answer the questions please chapter 8 page number 287 to 327 pages 2

Concept Application:
Beijing and the Calgary Oil Sands

2. How are the following parties potentially affected by this takeover? Discuss both the potential benefits and negative consequences that each may experience as a result.

a. CNOOC

b. Nexen

c. Canadian employment

d. The Canadian economy

e. Canadian competitors in this industry

f. Global competitors in this industry

Copyright 2015 Pearson Canada Inc.

*

Although there is no universally agreed-upon definition, globalization may be considered as a process involving the integration of national economies and the process of generating a single world economic system.

Globalization can be considered a process that is expanding the degree and forms of cross-border transactions among people, assets, goods, and services.

Globalization refers to the growth in direct foreign investment in regions across the world.

Globalization also reflects the shift toward increasing economic interdependence—the process of generating one world economic system or a global economy.

So, we have a global economy, but why would businesses want to go global? What are the motivating factors? “Pull” factors and “push” factors are two broad categories.

Under “pull” factors, certainly, businesses may want to increase sales, and expand into new markets. This can help businesses grow. A business, however, may also need resources (that is, raw materials) in order to produce goods and services. Certainly, as China and India’s economies grow, Canada can trade its natural resources and develop stronger economic relationships with these countries.

Pull factors are more internal motivating factors for a business to go global.

Push factors, on the other hand, are more the external environmental factors pushing businesses to compete globally. The force of competition is one reason.

A shift towards democracy is another. Certainly, as many countries are opening their borders to trade more with others countries, this is allowing businesses and their competitors to sell their products and services in these new markets. Perhaps one symbol of this acceptance was the success of McDonald’s in entering the Russian marketplace years ago. Similarly, there has been a great interest in foreign investment in China since its move toward privatization—that is, the reduction in government ownership—in many areas. A reduction in trade barriers has also allowed further trade.

Another fundamental source of influence on globalization has been technology. Advancements in technology have more efficiently facilitated cross-border transactions. Innovations in information technology, as well as advances in transportation, have made it increasingly easy to transfer information, products, services, capital, and human resources around the world. Email, the Internet, teleconferencing, faxing, and transatlantic supersonic travel were among the activities that were not available until the late 20th century.

There are a variety of ways that organizations engage in global business.

• Exporting and Importing
• Outsourcing/Offshoring
• Licensing and Franchising Arrangements
• Direct Investment in Foreign Operations - Foreign direct investment (FDI)
• Joint Ventures and Strategic Alliances
• Mergers and Acquisitions
• Establishment of Subsidiaries

Exporting and Importing - Businesses that engage in international trade are more likely to be involved in importing and exporting than in any other type of global business activity. While there are about 30 million potential customers within our Canadian borders, there are over 6 billion potential customers across the world, increasing by about 95 million people annually. Many Canadian businesses have taken advantage of the benefits of exporting. Canada exports over 40% of our production, making us a major trading nation.

Over a 10 year period, between 2001 and 2011, Canada’s exports have been steadily increasing.

Outsourcing/Offshoring - As you may recall, outsourcing involves hiring external organizations to conduct work in certain functions of the company. So, for example, payroll, accounting, and legal work can be assigned to outsourced staff. Nike has typically entered into contractual arrangements with manufacturers in developing nations to produce its footwear while it focuses largely on marketing its product. In fact, this has been a major underlying source of controversy with regard to businesses “going global”—the fear that relatively higher-paying North American jobs will be lost as businesses decide to outsource manufacturing functions to cheaply paid labour in developing countries. There are also ethical factors to consider.

In Chapter 10, we will examine ethics and corporate social responsibility issues that businesses must address when health, safety and labour laws are lacking with their suppliers in other countries, and how outsourcing or offshoring can be a risk in damaging their businesses’ reputation.

Licensing and Franchising Arrangements - The licensing agreement is an arrangement whereby the owner of a product or process is paid a fee or royalty from another company in return for granting them permission to produce or distribute the product or process. How could this be a type of global business activity? Franchising shares some of the advantages of licensing, in that both are relatively lower risk forms of global business. Franchising is, of course, a common type of business activity in Canada and elsewhere. This becomes a global business activity when the franchises are scattered in different locations around the world.

Tim Hortons is an example of a Canadian corporation that has franchised out its business across Canada and the United States.

Direct Investment in Foreign Operations - Foreign direct investment (FDI) involves the purchase of physical assets or an amount of share ownership in a company from another country to gain a measure of management control. Foreign direct investment in Canada is the second highest in the G7 as a share of GDP.

Why would businesses wish to engage in foreign direct investment? Controlling companies can obtain access to a larger market or needed resources via the FDI. Earlier in the process of globalization, direct investment was, in a sense, a substitute for trade.

Since 1996, foreign direct investment in Canada, as well as Canada’s investment in other companies’ abroad, has risen considerably.

Joint Ventures and Strategic Alliances - A joint venture involves an arrangement between two or more companies from different countries to produce a product or service together, or to collaborate in the research, development, or marketing of a product or service. This relationship has also been referred to as a strategic alliance. Strategic alliances often aim to extend or enhance the core competencies of the businesses involved, obtain access to the expertise of another organization, and generate new market opportunities for all parties involved. A typical arrangement may exist between a multinational corporation (MNC) and a local partner, since this facilitates the MNC’s quick entry into a new foreign market through the joint venture with an already established local business.

Mergers and Acquisitions - A Canadian-owned company could actually merge with a foreign-owned company and create a new jointly owned enterprise that operates in at least two countries. This is called a merger. Why do such mergers occur? A number of factors typically generate the drive to merge, including the goal of obtaining new markets for the business and the desire to obtain new knowledge and expertise in an industry. The notion of achieving economics of scale in production may also influence the decision to merge.

Establishment of Subsidiaries - Another well-known type of global business activity is the creation of subsidiaries or branch operations in foreign countries through which the enterprises can produce or market goods and services. What are the benefits of such types of global arrangements? If the foreign country is a high source of sales for the enterprise, it may make sense to establish a presence in that country to be more responsive to local consumer needs. Among the risks is the fact that much more is at stake when the company has invested in a wholly owned subsidiary— including the time, effort, and expense they have invested to create this operation.

Royal Bank is an example of one company that has many subsidiaries. The financial institution has offices in Canada, the U.S., and 42 other countries.

Royal Bank is also an example of a multinational.

What is a multinational corporation, and why are we seeing its presence increasing across the globe?

The first place to start is to offer a definition. What exactly are multinational corporations, and in what way are they “global businesses”? A global business is a business that engages directly in some form of international business activity, including such activities as exporting, importing, or international production. A business that has direct investments (whether in the form of marketing or manufacturing facilities) in at least two different countries is specifically referred to as a multinational corporation (MNC).

One example of a well-known Canadian MNC is Bombardier, which is very much a part of the global market. This company has operations that include transportation equipment and aircraft production. While its head office is in Montreal, nearly 90% of its sales are in markets outside of Canada. It has production facilities in locations including Canada, the United States, France, and Austria, and it markets products on five different continents.

What benefits do multinationals offer? They:

• Encourage economic development.
• Offer management expertise.
• Introduce new technologies.
• Provide financial support.

• Create employment.
• Encourage international trade.
• Bring countries closer together.
• Facilitate global cooperation.

What risks or disadvantages do multinationals pose?

• MNCs have no allegiance to the host country.
• Profits are returned to the home country.
• Decision-making can be highly centralized.
• And MNCs can be difficult to control.

Teaching note: This is a general question for students to think about what U.S. companies exist in Canada and how large their presence is. This can be structured in smaller groups or a general class discussion and can be used as a fun game as far as who can come up with the highest number of U.S. companies in Canada (within a certain period of time) Students can start thinking about where they shop, and various industries impacted.

The globalization of business may be a relatively new buzzword, but one of its fundamental forms has been around for a long time: the notion of international trade. International trade essentially involves the purchase, sale, or exchange of goods or services across countries.

The Logic of Trade - One fundamental argument is that since some countries can produce certain goods or services more efficiently than others, global efficiency and hence wealth can be improved through free trade. Free trade is based on the objective of open markets, where a level playing field is created for businesses in one country to compete fairly against businesses in other countries for the sale of their products or services. The aim reflects the fundamental principles of comparative advantage. Each country expects to take advantage of each other’s strengths, and thereby be permitted to focus on their own strengths.

Mercantilism - The trade theory underlying economic thinking from the period ranging from about 1500 to 1800 was referred to as mercantilism. Specifically, the fundamental view was that a country’s wealth depended on its holdings of treasure, typically in the form of gold. Mercantilism, essentially, is the economic policy of accumulating this financial wealth through trade surpluses. Trade surpluses come about when a country’s exports exceed its imports. Typically, the governments would also subsidize domestic industries to encourage growth in their exports. Trade between mercantilist countries and their colonies resulted in large profits, given that the colonies typically were paid little for their raw materials but were forced to pay high prices to purchase the final Products. Japan has often been viewed as a mercantilist country because of its typically high trade surplus with a number of industrial nations, including the United States.

Trade Protectionism - Essentially, trade protectionism is about protecting a country’s domestic economy and businesses through restriction on imports. Why might imports be a threat to a country’s businesses and economy?

Low-priced foreign goods that enter the country could compete with goods already produced here and, in effect, take business away from domestic producers. The ultimate consequence may be loss of sales and loss of jobs for domestic industries that are unable to compete with these lower-priced imports.

A country that imports more than it exports will have a negative balance of trade, or a trade deficit , which often results in more money flowing out of the country (to buy the imported goods) than flowing in (for our exports).

Another common form of trade barrier or restriction is the import quota, which limits the amount of a product that can be imported. The reasons for this restriction are the same: to help ensure that domestic producers retain an adequate share of consumer demand for this product.

What’s Wrong with Mercantilism and Protectionism? The practice creates a “one-way street” of trade, so to speak. That is, a mercantilist country aims to maximize the goods and services it sells to other countries, yet it expects to restrict the goods and services that these same countries attempt to sell to it.

Promoting International Trade - Whether it is tariffs or quotas or other forms of protectionism, we have seen a gradual lifting of trade restrictions as part of the wave of globalization. Most countries are endeavouring to eliminate trade barriers altogether. There are different forms of regional economic integration.

Regional economic integration means bringing different countries closer together by reducing or eliminating obstacles to the international movement of capital, labour, and products or services. A collection of countries within such an integrated region is typically referred to as a regional trading bloc. Why do countries endeavour to integrate? It is, largely, a logical conclusion to maximizing the benefits of international trade.

Regional integration can occur at different levels of intensity, so to speak. These include, from the lowest to the highest levels of integration, free trade areas, customs unions, common markets, and economic unions.

Free trade area: This form of economic integration involves the removal of tariffs and nontariff trade barriers (that is, subsidies and quotas) on international trade in goods and services among the member countries. Given that this form involves the lowest degree of regional economic integration, there is greater member autonomy with regard to such issues as how it chooses to deal with nonmembers.

Customs union: This form of economic integration involves the removal of trade barriers on international trade in goods and services among the member countries. However, given that this form involves a somewhat greater degree of economic integration, there is less member autonomy with regard to such issues as how it chooses to deal with nonmembers and what types of barriers it should construct against nonmember countries.

Common market: This form of economic integration builds on the elements of the two previous forms, including the removal of trade barriers and the implementation of a common trade policy regarding nonmembers. Given the requirement of cooperation in economic and labour policy, this level of economic integration is more difficult to achieve than the previous two levels.

Economic union: This form of economic integration builds on the previous three forms and, in addition, involves a coordination of economic policies among the member countries. It requires a higher level of integration than a common market because it involves the harmonization of fiscal, monetary, and tax policies.

European Union (EU) - In 1992, 12 nations of Europe established a common market called the European Community (EC) and in 1994, after adding several new members, it became known as the European Union (EU). The European Union is a common market with a single currency and a free flow of money, people, products, and services within its member countries. Currently, there are 27 member states within the EU, with some members also adopting a common currency (the euro) and monetary policy.

Asian Trading bloc - Another region of growing importance to Canada has been the Asia-Pacific region. This region has a total population of about 2 billion people—approximately twice that of the European community. In addition to the drive for greater economic integration and free trade in Europe and North and South America, Asia has also sought to create trading blocs. Singapore, Hong Kong, Taiwan, and South Korea (also referred to as the Four Tigers), together with the relatively dominant partner, Japan, have grown to become an increasingly integrated economic region.

• Association of Southeast Asian Nations (ASEAN) – ASEAN was the first major free trade bloc in Asia. It aimed to promote greater cooperation in areas such as industry and trade among its members. At the same time, member countries were protected by trade barriers from nonmembers.
• Asia-Pacific Economic Cooperation (APEC) – APEC was a trading bloc formed in 1989. Among the members are the People’s Republic of China, Hong Kong, Japan, Indonesia, Malaysia, South Korea, Canada, and the United States, to name a few of the 21 members.

In 1994, the North American Free Trade Agreement (NAFTA) was established, which was an agreement to remove trade barriers between Canada, the United States, and Mexico. This agreement, which replaced the FTA, essentially aimed to produce a common market among the members. There has been much debate regarding the impact that NAFTA has had on the three member countries.

How has NAFTA impacted Canada? What are some of the arguments in support of and against NAFTA when we consider the following areas: business, the consumer, employment, trade and culture?

Those in favour of NAFTA argue it has many advantages such as the following:

1. increases in trade and exports

2. increases in GDP

3. creates synergies between 3 countries that “go beyond economic prosperity”

4. foreign competition forces domestic companies to improve products, processes and customer service to be more competitive

5. forces countries to reduce/abolish inefficient operations and to direct efforts where they can obtain a competitive advantage

Other advantages are:

6. Canadian culture is supported (eg. music royalties).

7. more choice of goods/services.

8. less expensive goods/services..

9. less (or no) taxes/tariffs on imported goods.

10. allows a free and open market.

Those opposed to NAFTA argue it has many disadvantages:

1. increases in foreign imports, competing with Canadian goods.

2. increases in trade only due to Canadian low dollar, not NAFTA.

3. Canada still trades mainly raw materials/natural resources, not technology-based exports.

4. too dependent on trade with U.S.; still need to improve trade with other nations globally.

5. Canadian companies cannot compete against U.S. and other larger international companies.

Other disadvantages include the following:

6. Jobs are being lost to Mexico where there are cheaper wages.

7. Canadians lose jobs when U.S. companies decide to shut down in Canada and now just ship goods directly from the U.S. across the border tariff-free.

8. American companies will focus on “American” culture, and will indirectly discourage Canadian culture by having a dominant presence.

9. Canada will become an “economic subsidiary” of the U.S.

10. NAFTA has not caused an increase in productivity.

Teaching note: Refer to the Instructor’s manual for suggested answers to this case.