Globalization and Business
“A desk is a dangerous place from which to view the world.”
John Le Carre
Agenda
• Globalization – What is it and why do Businesses and
Nations engage in international business
• How can firms get involved in international business?
• Promoting Trade and Barriers to Trade
Globalization
• The process by which the world economy is becoming a single
interdependent system – How we rely on each other
• Can’t really succeed as an economy without globalization
• Technology makes globalization and international business easier
Forms of Competitive Advantage
• Absolute Advantage
(1) A county is the only source of a particular product or (2) it can
make more of a product using fewer resources than other countries
• Comparative Advantage
A country can produce certain items with lower opportunity costs
than it can other items. Opportunity cost is what you (or an
economy) must give up to achieve something.
How do we measure trade in a given
economy?
1. Balance of Trade = A country’s exports minus A country’s imports = Exports – Imports
If Balance of Trade positive à Country has more exports than imports à Trade surplus
If Balance of Trade negative à Country has more imports than exports à Trade deficit
2. Balance of Payments = the difference between the total flow of money coming into a
country and the total flow of money going out = Money coming in minus money going out
Balance of Payments
vcash flow in – cash flow out
• exports • imports
• foreign tourist spending in • Canadian tourist spending
Canada overseas
• foreign investments in Canada • foreign aid grants
• earnings from investments • military spending abroad
outside of Canada • Canadian investment abroad
• earnings from foreign
investment in Canada
The Contemporary Global Economy
Imports
• products purchased
in Canada that are
manufactured in
other countries
Exports
• products made in
Canada that are
purchased by
consumers in other
countries
1. Exporting and importing
How can firms 2. Licensing and Franchising
get involved in 3. Contract manufacturing and outsourcing
international 4. Strategic Alliances and Joint Venture
5. Foreign Direct Investment and Subsidiaries
business? 6. Multinational firms
1. Importing and Exporting
Exporting and Importing
• An exporter is a firm that makes
products in one country and
then distributes and sells them
in others. Ex: A Canadian
business exporting lumber to US
• An importer buys products in
foreign markets and then
imports them for resale in its
home country. Ex.: A Canadian
business importing delivery
trucks made in Mexico
2. Licensing and Franchising
International Licensing: Company A (the licensor) allows another company in a foreign
country (Company B, the licensee) to sell Company A’s products in exchange for royalty
fees.
Ex. You make yummy ice cream in Canada and enter into an international licensing
agreement with a Japanese company, allowing the Japanese company to sell your ice
cream in Japan. The Japanese company pays you a % of sales in royalty fee.
International Franchising: Company A (the franchiser) grants a foreign company B (the
franchisee) the right to use its brand name and to sell its products or services.
Ex: McDonalds restaurant opens in Japan. Franchisee in Japan must follow the recipe,
rules, logo, branding, advertising, marketing etc. of McDonalds Headquarters (Franchiser)
3. Contract 1 2
manufacturing Contract Outsourcing: Having
and manufacturing: Firms
have their products
certain business
activities or functions
outsourcing manufactured in
foreign countries.
abroad
4. Strategic Alliances and Joint
Ventures
Strategic Alliance: A strategic alliance is an agreement
between two companies (or a company and a nation) to pool
resources in order to achieve business goals that benefit both
partners.
Joint Venture: Alliances in which the partners fund a separate
entity (perhaps a partnership or a corporation) to manage
their joint operation.
5. Foreign Direct Investment and
Subsidiaries
Foreign Direct Investment (FDI): Formally establishing business operations in another country
- building of factories, sales offices, and distribution networks in a foreign nation her than the
company’s home country.
• Is the most committed and expensive form of going abroad
Subsidiary: Form of FDI. It is an independent company owned by a foreign firm (called the
parent).
• Parent firm maintains control over operations, while the subsidiary employs local workers,
gets easy access to foreign market
6. Multinational firm
Multinational Firm: Firm
operating in multiple markets.
They often adjust their
operations, products,
marketing, and distribution to
mesh with the environments of
the countries in which they
operate.
“Going International”
Barriers to Trade
• Social and cultural differences: Differences in lifestyles,
habits and demographics
• Economic differences: Tariffs and Quotas, economic system
• Legal and political differences: Laws created to limit trade,
political interests that cause issues to emerge, protecting
citizens
Consumers and free trade
• Consumer fears • Consumer support
• Job losses • Access to markets
• Market flooded with cheaper • More exports – more jobs
goods • About trade – not cultural
• Loss of control sovereignty
Free Trade
• Agreements created by various countries to
allow free flow of goods
• Various organizations
European Union (EU)
• Was 25 nations and offered free trade
between countries
• Britain was in but always reserved
• Pulled out in 2016 - Brexit
• Replaces NAFTA
CUSMA – • Compared to NAFTA, USMCA increases
Canada-US- environmental and working regulations,
and incentivizes more domestic
production of cars and trucks
Mexica • gives the United States more access
agreement to Canada's dairy market, imposes a quota
for Canadian and Mexican automotive
on trade production
• And others
What did you learn today?
• Nations trade because they don’t produce all the products that their inhabitants need.
• To explain how countries decide what products to import and export, economists use the
concepts of absolute and comparative advantage.
• Balance of trade, and balance of payments are important measures of international trade
• For a company in Canada wishing to expand beyond national borders, there are a variety
of ways to get involved in international business: exporting, importing, franchising,
licensing, outsourcing, joint venture, strategic alliance, foreign direct investment
• Tariffs, quotas and embargo are used to restrict international trade
• Free trade is encouraged by a number of agreements, such as WTO, GATT, CUSMA
(formerly NAFTA) and the EU.
