CGMS723 Module 1

What is the Domestic Market in international business?

The domestic market is the market within which the company’s headquarters is located and continues to serve with its products/services. E.g., Magna's domestic market is Canada; BMW’s is Germany.

What is an International Market?

An international market is any market outside a company’s domestic market that creates demand for the company’s products or services.

What are the five levels of international business transactions?

• Accidental Exporting

• Active Exporting

• International Marketing

• International Marketing and Limited Operations

• Foreign Direct Investment (FDI)

What defines Level 1 – Accidental Exporting?

A company sells products domestically to another domestic company that uses them in products exported abroad. The original company does not actively export and avoids international business risks.

Give an example of Level 1 – Accidental Exporting.

A South Korean chip maker sells chips to a domestic computer company, which exports computers to the U.S. The chip maker’s products reach international markets without intentional exporting.

What risks are avoided in Level 1 – Accidental Exporting?

Risks avoided include currency risk, foreign government and legal system risk, labor risk, shipping risk, piracy, etc.

What defines Level 2 – Active Exporting?

A company actively produces in its domestic market to meet international demand, allocating resources to exporting and taking on international business risks.

Give an example of Level 2 – Active Exporting.

Cave Spring Estate winery in Ontario produces wine for U.S. and European markets.

What risks are involved in Level 2 – Active Exporting?

Risks include currency risk, payment risk, shipping/handling risk, customs risk, etc.

What defines Level 3 – International Marketing?

Level 2 activities + moving the marketing function to or near the international market, increasing risk due to foreign legal, regulatory, and labor environments.

Give an example of Level 3 – International Marketing.

TCBY Yogurt manufactures in Canada but has marketing/sales offices in the EU for franchises.

What defines Level 4 – International Marketing and Limited Operations?

Level 3 activities + limited warehousing/final assembly abroad, typically to support seasonal or predictable demand in international markets.

Give an example of Level 4 – International Marketing and Limited Operations.

A German nutcracker manufacturer ships inventory to a warehouse in New Jersey in advance of the Christmas season.

Why is Level 4 less common than Level 3 or 5?

Most companies tend to skip Level 4 and move directly from Level 3 to Level 5.

What defines Level 5 – Foreign Direct Investment (FDI)?

A multinational company invests people, money, technology, and resources into a foreign market, replicating its full structure there. This level has the highest business risk.

Give an example of Level 5 – Foreign Direct Investment.

Coca-Cola’s European division operates fully within the EU. Other examples: Apple, Microsoft, GM, Toyota, Walmart, etc.

What is the expected return from Level 5 operations?

A very high return (e.g., Coca-Cola in Europe expects a 300% ROI).

Why do companies engage in Levels 2 to 5 of international business?

To grow their business and achieve higher profit returns than available in their domestic market.

Which level is considered a growth strategy and is the focus of CGMS723?

Level 2 – Active Exporting.

What is international trade?

It is the exchange of capital, goods, and/or services across international borders or territories. It often makes up a significant share of a country's GDP.

Why is international trade important?

It has growing economic, social, and political significance, impacting national GDP and global relations.

What are two foundational theories that explain why countries engage in international trade?

The theory of absolute advantage and the theory of comparative advantage.

What does the theory of absolute advantage state?

A country should trade only in goods or services it can produce more efficiently (i.e., in greater quantity using the same resources) than other countries.

Give an example of absolute advantage.

Countries like China have an absolute advantage in manufacturing due to lower labor costs.

What does the theory of comparative advantage state?

Two countries should trade goods/services in which each has the lowest opportunity cost, even if one is more efficient at producing everything.

What's the key difference between absolute and comparative advantage?

Absolute advantage is about being more productive overall; comparative advantage is about specializing in what you’re relatively better at to maximize trade benefits.

What is the Heckscher-Ohlin Theory?

A trade theory that suggests countries should produce and export goods that require abundant local resources, and import goods that require scarce resources.

What is the main idea behind the Heckscher-Ohlin Theory?

Countries should specialize in goods that they can produce using abundant factors of production (e.g., labor, land, capital).

How does the Heckscher-Ohlin Theory differ from Absolute and Comparative Advantage theories?

It focuses on the resource availability and production factors rather than productivity or opportunity cost.

What does the Heckscher-Ohlin Theory emphasize in international trade?

The productivity of the production process based on resource abundance.

What is a downside of the Heckscher-Ohlin Theory?

It may restrict a country's ability to diversify its economy in the long run.

For what type of countries is the Heckscher-Ohlin Theory especially useful?

Countries with underdeveloped economies.

What does New Trade Theory (NTT) recognize that traditional trade theories do not?

It recognizes the importance of economies of scale and network effects in shaping modern international trade patterns.

What are the two main factors emphasized in New Trade Theory?

• Economies of scale

• Network technologies/effects

How can economies of scale affect trade patterns according to NTT?

Producing in large volumes reduces per-unit costs, allowing firms to compete internationally—even without a traditional comparative advantage.

What are network effects in the context of NTT?

Benefits gained as a product or service becomes more valuable when more people use it, often enhanced by modern communication technology.

How does NTT challenge traditional trade theories like comparative advantage?

It shows that scale and technology-based efficiencies can drive trade, even when comparative advantage is not present.

Give an example of New Trade Theory in practice.

VW uses robotic technology and German design in a Mexican plant to produce cars efficiently and sell them to the US, despite the US having a comparative advantage in automotive production.

What is the main purpose of the World Trade Organization (WTO)?

To oversee and make judgments on the rules of trade between nations, helping producers, exporters, and importers manage trade relationships fairly and equitably.

Where is the WTO headquartered?

Geneva, Switzerland.

What international agreement did the WTO evolve from?

The General Agreement on Trade and Tariffs (GATT).

What does the WTO aim to ensure in global trade?

Fairness and equity in the administration of trade relationships between countries.

What is the Organization for Economic Cooperation and Development (OECD)?

A group of 122 of the world’s richest economies that uses member data to promote prosperity and fight poverty through economic growth and financial stability.

What role does the OECD play in global trade?

It provides aggregate data and insights on international trade as it is a major part of member countries’ GDPs.

Where is the OECD headquartered?

Paris, France.

Which country remains the largest economy influencing global trade?

The United States.

Which country is the second largest economy after the US in global trade?

China.

What was the total value of world trade in merchandise in 2023?

Approximately $47 trillion USD.

How did world trade merchandise value in 2023 compare to 2013?

It increased from about $18 trillion USD in 2013 to $47 trillion USD in 2023.

What is the expected growth rate of international trade due to current global volatility?

Approximately 1.7% growth.

Where can one find updated and interactive information on international trade statistics?

On the WTO’s International Trade and Market Access Data website, using their “New Interactive Tool.”

What can you do with the WTO’s Interactive Trade Tool?

You can view updated trade information by regions and countries, and compare countries such as Canada, the US, Australia, and Great Britain.