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Chapter 4: International Business
What Is International Business?
A domestic transaction is the selling of items produced in the same
country.
An international transaction is the selling of items produced in other
countries. These items contribute to the global economy.
Benefits for Business
• access to markets
• cheaper labour
• increased quality of goods
• increased quantity of goods
• access to resources

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Benefits for Business
Access to Markets
By trading abroad, Canadian businesses can gain access to markets
that are 200 times larger than those at home.
Customers in other parts of the world have different needs and wants.
Businesses must make adaptations to their products and services to
be successful in other countries.
A global product is a standardized item that is offered in the same
format in all countries.
Cheaper Labour
Lower prices as the result of cheap labour in other countries is the
number one reason why consumers buy items made in different parts
of the world.

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Increased Quality of Goods
International business can help producers improve the quality of the
products they sell.
Increased Quantity
As long as a product has international appeal, so does the potential
for increased sales.
Access to Resources
Connections to international markets provides businesses with
increased access to the three types of economic resources: natural,
human, and capital.

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The Five Ps of International Business
All countries benefit when businesses produce
specialized goods and services that appeal to
consumers.
International business provides increased markets
for businesses and offers them a broader choice of
products, services, and prices for its consumers.
The Five Ps of International Business
1. Product
2. Price
3. Proximity
4. Preference
5. Promotion

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Product
A country’s resources determine what goods and services it
produces.
Price
The cost of producing goods and services varies from country to
country. Sometimes it may be more profitable for Canadian
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 rather than domestically.
Proximity
It may be more advantageous and profitable for some businesses to
sell products and services to consumers near a neighbouring
country’s border rather than to its domestic customers. For example,
80 percent of the Canadian population lives within 170 km of the
American border. Therefore, many Canadian businesses trade
extensively with Americans. The reverse is also true: Americans
market many of their goods and services to Canada.

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Preference
Consumers often purchase foreign goods and
services based on their reputation and
specialization, even though similar products are
produced domestically. Two examples are Swiss
watches and Belgium chocolates.
Promotion
Technology, especially the Internet, makes it easy
for businesses to promote their products and
services internationally.

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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
Offshore outsourcing occurs when businesses decide to produce
all or part of their goods in countries where labour costs are lower.
Some advantages include proximity to natural resources, more
efficient technology, indigenous innovation, and favorable tax
structures.
However, offshore outsourcing faces potential changes in the future
as companies may turn to transnational corporations that operate
in several countries to produce their goods and services.

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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.
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 is the process of developing land, cities,
businesses, and communities that meet the needs of the present
generation without compromising those of the future.
Environmental degradation is the consumption of natural resources,
such as trees, water, earth, habitat, and air, faster that nature can
replenish them.

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Barriers to International Business
The Canadian government uses barriers, often referred to a roadblocks,
to help protect domestic businesses and consumers.
Tariffs
Tariffs, also called customs duties, are 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. In an effort to protect their domestic industries,
countries put up tariff barriers by increasing the cost of imported
goods.

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Non-tariff Barriers
Non-tariff barriers are controls or standards for the quality of
imported goods set so high that foreign competitors cannot enter
the market.
Costs of Importing and Exporting
The price of a product or service must take the landed cost into
consideration. The 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.

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Excise Taxes
An excise tax is a tax on the manufacture, sale, or
consumption of a particular product within a country.
Currency Fluctuations
Since 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.

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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, 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

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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.

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Offsetting Risks
Exporters reduce risks by planning carefully. As part of their plan,
they conduct market research to ensure that there are consumers for
their goods and services.
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

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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 boarders.
World Trade Organization (WTO)
In 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.

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Canada and International Trade
Agreements
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).
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.
The Group of Eight (G8)
The Group of Eight (G8) is 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.

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The Future of International Trade
The Asia-Pacific Economic Corporation (APEC) is an economic
development organization formed in 1889. The Asia-Pacific
market is the fastest growing trade group.
European Union (EU)
In 1993, the European Union (EU) united 12 member states into
a true single market. Today the EU has 15 members and a
population of more that 370 million people.
Evolution of NAFTA
If NAFTA becomes a single market, it could result in workers from
the US, Canada, and Mexico moving freely between countries.

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Impact of Cultural Differences
International trade depends on our response to and acceptance of
cultural differences. Culture is the sum of a country’s way of life,
beliefs, and customs.
Dealing with People
Conducting successful business in foreign countries involves learning
what is important to their populations as well as its cultural nuances.
Punctuality
The value of punctuality depends on the cultures: some cultures value
timeliness, some do not. It is important to understand this before visiting
foreign countries. Other characteristics to recognize are working at an
acceptable pace, having good manners, and learning to avoid waits and
disappointments.
Greetings
Greeting someone can leave an important first impression.

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Nonverbal Communication Signals
Nonverbal signals can convey more than words do.
Good Manners
In Canada, the United States, and some European
countries, business is completed at a quick and efficient
pace. Most other countries prefer to get to know people
before any business is done.
Decision Making
In North America, decision making is typically top-down. In
other cultures, decisions are made from the bottom up.
Global Dependency
Global dependency exists when customers in one country
demand items that are created in another.

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