Chapter 3 Competing in Global Markets: A Comprehensive University Guide
Learning Objectives
Global Market Importance and Trade Theory: Describe the significance of the global market and analyze the roles of comparative advantage and absolute advantage in international trade.
Importing and Exporting: Explain the foundational importance of importing and exporting and define the technical terms utilized in global business transactions.
Global Reach Strategies: Illustrate the various strategies employed by companies to reach global markets and evaluate the specific role played by multinational corporations.
Forces Affecting Trade: Evaluate the diverse forces (social, economic, legal, and technological) that impact trading routines in the global environment.
The Changing Landscape: Discuss the ongoing shifts and evolving nature of the global market landscape.
The Globalization of the Modern Market
Globalization Defined: A process where companies manufacture, finance, and market their products and services worldwide.
Market Size Comparison:
Canadian Market: Represents a potential customer base of approximately .
Global Market: Represents over potential customers distributed across countries.
Supply Chain and Current Events:
Global Shortages: Recent crises include a shortage of a microchip that caused significant pauses in production for several automakers.
Labor and Food Industry: The food industry has faced labor shortages designated as a situation where the "entire world is short-staffed," threatening to cause a rise in food prices.
Sourcing Awareness: Modern business requires understanding the origin of materials, such as where shoes or smartphones are manufactured (e.g., Good Housekeeping reports on shoe comfort and manufacturing).
The Fundamentals of International Trade
Necessity for Trade: No country, regardless of its technological advancement, can produce every product its citizens desire or require. Trade is essential to acquire goods not available locally.
Canadian Specifics:
Imports: Canada does not naturally produce citrus fruit, necessitating trade to acquire it.
Exports: Canada produces natural resources like lumber in quantities far exceeding domestic consumption, leading to the export of the surplus.
Key Definitions:
Exporting: The act of selling goods and services to another country.
Importing: The act of purchasing products from another country.
Competition: Exporting is a highly intense field; Canadian firms face aggressive competition from global exporters.
The Advantages and Disadvantages of Free Trade
Pros of Free Trade:
Access to a global market of more than potential customers.
Improvement in productivity as nations focus on goods/services where they hold a comparative advantage.
Keeps prices down through global competition and less-expensive imports, preventing inflation from hindering economic growth.
Inspires innovation for new products and maintains competitive pressure on firms.
Uninterrupted flow of capital provides access to foreign investment, helping to keep interest rates low.
Cons of Free Trade:
Domestic job loss (particularly in manufacturing) due to production shifts to low-wage markets.
Downward pressure on wages as employers may threaten to move operations to lower-cost regions.
Loss of service and white-collar jobs as operations move overseas due to competitive pressure.
Domestic firms risk losing their comparative advantage when competitors establish advanced facilities in low-wage countries.
Economic Theories: Absolute and Comparative Advantage
General Principle: Countries should export goods/services they produce most effectively and efficiently, while importing those where they lack such advantages. In practice, many nations ignore this by using duties and tariffs to generate artificial competitive advantages.
Comparative Advantage:
Definition: A country should produce and sell items it can produce more cheaply than it can other items.
Comparison Example: Canada holds a comparative advantage in forestry products, while Japan holds a comparative advantage in cars and electronics.
Absolute Advantage:
Definition: A country has an absolute advantage when it can produce a specific product better or more cheaply than any other country.
Comparison Example: South Africa historically maintained a virtual monopoly on diamond production, representing an absolute advantage.
Canada's Position in International Trade
Economic Impact: Exports generate out of every dollar earned in Canada.
Employment: Exports account for of all Canadian jobs.
Small Business Role: In Canada, small businesses account for roughly half of the total private labor force and represent the majority of exporters. There has been a trend of increased small-business involvement in international trade.
Primary Trade Partners:
Over of Canadian exports go to the United States.
Approximately of Canadian imports originate from the United States.
Strategic Approaches to Global Expansion
Strategies are categorized by their level of commitment, control, risk, and profit potential, ranging from the least (Licensing) to the most (Foreign Direct Investment).
Licensing: A licensor grants a foreign company (licensee) the right to manufacture its product or use its trademark for a fee, known as a royalty.
Exporting: The simplest entry method. Global success in exporting often evolves into licensing to better serve local markets via local production.
Franchising: A franchisor sells the rights to use a business name and sell products/services in a specific territory. Adaptation to local culture is critical for success.
Contract Manufacturing: A form of outsourcing where a foreign company produces private-label goods for a domestic company to brand. It allows market experimentation without high start-up costs for plants.
International Joint Venture: A partnership between two or more companies (often from different nations) to undertake a major project or form a new entity. They share costs, risks, management, and profits.
Strategic Alliance: A long-term partnership to build competitive advantages. Unlike joint ventures, these typically do not involve shared costs, risks, management, or profits.
Foreign Direct Investment (FDI): Buying permanent property or businesses in foreign nations. FDI benefits Canadian firms through the transfer of knowledge, technology, skills, and increased productivity.
Forces Affecting Global Trade
Social and Cultural Differences: Variations in values and habits. Example: Starbucks in China launched a "family forum" featuring stories from managers to appeal to China's achievement-oriented culture and customize their offering.
Economic and Financial Forces: Global finanacial markets use a system of floating exchange rates rather than a single worldwide currency (No worldwide currency). Fluctuations in exchange rates significantly impact trade value.
Technological Forces: Constraints in infrastructure may prevent the use of standard machinery or devices. Developing nations may lack the same levels of computer and internet usage seen in North America and Europe.
Legal and Political Forces: Canadian firms must adhere to Canadian laws even when abroad. For example, bribery is illegal for Canadian businesses conducting global operations. Regulatory environments vary by province and federal level.
Key International Trade Agreements and Organizations
CUSMA (Canada-US-Mexico Agreement): The successor to NAFTA, establishing a free-trade area with objectives to eliminate trade barriers, promote fair competition, increase investment, protect intellectual property (patents, copyrights), and improve working conditions.
European Union (EU): A union of nations characterized by a common currency, no tariffs, and no non-tariff barriers. Factors like Brexit have shifted its recent landscape.
World Trade Organization (WTO): Consists of members. It functions as a "world trade referee" to resolve grievances over trade agreement violations.
International Monetary Fund (IMF): Provides financial assistance to nations on the condition that they adopt specific policies to stabilize their economies.
World Bank: A group of five institutions, including the International Bank for Reconstruction and Development. It funds large-scale projects that international businesses can participate in.
Future Outlook and Globalization
Emerging Economies (BRIC): Brazil, Russia, India, and China represent massive populations and growing economies, offering significant trade opportunities.
Competition and Innovation: To stay competitive, Canada must remain aware of global challenges and prioritize innovation and entrepreneurship.
Sustainability of Trade: Trade remains essential because resources and skills are not distributed evenly; however, firms must navigate trade protectionism, including tariff and non-tariff barriers.