BBB4M – Grade 12 International Business – Chapter 1 and 2 Test

Chapter 1 Notes

 

Domestic vs International Business

  • Business: is the manufacturing of goods or services in order to make a profit
    • Term “trade” is used interchangeably with business
  • Transactions: exchange of things of value

 

  • Domestic Business: business that transacts mainly in the country it was base din
    • ie owned by Canadians, in Canada, selling to Canadians (Rare)
  • International Business: economic system of transactions conducted between businesses in different countries

 

  • Domestic Transaction: between 2 Canadian companies
  • International Transaction: between Canadian + non Canadian company

 

  • Domestic Market: the customers of a business who are in the same country as the business
  • Foreign Market: the customers of a business who are in a different country as the business

 

  • 5 Ways for businesses to must be international
    • MUST own retailers or distributors in another country
    • MUST own manufacturing plant in another country
    • MUST export to other countries
    • MUST import from others
    • MUST invest in other country businesses

 

  • Trading Partner: Canada businesses make relationship with businesses in another country, so they would be Canada’s trading partner.

 

History of Canadian Trade

  • European Trade
    • 1700s – trades grew fast after permanent Canadian settlement
    • Demand for raw materials (beaver pelts, fish, lumber)
      • Europe manufactured Canada’s raw materials
    • After 7 years war, England and Canada made trade agreements (help war torn France)
      • near-port cities used to facilitate trade import/exports

 

  • US trade
    • Late 1700s, US independence and self reliant
    • Steam engine 1775 James Watt: revolutionized manufacturing and transporting
    • Cotton Gin by Eli Whitney: made cotton fibers, traded cotton with Canada
    • USA did most of Canada’s raw material manufacturing
    • To this day, US remains as Canada’s biggest trading partner
    • Mexico
      • NA Free Trade Agreement (NAFTA) made duty free trade in North America

 

  • Asian Trade
    • 1940s – Traded with Japan for electronics and cars
    • China manufacturing (Wal-Mart $15B to China)

 

  • Trade with Middle East
    • Oil
    • Politics, lack of industrialization, and technology limited trade
    • Dubai, Egypt, Israel have trades asides from oil

 

  • Indian Trade
    • High, educated population
    • Outsourcing and manufacturing
    • Although open government, lack of infrastructure and issues troubled trades
    • India aggressively expanded internationally
      • Imports: Linen, Rice, diamonds, clothes
      • Exports: fertilizers, vegetables, newspaper, copper

 

  • African Trade
    • Very low exchange with Canada (1% import, 3% export)
    • Corrupt government, infrastructure problems loom
    • Lots of primary resource potential
    • South Africa (no-oil) and Morocco (oil/fruits) trading partners:

 

Globalization and Interdependence

  • Globalization: where economies and cultures have become integrated through new global communication, investments, trade, and transport
    • easy to globalize nowadays
    • global sales, finance, marketing, manufacturing, transportation = globalization
    • international business IS NOT globalization
      • businesses can operate internationally but not globally
    • global businesses can be affected by global events
      • 2008 recession
        • Banks lent at low rates
        • not getting returned, lost money
        • closure of operations forced
  • History: Globalization began after WW2
    • United Nation first sign of globalization
      • Helps negotiate treaties and tariffs

 

  • Technology: Internet/cellular made trades nearly instant, quick, even at remote places
  • Social Issues
    • China – India building big economies
    • Large companies want to expand in China/India
      • Workers, moneyflow from huge population
    • Blur of political boundaries
      • EU collaborated all Europe nations
      • Agreements merge borders
  • Interdependence: reliance between 2 or more nations for each other’s products and services
    • eg US relying on China to make goods

 

  • Primary Industries: Mainly Raw materials
    • Agriculture, Hunting, Fishing, Energy/Mining, Forestry (FEFAH)
    • Western Canada: oil, gas, metals, beef
    • Eastern Canada: oil, offshore oil, minerals

 

  • Secondary Industries: manufacturing or processing capital goods or consumer goods
    • Canada as good manufacturing paper, oil refining, diamond, paper
    • Canada relies on US and China for making other goods
      • Branch Plant: a factory located outside of host country
      • Canada branch plant policy saying you must have a factory to conduct business here
      • Disadvantages of branch plants (3)
        • Business reduction in roles mainly R&D and execs
        • Innovation follows parent company
        • Exports lack – made in Canada for Canadians
        • Non-Canadian Materials – uses imported materials often
      • Foreign secondary + domestic secondary can add value to raw materials

 

  • Tertiary Industries: provides services for consumers and businesses
    • Retail is the largest (banking, construction, communication)
      • Canadian retail depend on imports
      • Most Canadian retails are owned by foreign places

 

How International business help Canadians

  • Variety of products
    • most products made in USA, but we have access to those
    • experiences from around the world
    • electronics mostly imported
    • benefit from cheap labour and materials in China and India
  • New Markets, More Jobs
    • 34 M pop’n in Canada, 100M pop’n in USA, 1B+ pop’n in China
    • BL: make products that suit Chinese demographics
    • Tim Hortons USA locations mean they hire more people
    • Foreign companies in Canada spend more money on R&D
  • Foreign Investments
    • (1) Foreign Direct Investments (FDI): done to control all or some of business’ operations (startups)
    • (2) Foreign Portfolio Investments: stocks/bonds/funds issued by companies to own a part of it
    • HBC went bankrupt if it wasnt for foreign investments backing them up
  • New processes and Technology
    • medical, consumer electronics

 

How International business hurts Canadians

  • Loss of culture/identity
    • Movies are mostly representing American culture, rare about Canada
      • CRTC regulates how much Canadian TV shows are shown in Canada
      • 35% of radio music must be canadian
        • M – Music
        • A – Artist
        • P – Produced
        • L – Lyrics
      • Canadians are often aware of Canadian books and TV shows due to recognition
    • Increased foreign ownership of Canadian companies
      • Foreign companies are likely to stay loyal to their come country
        • often leaves Canada in the dark when corporate problems rise
      • R&D is often left in home country, making such jobs not in Canada and lowered profits
      • Reduced Exports: foreign branch in Canada does things for Canada and doesnt export
      • Revenues leave Canada pay head offices: Canadian branch helps pay head office costs
        • This lowers actual income and lesser taxation.
        • High jobs like accounting, advertising, and marketing is done in home country
      • Economic destabilization, Global events can influence and impact Canadian economy due to many plugins from foreign businesses
        • Eg 2008 American “Buy American” campaign negatively affected CDN economy.

Chapter 2 Notes

International Business Practices

  • Canada trades internationally because of 7 main reasons:
    • Company Growth
    • Entry into new markets
    • Expanded customer base
    • Increased profits
    • Access to inexpensive supplies
    • Lower labour costs
    • Access to financing

 

  • Foreign Portfolio Investment (FPI): investments made on items from foreign countries
    • Joint Ventures are the riskiest
      • High % of ownership reside in foreign country, not home country
    • CDNs purchase stocks, bonds, and financial instruments to make money
    • Dividend: Interest made or amount that can be gained from an investment
    • Short-Term Investments: (Liquid) safe because they can be converted to cash easily
    • Capital Market: investing platform with long-term investments such as bonds, stocks.
      • Stocks are popular way of FPI in New York or Tokyo.
      • Mutual Funds: combined $ from many people are invested and dividends paid
    • CDNs invest in foreign to diversify their portfolio
      • Canada is only 2% of world’s stock markets
      • Risk: International markets are interrelated with global events
        • 2008 US Crisis affected global markets

 

  • Imports: bringing products or services into a country
    • Intended for resale or Business to Business (B2B)
    • Global Sourcing: importing equipment, capital, raw materials from around the world
    • Importing helps keep costs low, improve quality, or access new technologies
    • Services can also be imported
      • Call centers are regularly imported from India
    • Canada Imports: machinery, cars, oil, chemicals, electricity, consumer goods
    • In 2008, Canada’s import were ~$490 B

 

  • Exports: when companies outside of Canada purchase Canadian goods or services
    • Services can also be exported, ie Call centers
    • Canada exports lumber, telecom. equipment, chemicals, plastics, fertilizers, oil, gas, electricity, aluminum
    • In 2008, Canada’s exports were ~$443 B
    • Exports are vital to Canada’s economic success
    • #1 CA trading partner is US, who is 77.7% of global exports

 

  • Optional Section: Oil
    • CA imports 1 M barrels/day
    • CA exports 3.4 M barrels/day
    • CA imports for Eastern CA because there aren’t pipelines spanning west-east, only north-south

 

  • Value Added: amount of worth that is added to a product as it is processed
    • = cost of finished products – cost of raw materials
    • Issue: Canada, making mainly primary goods, have little Value added to exports
    • Example: Value addition for furniture
      • CDN Lumber sold at $50, zero value added
      • US Furniture Maker sells table at $3000, added $2950 in value
      • CA Furniture store buys table for $3000, sells for $4500, made $1500 in value

 

  • Licensing Agreement: gives a company permission to use a product, service, brand name, or patent in exchange for free or royalty.
    • Usually applicable in one specific region
    • For Example: Bell Mobility wanted to use UK Virgin brand in CA
      • Bell has to pay Virgin a fee for using it in Canada
      • Bell therefore has increased profits because of this new brand

 

  • Exclusive Distribution Rights: a form of licensing where a company is allowed to be the only distributor of a product in a specific geographic area.
    • Strategy often used as an entry into a foreign market
    • Example: Rogers was the exclusive carrier for the iPhone 3G in ’08 when it first came out in CA
    • Licensing is used mostly for manufacturing also
      • Senior parent company staff are sent to train foreign manufacturing
      • After they are trained, the foreign employees manage it as parent staff retreats
    • Licensing agreements have little risk but offer limited money returns.

 

  • Franchising: agreement to use a company’s name, services, products, and marketing.
    • Franchisee signs a contract and agrees to follow all the rules with the franchisor
    • They pay franchisor fees for finance, marketing, HR, operations, quality support
    • Examples include Kumon, McDonald’s, Wendy’s, Boston Pizza
    • Franchisees have less risk and lots of support from franchisor
    • Often have lesser profit, strict rules, and loss of control

 

  • Joint Ventures: when 2 businesses, one from a foreign country, form a company with shared ownership
    • 25-40% of all foreign investments are joint ventures
    • Reason: joined so they’ll be allowed into countries
      • Often joining with gov’t or companies in China or Cuba with communist
        • Trade Winds Inc is a CDN mining company in China to explore
    • Companies can gain control of new markets, customers, and products
    • May also share financing, technology, cultural, risk reduction
    • However, it may be a risk for investors because 50% of all joint ventures fail
      • GM and Toyota joint failed, lost investor’s money
    • To over come these risks, formal contracts, and attention to detail makes things run smoothly

 

 

Trade Barriers

  • Tariffs
    • Most common type of trade barrier
    • Tariffs are taxes or duties put on imported products or services.
    • Purpose to raise the cost of imported goods so consumers will purchase local products
    • Protectionism: shielding against foreign competition
    • Winners
      • Domestic government
      • Local producers
      • Local employees
    • Losers
      • Foreign producers
      • Consumers – price of products go up
      • Foreign employees – overseas employees lose out on opportunities
    • Canada uses NAFTA to void taxes in North America

 

  • Trade Quotas
    • Government imposed limit on the amount of a product that cam be imported
    • Protects domestic producers limiting import and reducing foreign competition
      • eg Canada has a quota of 14.5M kg of peanut butter to export to USA
    • Tariffs increase once company exceeds quota

 

  • Trade Embargoes
    • banning ALL trade on a specific product or with a specific country
    • used to pressure foreign countries to change government policies or human rights
    • Embargoes increase the price of products as supply decreases
      • 2003 Canada embargo for beef with mad cow disease

 

  • Trade Sanctions
    • Action taken by a country to force another to follow to international trade agreements or norms of conducts
    • Similar to embargoes, but Sanctions often only involve banning some products
    • Cuba – USA sanction for banning trade will continue until Cuba becomes democratic

 

  • Foreign Investment Restrictions
    • Laws in Canada influences foreign investment
      • Investments Canada Act must review investments to make sure they benefit Canada
        • ie investments > $5M with non WTO country must be reviewed
        • investments >$312M with WTO country must be reviewed
        • trades of uranium, financial, transport, or culture industries must be reviewed
      • Bank act, telecom act, transport act also limit foreign ownership
        • Transport act limits 25% ownership to all Canadian domestic airlines
      • Canada faces foreign restrictions too
        • Canadians face Australia’s Foreign Investment Review Board for >$5M real estate invests

 

  • Standards
    • Countries have different standards for environmental protection, voltage, or health/safety
    • Companies making products must account for compatibility in foreign standards
    • ISO (International Organization for Standardization) can help alleviate this standards issue

 

  • Currencies
    • Exchange Rate: amount of currency in relation to the currency of another country
    • Fluctuations cause barriers because of uncertainty in pricing goods accurately
    • CAD often quoted with USD because they are largest partners in the world
      • Historically CAD was less than USD, at one time low of 1CAD = $0.637 USD
      • But now it’s sometimes higher if not even at most times
      • Canada is 7th most traded in the world

 

  • Winners of High Canadian Dollar
    • Importers: consumers like high dollar, means pay less CAD for USD products
      • Companies gain when importing US goods like machinery etc.
    • Canadian Travelers: costs less to spend CAD in USD after conversion
    • Major League Sports Teams: teams operating in Canada pay US dollars to players
      • If CAD is higher, it costs USD less to pay Canadian players

 

  • Losses of High Canadian Dollar
    • Exports: difficult to foreign importers to buy Canadian products
      • causes companies to leave Canada for less expensive locations
    • Canadian Tourism: high cost in Canada keeps tourists home
      • 2009 Passport policies discouraged American visits even more
      • Hollywood Movies which were usually made in Canada are no longer
    • Canadian Retailers: Canadian shops in USA don’t import from Canada, prefer to buy from elsewhere

 

  • Factors affecting the exchange rate
    • Floating Rate: no fixed rate in CAD compared to other currencies
    • Currency Valuation: demand > supply causing CAD to rise
    • Currency Devaluation: supply > demand causing CAD to fall
      • Economic Conditions in Canada: Inflation rate, GDP, unemployment rate have impact
        • Inflation Rate low = good stable prices
        • GDP increase = stable healthy economy
        • Low unemployment = good job market
        • Interest rates in CA attracts investors here
      • Trading Between Countries
        • Export > Imports = more demand for currency
        • Higher Terms of Trade: comparison between exports to imports = Higher currency
      • Politics: stability of country affects currency
        • Tension, terrorism, rioting
      • Psychological Factors: historical significance on international market
        • In international uprising, Swiss Franc is refugge, US+Euro are safe.
        • Hard currencies: easily convert to other currencies (CAD, US, Euro)
        • Soft currencies: not easily converted (Yuan, Russian ruble)
        • Canada wasn’t affected in 2008 recession because, by comparison, US had more problems while Canada’s natural resource was still growing. Thus, CAD still stayed high

 

    • Currency Speculating: trading or holding foreign currency in anticipation of its changing value
      • Profit from currency fluctuations
      • Canadian companies often trade in USD to avoid currency fluctuations
      • Also trade with other countries in USD to have common currencies
      • Overcome currency fluctuations with multiple bank accounts serving different currencies

 

  • Time Zones
    • Different time zones mean Canada can’t call Japan on demand, they must wait for the right time
    • Communication technologies make it easier, but still a barrier
    • Call centers business take advantage of this
    • Text/email can communicate, but real time feedback is hard to happen