Chapter 7: Global Business Vocabulary Flashcards

Chapter 7 Learning Outcomes

• Explain the reasons nations and companies participate in international trade and the methods used to measure that trade.

• Describe the theoretical concepts of absolute and comparative advantage.

• Describe strategies for entering foreign markets through importing and exporting.

• Explain the logic behind choosing outsourcing and contract manufacturing in foreign countries.

• Explain international market entry through licensing agreements and franchises.

• Differentiate between strategic alliances and joint ventures regarding structure, commitment, and goals.

• Explain reasons for making direct investments in foreign operations.

• Describe how companies utilize contract manufacturing and outsourcing to reduce costs.

• Identify and explain how cultural, economic, legal, and political differences create challenges in global business.

• Discuss initiatives and organizations designed to reduce trade barriers and promote free trade.

The Globalization of Business

• Globalization Defined: The process of increasing economic and social integration between countries, characterized by the increased flow of goods, services, and people across borders.

• The Global Customer: Participation in global business is common through everyday consumption. Examples include:

  • Wearing Nike or Timberland products (manufactured overseas).

  • Using Spotify (a Swedish enterprise).

• Global Retail Evidence: Orchard Road in Singapore features international retailers like Takashimaya (Tokyo-based), Marks & Spencer (London), Ralph Lauren, Polo, Burberry, and Chanel, alongside Seattle-based Starbucks.

• Global Brands in Foreign Capitals:

  • Beijing, China: Fleets of black Buicks (General Motors) are parked in front of the Great Hall of the People.

  • Faisalabad, Pakistan: Hamdard University uses computers displaying the Microsoft flag, reflecting software common to Seattle and the rest of the planet.

• Impact on Individuals: Globalization ensures consumers buy overseas products and work with individuals from diverse cultures as colleagues, suppliers, or employers.

• The Expanded Circular Flow Model (Figure 7.1): Illustrates the interaction between Households, Firms, Government, Financial Markets, and the Rest of the World through imports, exports, taxes, wages, and investments.

Why Do Nations Trade?

• Strategic Rationale: Nations trade to capitalize on unique advantages, foster economic growth, enhance living standards, and build international relationships.

• Access to Goods: Trade allows access to products not produced domestically (e.g., tropical fruits imported by Canada).

• Economies of Scale: Exporting allows businesses to produce on a larger scale, lowering costs. For example, German automotive manufacturers produce vehicles globally.

• Innovation and Interdependence: Trade drives the spread of technology (such as renewable energy advancements) and builds interdependence to reduce conflict potential (e.g., the European Union).

• Economic Growth: Exporting generates income and jobs. Canada's export of oil and gas is a significant contributor to National Gross Domestic Product ($GDP$).

• Trade Volume Statistics (2023):

  • Total value of world trade in merchandise and commercial services was $30.5\,trillion$, a $2\%$ decrease from the previous year.

  • Goods trade declined by $5\%$.

  • Services trade increased by $9\%$.

  • World Trade Organization ($WTO$) projections for merchandise trade growth: $0.8\%$ in $2023$ and $3.3\%$ in $2024$.

• Factors Impacting Recent Trade:

  • War in Ukraine and Geopolitical tensions.

  • High inflation and tightening monetary policy in major economies.

  • High energy prices and rising interest rates.

  • Food and energy insecurity.

  • Risk of financial instability and high levels of external debt.

Absolute and Comparative Advantage

• Absolute Advantage: Occurs when a nation is the only source of a product or can produce it using fewer resources than any other country. France historically held an absolute advantage in wine until challenged by Italy, Spain, the U.S., and Canada. This advantage rarely lasts unless based on limited natural resources.

• Specialization and Comparative Advantage: Countries benefit by focusing on what they produce most efficiently and trading for other needs.

  • Comparative Advantage Defined: Exists when a country can produce a product at a lower opportunity cost than another nation.

• Canada's Export Profile ($2023$):

  • Top destinations: United States ($76\%$), China, and the United Kingdom.

  • Energy exports: $22\%$ of total exports (mineral fuels, oils).

  • Cars and parts: $19\%$ of total exports.

  • Consumer goods: $12\%$ of total exports.

  • Minerals: Potash (Canada was the world's largest exporter in $2022$), metallurgical coal, and diamonds.

• Global Examples of Comparative Advantage:

  • United States: Knowledge-based products (software, movies, music, professional services).

  • France and Italy: Fashion, luxury goods, wine, and perfume.

  • Japan: Engineering, automobiles, and consumer electronics.

  • India: Highly skilled graduates in technology, leading in low-cost computer-software engineering.

The Role of Opportunity Costs

• Definition: The value of the next best alternative given up to obtain something else.

• Fundamental Principle: Since resources are limited, every choice involves a trade-off.

• Individual Examples:

  • Skipping class results in missing learning.

  • Spending $10$ daily on lunch vs. $3$ at home creates a $7$ daily opportunity cost ($2,500$ per year, potentially the cost of a vacation).

• Societal Decisions: High-level policy choices involve trade-offs (e.g., universal healthcare vs. national defense).

• Case Study: Airline Security ($9/11$ Response):

  • Sky marshals cost: $3\,billion/year$.

  • Reinforced cockpit doors: $450\,million$.

  • Baggage scanners: $2\,billion$.

  • Time Cost Calculation: With over $800\,million$ passengers annually ($2012$ data), an extra $30$ minutes ($0.5\,hours$) of wait time valued at $20/hour$ results in an opportunity cost of: $800\,million \times 0.5\,hours \times$20/hour = $8\,billion/year$.

Measuring Trade Between Nations

• Balance of Trade: Calculated as Value of Exports - Value of Imports.

  • Trade Surplus: Favourable balance where a country sells more than it buys.

  • Trade Deficit: Unfavourable balance where a country buys more than it sells.

  • Canada's Status ($2023$): Merchandise exports fell $1.4\%$ to $768.2\,billion$, while imports rose $1.4\%$ to $770.2\,billion$. Canada recorded surpluses between $1980$ and $2008$ (except $1991$, $1992$), then deficits from $2009$ onward, returning to surplus briefly in $2021$.

  • Perspectives on Deficits: Warren Buffett warns that continuous large deficits are unsustainable because creditor nations will eventually stop accepting "IOUs."

• Trade Surplus Dynamics: While indicative of growth, surpluses can cause higher prices and interest rates. In Japan ($1970$s-$1980$s), many goods were cheaper abroad (Honolulu/LA) than in Tokyo because producers priced exports competitively but kept domestic prices high due to limited competition and high distribution costs.

• Balance of Payments: The total flow of money into a country minus the flow out over a period.

  • Includes import/export cash, foreign investment, loans, tourism, military spend, and foreign aid.

  • Current Account: Records goods, services, primary, and secondary income.

  • Capital and Financial Account: Records capital transfers and transactions in financial assets/liabilities.

  • Canada's $2024$ Balance of Payments: Current account deficit of $15.6\,billion$. Trade in goods deficit was $6.9\,billion$. Metal products (gold) and crude oil exports increased, while motor vehicle exports decreased.

National Debt Facts

• Canada's National Debt: Combined federal, provincial, and territorial debt. Federal debt was $1,236.2\,billion$ as of March $31, 2024$.

• Federal Debt-to-$GDP$ Ratio: $42.1\%$ ($2024$), up from $41.1\%$ the previous year.

• United States Debt: Largest economy with the largest dollar amount of debt; debt-to-$GDP$ ratio of approximately $121.31\%$. Major holders of U.S. debt: Japan, China, UK, Belgium, and Luxembourg.

• China-Canada Loan: As of $2021$, China owed Canada $371\,million$ from decades-old loans, with repayment expected by $2045$.

• Pakistan-China Debt: As of $2024$, Pakistan owed China $26.6\,billion$ for infrastructure and energy projects.

Strategies for International Business Entry

• Importing and Exporting: Prevalent forms of trade.

  • Importing Reasons: Reduce costs, obtain new products earlier, allow business specialization, and increase competition.

  • Exporting Reasons: Reach new markets, spread risk, improve competitiveness, enhance innovation, boost profile, utilize trade agreements, and manage seasonal fluctuations.

  • Customs: The process of declaring and paying taxes on imported goods to protect economies, environments, and residents from prohibited items (e.g., drugs, weapons).

• Licensing: An agreement where a licensor allows a foreign company (licensee) to sell products or use intellectual property (patents, trademarks) for royalty fees. Example: Lego licensing Star Wars from Disney.

• Franchising: A franchiser grants a franchisee the right to use a brand and business model. International franchising often involves a "master franchisee" who can open company-owned outlets and sub-franchise locally. Examples: McDonald's, Best Western.

• Outsourcing and Contract Manufacturing:

  • Outsourcing: Using inexpensive foreign labor for services like software development or accounting.

  • Contract Manufacturing: A form of outsourcing where a domestic company contracts a foreign firm to manufacture products but retains control over design and development (common in apparel).

• Strategic Alliances: Agreements to pool resources for mutual goals while remaining legally independent. Easier to dissolve than joint ventures. Example: Starbucks and PepsiCo for ready-to-drink beverages; Apple and Nike for Nike+ iPod.

• Joint Ventures: Two or more companies form a new, independent legal entity. They share ownership, profits, and risk. Examples: Sony Ericsson, NASA and Google (Google Earth), SIA and TATA (Vistara Airlines).

• Foreign Direct Investment ($FDI$): Direct investment in foreign operations (factories, offices). Highest level of commitment.

  • Offshoring: Replacing domestic manufacturing with foreign facilities to send goods back home for sale.

  • Foreign Subsidiary: An independent company owned by a parent company (e.g., IBM-Japan). Gerber Products is a subsidiary of the Swiss company Novartis.

• Acquisitions: Acquiring a substantial stake (usually $10\%$ or more) in a foreign business. Example: Walmart's $16\,billion$ acquisition of a $77\%$ stake in India's Flipkart in $2018$.

• Mergers: Two companies combine into one new single entity. Example: Vodafone Group (UK) and Idea Cellular (India) merging into Vodafone Idea Limited.

Multinational Corporations ($MNC$s)

• MNC Definition: A company operating in many countries.

• Largest MNCs (Fortune Global 500, 2024):

  • Revenue: Walmart (ranked $1^{st}$ for $11$ consecutive years with $648\,billion$ revenue).

  • Profitability: Apple (net income of $100\,billion$ in $2024$), Microsoft, and Alphabet.

• Management Strategies:

  • Decentralization: Using local talent and giving them decision-making power to improve speed and local image (e.g., IBM in Japan).

  • Standardization: Maintaining a single unified product across all markets to keep costs low (e.g., Nike, Red Bull).

  • Adaptation ("Glocal"): Modifying products for local markets (e.g., McDonald's Chicken McArabia, Coca-Cola coffee alternatives in Japan, seafood pizza at Domino's in Asia).

• Benefits of $MNC$s: Wealth/job creation, economies of scale leading to lower costs, research and development funding, and establishing minimum standards (e.g., Starbucks quality).

• Criticisms of $MNC$s: Destruction of home-country livelihoods, weakening of traditional cultures, environmental damage, profit repatriation to home countries, and crowding out local small businesses.

The Global Business Environment

• Cultural Environment: System of shared beliefs, values, and customs. Success requires high Cultural Quotient ($CQ$).

  • Language: English is the international business language, but blunders occur in translation (e.g., "Body by Fisher" became "Corpse by Fisher" in Belgium; Chevy Nova means "it doesn't go" in Spanish).

  • Communication Styles: High-context cultures (Asia, Middle East) rely on non-verbal cues; Low-context cultures (U.S., Germany) prioritize explicit verbal directness.

  • Time and Sociability: Western cultures view time as money; Latin American and Middle Eastern cultures prioritize hospitality and personal inquiries before business.

• Economic Environment: Level of economic development measured by annual income per citizen.

  • World Bank Classifications ($2024$):

    • High income: >$14,005$.

    • Upper-middle: $4,516$ - $14,005$.

    • Lower-middle: $1,146$ - $4,515$.

    • Low income: <$1,145$.

  • Infrastructure: Systems of communication, transportation, energy, and social facilities required for growth.

• Legal and Regulatory Environment:

  • Corruption of Foreign Public Officials Act ($CFPOA$): Canadian law prohibiting bribes to foreign officials.

  • Corruption Perceptions Index ($CPI$): Transparency International rates countries from $0$ (highly corrupt) to $100$ (very clean).

  • $2024\,CPI$ Rankings: Denmark ($1^{st}$, score $90$), Canada ($15^{th}$, score $75$), South Sudan ($180^{th}$, most corrupt).

Trade Controls and Protectionism

• Subsidies: Government payments to domestic producers to offset costs and lower prices (e.g., Canadian agricultural subsidies).

• Tariffs: Taxes on imports (e.g., Trump administration's $25\%$ tariff on imported steel).

• Quotas: Limits on the quantity of imported goods.

  • Absolute Quotas: Fixed upper limits.

  • Tariff-rate Quotas: High taxes applied after a limit is reached.

• Embargoes: Total ban on import/export with a specific country.

• Dumping: Selling exported goods below home-market prices or production costs to gain market share.

International Trade Initiatives

• General Agreement on Tariffs and Trade ($GATT$): Signed in $1947$ by $23$ nations to reduce trade restrictions.

• World Trade Organization ($WTO$): Established in $1995$ with nearly $150$ members to enforce trade rules and resolve disputes.

• International Monetary Fund ($IMF$): Provides loans to countries in financial crisis on the condition of economic reform.

• World Bank: Provides assistance/loans for poor and developing countries for social services and infrastructure (committed $128.3\,billion$).

• Trading Blocs:

  • $USMCA/CUSMA$: Free trade between U.S., Mexico, and Canada ($2020$).

  • European Union ($EU$): $27$ countries with eliminated internal barriers. The Euro ($1999/2002$) is used by most members, though six (including Denmark) opt for legacy currencies.

  • $CPTPP$: $11$ nations in Asia-Pacific ($2019$).

  • $CETA$: Canada-EU agreement making $98\%$ of goods duty-free.

  • $Mercosur$: Trading bloc of Argentina, Brazil, Paraguay, and Uruguay; Canada resumed negotiations in $2023$.