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CHAPTER 5
Understanding
International Business
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-2
Learning Objectives
Describe the rise of international business and
identify the major world marketplaces
Explain how different forms of competitive
advantage, import-export balances, exchange
rates, and foreign competition determine the
ways in which countries and businesses respond
to the international environment
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-3
More Learning Objectives
Discuss the factors involved in deciding to do
business internationally and in selecting the
appropriate levels of international involvement and
international organizational structure
Describe some of the ways in which social, cultural,
economic, legal, and political differences act as
barriers to international trade
Explain how free trade agreements assist world trade
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-4
The Rise of International Business
Total volume of world trade  $8 trillion /yr
Globalization
The integration of markets globally
The world is becoming a
single interdependent system
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-5
Imports and Exports
Imports
Products purchased in Canada which are
manufactured and shipped in from other
countries
Exports
Products made in Canada which are
purchased by consumers in other countries
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-6
Major World Marketplaces
North America
US largest and most stable market
Our largest trading partner is US
Mexico exports increasing (esp. autos)
Europe
Western and Eastern
Asia-Pacific
esp. Japan and China
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-7
Competitive Advantage
Absolute advantage
 a country can produce something more cheaply or
better than any other country
Comparative advantage
 a country can produce certain items more cheaply than
it can other items
International competitiveness
 ability of a country to generate more wealth than others
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-8
Balance of Trade
Imports < Exports
= Trade Surplus
(Favourable)
Imports > Exports
= Trade Deficit
(Unfavourable)
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-9
Balance of Payments
Difference between
cash flowing into the country and out of the country
Cash flow in
Cash flow out
 exports
 imports
 foreign tourist
spending in Canada
 Canadian tourist spending
outside of Canada
 foreign investments in
Canada
 earnings from
Canadian investments
outside
of Canada
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
 Canadian investments
outside of Canada
 earnings of foreign
investments in Canada
 foreign aid, military
expenditure outside of
Canada
Copyright © 2008 Pearson Education Canada
5-10
Foreign Exchange Rate
Ratio of one currency to another
“strong” Cdn $ when high demand for
Canadian dollars and products
When the value of the Cdn $ depreciates
exports increase and imports cost more
When the value of the Cdn $ appreciates
exports decrease and imports cost less
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-11
Levels of Involvement in
International Business
Multinational Firm
(assets and facilities in 2 or
more foreign countries)
International Firm
Exporter
(significant portion of
business abroad and
overseas facilities)
(make in one country and
sell to others)
Importer
(buy products in foreign
markets for resale at home)
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-12
Multinational Firms
Control assets, factories, mines,
sales offices, and affiliates in
two or more foreign countries
 worldwide presence
 favourable exchange rates, technology and expertise
 provide needed jobs, prosperity, technology, and growth
to developing nations
 often criticized for taking resources out of the country,
and not doing enough to develop local labour markets
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-13
International Organizational Strategies
Importing or
Exporting via
Independent Agent
Licensing
Arrangement
Establishing a
Branch Office
Choosing a
Strategic Alliance
Foreign
Direct Investment
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-14
Why Have a Branch Office?
Established in foreign country
Increased sales due to local presence
More direct control
May be a foreign legal requirement
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-15
Strategic Alliances
Strategic alliance
“joint venture” or “partnership” between two
independently owned firms
May be mandated in some nations
Get knowledge and expertise
of the foreign partner
Greater control
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-16
Top Ten Foreign Controlled Companies
in Canada
Company
General Motors of Canada Ltd.
Imperial Oil Ltd.
Daimler/Chrysler Canada Inc.
Shell Canada Ltd
Ford Motor Co. of Canada Ltd.
Wal-Mart Canada Corp.
Honda Canada Inc.
Ultramar Ltd.
Costco Wholesale Canada
McKesson Canada Corp.
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Revenue (Billions)
$34.9
27.7
20.8
14.1
13.8
13.5
13.0
9.5
8.1
7.1
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5-17
Barriers to Trade
Social and Cultural Differences
Economic Differences
Legal and Political Differences
Quotas/Tariffs/Subsidies
Local Content Laws
Business Practice Laws
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-18
Social & Cultural Differences
Language
Population demographics
Shopping habits
Religious differences
Social beliefs
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-19
Economic Differences
The role of government in the economy
Planned vs. Market economies
capitalist
socialist
communist
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-20
Quotas, Tariffs, & Subsidies
Quota
 limitations on importation of a product class
Embargo
 forbidding export/import from a nation (US vs. Cuba)
Tariff: a tax on imported goods
 Protectionist measure to protect domestic producers
 Raises government revenues as well
Subsidy
 government financial assistance for domestic firms
Protectionism
 Protecting domestic business at expense of free market
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-21
Local Content Laws
Requires that at least part of the product be made
in the export (foreign) country
 may result in joint venture
Canadian provinces may buy
from their own companies
before going to other provinces
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-22
Business Practices
Bribes
 seen as “gratuities” to government officials in some
nations
Dumping
 the practice of selling goods abroad for less than a firm
charges in its home market, is illegal in most nations
Cartels
 associations of producers created to control supply and
demand (OPEC)
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-23
Overcoming Barriers to Trade
General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
European Union (EU)
The North American Free Trade Agreement (NAFTA)
Other
 South American Free Trade Area (SAFTA)
 Americas Free Trade Area (AFTA)
 ASEAN Free Trade Agreement
 Asia-Pacific Economic Cooperation
 Economic Community of Central African States
 Gulf Cooperation Council
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-24
European Union (EU)
Largest free marketplace in the world
25 countries, plus
Eliminated quotas and
set uniform tariffs
within the union
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-25
World Trade Organization (WTO)
Member nations negotiate trade
agreements and resolve trade disputes
successor of GATT, but more power
140 countries, plus
Agricultural subsidies controversial
Some protest against trade liberalization
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-26
North American Free Trade
Agreement
Came into effect
in 1994
Goal to remove
tariffs and other
trade barriers
among Canada,
the United States
and Mexico
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-27
Consumers’ Fears of Free Trade
Job losses
Market flooded with goods produced in low-wage
countries like Mexico
Loss of control over environmental standards
US takeover of Canada’s natural resources
Loss of Canadian cultural sovereignty
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
5-28
Consumer Support for
Free Trade
Access to lucrative US markets for Canadian
exporters
Increased jobs due to increased exports
Environment is not covered or threatened by free
trade agreements
Nothing threatening natural resources
About trade, not cultural sovereignty
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada