Chapter 5 International Business

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Chapter 5 International Business
2
Context
0.5
1.8
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Context Contd

• Markets
• Supplies

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Todays class

• Free trade v protectionism
• Theoretical case for free trade
• Barriers to trade
• WTO, EU, NAFTA
• Differences across countries
• Currencies
• Culture
• Economic
• Legal
• Forms of intl business

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Free Trade v Protectionism

• Free trade level playing field
• Protectionism limits or costs on imports
• Why do you think governments adopt protectionist
  policies?

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Trade barriers

• Tariff
• Quota
• Administrative barriers

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Theory of comparative advantage - EXAMPLE

• Annie
• Marketing efficiency 1 project per 5 days
• Programming efficiency 2 30 days per project
• Bonnie
• Marketing efficiency 1 project per 15 days
• Programming efficiency 4 60 days per project
• Absolute advantage
• Comparative advantage

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Theory of comparative advantage International
context

• Shirt-making example suppose
• Canada 15 minutes
• Bangladesh 30 minutes
• Canada is more time-efficient
• Bangladesh is more cost-efficient (if wage rates
  are less than ½ of Canadian wage rates)

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Theory of comparative advantage International
context (contd)

• Canada can benefit from trade with Bangladesh
  even if Canada is faster at everything
• Canada should export goods it can produce way
  faster (e.g. telecommunications switches), and
  should import goods it can only produce slightly
  faster (e.g. shirts)
• Why? Shirt making diverts workers away from
  telecommunication switch production.

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Theory of comparative advantage International
context (contd)

• But not everyone benefits
• Suppose Canada and Bangladesh were to completely
  free up trade so that Canada freely imports
  shirts from Bangladesh while Bangladesh freely
  imports telecommunications switches from Canada.
  Which Canadians would gain from free trade, and
  which Canadians would be worse off? What about
  the Bangladeshis?

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Trade Organizations - Worldwide

• 1930s protectionism
• 1948 GATT formed
• 1995 WTO formed
• WTO has binding arbitration system
• 1999 Seattle

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Trade Organizations Worldwide (contd)

• Do you agree with the complaints of the WTOs
  opponents?
• Overall, do you think free trade is good or bad?

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Trade Organizations Worldwide (contd)

• Current Status
• Stalled
• Protesters have influenced governments
• Cancún Breakdown

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Trading Blocs - Regions

• WTO agreement is hard
• Need members consent
• Countries differ a lot
• EU, NAFTA

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Trading Blocs - EU

• Integration
• Free movement of goods people
• Currency
• Product standards
• Citizenship

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Trading Blocs NAFTA

• Many tariffs eliminated
• Integration?
• Still have border controls
• Different currencies
• Different product standards
• No common citizenship
• Why do you think the NAFTA countries have not
  integrated to the degree that the EU has?

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Currencies

• Outside of Europe, most countries have their own
  currency
• Fluctuate
• Yesterday US1 C1.1352
• Week ago US1 C1.1458
• Year ago US1 C1.1718
• 2 years ago US1 C1.5993
• Based on these rates, has the Canadian dollar
  appreciated or depreciated relative to the US
  dollar?

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Currencies (contd)

• Floating Rates supply demand
• Fixed rates e.g. HK7.75 US1
• Effects on business
• Transaction Costs
• Investment Risk Competitiveness

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Cultural Differences

• Language
• Role of English
• Non Verbal Cues
• Consumer tastes
• Religious differences
• Employment practices
• E.g.

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Economic Differences

• Rich countries / Poor countries
• Distribution of Wealth

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Legal Differences

• Different laws
• Different degrees of enforcement
• Different levels if government interference

Hernando Desoto
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Forms of Doing Business Overseas

• Exporting
• Subsidiary
• Joint venture
• Licensing
• What are some disadvantages to licensing?

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Context (again)

• Huge world of markets for our
• Telecommunications switches
• Aircraft
• Petroleum
• Paper
• We benefit from great
• Automobiles from Japan
• Manufacturing equipment from Germany
• We benefit from cheap
• Clothes and other goods from SE Asia