer products and services at| lower prices and increase their profits.  Proximity Proximity to a fellow neighbouring country allows for a company and/or country to benefit from doing business across the border 80% of Canadian population lives with 170km of the American border. Example:  Windsor, ON has a population of about 350 000  Across the bridge from Windsor is Detroit, Michigan which has a population of several million.  Many people and businesses provide Detroit’s car manufacturing plants with parts and labour. Preference Some countries specialize in certain goods or services that have a reputation for quality all over the world Examples: Belgian chocolates, Swiss watches, German cars, Canadian wheat.  Promotion The internet and satellite broadcasting have made it easier to inform people around the world about goods and services available. Ease of electronic promotion and other communications technology provides incentive for businesses to reach beyond their domestic market.  Benefits and Costs of International Trade Benefits to Society and Consumers 1. Availability of products and services unavailable in your own country 2. Broader range of prices offered (cheaper to purchase various goods) 3. Job creation 4. Political Benefits – “countries that trade with one another seldom go to war with each other.” 5. Opens up communication lines with people, improves mutual understanding, and increases the level of respect people from different countries have for one another.  Costs of International Trade The hidden or social costs of international business engaging in offshore outsourcing: 1. Human rights and labour abuses 2. Environmental degradation  Offshore Outsourcing Also known as “contracting out.” The practice of hiring individuals from countries where labour costs are lower to complete some or all of the steps in the production process. Example: Many companies use call centres in India, China and Costa Rica for customer service and IT customer service.  Offshore Outsourcing Advantages Lower costs to company which can focus on tasks it does better Be closer to natural resources needed Proximity to more efficient technologies Increase profits from lower labour costs, another country’s innovations, and different tax structure Human Rights Issues and Labour Abuses Typical abuses in poor countries include: 1. Physical abuse 2. Sexual abuse 3. Forced confinement 4. Non-payment of wages 5. Denial of food and health care 6. Excessive working hours with no rest 7. Child labour Human Rights Issues and Labour Abuses Child Labour defined Regular employment for boys and girls under the age of 16 Many countries ignore abuses that target children and women.  What can be done to stop Child Labour and Human Rights Abuses? International Labour Organization (ILO) United Nations (UN) specialized agency that seeks the promotion of social justice and human and labour rights that are accepted by all countries. Environmental Degradation Occurs when nature’s own resources such as trees, habitat, earth, water, and air are being used up (consumed) faster than nature can replenish them.  Sustainable Development The process of developing land, cities, businesses, and communities that meet the needs of the present without compromising the ability of future generations to meet their own needs. Businesses need to be looking to provide sustainable business practices.  Barriers to International Business Purpose of Barriers To help protect domestic businesses and consumers May be used to: 1. help assist a new business getting started 2. protect an existing industry struggling in a competitive global environment. 3. protect consumers from imports with problems or that do not conform to Canadian safety standards. Barriers to International Business Barriers include: 1. Tariffs or Custom duties 2. Non-Tariff barriers 3. Increased costs of importing and Exporting 4. Excise taxes 5. Currency Fluctuations 1. Tariffs  Also called “customs duties”.  A form of tax on certain types of imports (goods coming into Canada from other countries)  Companies bringing in the goods from another country to sell in Canada must pay the tariffs.  Tariffs are based on a percentage of the retail value, (i.e. 5% of retail selling price.) or;  On another basis (i.e. $6 per kilogram)  Money collected goes to the government.  One of the most important tools for any government in managing trade with other countries. 2. Non-tariff Barriers Legal and policy standards for the quality of imported goods are set so high that foreign competitors can not enter the market. Examples: A Canadian law forces an international company to apply for a license to do business in Canada (it may be very time consuming and expensive). Government will allow some goods into the country only after being inspected and having met certain health and safety standards set out by the Canadian Food and Inspection Agency. 3. Costs of Importing and Exporting Landed Cost The actual cost for an imported purchased item. It is composed of the vendor cost, transportation charges, duties, taxes, broker fees, and any other charges associated with getting the product ready to sell in a foreign market. (another country)  Price of a good sold is based on the following costs among others: Manufacturing (includes wages); storage; Marketing; Shipping; Advertising Overhead (Equipment, Heating etc, Salaries) % of profit the company wants to make on the sale Depending on the laws of another country and cultural differences, additional costs may be incurred. 4. Excise Taxe  A tax on the manufacture, sale, or consumption of a particular product produced in your country Governments use excise taxes to: 1. Raise money (i.e tobacco related health care costs) 2. Discourage people from engaging in certain activities 3. Increase the costs of imported goods to encourage consumers to buy Canadian products. Examples of excise taxes:  10 cents per litre on gasoline for the federal government  14.5 cents per litre on gasoline for the provincial government  Excise tax on tobacco products varies from province to province  5. Currency Fluctuations Converting the value of $1 Canadian dollar to US currency and other national currencies. Examples Nov. 2000 - $100 US  $157 Canadian Nov. 2007 - $100 US  $98 Canadian Website to research a history of exchange rates http://www.oanda.com/convert/fxhistory Factors Affecting Exchange Rates 1. The financial health of Canada’s economy versus the US economy 2. Interest Rates Example:  If the Canadian economy is performing better than the US, the value of the Canadian dollar will increase. The demand for the Canadian dollar rises. Demand > Supply, the value rises.  If interest rates are higher than those of other countries while inflation remains fairly stable, the value of the Canadian dollar will increase. Foreigners will be attracted to invest in Canadian funds where banks are providing higher interest rates. Demand > Supply, the value rises. Information on factors affecting exchange rates:  http://www.bankofcanada.ca/en/backgrounders/bg-e1.html Impacts of Exchange Rates  Canadian economy is largely dependent on the value of imports and exports which can be greatly impacted by the value of the Canadian dollar. The US is Canada’s biggest trading partner.  When Canadian Exports to US > US Imports = Trade Surplus  When Canadian Exports to US < US Imports = Trade Deficit Exports decrease when:  the Canadian dollar increases in value to the US dollar, it makes exports more expensive.  the US economy is weak and the CD dollar is increasing, the US will be purchasing less from Canadian businesses Note: Canadian consumers also tend to purchase more products from the US because the value of the dollar is higher, and goods are often cheaper in the US, thus making imports higher. Result:  Less sales revenue for Canadian businesses which in the long run, can end up hurting the Canadian economy. For example, when businesses are earning less revenue, profits decrease and if significant decreases occur, businesses may start laying off employees. Flow of Goods And Services Imports  Goods and services flowing/coming into Canada Exports  Goods and services flowing/going out of Canada Imports may include:  Raw materials  Processed materials  Simi-finished goods,  Manufactured goods ready for sale. The less finished the imported goods, the more jobs they create for Canadians.  Canadian Imports 2008 Forestry 0.64% Products Agriculture 6% and Fishing 12% Energy 14.50% Other 16% Automotive 21% products Industrial 28% Goods and Materials Machinery 0% 10% 20% 30% and Data Source: Equipment “Imports of goods on a balance-of-payments basis, by product” Statistics Canada, September 10, 2009, [Online]. Available: http://www40.statcan.gc.ca/l01/cst01/gblec05-eng.htm  Canadian Exports 2008 Foresty Other 6% Agriculture and Fishing 8% 12% Automotive Products 19% Machinery and Equipment 23% Industrial Goods and 26% Materials Energy Data Source:0% 10% 20% 30% “Export of Goods on a Balance-of-Payment Basis” Statistics Canada. September 10, 2009. [Online] Available:http://www40.statcan.gc.ca/l01/cst01/gblec04-eng.htm Balance of Trade  Relationship between a country’s total imports and total exports. Trade Surplus = E > I  Export$ are greater than Import$.  Canadians are selling more products to other countries than they are importing.  If surplus is made up of primarily manufactured goods, then more jobs are created for Canadians. Trade Deficit = E < I  Canadians are spending more money on importing goods from other countries than selling/exporting goods to other countries.  Usually means that fewer Canadian jobs are being provided  Export Business Two ways a business may export goods: 1. Through direct exporting 2. Through indirect exporting Exporting Business Direct Exporting  The exporting company deals directly with the company that will wishes to import the goods into his/her country.  Conducted usually by established companies who have the experience and resources to set up offices and sales staff in foreign countries.  More risky as the exporting company assumes all risky Canadian China Company Company Indirect Exporting  Goods move from the exporter to an intermediary, who is often from the foreign country, and then on to the importing business. Intermediary  Someone or another company who helps the exporter find a company who wants to purchase and import your goods) Canadian Intermediary China Company Business or Company Individual Indirect Exporting Usually conducted by new businesses which don’t have the resources, or global reputation Business share financial risks with the intermediary Some countries prohibit direct exporting, likely to create jobs for local intermediaries. (i.e. in the Middle East, Central America and Asia)  Canada’s Major Trading Partners Canada’s Top 10 Export Markets Country 2004 2005 2006 2007 2008 U.S 84.4% 83.8% 81.5% 78.9% 77.64% U.K 1.88% 1.89% 2.3% 2.84% 2.7% Japan 2.08% 2.10% 2.14% 2.05% 2.29% China 1.64% 1.65% 1.77% 2.11% 2.17% Mexico 0.75% 0.77% 0.99% 1.10% 1.21% Germany 0.65%.074% 0.90% 0.86% 0.93% South 0.55% 0.65% 0.75% 0.67% 0.79% Korea Netherlands 0.47% 0.50% 0.70% 0.90% 0.77% Belgium 0.55% 0.52% 0.55% 0.66% 0.70% France 0.58% 0.58% 0.65% 0.69% 0.67% Source: Statistics Canada: http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag  Canada’s Major Trading Partners Canada’s Top 10 Import Markets Country 2004 2005 2006 2007 2008 U.S. 58.7% 56.5% 54.8% 54.2% 52.4% China 6.77% 7.75% 8.70% 9.41% 9.83% Mexico 3.78% 3.83% 4.04% 4.22% 4.13% Japan 3.80% 3.89% 3.86% 3.80% 3.53% Germany 2.65% 2.70% 2.82% 2.83% 2.93% U.K. 2.71% 2.74% 2.74% 2.82% 2.91% Algeria 0.87% 1.10% 1.25% 1.25% 1.78% Norway 1.39% 1.59% 1.38% 1.32% 1.43% South 1.64% 1.41% 1.45% 1.32% 1.39% Korea France 1.50% 1.31% 1.31% 1.25% 1.37% Source: Statistics Canada: http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag  Canada and US Trade Relationship Why does it make sense to establish a solid trading relationship with the US? 1. Shipping costs are cheaper (proximity factor) 2. Similar culture and interests so same types of products and services will appeal to citizens 3. Speak the same language, watch same TV programs, movies, sports and similar fashion styles 4. Population of the states is 10x that of Canada’s  International Trade Agreements  Legal contract between or amongst nations who voluntarily agree to conduct business affairs in each other’s country based on the terms set out in the agreement. Common terms outlined in the agreements include:  Reducing tariffs and custom duties on various products to reduce trade barriers;  When and why people will be able to work across international borders;  What qualifications one will need to work in another country;  How business trade secrets will be protected (intellectual property);  Process for resolving trade disputes amongst the participating countries in the agreement.  Advantages of Reducing Trade Barriers Two main advantages: Canadian businesses or other domestic businesses are able to sell their products and services to international markets at lower prices because additional tariffs on exported products are reduced or eliminated. Increased competition motivates companies to improve their quality or reduce their prices in order to compete with imported goods. (Great for the consumer) History of the WTO  WTO developed out of an international trade agreement called the General Agreement on Tariffs and Trade (GATT).  GATT came into effect in 1948  GATT was signed by Canada and 22 other nations who were allies during World War II.  An international organization was set up to help GATT nations negotiate trade deals, resolve problems and collect data about world trade.  In 1995, the WTO replaced the initial GATT organization.  The WTO currently has 139 member countries. World Trade Organization WTO Today Main international organization that deals with the rules of trade between nations. The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all; Contributes to global economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application. The current body of trade agreements comprising the WTO consists of 16 different multilateral agreements (to which all WTO members are parties) and two different plurilateral agreements (to which only some WTO members are parties). Governs approximately 97% of all world trade Source: World Trade Organization http://www.wto.org/english/thewto_e/whatis_e/wto_dg_stat_e.htm International Trade Agreements General Agreement on Trade in Services GATS came into effect in 1995 Sets guidelines for the trade of services such as banking across international borders. International Trade Agreements North American Free Trade Agreement Commonly known as NAFTA Came into effect in 1994 Trade between Canada, US and Mexico is tariff free for all products produced in the free-trade zone except for exemptions mentioned. Each day NAFTA countries conduct $1.7 billion in trilateral trade.  NAFTA Canada US Mexico Economic E.G. is up 30.9% since E.G is up 38% E.G. is up Growth 1994 since 1994 30% (E.G.) Export sales have (1994- increased by 104% 2003) Export sales to US have increased by 250% Concerns Depletion of Canada’s Canada and Wealthier Expressed natural resources as US Mexico are northern and Mexico have to much perceived to be countries access taking away jobs are Canada’s cultural industries from Americans perceived (book, magazine, and TV) as are becoming exploiting Americanized. Mexico for its low wages. Trade agreements give businesses power over elected governments, and in time, these agreements will erode democracy.  Canada and Other Free Trade Agreements Regional Trade Agreements Trade agreements involving groups of countries Bilateral Trade Agreements  Trade agreements involving Canada and one other country or group Trading Bloc Group of countries that share the same trading interests Other Free Trade Agreements Free Trade Area of the Americas Central American Free Trade Agreement (2004) European Free Trade Association (1960) Asia-Pacific Economic Cooperation (1989)  The Future of International Business 1. Reduction of Protectionism 2. European Union 3. NAFTA 4. Impact of Cultural Differences 5. Global Dependency The Future of International Trade Protectionism  a term to describe when countries seek to protect their individual economic interests by imposing tariffs on other countries or restricting external trade.  Economic experts agree that such practices will hurt the global economy as it is all interconnected.  APEC is the fastest growing trading group and largest trading bloc in the world and engages in protectionism practices by imposing tariffs and other trade barriers on countries outside of APEC. European Union (EU) 27 European countries represent a single market in Europe All but the UK and Denmark have adopted a the euro as the single currency to be used in member state EU court rulings over rule individual country court rulings and/or laws. Citizens of member states may travel, move, and work freely in each other’s countries. Population is currently about 370 milion. Impact of Cultural Differences Culture the sum of a country’s way of life, beliefs, customs Influences how things are purchased, sold, Sets boundaries on what can or can not be done Impacts preferences, style, values, and norms May be represented by a specific language Cultural Differences  In order to do business with differing cultures, much market research is needed to help companies understand various similarities and differences even when dealing with everyday cultural norms dealing with people such as: 1. Punctuality 2. Greetings 3. Nonverbal communication signals 4. Good Manners 5. Decision making  Punctuality Punctuality Norms in North America?  People are expected to be on time  Rely on books, calendars and even pay a fee sometimes for missed appointments Punctuality Norms in Other Countries  Time is considered flowing, flexible, beyond’s people control Other Differences North Americans read from right to left. Israel and Egyptians read left to right. This difference may impact the order in which a sequential advertisement is laid out from one country to another.