International Business Test One

The Changing Nature of the Multinational Enterprise

A multinational enterprise is any business that has productive activities in two or more countries. Non-U.S. Multinationals In the 1960s, large U.S. multinationals dominated the global business environment, accounting for about two-thirds of all foreign direct investment. By 2012, a different picture had emerged (as indicated in Figure 1.4). The globalization of the world economy has resulted in a relative decline in the dominance of U.S. firms in the global marketplace. While most of the world's largest multinationals were from developed countries, firms from developing economies had also begun to play a major role in the global economy. Looking to the future, we can reasonably expect the growth of new multinational enterprises (any business that has productive activities in two or more countries) from the world's developing nations. The Rise of Mini-Multinationals Another trend in international business has been the growth of medium-sized and small multinationals. These businesses are referred to as mini-multinationals.

Globalization, Labor Policies, and the Environment

A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous. - Supporters of free trade and greater globalization express serious doubts about this scenario. They point out that tougher environmental regulation and stricter labor standards go hand in hand with economic progress. In general, as countries get richer, they enact tougher environmental and labor regulations. Lower labor costs are only one of the reasons why a firm may seek to expand in developing countries. These countries may also have lower standards on environmental controls and workplace safety. - Nevertheless, since investment typically leads to higher living standards, there is often pressure to increase safety regulations to international levels. This is indicated in Figure 1.5 which indicates that pollution levels decrease after per capital income levels reach $8,000. - No country wants to be known for its poor record on health and human safety. Thus supporters of globalization argue that foreign investment often helps a country to raise its standards.

National Differences in Political, Economic, and Legal Systems: Introduction

A) Different countries have different political, economic, and legal systems. Cultural practices can vary dramatically from country to country, as can the education and skill level of the population. All of these differences have major implications for the practice of international business. B) This chapter explores how the political, economic, and legal systems of countries differ. Together these systems are known as the political economy of a country. C) The opening case on the changing economic landscape in Vietnam illustrates how economic growth in a country can be driven by necessity for growth within a command economy structure. A series of market-based reforms introduced by the Communist Party beginning in 1986 brought about unprecedented growth in the economy. However, more recently, some command economy tools such as price controls have been reinstituted to a degree. Today, the country faces the potential for continued economic growth with the initiation of the Trans Pacific Partnership.

Managing in the Global Marketplace

An international business is any firm that engages in international trade or investment. As their organizations increasingly engage in cross-border trade and investment, managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. These differences require that business people vary their practices country by country, recognizing what changes are required to operate effectively. It is necessary to strike a balance between adaptation and maintaining global consistency, however. As a result of making local adaptations, the complexity of international business is clearly greater than that of a purely domestic firm. Firms need to decide which countries to enter, what mode of entry to use, and which countries to avoid. Rules and regulations also differ, as do currencies and languages. Managing an international business is different from managing a purely domestic business for at least four reasons: 1) countries differ, 2) the range of problems and manager faces is greater and more complex, 3) an international business must find ways to work within the limits imposed by governmental intervention and the global trading system, and 4) international transactions require converting funds and are susceptible to exchange rate changes.

Globalization and National Sovereignty

Another concern voiced by critics of globalization is that in today's increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations such as the World Trade Organization (WTO), the European Union (EU), and the United Nations. - As perceived by critics, the problem is that unelected bureaucrats are now sometimes able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states. With the development of the WTO and other multilateral organizations such as the EU and NAFTA, countries and localities necessarily cede some authority over their actions. - Supporters of these organizations claim that if the organizations fail to serve the collective interests of member states, the states will withdraw their support and the organizations will collapse.

The Changing Demographics of the Global Economy

As late as the 1960s, four facts described the demographics of the economy. 1) The first was the U.S. dominance in the world economy and the world trade picture. 2) The second was U.S. dominance in world foreign direct investment. 3) The third fact was the dominance of large, multinational U.S. firms on the international business scene. 4) The fourth was that roughly half of the globe - the centrally planned economies of the Communist world - was off limits to Western international business.

The Changing Foreign Direct Investment Picture

As shown in Figure 1.2 in the textbook, the share of total foreign direct investment stock since the 1980s for developed economies such as the United States and the United Kingdom has declined. - Meanwhile, the same statistic indicates a considerable increase in developing economies. As shown in Figure 1.3, this trend is mirrored in FDI. However, fluctuations appear in the total amount of foreign direct investment inflows due to economic factors. - This is most noticeable for the 2001-2005 and 2009-2014 periods. - The first drastic reduction (2001-2005) did not show recovery until 2006. - Meanwhile, the decrease from 2007 has yet to fully recover.

Political Systems

By political system we mean the system of government in a nation. Political systems can be assessed according to two related dimensions. The first is the degree to which they emphasize collectivism as opposed to individualism. The second dimension is the degree to which they are democratic or totalitarian.

Globalization and the World's Poor

Critics of globalization argue that over the last century, the gap between rich and poor has gotten wider, and the benefits of globalization have not been shared equally. - However, supporters of free trade suggest that the actions of governments have limited economic improvement in many countries. In addition, debt may also be limiting growth in some countries. Today, there are various efforts underway to encourage debt relief programs.

CHAPTER ONE

GLOBALIZATION

What is globalization?

Globalization refers to the trend towards a more integrated global economic system - where barriers to cross-border trade and investment are declining, perceived distance is shrinking thanks to advances in transportation and telecommunications, and material cultures are more similar across borders. - The effects of globalization can be seen everywhere, from the cars people drive and the food they eat, to the jobs they have and the clothes they wear. Pros for Businesses: - expand their revenues, - drive down their costs, - and boost their profits. Challenges for Businesses: - how best to expand into a foreign market, - whether and how to customize product offerings, marketing policies, human resources practices, business strategies in order to deal with national differences in culture, - and how best to deal with the threat posed by efficient foreign competitors entering the home marketplace. - People become more anxious about job security (thanks to advances in technology, lower transportation costs, and an increase in skilled workers in low cost nations such as India, and China, services that had been performed locally can be exported) The accounting services industry is just one of many that have been transformed as a result of globalization. - Today, many accountants in India who are trained in the U.S. accounting code perform work for U.S. accounting firms. These accountants access individual tax returns stored on computers in the United States, perform routine calculations, and save their work. A U.S. counterpart then inspects their work, and bills the U.S. client for services. Two key facets of globalization are: 1) The globalization of markets 2) The globalization of production

Globalization, Jobs, and Incomes

In developed countries, labor leaders lament the loss of good paying jobs to low wage countries. However, supporters of globalization argue that free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently. Free trade advocates suggest that despite some job dislocation, the whole economy is better off with free trade. They make a similar argument to support the outsourcing of services like call centers to low-wage countries. However, given that the wage gap between developed and developing countries is closing, the migration of unskilled jobs to low-cost nations may only be a temporary phenomenon.

The Changing World Output and World Trade Picture

In the early 1960s, the U.S. was still by far the world's dominant industrial power. - In 1960, for example, the U.S. accounted for 38.3 percent of world manufacturing output. By 2014, the United States accounted for only 22.4 percent. This decline in the U.S. position was not an absolute decline, rather, it was a relative decline, reflecting the faster economic growth of several other economies, most notably those in Asia. If we look into the future, most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China, Russia, India, Indonesia, Thailand, Mexico, Brazil, and South Korea, and a commensurate decline in the share enjoyed by rich industrialized countries such as Great Britain, Germany, Japan, and the United States. - For international companies, these trends suggest that future economic opportunities may be greater in developing nations, and that new competitors are like to emerge from these countries.

Declining Trade and Investment Barriers

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. After WWII, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. Under GATT, nations negotiated even further decreases in tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services). With the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws. This removal of barriers to trade has taken place in conjunction with increased international trade, world output, and foreign direct investment. - World Trade Organization data shows that the volume of world merchandise trade has grown consistently faster than the rate of the world economy since 1950. - In 2014, the volume of world merchandise trade was 5.3 times larger than it was in 1990. International trade in services has also grown significantly since the 1980s, and now accounts for about 20 percent of the value of all world trade. The growth of foreign direct investment is a direct result of nations liberalizing their regulations to allow foreign firms to invest in facilities and acquire local companies. - With their investments, these foreign firms often also bring expertise and global connections that allow local operations to have a much broader reach than would have been possible for a purely domestic company. - In 2013, FDI flows were about $1.5 trillion, below the peak of $2 trillion in 2007, but showing a strong upward trend.

The Globalization Debate

Is the shift toward a more integrated and interdependent global economy a good thing? While many economists, politicians and business leaders seem to think so, globalization is not without its critics. Globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global economy. Yet, there is a rising tide of opposition to globalization.

Emergence of Global Institutions

Over the last half century, a number of global institutions have been created to help manage, regulate, and police the global marketplace, as well as to promote the establishment of multinational treaties to govern the global business system. 1) The World Trade Organization (WTO), like its predecessor the General Agreement on Tariffs and Trade (GATT), is responsible for policing the world trading system and making sure that nations adhere to the rules established in WTO treaties. - As of 2016, the 162 nations that account for about 98 percent of world trade were all members of the WTO. 2) The International Monetary Fund (IMF) maintains order in the international monetary system while the World Bank promotes economic development. 3) The United Nations (UN) maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems, promotes respect for human rights, and is a center for harmonizing the actions of nations.

Antiglobalization Protests

Since 1999, when protesters against globalization targeted the WTO meeting in Seattle, anti-globalization protesters have turned up at almost every major meeting of a global institution. Protesters fear that globalization is forever changing the world in a negative way. However, despite their protests, most citizens seem to welcome the higher living standards that progress brings.

The Changing World Order

The collapse of communism in Eastern Europe presented a host of export and investment opportunities for Western businesses. However, because there is still unrest and totalitarian tendencies in many states, companies must be cautious. The economic development of China presents huge opportunities and risks, in spite of its continued Communist control. In addition, firms must be aware of the threat posed by China's emerging multinationals. For North American firms, the growth and market reforms in Mexico and Latin America also present tremendous new opportunities both as markets and sources of materials and production. However, given the history of economic mismanagement in Latin America, the favorable trends may not continue.

The Globalization of Markets

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace in which the tastes and preferences of consumers in different nations are beginning to converge upon some global norm. - The global acceptance of Coca-Cola, Citigroup credit cards, IKEA furniture, and McDonald's hamburgers are all examples. These firms not only benefit from the globalization of markets, they also, by offering the same basic products worldwide, facilitate the trend. Yet there are still significant differences between markets that frequently require that marketing strategies, product features, and operating practices be customized for a country. - In fact, most global markets are for industrial goods and materials that serve a universal need around the world like microprocessors, rather than for consumer products. - In many industries, there is no such thing as a "German market" or an "American market," there is only a global market.

The Globalization of Production

The 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 (such as land, labor, capital, and energy), thereby allowing them to compete more effectively against their rivals. - Building Boeing's 777 for example, involves eight Japanese suppliers, and a supplier from Singapore. Boeing outsources 65 percent of its 787 aircraft to foreign companies.

The Global Economy of the Twenty-First Century

The path to full economic liberalization and open markets is not without obstruction. Economic crises in Latin America, South East Asia, and Russia all caused difficulties in 1997 and 1998. While firms must be prepared to take advantage of an ever more integrated global economy, they must also prepare for political and economic disruptions that may throw their plans into disarray. The 2008-2009 financial crisis that began in the United States, for example, quickly spread to much of the rest of the world.

Chapter 2: National Differences in Political, Economic, and Legal Systems

This chapter focuses on the different political, economic, and legal systems that are influential in the world. It is made clear to the reader that these differences are significant, and must be clearly understood by the managers of international firms. The section focusing on legal systems includes a discussion of intellectual property including patents, copyrights, and trademarks. Protecting intellectual property is a particularly problematic issue in international trade. Finally, the chapter ends with a discussion of the managerial implications of differing political, economic, and legal systems of a country.

Drivers of Globalization

Two factors underlie the trend toward greater globalization. 1) The decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II 2) Technological change in recent decades has brought about advances in communication, information processing, and transportation.

The Role of Technological Change

While the lowering of trade barriers made globalization of markets and production a theoretical possibility, technological change made it a tangible reality. Microprocessors and Telecommunications Since the end of World War II, there have been major advances in communications and information processing. Moore's Law predicts the power of microprocessor technology doubles and its cost of production falls in half every 18 months. As this happens, the cost of global communication plummets, lowering the cost of coordinating and controlling a global organization. The Internet The Internet, which has experienced explosive growth worldwide, promises to continue to develop as the information backbone of tomorrow's global economy. The Internet effectively allows its 3.3 billion users in 2015 to find each other. For business, it can be a goldmine. In the United States, online retail sales in 2015 were about $340 billion and global e-commerce sales surpassed $1 trillion in 2012. Transportation Technology In addition to these developments, several major innovations in transportation technology have occurred since World War II. In economic terms, the most important are probably development of commercial jet aircraft and super freighters and the introduction of containerization, which greatly simplifies transshipment from one mode of transport to another. Implications for the Globalization of Production Due to technological innovations, the real costs of information processing and communication have fallen dramatically in the past two decades. These developments make it possible for a firm to create and then manage a globally dispersed production system, further facilitating the globalization of production. A worldwide communications network has become essential for many international businesses. Implications for the Globalization of Markets As a consequence of these trends, a manager in today's firm operates in an environment that offers more opportunities, but is also more complex and competitive than that faced a generation ago. While there has been some convergence of consumer tastes and preferences between markets (a global culture), firms must still address differences between countries.