International transactions ( foreign trade ) involve creating, shipping, and selling foods and services across national boarders. The global economy is the exchange of goods and services among people in different countries throughout the world.
BENEFITS FOR BUSINESS? Access to Markets Examples of standardized, or global product are pencils, soccer balls, and cameras. Packages food items are not generally global products. Cheaper Labour Canadian businesses, in an attempt to lower costs of production, use cheap foreign labour to maximize profits.
BENEFITS FOR BUSINESS? Increased Quality of Goods Products such as luxury cars as parts manufactured in many different countries come together to form the finished product. Increased Quantity Companies may have to increase production to meet demand, this may means increased efficiency, longer hours of operation or the establishment of new facilities. Access to Resources Natural Resources : bamboo from China to make furniture Human Resources : cheap factory labour in India Capital Resources : specialized machinery made in Germany
THE FIVE Ps OF INTERNATIONAL BUSINESS As businesses expand internationally they create jobs at home and overseas. Knowledge that is exchanged, as a result of international business, it results in new approaches to production, marketing, and selling that benefits domestic consumers as well as producers. Political benefits also materialize, dialogue and understanding are improved and communication and respect are enhanced.
THE FIVE Ps OF INTERNATIONAL BUSINESS Product Due to out geographical location and seasonal climate change Canada imports crops (such as citrus all year and strawberries in the winter) from other countries. Canada exports products such as timber and grain that we have an abundance of. Price Lower production costs may mean lower prices for consumers, causing increased units sold, therefore improved profits. Proximity Historically trade between countries was heavily dependant on proximity; the closer a business or individual that you traded with the greater an asset they were to you or your business.
THE FIVE Ps OF INTERNATIONAL BUSINESS Preferences Some foreign products that Canadian consumers purchase due to preference are Belgian chocolate, Swiss watches, Australian wine, German cars, and Cuban cigars. Promotion Before global communication methods (such as satellite broadcasting and the Internet) businesses found it difficult to let others far away know about themselves. According to Interbrand Corp.’s website a business can develop a global brand name in three years by using the Internet. Easy promotion is an incentive for companies to create an international presence.
COSTS OF INTERNATIONAL TRADE Offshore Outsourcing Also, known as contracting out, offshore outsourcing is the practice of subcontracting work to other companies to lower costs or to focus on tasks done better. High-tech jobs and customer support services are commonly outsourced to India, China, and Costa Rica. Cost associated include salaries, benefits, training, and recruiting. Services (bookkeeping and accounting) can also be outsourced. Time differences allow work to be done overnight and submitted in the morning. Transnational ( multinational ) corporations operate in several nations.
COSTS OF INTERNATIONAL TRADE Human Rights Issues and Labour Abuses Sometimes the Canadian company outsourcing is not aware to the abuses. The International Labour Organization (ILO) is the UN specialized agency that seeks the promotion of social justice and internationally recognized human rights. The ILO estimates that there are nearly 700 000 child domestic workers in Indonesia. According to the the ILO girls under 16, doing housework and child care, is the largest category of child labour. Environmental Degradation Sometimes businesses ignore the damage growth causes in the name of business goals. Businesses should be aware of the impact that their procedures and policies have on the environment and invest in solutions.
BARRIERS TO INTERNATIONAL BUSINESS Canada prohibits the entry of goods such as illegal narcotics, certain weapons, and products made from endangered animals; print material that is obscene or that promotes hatred or treason. Goods coming into Canada have to inspected, accompanied by a valid permit, or have special packaging and labeling. The Canadian Food Inspection Agency tests of antibiotics, drugs, and hormones in meat, allergens and pesticides in good, and other threats to food safety. See Table 4.1, “Imported Goods That Require Permits, Inspection, or Special Packaging” on page 124. Tariffs Custom duties (tariffs) are an amount added by a country to the cost of an imported product. The duty is usually a percent of the price of the product, depending on the tariff of the country. Finance Canada monitors Canadian, and international, tariff polices to ensure the development of new polices that will best serve the Canadian economy. Effective January 1, 2005, the government eliminated tariffs on fibre, yarn, and textile inputs used by the apparel industry imports. This change saved the domestic industry more than $90 million.
BARRIERS TO INTERNATIONAL BUSINESS Non-tariff Barriers Standards for safety and environmental controls can limit the competition because of the cost to comply. Another barrier is the requirement of an expensive licence to sell goods in the country’s market. Customs inspections at a country’s border can also impose barriers. Costs of Importing and Exporting Price is based on the cost of manufacturing, plus the costs of storage, marketing, shipping, advertising, overhead, and the profit margins. Some examples of import/export costs include airfreight, translator, interest charges, labeling costs, etc. A foreign purchase is not always a better deal than a domestic purchase.
BARRIERS TO INTERNATIONAL BUSINESS Excise Taxes The Canadian government charges an excise tax of 10 cents per litre on gasoline ($4 billion per year) and provincial governments charge about 14.5 cents per litre. Excise taxes depend on the quantity or mass of an item. Excise taxes are used to raise money, sometimes to discourage purchase as in the case of tobacco (smoking), and to encourage consumers to buy Canadian. Currency Fluctuations Currency exchange rates have a big impact on doing business internationally.
The importation of goods and materials provides, more or less, jobs for Canadians. See Figure 4.2, “Canadian Imports and Exports for 2005”, on page 129. BALANCE OF TRADE Countries usually try to reduce high trade deficits because it means money is flowing out and fewer jobs are being provided. A manufactured good surplus can be good because the domestic production process means more Canadian jobs. In 2005, Canada had a trade surplus of just under $65 billion; as a result of the $85 billion trade surplus with the U.S. that countered the $20 billion trade deficit from all other international trading.
IMPORTS See figure 4.3, “Five Ways to Offset the Risks of Importing”, on page 130. EXPORTS Established companies usually export directly . Businesses that export directly often set up offices and sales staff in foreign countries or send a sales representative to the country. Many new companies use indirect exporting as they do not have the resources to establish abroad. Intermediaries are familiar with regulations, restrictions and culture. Intermediaries handle paperwork, collect money, and can assume risk. Some countries such as the Middle East, Central America, and Asia do not allow direct exporting, probably to create domestic jobs.
EXPORTS Offsetting Risks Sources of information to reduce risk include: Foreign Affairs International Trade Canada Internet Asia Pacific Foundation of Canada Canadian Manufacturers and Exporters Canadian Association of Importers and Exporters Canadian Embassies See questions that embassy staff suggest foreign clients might ask, on page 131. CANADA’S MAJOR TRADING PARTNERS A Canadian product or service sold in both the Canadian and U.S. markets will be far more profitable than a product sold only in Canada. See Table 4.2, “Canada’s Top 10 Export & Import Markets by Country, 2005”, page 133.
Initial trade agreements usually start out dealing with importing and exporting. Agreements usually address tariff elimination or reduction, and processes for resolving disputes. Agreements should also include issues such as when and why people will be permitted to work across international boarders, qualifications needs, standards applied to their work, and how intellectual property will be protected. Intellectual property is a business’s trade secrets or the ideas or talent of its workforce. WORLD TRADE ORGANIZATION (WTO) An international organization was set up to help GATT negotiate trade deals, resolve problems, and collect data. An important WTO agreement is the 1995 General Agreement on Trade in Services (GATS) that sets guidelines for the trade of services (such as banking). The WTO governs about 97% of all world trade.
NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) Canada hoped to gain, with the FTA , stable access to U.S. markets, clarify government assistance to industry, ability of Canadian companies to bid on U.S. government contracts, and allow Canada an equal say in disputes. The U.S. wanted to clarify rules regarding services and intellectual property, reduce restrictions on investment in Canadian industries, and increase exports to Canada with the FTA . See Table 4.3, “Canada-U.S. Free Trade Agreement (FTA) (1989)”, on page 136. NAFTA created a continent-wide free-trade zone. Products made within the free-trade zone could be traded across the boarders without tariffs. Each day, Canada, U.S., and Mexico conduct nearly $1.7 billion in trilateral trade. See Table 4.4, “North American Free Trade Agreement (NAFTA) (1994)”, on page 136. OTHER FREE TRADE AGREEMENTS Canada has bilateral free trade agreements with Chile and Israel. Canada is negotiating agreements with Costa Rica and a trading bloc made up of Guatemala, El Salvador, Honduras, and Nicaragua. See Table 4.5, “Other Free Trade Agreements”, on page 138. THE GROUP OF EIGHT (G8) The G8 (1975) is made up of Britain, France, Germany, Italy, Canada, United States, Japan (original Group of Seven (G7)), and Russia (joined in 1998).
APEC is based on consensus and voluntary participation. EUROPEAN UNION (EU) EU members in 1993 were Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom (UK). In 1993 Austria, Finland, and Sweden joined the EU. A single currency, the euro, is used by member countries except the UK and Denmark. The EU has its own elected government and citizens can move freely from one country to another. The EU members could be 28 countries by 2010. EVOLUTION OF NAFTA A single market would mean American and Mexican workers could vie for Canadian jobs in Canada. A single currency could also evolve.
IMPACT OF CULTUREAL DIFFERENCES Culture influences what can and can not be done, of what is acceptable and unacceptable. Culture can be learned. Operating in different cultures requires research that looks at important social and environmental issues and demographic characteristics that shape the market. Greetings Handshakes are common in most countries, but they are not all done the same way. A single shake in France is acceptable. Eye contact is polite in most cultures, in some however averting your eyes is a sign of respect.
IMPACT OF CULTUREAL DIFFERENCES Nonverbal Communication Signals Asian businesspeople often do not say “no”, they use body language especially to convey a negative response. People in Bulgaria say “yes” with a side-to-side shake of the head, while “no” is a nod up and down. The “okay” sign, is an offensive gesture in Brazil and the symbol for money in Japan. Proximity and touching are also communication signals interpreted differently from country to country. Good Manners Asian and Latin America are countries were the three Fs of business – family, friends, and favours, have a very strong influence on the business decisions people make. Decision Making Latin America uses the typical top-down approach. When many people, from the bottom up, are consulted decisions may take longer to make. GLOBAL DEPENDENCY Global communication (television, movies, satellite communications, and the Internet) aid in global awareness. Global dependency will increase, as communication technology advances.
1Chapter 4: International BusinessWhat Is International Business?A domestic transaction is the selling of items produced in the samecountry.An international transaction is the selling of items produced in othercountries. 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
2Chapter 4: International BusinessWhat Is International Business?Benefits for BusinessAccess to MarketsBy trading abroad, Canadian businesses can gain access to marketsthat 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 tobe successful in other countries.A global product is a standardized item that is offered in the sameformat in all countries.Cheaper LabourLower prices as the result of cheap labour in other countries is thenumber one reason why consumers buy items made in different partsof the world.
3Chapter 4: International BusinessWhat Is International Business?Increased Quality of GoodsInternational business can help producers improve the quality of theproducts they sell.Increased QuantityAs long as a product has international appeal, so does the potentialfor increased sales.Access to ResourcesConnections to international markets provides businesses withincreased access to the three types of economic resources: natural,human, and capital.
4Chapter 4: International BusinessWhat Is International Business?The Five Ps of International BusinessAll countries benefit when businesses producespecialized goods and services that appeal toconsumers.International business provides increased marketsfor businesses and offers them a broader choice ofproducts, services, and prices for its consumers.The Five Ps of International Business1. Product2. Price3. Proximity4. Preference5. Promotion
5Chapter 4: International BusinessWhat Is International Business?ProductA country’s resources determine what goods and services itproduces.PriceThe cost of producing goods and services varies from country tocountry. Sometimes it may be more profitable for Canadianbusinesses to produce products overseas and then ship them here tosell to consumers. Lower foreign wages, taxes, and material costsmake it cheaper to produce products abroad rather than domestically.ProximityIt may be more advantageous and profitable for some businesses tosell products and services to consumers near a neighbouringcountry’s border rather than to its domestic customers. For example,80 percent of the Canadian population lives within 170 km of theAmerican border. Therefore, many Canadian businesses tradeextensively with Americans. The reverse is also true: Americansmarket many of their goods and services to Canada.
6Chapter 4: International BusinessWhat Is International Business?PreferenceConsumers often purchase foreign goods andservices based on their reputation andspecialization, even though similar products areproduced domestically. Two examples are Swisswatches and Belgium chocolates.PromotionTechnology, especially the Internet, makes it easyfor businesses to promote their products andservices internationally.
7Chapter 4: International BusinessWhat Is International Business?Costs of International TradeThe hidden or social costs often associated with international tradeinclude offshore outsourcing, human rights or labour abuses, andenvironmental degradation.Offshore OutsourcingOffshore outsourcing occurs when businesses decide to produceall or part of their goods in countries where labour costs are lower.Some advantages include proximity to natural resources, moreefficient technology, indigenous innovation, and favorable taxstructures.However, offshore outsourcing faces potential changes in the futureas companies may turn to transnational corporations that operatein several countries to produce their goods and services.
8Chapter 4: International BusinessWhat Is International Business?Human Rights Issues and Labour AbusesSome workers in poor countries face labour exploitation, such asphysical and sexual abuses, forced confinement, non-payment ofwages, denial of food and health care, and excessive working hours.Child labour—the regular employment of boys and girls under the ageof 16—is commonly practiced in poor countries where the workforce isoften exploited.Environmental DegradationSustainable development is the process of developing land, cities,businesses, and communities that meet the needs of the presentgeneration 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 canreplenish them.
9Chapter 4: International BusinessWhat Is International Business?Barriers to International BusinessThe Canadian government uses barriers, often referred to a roadblocks,to help protect domestic businesses and consumers.TariffsTariffs, also called customs duties, are a form of tax on certain typesof imports. Finished imported goods include tariffs, which increase theirprices. Canadian products do not carry such tariffs, and, therefore, maybe sold at lower prices. In an effort to protect their domestic industries,countries put up tariff barriers by increasing the cost of importedgoods.
10Chapter 4: International BusinessWhat Is International Business?Non-tariff BarriersNon-tariff barriers are controls or standards for the quality ofimported goods set so high that foreign competitors cannot enterthe market.Costs of Importing and ExportingThe price of a product or service must take the landed cost intoconsideration. The landed cost is the actual cost of an importedpurchased item, composed of the vendor cost, transportationcharges, duties, taxes, broker fees, and any other charges.
11Chapter 4: International BusinessWhat Is International Business?Excise TaxesAn excise tax is a tax on the manufacture, sale, orconsumption of a particular product within a country.Currency FluctuationsSince currency rates fluctuate on a daily basis, aninternational purchase made on one day may cost less ormore than another purchase on the following day. Shiftingcurrency exchange rates vary as the economic strength ofthe two countries change on a daily or weekly basis.
12Chapter 4: International BusinessFlow of Goods and ServicesImports, such as raw materials, processed material, semi-finishedgoods, and manufactured products, flow into Canada. Goods andmaterials also leave Canada as exports.Balance of TradeTo maintain a healthy balance of trade, countries try to import thesame total value of products that they export. An imbalance of the tworesults in the following:• a trade deficit in which a country pays more for imports than itearns from exports• a trade surplus in which a country earns more from exportsthan it pays for imports
13Chapter 4: International BusinessFlow of Goods and ServicesImportsFive Ways to Offset the Risk of Importing1. Measure consumer interest.2. Use care when selecting foreign suppliers.3. Learn about a foreign partner’s culture.4. Carefully scrutinize the purchase agreement and then sign it.5. Check goods for quantity and quality upon arrival.ExportsDirect exporting is exporting a product directly to an importer withoutusing an intermediary. Indirect exporting is exporting a product to anintermediary who then conveys the product to the importer. Largerestablished companies usually use direct exporting while newer onesutilize indirect exporting.
14Chapter 4: International BusinessFlow of Goods and ServicesOffsetting RisksExporters reduce risks by planning carefully. As part of their plan,they conduct market research to ensure that there are consumers fortheir goods and services.Canada’s Major Trading PartnersCanada’s number one trade partner is the United States.Three major reasons for trading with the United States include1. low cost shipping due to proximity2. similar cultures (language, interests, product interest, and so on3. a market that is 10 timers larger than the domestic one
15Chapter 4: International BusinessCanada and International TradeAgreementsTwo Main Advantages to Reducing Trade Barriers1. Domestic business can sell their products abroad at lower pricessince duties are not added.2. Consumers have access to new foreign products that may resultin lower costs and quality improvement of domestic products.Trade agreements between countries allow goods and service to flowmore freely across boarders.World Trade Organization (WTO)In 1947, the General Agreement on Tariffs and Trade (GATT) wassigned by 23 nations who were allies in World War II. The tradeagreement came into effective in 1948. Eventually, GATT grew to 115member states before it was replaced by the World Trade Organization(WTO) in 1995. Today the WTO is the principal international organizationthat deals with rules of trade between nations.
16Chapter 4: International BusinessCanada and International TradeAgreementsNorth American Free Trade Agreement (NAFTA)Canada-U.S. Free Trade Agreement (FTA) came into effect in January1989. In 1994, Mexico, the United States, and Canada formed theNorth American Free Trade Agreement (NAFTA).Other Free Trade AgreementsBilateral 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 powerfulindustrialized democracies. Meeting annually, the G8 deals with economicand political issues facing their own countries and those of the largerinternational community. Topics discussed include energy, employment,the environment, human rights, and arms control.
17Chapter 4: International BusinessThe Future of International TradeThe Asia-Pacific Economic Corporation (APEC) is an economicdevelopment organization formed in 1889. The Asia-Pacificmarket is the fastest growing trade group.European Union (EU)In 1993, the European Union (EU) united 12 member states intoa true single market. Today the EU has 15 members and apopulation of more that 370 million people.Evolution of NAFTAIf NAFTA becomes a single market, it could result in workers fromthe US, Canada, and Mexico moving freely between countries.
18Chapter 4: International BusinessThe Future of International TradeImpact of Cultural DifferencesInternational trade depends on our response to and acceptance ofcultural differences. Culture is the sum of a country’s way of life,beliefs, and customs.Dealing with PeopleConducting successful business in foreign countries involves learningwhat is important to their populations as well as its cultural nuances.PunctualityThe value of punctuality depends on the cultures: some cultures valuetimeliness, some do not. It is important to understand this before visitingforeign countries. Other characteristics to recognize are working at anacceptable pace, having good manners, and learning to avoid waits anddisappointments.GreetingsGreeting someone can leave an important first impression.
19Chapter 4: International BusinessThe Future of International TradeNonverbal Communication SignalsNonverbal signals can convey more than words do.Good MannersIn Canada, the United States, and some Europeancountries, business is completed at a quick and efficientpace. Most other countries prefer to get to know peoplebefore any business is done.Decision MakingIn North America, decision making is typically top-down. Inother cultures, decisions are made from the bottom up.Global DependencyGlobal dependency exists when customers in one countrydemand items that are created in another.