D080 Managing in a Global Business Environment

Most Favored Nation Rule

- A WTO member country cannot discriminate against its trading partners. - Emphasizes equality across all trading partners

Horizontal FDI

- A company trying to open a new market or build a new production facility in another country (ex. a retailer that builds a store in a foreign country to sell to the local market) - Related to the market entry and product specialization stages of entering a global market

Common Market of the South (MERCOSUR)

- A customs union, not an actual common market - Members include Argentina, Brazil, Paraguay, Uruguay, and Venezuela - An economic trade initiative with clear political goals committed to the consolidation of democracy and maintenance of peace throughout the southern cone (ex. agreements in nuclear field) - Has suspended Venezuela indefinitely starting in 2016, due to human rights violations and a lack of commitment to democracy - Constituents compose nearly half the wealth in all Latin America (South America)

Quotas

- A quantity limit on an imported product - Absolute quota: an absolute quantity limit on an import (limit on the number of value of goods imported during a certain period) - Tariff rate quota: a combination of a tariff and a quota (initial quota is at a lower duty rate, additional amounts are at a higher duty rate) - Domestic businesses are protected (their goods are purchased and their revenues increase, making a positive impact on wages, jobs, and the economy). - Limiting imports reduces the amount of supply in the economy, allowing the US market to increase its prices and generate greater profit (less competition). - Foreign producers sell less under the quota, but to bring in the same amount of revenue, they increase the price of the imported goods.

Multinational Corporations (MNCs)

- Aka Multinational Enterprises (MNEs) - For profit companies that move natural resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located (owns and controls manufacturing services, R&D facilities, or other business entities on foreign soil) - Operates in two or more countries, leveraging the global environment to enter new markets to increase revenue - One of the instruments of globalization and the primary means of foreign direct investment (FDI) - Large corporations with significant amounts of resources (capital, management, talent, and technology) at their disposal - Willing and able to take on huge risks (leading to huge rewards) needed to globally operate - Maximizing profits and shareholder wealth - Look for countries with high-growth potential and a rising per-capita income, as well as a growing middle class with high demand for goods and services - Can enter foreign markets as foreign direct investors, exporters, licensors, franchisors, joint ventures, strategic partners, etc.

Similarities Between the IMF and World Bank

- Both established in 1944 at the Bretton Woods Conference - Owned and directed by governments of member nations - Almost every country on earth is a member of both institutions. - Both concern themselves with economic issues - Both focus on broadening and strengthening the economies of their member nations - Hold joint annual meetings - Headquartered in Washington, DC USA - Share joint task forces, sessions, and research efforts

Association of Southeast Asian Nations (ASEAN)

- Can be characterized as a common market, except labor movement across member nations is restricted - Most important trading partner has been China, but has now expanded to Australia, New Zealand, and India - Focuses on the economic, social, cultural, and technical cooperation as well as promoting regional peace and stability - Initially interested in preventing domination by external world powers

Brownfield FDIs

- Companies or government entities use existing production facilities to launch new production activity - Cleans up facility from production to a less polluting one (like an office space/residential area) - Less expensive and faster implementation - Challenges include existing employees, outdated equipment, entrenched processes, and cultural differences.

Vertical FDI

- Company invests internationally to provide input to its core operations (pertains to a company's value chain) - Related to the value chain disaggregation stage of entering a global market - Backward vertical FDI: investing in the supply field for production or resources for core operations - Forward vertical FDI: investing in the distribution field for selling or distributing goods - Largest global companies do both

Special Drawing Right

- Created by the International Monetary Fund (IMF) - International monetary reserve asset, aka the basket of currencies (US dollar, British pound, Japanese yen, Euro, Chinese Renminbi) - Allocated to IMF member countries and can be used to pay debts or loan out to other countries

Desired Political System for Globalization

- Democratic political system - High levels of political stability that give businesses confidence to operate in the country - Business freedom to operate in the market (with few limitations from the government), transparent governance that reduces corruption, freedom of speech, independent judiciary, etc. - Business owners must consider the country's political system and choose the best one that fits their needs (ex. some oil companies prefer authoritarian governments because they require a significant amount of long-term investment and government coordination).

Economic System

- Determines a country's economic production of goods and services - A country has to determine what to produce, how to produce the product, and who gets the final product.

World Bank

- Developmental institution that encourages developing countries to borrow for infrastructure and development projects which will improve quality of life and their under-developed economic system to promote prosperity (and therefore investing in people to help build sustainable economic growth) - Initial goal was to help Europe rebuild their infrastructure - Current goal is to provide long-term loans to support the development of poor nations to help them fight poverty and eventually improve the quality of life in developing areas - Such projects cannot be done within one or two years, which is why the loans offered by the World Bank are long-term. - Investment bank owned by governments of member nations - Borrows and loans to those who qualify and meet long-term loan requirements (doesn't have to be a member country) - Low interest, interest-free credits, and conditional grants - The International Bank for Reconstruction and Development (IBRD) is linked to the World Bank's initial goal to rebuild Europe's infrastructure.

Market Capitalization Macroeconomic Indicators

- Economic growth rates (ex. product demand and trends) - Exchange rate stability (ex. converting foreign revenue into home country dollars) - Health of foreign banking system and interest rates (ex. ease of loan approval) - Liquidity of stock and bond markets - Most important indicators are political, stability, and security

Market Economy

- Economic system - Businesses and resources are privately owned. - Minimal government control on business operations - Economic production is determined by market supply and demand. - Focuses on maximizing profits - Competition helps set prices. - Innovative, productive, and profitable - Capitalism requires this type of market.

Command Economy

- Economic system - Observed in countries such as Cuba and North Korea - 100% government controlled (resources, assets, and businesses) - The government determines who, what, when, and where of goods, production, and distribution. - The system's property is publicly owned. - Black markets are common. - The economy is less flexible and slower to react to change. - Can lead to neglection of societal needs - Currency is regulated by the government. - Economic production is regulated by the government which challenges globalization.

Mixed Economy

- Economic system - Observed in the United States - Stands in between a command economy and a market economy - While the market is still the major determining power of economic production, the government has more controls on industries in this economy. - The government intervenes the market only when necessary (ex. stimulus checks and small business loans being sent out to help the society during the covid pandemic). - Most economies fall here.

Traditional Economy

- Economic system - Observed in very underdeveloped areas such as Africa, Southeast Asia, and Latin America - Farming is the main focus. - More self-sufficient and sustainable than other countries but low standard of living (usually struggling with poverty) - Families produce agricultural products to feed themselves. - No extra products due to the lack of advanced technological levels (no surplus) - The exchange of goods and services without the use of money (bartering)

North American Free Trade Agreement (NAFTA)

- Encourages trade between Canada, the US, and Mexico - Includes protection and enforcement of intellectual property rights - Includes the country of origin rule, which states that automobiles must have 75% of their components manufactured in the US, Canada, and Mexico to qualify for a zero tariff rate - There is also a labor provision for wages, which states that 40 to 45% of automobile parts must be made by workers earning a minimum of $16 per hour. - Reduces tariffs and trade barriers with the hope that with a free trade zone, companies can benefit from the transfer of goods - Has provisions for workers' rights, environmental protections, and dispute resolution to appease concerns with relocating jobs, due to lower wages and looser environmental laws (shifts them away from low comparative advantage industries)

Stock Exchange

- Equity (shares) - Shares/stocks for larger and publicly traded organizations - Riskier, most costly, and less reliable type of financing - Doesn't have to be repaid at a specific time or interest rate, but every offering firm loses some control to stockholders - Global equities and debts promote complicated sources of funding due to foreign currency/exchange rates. - Exchanges include NYSE, NASDAQ, Euronext, Tokyo Stock Exchange, and London Stock Exchange.

International Investors

- Exchanging currencies to settle transactions - Ex. a foreign firm exports to the US; the firm is a supplier of US dollars, demander of their home currency (the firm buys their goods in US dollars, and exchanges their revenue in US dollars for their own currency to pay their workers based in their country)

Creation of New Markets

- Fifth stage of business globalization - Creates new demand due to the reduction of ticket price - Only created with the creation of new demand from new customers, who are now willing to buy products at a lower price (the lower the price, the more likely people will buy, creating demand; those that wouldn't buy before but will now at this new lower price is the "new market")

Political Union

- Fifth stage of regional economic integration - Contains all the features of the economic union, including a unification of all political policies by a common organization - The member nations of a political union agree to be integrated into a single country or political entity. - For some, a political union is an ideal that has not yet been achieved, while others cite that the United Arab Emirates (UAE) and the United States are political unions. - Common economic policies may create common political and foreign policies. - Economic integration presents an alliance of all policies by a common organization.

Market Entry

- First stage of business globalization - Deployment into new countries using business models similar to the ones deployed in their home markets

Free Trade Area

- First stage of regional economic integration - Member countries reduce or even remove all barriers to trade, namely tariffs and quotas among themselves, but independently determine their own trade policies with nonmember nations. - Ex. the countries that compose the North American Free Trade Agreement (NAFTA) have removed all tariffs and quotas with one another, but each country has its own individual trade policy with China

International Monetary Fund (IMF)

- Focuses on maintaining the short-term global financial stability and making international transactions smoother and safer - Initial goal was to restore the international payment system and oversee the fixed exchange rate system (Brenton Woods system) - Current goal is to stabilize the exchange rate for international transactions and promote trade - Seeks to help member countries develop appropriate monetary and economic policies to stabilize the value of the currency - Makes short-term loans to member countries and helps them correct the debt issue - The borrowing nation has to pay off the loan in a short time period - Oversees the international monetary system - Monitors and stabilizes the exchange rate - Guides economic policy development - Resources come from quota subscriptions and membership fees. - Acts like a credit union that only serves its member countries

Economic Globalization

- Focuses on the economic development of participating countries in globalization - The international movement of goods, capital, and services - More trade and investment leads to faster economic development. - Increase in information technology - Improvement in social well-being - Tends to benefit rich countries more than poor countries because there are more gains - Lost jobs in developed countries are due to cheap labor in undeveloped countries. - Environmental damages in developed countries because they do not have well established environmental protection enforced - The use of sweatshops and child labor (unethical labor practices)

Doha Round

- Focuses on the reduction of agricultural tariffs - Developing countries think the use of agricultural subsidies in developed countries is unfair to the farmers in developing countries, while developed countries want to push the developing nations to reduce the agricultural tariff (no agreement can be achieved with such conflict). - An inconclusive round as there is not enough room for negotiation

Uruguay Round

- Focuses on the reduction of general tariffs globally - Started the protection on intellectual property rights for global businesses (TRIPS)

Value Chain Reengineering

- Fourth stage of business globalization - Increases cost savings by reengineering processes to suit local market conditions by substituting lower cost labor for capital - Changes the method of setting up the production line to what is most cost effective (ex. moving from automation to unskilled labor because unskilled labor is cheaper)

Economic Union

- Fourth stage of regional economic integration - Has all the characteristics of a common market, but also adopts a common economic policy (members use a common currency, harmonized taxes, monetary/fiscal policies) - Standard set of laws and regulations for competition, mergers, corporate behaviors, and licensing, etc. - Ex. the European Union (EU)

The World is Flat View

- Globalization has leveled the economic playing field as more and more contributions are made by nations outside of the industrialized West group (refers to developed countries such as the US, Japan, and European countries). - The use of technology and the internet has made it easier for businesses to conduct global operations. - The convergence of three more powerful forces include new software and increased public familiarity with the internet, the incorporation of that knowledge into business and personal communication, and the market influx of billions of people from Asia and the former Soviet Union who wanted to become more prosperous quickly.

Government Drivers

- Governments can use a lower tax bracket to attract foreign direct investment (ex. a Chinese company moving their operations to the US because of cheaper taxes). - Governments can also encourage domestic businesses by giving them subsidies (free money offered by the government to help reduce costs of products and charge lower prices). - Trade policies, tech standards, policies and regulations, government/subsidized competitors, and customers affect elements of global strategy.

Free Trade

- Governments do not discriminate against exports and imports. - Few restrictions (markets open to both foreign and domestic supply and demand) - Eliminates tariffs and import/export quotas - Encourages countries to specialize in their comparative advantage area of production and gain economies of scale to improve production efficiency - The negative impacts of free trade include possible manufacturing job loss (developed nations), concerning labor standards and working conditions (developing nations), and domestic businesses facing challenges. - Goods made in developing countries can be offered at more competitive prices because labor is cheaper while still having a greater profit margin. - Import of raw materials to make domestic goods cost less (no tariffs) - Agreements must be approved by both houses of Congress because they involve revenue from trade (whereas treaties only need approval from Senate).

Political Globalization

- Governments seek opportunities to collaborate together and remove barriers (collaboration among countries). - Collaboration to remove barriers has increased world organizations (WTO, World Bank, NAFTA, EU, etc.) and nongovernmental organizations (NGOs). - Before joining, countries have to sign agreements in order to obey rules within the organization. - A con is giving up some independence (reduced importance of their nation-states) because of the need to follow leading countries' requirements (sacrificing some political independence).

Cost Drivers

- Includes economies of scale and other factors (economies of scope) that can reduce the production cost for the company - Economies of scale: allows for reduction of costs (the per unit cost of the product drops as the quantity of the product produced increases) - Economies of scope: a company uses the same production facility to produce multiple products, reducing the cost (ex. Apple using one production line to produce iPhones, iPods, and iPads because they are very similar) - Focuses on factors of production cost reduction, such as labor cost or national resources cost reduction

Competition Drivers

- Increasing profit and competitiveness of the company by going global - Increased access to technologies increases the interdependence of its operations, allowing them to stay on top in their field.

Globalization

- Interdependence and interconnectedness among companies and countries around the globe - International integration that arises from the interchange of world views, products, ideas, and other aspects of culture - A process to remove all kinds of barriers among countries - Ultimate goal is to promote collaboration and interdependence of countries

Neo-Mercantilism

- International trade theory - A new modern day thinking of the Mercantilism theory - Trade surplus increases wealth (more export, less import) - Governments can use trade barriers such as tariffs and quotas to limit export and protect the domestic industry. - Countries promote a combination of protectionist policies (subsidies) and restrictions and domestic industry subsidies.

Heckscher Ohlin Theory

- International trade theory - Aka the Factor Endowment Theory - Says that any production needs factors of production to get started with (labor, land, natural resources, capital, and technology) - Countries produce and export goods that require resources or factors that are in abundant supply and are therefore cheaper. - Countries import goods that require resources in short supply but in higher demand (ex. China and India have cheap labor for textiles and garments).

Mercantilism

- International trade theory - Explains international trade occurence as a way for a country to earn gold and silver coins (money) - Believes that the only way to make a country wealthier and stronger is to earn money through international trade - Trade surplus increases wealth (more export, less import)

Global Strategic Rivalry Theory

- International trade theory - Firms participate in international trade because they would like to increase their competitive advantage. - Multinational corporations and efforts to gain competitive advantage against other global firms in their industry - Sustainable competitive advantage through barriers for entry through R&D, intellectual property rights, economies of scale, unique process/methods, industry experience, and access/control of resources/raw materials

Absolute Advantage

- International trade theory - Uses the absolute production cost to determine specialization - Both exporting and importing countries win as free trade generates values and encourages specialization. - A country's living standard is what matters to make the country wealthier, not money. - Country's ability to produce a good more efficiently (cheaper and/or faster) than another nation = specialization - Increased productivity = increased profit - Can be the result of a natural endowment (ex. Saudi Arabia and their oil)

Comparative Advantage

- International trade theory - Uses the opportunity cost to determine specialization - Each country has limited resources to produce products. - When a country uses the resources to produce one product, it gives up the opportunity of using the resources to produce another product (one or the other). - Producing goods at the lowest opportunity cost = more efficiency in producing the current product - A country giving up less to produce the current product = gaining competitive advantage in the area (area of specialization)

Country Similarity Theory

- International trade theory - When a firm tries to export extra inventory to a foreign country, it chooses the country that is similar to its home country (customer preferences, living standards, etc.). - Countries in the same or similar stage of development have similar preferences. - Trade in manufactured goods occurs between countries that are similar in per capita incomes, and intra-industry trade is standard. - Helps the understanding of trade in goods with brand names, and product reputations are important factors in decision-making and purchase processes

Foreign Direct Investment (FDI)

- Investment or acquisition of foreign assets with the intent to control or manage them - Include investing in companies, new property facilities and equipment, or participating in some type of partnership with a foreign company - Long-term strategy to strengthen economic and financial market position through purchasing of new assets, capital, or participation in joint business ventures - Country can have an inward (positive) or an outward (negative) net FDI inflow - Don't need to sell in a foreign market for it to be a good option for direct investment (low-cost production and export all products) - Direct involvement in management and ownership control

Regional Economic Integration

- Involves agreements among nations in the same geographical area to reduce or eliminate trade barriers such as tariffs and quotas - Establishes a single political, economic, and trade policy - Collaboration of countries in a specific geographic area is used to increase competitive advantage. - Occurs more for economic reasons (rather than political) - Meant to increase interregional trade and lead to a more competitive trade position and more efficient resource allocation - Helps nations attain higher living standards by encouraging specialization, lowering prices, providing more choices on goods/services, increasing productivity, and allowing for more efficient use of natural resources - Allows a country to focus on issues relevant to their stage of development as well as encourage trade between neighbors

Foreign Portfolio Investment (FPI)

- Involves purchasing stocks in a foreign business - The portfolio investor is eligible to receive dividend payments and participate in all decisions usually by voting at shareholder meetings, and sell the stocks at any time for a profit or a loss. - No active involvement in management

Religious Law

- Legal system - Aka Theocratic Law - Mostly impacts businesses in Middle Eastern and Southeast Asian countries - Based on religious guidelines and focuses on moral standards - Islamic law and the prohibition of interest - Other religious laws include the Talmudic law (Jewish community), Cannon law (Christian community), and customary law which is usually observed in an area where there is no strong justice system.

Civil Law

- Legal system - Used in Continental Europe and Central American countries - The judge applies the law code (rarely uses the jury). - The judge first investigates the case, determines the facts of the case, then applies the legislature's written laws.

Common Law

- Legal system - Used in the United States and United Kingdom - The jury determines innocence or guilt based on facts. - The judge determines which law applies to the case.

Multinational Production

- Maximizes production potential of multiple regions simultaneously to increase efficiency and mitigate production risks - Don't necessarily need one factory to build a product, instead choose a variety of partners in different countries - Strategies include manufacture and export, global components with local assembly (concern with coordination issues and supplier quality, country-of-origin effect), and local production (complete production in a foreign country = high investment and political risks but takes advantage of lower-cost labor, regional suppliers and local resources and knowledge) - Things to consider are production processes and cycles, resource/availability cost, demographics, culture, rapid technological advances, shipping/logistics, fixed costs of business investment, economic/business growth, government incentives/requirements, cost reduction, insourcing/outsourcing, etc.

Global Players

- Multinational corporations (MNCs) that have become conglomerates with worldwide reach - Have roles economically, politically, socially, and culturally

Greenfield FDIs

- Multinational corps build new in developing countries - Creates long-term jobs - Incentives to companies are tax breaks, subsidies, etc. because they invest in infrastructure, energy, and water to increase jobs and wages in the host country

Technical Barriers

- Non tariff/quota barrier - Standards that need to be met before goods can enter or leave country - Used to limit trade, such as special sanitary measures, requirements for packaging (size and weight), standards for labeling, ingredient standards, etc. - The government can place more regulations to make trade more difficult.

Voluntary Export Restriction

- Non tariff/quota barrier - The exporting country can voluntarily reduce export quantity to avoid harsher punishment from the importing country. - Ex. the imports of vehicles from Japan has hurt the US automobile industries, so the US uses a 30% tariff rate on imported vehicles from Japan to limit the number of vehicles the Japanese government exports

Government Procurement Programs

- Non tariff/quota barrier - Used to ensure that government departments buy from local businesses, not international businesses - Ex. congress signed the Buy American Act to require the US government to prefer US made products for its purchases

Bureaucratic Delays

- Non tariff/quota barrier - Used to make trade more difficult - Delays at ports/borders due to admin/red tape increases the uncertainty and cost of maintaining inventory. - Ex. if the US customs take three months to process the export and import documentation, it would greatly reduce foreign businesses' interests in trading with American businesses

Benefits of MNCs

- Often overcome trade problems (ex. after the United States imposed tariffs on European Union produced steel, the EU retaliated by imposing its own tariffs on US manufactured Harley Davidson motorcycles; Harley Davidson responded by moving some of its production to other countries to sidestep the EU tariffs) - Ability to sidestep regulatory problems (ex. a US MNC facing certain restrictions against foreign companies in the EU can merge with a French company facing restrictions in the United States so that the combined organization is seen as a "home" company in both markets) - Can shift production from one location to another as market conditions change (ex. if a natural disaster has shut down operations in country A, the MNC can increase production in countries B and C) - Can exploit R&D in research centers around the world (ex. a laundry detergent formula developed in Japan and small gear components designed in Spain) - Ability to save on labor costs (ex. if faced with pressure to increase wages, an MNC can threaten to shut down operations in a highly unionized environment and move to a country with lower labor costs)

Market Drivers

- Opportunity to find the convergence of needs (foreign consumer demand = domestic consumer demand) that allows the same or similar product to be produced in bulk - No redesigns needed because the needs are the same

Cooperative Institution

- Owned and directed by the governments of member nations - Gives short-term loans to member countries to assist with debt issues to prevent impact on trading partners

Dictatorship

- Political system - A single person that possesses absolute power without effective constitutional limitations - The ruling class can be in power for as long as they want as long as nobody objects. - Oppressive policies

Anarchy

- Political system - Citizens have the power to determine all policies that the country needs (no government needed). - Every political and economic policy determination requires an all citizen vote.

Oligarchy

- Political system - Used in Russia and China - A small group of elite members that gains power to control the country - Power is centralized within a leadership team, rather than involving everyone in every decision (people can still participate in activities and work while the small group in power handles bigger issues of the society). - Tends to exclude outsiders as the ruling class gains more expertise (ex. Russia's ruling class being in control of the country for a long time) - Can sometimes turn into a dictatorship (ex. Putin becoming president and being able to change the constitution so he can have an unlimited term)

Monarchy

- Political system - Used in the United Kingdom - Relates to the royal power (a king or queen rules the country) - Absolute monarchy system: the king or queen still has absolute power to control every aspect of the country and make policies - Constitutional monarchy system: the queen acts only as the symbol of the country, while the prime minister has the absolute administration power over the country

Democracy

- Political system - Used in the United States - Gives citizens the right to vote for political leaders - A government is formed to represent the citizens and make decisions on all kinds of policies. - Includes congress and senate

Conditionalities

- Purpose is to help the borrowing nation cut expenditures to save money and pay off loans later (a criticism of the IMF and World Bank) - A borrowing nation might privatize or deregulate their industries to save expenditures (ex. a government privatizing the healthcare industry by giving previously government owned healthcare facilities to private parties, due to spending cuts).

Central America Free Trade Agreement (CAFTA)

- Removed all tariffs on US consumer and industrial exports as well as agricultural products by 2020 - Reduces barriers to the US, their largest export market, and increases attraction for foreign direct investments (FDIs)

Product Specialization

- Second stage of business globalization - Transfers full production process of a particular product to a foreign country to produce that product and save costs - The focus of this stage is to take advantage of other countries' comparative advantages such as labor, natural resources, operational expenses, etc.

Customs Union

- Second stage of regional economic integration - Has all the features of a free trade area except that member nations have common trade policies with nonmember countries - Ex. members of the Common Market of the South (MERCOSUR) have to all agree whether a tariff should be imposed on goods manufactured in India

Why MNCs Go Abroad

- Significant competition in the home market has led to decreasing profit margins and market saturation for product/service. - Identification of new business opportunities abroad based upon competitive advantages in production, technology, and/or management - Reach new customers - Access cheaper resources - Minimize risk of business cycle fluctuations

Tariffs

- Taxes imposed to limit trade (classified based on type, purpose, or value) - Bring in extra revenue for the government - Imports often cost more, and the cost of tariffs are passed down to the consumer. - Encourages country dependance on itself; domestic businesses can make more and sell more - Import tariffs: taxes imposed on imported products (more common) - Export tariffs: taxes imposed on exported products (restrict the world supply of goods or raise tariff revenue) - Revenue tariffs: used to raise tax revenues for the government - Protective tariffs: used to reduce imports and protect domestic industries, making imports more expensive to purchase than equivalent domestic goods - Specific tariffs: flat rate taxes charged for each unit of a product (flat rate on import) - Ad valorem tariffs: collected as percentages of values of imported products - Compound tariffs: combination of specific tariffs and ad valorem tariffs

International Business

- The exchange of goods, services, and resources across two or more nations (crosses country borders) in exchange for physical goods, money, people, patents, copyrights, data, assets, liabilities, etc. - Promotes foreign direct investment (reduces barriers for investment and encourages governments to release regulation on industries) - Takes place in markets (seen in production where goods are sourced from other countries) - The goal is to maximize profit.

Economic Growth

- The increase in the amount of goods and services produced by an economy over time - Measures the total market value of the goods and services a country produces (categorized as industrialized nations, less-developed nations, and developing nations) - Conventionally measured as a percentage change in gross domestic product (GDP) or gross national product (GNP)

European Union (EU)

- The most integrated form of economic cooperation - Has its origins in the European Coal and Steel community, which was established in 1950 (the actual EU was created by the Maastricht Treaty in 1993) - Member countries have implemented product labeling standards, eliminated border controls, and established unified policies for energy, agriculture, and social services. - A standard set of laws and regulations pertaining to competition, mergers, and corporate behavior and licensing standards for professionals have been established. - In 2009, the 28 EU countries signed the Treaty of Lisbon, which was designed to make the EU more democratic, efficient, and transparent, as well as tackle global challenges such as climate change, security, and sustainable development. - Larger trading platform to compete against markets of the US, China, and India - Initially formed to end frequent wars between neighboring countries in Europe - Eventually established common currency - Creates monetary and fiscal targets for member countries - Political union treaty, including development of common foreign and defense policy and common citizenship - The Eurozone is a subgroup of EU member states that have adopted the euro as their official currency (the European central bank is responsible for setting the monetary policy for the eurozone). - Benefits include single tariff/tax upon market entry and antitrust enforcement. - Challenges include labor markets and protectionist movement against outsiders.

CAGE Analysis

- The world is spikey (multi-domestic) instead of flat. - Countries are so different from each other in many aspects that trade barriers still exist. - Culture: differences between countries decrease trade volume - Administration: similar countries trade more frequently; similar administration/membership in the same trading bloc makes it easier for countries to trade with each other, and countries trade with countries with similar trading conditions due to ease - Geography: distance between countries (increases the cost of transportation), shared borders vs. ocean ports, and time zones, topography, and climate - Economics: differences in demographic and socioeconomic conditions impacts trade volume and country size, affects gross domestic product (GDP), per capita income, cost differences (labor, natural resources, capital), infrastructures (distribution, communication, technology), and business systems, etc.

Value Chain Disaggregation

- Third stage of business globalization - Separates production process and focuses on completing each activity in the most advantageous locations

Common Market

- Third stage of regional economic integration - Has all the features of a customs union in addition to which restrictions on the movement of labor, technology, and capital among member countries has been removed - Workers no longer need a work permit or visa to work in another member country of a common market. - Ex. the Association of Southeast Asian Nations (ASEAN) and the Common Market for Eastern and Southern Africa (COMESA)

4 Aspects of Globalization

- Trade and transactions - Capital and investment moments - Migration and movement of people - Dissemination of knowledge

Antidumping

- Trade barrier to limit trade - A company dumps its extra inventory on a foreign country's market and sells the product at a price that is even lower than the production cost. - Charging lower prices for products in the foreign market but not in the home market - Predatory pricing in foreign markets - A government can use an antidumping tariff, sometimes called a countervailing duty, to challenge dumping behavior (for the purpose of protecting local businesses).

Limiting Outsourcing

- Trade barrier to limit trade - A developed nation could use trade barriers to limit trade and outsourcing to protect domestic manufacturing workers. - By making the imported product more expensive, the government could then encourage domestic buyers to buy more domestically made products (giving domestic businesses opportunities to produce more and hire more workers).

Infant Industry Argument

- Trade barrier to limit trade - A special form of protectionism as the government would protect an infant industry, not just any industry - A new industry at the beginning stage of development that is not mature enough to compete with matured foreign businesses - Until established and able to compete better in the world market, it is protected with high tariffs on competing imports.

Embargoes

- Trade barrier to limit trade - Aka sanctions - Prohibition (ban) on import/export to certain countries, usually involving direct military/air blockage (legal, not acts of war) - Vary from restriction in trade - Imposition of tariff to complete ban on blockage of trade - Can be used if two countries have a poor political relationship - Country is usually self-sufficient or a closed economy if they can do this

National Security

- Trade barrier to limit trade - Related to political reasons - Ex. the US government requires the army to purchase necessary products from American companies as this relates to national security

Health and Safety

- Trade barrier to limit trade - Related to social reasons - Banning products for health and safety reasons (ex. Food and Drug Administration and Bureau of Consumer Protection) - Ex. if a battery imported from Vietnam causes fires on cars, the government might stop importing the batteries as this is a product safety issue - Ex. if a processed food imported from a foreign country contains bacteria and causes citizens to be hospitalized, the government might limit the imports of that food as well

Protectionism

- Trade barrier to limit trade - The general protection on any industry to help them face global competition brought by trade

World Trade Organization (WTO)

- Trade moderator of the world that enforces rules and reviews each governments' trade policies, evaluating them for fairness and transparency - Encourages the international trade of goods, services, and intellectual properties between member countries by overseeing agreements through negotiations (Uruguay and Doha rounds) on the lowering of trade barriers - Transparent trade policies - Non-discrimination among members and trading partners (most favored nation)

Cultural Globalization

- Transmission of ideas, meanings, and values around the world (barriers are reduced or removed because of globalization) - Increased awareness of international communities and cultural integration because of immigration - Loss of uniqueness of country's culture (not as homogeneous)

Criticisms of the WTO

- Transparent requirement hurts national sovereignty (any WTO member country that wants to change the trader policy has to submit the change to the WTO for review; the WTO will then make the policy change public to all member countries) - Trade rules protect developed countries more than developing countries. - The MFN rule gives multinational companies an unfair advantage (a domestic business cannot get a larger market, lower costs, advanced technologies, etc.). - The use of agricultural subsidies hurt developing countries (related to the Doha round). - The impact of free trade on labor rights (could cause unethical practices of labor in developing countries such as child labor and sweatshops) - Ignores environmental concerns

United States Mexico Canada Agreement (USMCA)

- Updated NAFTA - Added the protection of intellectual property rights, data protection for biological drugs, patent protection, and minimum copyright term - Country of origin rule for automobiles components to meet the zero-tariff rate - Labor provisions for wages of manufacturing of auto parts - Canadian dairy market accessibility to US farmers - Sunset clause calling for review and expiration of agreement

Benefits and Costs of Global Expansion

Benefits - Achieves either higher levels of revenue or a lower cost structure within their operations - Looks for opportunities to realize economies of scale by mass-producing goods in markets that have substantially cheaper costs for labor or other inputs, or they may look for economies of scope - Increases financial stability of many developing nations as a positive consequence of globalization - A collaborative global economy may also push the development of technology that could benefit everyone. Costs - Ethical issues, governmental policies, and economic restrictions are all likely when a company moves into an unfamiliar global space. - A multinational company may also face infrastructural and technological challenges in a developing country. - Concerns have been expressed for sustainability in the face of globalization and the ability of richer companies and nations to exercise their power at the expense of less powerful nations.

Benefits and Challenges of FDI

Benefits - Good for the global and local economy - Goes to businesses with the highest potential for growth - Profit motive is non-discriminatory because profit is profit - Risk can be decreased through diversification. - Investing in capital leads to growth in business and in jobs in the host country. Challenges - Can lower the competitive advantage of strategically important industries within host nation - Investors can take advantage of the company (take all assets away and then leave the country).

Benefits and Drawbacks of Trade

Benefits - Removes barriers to trade and investment regionally - Increased efficiency leads to lower prices and higher consumer demand which cycles to increased production and trade. - Higher growth rates in less-developed countries - Expands job opportunities through removal of labor restrictions Drawbacks - Trade exclusivity (which may also be more expensive if only willing to deal with member countries who are more expensive than non-member) - Job loss due to cheaper labor in neighboring countries - Political and economic compromises or giving up rights completely - Mergers and acquisitions within the region blocking larger rivals within the same region (conglomerates) and/or overshadowing smaller firms - Regional trade agreements creating trade barriers with nonmember countries and lowering global free trade - Difficulty competing with cheaper/better imports resulting from specialization (international trade) - Global demand shift causing economic issues for the country of origin because goods are no longer needed (international trade) - Economic/political changes impacting the supply of goods if there is resource dependance between nations (international trade)

Benefits of Regional Economic Integration

Benefits - Trade agreements create more opportunities for trade and investment by reducing or removing trade barriers such as tariffs and quotas, which also increase competition among companies in each integrated region, leading to lower prices for consumers. - Has shown to significantly contribute to the high growth rates experienced in less developed countries - Member nations may find it easier to agree with smaller numbers of countries. - Regional understanding and similarities may also facilitate closer political cooperation and peace. - Production tends to move to countries within the trading bloc that have comparative advantages and various factors of production which increases efficiency. - Increased efficiency is manifested in terms of lower costs of production. - By removing restrictions on the movement of labor, economic integration can help expand job opportunities.

Centralized vs. Decentralized Decision-Making in MNCs

Centralized Approach - Only the top managers make decisions. - Lower-level managers execute the directives. - Inefficient decision-making - Consistency - Ex. top generals in the US Army will pass directions down to lower level officers and enlisted members to carry the directions out Decentralized Approach - Decision-making is pushed down to the managers who are closest to the work or client. - Flexibility to meet local needs - Inconsistent decision-making

Drawbacks of Regional Economic Integration

Drawbacks - Member countries may end up choosing to trade more with one another at the exclusion of nonmembers. - Increased exclusive internal trade may lead to increased trade with less efficient or more expensive producers simply because they are located in a member country. - A regional economic bloc may go a step further and impose greater external trade restrictions to keep all trading internal to the bloc. - As trade stays more internal and competition is reduced, consumers may be faced with price increases. - A common trade policy is necessary before this can happen (most likely to occur in all levels except the free trade area). - Countries may move production to cheaper labor markets in member countries (similarly, workers can move to gain access to better jobs and wages). - Nations may be compelled to give up more of their political and economic rights depending on the requirements of their regional economic bloc. - Countries may see a dilution of their national cultural identity. - Regional integration may encourage mergers and acquisitions within the bloc to create large companies with market power. - External larger companies can dominate small local firms and put them out of business, which requires the free movement of capital and technology.

Criticisms of the IMF and World Bank

IMF - Imbalance of voting power (poorer countries are underrepresented) - Policies are significantly impacted by rich countries. - Conditionalities cause the citizens of the borrowing country to pay a heavy price in the short-run (requiring borrowing countries to make structural adjustments such as privatization/deregulation can make conditions worse in a struggling country). - Projects might hurt environmental quality. World Bank - Imbalance in the leadership - Enforced conditionality causes harm to developing countries. - Privatization of healthcare - Funded projects causing environmental damage

Opportunities and Challenges to International Business

Opportunities - More revenue from foreign sales - Cheaper labor, natural resources, and operational costs - Access to advanced technologies Challenges - Some developing countries might have very loose regulation that results in unethical labor practices (countries have different rules and regulations). - Organizational structure changes as businesses try to create new international divisions. - Public relations could cause hardship to businesses as they have to build customer loyalty. - Different leadership styles in countries due to culture - Different legal and regulatory structures in countries due to different rules and systems

Governments Promoting FDI

Why? - Expanding domestic economies and attracting new technologies, business knowledge, and capital in their country - Investing capital in existing firms and in new enterprises in the host country itself can lead to economic growth and subsequently increase jobs. - Increased employment = decreasing poverty in the host country - Can benefit from the development of new skills, presence of new technologies, business knowledge, and an increase in tax revenues - Opportunities for workforce development How? - Host countries offer businesses a combination of tax incentives and loans to invest. - Host countries develop and modernize local infrastructure such as energy, transportation, and communications to encourage specific industries to invest. - Host country businesses also benefit from infrastructure development and modernization. - Host country governments reduce bureacracy and regulatory requirements for foreign companies. - Countries seek to improve their workforce through education and job training (an educated and skilled workforce is an important investment criteria for many global businesses). - Governments create export processing zones, usually located near a port, to promote export industries (final products are assembled by cheap labor and then exported).

Governments Restricting FDI

Why? - Protecting local industries and critical resources (steel, petroleum, minerals, etc.) because foreign ownership of such strategically important industries could lower the competitive advantage of a host country - Preserving culture, protecting the domestic population, maintaining political/economic independence, and managing economic growth (seek sustainable economic development) - May require that intermediate goods be purchased from host countries - Changes in government/policies may expropriate foreign assets to nationalize critical industries. How? - Host countries can specify ownership restrictions if they want to keep control of local markets or industries in their citizens' hands. - The government may choose to nationalize certain sectors such as petroleum, mining, and steel. - Foreign investors may be required to purchase a certain percentage of intermediate goods and raw materials from host country businesses. - Foreign investors may be required to partner with local businesses, such as forming joint ventures.