Part 1 Business in a Global Environment

CHAPTER 4

Competing in World Markets

Chapter Summary: Key Concepts

1 Why Nations Trade

Importing/exporting Exports are domestically produced goods and services that

are sold in other countries. Imports are foreign-made
products purchased by domestic customers. International
trade is vital to a nation and its businesses because it
boosts economic growth by providing a market for its
products and access to needed resources.

International sources of Business decisions to operate abroad depend on the

factors of production availability, price, and quality of labour, natural resources,
capital, and entrepreneurship found in a foreign country.
Trading with other countries also allows a company to
spread risk, because different nations may be at different
stages of the business cycle or in different phases of
development.

Size of the international Most of the world’s population lives outside the
marketplace developed nations, providing a rich source of new markets
and customers. Firms looking for new revenue are
attracted to developing countries like China and India,
which represent opportunities for global business.

Major world markets While the major Canadian trading partners are the United
States, Mexico, China, and Japan, Canada has other
important global partners in all the world’s major market
regions.

Absolute and comparative A country has an absolute advantage when it can

advantage maintain a monopoly or consistently produce at a lower
cost than any competitor. This is very rare today. A
comparative advantage occurs when a nation can produce
one good more efficiently than can other producers, and
then exports what it does best. Each nation exploiting its
comparative advantage in the global marketplace leads to
higher standards of living everywhere.

2 Measuring Trade between Nations

Balance of trade The difference between a country’s exports and imports. If

exports are larger than imports, a trade surplus exists. If

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4–2 Study Guide for Contemporary Business, Second Canadian Edition

imports are larger than exports, the result is a trade deficit.

Balance of payments The overall flow of money into or out of a country.

Major Canadian exports and Canada’s top exports are industrial goods and
imports materials, energy products, and machinery and equipment.
Energy product exports have increased dramatically over
the past 10 years. Canada’s top imports are machinery and
equipment, industrial goods and materials, and automotive
products.

Exchange rates The value of one nation’s currency relative to the

currencies of other countries. These values fluctuate in
free floating exchange markets depending on each
country’s relative economic and political condition, the
intervention of its central bank, balance-of-payment
position, and speculation of future currency values.
Nations sometimes take deliberate action to devalue their
currencies as a way to increase exports and stimulate
foreign investment. When the value of one currency falls
relative to another, it is experiencing devaluation.

3 Barriers to International Trade

Social and cultural Differences in language, values, and religious attitudes

differences are challenges that must be recognized and overcome in
the global marketplace.

Economic differences A country’s size, per-capita income, and stage of

economic development are among the economic factors to
consider when evaluating it as a candidate for an
international business venture. In addition, infrastructure,
which includes communications, transportation, and
energy systems of a country, must be considered.

Political and legal differences The uncertain political climates in many parts of the world
have changed the market and legal environments in these
places. International business requires managers to be
aware of three dimensions of law: Canadian law,
international regulations, and the laws in the countries
where they plan to trade. To regulate international
commerce, Canada and many other countries have ratified
treaties and other agreements.

Types of trade restrictions Tariffs are taxes or surcharges imposed on imported

goods, and may be levied for the purposes of generating
revenue for a government or protecting domestic
industries. Nontariff barriers include quotas (a limit on

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 Competing in World Markets 4–3

imports) that help prevent dumping, an embargo (a total

ban on trade), and exchange controls (which regulate
currency exchanges).

4 Reducing Barriers to International Trade

Organizations promoting Organizations that promote international trade

international trade began with the General Agreement on Tariffs and Trade
(GATT), which was an international accord aimed at
reducing tariffs. Its successor, the World Trade
Organization (WTO), monitors trade agreements and
mediates trade disputes. The International Monetary Fund
(IMF) was created to promote trade, eliminate trade
barriers, and make short-term loans to member nations.

International economic International economic communities, such as the North

communities American Free Trade Agreement (NAFTA), Central
America-Dominican Republic Free Trade Agreement
(CAFTA-DR), and the European Union (EU), aim to
reduce trade barriers and promote regional economic
integration. They exist in various forms, such as a
free-trade area, a customs union, or a common market.

NAFTA The North American Free Trade Agreement created the

largest free-trade zone with the U.S., Canada, and Mexico
by eliminating all trade barriers and investment
restrictions.

CAFTA-DR The Central American-Dominican Republic Free Trade

Agreement created a free-trade area among the U.S., Costa
Rica, the Dominican Republic, El Salvador, Guatemala,
Honduras, and Nicaragua to reduce tariffs and trade
restrictions.

European Union The European Union (EU) is a 28-nation European

economic alliance. Its goal is to promote economic and
social progress and to achieve a borderless Europe. It also
introduced the Euro, the common European currency.

5 Going Global

Expanding into overseas markets Although expanding into overseas markets can increase
profits and marketing opportunities, it also introduces new
complexities to a firm’s business operations. Before
deciding to go global, a company faces a number of key
decisions, which include: determining which foreign
market(s) to enter, analyzing the expenditures required to
enter a new market, and deciding the best way to organize

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4–4 Study Guide for Contemporary Business, Second Canadian Edition

the overseas operations.

Levels of involvement Direct and indirect exporting is the simplest and least risky
level. Countertrade occurs when payments are made in
local products instead of currency. Contractual agreements
such as franchising, foreign licensing, or subcontracting
involve more risk but also more control. Firms can make
direct investment in a foreign market through acquisitions,
joint ventures, or establishing an overseas division for
greater control accompanied by greater risk.

Multinational corporation A multinational corporation (MNC) is a firm with

significant operations and marketing activities overseas.
MNCs expand overseas because they believe foreign
markets can offer great profits or provide low-cost labour
when compared with many developed nations.

6 Developing a Strategy for International Business

Global business strategies A global business strategy (also known as standardization)

offers a standardized, worldwide product and selling it in
essentially the same manner throughout a firm’s domestic
and foreign markets.

Multidomestic business strategies A multiple domestic business strategy (also known as

adaptation) develops and markets products to serve
different needs and tastes of separate national markets.

Business Vocabulary
balance of payments global business strategy
balance of trade imports
Central American-Dominican Republic Free infrastructure
Trade Agreement (CAFTA-DR)
countertrade International Monetary Fund (IMF)
devaluation joint venture
dumping multidomestic business strategy
embargo multinational corporation (MNC)
European Union (EU) North American Free Trade Agreement
(NAFTA)
exchange control quotas
exchange rate subcontracting
exports tariff
foreign licensing agreement World Bank
franchise World Trade Organization (WTO)
General Agreement on Tariffs and Trade
(GATT)

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 Competing in World Markets 4–5

Application of Vocabulary
Select the term from the list above that best completes the statements. Write that term in the
space provided.

1. ______ is the relationship between the flow of money into and out of a country.

2. A complete ban on importing certain products is called a(n) ______.

3. A ______ is a tax or surcharge on imports.

4. ______ is selling domestically produced products abroad.

5. A free-trade area between the U.S. and several Central American countries is known as the
______.

6. The ______ of a country is based on the rate at which its currency is valued against other
currencies.

7. ______ is the relationship between a country’s exports and imports.

8. The reduction in value of a country’s currency is called ______.

9. In order to help domestic industries, a ______ limits the number of products in certain
categories that can be imported.

10. Buying foreign goods and raw materials is defined as ______.

11. Governments that control access to foreign currency exchange in accordance with national
policy are exercising ______.

12. The ______ is the accord that removes trade barriers among Canada, Mexico, and the United
States.

13. If a country tries to penetrate foreign markets by selling goods or services abroad at a price
lower than it charges in its own domestic market, it is engaged in ______.

14. A ______ is a contractual agreement in which a wholesaler or retailer gains the right to sell
another company’s products under that firm’s brand name in compliance with that firm’s
operating requirements, common with fast-food firms.

15. The ______ is involved with making short-term loans to countries to promote international
trade.

16. A corporation that operates, produces, and/or markets on an international level is known as a
______.

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4–6 Study Guide for Contemporary Business, Second Canadian Edition

17. A firm following a ______ uses a standardized product and marketing strategy worldwide.

18. ______ occurs when a firm hires a local company to produce, distribute, or sell a good or
service in a foreign market.

19. A contractual agreement in which one firm allows another to produce or sell its product or
use its trademark, patent, or manufacturing processes in a specific geographic area in exchange
for royalties is a ______.

20. The ______ is an international trade accord to reduce tariffs and standardize trading rules
worldwide.

21. The ______ makes long-term loans for economic development projects.

22. International bartering agreements used to facilitate trade are known as ______.

23. The federation of European countries that seeks to protect and promote trade among them is
called the ______.

24. The ______ is the institution that succeeded GATT in monitoring and enforcing trade
agreements.

25. A ______ is a cooperative agreement that allows a company to share risks, costs, profits, and
management responsibilities with one or more partners in the host country.

26. If a firm relies on market segmentation to identify specific foreign markets, tailoring the
marketing mix to match specific traits, it is using a ______ ______.

27. A country’s basic system of communication, transportation, energy and other utility
resources is collectively called its ______.

Analysis of Learning Objectives

Learning Objective 4.1: Explain why nations trade.

True or False

1. ______ Foreign trade makes up a large portion of Canada’s business activity.

2. ______ Canada mainly trades with Western Europe over other areas of the world.

3. ______ Trading with other countries increases a company’s dependence on economic

conditions in its home market.

4. ______ Trading with other countries spreads out risk for multinational firms.

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 Competing in World Markets 4–7

Multiple Choice

5. If a nation has the ability to produce a product at lower cost than other countries, that nation
has:
a) an absolute advantage.
b) a monopoly.
c) a comparative advantage.
d) luck.
e) an excellent workforce.

6. Although it is rare, a country that is the sole producer of a product has:

a) an absolute advantage.
b) a comparative advantage.
c) an oligopoly.
d) a slight advantage.
e) luck.

7. Specialization of production among nations:

a) allows each nation to focus on producing what it does best.
b) means consumers have access to the most efficient producers of goods and services they want
to buy.
c) is the basis of international trade.
d) all of these answers are correct.
e) is a major means of raising the standard of living for people throughout the world.

Learning Objective 4.2: Describe how trade is measured between nations.

True or False

1. ______ A positive balance of trade is referred to as a balance surplus.

2. ______ An unfavourable balance of trade results in a trade deficit.

3. ______ A strong dollar helps Canada create a favourable balance of trade.

4. ______ Currency values rarely fluctuate.

5. ______ The overall flow of money into or out of a country comprises that country’s balance
of trade.

6. ______ All of the world’s major currencies are based on a fixed standard: the price of gold.

Learning Objective 4.3: Identify the barriers to international trade.

Short Answer

Describe how the following factors are related to global business.

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4–8 Study Guide for Contemporary Business, Second Canadian Edition

1. International regulations.

2. Political climate.

3. Currency conversions and shifts.

4. Language.

Learning Objective 4.4: Discuss reducing barriers to international trade.

True or False

1.______ Where obstacles to multinational economic integration still exist, the trend is toward
greater free trade.

2. _____ The European Union (EU) is composed of only western European countries in order
to avoid trading or job-related conflicts.

3. ______ The General Agreement on Tariffs and Trade (GATT) has been succeeded by the
World Trade Organization (WTO).

4. ______ NAFTA created a free-trade zone between Canada, Mexico, and the U. S.

5. ______ The World Bank is also known as the International Monetary Fund (IMF).

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 Competing in World Markets 4–9

Learning Objective 4.5: Explain the decisions to go global.

True or False

1. ______ A country’s level of risk falls as its level of involvement in global business increases.

2. ______ Contracting with a foreign manufacturer to produce a product rather than exporting it
is known as foreign licensing.

3. ______ Franchising works well for companies working to expand into international markets.

4. ______ While it is not generally considered a way of initiating business internationally,

offshoring, or the relocation of business processes to a lower-cost location overseas,
has become a widespread practice.

5. ______ In general, the greater degree of control a company exercises through foreign
investment, the less risk the company faces.

Learning Objective 4.6: Discuss developing a strategy for international business.

True or False

1. ______ In a global business strategy, a business will adjust how they sell a particular product
for each country.

2. ______ When a unique product and/or marketing strategy is designed for each foreign
market, a multidomestic business strategy is in use.

3. _____ Companies that neglect the global nature of the Internet can unwittingly cause
problems for potential customers by failing to adapt their strategy.

4. ______ Regardless of global business strategies, companies need to be aware of cultural and
business customs in the countries in which they do business and of whether certain
behaviours are accepted.

Self Review
True or False

1. ______ Canada is the world’s largest importer.

2. ______ Foreign trade is less critical to Canada than to countries such as Mexico.

3. ______ When a nation’s exports exceed its imports, it is said to have a favourable balance of
trade.

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4 – 10 Study Guide for Contemporary Business, Second Canadian Edition

4. ______ A favourable balance of payments means that there is a net money flow into the
nation.

5. ______ Countertrade involves business payments with currency rather than products.

6. ______ Dumping refers to a practice of countries carrying their waste products out to sea
beyond their international boundary and disposing of them in the ocean.

7. ______ An embargo imposes a total ban on importing a specified product or even a total halt
to trading with a particular country.

8. ______ The European Union is a common market.

9. ______ A tariff produces revenue for the government of the importing country.

10. ______ A complete ban on certain products is called a tariff.

11. ______ In a free-trade area, the participants have no tariffs or trade restrictions.

12. ______ Most companies choose not to establish an overseas division.

13. ______ Exchange control is the regulation of foreign trade through a central bank or
government agency.

14. ______ If a firm allows a foreign company to produce and distribute its products or use its
trademarks or patents, it is engaged in dumping.

15. ______ The International Monetary Fund was created to promote trade through financial
cooperation.

16. ______ The International Monetary Fund was established to make long-term loans to
countries requiring assistance in conducting trade.

17. ______ Virtually all successful global exporters are large firms.

18. ______ Developing nations often prove to have higher GDP growth rates.

19. ______ The number-one trading partner of Canada is now China.

20. ______ A country’s size, per-capita income, and stage of economic development are among
the economic factors to consider when evaluating it as a candidate for an
international business venture.

Multiple Choice

1. Which of the following does NOT affect the Canadian balance of payments?
a) tourism.
b) congressional budget actions.

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 Competing in World Markets 4 – 11

c) exports.
d) foreign investments.
e) imports.

2. Canadian firms operating abroad must conform to:

a) Canadian law.
b) host country law.
c) international regulations.
d) all of the above.

3. As a result of the Canadian ability to grow wheat, there is a surplus. What is the most
profitable short-term method to handle the surplus?
a) export the wheat.
b) lower the selling price.
c) store the surplus until there is a domestic shortage.
d) advertise it on television.
e. stop planting wheat.

4. At the end of the year, a country with limited resources determined that the amount of goods it
imported was approximately 30 percent more than the amount of domestically produced goods it
exported. The country has experienced:
a) an unfavourable balance of trade.
b) a successful attempt at self-sufficiency.
c) a favourable balance of payments.
d) an absolute advantage.
e. all of the above.

5. To help reverse an unfavourable balance of payments, a country might:

a) import more foreign goods.
b) supply an underdeveloped nation with personnel and equipment to help start a new industry.
c) start a campaign to encourage foreign tourists.
d) establish a military base in a friendly foreign country.
e. encourage its citizens to travel abroad.

6. Business firms that invest in foreign countries may be contributing to their own country’s:
a) favourable balance of trade.
b) ability to import more foreign goods.
c) employment standards.
d) unfavourable balance of payments.

7. Obstacles to international trade that occur due to uncertain transportation, poor

communications systems, and unreliable utility systems are examples of:
a) cultural barriers.
b) weak infrastructure.
c) tariffs and trade restrictions.
d) political and legal obstacles.

8. The price of imported goods is increased by:

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4 – 12 Study Guide for Contemporary Business, Second Canadian Edition

a) an evaluation of a nation’s currency.

b) a devaluation of a nation’s currency.
c) a revaluation of a nation’s currency.
d) the strengthening of a nation’s currency.

9. A floating exchange rate:

a) depends on the world price of gold.
b) is currently unpopular with most industrial nations.
c) varies according to market conditions.
d) automatically leads to devaluation of a nation’s currency.
e) depends on the level of rainfall.

10. The international business arrangement whereby Saudi Arabia sells oil to Japan in return for
fresh water would be an example of:
a) absolute advantage.
b) exchange rate fluctuation.
c) licensing.
d) countertrade.
e. specialization.

11. The lender of last resort for troubled nations is the:

a) World Bank.
b) International Monetary Fund (IMF).
c) NAFTA.
d) World Trade Organization (WTO).

12. A tax on imports is a(n):

a) tariff.
b) embargo.
c) exchange control.
d) quota.

13. A foreign firm given the right to produce, sell, or utilize a trademark, patent, or process in
exchange for royalty payments is a(n):
a) license holder.
b) joint venture.
c) exporter.
d) revenue agent.

Application Exercise
During a conversation between the director of the international division and the president of a
motor manufacturing company, the international director stated that the firm is less and less
involved in direct or indirect exporting and more involved in international production. She noted
that it may be to the firm’s advantage to either enter into a joint venture or set up a foreign
licensing agreement in other countries.

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 Competing in World Markets 4 – 13

The president also stated that while she is familiar with direct and indirect exporting, she knows
very little about joint ventures or foreign licensing agreements. She wants the director to write up
a report explaining each arrangement.

What should be included in the report?

Short Essay Questions

1. What exactly is a trade deficit, and how does it arise? What steps might a country such as
Canada take to reverse this situation?

2. In today’s growing global market, it’s important for businesspeople to be familiar with
exchange rates. Define exchange rate. What factors influence exchange rate? How can exchange
rate affect comparative advantage?

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