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International Business Notes A.

Terminology 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 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 Ottawas economy Provincial Ontarios economy National Canadas 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 data, trade deficits vs. surplus (Next Chapter)

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? B. Benefits For 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 Canadas Population: Roughly 33,600,000 33 million six hundred thousand World Population: Roughly 6, 500,000,000 6 billion 500 million Conclusion: The Global market can reach roughly 200 times more consumers than simply just Canadian consumers. 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. Discuss the ethical considerations of cheap labour?

3. 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 fromanother 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. C. The Impact of Culture, Customs and Beliefs on International Trade Culture the sum of a countrys 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 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. 2. 3. 4. 5. Punctuality Greetings Nonverbal communication signals Good Manners Decision making

1. 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 2. Punctuality Norms in Other Countries Time is considered flowing, flexible, beyonds people control Greetings Shaking hands differs from one country to the next Eye contact made in some countries, not in others Bowing before an elder acquaintance versus not bowing at all

3. Nonverbal Communications Signals Considered rude in Asian cultures to refuse someones request, so an Asian business person may not give a direct no answer to a sales request A nod means yes to North Americans but no to a Bulgarian. Shaking the head side to side means no to North Americans but yes to Bulgarians. The sign okay with ones hand is a symbol for money in Japan and is an offensive gesture in Brazil. Personal space interpretations also differs from place to place. 4. Good Manners In North America, getting down to business is the norm when to business people meet. In other Asian and Latin American countries it would be considered rude not to discuss family, friends, and favours first to establish a personal relationship before business. 5. Decision Making In some cultures, decisions are made from the top down approach, in others, from the bottom up approach. 6. Other Differences North Americans read from left to right. Israel and Egyptians read right to left. This difference may impact the order in which a sequential advertisement is laid out from one country to another. Benefits and Costs of International Business 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. Advantages of Outsourcing 1. Lower costs to company which can focus on tasks it does better 2. Be closer to natural resources needed 3. Proximity to more efficient technologies 4. Increase profits from lower labour costs, another countrys innovations, anddifferent tax structure Human Rights Issues and Labour Abuses Typical abuses in poor countries include: 1. 2. 3. 4. 5. 6. 7. Physical abuse Sexual abuse Forced confinement Non-payment of wages Denial of food and health care Excessive working hours with no rest Child labour

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. Other? Environmental Degradation Occurs when natures 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 Trade 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 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 custom duties One of the most important tools for any government in managing trade with other countries. 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.

Whose job is it to: 1. monitor Canadian tariff policies? 2. monitor tariff policies of other countries? 3. change Canadian tariff policies to best serve the Canadian economy? Answer: Finance Canada 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) Question If you owned Canadian Tire and had to choose between selling a tool from a Canadian manufacturer or a foreign manufacturer, which one would you select if the quality of both products was equal? a. the foreign tool whose landed cost was greater than the domestic purchase cost or; b. the domestic tool whose cost was cheaper than the landed cost. 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 Taxes 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/ Exchange Rates 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 The financial health of Canadas economy versus the US economy 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 Canadas 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 importsZ 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.

International Trade Agreements International Trade Agreement Legal contract between or amongst nations who voluntarily agree to conduct business affairs in each others 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 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) A. 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. 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 B. International Trade Agreements 1. 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.

2. The Canada-US Free Trade Agreement Commonly known as FTA came into effect in January 1989. Intended to gradually phase out (get rid of) a number of tariff barriers between the two countries Issues dealt with under the agreement Canadas wishes: wanted stable access to U.S. Markets Wanted to bid on US government contracts wanted to create a dispute settlement tribunal To increase exports to the US Exemptions included dairy and poultry US Wishes: 3. Wanted to increase their exports to Canada Wanted clarification regarding rules of intellectual property To reduce restrictions on US investment in Canadian industries Exemptions: sugar, diary, peanuts, and cotton

All products other than exemptions are duty-free if produced within the free-trade zone. 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.

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 International Organizations C. Other International Organizations 1. Group of Eight (G8) Eight of the worlds largest and most powerful industrialized democracies meet annually and work together to deal with major economic and political issues facing their individual and collective countries. Topics dealt with at major G8 summits include: Energy Employment Environment Human rights Arms Control Seek to provide guidance and support to established international organizations Countries include Britain, France, Germany, Italy, Canada, US, Japan, and Russia

2. What is the G-20? Established in 1999 The Group of Twenty (G-20) Finance Ministers and Central Bank Governors of important industrialized and developing economies to discuss key issues in the global economy. G-20 Mandate The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. To help support growth and development across the globe by contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions D. 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) Sources: About G20. [Online] Available: http://www.g20.org/about_what_is_g20.aspx Wilson Jack et al. The World of Business, 5th Ed. Nelson Education Ltd., Canada, 2007 World Trade Organization [Online] Available: http://www.wto.org/english/thewto_e/whatis_e/wto_dg_stat_e.htm