Chapter 3 - Competing in Global Markets

Exporting

Selling product to another country

Importing

Buying products from another country

Free Trade

The movement of goods and services among nations without political or economic barriers

Theories of Comparative & Absolute Advantage

• Global trade involves the exchange of goods and services across national borders

• Countries export art, sports, cultural events, medical advances, space exploration, and labour

Comparative Advantage Theory 

A theory that states a country could sell to other countries those products that it produces most effectively and efficiently and buy from other countries those products that it cannot produce as effectively or efficiently

Absolute Advantage

The advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries 

Measuring Global Trade

Nations follow two key indicators to measure the effectiveness of global trade: balance of trade and balance of payments

Exporting Goods and Services

You can sell almost any good and service that is used in Canada to other countries

• Competition is typically not as intense for producers in global markets compared to at home

Small Businesses & Global Trade

• Contributed 51-53% to Canada’s GDP between 2015 and 2019

• Responsible for 69% of net employment growth between 2020 and 2021 in the private sector

• They accounted for ~42% of Canada’s total value of exported goods in 2021

The Canada Border Services Agency

Deals with importers across the whole range of goods and services that enter our country

Balance of Trade

A nation’s ratio of exports to imports

Trade Surplus

A favourable balance of trade; when the value of a country’s exports exceeds that of its imports

Trade Deficit

An unfavourable balance of trade; occurs when the value of a country’s imports exceeds that of its exports

Balance of Payments

The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors, such as tourism, foreign aid, military expenditures, and foreign investment

The Canadian Experience Trading in Global Markets

• Canada is dependent on the United States

• Long-term, Canada’s international trade will be driven by exchange with economies other than the United States

Canada’s Priority Markets

Emerging economies are enjoying high growth rates, rapid increases in living standards and a rising global prominence

Reaching Global Markets

Businesses use many different strategies to compete in global markets:

• Licensing

• Exporting

• Franchising

• Contract manufacturing

• Creating international joint ventures and strategic alliances

• Engaging in foreign direct investment

Licensing

A global strategy in which a firm (the licensor) allow a foreign company (the licensee) to produce its product in exchange for a fee (a royalty)

Exporting

Often the first export sales occur as a result of unsolicited orders received

Franchising

A contractual agreement whereby someone with a good idea for a business sells the rights to use the business name and sell a product/service in a given territory in a specified manner 

• Popular domestically and internationally

Contract Manufacturing

A foreign company’s production of private-label goods to which a domestic company then attaches its brand name or trademark; aka outsourcing

Joint Venture

A partnership in which two or more companies from different countries join to undertake a major project

Benefits of International Joint Ventures

• Shared technology and risk

• Shared marketing and management expertise

• Entry into markets where foreign companies are often not allowed unless goods are produced locally

Foreign Direct Investment (FDI)

The buying of permanent property and businesses in foreign nations

Foreign Subsidiary

A company owned in a foreign country by the parent company

Multinational Corporation

An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management

Investment Canada Act

Legislation that provides rules to review significant investment in Canada by non-Canadians

Forces Affecting Trading in Global Markets: Sociocultural Forces

• Culture: the set of values, beliefs, rules, and institutions held by a specific group of people

• Ethnorelativism: an attitude that one’s own culture is best understoof in relation to other cultures

Forces Affecting Trading in Global Markets: Economic & Financial Forces

• Exchange Rate: the value of one nation’s currency relative to the currencies of other countries

• Devaluation: lowering the value of a nation’s currency relative to other currencies

• Countertrading: a complex form of bartering in which several countries may be involved, each trading goods for goods or services for goods 

Forces Affecting Trading in Global Markets: Legal Forces

• Conduct and direction of a business are firmly tied to the legal environment

• Canadian federal and provincial laws heavily affect business practices

• In global markets, the absence of a central system of law means many different systems may apply

• Antitrust rules, labour relations, patents, copyrights, trade practices, taxes, child labour, product liability, and other issues are governed differently between each country

Forces Affecting Trading in Global Markets: Physical & Environmental Forces

• Certain technological forces can also have an important impact on a company’s ability to conduct business in global markets 

• Technological constraints may make it difficult given the nature of exportable products 

Trade Protectionism

The use of government regulations to limit the import of goods and services

Dumping

Selling products in a foreign country at a lower price than those charged in the producing country

Tariffs

A tax imposed on imports

Revenue Tariffs

Generate funds for the government

Protective Tariffs

Meant to save jobs for the domestic workers and to keep industries from closing—especially infant industries that have companies in the early stages of growth

Non-Tariff Barriers

Include restrictive standards or paperwork that detail exactly how a product must be sold in a country

• Not as specific or formal as tariffs, import quotas, or embargoes but can be as detrimental

Import Quota

A limit on the number of products in certain categories that a nation can import

Embargo

A complete ban on the import or export of a certain product or the stopping of all trade with a particular country

General Agreement of Tariffs and Trade (GATT)

A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions

World Trade Organization (WTO)

The international organization that replaced the GATT and was assigned the duty to mediate trade disputes among nations

International Monetary Fund (IMF)

An international bank that makes short-term loans to countries experiencing problems with their balance of trade

World Bank

An autonomous United Nations agency that borrows money from the more prosperous country and lends it to less-develop countries to develop their infrastructure

Producers’ Cartels

Organizations of commodity-producing countries that are formed to stabilize or increase prices to optimize overall profits in the long-run

Common Market (Trading Bloc)

A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; aka trading bloc

• Eg. European Union

The European Union (EU)

• 27 nations

• No tariff or non-tariff barriers

• Common currency

• Brexit (withdrawal of UK from the EU)

United States-Mexico-Canada Agreement (USMCA)

The agreement among three member countries that coordinates trade; replaces the NAFTA agreement

Offshoring

The shift in outsourcing manufacturing and services from domestic businesses to primarily low-wage markets outside of Canada; it is getting more attention

Strategic Alliance

A long-term partnership between two or more companies established to help each company build competitive market advantages

• Unlike joint ventures, they do not typically involve sharing costs, risks, management, or profits

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

Pros of Free Trade

• The global market contains more than 7.7 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

Cons of Free Trade

• Domestic workers (particularly in manufacturing-based jobs) can lose their jobs due to increased imports or production shifts to lower-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