Chapter 3 - COMPETING IN GLOBAL MARKETS

COMPETING IN GLOBAL MARKETS Chapter 3 © 2013 McGraw-Hill Ryerson Limited 1 Globalization: companies manufacture, finance, and market worldwide Canada represents a potential market of only 34.6 million customers There are over 7 billion potential customers globally in 195 countries. The global market © 2013 McGraw-Hill Ryerson Limited 2 Canada and the global market Because the global market is so large, it is important to understand the language of international trade. Canada is a large exporting nation. Exporting is selling products (i.e., goods and services) to another country. Importing is buying products from another country. Competition in exporting is very intense and Canadian companies face aggressive competition from exporters around the world. © 2013 McGraw-Hill Ryerson Limited 3 Why Countries trade We trade to get goods that are not available locally. In Canada, we do not produce citrus fruit, so we trade for it. We produce other goods, like lumber, beyond our ability to consume, so we export these goods. Canada is also very strong in the auto parts and auto assembly industry – but since early 2009 this industry has seen serious challenges. © 2013 McGraw-Hill Ryerson Limited 4 The theory of comparative advantage Countries export those goods and services that they produce most effectively and efficiently . Countries import those goods and services where they do not have this comparative advantage. In practice, many countries ignore this economic principle. They inhibit the free flow of goods using duties and tariffs. They attempt to give their producers a competitive advantage. © 2013 McGraw-Hill Ryerson Limited 5 Canadian international trade While Canada has a small population, it produces vast quantities of products, ranking high in terms of nations that export. Exports alone account for one in five Canadian jobs and generate 30 cents out of every dollar earned. © 2013 McGraw-Hill Ryerson Limited 6 International trade: terminology Balance of Trade: the relationship between exports and imports. Balance of Payments: the difference between money coming into a country (from exports) and money leaving the country (for imports). Current account: the difference between money coming in and going out of the country from all sources. © 2013 McGraw-Hill Ryerson Limited 7 International trade: Terminology Dumping: selling cheaper in foreign markets than at home. Protectionism: using government regulations to keep foreign goods out. MNC: Multinational corporation. © 2013 McGraw-Hill Ryerson Limited 8 Trading in global markets: the canadian experience As a country, we rank eleventh in the world as both exporter and importer in world merchandise trade. Over 73 percent of our exports and a little under 69 percent of our imports are with the United States. No other modern industrialized country is so dependent on one country for trade and investments. © 2013 McGraw-Hill Ryerson Limited 9 Strategies for global markets © 2013 McGraw-Hill Ryerson Limited 10 Exporting Licensing Franchising Subsidiaries Joint ventures and strategic alliances Foreign direct investment Countertrading or barter Strategies for reaching global markets © 2013 McGraw-Hill Ryerson Limited 11 Exporting The simplest way of going international is to export your goods and services. With exporting the company does not necessarily have a physical presence in the company, their goods do. Strategies for reaching global markets Licensing A firm (the licensor) may decide to compete in a global market by licensing the right to manufacture its product or use its trademark to a foreign company (the licensee) for a fee (a royalty). In effect the product is not exported physically, the intellectual property is exported. © 2013 McGraw-Hill Ryerson Limited 12 Strategies for reaching global markets Franchising Franchising is an arrangement whereby someone with a proven business model sells the rights to use the business name and sell a product or service to others in a given territory. The franchisee takes more of the financial risk in the host country. © 2013 McGraw-Hill Ryerson Limited 13 Strategies for reaching global markets Contract Manufacturing Involves a foreign company’s production of private-label goods to which a domestic company then attaches its own brand name or trademark. The practice falls under the broad category of outsourcing. Contract manufacturing enables a company to experiment in a new market without incurring heavy start-up costs such as a manufacturing plant. © 2013 McGraw-Hill Ryerson Limited 14 Strategies for reaching global markets Joint Venture Basically a partnership in which two or more companies (often from different countries) join to undertake a major project or to form a new company. Strategic Alliance Long-term partnership between two or more companies established to help each company build competitive market advantages. Unlike joint ventures, however, they do not typically involve sharing costs, risks, management, or even profits. © 2013 McGraw-Hill Ryerson Limited 15 Strategies for reaching global markets: FDI Foreign direct investment Buying permanent property and businesses in foreign nations. FDI provides benefits to Canadian firms through the transfer of knowledge, technology and skills, and increased trade related to investment, all of which contribute to productivity growth and competitiveness. © 2013 McGraw-Hill Ryerson Limited 16 Strategies for reaching global markets © 2013 McGraw-Hill Ryerson Limited 17 Forces (Environments) affecting trading in global markets Social-Cultural Differences: In Turkey, it’s rude to cross your arms while you are facing someone. In India, never pat someone’s head as it’s the seat of the soul. Economic Forces: Global financial markets unfortunately do not have a worldwide currency. Changes in a nation’s exchange rates can have important implications in global markets. Global financial markets operate under a system called floating exchange rates © 2013 McGraw-Hill Ryerson Limited 18 Forces affecting trading in global markets Technological Forces: Technological constraints in some countries may make it difficult to use the same devices and same machinery everywhere Compatibility issues could take away any competitive advantage a company may otherwise enjoy. © 2013 McGraw-Hill Ryerson Limited 19 Forces affecting trade in global markets Political – Legal and Regulatory Forces In Canada, federal and provincial laws and regulations heavily affect business practices Canadian businesses must follow Canadian laws and regulations in conducting business globally. For example, bribery is not considered legal in Canada, (or outside Canada for Canadian firms) © 2013 McGraw-Hill Ryerson Limited 20 Trade protectionism Colonialism: the “Mother Country” would export finished goods to the colonies. The colonies provided raw materials and a market for finished goods. Mercantilism: (16th and 17th centuries): exports are good; imports are bad. Trade protectionism: is based upon these same ideas, the idea that it is possible to prevent imports while exporting. © 2013 McGraw-Hill Ryerson Limited 21 Protectionism practices Tariffs and quotas to limit imports. Revenue tariffs to generate funds for the government. Regulatory trade barriers: labeling, health, safety, emission standards can be used as trade embargoes. Restrictive paperwork or port facilities can act as non-tariff barriers. Non-tariff barriers are not as specific or formal as tariffs, import quotas, or embargoes but can be as detrimental. It’s common for nations to set restrictive standards that detail exactly how a product must be sold in a country. © 2013 McGraw-Hill Ryerson Limited 22 International trade organizations The World Trade Organization has over 100 members. The WTO is essentially a world trade referee for countries wanting to grieve that parties to trade agreements have broken the agreements. The IMF and the World Bank lend money to less-developed nations to finance trade. The IMF negotiates with a country to provide financial assistance if the country will agree to adopt certain policies to stabilize its economy © 2013 McGraw-Hill Ryerson Limited 23 Trade Agreements/unions: nafta A free-trade area among Canada, the United States, and Mexico. The objectives of NAFTA were to: (1) eliminate trade barriers and facilitate cross-border movement of goods and services among the three countries. (2) promote conditions of fair competition in this free-trade area. (3) increase investment opportunities in the territories of the three nations. (4) provide effective protection and enforcement of intellectual property rights (patents, copyrights, etc.) in each nation’s territory. (5) establish a framework for further regional trade cooperation. (6) improve working conditions in North America. © 2013 McGraw-Hill Ryerson Limited 24