IBUS 380 Exam 2

General Rationale for Government Intervention

Governments impose tariffs and other trade barriers to achieve various goals: -To generate revenue. Tariffs are an important source of government revenue in many developing economies. -To ensure citizen safety, security, and welfare. For example, governments pass laws to prevent importation of harmful products such as contaminated food. -To pursue economic, political, or social objectives. E.g., Intervention can promote domestic job growth. -To serve company and industrial interests. Government intervention can help stimulate development of domestic industries.

Extraterritoriality

The application of home-country laws to other countries. For example, the European Union pursued Microsoft for monopolistic practices.

Absolute Advantage Principle

the idea that a country benefits by producing only those products it can produce using fewer resources

Foreign Corrupt Practices Act

(1966; U.S.) made it illegal to offer bribes to foreign parties. The act may harm U.S. firms because foreign competitors are usually not so constrained.

Mercantilism

- A belief popular in the 16th century that national prosperity results from maximizing exports and minimizing imports. -if there is a winner then there has to be a loser

limitations of early trade theories

- Fail to account for international transportation costs. - Governments distort normal trade by selectively imposing protectionism (e.g., tariffs) or investing in certain industries (e.g., via subsidies). - Services: Some cannot be traded; others can be traded freely via the Internet or global telephony. - For many firms, scale economies and superior business strategies provide efficiencies and other advantages. Early trade theories failed to account for this. (e.g., Japan lacks comparative advantages, but its firms succeeded anyway, via superior strategies.) - in both absolute and competitive theory we are assuming that there are only 2 countries in the world, and that they can easily change from one mode of production to another

Religious Law

- Strongly influenced by religious beliefs, ethical codes, and moral values viewed as mandated by a supreme being - Most important religious legal systems are based on Hindu, Jewish, and Islamic law - Islamic law spells out norms of behavior regarding politics, economics, banking, contracts, marriage, and many other social and business issues.

Political Freedom

- free and fair elections - the right to form political parties - fair electoral laws - existence of a parliament or other legislative body - freedom from domination by the military, foreign powers, or religious hierarchies - self-determination for cultural, ethnic, and religious minorities

Political system

-A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The system also defines how these groups interact with each other. Three Major types of political systems: -Authoritarian -Socialism -Democracy

Legal System

-A system for interpreting and enforcing laws. The laws, regulations, and rules establish norms for conduct. It incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as protecting intellectual property and taxing economic output. Four Major Types of Legal Systems: -Common Law -Civil Law -Religious Law -Mixed Systems

Purchasing Power Parity (PPP)

-An adjustment in gross domestic product per capita to reflect differences in the cost of living •PPP adjustment provides a more realistic indicator of purchasing power of consumers in emerging and developing economies. Highest Per-Capita GDP using PPP: 1. US 2. South Korea 3. Poland 4. Russia 5. Turkey

Foreign Direct Investment and Ownership Restrictions

-Rules that limit the ability of foreign firms to invest in certain industries or acquire local firms. -Limits how much foreigners can invest in a country, and/or the proportion of ownership that foreigners can hold in firms in the country

administrative or bureaucratic procedures

-Complex procedures or requirements imposed on importers or foreign investors that hinder trade and investment. -Slows the import of products or services; hinders or delays firms' investment activities

Democracy

-Democracy is associated with "openness", the lack of regulation and barriers to entry of firms in foreign markets "openness" is associated with: -successful market entry increase market demand -competition on quality, which improves overall product quality -increased competition, leading to efficiencies and lower prices Limited government: -The government performs only essential functions that serve all citizens, such as national defense, maintaining law & order, foreign relations, and providing basic infrastructure. Private property rights: -The ability to own property and assets and to increase one's asset base by accumulating private wealth. Property includes land, buildings, stocks, contracts, patents. Encourages initiative, ambition, innovation. -Australia -Canada -Japan -New Zealand -United States -Most European countries -Most Latin American Countries

The rule of Law

-Existence of a legal system where rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government. •Common in the advanced economies. •The legal system is: -Applied to all citizens equally. -Issued via recognized government authorities. -Enforced fairly and systematically by police forces and formally organized judicial bodies. -Economic activity suffers and uncertainty increases when the rule of law is weak.

What is country risk?

-Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments. -similar to "political risk", but also can include economic challenges -Each country has unique political and legal systems that often pose challenges for company performance Example: •Coca-Cola's business fell off in Germany when the government enacted a recycling plan. New laws required consumers to return non-reusable soft drink containers to stores for a refund of 0.25 euros. Rather than cope with the unwanted returns, big supermarket chains pulled Coke from their shelves.

Why import tariffs have been declining

-Governments have reduced tariffs over time, mainly via the General Agreement on Tariffs and Trade (G A T T), which became the World Trade Organization (W T O). -Economic integration also leads to lower tariffs, but only within economic blocs. E.g., Under N A F T A, Mexico eliminated nearly all tariffs on imports from the U.S., but maintains tariffs with the rest of the world. -China reduced its tariffs since joining the W T O in 2001. -Firms bypass tariffs by entering countries via F D I. E.g., Toyota built factories in the U.S. partly to avoid tariffs.

Why do governments intervene?

-Governments intervene in trade and investment to achieve political, social, or economic objectives. -Governments impose trade and investment barriers that benefit interest groups, such as domestic firms, industries, and labor unions. -Government intervention alters the competitive landscape, by hindering or helping the ability of firms to compete internationally. -Government intervention is an important dimension of country risk. -Government protection is a key component of country risk

Dimensions of Country Risk

-Harmful or unstable political system -Laws and regulations unfavorable to foreign firms -Inadequate or underdeveloped legal system -Bureaucracy and red tape -Corruption and other ethical blunders -Government intervention, protectionism, and barriers to trade and investment -Mismanagement or failure of the national economy

Adam Smith

-Scottish economist, philosopher, pioneer of political economy, and a key figure during the Scottish Enlightenment. -Scottish economist who wrote the Wealth of Nations a precursor to modern Capitalism.

Ethical Connections in international business

-Many countries lack anti-bribery laws for international transactions. -The Organization for Economic Cooperation and Development (OECD) recently called for a ban on "grease payments," small-scale bribes intended to speed up telephone hookups, government paperwork, and other everyday matters in global commerce. -A culture of grease payments and other corruption is corrosive, harming the rule of law and sustainable economic development.

Protectionsim

-National economic policies that restrict free trade. Usually intended to raise revenue or protect domestic industries from foreign competition.

How to manage country risks?:

-Proactive Environmental Scanning -Strict Adherence to Ethical Standards -Alliances with Qualified Local Partners -Protection through Legal Contracts

Evolution of Government Intervention

-Protectionist tendencies, the Great Depression, and isolationism shaped early 20th century world trade. -The Smoot-Hawley Act (1930) raised U.S. tariffs to more than 50% (compared to only 3% today). -Trade policies greatly reduced tariffs after WWII. In 1947, 23 nations signed the General Agreement on Tariffs and Trade (G A T T). The G A T T: -Reduced tariffs via continuous worldwide trade negotiations; -Created an agency to supervise world trade -Created a forum for resolving trade disputes.

Quotas

-Quantitative restriction on imports of a product during a specified period of time. -this is done to protect local firms -Gives early importers monopoly power and the ability to charge higher prices; harms late importers; usually results in higher prices to the buyer voluntary quotas -under which firms agree to limit exports of certain products. These are also known as voluntary export restraints, or VERs.

consequences of protectionism

-Reduced supply of goods to buyers. -Price inflation. -Reduced variety, fewer choices available to buyers. -Reduced industrial competitiveness. -Various adverse unintended consequences (e.g., while the home country dithers, other countries can race ahead).

Average Tariffs

-Tariffs are declining in Developing economies along with advanced economies -while tariffs are declining the GDP and world trade have flourished in its place. -the decline of tariffs has supported international trade and caused the world GDP to increase as a result.

The GATT

-The GATT introduced the concept of most favored nation (renamed normal trade relations), according to which each member nation agreed to extend the tariff reductions covered in a trade agreement with one country to all other countries. A concession to one became a concession to all. -In 1995 the GATT was superseded by the World Trade Organization (W T O), and grew to include 150 member nations. -The GATT and W T O presided over the greatest global decline in trade barriers in history.

Customs

-The checkpoint at national ports of entry where officials inspect imported goods and levy tariffs.

Firm strategy, structure, and rivalry

-The nature of domestic rivalry, and conditions that determine how a nation's firms are created, organized, and managed. -need to look at national industry policy Example: -Italy has many top firms in design industries such as textiles, furniture, lighting, and fashion. Vigorous competitive rivalry puts these firms under constant pressure to innovate, which has propelled Italy to a leading position in design worldwide.

World at night

-The world at night helps us illustrate the different levels of industrialization around the world

Boycotts against Firms and nations:

-Voluntary refusal to engage in commercial dealings with a nation or a company. Examples from France -Citizens boycotted Disneyland Paris, to express opposition to globalization and takeover of French farmland. -French farmers boycotted McDonald's and crashed a tractor into a shop to vent their anger with agricultural policies and globalization.

International Product Life Cycle Theory:

-You can extend the life of a product by moving to a different country and applying the same process in the new country.

regulations and technical standards

-another type of nontariff trade barrier -safety, health, or technical regulations; labeling requirements -May hinder the entry of imported products and reduce the quantity of available products, resulting in higher costs to importers and buyers

subsidiary

-are government grants (monetary or other resources) to firm(s), intended to ensure their survival or success by facilitating production at reduced prices, or encouraging exports. -Grants include cash, tax breaks, infrastructure construction, or government contracts at inflated prices. -Increases the competitive advantage of the grantee while diminishing the competitive advantages of those that do not receive the subsidy Examples -In China, Shanghai Automotive and numerous other MNEs are partly owned by the Chinese government, and receive huge financial resources. -Europe and the U.S. provide huge agricultural subsidies to farmers. E U subsidies represent 40 percent of the E U budget.

Comparative Advantage Principle

-assumes that one country has absolute advantage in both products -you should produce what you are be best at producing. -It is beneficial for two countries to trade even if one has absolute advantage in the production of all products. What matters is not the absolute cost of production but the relative efficiency with which it can produce the product. Its says compare the efficiency rate: •Germany is 3x more affective in clothes production •Germany is only 2X more efficient in wheat production In this case Germany should produce cloth and France should produce wheat -we have to look at the ratio and see how productive they are -the key ratio is the production costs

Actors in Political and Legal Systems

-government, or the "public sector", operating at national and local levels. -International organizations such as the World Bank, World Trade Organization, and the United Nations. -Regional trade organizations, such as the European Union, and many others. -Special interest groups such as labor unions and environmental advocates. -Local competing firms, which oppose foreign firms.

Economic Freedom

-is the absence of government coercion so that people can work, produce, consume, and invest however they want to. Index of Economic Freedom -assesses the rule of law, trade barriers, regulations, and other criteria. -Virtually all advanced economies are "free". -Emerging markets are either "free" or "mostly free". -Most developing economies are "mostly unfree" or "repressed".

International Product Cycle: Standardization Stage

-manufacturing ceases in the original innovator country, and it becomes a net importer of the product. Today under globalization, the cycle occurs quickly for many products. -the inventor country becomes a major importer of their invention

National Governance

-refers to the system of policies and processes by which nations are governed and the manner in which they develop laws and regulations, conduct public affairs, and manage public resources. -is related to political freedom and economic freedom

Local content requirements

-require manufacturers to include a minimum of local value added—that is, production that takes place locally. -Local content requirements are usually imposed in countries that are members of an economic bloc, such as the EU and NAFTA. -The so-called rules of origin requirement specifies that a certain proportion of products and supplies, or of intermediate goods used in local manufacturing, must be produced within the bloc. -This discourages the imports of raw materials, parts, and supplies, which can harm manufacturers sourcing options

confiscation

-seizure of corporate assets with out compensation -in Venezuela, ExxonMobil and Conoco Philips were forced to abandon multi-billion dollar investments in the local oil industry

International Product Cycle: Introduction Stage

-the inventor country enjoys a monopoly both in manufacturing and exports. -the product is still relatively new and the inventor has the comparative and absolute advantage

Demand Conditions

-the nature of home demand for the industry's product or service -the strengths and sophistication of customer demand Example: -Japan is a densely populated, hot, and humid country with very demanding consumers. These conditions led Japan to become one of the leading producers of superior, compact air conditioners.

International Product Cycle: Maturity Stage

-the product's manufacturing becomes relatively standardized, other countries start producing and exporting the product. -The countries that are being sold too will start producing these products as well

What makes emerging markets attractive?

1. Emerging Markets as Target Markets -Many have huge middle classes, with significant income 2. Emerging markets as manufacturing bases -Home to low-wage, high-quality labor for manufacturing and assembly operations. -Large reserves of raw materials and natural resources. e.g., South Africa, Brazil, Russia 3. Emerging markets as sourcing destinations -MNEs have established numerous call centers in eastern Europe, India, the Philippines, and elsewhere.

Civil Law vs. Common Law

1. Ownership of intellectual property 2. enforcing agreements 3. specificity of contracts 4. compliance with contracts (these correspond with the numbers below for each term) Civil Law: 1. determined by registration 2. commercial agreements become enforceable only if properly notarized or registered 3. contracts tend to be brief because many potential problems are already covered in the civil code 4. Noncompliance is extended to include unforeseeable human acts such as labor strikes and riots. Common Law: 1. Determined by prior use. 2. proof of agreement is sufficient for enforcing contracts. 3. contracts tend to be very detailed, with all possible contingencies spelled out. Usually more costly to draft a contract. 4. Acts of God (floods, lightning, hurricanes, etc.) are the only justifiable excuses for noncompliance with the provisions of contracts.

Countries with the highest country risk:

1. Venezuela 2. Libya 2. Zimbabwe 4. Afghanistan 5. Iran

EU an example of a full-fledged economic Union

1.Market access. -Tariffs and most nontariff barriers have been eliminated. 2.Common market. -Barriers to cross-border movement of production factors-labor, capital, and technology. 3.Trade rules. -Cross-national customs procedures and regulations have been eliminated, which has streamlined transportation and logistics within Europe. 4.Standards harmonization. -Technical standards, regulations, and enforcements have been harmonized. 5.Common fiscal, monetary, taxation, and social welfare policies is the ultimate goal over time.

EU today

27 members, founders are Belgium Italy, France, Germany, Luxembourg and the Netherlands. -New members such as Poland, Hungary and CR are low-cost manufacturing sites. -Most new EU entrants are in Eastern Europe. -Most are emerging markets with fast economic growth rates. -The UK voted to withdraw from the union in 2016 due to Brexit -the U.K. may exit from the EU altogether. Or it may adopt an approach similar to Norway, which maintains free movement of goods, capital, and workers with the EU but is not an EU member and follows only selected EU regulations.

Michael Porter sources of National Competitive advantage

4 Factors: -Factor Conditions -Firm, Strategy, Strucutre. and Rivalry -Demand Conditions -Related and Supporting Industries

Economic Bloc

A geographic area consisting of two or more countries that agree to pursue economic integration by reducing tariffs and other barriers to the cross-border flow of products, services, capital, and, in more advanced cases, labor Examples: -European Union, NAFTA, MERCOSUR, APEC, ASEAN, and many others.

Harmonized Tariff Schedule

A schedule of tariff nomenclature arranged in 6-digit codes allowing all participating countries to classify traded goods on a common basis. Beyond the 6-digit level, countries may introduce national distinctions for tariff or statistical purpose.

USMCA (NAFTA)

A trade agreement between Canada, the United States and Mexico that encourages free trade between these North American countries. USMCA (NAFTA): •Eliminated tariffs and most nontariff barriers for products and services. •Established trade and investment rules, uniform customs procedures, and intellectual property rights. •Provided procedures for settling trade disputes.

shadow economy

An informal economy in more developed countries that is not regulated by local government.

Trade conditions in the major country groups

Advanced Economies: -Highly developed industry -Substantial competition -Minimal trade barriers -High Trade volume -High inward FDI Developing Economies: -Poor Industry -Limited competition -Moderate to high trade barriers -Low trade volume -Low inward FDI Emerging Markets: -Rapidly improving industry -Substantial competition -Moderate trade barriers -High trade volume -Moderate to High inward FDI

Highest Agriculture and Nonagricultural Import Tariffs

Agriculture: 1. India 2. Canada 3. China 4. Mexico Nonagricultural: 1. Brazil 2. India 3. China 4. Mexico

Expropriation

Asset seizure with compensation

Political systems correlated to economic systems

Authoritarianism: -Command Economies -the state makes all decisions on what to produce, how much to produce, and what prices to charge. Democracy: -Market Economies and capitalism -decisions are largely left to market forces, that is, supply and demand Socialism: -Mixed Economies -has features of both market and command economies, combining state intervention and market mechanisms (Sweden, Singapore)

BRIC countries

Brazil, Russia, India, China

Comparative vs. Competitive Advantage

Comparative Advantage: Location-specific advantage arises from an abundance in a country of: -valuable natural resources -Arable or buildable land -Strategic Location -Favorable Climate -Low-cost Labor -Skilled labor VS. Competitive Advantage: Firm-specific advantage, or owner-ship-specific advantage, arises from an abundance in a firm of: -specific knowledge -specific capabilities -certain types of skills -superior strategies -strong networks -other assets Together they Equal National Competitiveness

Levels of Regional Integration

Each new level contains elements of the previous ones 1. Free trade area: -Simplest, most common arrangement. Member countries agree to gradually eliminate formal trade barriers within the bloc, while each member maintains an independent international trade policy with countries outside the bloc. One example is USMCA (NAFTA). -Lowest integration -elimination o tariff and nontariff barriers 2. Customs union: -Similar to a free trade area except the members harmonize their trade policies toward nonmember countries, by enacting common tariff and nontariff barriers on imports from nonmember countries. MERCOSUR is an example. -all members will decide on a standard customs rate -common external tariffs 3. Common market: -Like a customs union, except products, services, and factors of production such as capital, labor, and technology can move freely among the member countries. e.g., The EU countries put in place many common labor and economic policies. -There is free movement of factors of product, free movements of capital, product, and labor -In the European union if you are from Poland you will have the same rights as Italian citizens and can work there. Goes the same for other countries too. -You can send huge amounts of money 4. Economic union: -Like a common market, but members also aim for common fiscal and monetary policies, and standardized commercial regulations. The EU is moving toward an economic union by forming a monetary union with a single currency, the euro. -Getting a standard currency -There is a common monetary fiscal policy -All monetary policies should be the same 5. Political Union: -everything from the previous levels except now everyone has the same government -this is nearly impossible because this would mean that everyone in the Union needs to follow the same law system and regulations -there would be one union government

Why Do firms pursue Economic integration?

Expand market size: -Increases size of the marketplace for firms inside the economic bloc. Belgium has a population of just 10 million; the E U has a population of nearly 500 million. -Buyers can access larger selection of goods. Achieve economies of scale and productivity: -Bigger market facilitates economies of scale. -Internationalization inside the bloc helps firms learn to compete outside the bloc. -Competition and efficient resource usage inside the bloc leads to lower prices for bloc consumers. Attract direct investment from outside the bloc: -Compared to investing in stand-alone countries, foreign firms prefer to invest in countries belonging to an economic bloc. General Mills, Samsung, and Tata have invested heavily in E U-member countries. Acquire stronger defensive and political posture: -Belonging to a bloc provides member countries with a stronger defensive posture relative to other nations and world regions. This was a key motive for formation of the European Union.

Emerging market economies

Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth. -evolving towards wealthy nations E.g., Indonesia, Mexico, Poland, Turkey.

Free Market vs. Command Economy

Free Market: -Competition is encourages to promote innovation, economic growth, high quality, and efficiency -Prices are determined by supply and demand -Problems are inequality, market failure, monopoly Command economy: -little motivation exists to improve customer service or introduce innovative -Price are controlled -problems are inefficiency, bureaucratic, shortages, surpluses, less choice, less freedom

Special Interest Groups Typical Issues

Labor Unions: -Oppose imported goods and global sourcing -U.S. united steelworkers union opposed imports of steel from China Competing businesses: -Dislike competition from foreign firms -Japanese rice producers opposed imports of rice from the United States Customers: -May avoid foreign-made products. Dislike improper marketing practices -Motorists in Australia accused BP of unfair pricing of petroleum Conservationists: -Fight against wildlife loss and destruction of the natural environment -environmentalists oppose lumber imports from countries with tropical rain forests

Implications of Regional Integration for the Firm

Internationalization by firms inside the economic bloc: -Regional integration facilitates company internationalization. Expansion into neighboring countries provides valuable experience, prompting internationalization to other markets worldwide. Rationalization of operations: -By restructuring and consolidating company operations, managers can develop strategies and value-chain activities suited to the region, not just individual countries. Goal is to cut costs and redundancy, and increase efficiencies via scale economies. Regional products and marketing strategy: -Firms cut costs by standardizing products and services. Case Inc. reduced its Magnum line of tractors from 17 to only a few versions in Europe, following integration of the E U. Internationalization by firms from outside the bloc: -Because external trade barriers mainly affect exporting, many foreign firms prefer to enter a bloc through F D I. In this way, after formation of the E U, Britain became the largest recipient of F D I from the United States.

new global challengers

Leading firms from emerging markets that are fast becoming key contenders in world markets. Brazil: -Food Processor, Aerospace, Cosmetics China: -E-commerce, Information and communications technology, Computer Technology India: Telecommunication Services, Technology Consulting, Automotive Mexico: Telecommunication, Building Materials, Baking, Snacks Russia: Natural Gas, Oil, Steel and mining Turkey: Industrial, Industrial and financial, confectionary

Key criteria for assessing the attractiveness of Emerging Markets and Developing economies

Market Size: -The country's population, especially those living in urban areas. Market Growth Rate: -The country's real GDP growth rate. Market Consumption Capacity: -Income of the middle class. Commercial Infrastructure: -Density of telephone lines, number of personal computers, density of paved roads, population per retail outlet, and other such characteristics. Economic Freedom: -The degree to which government intervenes in business activities. Country Risk: -Degree of political and macroeconomic risk.

Offensive Rationale for Government Intervention

National strategic priorities -Protection helps ensure the development of industries that bolster the nation's economy. Countries create better jobs and higher tax revenues when they support high value-adding industries, such as IT, automotive, pharmaceuticals, or financial services. Increase employment -Protection helps preserve domestic jobs, at least in the short term. However, protected industries become less competitive over time, especially in global markets, leading to job loss in the long run.

first-mover advantage

Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage

advanced economies

Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure; -typically the richest countries, including Australia, Canada, Japan, the United States, and nations of Western Europe

Dominant Legal systems in selected countries

Primarily common Law: -Australia -Canada -Ireland -New Zealand -United Kingdom -United States Primarily Civil Law: -Much of western Europe and Latin America -Japan -Russia -South Korea Primarily Religious Law: -Much of the middle east -North Africa -Afghanistan -Mauritania -Pakistan -Sudan Mixed Systems: -Bangladesh -India -Indonesia -Israel -Kenya -Malaysia -Philippines

Defensive Rationale for Government intervention

Protection of the national economy. -Weak or young economies sometimes need protection from foreign competitors. E.g., India imposed barriers to shield its huge agricultural sector, which employs millions. Protection of an infant industry. -A young industry may need protection, to give it a chance to grow and succeed. e.g., Japan long protected its car industry. National security. -The United States prohibits exports of plutonium and similar products to North Korea. National culture and identity. -Canada restricts foreign investment in its movie and TV industries. They want to safeguard their national culture -The French Government prevents foreign companies from owning television and movie companies in France

Factor Conditions

Quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production Example: -An abundance of cost-effective and well-educated workers give China a competitive advantage in the production of laptop computers.

Regional Economic Integration

Refers to the growing economic interdependence that results when nations within a geographic region form an alliance aimed at reducing barriers to trade and investment. -Over 50 percent of world trade today occurs under some form of preferential trade agreements signed by groups of countries. Cooperating nations obtain: -increased product choices, productivity, living standards, -lower prices, and -more efficient resource use.

Firms Response to Government Intervention

Research to gather knowledge and intelligence. -Understand trade and investment barriers abroad. Scan the business environment to identify the nature of government intervention. Choose the most appropriate entry strategies. -Most firms choose exporting as their initial strategy, but if high tariffs are present, other strategies should be considered, such as licensing, or FDI and JVs that allow the firm to produce directly in the market. Take advantage of foreign trade zones. -FTZs are areas where imports receive preferential tariff treatment, intended to stimulate local economic development. e.g., A successful experiment with FTZs has been the maquiladoras - export-assembly plants in northern Mexico. -Seek favorable customs classifications for exported products. Reduce exposure to trade barriers by ensuring that products are classified properly. Seek favorable customs classifications for exported products Take advantage of investment incentives and other government support programs lobby for freer trade and investment

Nationalization

Takeover of an entire industry, with or without compensation -Gradual yet persistent pressure from the Russian Government led TNK-BP, a Russian subsidiary of British energy giant BP, to sell a major stake in its business to the national gas monopoly Gazprom

Key instruments in Government intervention:

Tariff - A tax on imports (e.g., Citrus, textiles). Nontariff trade barrier - Government policy, regulation, or procedure that impedes trade. Quota - Quantitative restriction on imports of a specific product (e.g., Imports of Japanese cars). Investment barriers - Rules or laws that hinder foreign direct investment (e.g., Mexico's restrictions in its oil industry).

Neomercantilism

The Idea that a nation should a trade surplus. If you have a trade surplus your economy will be better off, and you will become a powerful country •Trade surpluses are not sustainable •Other countries will not be able to afford to buy products from your country •The products in other countries will be cheaper •Then the rich country will start to import products and it will balance out- the idea that the nation should run a trade surplus supporters of neomercantilism: - Labor unions (who want to protect domestic jobs) - farmers (who want to keep crop prices high) - Some manufacturers (that rely only on exports)

New Global challengers

The New Global Challengers benefit from -Emerging Markets: -Rapidly growing markets, some of which are large. -Low-cost labor. -Complex operating environments, which produce some very capable firms. there are some 100 companies that are coming from emerging markets that are posed to becom MNEs Examples Brazil: -Embraer, Sadia & Perdigao, Natura Mexico: -America Movil, Grupo Modelo India: -Ranbaxy, Infosys, Tata Tea, WIPRO China: -Galanz, Haier, Chunlan Group Corp., Lenovo, Pearl River Piano Turkey: -Koc Holding, Vestel & Sisecam

Free Trade

The absence of barriers to the free flow of goods and services between nations. •Free trade is usually best because: -Consumers and firms can buy the products they want. -Imported products may be cheaper than domestically produced products -Lower-cost imports help reduce business costs, thereby raising company profits -Lower-cost imports help consumers save money, thereby increasing their living standards -Unrestricted international trade tends to increase the overall prosperity of nations.

Privatization

Transfer of state-owned industries to private concerns.

Wars, Insurrection, and Violence

War and insurrection: - Indirect effects can be disastrous for company activities. Terrorism: -The threat or actual use of force or violence to attain a political goal through fear and intimidation. -Some terrorism is sponsored by national governments. -Terrorism particularly affects certain industries - tourism, hospitality, aviation, finance, retailing.

transition economies

a subset of emerging markets that evolved from centrally planned economies into liberalized markets

contract laws

affect the sale of goods and services; intermediary agreements; licensing and franchising; foreign direct investment; and joint ventures

environmental laws

aim to preserve natural resources, combat pollution, and ensure safety

export-led development

an economic model that emphasizes the production of goods for export as a means of economic growth

controls on operating forms and practices

are laws and regulations on how firms can conduct production, marketing, and distribution activities. Example -In the telecommunications sector in China, the Chinese government requires foreign investors to seek joint ventures with local firms. This ensures local control of the telecom industry. Thus, China gains access to foreign capital and technology.

strategies for doing business in emerging markets:

customize offerings to unique emerging market needs: -Successful firms develop a deep understanding of the distinctive characteristics of buyers, local suppliers, and distribution channels in emerging markets, and customize offerings and business models accordingly partner with family conglomerates: -FCs can provide various advantages, including financing, bank services, local suppliers, and distribution channels target governments: -Buy enormous quantities of products, such as computers, furniture, office supplies, and motor vehicles, as well as services. skillfully challenge emerging market competitors: -New global challengers and other emerging market firms possess various advantages that require skillful strategies and due diligence to overcome.

Foreign trade zone

designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures

Accounting and reporting laws

differ widely around the world. Two examples: -Physical asset valuations: Canada and the U.S. use historical costs. Some Latin American countries use inflation-adjusted market value. -R&D costs: Expensed as incurred in most of the world; capitalized in South Korea and Spain. Some countries use both conventions.

countervailing duties

government tariffs to offset suspected subsidies provided by foreign governments to their producers

importance of middle class

group in the middle of the population who live comfortably above poverty levels, are employed, and not independently wealthy. overwhelming strength in numbers, imperative to keep the middle class strong, key factor in fueling the economy and fashion business

Transparency in financial reporting

is the degree to which firms regularly reveal substantial financial and accounting information. This varies worldwide.

Laws on income repatriation

limit the amount of net income or dividends that firms can bring back to the home country

developing economies

low-income countries characterized by limited industrialization and stagnant economies

Internet and e-commerce regulations

new frontier in legal systems and continue to evolve

Challenges of doing business in Emerging markets

political instability: -corruption, weak legal systems, and unreliable government authorities increase business risks and costs weak intellectual property protection: -Discourages producing or selling goods that entail valuable assets bureaucracy, red tape, and lack of transparency: -Burdensome rules, excessive requirements for licenses, approvals, and paperwork; not accountable legal and political systems poor physical infrastructure: -Lower quality roads, drainage systems, sewers, and electrical utilities are often a factor in emerging markets partner availability and qualifications: -MNEs that seek alliances with well-qualified local companies may find such partners in short supply in emerging markets resistance from family conglomerates: -Economies may be dominated by privately-owned local firms that are highly diversified, and control supplies and employment

Inadequate or underdeveloped legal systems

poor enforcement of existing laws -laws may be weak regarding intellectual property, pollution, consumer protection, and other areas -While the problem is common in developing economies, it can occur in advanced economies too Examples: -In China and Russia, foreign firms sometimes abandon business ventures due to erratic legal environments. -The recent global financial crisis was triggered partly by poor regulation in the United States and Europe.

Marketing and distribution laws

regulate practices in advertising, promotion, and distribution. Examples -Finland, France, Norway, and New Zealand prohibit cigarette advertising on television. -Canada and other countries cap prices in the pharmaceutical and other industries.

Leontief Paradox

revealed that countries can successfully export products that use less abundant resources (e.g., the U.S. often exports labor-intensive goods). -Implies that international trade is complex and cannot be fully explained by a single theory.

Types of Tariffs

specific tariff: —a flat fee or fixed amount per unit of the imported product—based on weight, volume, or surface area, such as barrels of oil or square meters of fabric. Ad Volerem: -A tax on an import calculated as a percentage of the value of the import export tariffs: -taxes on products exported by their own companies. import tariff: -a tax levied on imported products. Import tariffs are usually ad valorem: —that is, they are assessed as a percentage of the value of the imported product. protective tariff: -aims to protect domestic industries from foreign competition. prohibitive tariff: -is one so high that no one can import any of the items.

Competitive Adavantage

•A foundation concept that explains how individual firms gain and maintain distinctive competencies, relative to competitors, that lead to superior performance. •It refers to the distinctive assets, competencies, and capabilities that are developed or acquired by the firm. •The collective competitive advantages held by the firms in a nation are the basis for the competitive advantages of the nation at large. examples: •Dell's prowess in the management of its global supply chain. •Samsung's technological leadership in flat-panel televisions. •Cadbury's capabilities in international marketing and distribution.

Common Law

•A legal system that originated in England and spread to Australia, Canada, U S A, and other former members of the British Commonwealth (also known as case law). •The basis of law is tradition, past practices, and legal precedents set by courts via interpretation of statutes, legislation, and past rulings. •Judges have significant power to interpret laws based on the circumstances of individual cases. Thus, common law is relatively flexible.

Factor Proportions Theory

•Also known as "Factor Endowments Theory." It argues that each country should produce and export products that intensively use relatively abundant resources of production, and import goods that intensively use relatively scarce resources. Shows us that we have to look at the endowments of countries: -Cheap labor is an endowment -Climate can be an endowment -Labor can too Example: -Russia has land as an endowment -China has labor -USA has capital

New Trade Theroy

•Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages. Some industries succeed best as their volume of production increases. Example: -The commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability.

Socialism

•Capital is vested in the state and used primarily as a means of production for use rather than for profit. •Group welfare outweighs individual welfare. •Government's role is to control the basic means of production, distribution, and commercial activity. •Socialism occurs in much of the world as social democracy (e.g., Western Europe, Brazil, India). •Government intervention in the private sector. •Corporate income tax rates are higher. -Bolivia -China -Egypt -India -Romania -Russia -Tanzania

Problems when estimating potential emerging markets

•Estimations are challenging because of peculiar economic and social environments in these countries. •Limited availability and reliability of data. -Market research can be very costly and less precise, as compared to the advanced economies •Market potential indicators include: -GDP growth rate -income distribution -commercial infrastructure -unemployment rate -consumer expenditures for discretionary items.

Types of country Risk produced by legal systems

•Foreign investment laws •Controls on operating forms and practices •Marketing and distribution laws •Laws regarding income repatriation •Environmental laws •Contract laws •Internet and e-commerce regulations •Inadequate or underdeveloped legal systems

Civil Law

•Found in France, Germany, Italy, Japan, Turkey, and much of Latin America. •Based on an all-inclusive system of laws that have been "codified" - clearly written by legislative bodies. •Laws are more "cast in stone" and not strongly subject to interpretation by courts. •A key difference is that common law is mainly judicial in origin and based on court decisions, whereas civil law is mainly legislative and based on laws passed by national and state legislatures.

Authoritarianism

•Government controls all economic and political matters. •Either theocratic (religion-based) or secular •A state party is led by a dictator. Membership is mandatory for those wanting to advance. •Power is sustained via secret police, propaganda, regulation of free discussion and criticism. •Today: Some countries in the Middle East and Africa; Cuba, North Korea. Ex-authoritarian states tend to have much government intervention and bureaucracy Examples: -China (1949-1980s) -Germany (1933-1945) -Soviet Union (1918-1991) -Spain (1939-1965) -Afghanistan -Iran -North Korea -Venezuela several countries in Africa (Eritrea, Sudan, Equatorial Guinea, Zimbabwe)

Embargos and Sanctions

•Governments may respond to offensive activities of foreign countries by imposing embargoes and sanctions. Sanctions - are bans on international trade, usually undertaken by a country, or a group of countries, against another who is judged to have jeopardized peace and security. Embargoes -an official ban on trade or other commercial activity with a particular country. -one country against another Example: -The U.S. has enforced embargoes against Cuba, Iran, and North Korea, labeled as state sponsors of terrorism.

China's growing role in International Business

•Huge population; rapidly growing economy; big importer. •Began pursuing market reforms in the late 1970s. •Achieved explosive economic growth, quadrupling its GDP during the succeeding 30 years. •China is already the world's second-largest economy, but has poor business infrastructure. •China buys one-third of the world's coal, cotton, fish, and rice; one-quarter of the world's steel; and one-half its pork. •But China endures serious problems of air, water, and land pollution; has 8 of the world's top 10 polluted cities.

Example of Protectionism

•In the early 2000s, the U.S. government imposed tariffs on imports of foreign steel to protect U.S. steel manufacturers from foreign competition, aiming to give the U.S. steel industry time to restructure and revive itself. However, this resulted in: -Higher steel costs. -Increased production costs for firms that use steel, such as Ford, Whirlpool, and General Electric. -Reduced prospects for selling products in world markets, making U.S. steel firms less competitive. -The steel tariffs were removed within two years.

Role of Innovation

•Innovation is a key source of competitive advantage. •Many innovative firms in a nation leads to national competitive advantage The firm innovates in four major ways. It can develop: -A new product or improve an existing product. -New ways of manufacturing. -New ways of marketing. -New ways of organizing company operations. can be: -Managerial -Organizational structures -Marketing -Manufacturing -Advertising

Role of Productivity

•Productivity is the value of the output produced by a unit of labor or capital. •It is a key source of competitive advantage for firms. •The greater the productivity of the firm, the more efficiently it uses its resources. •The more productive the firms in a nation, the more efficiently the nation uses its resources. •Aggregate productivity is a key determinant of the nation's standard of living.

Functions of Political Systems

•Provide protection from external threats. •Ensure stability based on laws. •Govern the allocation of valued resources among the members of a society. •Define how society's members interact with each other.

Country Risk Produced by Legal Systems:

•The Foreign Corrupt Practices Act (FCPA) •Accounting and reporting laws •Transparency in financial reporting

Comparative Advantage

•The foundation concept of international trade, which answers the question of how nations can achieve and sustain economic success and prosperity. •It refers to the superior features of a country that provide it with unique benefits in global competition. •Comparative advantages are derived either from natural endowments or from deliberate national policies. examples: •France has superior climate and soil for producing wine. •Saudi Arabia has a natural abundance of oil which is used in the production of petroleum products. •Japan has acquired a superior base of knowledge and experience for producing cars. •India has acquired a superior base of IT workers for producing computer software.

El Mercado Comun del Sur (MERCOSUR)

•The leading economic bloc in South America, accounting for nearly all of the region's GDP. •Launched in 1991, the four initial members were Argentina, Brazil, Paraguay, and Uruguay. •Established free movement of products and services, common external tariff and trade policy, and coordinated monetary and fiscal policies. •May be integrated with NAFTA as part of a future Free Trade Area of the Americas.

Creeping Expropriation

•The most common expropriation today. •The government gradually modifies regulations and laws after foreign MNEs have made big local investments in property and plants. Examples •Abrupt termination of contracts. •Creation of laws that favor local firms. •The governments in Bolivia, Russia, and Venezuela have modified tax regimes to extract revenues from coal, oil, and gas companies.

Related and Supporting Industries

•The presence of suppliers, competitors, and complementary firms that excel within a given industry. Example: -The Silicon Valley in California is a great place to launch a computer software firm because it is home to thousands of knowledgeable firms and workers in the software industry.

global sourcing

•The procurement of products or services from independent suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country.

Outsourcing

•The procurement of selected value-chain activities, including production of intermediate goods or finished products, from independent suppliers.

Mixed Systems

•Two or more legal systems operating together. •The contrast between civil and common law has become blurred as countries combine both systems. •Authoritarianism is most associated with religious law and socialist law. •Democracy is associated with common law, civil law, and mixed systems. Example: •Legal systems in Lebanon, Morocco, and Tunisia share elements of civil law and Islamic law.

Foreign investment laws

•affect Foreign direct investment entry. Examples: -Japan - The "large-scale retail store law" restricted foreigners from opening warehouse-style stores like Toys"R"Us, in favor of smaller Japanese retailers. -Mexico - Foreign oil companies cannot obtain 100% ownership of Mexican oil firms. -United States - Restricts inward investments seen to affect national security. e.g., The U.S. Congress blocked Dubai Ports World, a Middle Eastern firm, which sought a deal to manage U.S. ports.