IB Exam Review

Trade

when a business in one country develops a relationship with business in another country, those countries are considered trading partners 

• Foreign trade or international trade mean the same as international business

USA vs Canada Interdependence - why they trade:

• Strengthens economies and builds relationships.

• Canada has resources (oil, timber), while the USA excels in technology and manufacturing.

• Specialization increases profit and efficiency.

Interdependence

• Both rely on each other for goods they don’t produce efficiently.

• Shared supply chains (e.g., automotive industry).

• Trade stabilizes both economies.

Absolute Advantage

A country's ability to produce more of a good or service than other nations with the same amount of resources.

comparative advantage

A country's ability to produce goods or services at a lower opportunity cost than others.

Absolute & Comparative Advantage (USA & Canada)

• Canada: Absolute advantage in natural resources, lower opportunity cost in oil/lumber.

• USA: Absolute advantage in technology, lower opportunity cost in high-tech goods.

• Specialization: Canada exports resources, the USA exports technology, benefiting both.

Advantages of trade

• Variety of products: shoes, movies, fresh fruit.
• Increased Sales: Increase in jobs.
• Foreign Investment: Non-Canadians investing in Canadian offices, warehouses, manufacturing plants.
• Foreign Direct Investment (FDI): Controlling business operations.
• Portfolio Investment: Canadian stocks, bonds, real estate.
• New Processes and Technology: Patented and used globally.

disadvantages in trade

• Human Rights Violation: Products may indirectly support companies violating human rights.
• Environmental and Political Issues: Different countries may have different environmental protection policies.
• Cultural Identity Issues: Influence from American culture can dilute Canadian cultures.
• Increased Foreign Ownership: Foreign companies can lead to foreign loyalties.
• Lack of Research and Development: Foreign ownership can reduce exports.
• Economic Destabilization: Dependence on global trade can lead to economic destabilization.

Main Reasons for International Trade - Company Growth

• Expands beyond domestic markets, increasing production and sales.

  • E.g.; Apple Inc. expanded globally, becoming a tech industry leader.

Main Reasons for International Trade - Entry into New Markets

• Diversified customer base, reducing dependence on one market.

  • E.g.; Starbucks entered China, leading to significant revenue growth.

Main Reasons for International Trade - Expanded Customer Base

• Increases potential customers and global brand awareness.

  • E.g.; Netflix expanded internationally, tailoring content for diverse cultures.

Main Reasons for International Trade-Increase Profits

• New markets and customers boost sales and revenue stability.

  • E.g.; Toyota’s international sales contribute to high profit margins.

Main Reasons for International Trade - Lower Labour Costs

• Companies produce goods in lower-cost countries to reduce expenses.

  • E.g.; Nike manufactures in low-cost countries to offer competitive pricing.

Main Reasons for International Trade - Access to Financing

• International trade provides better financial opportunities and investment incentives.

  • E.g.; Huawei raised capital through international financial markets.

International Trading Practices - Foreign Investment Portfolios (FPI)

• Entry of funds into a country via deposits, stocks, or bonds.

• Investors seek dividends for higher returns.

  • Eg;  Money markets, direct stock purchases.

International Trading Practices - Importing

• Bringing goods or services into a country.

• Types - 

  • Business-to-business imports.

  • Imports for resale.

  • Global sourcing (manufacturers importing materials for production).

International Trading Practices-Exporting

• Selling your country's goods and services to foreign companies.

• Can be business-to-business or for resale.

International Trading Practices - Value Added

• Additional value created as a product is processed.

  • Eg; Difference between raw materials and finished goods.

• Canada’s imports/exports lack value-added products.

International Trading Practices - Licensing Agreements

• Permission to use a product, service, brand, or patent in exchange for a fee or royalty.

  • Eg; Bell Canada uses the Virgin Mobile brand in Canada, benefiting from Virgin’s services.

International Trading Practices - Franchising

• Agreement to use a company’s brand, services, and marketing.

• Must follow franchisor’s rules and guidelines.

  • Advantages - Lower risk, expert knowledge, financial aid.

  • Disadvantages - Less profit, strict rules, loss of control.

International Trading Practices - Joint Ventures

• Definition: Two businesses (one foreign) form a company with shared ownership.

• Stats: 25-40% of all foreign investments come through joint ventures.

• Challenges: 50% of joint ventures fail due to cultural differences, unclear roles, and lengthy negotiations.

• Example: China & Cuba.

International Trading Practices - Foreign Subsidiaries

• Definition: A parent company allows a branch in another country to operate independently.

• Operations: Parent company sets financial, sales, and growth targets.

• If targets are met, the subsidiary focuses on daily operations.

Foreign Direct Investment (FDI)

Investment made by a company in one country into business interests in another country, typically through establishing business operations or acquiring assets.

• Investment made by a company in one country into business interests in another country, typically through establishing business operations or acquiring assets.

  • Investors have significant control over foreign businesses, distinguishing it from other international investments.
  • fosters and maintains economic growth in both recipient and investment countries.
  • Developing countries finance infrastructure construction and job creation through this

Trade Liberalization

Making international trade easier by reducing restrictions.

Protectionism

• When governments establish barriers (tariffs, quotas, etc.) to protect local industries.

Importance/reason for trade barrier

Measures put in place by governments to control or restrict international trade for various reasons.

EX - tariffs, product standards, export subsidy, quotas, FDI regulations, embargoes

Tariff

tax on imported goods 

Product standards

its safety requirements, product features, and packaging requirements on products

Export subsidy

A government policy to encourage export of goods and discourage sale of goods on the domestic market through direct payments, low-cost loans, tax relief for exporters, or government-financed international advertising.

Quotas

A limit on the quantity of imports

FDI Regulations

• Sometimes FDI is restricted to ensure that it always benefits the country 

  • E.G.; In Canada, the transport act limits foreign ownership, only allows Canadian owned airlines to provide domestic flights 

Embargoes

Banning trade of a specific product or trade from a specific country 

Protectionism

Government measures (tariffs, quotas) established to protect local industries from foreign competition

protectionism pros

• Protects Domestic Industries - Shielding local industries from foreign competition allows them to grow and stabilize

  • Example: The U.S. imposed tariffs on Chinese solar panels to protect its solar industry

• Safeguards Jobs - By limiting imports, domestic jobs in certain sectors can be preserved

  • Example: The U.K. uses quotas on textiles to protect jobs in its domestic textile industry

• Promotes National Security - Protecting critical industries ensures control over essential goods and technologies.

  • Example: Many countries, including the U.S., limit foreign involvement in telecommunications to safeguard data security.

protectionism cons

• Higher Prices for Consumers - Tariffs and quotas can lead to increased prices for goods, as there is less competition

  • Example: In India, tariffs on electronics have led to higher prices for smartphones.

• Retaliation by Other Countries: Other nations might respond with their own trade barriers, leading to trade wars.

  • Example: The U.S.-China trade war saw reciprocal tariffs, harming various industries in both countries.

• Reduced Economic Efficiency - Protectionism can lead to inefficient resource allocation as industries that would otherwise fail are artificially supported.

  • Example: Japan's protection of its rice industry has led to higher costs and limited innovation in agriculture.

Foreign Currency Exchanges

Refers to the global marketplace where currencies are traded, allowing for the exchange of one currency for another.

• It facilitates international trade and investments

What Affects the Value of Canadian Money? - Foreign Currency Exchanges

• Interest Rates: Higher rates attract foreign money, increasing CAD value.

• Commodity Prices: High prices for Canada’s exports (like oil) make CAD stronger.

• Trade Balance: Selling more than buying (trade surplus) raises CAD value.

• Foreign Investment: When other countries invest in Canada, CAD gets stronger.

• Productivity: Making things faster and cheaper boosts exports and CAD value.

Globalisation

The increasing interconnectedness of countries due to improvements in transport communications and technology 

Glocalisation

Adapting products and business practices to fit local markets while operating globally

• (e.g., adjusting Ikea’s furniture size for different countries).

1. glocalisation vs 2. globalisation

1. involves adapting global products for local markets.

2. The interconnectedness of nations through improved transport and communication.

International Dependency Trade Agreements & Organizations (ie. WTO, EU, etc.) IMF

Occurs when countries rely on each other for goods, services, and resources they cannot efficiently produce themselves.

G8/G7

A Political forum (1997-2014) with Canada, France, Germany, Japan, Russia, UK, and USA.

• Became G7 in 2014 after Russia’s suspension due to Crimea annexation.

G20

A Forum of 19 countries + EU, founded in 1990, focusing on financial stability and economic growth.

• Annual summits discuss global trade, economic policies, and crises (e.g., COVID-19 in 2021).

World Trade Organization (WTO)

Established in 1995 to regulate global trade, resolve disputes, and negotiate trade agreements.

• World Intellectual Property Organization (WIPO)

• UN agency managing global intellectual property rights, patents, and trademarks.

World Bank (WB)

Founded in 1944 to provide loans and grants for infrastructure and poverty reduction projects.

OPEC (Organization of Petroleum Exporting Countries)

13 oil-exporting nations coordinating petroleum policies to stabilize prices and supply.

NAFTA/USMCA

Free trade between Canada, USA, and Mexico.

• Replaced by USMCA (2020) with updated labor rights, digital trade, and IP protections.

International Monetary Fund (IMF)

Established in 1944 to promote financial stability, economic growth, and emergency aid.

• Provides financial assistance to countries in crises (e.g., COVID-19 relief).

1. Trade Agreements vs. 2. Trade Organizations

1. Treaties setting trade rules (e.g., USMCA, EU).

2. Regulate global trade (WTO, IMF, World Bank).

Corporate Social Responsibility - CSR

About understanding your business impact on the wider world and considering how you can use this impact in a positive way.

The Four Principles of CSR

• Economic – Responsibility to earn profit for the owners.

• Legal – Responsibility to comply with the law.

• Ethical – Not acting just for profit but doing what is right and just in fairness.

• Voluntary and Philanthropic – Promoting human welfare and goodwill, being a good citizen to the community.

Sustainability

Meeting the needs of the current generation without compromising the ability of future generations to meet their own needs.

sustainability stool - Economic Leg

• Good jobs, fair wages, security, infrastructure, and fair trade.

sustainabilty stool - social leg

Working conditions, health services, education services, community and culture, and social justice.

sustainability stool - envviromental leg

• Zero pollution and waste, renewable energy, conservation, and restoration.

 Impact of International events

Things happening around the world, like wars, natural disasters, or big political decisions, that can affect countries’ economies and currencies. These events can change trade, investments, or the demand for certain goods, which impacts the value of money and businesses everywhere. Creates both challenges and opportunities, requiring businesses to adapt and respond strategically to remain successful.

• Economic Fluctuations – Changes in global markets affect business cycles, employment rates, and consumer spending.

• Political Instability – Government changes, trade policies, and conflicts impact investment decisions.

  • E.G.; Multinational companies evaluate the political climate before expanding operations.

• Natural Disasters – Disrupt supply chains, production, and economies.

  • E.G.; The Deepwater Horizon Oil Spill (2010) lasted over 87 days, affecting the environment, business, tourism, and livelihoods.

• Technological Advancements – Innovation forces businesses to adapt to remain competitive.

• Global Competition – Companies compete for market share and may influence regulations.

  • E.G.; U.S. pharmaceutical companies lobbied the FDA to speed up new drug approvals.

Market Structures

1. Pure/Perfect Competition

• Many producers with the same product.

2. Monopolistic

• When the product can be differentiated and there are a number of firms operating in the market

3. Oligopoly

• Market dominated by a few sellers. Prices seem to change in tandem; collusion occurs

4. Monopoly

• Market dominated by one seller. ‘Alone To Sell’

Cultural Differences

• These come from the fact that individual societies and groups within them may have a distinctive way of life.  

  • This will affect their patterns of consumption and the products they favour. But it will also affect the way they do business with one another.

Hofstede Cultural Dimensions

• Hofstede created the theory of SIX cultural dimensions to describe specific aspects of culture, and to help those doing business in other countries to understand the cultural differences between two countries

1. Power Distance (PDI): How society handles inequality. High PDI means accepting hierarchy; low PDI means equality and questioning power.

2. Individualism vs. Collectivism (IDV): The importance of individual rights vs. group loyalty. Individualism values personal freedom, while collectivism values group harmony.

3. Uncertainty Avoidance (UAI): How much people dislike uncertainty. High UAI prefers structured rules, while low UAI is more relaxed and adaptable.

4. Masculinity vs. Femininity (MAS): Focus on achievement and success (masculinity) vs. caring for quality of life and cooperation (femininity).

5. Long-Term vs. Short-Term Orientation (LTO): Long-term cultures focus on future goals and persistence; short-term cultures value tradition and current needs.

Indulgence vs. Restraint (IND): Indulgence allows freedom in enjoying life, while restraint controls desires based on social norms.

CAGE framework*

• The cage framework help managers identify the impact of 'distance' between countries in 4 areas - Cultural, Administrative, Geographic, and Economic Distance

  • Cultural Distance

    • Language, ethnicity, religion, social norms.

    • Impacts - products tied to culture, language, and identity (e.g., TV, food, wine).

  • Administrative Distance

    • Political ties, monetary systems, government policies, institutional strength.

    • Foreign Governments Protects - Large employers (e.g., US corn farmers), National security industries (e.g., communications), Key industries (e.g., oil, Cadbury).

  • Geographic Distance

    • Physical remoteness, borders, sea/river access, climate, infrastructure.

    • Industries Affected - Heavy goods (e.g., cement), Perishable items (e.g., fruit, glass), Industries needing connectivity (e.g., financial services).

  • Economic Distance

    • Consumer income, technological infrastructure, costs of resources (natural, financial, human)

Democracy:

Government by elected representatives with free elections, rule of law, and individual freedoms. (eg; switzerland)

Autocracy:

• A government with total control by one leader or a small group, often with military influence and limited citizen freedoms. (eg; germany)

Business Cycle* 

• Recession: Economic slowdown marked by lower consumer spending, higher unemployment, and reduced tax revenues.

• Trough: The lowest point in the cycle, where production and employment hit rock bottom. A prolonged trough is called a depression.

• Expansion (Recovery): The economy begins to grow again, with rising employment, wages, production, and profits.

• Peak: The economy reaches its highest point before starting to contract again.

economic systems

• Planned Economy: The government controls all production, distribution, and the allocation of resources.

• Market Economy: Private individuals make most economic decisions, with minimal government interference.

• Mixed Economy: A combination of private sector businesses and government-run services. Most countries, including Canada, UK, and France, follow this model.

4 p’s

1. price

2. place

3. promotion

4. product

2 c’s

1. consumers

2. competition

Gross Domestic Product (GDP)

The total monetary value of all goods and services produced within a country’s borders over a specific time period, typically measured annually or quarterly. It is a key indicator of a country’s economic performance.