Context of Business Understanding the

Canadian Business Environment

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Solutions Manual
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 Chapter 8 – Global Forces

CHAPTER 8

Global Forces

CHAPTER SYNOPSIS
This chapter focuses on the global nature of business. Sources of global activity such as mergers
and acquisitions, exporting and importing and other factors will be examined. Canada’s role in
the global economy and its export strengths will also be discussed. And we will consider the
effects of the North American Free Trade Agreement (NAFTA) on Canada in terms of its
businesses, culture and competitiveness.

LEARNING OBJECTIVES
1. Identify factors that have encouraged the globalization of business.
2. Describe the central channels or forms of global business activity.
3. Discuss the importance and consequences of multinational and borderless corporations.
4. Explain the purpose of protectionism and its relationship with international trade.
5. Identify the types of regional economic integration.
6. Discuss the implications of NAFTA for Canada and the Canadian business environment.

CHAPTER OUTLINE
CHAPTER 8

GLOBAL FORCES
 How Is Canada Faring in the Global Village? 268
 Learning Objectives 268
 The Business World: Foreign Outsourcing And RBC 269

WHAT IS GLOBALIZATION? 271

 Sources Encouraging Global Business Activity 271
 Pull Factors 272
 Push Factors 272
 Channels of Global Business Activity 274
 Exporting and Importing 274
 Outsourcing/Offshoring 280
 Licensing and Franchising Arrangements 280
 Direct Investment in Foreign Operations 281
 Joint Ventures and Strategic Alliances 284

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 Chapter 8 – Global Forces

 Mergers and Acquisitions 284

 Putting Mergers and Acquisitions in Historical Perspective 285
 Establishment of Subsidiaries 286

THE MULTINATIONAL CORPORATION 286

 The Borderless Corporation 287

INTERNATIONAL TRADE 290

 The Logic of Trade 290
 Mercantilism 290
 Trade Protectionism 291
 Promoting International Trade 294
 Facilitating Global Business: Regional Economic Integration 295
 European Union (EU) 296
 Asian Trading Bloc 297
 North American Trading Bloc and NAFTA 298
 Where Is Canada Headed? 303

CHAPTER SUMMARY 304

CHAPTER LEARNING TOOLS 304

 Key Terms 304
 Multiple-Choice Questions 305
 Discussion Questions 305
 CONCEPT APPLICATION: BEIJING AND THE CALGARY OIL SANDS 306

BUSINESS WORLD EXERCISE

1. Refer to the Business World article “Foreign Outsourcing and RBC (page 269).” Why
was the outsourcing by RBC controversial?

• Forty-five high-paying IT Canadian jobs were being offshored to an Indian

company called iGate to reduce costs when RBC had made a record $7.5 billion
in profit that year.

TALKING BUSINESS EXERCISES

1. Refer to the TALKING BUSINESS 8.1, “Canada’s Dairy Industry Under Pressure (page
273.” What is the challenge facing Canada’s dairy industry?

• The Canadian dairy industry has been heavily regulated and protected by the
Canadian government in the past. However, other countries want to change this as
many countries want greater access to Canada’s dairy market in exchange to trade

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 Chapter 8 – Global Forces

with the EU market for goods and services. As a result, Canadian dairy farmers
may face new global competition from a once protected industry.

2. Refer to the Talking Business 8.2, “Canada’s Exports to China: Still Hewers of Wood
and Drawers of Water (p.277).” How significant is China trade with Canada? Consider
both imports and exports.

The Canada-China trade relationship is growing when you consider the following:
• China is Canada’s second largest trading partner.
• Canada runs a trade deficit with China of about $30 billion dollars, indicating we
import a lot more goods and services than we export.
• Canada exports about 3.3% of merchandise to China.
• Canada’s top three exports to China in 2010 were pulp, canola oil and coal.
(makes up about 1/3 of goods exported to China).
• Three non-commodity exports include organic chemicals and resins, as well as
navigational, measuring and control instruments. (makes up about 7% of goods
exported to China).
• Wood products exported to China have also surged in the last two years.

3. Refer to the Talking Business 8.3, “What are Canada’s New Export Strengths
(p.279).”How has Canada’s key exports changed in recent years?

Exports in Prior Years

• auto and auto parts
• pulp and paper
• electronics
• wood products

Exports Today
• oil and gas
• mining and mineral products
• chemicals
• primary metals
• food products
• financial services
• insurance

4. Refer to the Talking Business 8.4, “What helps a Country Obtain Foreign Direct
Investment” (page 282). What can attract investment to a country?

• a highly educated workforce (skill effect)

• a high level of spending on R&D (innovation effect)

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 Chapter 8 – Global Forces

• penetration of new technologies (particularly information and communications

technology)
• strong regional clusters (industry specialization effect)
• infrastructure and accessibility (access effect)
• a well-functioning investment promotion agency
• regional economic strategies
• FDI incentives.

5. Refer to Talking Business 8.5, “Is Canada Being Hollowed Out by Foreign Takeovers?
Putting Mergers and Acquisitions in Historical Perspective. (page 285).” What is
causing the increase in acquisitions in Canada?

• lower interest rates

• potential increase in profits
• globalization
• China, India and Brazil (3 major exporters) need to expand to become more
efficient

6. Refer to Talking Business 8.6, “What’s the Third World (page 287)?” How has the use of
the concept of “Third World” changed?

• The concept of “the Third World” generally use to refer to poor and undeveloped
countries. However, many countries that were once referred to as being a Third
World nation are actually developing quite rapidly such as Brazil, South Africa,
etc.

7. Refer to Talking Business 8.7, “Think Global, Act Local. (page 288).” How is decision-
making changing?

• Multinationals are changing from centralized operations to decentralized

operations, allowing decision-making locally to cater to local needs and
preferences.

8. Refer to Talking Business 8.8, “Made in Canada: How Globalization Has Hit the
Canadian Apparel Industry (page 292).”What impact has globalization had on Canadian
clothing manufacturers?

• There have been many bankruptcies. Only three shirt factories are left in Canada.
• The government changed its “duty remissions program.”
• Canada removed tariffs from 49 developed countries.

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 Chapter 8 – Global Forces

• Manufacturing jobs have moved to low-wage countries.

9. Refer to Talking Business 8.9, “The Futility of Protectionism (page 294).” How can
protectionism be harmful to a country?

• A country with a protectionist policy can cause other countries to retaliate and impose
tariffs on its exports. Thus, creating poor trade relations.

SAMPLE CLASS DISCUSSION QUESTIONS

1. Do you think globalization is a good thing or a bad thing for Canada? Explain.

2. Name some Canadian companies that are also multinationals.

3. Name some U.S. companies that operate in Canada that are multinationals.

CHAPTER LEARNING TOOLS

Multiple Choice Answers

(also available in the back of the textbook, page 487)

1.D 2.D 3.A 4.A 5.D 6.D 7.D 8.A 9.D 10.B 11.C 12.C 13.C 14.D 15.A

Discussion Questions
1. Discuss globalization and compare its many definitions.

Globalization is really a very broad term with no one universal definition.

• It is a process involving the integration of world economies – facilitated by bodies

such as NAFTA (the North American Free Trade Agreement), EU (European Union),
APEC (the Asian-Pacific Economic Co-operation), and ASEAN (the Association of
Southeast Asian Nations) etc.
• Globalization is the integration of world markets. That is the free movement of goods
and services, capital and labour.
• It includes cross border transactions, FDI (foreign direct investment) & economic
interdependence.

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 Chapter 8 – Global Forces

• Another way of thinking about globalization, is countries freely trading between each
other, without any trade barriers.

2. Describe the differences between pull and push factors.

Pull factors are the positive outcomes a business would gain from entering the
international context. On the other hand, push factors are forces that act upon all
businesses to create an environment where competing successfully means competing
globally.

Pull factors are influenced by:

• potential for sales growth and
• obtaining needed Resources

Push factors are influenced by:

• the force of competition
• shift toward democracy
• reduction in trade barriers
• improvements in technology

3. Identify and describe the seven channels of global business activity.

• Mergers and acquisitions

• Joint ventures and strategic alliances
• Direct Investment in Foreign Operations
• Licensing and Franchising
• Outsourcing
• Exporting and Importing
• Establishing Subsidiaries

4. What is a multinational corporation (MNC)?

• A multinational corporation is a business enterprise that controls assets, factories, and so

on that are either operated as branch offices or as affiliates in two or more foreign
countries. The MNC generates products or services through its affiliates in several
countries and maintains control over their operation, managing from a global perspective.

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 Chapter 8 – Global Forces

5. What are the potential benefits and risks of an MNC?

Potential Benefits
• Encourages economic development.
• Offers management expertise.
• Introduces new technologies.
• Provides financial support to underdeveloped regions of the world.
• Creates employment.
• Encourages international trade through a company’s access to different markets; it is
relatively easy to produce goods in one country and distribute them in another country
through a subsidiary or foreign affiliate.
• Brings different countries closer together.
• Facilitates global cooperation and worldwide economic development.

Potential Threats
• MNCs do not have any particular allegiance or commitment to their host country.
• Profits made by an MNC do not necessarily remain within the host country but may be
transferred out to other locations depending on where the MNC feels the funds are most
needed.
• Decision making and other key functions of MNCs may be highly centralized in the
home country, so that even though other operations are performed in the host country,
they do not necessarily include things like research and development or strategic
planning.
• There is difficulty in the ability to control and hold MNCs accountable, which can create
serious ethical concerns for the host country.

6. Explain the meaning of a trade barrier and provide two examples.

• A trade barrier is a way to prevent foreign goods and services from entering a domestic
country. A trade barrier is initiated by the domestic country’s government and could take
many forms including tariffs and quotas.

7. Contrast the difference between a trade surplus and a trade deficit.

• A trade surplus occurs when a country’s exports exceed its imports, so that more money
enters the country than leaves it. A trade surplus is also referred to as a positive balance
of trade.

• A trade deficit occurs when a country imports more than it exports to the degree that the
value of its imports exceeds the value of its exports. A trade deficit is also referred to as a
negative balance of trade.

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 Chapter 8 – Global Forces

8. Explain regional economic integration and provide four levels of intensity.

Regional economic integration brings different countries closer together by reducing or

eliminating obstacles to the international movement of capital, labour, and products or
services.

• The free trade area is the lowest degree of regional economic integration, where tariffs
and nontariff trade barriers on international trade in goods and services among the
member countries are removed.

• The customs union is the economic integration with the removal of trade barriers in
goods and services among the member countries. A greater degree of integration than
free trade areas, but with less member autonomy in how non-member countries are dealt
with.

• The common market is economic integration that goes beyond free trade areas and
customs unions and includes, for example, freer flow of labour and capital across
members’ borders and a common trade policy regarding nonmembers.

• The economic union is a higher level of economic integration than a common market,
with harmonization of fiscal, monetary, and tax policies and often a common currency.
There is comparably very little member autonomy.

9. What is a trade agreement? Provide three examples.

A trade agreement is a political and economic agreement between two or more countries that
reduce trade barriers to conduct greater trade activities between each other.

Three examples of trade agreements include:

• Free Trade Agreement (FTA) 1989

• North American Free Trade Agreement (NAFTA) 1994
• Canada-Panama Free Trade Agreement 2013

See the Government of Canada web site for more examples:

http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fta-
ale.aspx?lang=eng

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10. What are some arguments for and against the North American Free Trade Agreement
(NAFTA)?
Arguments “For” NAFTA
Employment and Business • Foreign competition forces
domestic businesses to
improve their operations
and improve their products
and services.
• Protecting domestic
business amounts to
discouraging
competitiveness and
innovation and, ultimately,
will lead to job losses, given
the inability to remain
competitive in world
markets.
• Free trade encourages
countries to abort inefficient
operations and focus on the
relatively stronger
commodities or services in
which they have a
competitive or comparative
advantage.
Culture • The agreement is not
signing away Canada’s
cultural heritage any more
than the European Union
forced European nations to
lose their individual
cultures.
• According to Statistics
Canada, Canadian cultural
exports exceed $4.5 billion,
and more royalty money for
music is coming into
Canada than is leaving.
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Chapter 8 – Global Forces
Arguments “Against” NAFTA
• Many Canadian
manufacturers cannot
compete with US imports
and are forced out of
business.
• Job losses arise from US
companies deciding to shut
down their Canadian
subsidiaries and exporting
their tariff-free goods to
Canada.
• Many manufacturing jobs
are lost to Mexico, given
that country’s relatively
cheaper labour and, hence,
lower-priced goods.
• Free trade will encourage
the destruction of a unique
Canadian culture.
• Increasing foreign
domination of the Canadian
economy will transform
Canada into a pure
economic subsidiary of the
United States.
• Publishing and broadcasting
industries are threatened by
American competitors and
the increasing presence of
American-based media.
• The presence of the United
States in areas like the
Canadian entertainment
industry would pose a
serious threat to the
transmission of Canadian
 Chapter 8 – Global Forces

Canadian Competitiveness • One of the central objectives •
and the Canadian
Consumer
• Canadian consumers are
• Canadian companies that
• Canada cannot afford to
of the FTA was to
encourage Canadian
businesses to become more
competitive through
exposure to greater
competition from American
business.
given more choice and are
exposed to competitive
products with free trade.
That is, they will have
access to potentially less
expensive goods or
services—whether they
come from the United States
or from increasingly
competitive Canadian
businesses.
require inputs from US
businesses can now obtain
them more cheaply and pass
these savings on to the
consumer.
ignore the US market. If
Canadian companies wish to
become more competitive,
they also need to serve a
larger market—and the
United States certainly
offers a huge market for
Canadian goods. Free trade
gives Canada greater access
to selling goods and services
to this market through the
reduction of trade barriers.
culture.
NAFTA has not encouraged
any increase in productivity.
Canadians have been unable
to match US productivity
rates for the past 20 years,
and have produced at rates
that are equal to about 80%
of the output of workers in
the United States.
• NAFTA has not reduced the
productivity gap between
Canada and the United
States.
• Our good record of exports
has come about largely
because the relatively low
value of the Canadian dollar
has made our goods cheaper
in the past. In other words, it
is not that we were
producing cost-efficient
goods, but rather it is an
artificial reduction in the
value of our dollar that has
made them cheaper in
foreign markets.
Consequently, a higher
Canadian dollar results in
decreased export. What is
needed, arguably, is real
improvements in
productivity coming from
things like updating
equipment, retraining
workers, and building
competitiveness.

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 Chapter 8 – Global Forces

Conception Application
Case: Beijing and the Calgary Oil Sands
1. How does this case reflect themes of globalization?

Themes of Globalization Examples

Establishing subsidiaries • CNOOC (China) acquired Nexen; so Nexen became

a wholey-owned subsidiary

Exporting and importing • Canada exports oil to China, for example.

Outsourcing • N/A

Licensing and Franchising • N/A

Direct Investment in Foreign • FDI is the purchase of physical assets or an amount

Operations of ownership in a company from another country.
(Foreign direct investment) Examples below:
• Glencore international PLC (Swiss) acquired
Viterra Inc. (CDN)
• Vale (Brazilian) acquired Inco (CDN)
• Rio Tinto (U.K.) acquired Alcan (CDN)
• Xstrata (Swiss) acquired Falconbridge (CDN)
• Steel Corp. (U.S.) acquired Stelco (CDN)
• Advanced Micro Devices (U.S.) Acquired ATI
Technologies (CDN)
• Caterpillar Inc. acquired Electro-Motive
• CNOOC (China) acquired Nexen

Joint Ventures and Strategic • N/A

Alliances
Mergers and Acquisitions • Examples of acquisitions:
• Glencore international PLC (Swiss) acquired
Viterra Inc. (CDN)
• Vale (Brazilian) acquired Inco (CDN)
• Rio Tinto (U.K.) acquired Alcan (CDN)
• Xstrata (Swiss) acquired Falconbridge (CDN)
• Steel Corp. (U.S.) acquired Stelco (CDN)
• Advanced Micro Devices (U.S.) Acquired ATI
Technologies (CDN)
• Caterpillar Inc. acquired Electro-Motive
• CNOOC (China) acquired Nexen

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 Chapter 8 – Global Forces

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:

Parties Consequences of takeover

CNOOC Pros
(China National • Access to needed resources (eg. supply of oil for China; 2nd
Offshore Company largest consumer of oil in the world and biggest energy
Oil Co.) consumer in the world)
-owned by China Cons
government • Assumption: somewhat volatile industry.

Nexen Inc. Pros

• Purchased for about $15 billion (shareholders get some money)
• Long-term, stable market achieved.
• CNOOC has the financial resources to accelerate development
of Nexen oil sands, which can boost investment and tax
revenues in Canada.
• Calgary would serve as headquarters for North and Central
America operations.

Cons
• Loss of Canadian control.
• Loss of a profitable Canadian company, in a resource industry in
high global demand.
• A transfer of control of Canadian natural resources to foreign
interests.
• China has poor human rights and environmental records.

Canadian employment Pros

• CNOOC agreed to retain all Nexen employees
Cons
• Future jobs could be lost?

Canadian economy Pros

• Positively impact business relations with Beijing, China.
• Strengthen exports with other countries such as China (one of
the world’s top economic powers), and be less dependent on the
U.S. for export of Canadian products.
• Canadian government received a commitment from the Beijing
government for better investment access for Canadian
businesses in China.

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 Chapter 8 – Global Forces

• CNOOC promised to acquire a listing on the Toronto Stock

Exchange
• More Chinese investment in Canada and boosting oil sands
production – both of which are economic benefits to Canada

Cons
• Assumption: Potential future loss of control of an important
Canadian industry

Canadian competitors Pros

in the industry • The Canadian government put in place regulation that would
largely preclude future takeovers of Canadian energy firms by
state-owned foreign companies.
• The deal between CNOOC and Nexen led to the updating of
Canada’s Investment Act to preclude foreign state-owned
enterprises from purchasing Canadian oil producers in all but
“exceptional circumstances”
Cons
• The deal may trigger more takeovers in Canada.

Global competitors in Pros

the industry • One less competitor in industry.
Cons
• CNOCC is now larger and may have a strategic advantage.
• The deal between CNOOC and Nexen led to the updating of
Canada’s Investment Act to preclude foreign state-owned
enterprises from purchasing Canadian oil producers in all but
“exceptional circumstances” (In other words, to the disadvantage
of other global competitors)

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3. “The Canadian government should protect Canadian business from both foreign
competition and take-overs.” Discuss the merits of this statement in the context of this case.
Yes, the Canadian government should protect
Canadian businesses from foreign takeovers
Multinationals in Canada:
• MNCs do not have any particular
allegiance or commitment to their host
country.
• Profits made by an MNC do not necessarily
remain within the host country but may be
transferred out to other locations depending
on where the MNC feels the funds are most
needed.
• Decision making and other key functions
of MNCs may be highly centralized in the
home country, so that even though other
operations are performed in the host
country, they do not necessarily include
things like research and development or
strategic planning.
• There is difficulty in the ability to control
and hold MNCs accountable, which can
create serious ethical concerns for the host
country.
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Chapter 8 – Global Forces
No, the Canadian government should NOT
protect Canadian businesses from foreign
takeovers
Multinationals in Canada:
• Encourages economic development.
• Offers management expertise.
• Introduces new technologies.
• Provides financial support to
underdeveloped regions of the world.
• Creates employment.
• Encourages international trade through
a company’s access to different
markets; it is relatively easy to produce
goods in one country and distribute
them in another country through a
subsidiary or foreign affiliate.
• Brings different countries closer
together (eg. Canada and China –
Nexen purchase).
• Facilitates global cooperation and
worldwide economic development.