CHAPTER 3

Competing in
Global Markets

Prepared by Michael Wade, Seneca College

© 2019 McGraw-Hill Education Limited

 Learning Objectives
1. Describe the importance of the global market and the roles of
comparative advantage and absolute advantage in global trade.
2. Explain the importance of importing and exporting and define key
terms used in global business.
3. Illustrate the strategies used in reaching global markets and explain
the role of multinational corporations in global markets.
4. Evaluate the forces that affect trading in global markets.
5. Debate the advantages and disadvantages of trade protectionism,
define tariff and non-tariff barriers, and give examples of common
markets.
6. Discuss the changing landscape of the global market.

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 The Dynamic Global Market
• Globalization: companies manufacture, finance, and market worldwide
• Canada represents a potential market of only 37 million customers
• There are over 7 billion potential customers globally in 194 countries.

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 Why Trade with Other Nations
• No country, not even a technologically advanced one, can
produce all of the products that its people want and need.
• We trade to get goods that are not available locally.
– In Canada, we do not produce citrus fruit, so we trade for
it.
• We produce other goods, like lumber, beyond our ability to
consume, so we export these goods.

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 Canada and the Global Market
• Because the global market is so large, it is important to
understand the language of international trade. Canada is a
large exporting nation.
• Exporting is selling products (i.e., goods and services) to
another country.
• Importing is buying products from another country.
• Competition in exporting is very intense and Canadian
companies face aggressive competition from exporters
around the world.

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 The Pros and Cons of Free Trade
Pros
• The global market contains more than 7 billion
potential customers for goods and services.
• Productivity improves when countries produce
goods and services in which they have a
comparative advantage.
• Global competition and less-costly imports
keep prices down, so inflation does not curtail
economic growth.
• Free trade inspires innovation for new
products and keeps firms competitively
challenged.
• The uninterrupted flow of capital gives
countries access to foreign investments, which
helps keep interest rates low.
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Cons
• Domestic workers (particularly in
manufacturing-based jobs) can lose their jobs
due to increased imports or production shifts
to low-wage global markets.
• Workers may be forced to accept pay cuts from
employers who can threaten to move their
jobs to lower-cost global markets.
• Moving operations overseas because of
intense competitive pressure often means the
loss of service jobs and white-collar jobs.
• Domestic companies can lose their
comparative advantage when competitors
build advanced production operations in low-
wage countries.
6
 The Theory of Comparative
Advantage
• Countries export those goods and services that they produce
most effectively and efficiently .
• Countries import those goods and services where they do not
have this comparative advantage.
• In practice, many countries ignore this economic principle.
– They inhibit the free flow of goods using duties and tariffs.
– They attempt to give their producers a competitive
advantage.

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Comparing Canada and Japan
Comparative
Canada Advantage Japan

Canada
Japan Output per
Unit of Input

Forestry Cars.
products electronics

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Theory of Absolute Advantage
Absolute = Virtual Monopoly

South Africa

Output per
Unit of Input The Rest of the
World

Diamond Production

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 International Trade
• Large multinational firms, like Intel and Coca-Cola, do
large amounts of international trade.
• Recent years have seen the small-business sector
become more involved in international trade.
– In Canada, small businesses account for about half
of the total private labour force and the majority
of the exports.
• Foreign travel and immigration often reveal
opportunities for trade.

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 Canadian International Trade
• While Canada has a small population, it produces
vast quantities of products, ranking high in terms of
nations that export.
• Exports alone account for one in five Canadian jobs
and generate 30 cents out of every dollar earned.

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 International Trade: Terminology
• Balance of Trade: the relationship between exports
and imports.
• Balance of Payments: the difference between money
coming into a country (from exports) and money
leaving the country (for imports).
• Current account: the difference between money
coming in and going out of the country from all
sources.

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 International Trade: Terminology
• Dumping: selling cheaper in foreign markets than at
home.
• Protectionism: using government regulations to keep
foreign goods out.
• MNC: Multinational corporation.

13
 Trading in Global Markets:
the Canadian Experience
• As a country, we rank eleventh in the world as both
exporter and importer in world merchandise trade.
• Over 75 percent of our exports and 65 percent of our
imports are with the United States.
• No other modern industrialized country is so
dependent on one country for trade and
investments.

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Trading in Global Markets: the Canadian Experience
Canada’s Goods and Services Trade by Region, 2016
Services Goods
Exports % Imports % Exports % Imports %

United States 55.1 54.4 75.3 65.8

European Union 16.8 16.8 8 9.5

China --* -- 4.3 6.9
Japan 1.6 1.6 2.1 2.1
Mexico -- -- 1.7 3.5
India -- -- 0.8 0.5
South Korea -- -- 0.9 1.6
Rest of World 26.5 26.5 6.9 10.1
* indicates no services export or import values for the region were provided in the federal government report.

Source: “Canada’s State of Trade: Trade and Investment Update—2017,” Table 4.2-"Goods Exports 2016", Table 4.3-"Goods Imports 2016", and Table
4.6-"Services Exports and Imports by Region 2016", Global Affairs Canada, accessed May 20, 2018, http://www.international.gc.ca/economist-
economiste/performance/state-point/state_2017_point/index.aspx?lang=eng#1_0.

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Strategies for Global Markets

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 Strategies for Reaching Global
Markets
Exporting
• The simplest way of going international is to
export your goods and services.
• Success in exporting often leads to licensing
with a foreign company to produce the
product locally to better serve the local
market.

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 Strategies for Reaching Global
Markets
Licensing
• A firm (the licensor) may decide to compete in a
global market by licensing the right to manufacture
its product or use its trademark to a foreign company
(the licensee) for a fee (a royalty).

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 Strategies for Reaching Global
Markets
Franchising
• Franchising is an arrangement whereby someone
with a good idea for a business sells the rights to use
the business name and sell a product or service to
others in a given territory.
• Franchisors; however, have to be careful to adapt
their good or service in the countries they serve.

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 Strategies for Reaching Global
Markets
Contract Manufacturing
• Involves a foreign company’s production of private-
label goods to which a domestic company then
attaches its own brand name or trademark.
• The practice falls under the broad category of
outsourcing.
• Contract manufacturing enables a company to
experiment in a new market without incurring heavy
start-up costs such as a manufacturing plant.

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 Strategies for Reaching Global
Markets
Joint Venture
• Basically a partnership in which two or more
companies (often from different countries) join to
undertake a major project or to form a new
company.

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 Strategies for Reaching Global
Markets
Strategic Alliance
• a long-term partnership between two or more
companies established to help each company build
competitive market advantages.
• Unlike joint ventures, however, they do not typically
involve sharing costs, risks, management, or even
profits.

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 Strategies for Reaching Global Markets:
FDI Foreign Direct Investment
• Buying permanent property and businesses in foreign nations.
• FDI provides benefits to Canadian firms through the transfer
of knowledge, technology and skills, and increased trade
related to investment,
all of which contribute to
productivity growth and
competitiveness.

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 Forces (Environments) Affecting
Trading in Global Markets
Social-Cultural Differences:
• We tend to call each other by our first names and try to
get friendly even on the first encounter. In Japan, China,
and other countries these actions would be considered
surprising and even rude.
• Canadian negotiators will say no if they mean no, but
Japanese negotiators usually say maybe when they mean
no.

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 Forces Affecting Trading in Global
Markets
Economic and Financial Forces:
• Global financial markets unfortunately do not have a
worldwide currency.
• Changes in a nation’s exchange rates can have
important implications in global markets.
• Global financial markets operate under a system
called floating exchange rates.

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 Forces Affecting Trading in Global
Markets
Technological Forces:
• Technological constraints in some countries may
make it difficult to use the same devices and same
machinery everywhere
• Computer and Internet usage in many developing
countries is not the same as in North America and
Europe.

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 Forces Affecting Trade in Global
Markets
Political – Legal and Regulatory Forces:
• In Canada, federal and provincial laws and
regulations heavily affect business practices.
• Canadian businesses must follow Canadian laws and
regulations in conducting business globally.
– For example, bribery is not considered legal in
Canada.

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 Trade Protectionism
• The use of government regulations to limit the
import of goods and services.
• Mercantilism: (17th and 18th centuries): idea was for
a nation to sell more goods to other nations than it
bought from them; have a favourable balance of
trade.

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 Protectionism Practices
• Tariffs and quotas to limit imports.
• Tariffs are a tax imposed on imports, 2 kinds of tariffs
• Revenue tariffs to generate funds for the
government.
• Protective tariffs meant to save jobs for domestic
workers and to keep industries from closing —
especially infant industries that have companies in
the early stages of growth.

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 Protectionism Practices
In the past, the United States imposed duties of 27 percent
on Canadian softwood lumber, arguing that Canada
unfairly subsidized producers of spruce, pine, and fir lumber.
Canada’s long dispute with the United States over softwood
lumber cost the economy billions of dollars and thousands
of jobs.

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 Protectionism Practices
• Non-tariff barriers are not as specific or formal as
tariffs, import quotas, or embargoes but can be as
detrimental.
• Non-tariff barriers include restrictive standards or
paperwork that detail exactly how a product must be
sold in a country.
• It’s common for nations to set restrictive standards
that detail exactly how a product must be sold in a
country.

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 Protectionism Practices
• Dumping is selling products in a foreign country at
lower prices than those charged in the producing
country.

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 International Trade Organizations
• The World Trade Organization (www.wto.org) has
over 100 members.
• The WTO is essentially a world trade referee for
countries wanting to grieve that parties to trade
agreements have broken the agreements.

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 International Trade Organizations
• The IMF (www.imf.org)and the World Bank lend
money to less-developed nations.
• "The IMF negotiates with a country to provide
financial assistance if the country will agree to adopt
certain policies to stabilize its economy"

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 International Trade Organizations
• The World Bank www.worldbank.org is not one
single entity but rather a group of five institutions
• The activities of the World Bank, particularly the
International Bank for Reconstruction and
Development, are important to international
businesses because the projects, paid for by the
bank, are projects that many companies can be
involved in.

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 Trade Agreements/Unions: NAFTA
• A free-trade area among Canada, the United States, and
Mexico.
• The objectives of NAFTA were to:
1. eliminate trade barriers and facilitate cross-border movement
of goods and services among the three countries.
2. promote conditions of fair competition in this free-trade area.
3. increase investment opportunities in the territories of the
three nations.
4. provide effective protection and enforcement of intellectual
property rights (patents, copyrights, etc.) in each nation’s
territory.
5. establish a framework for further regional trade cooperation.
6. improve working conditions in North America.
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 Globalization And Your Future
• Global trade opportunities grow more interesting,
yet challenging, each day.
• BRIC(Brazil, Russia, India and China) have large
populations and growing economies, lots of
opportunities.
• To remain competitive, Canada must stay aware of
the global challenge and focus on innovation and
entrepreneurship.

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 Chapter Summary
1. Globalization:
– Nations should trade globally because:
– no country is self-sufficient,
– other countries need products that prosperous countries
produce, and
– natural resources and technological skills are not
distributed evenly around the world.
2. Exporting/importing:
– Just about any kind of product can be imported and
exported.
3. Strategies for reaching markets:
– Joint ventures, strategic alliances

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 Chapter Summary, cont.
4. Forces that affect global trading:
– Cultural differences
– Economic forces
– Technological forces
5. The advantages and disadvantages of trade protectionism.
6. Tariff and non-tariff barriers.

© 2019 McGraw-Hill Education Limited 39