Business Across Borders

• Objectives of this session– Define “international.”– Introduce the key international business (IB)

transactions and entities.– Analyze the factors that make international

business more costly than domestic business and—potentially—more rewarding: The six forms of separation.

Transactions• Current Account

– Goods– Services– Income payments

• Financial Account– Portfolio Investment– Direct Investment

Foreign exchange transactions underlie these transactions

Goods transactions• The transfer of ownership of a tangible

and moveable object. Trade is usually accompanied by the transfer of “title of ownership.”

• Identifying the “nationality” of a good can be tricky because portions of goods are produced in different countries.

Services transactions• Def.: Actions performed by a provider that benefit a

consumer.• Balance of payments transactions are based on the

residence test. They include:– a lawyer resident in Canada giving legal advice via

phone, email, fax to a client in the United States– Chinese accountants travelling to Canada to learn

about international business from an American who is resident in Canada

• WTO covers other modes of service provision as well:– “Commercial presence” covers services provided by

foreign branches and subsidiaries

Service categories used by WTO

(1) business (including professional and computer)(2) communication(3) construction and related engineering(4) distribution(5) educational(6) environmental(7) financial (insurance and banking)(8) health-related and social services(9) tourism and travel-related (10) recreational, cultural, and sporting(11) transport(12) other

Income payments

• Primarily payments to foreign investors– Dividends– Interest payments

Financial account

• The financial account records changes in foreign ownership of assets

• Direct investment occurs when ownership involves “an effective voice in management.”– The International Monetary Fund recommends 10%

equity as the critical share necessary for “an effect voice”

• Portfolio investments are “passive”• Multinational enterprises (MNEs) are defined as

companies with direct investment

Canada’s IB transactions in 2008, $Cdn

Transaction + Money in (Bn$) - Money out (Bn$)

Goods (exports+) 489.9 443.0

Services (exports+) 70.5 93.0

Income (receipts+) 71.7 86.9

Portfolio (inward+) 29.0 -13.6

Direct (inward+) 47.7 83.9

China’s IB transactions in 2008, $US

Transaction + Money in (Bn$) - Money out (Bn$)

Goods (exports+) 1434.6 1073.9

Services (exports+) 147.1 158.9

Income (receipts+) 91.6 60.2

Portfolio (inward+) 67.7 25.0

Direct (inward+) 163.1 68.7

Test your knowledge of international trade

• What is the ratio of world exports (goods and services) to world GDP in 2007? (10%, 30%, 50%)

• What is the ratio of world service exports to world goods trade in 2007? (10%, 23%, 53%)

• Name 3 of the top 5 exporting countries in the world• Name 3 of the top 5 countries with the highest exports to

GDP ratios• What are Canada’s leading imports, exports? • What is the U.S. share of 2007 Canadian exports (50%,

65%, 80%)?• What are China’s leading imports, exports?• What country receives the most Chinese exports? What

country does China import most from?

World GDP and Trade (US$ trillion)

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

1975 1980 1985 1990 1995 2000 2005

GDP

Goods exports

Services exports

Top Goods Exporters, 2008, US$ bill.

Country ExportsGermany 1498.2China 1434.6United States 1295.4Japan 746.5France 601.8Italy 546.9Netherlands 534.1Russian Federation 471.6Canada 462.7Korea, Rep. 433.5Belgium 373.0Hong Kong, China 365.2

Top Goods Importers, 2008, US$ bill.

Country ImportsUnited States 2166.0Germany 1206.2China 1133.0Japan 762.0France 707.7United Kingdom 631.9Netherlands 573.9Italy 556.3Belgium 469.9Korea, Rep. 435.3Canada 418.3Spain 402.3

Goods Trade Balances, 2008, US$ bill.

Country BalanceChina 295.4Germany 259.0Saudi Arabia 217.1Russian Federation 179.8Norway 78.9United Arab Emirates 72.7Turkey -70.0France -99.0India -112.5Spain -134.2United Kingdom -173.9United States -865.5

China’s Exaggerated Trade Surplus with the U.S.

China(assembly)

USAKorea

Parts$100 Final goods

$110

China registers a $110 export to USAbut there is only $10 of Chinese value added!

Top Service Exporters, 2008, US$ bill.

Country ExportsUnited States 540.4Germany 246.7France 161.7Japan 148.8China 147.1Spain 143.6Italy 123.5Netherlands 104.5Ireland 99.3Hong Kong, China 92.5Belgium 88.6Switzerland 76.9

Top Service Importers, 2008, US$ bill.

Country ImportsUnited States 404.7Germany 285.0Japan 169.5China 158.9France 140.7Italy 134.4Ireland 106.2Spain 104.4Korea, Rep. 92.7Netherlands 91.6Canada 87.7Belgium 82.2

Service Trade Balances, 2008, US$ bill.

Country BalanceUnited States 135.7Hong Kong, China 46.6Switzerland 40.1Spain 39.2Luxembourg 28.6Greece 25.6Brazil -16.7Korea, Rep. -16.7Japan -20.8Canada -21.3Russian Federation -25.0Germany -38.2

Rank   Country  Amount  (top to bottom)   

#1   Singapore 173.56  

#11   Belgium 84.42  

#22   Thailand 66.26  

#23   Netherlands 65.06  

#55   Sweden 46.45  

#65   Canada 43.81  

#70   Indonesia 41.08  

#84   Russia 36.81  

#85   New Zealand 36.74  

#102   Spain 29.92  

#105   Poland 29.12  

#110   France 27.91  

#113   Mexico 27.61  

#115   United Kingdom 27.12  

#119   China 25.83  

#126   Australia 22.85  

#149   India 13.65  

#150   Brazil 13.36  

#158   United States 11.24  

#159   Japan 10.44  

Exports of Goods and Services as % of GDP

Canadian Trade ($cdn billion)

2004 2005 2006 2007 2008Exports 429.0 450.2 454.0 463.1 489.9

Agricultural and fishing products 30.7 30.1 31.2 34.4 40.9Energy products 68.1 86.9 86.8 91.3 125.8Forestry products 39.4 36.4 33.4 29.3 25.7

Industrial goods and materials 78.0 84.2 94.2 104.8 111.5Machinery and equipment 91.1 93.0 93.3 93.4 93.0Automotive products 90.4 88.0 82.3 77.3 61.1

 

 2004  2005  2006  2007  2008

Imports 363.2 387.8 404.3 415.2 443.0

Agricultural and fishing products 21.4 22.0 23.5 25.5 28.5Energy products 24.8 33.7 34.7 36.7 53.1Forestry products 3.2 3.1 3.1 3.0 2.9

Industrial goods and materials 73.5 78.5 83.9 85.1 91.6Machinery and equipment 104.1 110.9 114.7 116.7 122.6Automotive products 77.4 78.4 79.8 79.9 72.0

Canada Exports (billion $US)

2003 2004 2005 2006 2007

U.S. 326.7 348.1 365.8 359.3 356.0UK 6.1 7.7 8.3 10.1 12.8China 4.8 6.8 7.1 7.7 9.3Japan 8.2 8.6 9.2 9.4 9.2Mexico 2.2 3.1 3.4 4.4 5.0Netherlands 1.6 1.9 2.2 3.1 4.0

Total 381.1 412.3 436.3 440.3 450.4

Canada Imports (billion $US)

2003 2004 2005 2006 2007

U.S. 203.8 209.0 215.2 217.6 220.5

China 18.6 24.1 29.5 34.5 38.3

Mexico 12.2 13.4 14.6 16.0 17.2

Japan 13.8 13.5 14.8 15.3 15.5

Germany 8.6 9.4 10.3 11.1 11.5

UK 9.2 9.7 10.4 10.9 11.5

Total 336.1 355.9 380.9 396.6 406.7

Chinese trade, 2006, $billionChina’s exports

United States 305.8

Hong Kong 153.7

Japan 118.4

Germany 54.5

Korea, Rep. 44.1

Netherlands 39.0

China’s imports

Japan 115.8

Korea, Rep. 89.8

United States 59.3

Germany 37.9

Malaysia 23.6

Australia 19.2

Six Forms of Separation

• Political separation

• Physical separation

• Relational separation

• Environmental separation

• Developmental separation

• Cultural separation

Political Separation

Political Borders Impede

• Movement of goods: Customs

• Movement of people: Immigration

• Movement of money: Currency exchange

• Movement of capital: Regulation, Taxation

Political separation and standards

• Societies must adopt standards to ensure compatibility– currency – language– voltage– paper size

• These standards may vary across political boundaries

Different Keyboard Standards

France’sAZERTY

QWERTY

What share of the world drives on the left?

1/3 of the world’s population drives on the left! (so their cars should have steering wheels on the right)

Standard changes are rare, but there are strong pressures to conform to practices of neighboring countries.

BC (1922), New Brunswick (1922), Nova Scotia (1923), PEI (1924), and Newfoundland (1947) switched.

Sweden switched twice! (in 1736 to the left and 1967 back to the right)

AC Power Plugs

U.K., Hong Kong, parts of Africa

Europe, parts of Middle East

Australia, China

“Metrication” everywhere (except US, Liberia, and Burma)

Paper sizes

210mm X 297mm(rest of world)

216mm X 279mm(US + Canada)

English is the 3rd or 4th most common native language.

It is spoken/understood to some extent by 1/4 to 1/3 of the world

English is an official language in 52 countries

Physical Separation

• Natural barriers to movement of goods, people, and information.– Oceans– Mountains– Distance: costs associated with transport

(goods, people) and communication (information) costs

• Costs include shipping costs as well as time costs (inventory holding costs, costs of delay getting goods to customers)

Physical Separation

Relational Separation

Relationships, Trust, & Trade

• Ingredients for a profitable transaction– Matchmaking: profitable match between buyer and

seller– Seller fulfills promise: must deliver good/service on

time and in proper quantity and quality– Buyer fulfills promise: must pay seller

For domestic transactions– How do sellers match to buyers?– What ensures buyer and seller fulfill promises?

What difficulties exist when transaction is international?

Environmental Separation

Environmental Separation

Environmental Separation: Why?

• Foreign countries are far away (physical separation)

• Far away countries tend to be different– Temperature (distance to equator, coast,

altitude)– Precipitation – Soil types and underground mineral reserves– Population density

Environmental Separation: So What?

• Differences create opportunities (counter-seasonal fruit exports from Chile, Saudi oil)

• Differences change consumer demands– Trucks in mountainous countries must have thicker

axels, more likely to prefer diesel engines.– Trucks in dense countries must have a tight turning

radius.

Developmental Separation

Developmental Separation: How to Measure it?

• Multiple indexes: Life expectancy, poverty, …– Canada: 79.2 years, 0% live on <$1/day– China: 70.2 years, 16% live on <$1/day– Indonesia: 66.2 years, 7.2% live on <$1/day– Nigeria: 51.8 years, 70% live on <$1/day

• Economists focus on real income per person (also known as per capita GDP)

PPP

Developmental Separation

Developmental Separation: So What?

• Income differences affect how much consumers can purchase and also the attributes of goods that they demand.

• Incomes differences may reflect differences in skill levels. Poor countries may not be cheap countries if production requires high skills

Cultural Separation

Globalization

• International trade and investment has been growing over time. Of course, world output (GDP) has grown over time as well.

• Globalization occurs when international transactions increase more rapidly than GDP

2000

1000

200

100

1929/32 38 48 60 70 80 90199550

GATTcreated

WTOcreated

GDP

Merchandise trade

Growth of trade and GDP (1975=100)

100

300

500

700

900

1100

1300

1500

1700

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Goods

GDP

Services

Globalization of firms

• Foreign sales: many multinationals sell the majority of their products abroad. Often they employ more workers abroad than at home.

• Multinational vertical networks: multinationals have divided the product into (vertical) stages and dispersed these stages across the globe.

Article-One World

• Reasons for globalization(1) Falling transportation and communication costs(2) Reductions in trade barriers

• Historical perspective: Some countries were as “globalized” in 1914 as they are today.

• Labour is still somewhat immobile across countries.