BUS701A – The World of Business

1. BUS701A – The World of Business Chapter 4 – International Business

2. Chapter 4: International BusinessWhat 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

3. Chapter 4: International BusinessWhat Is International Business? Benefits for Business Access to Markets By 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. Cheaper Labour Lower 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.

4. Chapter 4: International BusinessWhat Is International Business? Increased Quality of Goods International business can help producers improve the quality of the products they sell. Increased Quantity As long as a product has international appeal, so does the potential for increased sales. Access to Resources Connections to international markets provides businesses with increased access to the three types of economic resources: natural, human, and capital.

5. Chapter 4: International BusinessWhat Is International Business? 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 Business • Product • Price • Proximity • Preference • Promotion

6. Chapter 4: International BusinessWhat Is International Business? Product A country’s resources determine what goods and services it produces. Price The 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. Proximity It 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.

7. Chapter 4: International BusinessWhat Is International Business? Preference Consumers 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. Promotion Technology, especially the Internet, makes it easy for businesses to promote their products and services internationally.

8. Chapter 4: International BusinessWhat Is International Business? 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. Offshore Outsourcing Offshore 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 transnationalcorporations that operate in several countries to produce their goods and services.

9. Chapter 4: International BusinessWhat Is International Business? Human Rights Issues and Labour Abuses Some 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. Environmental Degradation Sustainable 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.

10. Chapter 4: International BusinessWhat Is International Business? Barriers to International Business The Canadian government uses barriers, often referred to a roadblocks, to help protect domestic businesses and consumers. Tariffs Tariffs, 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.

11. Chapter 4: International BusinessWhat Is International Business? Non-tariff Barriers Non-tariff barriers are controls or standards for the quality of imported goods set so high that foreign competitors cannot enter the market. Costs of Importing and Exporting The 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.

12. Chapter 4: International BusinessWhat Is International Business? Excise Taxes An 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.

13. Chapter 4: International BusinessFlow 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

14. Chapter 4: International BusinessFlow of Goods and Services Imports Five Ways to Offset the Risk of Importing • Measure consumer interest. • Use care when selecting foreign suppliers. • Learn about a foreign partner’s culture. • Carefully scrutinize the purchase agreement and then sign it. • Check goods for quantity and quality upon arrival. Exports Direct 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.

15. Chapter 4: International BusinessFlow of Goods and Services Offsetting Risks Exporters 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 Partners Canada’s number one trade partner is the United States. Three major reasons for trading with the United States include • low cost shipping due to proximity • similar cultures (language, interests, product interest, and so on • a market that is 10 timers larger than the domestic one

16. Chapter 4: International BusinessCanada and International Trade Agreements Two Main Advantages to Reducing Trade Barriers • Domestic business can sell their products abroad at lower prices since duties are not added. • 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.

17. 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 January 1989. In 1994, Mexico, the United States, and Canada formed the NorthAmerican Free Trade Agreement (NAFTA). Other Free Trade Agreements Bilateral 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 powerful industrialized democracies. Meeting annually, the G8 deals with economic and political issues facing their own countries and those of the larger international community. Topics discussed include energy, employment, the environment, human rights, and arms control.

18. Chapter 4: International BusinessThe Future of International Trade The Asia-Pacific Economic Corporation (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 NAFTA If NAFTA becomes a single market, it could result in workers from the US, Canada, and Mexico moving freely between countries.

19. Chapter 4: International BusinessThe Future of International Trade Impact of Cultural Differences International 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 People Conducting successful business in foreign countries involves learning what is important to their populations as well as its cultural nuances. Punctuality The 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.

20. Chapter 4: International BusinessThe Future of International Trade Nonverbal Communication Signals Nonverbal signals can convey more than words do. Good Manners In 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 Making In North America, decision making is typically top-down. In other cultures, decisions are made from the bottom up. Global Dependency Global dependency exists when customers in one country demand items that are created in another.

21. References • Wilson, J., Notman, D., Guest, L., & Murphy, T. G. (2007). The World of Business (5th ed.). Scarborough, ON: Nelson Thompson Learning.