3600
World Trade Organization (WTO)
(like the GATT before it) is primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states.
patent
(n.) exclusive rights over an invention; copyright; (v.) to arrange or obtain such rights; (adj.) plain, open to view; copyrighted
How does globalization affect labor policies and environment?
- Critics argue that firms avoid the cost of adhering to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced - Supporters claim that tougher environmental and labor standards are associated with economic progress (as countries get richer from free trade, they implement tougher environmental and labor regulations)
What is a democracy?
- a political system in which government is by the people, exercised either directly or through elected representatives ➢associated with individualism ➢most modern democratic states practice representative democracy
What is totalitarianism?
- form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties ➢4 forms: ➢Communist totalitarianism ➢Theocratic totalitarianism ➢Tribal totalitarianism ➢Right-wing totalitarianism
command economy
- government plans the goods and services that a country produces, the quantity that is produced, and the prices at which they are sold ➢all businesses are state-owned, and governments allocate resources for "the good of society" ➢because there is little incentive to control costs and be efficient, command economies tend to stagnate
What is political economy?
- how the political, economic, and legal systems of a country are interdependent ➢they interact and influence each other ➢they affect the level of economic well-being in the nation
What is political system?
- the system of government in a nation ➢Assessed according to ➢Collectivism-individualism ➢Democracy-totalitarianism ➢these dimensions are interrelated
What are the benefits to Boeing of outsourcing manufacturing of components of the Boeing 787 to firms based in other countries?
1. As mentioned in the case, there are two major benefits to Boeing to outsource the components to firms in other countries. Firstly the countries from where the production was done usually ordered more planes from Boeing. This led to a sufficient increase in the sales and considering the close competition with Airbus for same airspace, the teams had to ensure all possibilities of sales were open and highly used. Another major reason as mentioned in the case is to ensure all the best manufacturers/ service providers could do the work in the respective areas. For instance, when Mitsubishi became a domain expert in manufacture of wings, it ensure that the products received from them were of the highest quality and reliability. Boeing as an organization no longer had to worry about the quality issues and management of inventory. Also using the outsourced model enables Boeing to focus on more value adding areas.
Drivers of Globalization
1. Declining barriers to trade 2. Technological change
Potential Impediments Hindering Further Improvements.
1. Lack of unity and peaceful coexistence among the citizens, 2. Corruption and lack of transparency in the public secto
3 types of economic systems
1. Market economies ➢2. Command economies ➢3. Mixed economies
3 types of economic systems
1. Market economies ➢all productive activities are privately owned and production is determined by the interaction of supply and demand ➢2. Command economies ➢government plans the goods and services that a country produces, the quantity that is produced, and the prices at which they are sold ➢can stagnate due to lack of incentive/motivation ➢3. Mixed economies ➢certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning
Nature of economic reforms being implemented.
1. Realistic. The government of Myanmar is realistic in ts reforms; the reforms are achievable by the country. 2. Long-term oriented. These reforms by the country help the government achieve long-term goals of its nation and citizens, the reforms are not only focused in the current generations but in generations to come. 3. Unique. The reforms set up by Myanmar is very special to the country and separates itself from that of other countries.
Managers need to focus on 2 broad areas
1. influence the attractiveness of that country as a market and/or investment site ➢2. can raise important ethical issues (Chapter 5)
Factors That Motivated Myanmar to take economic and political reforms.
1.The need to improve and stabilize its currency exchange rate 2.The need to improve the level of business growth and investments in the country. 3.The need for a peaceful nation. 4.The need and desire to improve trade internationally and entice foreign investments.
What are the potential costs and risks to Boeing of outsourcing?
2. Outsourcing always has a risk attached to it. One major issue which is highlighted in the case is late deliveries. When a company such as Mitsubishi is world leader for making wings, other aircraft manufacturers would also be placing the orders to them. For such companies there are lot of pending orders which gets piled up over time and which in turn leads to hasty delivery of shipments to customers. Managing the data flow from such a vast network of outsourced suppliers is also difficult. Another major risk is the data loss which can occur when dealing with such a vast group of suppliers.
In addition to foreign subcontractors and Boeing, who else benefits from Boeing's decision to outsource component part manufacturing assembly to other nations? Who are the potential losers?
3. In addition to foreign subcontractors and Boeing, the major benefactors of such an activity are the customers and the end customers. Customers are the flight service providers who purchase the aircraft and end customers are the passengers of the flight. Having such an agreement for assembly of aircraft ensure that the prices are competitive and the same can be passed on to the end customers. The potential losers could be the local employees who could have got a job in Boeing or its related companies for production of aircrafts.
Boeing's management decided to keep all production in America, what do you think the effect would be on the company, its employees, and the communities that depend on it?
4. If Boeing`s management decided to keep all the activities with themselves, it would be difficult for them to manage everything. Having a outsourced supplier network helps in focusing the resources to the high value adding areas. This helps in reduction of capital for research and development for each and other area of the aircraft. If Boeing decided to do all these by themselves, they would need to expand the capacities including infrastructure, human resources, skilled labor, inventories, and most importantly the intellectual property.
On balance, do you think that the kind of outsourcing undertaken by Boeing is a good thing or a bad thing for the American economy? Explain your reasoning.
5. Yes, I am of the opinion that such outsourcing activities are good for the economy. It forges new relationships across borders and helps in ensuring the best products are delivered to the customers when they need. It also give the organizations an opportunity to improve the core competency while not worrying about the other areas of operations. For an economy while the cash flow may be going outside the country, the value of the finished good will be very high. This brings a positive cash flow into the system. This also gives opportunities for the country to show the support in developing other countries.
Trademark
A brand that has exclusive legal protection for both its brand name and its design
National differences and economic development
A country's economic development is a function of its economic, political, and legal systems
National differences and economic development
A country's economic development is a function of its economic, political, and legal systems ➢Political system ➢Democracy ➢Economic system ➢Economic liberalization (deregulation), privatization, free market-based economy ➢Legal system ➢Adequate legal systems, property rights
Totalitarianism
A form of government in which the ruler is an absolute dictator (not restricted by a constitution or laws or opposition etc.)
Common Law
A legal system based on custom and court rulings
Entrepreneur
A person who organizes, manages, and takes on the risks of a business.
Tribal Totalitarianism
A political system in which a party, group, or individual that represents the interests of a particular tribe (ethnic group) monopolizes political power.
Right-Wing Totalitarianism
A political system in which political power is monopolized by a party, group, or individual that generally permits individual economic freedom but restricts individual political freedom, including free speech, often on the grounds that it would lead to the rise of communism.
Democracy
A political system in which the supreme power lies in a body of citizens who can elect people to represent them
intellectual property
A product of the intellect, such as an expressed idea or concept, that has commercial value.
Socialism
A system in which society, usually in the form of the government, owns and controls the means of production.
Representative Democracy
A system of government in which citizens elect representatives, or leaders, to make decisions about the laws for all the people.
Civil Law System
A system of law based on a very detailed set of written laws and codes.
Communism
A theory or system of social organization based on the holding of all property in common, actual ownership being ascribed to the community as a whole or to the state.
1. Why did the Russian economy perform well during the 2001-2013 period? Why did it run into trouble in 2014? What does this tell you about the efficacy of postcommunist economic and political reforms?
After the wreck of the Soviet Union and the ruble crash there was an economic growth of Russia which is considered to be the best till date. The era between 2001 & 2013 witnessed the progressive trend in oil and natural gas which benefitted Russia's economy to boost up as this nation mostly depends on its oil natural gas resources (Durkalec & Kroenig, 2016). In 2001 the nation's President Aliyev authorized the privatization of nearly a hundred of state owned entities belonging to the fuel and energy sectors like the oil and natural gas sector along with machine building of the chemical sectors.The economy of Russia ran into trouble in 2014 due to Russia's oil and natural gas prices fell out. The prices of the fuel got slacked as there was an increase in the supply of oil and natural gas globally by United States. The Russian ruble lost its value by half percent against USA, the countries of European Union and the weakening of the ruble (Dawisha, 2015).
innovation
An improvement of an existing technological product, system, or method of doing something.
World Intellectual Property Organization
An international organization whose members sign treaties to agree to protect intellectual property
World in 20 years
Author Francis Fukuyama argues that the new world order will be characterized by democratic regimes and free market capitalism ➢But, political scientist Samuel Huntington argues that while many societies are modernizing they are not becoming more Western ➢predicts a world split into different civilizations ➢these civilizations will be in conflict with each other
Different Legal Systems
Common law - based on tradition, precedent, and custom (exs. England, US) •Civil law - based on detailed set of laws organized into codes (exs. Germany, France, Japan, Russia) •Theocratic law - law is based on religious teachings (exs. Islamic countries)
Different legal systems
Common law - based on tradition, precedent, and custom (exs. England, US) •Civil law - based on detailed set of laws organized into codes (exs. Germany, France, Japan, Russia) •Theocratic law - law is based on religious teachings (exs. Islamic countries)
How does education influence economic development?
Countries that invest in education have higher growth rates because the workforce is more productive ➢countries in Southeast Asia have offset their geographical disadvantages by investing in education ➢Exs.: Indonesia, Malaysia, and Singapore
How does geography influence economic development?
Countries with favorable geography are more likely to engage in trade, and so, be more open to market-based economic systems, and the economic growth they promote ➢Jeffrey Sachs studied economic growth rates between 1965 and 1990 and found that ➢landlocked countries grew more slowly than coastal economies ➢being totally landlocked reduced a country's growth rate by 0.7% per year ➢tropical countries grew more slowly than countries in temperate zones
country focus
Country concentration and market diversification
United Nation Convention of the Law and Sea
Created boundaries in shared waters
How does economic freedom help economic progress?
Creates greater incentives for innovation and entrepreneurship ➢Innovation and entrepreneurship are the engines of long-run economic growth by creating new markets and products that did not previously exist ➢innovation includes new products, new processes, new organizations, new management practices, and new strategies ➢entrepreneurs commercialize innovative new products and processes ➢Both require strong property rights (Hernando de Soto)
How does globalization affect jobs and income?
Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries ➢Supporters contend that the benefits of this trend outweigh the costs ➢countries will specialize in what they do most efficiently and trade for other goods—and all countries will benefit
Driving globalization
Declining barriers to the free flow of goods, services, and capital ➢average tariffs are now at just 4% ➢more favorable environment for FDI ➢global stock of FDI was $20.4 trillion in 2011 ➢facilitates global production ➢Technological change ➢microprocessors and telecommunications ➢Internet: information backbone of the global economy ➢transportation technology ➢bonus: social media
What does the shift towed a market based system involved?
Deregulation - removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate ➢Privatization - transfers the ownership of state property into the hands of private investors ➢The creation of a legal system to safeguard property rights
What does a shift towards market based system involve?
Deregulation - removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate ➢Privatization - transfers the ownership of state property into the hands of private investors ➢The creation of a strong legal system to safeguard property rights
market economy
Economic decisions are made by individuals or the open market.
Group of Twenty (G20).
Established in 1999, comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank
Globalization of Production
Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land, labor, energy, and capital ➢Companies can ➢lower their overall cost structure ➢improve the quality or functionality of their product offering ➢Examples of outsourcing service activities (beyond manufacturing) ➢Opening Case: Medical Tourism and the Globalization of Healthcare ➢Management Focus: Vizio ➢Risks/barriers? ➢Informal barriers to trade, barriers to FDI, transportation costs, economic risk, political risk
As markets globalize and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate, and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system
General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization; the International Monetary Fund and its sister institution, the World Bank; and the United Nations. All these institutions were created by voluntary agreement between individual nation-states, and their functions are enshrined in international treaties.
Why do we need global institutions?
Global institutions ➢help manage, regulate, and police the global marketplace ➢promote the establishment of multinational treaties to govern the global business system
How can we measures a country's level of economic development?
Gross national income (GNI) per person measures the total annual income received by residents of a nation ➢GNI can be misleading because it does not consider differences in the cost of living ➢Need to adjust GNI figures using purchasing power parity (PPP) = GNI PPP per capita ➢Human Development Index (HDI) ➢Amartya Sen argues economic development should be assessed less by material output measures and more by the capabilities and opportunities that people enjoy
Globalization of Markets
Historically, distinct and separate national markets are merging ➢It no longer makes sense to talk about the "German market" or the "American market" ➢Instead, there is the "global market" ➢falling trade barriers make it easier to sell globally ➢consumers' tastes and preferences are converging on some global norm
How has world output and world trade changed?
In 1960, the U.S. accounted for almost 40% of world economic activity, but by 2012, the U.S. accounted for just 23% ➢a similar trend occurred in other developed countries ➢In contrast, the share of world output accounted for by developing nations is rising ➢expected to account for more than 60% of world economic activity by 2020
How has foreign direct investment changed over time?
In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows ➢Today, the United States accounts for less than one-fifth of worldwide FDI flows ➢Other developed countries have followed a similar pattern ➢In contrast, the share of FDI accounted for by developing countries has risen ➢Developing countries, especially China, have also become popular destinations for FDI
Modern Day Socialism
In the early 20th century, socialism split into •Communism - socialism can only be achieved through violent revolution and totalitarian dictatorship ➢in retreat worldwide by mid-1990s •Social democrats - socialism is achieved through democratic means ➢retreating as many countries move toward free market economies ➢state-owned enterprises have been privatized
Human Development Index (HDI)
Indicator of level of development for each country, constructed by United Nations, combining income, literacy, education, and life expectancy
What is the link between political ideology and economic system?
Individualism = market based economies ➢Collectivism = command based economies
Market economy and economic development
Innovation and entrepreneurship require a market economy ➢There is little incentive to develop new innovations in planned economies because the state owns all means production and therefore the gains ➢Debate on the kind of political system that best achieves a functioning market economy ➢Democracy vs totalitarian (South Korea, Taiwan, Singapore, Hong Kong) ➢There is a strong relationship between economic freedom and economic growth ➢The six countries with the highest ratings of economic freedom from 1975 to 1995 were also among the highest for economic growth ➢Hong Kong, Switzerland, Singapore, US, Canada, & Germany
What is intellectual property? And how can you protect it?
Intellectual property - property that is the product of intellectual activity ➢Can be protected using •Patents - exclusive rights for a defined period to the manufacture, use, or sale of that invention •Copyrights - the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit •Trademarks - design and names by which merchants or manufacturers designate and differentiate their products ➢Management Focus: Starbucks Wins Key Trademark Case in China
How is globalization affecting poor people?
Is the gap between rich nations and poor nations getting wider? ➢Critics believe that if globalization was beneficial there should not be a divergence between rich and poor nations ➢Supporters claim that the best way for the poor nations to improve their situation is to ➢reduce barriers to trade and investment ➢implement economic policies based on free market economies ➢receive debt forgiveness for debts incurred under totalitarian regimes
How does globalization affect national sovereignty?
Is today's global economy shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN? ➢Critics argue that unelected bureaucrats have the power to impose policies on the democratically elected governments of nation-states ➢Supporters claim that the power of these organizations is limited to what nation-states agree to grant ➢the power of the organizations lies in their ability to get countries to agree to follow certain actions
What does globalization mean for firms?
Lower barriers to trade and investment mean firms can: ➢view the world, rather than a single country, as their market ➢base production in the optimal location for that activity ➢But, firms may also find their home markets under attack by foreign firms
Due to globalization companies can...
Lower costs Improve quality
What does technology mean for firms?
Lower transportation costs ➢help create global markets and allow firms to disperse production to economical, geographically separate locations ➢Low cost information processing and communication ➢firms can create and manage globally dispersed production ➢Low cost global communications networks ➢help create an electronic global marketplace ➢Global communication networks and global media ➢create a worldwide culture and a global consumer product market
The changing world order
Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies ➢creates new opportunities for international businesses ➢China and Latin America are also moving toward greater free market reforms ➢between 1983 and 2010, FDI in China increased from less than $2 billion to $100 billion annually ➢but, China also has many new strong companies that could threaten Western firms ➢Opportunity and risk
Economic stagnation of Myanmar.
Myanmar is one of the poorest countries in the South Asia. The factors leading to stagnation in the country's economic recession include: 1) High inflation rates. 2) Exchange rate instability. 3) Environmental problems such as water shortages. 4) Political instability.
Do you think GNI PPP PER capita is everything?
Nobel-prize winner Amartya Sen argues economic development should be assessed less by material output measures such as GNI & GDP per capita and more by the capabilities and opportunities that people enjoy ➢the removal of major impediments to freedom like poverty, tyranny, and neglect of public facilities ➢the presence of basic health care and basic education ➢Amartya Sen also claims that economic progress requires the democratization of political communities to give citizens a voice
The chapter made the following points:
Over the past three decades, we have witnessed the globalization of markets and production. The globalization of markets implies that national markets are merging into one huge marketplace. However, it is important not to push this view too far. The globalization of production implies that firms are basing individual productive activities at the optimal world locations for the particular activities. As a consequence, it is increasingly irrelevant to talk about American products, Japanese products, or German products because these are being replaced by "global" products. Two factors seem to underlie the trend toward globalization: declining trade barriers and changes in communication, information, and transportation technologies. Since the end of World War II, barriers to the free flow of goods, services, and capital have been lowered significantly. More than anything else, this has facilitated the trend toward the globalization of production and has enabled firms to view the world as a single market. As a consequence of the globalization of production and markets, in the last decade world trade has grown faster than world output, foreign direct investment has surged, imports have penetrated more deeply into the world's industrial nations, and competitive pressures have increased in industry after industry. The development of the microprocessor and related developments in communication and information processing technology have helped firms link their worldwide operations into sophisticated information networks. Jet air travel, by shrinking travel time, has also helped link the worldwide operations of international businesses. These changes have enabled firms to achieve tight coordination of their worldwide operations and to view the world as a single market. In the 1960s, the U.S. economy was dominant in the world, U.S. firms accounted for most of the foreign direct investment in the world economy, U.S. firms dominated the list of large multinationals, and roughly half the world—the centrally planned economies of the communist world—was closed to Western businesses. By the 2000s, the U.S. share of world output had been cut in half, with major shares now being accounted for by western European and Southeast Asian economies. The U.S. share of worldwide foreign direct investment had also fallen by about two-thirds. U.S. multinationals were now facing competition from a large number of Japanese and European multinationals. In addition, the emergence of mini-multinationals was noted. One of the most dramatic developments of the past 30 years has been the collapse of communism in eastern Europe, which has created enormous opportunities for international businesses. In addition, the move toward free market economies in China and Latin America is creating opportunities (and threats) for Western international businesses. The benefits and costs of the emerging global economy are being hotly debated among businesspeople, economists, and politicians. The debate focuses on the impact of globalization on jobs, wages, the environment, working conditions, national sovereignty, and extreme poverty in the world's poorest nations. Managing an international business is different from managing a domestic business for at least four reasons: (a) countries are different, (b) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business, (c) managers in an international business must find ways to work within the limits imposed by governments' intervention in the international trade and investment system, and (d) international transactions involve converting money into different currencies.
Risks
Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise ➢Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise ➢Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
What is product safety and liability?
Product safety laws set certain standards to which a product must adhere ➢Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage ➢liability laws tend to be less extensive in less developed nations ➢there are both civil and criminal liability laws ➢Ethical issues
How are property rights and corruption related?
Property rights can be violated through •Private action - theft, piracy, blackmail •Public action - legally (ex. excessive taxation) or illegally (ex. bribes, blackmailing) ➢high levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country
The Globalization Debate
Pros ➢Increased trade & investment ➢Lower prices ➢Economic growth ➢Higher consumer income ➢More jobs Cons ➢Job losses ➢Environmental degradation ➢Cultural imperialism ➢A crisis in one region can affect the rest of the world (ex. 2009 financial crisis)
Global Institutions
Purpose: help manage, regulate, and police the global marketplace ➢the General Agreement on Tariffs and Trade (GATT) ➢the World Trade Organization (WTO) ➢the International Monetary Fund (IMF) ➢the World Bank ➢the United Nations (UN) ➢the G20
At this point, how secure do you think Putin's hold on power is? What might change things?
Putin has been controlling Russia with extreme power. But with the recession that has hit Russia in 2015 has left Russia to stagnant and decline. Russia is the result of Putin's leadership and had proved to grow under his leadership (Rutland, 2014). Along with certain poor decision made in military and economy such as invasion and annexation of Crimea and lower the fuel export price Putin seems to be strong but inefficient in controlling the fall of Russia into the abyss.Being mostly depended on its fuel resources Russia needs to find out ways to export its oil and natural gas and counteract the major share of exports globally by US to Iraq. The nation needs to alter the threat of natural gas reserves into the strongest opportunity. The manufacturing of more number of military and defense ships ,tanks, aircrafts and others transportation modes will boost Russia's economy (Dawisha, 2015).
How is political economy changing?
Since the late 1980s, two trends have emerged: •Democratic revolution (late 1980s and early 1990s) ➢democratically elected governments replaced totalitarian regimes ➢more committed to free market capitalism •A move away from centrally planned economies ➢more countries have shifted toward the market-based model ➢Apparent in Eastern Europe, Asia, Latin America, and Africa
How is the political economy changing?
Since the late 1980s, two trends have emerged: •Democratic revolution (late 1980s and early 1990s) ➢democratically elected governments replaced totalitarian regimes ➢more committed to free market capitalism •A move away from centrally planned economies ➢more countries have shifted toward the market-based model ➢Samuel Huntington predicts the world will split into different civilizations that will be in conflict with each other
How has Vladimir Putin been able to accumulate so much political power in Russia?
Starting his career as an officer in KGB Foreign intelligence, Putin dedicated 16 years of service before being the Lieutenant Colonel and joining the politics in 1991.After moving to Moscow he joined the administration of President Boris Yeltsin soon after he became the acting President in the year 1999. He won the presidential elections of 2000 by a major margin and again got reelected as the President in 2004 (Jonson, 2015). Russia witnessed a boom in the commodities and oil prices. Putin was unable to contest the election for the third consecutive time in accordance to the constitutional limits. Putin was then appointed as "tandemocracy" by then President Dmitry Medvedev in 2008 (The Economist, Februar, 2014). It was in 2012 March when the presidential tenure was extended to six years and Putin again contested in the elections and won with around 65% (Jonson, 2015). Putin became the leader who was internationally recognized as one of the most powerful leaders globally along with high ratings of domestic approval (Sutela, 2013).
2 dimensions: ➢1. collectivism vs. individualism ➢2. democracy vs. totalitarianism ➢Systems that emphasize collectivism tend towards totalitarianism ➢Systems that emphasize individualism tend to be democratic
T
Political ideology and economic systems are connected ➢countries that stress individual goals are likely to have market based economies ➢countries that stress collective goals are likely to have command based economies ➢Gray area (ex. China- move toward greater individual freedom in the economic sphere, but the government is still a totalitarian dictatorship)
T
➢Today, collectivism is equated with socialists (Karl Marx 1818-1883) ➢advocate state ownership of the basic means of production, distribution, and exchange ➢manage to benefit society as a whole, rather than individual capitalists
T
What is the foreign corrupt act?
The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority ➢facilitating or expediting payments to secure or expedite routine government action are permitted ("speed money" or "grease payments") ➢Rationale: merely facilitate performance of duties that the recipients are already obligated to perform ➢A bribe is a payment to a public official (or someone in authority in the private sector) for doing something he/she should not do; speed money is a payment for doing something he/she should do, faster
Imf
The International Monetary Fund (1944) ➢maintains order in the international monetary system ➢lender of last resort for countries in crisis ➢Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland, and Greece
UN
The United Nations (1945) ➢maintains international peace and security ➢develops friendly relations among nations ➢cooperates in solving international problems and in promoting respect for human rights ➢is a center for harmonizing the actions of nations
Are there other measures of economic development?
The United Nations used Sen's ideas to develop the Human Development Index (HDI) (http://hdr.undp.org/en/content/2019-human-development-index-ranking) which is based on: ➢life expectancy at birth ➢educational attainment ➢whether average incomes are sufficient to meet the basic needs of life in a country ➢World Happiness Report: https://www.dayofhappiness.net/report ➢OECD Better Life Index: http://www.oecdbetterlifeindex.org/#/11111111111
What do global institutions do?
The World Trade Organization (like its predecessor GATT) ➢polices the world trading system ➢makes sure that nation-states adhere to the rules laid down in trade treaties ➢promotes lower barriers to trade and investment ➢159 members in 2013
Purchasing Power Parity (PPP)
The amount of money needed in one country to purchase the same goods and services in another country
Benefits
The benefits of doing business in a country are a function of ➢the market's size ➢the purchasing power of its consumers ➢their likely future wealth ➢By identifying and investing early in potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country
Costs
The costs of doing business in a country are a function of its: ➢political system (political costs) ➢is it necessary to pay bribes to get market access? ➢economic level (economic costs) ➢are the necessary supporting businesses and infrastructure in place? ➢legal system (legal costs) ➢it can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights
Economic Risk
The likelihood that events, including economic mismanagement, will cause drastic changes in a country's business environment that adversely affect the profit and other goals of a particular business enterprise.
How Can Managers Determine A Market's Overall Attractiveness?
The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country Other things being equal, more attractive countries have democratic political institutions, market based economies, and strong legal systems that protect property rights and limit corruption
political economy
The political, economic, and legal systems of a country.
This chapter reviewed how the political, economic, and legal systems of countries vary. The potential benefits, costs, and risks of doing business in a country are a function of its political, economic, and legal systems. The chapter made the following points:
The rate of economic progress in a country seems to depend on the extent to which that country has a well-functioning market economy in which property rights are protected. Many countries are now in a state of transition. There is a marked shift away from totalitarian governments and command or mixed economic systems and toward democratic political institutions and free market economic systems. The attractiveness of a country as a market and/or investment site depends on balancing the likely long-run benefits of doing business in that country against the likely costs and risks. The benefits of doing business in a country are a function of the size of the market (population), its present wealth (purchasing power), and its future growth prospects. By investing early in countries that are currently poor but are nevertheless growing rapidly, firms can gain first-mover advantages that will pay back substantial dividends in the future. The costs of doing business in a country tend to be greater where political payoffs are required to gain market access, where supporting infrastructure is lacking or underdeveloped, and where adhering to local laws and regulations is costly. The risks of doing business in a country tend to be greater in countries that are politically unstable, subject to economic mismanagement, and lacking a legal system to provide adequate safeguards in the case of contract or property rights violations.
Gross National Income (GNI)
The value of the output of goods and services produced in a country in a year, including money that leaves and enters the country
How Will The Global Economy Of The 21st Century Look?
The world is moving toward a more global economic system... ➢But globalization is not inevitable ➢there are signs of a retreat from liberal economic ideology in Russia ➢Globalization brings risks ➢the financial crisis that swept through South East Asia in the late 1990s ➢the financial crisis that started in the U.S. in 2008-2009, and moved around the world ➢the recent financial crises in Europe & South America
Privatization
To change from government or public ownership or control to private ownership or control.
Foreign Corrupt Practices Act
U.S. law regulating behavior regarding the conduct of international business in the taking of bribes and other unethical actions.
Theocratic Totalitarianism
a political system in which political power is monopolized by a party, group, or individual that governs according to religious principles
Theocratic Law System
a system of law based on religious teachings
Communist Totalitarianism
a version of collectivism advocating that socialism can be achieved only through a totalitarian dictatorship
Market Economies
all productive activities are privately owned and production is determined by the interaction of supply and demand ➢government encourages free and fair competition between private producers ➢law of supply and demand ➢capitalist ➢forces businesses to operate as efficiently as possible
The International Monetary Fund (IMF)
and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was established to maintain order in the international monetary system
What is a multinational enterprise?
any business that has productive activities in two or more countries ➢Since the 1960s ➢the number of non-U.S. multinationals has risen ➢the number of mini-multinationals has risen
International Business
any firm that engages in international trade or investment
Overall Attractiveness
benefits, costs, and risks
mixed economy
certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning ➢governments tend to own firms that are considered important to national security
Contracts
document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved ➢
Individualism
giving priority to one's own goals over group goals and defining one's identity in terms of personal attributes rather than group identifications
Collectivism
giving priority to the goals of one's group (often one's extended family or work group) and defining one's identity accordingly
poltical risk
has been defined as the likelihood that political forces will cause drastic changes in a country's business environment that adversely affect the profit and other goals of a business enterprise
product liability
involves holding a firm and its officers responsible when a product causes injury, death, or damage
multinational enterprise (MNE)
is any business that has productive activities in two or more countries
Contract law
is the body of law that governs contract enforcement ➢under a common law system, contracts tend to be very detailed with all contingencies spelled out ➢under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code ➢CISG (UN Convention on Contracts for the International Sale of Goods)
Reasons for outsourcing engineering jobs boeing
it helps us sell them to other countries other countries specialize in making some of these parts unburden some risks and costs risks: Parts can be late, broken or don't fit together
factors of production
labor, energy, land, and capital
International trade
occurs when a firm exports goods or services to consumers in another country
Foreign direct investment (FDI)
occurs when a firm invests resources in business activities outside its home country
social democracy
political ideology in which there is a gradual transition from capitalism to socialism instead of a sudden violent overthrow of the system
What are property rights?
refer to a resource over which an individual or business holds a legal title; that is, a resource that they own and over the use made of any income that may be derived from that resource ➢Exs.: land, buildings, equipment, capital, mineral rights, businesses, and intellectual property (such as patents, copyrights and trademarks) ➢Countries differ significantly in the extent to which their legal system protects property rights ➢Corruption is bad for property rights (private & public action) ➢FCPA (Foreign Corrupt Practices Act)
globalization of markets
refers to the merging of historically distinct and separate national markets into one huge global marketplace
What is individualism?
refers to the philosophy that an individual should have freedom in his own economic and political pursuits (Aristotle) ➢Implies democratic political systems and free market economies
globalization of production
refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production
stock of foreign direct investment (FDI)
refers to the total cumulative value of foreign investments
Product Safety Laws
set certain safety standards to which a product must adhere
What is collectivism?
stresses the primacy of collective goals over individual goals - for the good of society (Plato) ➢Socialism (Marx) ➢Communism (achieved through violent revolution & totalitarian dictatorship) ➢Social democrats
legal system
system of rules that regulate behavior and the processes by which the laws of a country are enforced and through which redress of grievances is obtained
After the collapse of communism, many Western businesses started to invest in Russia. How do you think the current political and economic climate is impacting on the profitability of those investments?
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Given what is happening in Russia today, what do you think will happen to foreign direct investment in Russia going forward? Is this a country where a Western enterprise would want to do business?
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Paris Convention for the Protection of Industrial Property
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Contract Law
the body of law that governs contract enforcement
Copyright
the exclusive legal right, given to an originator or an assignee to print, publish, perform, film, or record literary, artistic, or musical material, and to authorize others to do the same.
Public Action
the extortion of income or resources of property holders by public officials, such as politicians and government bureaucrats
Legal Risk
the likelihood that a trading partner will opportunistically break a contract or expropriate intellectual property rights
What is a legal system?
the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained ➢the system in a country is influenced by the prevailing political system ➢Legal systems are important for business because they ➢define how business transactions are executed ➢identify the rights and obligations of parties involved in business transactions
What is Globalization?
the shift toward a more integrated and interdependent world economy
private action
the theft, piracy, blackmail, and the like by private individuals or groups
United Nations (UN)
was established October 24, 1945, by 51 countries committed to preserving peace through international cooperation and collective security.
Moore's law,
which predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months
Trends in the Global Economy
•The changing world output and world trade picture •The changing foreign direct investment picture •The changing nature of the multinational enterprise (mini-multinationals) •The changing world order
2 components of globalization
➢1. Globalization of markets ➢But, there are still national differences in tastes & preferences ➢2. Globalization of production ➢Factors of production (land, labor, energy, capital)
How do these 2 dimensions connect?
➢Systems that emphasize collectivism tend towards totalitarianism ➢Systems that emphasize individualism tend to be democratic
G20
➢forum through which major nations tried to launch a coordinated policy response to the 2008-2009 global financial crisis
The World Bank (1944)
➢promotes economic development via low interest loans for infrastructure projects