International Business: Key Concepts and Considerations
Foreign Portfolio Investment
Foreign Portfolio Investment refers to investment in businesses located outside Canada through stocks, bonds, and other financial instruments. It allows Canadians to spread out their investments, which is less risky than investing in just one area. It also provides greater choice and opportunity.
Importing
Importing is bringing products or services into a country for use by another business or for resale. The majority of Canada’s imports come from the US.
Global Sourcing
Global Sourcing is the process of a company buying equipment, capital goods, raw materials, or services from around the world.
Exporting
Exporting is sending goods or services to another country for use by a business or for resale. The majority of Canada’s exports go to the US.
Value Added
Value Added is the amount of worth added to a product at each stage of processing. It is the difference between the cost of raw materials and the cost of finished goods.
Licensing Agreement
A Licensing Agreement grants permission to a company to use a product, service, brand name, or patent in exchange for a fee or royalty. This can help a company achieve faster growth, gain flexibility, enter new markets, and increase profits.
Exclusive Distribution Rights
Exclusive Distribution Rights are a form of licensing agreement that grants a company the right to be the only distributor of a product in a specific geographic area or country.
Franchise
A Franchise is an agreement granted to an individual or group by a company to use that company’s name, services, products, and marketing. For a fee, the franchisor provides support to the franchisee in areas such as financing, operations, human resources, marketing, advertising, and quality control.
Joint Venture
A Joint Venture is a new company with shared ownership formed by two businesses, one of which is usually located in the country where the new company is established.
Tariffs
Tariffs, the most common type of trade barrier, are taxes or duties put on imported products or services. They raise the cost of imports, so that locally manufactured products are less expensive and more appealing to consumers.
Protectionism
Protectionism is the theory or practice of shielding domestic industries from foreign competition, often through trade barriers such as tariffs.
Trade Quotas
A Trade Quota is a government-imposed limit on the amount of product that can be imported in a certain period. The government does not impose a tax but limits how much enters the country.
Trade Embargo
A Trade Embargo is a government-imposed ban on trade of a specific product or with a specific country, often declared to pressure foreign governments to change their policies.
Trade Sanctions
Trade Sanctions are economic actions taken by a country to coerce another to conform to an international agreement or norms of conduct.
Foreign Investment Restrictions
The Canadian law with the greatest impact on foreign investment is the Investments Canada Act. It ensures that all foreign investments are reviewed to determine how they will benefit Canada.
Standards
Countries have different standards for products in areas such as environmental protection, voltage, and health and safety. The International Organization for Standardization is a network of standardization groups from over 170 countries established to set quality regulations.
Exchange Rate
The Exchange Rate is the amount of one country’s currency in relation to the currency of another country. The Canadian dollar is most often quoted against the US dollar because the two countries are the largest trading partners. Winners of a high Canadian dollar are importers, Canadian travelers, and major league sports teams. Losers of a high Canadian dollar are exporters, Canadian tourism, and Canadian retailers.
Floating Rate
A Floating Rate is an exchange rate that is not fixed in relation to other currencies. The price at which a currency with a floating rate is bought and sold fluctuates according to supply and demand.
Currency Revaluation and Devaluation
Currency Revaluation is the increase in the value of a currency because the demand for that currency is greater than the supply. Currency Devaluation is the decrease in the value of a currency because the supply of that currency is greater than the demand.
Hard and Soft Currencies
Hard Currencies are stable currencies, such as the Euro, and the US and Canadian dollars, which are easily converted to other currencies on the world exchange markets. Soft Currencies are currencies that belong to countries with small or weak economies and are difficult to convert, such as the Chinese Yuan and the Russian Ruble.
Currency Speculating
Currency Speculating involves buying, holding, or selling foreign currency in anticipation of its value changing in order to profit from fluctuations in the price of currency.
Time Zones
Communication technology allows the world of international business to operate 24 hours a day. Certain methods of communication can be used at any time (e.g., email, fax). Some methods offer immediate feedback and interaction; others do not.
Factors Affecting the Exchange Rate
- Economic conditions in Canada, such as the inflation rate, unemployment rate, GDP, and interest rates.
- Trading between countries: the more favorable the terms of trade (comparison of exports to imports), the higher the currency exchange.
- Politics: political tension and instability or the threat of terrorism decrease the demand for a currency.
- Psychological factors: historical significance and stability change the way currencies are viewed.
Foreign Subsidiaries
Often referred to as a wholly owned subsidiary, a Foreign Subsidiary is a branch of a company that is run as an independent entity in a country outside of the one in which the parent company is located. The parent company sets financial targets and allows the subsidiary to manage its own day-to-day operations as long as those targets are being met.