International Business Defined

“All the business transactions (exchanges of

money) necessary for creating, shipping, and
selling goods and services across national
borders. Also referred to international trade or
foreign trade”

Wilson, Jack et al. The World of Business (5th ed) Canada, Nelson, 2007
 International Business
Terminology
Domestic Transaction
 Selling of goods produced in the same
country.

For example:
 You visit a store in your community (local
store) and purchase a bicycle that has been
manufactured in Canada.
International Transaction
 Selling goods produced in another country.
 Involves creating, shipping, and selling goods and
services across national borders.
 Also referred to as international trade or foreign trade.

For example:
 You go to Canadian Tire and purchase a tool that was
manufactured in China.
Economy
 The financial health of a place
 Municipal – Ottawa’s economy
 Provincial – Ontario’s economy
 National – Canada’s economy
 Continental – North American economy
 Global – Global Economy

 The health of an economy is generally

determined/measured by looking at factors such as
employment rates, interest rates, gross domestic product
data, trade deficits vs. surplus
Imports
A good or service brought into Canada from another country. (made in
China)
Exports
A product or service produced in Canada and sold in another country.
(made in Canada)
Trade Deficit
 When Canada imports more goods than it exports, we have what is called a
Trade Deficit.
 Imports > Exports = Trade Deficit
Trade Surplus
 When Canada exports more goods than it imports, we have a Trade
Surplus.
 Exports > Imports = Trade Surplus

Which do you think is better for the Canadian economy?

 Benefits To Businesses Participating in
International Business

1. Access to many more markets

2. Access to cheaper labour
3. Increased quality or quantity of goods
4. Access to resources that may not be available at
home.
1. Access To Markets
Canada’s Population:
 Roughly 33,600,000

World Population:
 Roughly 6, 500,000,000

Conclusion:
The Global market can reach
roughly 200 times more consumers
than simply just Canadian
consumers.
 Access To Markets
Access to the global market does not guarantee bigger sales.
Why?
Companies must adapt their products and/or services to:
1. different needs, wants and preferences based on
cultural differences and/or preferences
2. conform to different laws of various countries
Global Product
 A standardized item that is offered in the same form in all
countries in which it is sold. (i.e. pencils, soccer balls,
cameras)
2. Cheaper Labour
Businesses make profits when their sales are greater than their
costs of running the business.

Thus profits can increase even more by maintaining their sales

level and decreasing their costs of running the business.

The single largest expense of any business/organization is

generally the labour (employees and management wages and
salaries)

If a company can produce its goods and/or services in

another country where the labour laws allow businesses to
pay employees less than they would be paid in Canada, they
can reduce their costs of doing business substantially.

In addition to helping increase profits, businesses can pass on

those savings to consumers by reducing the price of the
items.

The cheaper an item is, perhaps the more the business will
also sell.
Cheaper Labour
3. Increased Quality of Goods

THE BMW X5
 Increased Quality of Goods
The BMW X5
 Its engine is assembled in Munich, Germany;
 Shipped to the production plan in South Caroline, U.S.;
 Magna Corporation in ON, Canada, manufacturers the
rear-view mirror;
 Leather seats come from South Africa;
 Michelin tires are manufactured in France

BMW wanted to create the best possible

product for its consumers so it searched for
the manufacturers that produced the best
quality in its car components.
4. Increased Quantity

Access to international markets may lead to an

increase in demand of products thus
increased quantities of goods sold.

Results:
Hours of operation may increase
New production facilities may open and
perhaps in other countries
Increase in job opportunities
 5. Access to Resources
Natural Resource
Since Bamboo is a scarce resource in Canada a
furniture company making bamboo furniture will
import (bring into the country) bamboo from
another country.

Human Resources
A Canadian company which opens up a factory
in China to take advantage of its cheaper labour
costs
Capital Resources
A company that purchases a specialized piece
of machinery needed for their plant that is only
made in Japan.
 The Five P’s of International
Business
1. Product
2. Price
3. Proximity
4. Preference
5. Promotion
 Product
 A country’s resources determine what goods and
services it can produce.

Examples:
Canada buys citrus fruits from
countries with warmer climates

Canada’s large forests and wheat fields

provide lumber and grain for countries
that don’t have an abundance of these
resources
 Price
Cost of producing goods and services
varies from one country to another

Costs usually include: wages, taxes and

raw materials

If a company can reduce its costs, then

it can offer products and services at|
lower prices and increase their profits.
 Proximity
Proximity to a fellow neighbouring country allows for a
company and/or country to benefit from doing business across
the border

80% of Canadian population lives with 170km of the

American border.
Example:
 Windsor, ON has a population of about 350 000
 Across the bridge from Windsor is Detroit, Michigan which
has a population of several million.
 Many people and businesses provide Detroit’s car
manufacturing plants with parts and labour.
Preference
Some countries specialize in certain goods
or services that have a reputation for
quality all over the world
Examples:
Belgian chocolates, Swiss watches,
German cars, Canadian wheat.
 Promotion

The internet and satellite broadcasting

have made it easier to inform people
around the world about goods and
services available.

Ease of electronic promotion and other

communications technology provides
incentive for businesses to reach
beyond their domestic market.
 Benefits and Costs of International
Trade
Benefits to Society and Consumers
1. Availability of products and services unavailable in
your own country
2. Broader range of prices offered (cheaper to purchase
various goods)
3. Job creation
4. Political Benefits – “countries that trade with one
another seldom go to war with each other.”
5. Opens up communication lines with people, improves
mutual understanding, and increases the level of
respect people from different countries have for one
another.
 Costs of International Trade

The hidden or social costs of international business

engaging in offshore outsourcing:

1. Human rights and labour abuses

2. Environmental degradation
 Offshore Outsourcing
 Also known as “contracting out.”

 The practice of hiring individuals from

countries where labour costs are lower to
complete some or all of the steps in the
production process.

Example:
 Many companies use call centres in India,
China and Costa Rica for customer service
and IT customer service.
 Offshore Outsourcing
Advantages
Lower costs to company which can focus
on tasks it does better

Be closer to natural resources needed

Proximity to more efficient technologies

Increase profits from lower labour costs,

another country’s innovations, and
different tax structure
Human Rights Issues and Labour
Abuses
Typical abuses in poor countries include:

1. Physical abuse
2. Sexual abuse
3. Forced confinement
4. Non-payment of wages
5. Denial of food and health care
6. Excessive working hours with no rest
7. Child labour
Human Rights Issues and Labour
Abuses
Child Labour defined
 Regular employment for boys and girls under
the age of 16
 Many countries ignore abuses that target
children and women.
 What can be done to stop Child Labour
and Human Rights Abuses?

International Labour Organization (ILO)

United Nations (UN) specialized
agency that seeks the promotion of
social justice and human and labour
rights that are accepted by all
countries.
Environmental Degradation
 Occurs when nature’s own resources such as
trees, habitat, earth, water, and air are being
used up (consumed) faster than nature can
replenish them.
 Sustainable Development

The process of developing land,

cities, businesses, and communities
that meet the needs of the present
without compromising the ability of
future generations to meet their
own needs.

Businesses need to be looking to

provide sustainable business practices.
 Barriers to International Business

Purpose of Barriers
To help protect domestic businesses and
consumers

May be used to:

1. help assist a new business getting started
2. protect an existing industry struggling in a
competitive global environment.
3. protect consumers from imports with problems or
that do not conform to Canadian safety standards.
Barriers to International Business

Barriers include:
1. Tariffs or Custom duties
2. Non-Tariff barriers
3. Increased costs of importing and Exporting
4. Excise taxes
5. Currency Fluctuations
1. Tariffs
 Also called “customs duties”.
 A form of tax on certain types of imports (goods coming into
Canada from other countries)
 Companies bringing in the goods from another country to sell
in Canada must pay the tariffs.
 Tariffs are based on a percentage of the retail value, (i.e. 5% of
retail selling price.) or;
 On another basis (i.e. $6 per kilogram)
 Money collected goes to the government.
 One of the most important tools for any government in
managing trade with other countries.
2. Non-tariff Barriers
Legal and policy standards for the quality of
imported goods are set so high that foreign
competitors can not enter the market.

Examples:
A Canadian law forces an international
company to apply for a license to do business in
Canada (it may be very time consuming and
expensive).
Government will allow some goods into the
country only after being inspected and having met
certain health and safety standards set out by the
Canadian Food and Inspection Agency.
3. Costs of Importing and Exporting

Landed Cost
 The actual cost for an imported purchased item.
 It is composed of the vendor cost, transportation
charges, duties, taxes, broker fees, and any other
charges associated with getting the product ready to
sell in a foreign market. (another country)
 Price of a good sold is based on the following costs among
others:
 Manufacturing (includes wages);
 storage;
 Marketing;
 Shipping;
 Advertising
 Overhead (Equipment, Heating etc, Salaries)
 % of profit the company wants to make on the sale

Depending on the laws of another country and

cultural differences, additional costs may be
incurred.
4. Excise Taxe

 A tax on the manufacture, sale, or consumption of a particular product

produced in your country
Governments use excise taxes to:
1. Raise money (i.e tobacco related health care costs)
2. Discourage people from engaging in certain activities
3. Increase the costs of imported goods to encourage consumers to buy
Canadian products.
Examples of excise taxes:
 10 cents per litre on gasoline for the federal government
 14.5 cents per litre on gasoline for the provincial government
 Excise tax on tobacco products varies from province to province
 5. Currency Fluctuations
 Converting the value of $1 Canadian dollar to US
currency and other national currencies.

Examples
Nov. 2000 - $100 US  $157 Canadian
Nov. 2007 - $100 US  $98 Canadian

Website to research a history of exchange rates

http://www.oanda.com/convert/fxhistory
Factors Affecting Exchange Rates
1. The financial health of Canada’s economy versus the US economy
2. Interest Rates

Example:
 If the Canadian economy is performing better than the US, the value of the
Canadian dollar will increase. The demand for the Canadian dollar rises.
Demand > Supply, the value rises.
 If interest rates are higher than those of other countries while inflation
remains fairly stable, the value of the Canadian dollar will increase.
Foreigners will be attracted to invest in Canadian funds where banks are
providing higher interest rates. Demand > Supply, the value rises.

Information on factors affecting exchange rates:

 http://www.bankofcanada.ca/en/backgrounders/bg-e1.html
Impacts of Exchange Rates
 Canadian economy is largely dependent on the value of imports and exports which can be
greatly impacted by the value of the Canadian dollar.
The US is Canada’s biggest trading partner.
 When Canadian Exports to US > US Imports = Trade Surplus
 When Canadian Exports to US < US Imports = Trade Deficit
Exports decrease when:
 the Canadian dollar increases in value to the US dollar, it makes
exports more expensive.
 the US economy is weak and the CD dollar is increasing, the US
will be purchasing less from Canadian businesses
Note: Canadian consumers also tend to purchase more products
from the US because the value of the dollar is higher, and
goods are often cheaper in the US, thus making imports
higher.
Result:
 Less sales revenue for Canadian businesses which in the long run, can end up hurting the
Canadian economy. For example, when businesses are earning less revenue, profits decrease
and if significant decreases occur, businesses may start laying off employees.
Flow of Goods And Services

Imports
 Goods and services flowing/coming into Canada

Exports
 Goods and services flowing/going out of Canada

Imports may include:

 Raw materials
 Processed materials
 Simi-finished goods,
 Manufactured goods ready for sale.

The less finished the imported goods, the more jobs they create
for Canadians.
 Canadian Imports 2008

Forestry
0.64% Products

Agriculture
6% and Fishing

12% Energy

14.50%
Other

16%
Automotive
21% products

Industrial
28%
Goods and
Materials
Machinery
0% 10% 20% 30% and
Data Source:
Equipment
“Imports of goods on a balance-of-payments basis, by product” Statistics Canada, September 10, 2009, [Online]. Available: http://www40.statcan.gc.ca/l01/cst01/gblec05-eng.htm
 Canadian Exports 2008
Foresty

Other
6%

Agriculture and Fishing

8%

12% Automotive Products

19%
Machinery and
Equipment
23%

Industrial Goods and

26% Materials

Energy

Data Source: 0% 10% 20% 30%

“Export of Goods on a Balance-of-Payment Basis” Statistics Canada. September 10, 2009. [Online]
Available:http://www40.statcan.gc.ca/l01/cst01/gblec04-eng.htm
Balance of Trade
 Relationship between a country’s total imports and total exports.

Trade Surplus = E > I

 Export$ are greater than Import$.
 Canadians are selling more products to other countries than they are
importing.
 If surplus is made up of primarily manufactured goods, then more jobs are
created for Canadians.

Trade Deficit = E < I

 Canadians are spending more money on importing goods from other
countries than selling/exporting goods to other countries.
 Usually means that fewer Canadian jobs are being provided
 Export Business
Two ways a business may export goods:

1. Through direct exporting

2. Through indirect exporting
Exporting Business
Direct Exporting
 The exporting company deals directly with the company that
will wishes to import the goods into his/her country.
 Conducted usually by established companies who have the
experience and resources to set up offices and sales staff in
foreign countries.
 More risky as the exporting company assumes all risky

Canadian China
Company Company
Indirect Exporting
 Goods move from the exporter to an intermediary, who is
often from the foreign country, and then on to the importing
business.
Intermediary
 Someone or another company who helps the exporter find a
company who wants to purchase and import your goods)

Canadian Intermediary China

Company Business or Company
Individual
Indirect Exporting
 Usually conducted by new businesses which don’t
have the resources, or global reputation
 Business share financial risks with the intermediary
 Some countries prohibit direct exporting, likely to
create jobs for local intermediaries. (i.e. in the Middle
East, Central America and Asia)
 Canada’s Major Trading Partners
Canada’s Top 10 Export Markets

Country 2004 2005 2006 2007 2008

U.S 84.4% 83.8% 81.5% 78.9% 77.64%
U.K 1.88% 1.89% 2.3% 2.84% 2.7%
Japan 2.08% 2.10% 2.14% 2.05% 2.29%
China 1.64% 1.65% 1.77% 2.11% 2.17%
Mexico 0.75% 0.77% 0.99% 1.10% 1.21%
Germany 0.65% .074% 0.90% 0.86% 0.93%
South 0.55% 0.65% 0.75% 0.67% 0.79%
Korea
Netherlands 0.47% 0.50% 0.70% 0.90% 0.77%

Belgium 0.55% 0.52% 0.55% 0.66% 0.70%

France 0.58% 0.58% 0.65% 0.69% 0.67%

Source: Statistics Canada: http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag

 Canada’s Major Trading Partners
Canada’s Top 10 Import Markets

Country 2004 2005 2006 2007 2008

U.S. 58.7% 56.5% 54.8% 54.2% 52.4%
China 6.77% 7.75% 8.70% 9.41% 9.83%
Mexico 3.78% 3.83% 4.04% 4.22% 4.13%
Japan 3.80% 3.89% 3.86% 3.80% 3.53%
Germany 2.65% 2.70% 2.82% 2.83% 2.93%
U.K. 2.71% 2.74% 2.74% 2.82% 2.91%
Algeria 0.87% 1.10% 1.25% 1.25% 1.78%

Norway 1.39% 1.59% 1.38% 1.32% 1.43%

South 1.64% 1.41% 1.45% 1.32% 1.39%

Korea
France 1.50% 1.31% 1.31% 1.25% 1.37%
Source: Statistics Canada: http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag
 Canada and US Trade
Relationship
Why does it make sense to establish a solid trading
relationship with the US?
1. Shipping costs are cheaper (proximity factor)
2. Similar culture and interests so same types of products
and services will appeal to citizens
3. Speak the same language, watch same TV programs,
movies, sports and similar fashion styles
4. Population of the states is 10x that of Canada’s
 International Trade Agreements
 Legal contract between or amongst nations who voluntarily agree to
conduct business affairs in each other’s country based on the terms set out
in the agreement.

Common terms outlined in the agreements include:

 Reducing tariffs and custom duties on various products to reduce trade
barriers;
 When and why people will be able to work across international borders;
 What qualifications one will need to work in another country;
 How business trade secrets will be protected (intellectual property);
 Process for resolving trade disputes amongst the participating countries in
the agreement.
 Advantages of Reducing Trade Barriers
Two main advantages:
Canadian businesses or other domestic
businesses are able to sell their products and
services to international markets at lower
prices because additional tariffs on exported
products are reduced or eliminated.

Increased competition motivates companies

to improve their quality or reduce their prices
in order to compete with imported goods.
(Great for the consumer)
History of the WTO

 WTO developed out of an international trade agreement

called the General Agreement on Tariffs and Trade
(GATT).
 GATT came into effect in 1948
 GATT was signed by Canada and 22 other nations who
were allies during World War II.
 An international organization was set up to help GATT
nations negotiate trade deals, resolve problems and
collect data about world trade.
 In 1995, the WTO replaced the initial GATT organization.
 The WTO currently has 139 member countries.
World Trade Organization
WTO Today
Main international organization that deals with the rules of trade between
nations.

The WTO provides a forum for negotiating agreements aimed at reducing

obstacles to international trade and ensuring a level playing field for all;

Contributes to global economic growth and development.

The WTO also provides a legal and institutional framework for the
implementation and monitoring of these agreements, as well as for settling
disputes arising from their interpretation and application.

The current body of trade agreements comprising the WTO consists of 16

different multilateral agreements (to which all WTO members are parties) and
two different plurilateral agreements (to which only some WTO members are
parties).

Governs approximately 97% of all world trade

Source: World Trade Organization http://www.wto.org/english/thewto_e/whatis_e/wto_dg_stat_e.htm

International Trade Agreements

General Agreement on Trade in Services

 GATS came into effect in 1995
 Sets guidelines for the trade of services such
as banking across international borders.
International Trade Agreements

North American Free Trade Agreement

Commonly known as NAFTA
Came into effect in 1994
Trade between Canada, US and Mexico is tariff
free for all products produced in the free-trade
zone except for exemptions mentioned.
Each day NAFTA countries conduct $1.7
billion in trilateral trade.
 NAFTA
Canada US Mexico
Economic  E.G. is up 30.9% since  E.G is up 38%  E.G. is up
Growth 1994 since 1994 30%
(E.G.)  Export sales have
(1994- increased by 104%
2003)  Export sales to US have
increased by 250%

Concerns  Depletion of Canada’s  Canada and  Wealthier

Expressed natural resources as US Mexico are northern
and Mexico have to much perceived to be countries
access taking away jobs are
 Canada’s cultural industries from Americans perceived
(book, magazine, and TV) as
are becoming exploiting
Americanized. Mexico for
its low
wages.
Trade agreements give businesses power over elected governments,
and in time, these agreements will erode democracy.
 Canada and Other Free Trade
Agreements
Regional Trade Agreements
 Trade agreements involving groups of countries

Bilateral Trade Agreements

 Trade agreements involving Canada and one other
country or group

Trading Bloc
 Group of countries that share the same trading
interests
Other Free Trade Agreements

Free Trade Area of the Americas

Central American Free Trade

Agreement (2004)

European Free Trade Association

(1960)

Asia-Pacific Economic Cooperation

(1989)
 The Future of International Business
1. Reduction of Protectionism
2. European Union
3. NAFTA
4. Impact of Cultural Differences
5. Global Dependency
The Future of International Trade
Protectionism
 a term to describe when countries seek to
protect their individual economic interests by
imposing tariffs on other countries or restricting
external trade.
 Economic experts agree that such practices will
hurt the global economy as it is all
interconnected.
 APEC is the fastest growing trading group and
largest trading bloc in the world and engages in
protectionism practices by imposing tariffs and
other trade barriers on countries outside of
APEC.
European Union (EU)
 27 European countries represent a single market
in Europe
 All but the UK and Denmark have adopted a the
euro as the single currency to be used in
member state
 EU court rulings over rule individual country
court rulings and/or laws.
 Citizens of member states may travel, move,
and work freely in each other’s countries.
 Population is currently about 370 milion.
Impact of Cultural Differences

Culture
 the sum of a country’s way of life, beliefs,
customs
 Influences how things are purchased, sold,
 Sets boundaries on what can or can not be done
 Impacts preferences, style, values, and norms
 May be represented by a specific language
Cultural Differences
 In order to do business with differing cultures,
much market research is needed to help
companies understand various similarities and
differences even when dealing with everyday
cultural norms dealing with people such as:
1. Punctuality
2. Greetings
3. Nonverbal communication signals
4. Good Manners
5. Decision making
 Punctuality
Punctuality Norms in North America?
 People are expected to be
on time
 Rely on books, calendars and
even pay a fee sometimes
for missed appointments
Punctuality Norms in Other Countries
 Time is considered flowing, flexible,
beyond’s people control
Other Differences

 North Americans read from right to left.

 Israel and Egyptians read left to right.

 This difference may impact the order in which a

sequential advertisement is laid out from one country
to another.