The 5 Ps of International BusinessDay 2

The Five Ps of International Business

• Product• Price• Proximity• Preference• Promotion

Product

• A country’s resources determine what goods and services it produces

• Canada’s larger forests provide lumber to countries that don’t have an abundance of them (I.e. Japan - small country with high population per capita)

Price

• Cost of producing goods and services varies from country to country

• Sometimes more profitable for businesses to

produce products overseas and then ship them

here to sell to consumers

• Lower foreign wages, taxes, and material costs

make it cheaper to produce products abroad

Proximity

• Sometimes advantageous and profitable for some businesses to sell products and services to consumers near a neighbouring country’s border

• For example, 80% of the Canadian population lives within 170 km of the American border - makes for easy transfer

• Many Canadian businesses trade extensively with Americans due to closeness (and high population in comparison to Canada - 316M vs 35M)

• The reverse is also true: Americans trading with Canadians

Preference

• Consumers often purchase foreign goods and services based on their reputation and specialization

• Occurs even though similar products are produced domestically

• Examples are Swiss watches, German cars and Belgium chocolates

Promotion

• Technology, especially the Internet, makes it easy for businesses to promote their products and services internationally

• Now develop brand name internationally in three years, before computers would take decades

Costs of International Trade

The hidden or social costs often associated with international trade include offshore

outsourcing, human rights or labour abuses, and environmental degradation.

Offshore Outsourcing

• Occurs when businesses decide to produce all or part of their goods in countries where labour costs are lower (contracting out) but remain in current country

• Advantages: proximity to natural resources, more efficient technology, indigenous innovation, and favorable tax structures

• Disadvantages: salaries, benefits, training, recruiting

• transnational corporations operate in several countries to produce their goods and services

Human Rights Issues and Labour Abuses

• Some workers in poor countries face labour exploitation, such as physical and sexual abuses, forced confinement, non-payment of wages, denial of food and health care, and excessive working hours

ETHICS!!!!

• Child labour—the regular employment of boys and girls under the age of 16—is commonly practiced in poor countries where the workforce is often exploited

Environmental Degradation

Sustainable development• process of developing land, cities, businesses, and

communities that meet the needs of the present generation without compromising those of the future.

Environmental degradation• consumption of natural resources, such as trees, water,

earth, habitat, and air, faster that nature can replenish them.

Barriers to International Trade

• Government use barriers, often referred to a roadblocks (red tape), to help protect domestic businesses and consumers

−China just announced that the government is advocating for the use of domestic products over international, making it harder for international companies to sell their goods in China

• Used to protect existing industries, protect consumers from problematic imports (cars not conforming to Canadian safety standards)

1. Tariffs (Customs Duties)

• A form of tax on certain types of imports

• Finished imported goods include tariffs, which increase their prices.

• Canadian products do not carry such tariffs, and, therefore, may be sold at lower prices (Buy Local!!)

• In an effort to protect their domestic industries, countries put up tariff barriers by increasing the cost of imported goods.

2. Non-tariff Barriers

• Are controls or standards for the quality of imported goods set so high that foreign competitors cannot enter the market (High emission controls on cars)

• Can be a licence application to sell goods

• Sometimes a customs inspection at the border (i.e European ban on hormone treated beef products)

3. Costs of Importing and Exporting

• Price of a product or service must take the landed cost into consideration (manufacturing, storage, marketing, shipping, advertising, overhead, profits)

• Shipping is one of the largest components of cost

• landed cost is the actual cost of an imported purchased item, composed of the vendor cost, transportation charges, duties, taxes, broker fees, and any other charges.

4. Excise Taxes

• A tax on the manufacture, sale, or consumption of a particular product within a country

• Use to raise money (10 cent per liter on gasoline raises $4 billion per year)

• Used to discourage people from certain activities (tobacco tax)

• Can be used to increase the cost of imported goods

5. Currency Fluctuations

• currency rates fluctuate on a daily basis, an international purchase made on one day may cost less or more than another purchase on the following day

• Shifting currency exchange rates vary as the economic strength of the two countries change on a daily or weekly basis

Flow of Goods and Services

• Imports, such as raw materials, processed material, semi-finished goods, and manufactured products, flow into Canada

• Goods and materials also leave Canada as exports

Balance of Trade

➔ To maintain a healthy balance of trade (relationship between the value of imports and the value of exports), countries try to import the same total value of products that they export.

➔ An imbalance of the two results in the following:

• a trade deficit in which a country pays more for imports than it earns from exports

• a trade surplus in which a country earns more from exports than it pays for imports

Do you remember what Canada’s trade was with China, Japan and Korea?

Imports

Five Ways to Offset the Risk of Importing

1.Measure consumer interest.

2.Use care when selecting foreign suppliers.

3.Learn about a foreign partner’s culture.

4.Carefully scrutinize the purchase agreement and then sign it.

5.Check goods for quantity and quality upon arrival.

Exports

• Direct exporting is exporting a product directly to an importer without using an intermediary

• Indirect exporting is exporting a product to an intermediary who then conveys the product to the importer

• Larger established companies usually use direct exporting while newer ones utilize indirect exporting

Canada’s Major Trading Partners

Canada’s number one trade partner is the United States.

Three major reasons for trading with the United States include

1.low cost shipping due to proximity

2.similar cultures (language, interests, product interest, and so on)

3.a market that is 10 timers larger than the domestic one

Canada and International Trade Agreements

Two Main Advantages to Reducing Trade Barriers

1. Domestic business can sell their products abroad at lower prices since duties are not added.

2. Consumers have access to new foreign products that may result in lower costs and quality improvement of domestic products.

Trade agreements between countries allow goods and service to flow more freely across borders.

World Trade Organization (WTO)

● 1947, the General Agreement on Tariffs and Trade (GATT) was signed by 23 nations who were allies in World War II.

● The trade agreement came into effective in 1948.

● Eventually, GATT grew to 115 member states before it was replaced by the World Trade Organization (WTO) in 1995.

● Today the WTO is the principal international organization that deals with rules of trade between nations (governs 97% of all world trade)

North American Free Trade Agreement (NAFTA)

● Canada-U.S. Free Trade Agreement (FTA) came into effect in January 1989

● In 1994, Mexico, the United States, and Canada formed the North American Free Trade Agreement (NAFTA)

● Reduced the number of tariff barriers

Other Free Trade Agreements

● Bilateral agreements involve Canada and one other country or group

● A trading bloc is a group of countries that share trade interests.

● See page 138 of textbook

The Group of Eight (G8)-now G7!!

● an association of the world’s most powerful industrialized democracies.

● Meeting annually, the G8 deals with economic and political issues facing their own countries and those of the larger international community

● Topics discussed include energy, employment, the environment, human rights, and arms control

Of note: Russia was booted from the G8 in March 2014 due to the ongoing crisis in Crimea, Ukraine - is now the G7!!

European Union (EU)

● 1993, the European Union (EU) united 12 member states into a true single market

● Today the EU has 28 members and over 500 million people - Croatia joined in 2013

● Produced single currency market (Euro)

● Not just a trading bloc, it has elected government and allows citizens to move freely between countries