International Business
Absence of government
Anarchy
A stabilizing policy of linking a developing country's currency to a key currency.
Peg
a country, state, or society that is economically independent. (nation that tries to do everything by themselves)
Autarky
base of the pyramidPer capita GDP/GNI > $2,000 Approximately five billion people
BOP
• A country's international transaction statement, which includes merchandise trade, service trade, and capital movement.
Balance of payments
Ability to extract favorable outcome from negotiations due to one party's strengths.
Bargaining power
Repatriated earnings from profits from FDI. Increased exports of components and services to host countries. Learning via FDI from operations abroad.
Benefits to home countries
shirking = person no doing job when on clock corp gov = proposes how to get agents (employees) to work well for principles (owners) -stock options > aligns agent view w/ principle -principle/principle issues = minority oppression (51,49%)
Corp gov
(1) capital outflow (2) job loss
Costs to home countries
(1) loss of sovereignty (2) adverse effects on competition (3) capital outflow
Costs to host countries
British political economist, wealthy, off Adam smith's wealth of nations -comparative advantage theory -specialization: don't have to be the best just specialize and gain comparative advantages
David Ricardo
Net losses that occur in an economy as a result of tariffs.
Deadweight cost
Government's confiscation of foreign assets.
Expropriation
The amount of FDI moving in a given period (usually a year) in a certain direction FDI inflow- Inbound FDI moving into a country in a year. FDI outflow- Outbound FDI moving out of a country in a year.
FDI flow
The extent to which different countries possess various factors of production such as labor, land, and technology. o Theory: proposed that nations will develop comparative advantage based on their locally abundant factors.
Factor endowment
Shared power between the states and national government delegated limited power to the states federal government has enumerated powers allotted by the constitution
Federalism
Private equity care about exit strategies
Financial investors
A government policy to set the exchange rate of a currency relative to other currencies. S.A.F.E.> state administration of forgein exchange: regulates money in/out of china
Fixed exchange rate policy
A government policy to let supply-and-demand conditions determine exchange rates.
Floating (flexible) exchange rate policy
The price of one currency in terms of another.
Foreign exchange rate
Gross domestic product The sum of value added by resident firms, households, and governments operating in an economy.
GDP
Gross national income (GNI) GDP plus income from nonresident sources abroad. GNI is the term used by the World Bank and other international organizations to supersede the term GNP.
GNI
Gross national product (GNP) GDP plus income from nonresident sources abroad.
GNP
Dutch professor IBM (international business machines) study on cultural dimensions The cultural dimensions represent independent preferences for one state of affairs over another that distinguish countries (rather than individuals) from each other. The country scores on the dimensions are relative, as we are all human and simultaneously we are all unique.
Geert Hofstede
Mercantilist trade wars worsened the great depression and eventually led to WW11. Two organizations made to prevent a repeat were • General Agreement on Tariffs and Trade (GATT)- A multilateral agreement governing the international trade of goods (merchandise). Expanded to become o World Trade Organization (WTO)- The official title of the multilateral trading system and the organization underpinning this system since 2005. o And EU The GATT (1948-1994) significantly reduced tariff rates on merchandise trade. The WTO (1995-present) was set up not only to incorporate the GATT, but also to cover trade in services, intellectual property, trade dispute settlement, and peer review of trade policy.
Global Economic Integration
• Origin and evolution o In 1957, six member countries of ECSC signed the Treaty of Rome, which launched the European Economic Community (EEC)—later known as the European Community (EC). Starting as an FTA, the EEC/EC progressed to become a customs union and eventually a common market. In 1991, 12 member countries signed the Treaty on European Union in Maastricht, the Netherlands (in short, the "Maastricht Treaty") to complete the single market and establish an economic union.
Regional Economic Integration in Europe
• NAFTA (North America free trade agreement) o Canada, Mexico, U.S. o Net job loss was small o Allowed for job preservation o There is only so much that free trade can do; other reforms in infrastructure and education need to keep up.
Regional Economic Integration in the Americas
Efforts to reduce trade and investment barriers within one region.
Regional economic integration
sheds light on how firms can profit from favorable foreign exchange movements or avoid being crushed by unfavorable movements by developing their own firm-specific resources and capabilities.
Resource based view on currency
Assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry
Resource mobility
o 1. Reactive: Deny responsibility, do less than required o 2. Defensive: Admit responsibility but fight it, do the least required o 3. Accommodative: accept responsibility do all that is required o 4. Proactive: anticipate responsibility do more than required
Responses to ethical challenges
After WW11 leaders came up with institutions to help gain wealth through - free trade -privatization -freely convertible currency -unrestricted foreign investment -open markets - deregulation The International Monetary Fund (IMF)- bails countries out of financial trouble with the terms that they support above conditions World Bank. 2008 collapse happened, governments in developed economies bailed out private firms using public funds free market capitalism collapsed
Washington Consensus
Government rules that effect the market Fed, health insurance, Obama care law, tariffs Federal regulations- FDA, FAA, -Sherman anti-trust act (market concentration) -licenses for certain professions -age restrictions -zoning laws why colleges are increasingly expensive: easy for students to get loans students aren't price sensitive (student loans are subsidized) David Boies- U of R alumnus lawyer (human rights, torts, etc) Bush v. Gore represented vice president Al Gore
Ways the United States is a mixed market
electoral college representative democracy federalism system of checks and balances
Ways the United states is not a pure democracy
o western superiority/capitalism v. Islamic and Asian o Western dominance that causes the lackluster economic performance of Muslim countries. Aggressive marketing of Western products in these countries is seen as a cultural invasion. o Confucianism- China as an economic power house o It is superficial to advocate for a connection between certain cultural values and economic development
Western values versus Eastern values
• Informal o Come from socially transmitted information and are a part of the heritage that we call cultures, ethics, and norms. Those within a society tend to perceive their own culture, ethics, and norms as "natural, rational, and morally right." o Egocentrism- A self-centered mentality held by a group of people who perceive their own culture, ethics, and norms as natural, rational, and morally right. o - pinned by normative and cognitive pillars o 3 major aspects of informal institutions • culture • ethics • norms
Where do institutions come form?
The imperfection of the market mechanisms that make transactions prohibitively costly and sometimes make transactions unable to take place.
market imperfection
losers from trade, resistance to trade, reality of peoples interest differ from theory
externalities
Foreign Corrupt Practices Act A US law enacted in 1977 that bans bribery of foreign officials.
(FCPA)
State-owned enterprise A firm owned and controlled by the state (government).
(SOE)
o Proposition 1: Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework. • Example: Brazilian firms' migration to the gray market (because of higher government tax revenues) and US firms' interest in migrating overseas are rational responses when they pursue their interests within formal institutional constraints in these countries. • Bounded rationality: The necessity of making rational decisions in the absence of complete information. o Proposition 2: While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms. • Example: since the formal regime collapsed- In today's Russia, there are informal but clear rules of engagement for oligarchs, such as avoiding politics and paying taxes. • The skillful use of a country's institutional frameworks to acquire advantage is at the heart of the institution-based view. • Chief Formal Institutions o 1. Political systems o 2. Legal systems o 3. Economic systems
2 core propositions of institution based view
Scotish -invented economics "the wealth of nations" in 1776 -absolute advantage: do what you're good at buy what you can't from other people/nations -can create more stuff be specializing -win-win Free markets. • 1. By specializing in the production of goods for which each has an absolute advantage, both can produce more. 2. By trading, both can benefit more.
Adam Smith
• Focuses on the dynamic interaction between institutions and firms and considers firm behavior as the outcome of such interaction o Firm behavior is a reflection of the formal and informal constraints of a particular institutional framework
An Institution-Based View of Global Business
GOODS: China leading Exporter- 1.9 trillion U.S. Second leading- 1.5 trillion (oil, aircrafts) Services: U.S. #1 importer and exporter
U.S. and china import/export
Capital inflow can help improve a host country's balance of payments. (See Chapter 7 for more coverage on balance of payments.) Technology, especially more advanced technology from abroad, can create technology spillovers that benefit domestic firms and industries. Local rivals. Advanced management know-how may be highly valued. It is often difficult for indigenous development of management know-how to reach a world-class level in the absence of FDI. FDI creates jobs, both directly and indirectly.
Benefits to host countries
o Economic theories underpin the resource-based view, suggesting that successful exports are valuable, unique, and hard-to-imitate products generated by certain firms from a nation. o Political realities stress the explanatory and predictive power of the institutional based view: As rules of the game, institutions such as laws and regulations promoted by various special interest groups can protect certain domestic industries, firms, and individuals, erect trade barriers, and make the nation as a whole worse off.
Big Question: What determines the success and failure of firms exports around the globe?
What determines the success and failure of firms around the globe?
Big question
The necessity of making rational decisions in the absence of complete information.
Bounded rationality
Corporate social responsibility 2 views 1. shareholder values maximization 2. responsibility to others
CSR
o The underlying background upon which social interaction takes place. Only represents one dimension o Low-context cultures- (such as North American and Western European countries), communication is usually taken at face value without much reliance on unspoken context. In other words, "No" means "No." o High context cultures- (such as Arab and Asian countries), communication relies a lot on the underlying unspoken context, which is as important as the words used. For example, "No" does not necessarily mean "No."
Context
1. Licensing/Franchising (Pizza Hut in Thailand) Adv: -Low development costs -Low risk in overseas expansion Dis: Little control over technology and marketing May create competitors Inability to engage in global coordination 2. Turkey Projects Adv: Ability to earn returns from process technology in countries where FDI is restricted Dis: May create efficient competitors Lack of long-term presence 3. R&D Contracts Adv: Ability to tap into the best locations for certain innovations at low costs Dis: Difficult to negotiate and enforce contracts May nurture innovative competitors May lose core innovation capabilities 4. Co-Markering Adv: Ability to reach more customers Dis: Limited coordination
Contractual agreements
A pure market solution to determine exchange rates.
Clean (free) float
o Groups countries that share similar cultures together as one cluster. Lacks differences of cultures in clusters o Civilization • The highest cultural grouping of people and the broadest level of cultural identity people have. • Firms are more comfortable doing business with other countries within the same clusters
Cluster
Condoleezza Rice is the first black woman to serve as the United States' national security adviser, as well as the first black woman to serve as U.S. Secretary of State (2005-09). Now works at strategic consulting firm- Rice Hadley Gates
Condoleezza Rice
1. Cultural boundaries not the same as national boundaries 2. Cultural biases- he was more familiar with western cultures so the dimensions may have reflected this, and crucial dimensions relevant to eastern cultures may have been missed 3. Sample not representative of population -Single firm/industry design, results may have captured what was unique to IBM an AMERICAN company- therefore not truly representative of their respective national cultures. Smarter, privileged, education, affluent, opportunity. influenced to be more willing to take the test 4. Outdated, 40 years old failed to capture recent cultural change *Heizenberg princple: when people change b/c they are being watched, management, being asked questions from American Co --> influence american answers questions asked from Dutch perspective/ his culture missing religion dimension missing education dimension
Criticisms of Hofstede
• 3 ways to be systematically different o 1. Context o 2. Cluster o 3. Dimension approaches
Cultual differences
"The collective programming of the mind which distinguishes the members of one group or category of people from another." o There is not a strict correspondence between cultures and nation-states o Many subcultures exist o Major components of culture Language 6000 in the world, Chinese largest in terms of number of native speakers. English as global business language- lingua franca Common language makes trade cheaper and easier Disadvantages: miss cultural subtleties, makes detecting translation errors difficult, embarrassments Religion 85% of the worlds population has some religious beliefs • 1. Christianity, 2. Islam, 3. Hinduism Social structure The way a society broadly organizes its members—with rigidity or flexibility. 2 main things • Social stratification: The hierarchical arrangement of individuals into social categories (strata) such as classes, castes, and divisions within a society. • Social mobility: to the degree to which members from a lower social category can achieve a higher status. Outcome of a society's formal and informal rules of the game that give birth to its norms and values Education Teaches values and norms, sense of cultural identity
Culture
A monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate.
Currency board
Moment where trend has reversed-antiglobalization-trump supports bilateral agreements (not multilateral)
Current Globalization Position
• (1) fixed versus floating exchange rates o flexible exchange rates may help avoid the crises that occur under fixed exchange rates when expectations of an impending devaluation arise. • (2) a strong dollar versus a weak dollar o Strong Advantages • US consumers benefit from low prices on imports. Lower prices on foreign goods help keep US price level and inflation level low. US tourists enjoy lower prices abroad. US firms find it easier to acquire foreign targets. o Strong disadvantages • US exporters have a hard time to compete on price abroad. US firms in import-competing industries have a hard time competing with low-cost imports. Foreign tourists find it more expensive when visiting the US. • (3) hedging versus not hedging o
Debates and Extensions
The reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.
Demonstration (contagion or imitation) effect
Using selective government intervention to determine exchange rates.
Dirty (managed) float
o (1) internal divisions • debate on whether the EU should be an economic and political union, or just an economic union. o (2) enlargement concerns. • EU's largest expansion in 2004 took 10 new members • Economic burden: brought down avg GDP • "enlargement fatigue"
EU's challenges
• 2 arguments o 1. Protect domestic industries o 2. Necessity to shield infant industries • The argument that if domestic firms are as young as "infants," in the absence of government intervention, they stand no chances of surviving and will be crushed by mature foreign rivals.
Economic Arguments Against Free Trade
• Rules of the game on how a country is governed economically. • Three levels o Market Economy • Invisible hand of market forces. Laissez faire approach. All factors of production privately owned, government should only perform factors that the private sector can not perform o Mixed Economy * • The relative distribution of market forces versus command forces. o Command Economy • All factors of production should be government-owned or state-owned, and all supply, demand, and pricing are planned by the government.
Economic Systems
• Disputes are handled constructively. • Rules make life easier, and discrimination impossible, for all participating countries. o Multilateral trading system- The global system that governs international trade among countries—otherwise known as the GATT/WTO system. o Non-discrimination- A principle that a country cannot discriminate among its trading partners. • Free trade and investment raise incomes and stimulate economic growth.
Economic benefits For Global Economic Integration
Joint Ventures Wholly owned Subsidiaries
Equity (FDI) Modes
• 1. Gold Standard o A system in which the value of most major currencies was maintained by fixing their prices in terms of gold. • 2. Brent Woods system o A system in which all currencies were pegged at a fixed rate to the US dollar. • 3. Post Brent Woods system o A system of flexible exchange rate regimes with no official common denominator.
Evolution of the Monetary System
o When adjusted for PPP emerging economies contribute 43% of global GDP. o Global economic pyramid • One interesting recent development out of emerging economies is reverse innovation—an innovation that is adopted first in emerging economies and then diffused around the world. • Innovation flow is top down • The reverse innovation movement suggests that emerging economies are no longer merely low-cost production locations or attractive new markets (hence the term "emerging markets"). They are also sources of new innovations that may not only grow out of BOP markets, but also have the potential to go uphill to penetrate into the top of the global economic pyramid. • **don't ignore challenges and opportunities at bottom of the triangle
Explain the concepts of international business and global business, with a focus on emerging economies.
• Fostering foreign exchange literacy is a must. • Risk analysis of any country must include an analysis of its currency risks. • A currency risk management strategy is necessary—via currency hedging, strategic hedging, or both.
Management Savvy
First, a basic understanding of the global economy is necessary. Second, it is important to critically examine your own personal views and biases regarding globalization. globalization carries both benefits and costs, many of the elite have failed to take into sufficient account the social, political, and environmental costs associated with globalization. However, just because the elite share certain perspectives on globalization does not mean that most other members of the society share the same views. Unfortunately, many of the elite fail to understand the limits of their beliefs and mistakenly assume that the rest of the world thinks like them.
Global business and globalization at a crossroads
o Most influential, overcomes limitations of other two o Hofstede 6 cultural dimensions o 1. Power distance: the extent to which less powerful members within a country expect and accept that power is distributed unequally. o 2. Individualism/: the perspective that the identity of an individual is fundamentally his or her own o 2. Collectivism: to the idea that the identity of an individual is primarily based on the identity of his or her collective group. o 3. Masculinity versus femininity dimension refers to sex role differentiation. • M: A relatively strong form of societal-level sex role differentiation whereby men tend to have occupations that reward assertiveness and women tend to work in caring professions • F: A relatively weak form of societal-level sex role differentiation whereby more women occupy positions that reward assertiveness and more men work in caring professions. o 4. Uncertainty avoidance: The extent to which members in a culture accept or avoid ambiguous situations and uncertainty. • Low uncertainty avoidance cultures have greater willingness to take risk and less resistance to change o 5. Long-term orientation: emphasizes perseverance and savings for future betterment. indulgence- short term gratification vs. long-term investments
Hofstede's Dimension Approach
A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country.
Horizontal FDI
o Understand the rules of game—both formal and informal—governing competition in foreign markets. o Develop overwhelming resources and capabilities to offset the liability of foreignness. o Match efforts in market entry and geographic diversification with strategic goals.
Implications for action
More than 2 countries in trade agreement -easier if everyone moves together -helps overcome creed of destruction -bigger market access -creates national treatment
Multilateral agreements
The institution-based view argues that firm performance is, at least in part, determined by the informal cultures, ethics, and norms governing firm behavior.
Institution based answer to big question
- suggests that domestic and international institutions influence foreign exchange rates and affect capital movements. • China has state administration of foreign exchange: 2nd largest economy but no freely convertible currency • Currencies have different policies, not all freely floating/convertible like USD
Institution based view on currency
university endowment insurance company 401k retirement these investors put a small % into venture capitalists supporting assumptions -property rights -law enforcement shares aren't a real thing but with a legal system shares have value.
Institutional investors
overcoming market failure
Internalization advantages
Intrafirm trade
International transactions between two subsidiaries in two countries controlled by the same MNE.
Nongovernmental organization (NGO) An organization that is not affiliated with governments.
NGO
1. Minority JV's 2. 50/50 JV's 3. Majority JV's Advantages: Sharing costs, risks, and profits Access to partners' assets Politically acceptable Gaining market access, required in many countries Disadvantages: Divergent goals and interests of partners Limited equity and operational control Difficult to coordinate globally Creating competitor Why do a JV? Gaining market access, required in many countries
Joint Ventures (partially owned subsidiaries)
• MNE: a firm that engages in FDI when doing business abroad • Non-MNE: can also do business abroad by o (1) exporting and importing, o (2) licensing and franchising o (3) outsourcing o (4) engaging in FPI, or other means.
MNE v. Non-MNE
The formal rules of the game on how a country's laws are enacted and enforced. • By specifying do's and don'ts reduces transaction costs by minimizing uncertainty and combatting opportunism • 3 legal traditions o 1. Civil Law o 2. Common Law o 3. Theocratic Law Fiat= no law • Civil law o Based on statutes and codes (most common) • Common law o A legal tradition that is shaped by precedents and traditions from previous judicial decisions. • Theocratic law o A legal system based on religious teachings. ****Type of law does not matter, know how the law is enforced is the law relevant to how the people live? U.S. constitution vs. Chinese constitution
Legal Systems
The inherent disadvantage that foreign firms experience in host countries because of their nonnative status.
Liability of foreignness
o Natural geographical advantages o Agglomeration advantages- Clustering of economic activities in certain locations. Knowledge spillovers—knowledge being diffused from one firm to others among closely located firms that attempt to hire individuals from competitors. • Industry demand that creates a skilled labor force whose members may work for different firms without having to move out of the region. • Industry demand that facilitates a pool of specialized suppliers and buyers also located in the region. o Acquiring and Neutralizing Location advantages • Competitors often follow in order to acquire or neutralize advantages of competitor Oligopoly- Industry dominated by a small number of players.
Location Advantages
• Non-Equity Mode- A mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets. Examples- Exports, contractual agreements • Equity Mode- A mode of entry (JV and WOS) that indicates relatively larger, harder-to-reverse commitments to overseas markets. Calls for establishment of independent organizations over seas Examples: Partially owned subsidies, wholly owned subsides
Mode of Entry: Step 1 2 boxes
Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions.
Moral hazard
o Trade barrier that relies on nontariff means to discourage imports. o Includes: • Subsidies: Government payment to domestic firms. • Import quotas: Restriction on the quantity of imports. Worse than tariffs. • Export restraints: Voluntary export restraint (VER); An international agreement that shows that exporting countries voluntarily agree to restrict their exports. • Local content requirements: A requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country. • Administrative policies: Bureaucratic rules that make it harder to import foreign goods. (Product safety, consumer protection) • Antidumping duties: Tariffs levied on imports that have been "dumped" (selling below costs to "unfairly" drive domestic firms out of business). - Embargo- complete restraint of trade (foreign policy) • Trade barriers reduce or eliminate international trade. While certain domestic industries and firms benefit, the entire country—or at least a majority of its consumers—tends to suffer.
Non-Tariff Barriers
Exports Contractual Agreements
Non-equity modes
The deal struck by MNEs and host governments, which change their requirements after the initial FDI entry.
Obsolescing bargain
• General Agreement on Tariffs and Trade (GATT): 1948-1994 o Unlike the WTO, the GATT was technically an agreement but not an organization. o Its major contribution was to reduce the level of tariffs by sponsoring rounds of multilateral negotiations. As a result, the average tariff in developed economies dropped from 40% in 1948 to 3% in 2005. o Had to be reformed to focus on • Merchandise trade • IP • trade in services
Organizing World Trade: GATT
• "the inherent disadvantage that foreign firms experience in host countries" • 2 dimensions o 1. There are numerous differences in formal and informal institutions governing the rules of the game in different countries. While local firms are already well versed in these rules, foreign firms have to invest resources to learn such rules. Some of the rules are in favor of local firms. o 2. Foreign firms are often still discriminated against, sometimes formally and other times informally. o Resource based view: argues that foreign firms need to deploy overwhelming resources and capabilities to offset their liability of foreignness.
Overcoming the Liability of Foreignness
• Advance a nation's political, social, and environmental agenda regardless of possible economic gains from trade. o 1. National Security o 2. Consumer Protection- used as an argument for nations to erect trade barriers o 3. Foreign Policy- sought through trade intervention, trade embargos o 4. Environmental and social responsibility- used to initiate against certain countries
Political Arguments Against Free Trade
• Promote peace by promoting trade and investment. • Build confidence in a multilateral trading system.
Political Benefits for Global Economic Integration
• The Rules of the game on how a country is governed politically o Two levels: 1. Democracy 2. Totalitarianism • Democracy o A political system in which citizens elect representatives to govern the country on their behalf. o Pioneered by Athenians in ancient Greece o Today, Britain has the longest running democracy and India has the largest democracy o Rights to freedom, expression, and organization • Totalitarianism (dictatorship) o A political system in which one person or party exercises absolute political control over the population. • 4 major types 1. Communist: centers on communist party. Still practiced in China, Cuba Laos, North Korea, and Vietnam 2. Right-wing: intense hatred against communism. One party restricts political freedom arguing that such freedom would lead to communism. 3. Theocratic: the monopolization of political power in the hands of one religious party or group. 4. Tribal: one tribe or ethnic group monopolizing power and oppressing other tribes/ethnic groups. • Political Risk o Totalitarianism leads to higher political risk (Risk associated with political changes that may negatively impact domestic and foreign firms)
Political Systems
• Radical view: political view that is hostile to FDI • Free market view on FDI: A political view that suggests that FDI unrestricted by government intervention is the best. • Pragmatic nationalism on FDI: A political view that only approves FDI when its benefits outweigh its costs.
Realities of FDI
An innovation that is adopted first in emerging economies and is then diffused around the world.
Reverse innovation
Sovereign wealth fund A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets.
SWF
Per capita GDP/GNI $2,000-$20,000 Approximately 1.2 billion people
Second tier of pyramid
• The global economy at the beginning of the 21st century is approximately 60 trillion.2014 - 107.5 trillion
Size of the global economy
Have products and want to sell more care about market entrance not exit Ex: Heinz, proctor & gamble
Strategic investors
12 countries around transpacific -slash tariffs to boost economic trade
TPP
a means of discouraging imports by placing a tariff (tax) on imported goods. As a major tariff barrier, an import tariff is a tax imposed on a good brought in from another country. o Why are tariffs imposed? • Political realities: "Everybody" in a country suffers because of higher prices, it is extraordinarily costly, if not impossible, to politically organize geographically scattered individuals and firms in order to promote free trade. Special interest groups tend to be geographically concentrated and skillfully organized to advance their interests.
Tariff Barriers
Technology diffused from foreign firms to domestic firms.
Technology spillover
• 1. Launched in the after math of 9/11 attacks • 2. First round specifically aimed at promoting economic development • Ambitious agenda • Doha Round- A round of WTO negotiations to reduce agricultural subsidies, slash tariffs, and strengthen intellectual property protection that started in Doha, Qatar, in 2001. Officially known as the "Doha Development Agenda," it was suspended in 2006 due to disagreements.
The Doha Round—"The Doha Development Agenda"
-erased borders, amazing level of integration o 28 member countries, 500 million citizens, and $16 -trillion GDP. • Schengen- A passport-free travel zone within the EU. • Euro- The currency currently used in 19 EU countries. • Euro zone- The 19 EU countries that currently use the euro as the official currency. Benefits of adopting the euro • Reduce currency conversion costs. • Facilitate direct price comparison. • Impose monetary discipline on governments. Costs of adopting the euro • Unable to implement independent monetary policy. • Limit the flexibility in fiscal policy (in areas such as deficit spending).
The EU today
• An international organization that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements. • Quota- The weight a member country carries within the IMF, which determines the amount of its financial contribution (technically known as its "subscription"), its capacity to borrow from the IMF, and its voting power.
The International Monetary Fund
• Institutions: " The humanly devised constraints that structure human interaction." • Institutional framework: Institutions governing individual and firm behavior o Formal • Laws, regulations, rules • Regulatory pillar-Power from governments o Informal • Norms, culture, ethics • Normative and cognitive pillar Supported by 3 pillars • 1. Regulatory • 2. Normative: how values beliefs and actions influence behavior of individuals and firms • 3. Cognitive: internalized taken for granted values and beliefs that guide behavior
Understanding instituions
1. sets time limit for panel 2. WTO decisions are final 3. recommendation has no "teeth a country that has lost a dispute case can choose one of two options: (1) change its laws or practices to be in compliance, or (2) defy the ruling by doing nothing and suffer trade retaliation by the winning country, known as "punitive duties." let other country "hit them back"
Trade dispute settlement after 1994
(1) long delays, (2) blocking by accused countries, and (3) inadequate enforcement. Sanction, all have to agree. Minority could overturn majority "blackball"
Trade dispute settlement before 1994
The costs associated with economic transactions or, more broadly, the costs of doing business.
Transaction costs
o Free trade area (FTA)-A group of countries that remove trade barriers among themselves. o Customs union- One step beyond a free trade area (FTA), a customs union imposes common external policies on nonparticipating countries. o Common market- Combining everything a customs union has, a common market, in addition, permits the free movement of goods and people. o Economic union- Having all the features of a common market, members also coordinate and harmonize economic policies (in areas such as monetary, fiscal, and taxation) to blend their economies into a single economic entity. • Establish a Monetary union- A group of countries that use a common currency. o Political union- The integration of political and economic affairs of a region.
Types of Regional Economic Integration
18 trillion
U.S. GDP
Formal and informal rules of the game • suggests that the success and failure of firms are enabled and constrained by institutions. By institutions, we mean the rules of the game. Doing business around the globe requires intimate knowledge about both formal rules (such as laws) and informal rules (such as values) that govern competition in various countries. • formal institutions includes laws, regulations, and rules • informal institutions include cultures, ethics, and norms • largely determined by external environment
Unified framework- Institution based view
• focuses on a firm's-specific resources and capabilities. • Foreign firms have to overcome a liability of foreignness, which is the inherent disadvantage that foreign firms experience in host countries because of their non-native status. • Firms must possess some very rare and powerful firm-specific resources and capabilities that drive these remarkable success stories and are the envy of their rivals around the globe because its not natural for them to succeed in foreign markets. • Focuses on how winning firms acquire and develop such unique and enviable resources and capabilities and how competitor firms imitate and then innovate in an effort to outcompete the winning firms. Internal
Unified framework- Resource based view
A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country.
Upstream vertical FDI (opposite for downstream)
A type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country.
Vertical FDI
1. Greenfield's Adv: Complete equity and operational control Protection of know-how Ability to coordinate globally Dis: Potential political problems and risks High development costs Add new capacity to industry Slow entry speed (relative to acquisitions) 2. Acquisitions (brownfield)- buy existing firm Adv: Same as greenfield (above) Do not add new capacity Fast entry speed Dis: Potential political problems and risks High development costs but less expensive than greenfield Post-acquisition integration problems 3. Others
Wholly Owned Subsidiaries
specialization of labor --> productivity --> greater material wealth maximizing personal gain, expanded to the world
Why capitalism works
o OLI Advantages • O- ownership: An MNE's possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI. • L- location: Advantages enjoyed by firms operating in a certain location. • I- Internalization: The replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries. Institution view: response to the imperfect rules governing international transactions/ market imperfections
Why do firms become MNEs by engaging in FDI?
Shared economic gains from international trade Why are there economic gains from trade? • Resource based view o Some firms in one nation generate exports that are valuable, unique, and hard-to-imitate that firms from other nations find it beneficial to import. How do nations benefit from trade? • Institution based view o Different rules governing trade are designed to share (or not to share) such gains.
Why do nations trade?
• advance your employability and career in an increasingly competitive global economy. • Mastery of the knowledge of, and demonstration of interest in, global business during your education will set you apart as a more ideal candidate Better preparation for possible expatriate assignments abroad Stronger competence in interacting with foreign suppliers, partners, and competitors and in working for foreign-owned employers in your own country
Why study global business?
Accept the costs of the economy something being destroyed from trade costs/loses of trade costs are necessary for greater good of the economy: people move, invest in higher education with trade overall economy grows
creed of destruction
o global interest in western products o But this does not change eastern values o Therefore crossvergence approach is necessary
cultural convergence versus divergence
trade: selling something rules more liberal investment- putting capital in, stricter rules
trade vs. investment
1. company grows- takes long 2. initial public offering 3. sell stake in company to another company
venture capitalist/entrepreneur relationship Why invest?
• Reduce uncertainty by constraining the range of acceptable actions o Force majeure: doctrine that excuses firms form living up to the terms of a deal in the event of natural disasters and other calamities o Transaction costs: The costs associated with economic transactions or, more broadly, the costs of doing business. • Source of costs: opportunism- self interest seeking with guile ex: misleading, cheating, confusing o Institutional framework increases certainty by spelling out the rules of the game • Without framework transaction costs would become very high
what do institutions do
most of the money is institutionalized
where do venture capitalists get their money from?
o OIL vs. LLL framework • LLL: linkage- ability to identify and link gaps leverage-ability to take advantage of their unique resources and capabilities, Learning-Instead of the "I-will-tell-you-what-to-do" mentality typical of old-line MNEs from developed economies, many MNEs from emerging economies openly profess that they go abroad to learn. These advantages are usually associated with multinationals from emerging economies
old-line versus emerging multinationals
The act of seeking self-interest with guile.
opportunism
Individualism/collectivism- One cultural dimension, individualism/collectivism, may hold the key to an improved understanding of opportunism. One common stereotype is that players from collectivist societies (such as China) are more collaborative and trustworthy and that those from individualist societies (such as the United States) are more competitive and opportunistic. Collectivists are more collaborative only when dealing with in-group members—individuals and firms regarded as a part of their own collective. The flip side is that collectivists discriminate more harshly against out-group members—individuals and firms not regarded as part of "us." On the other hand, individualists, who believe that every person (firm) is on his or her (its) own, make less distinction between in-group and out-group. Therefore, while individualists may indeed be more opportunistic than collectivists when dealing with in-group members (this fits the stereotype), collectivists may be more opportunistic when dealing with out-group members.
opportunism versus individualism/collectivism.
Doesn't mean adopt every local custom, be sensitive, adjust, be thoughtful When in rome do as the romans do not always the right thing when it comes to basic rights and dignity
•Cultures are systematically different cultural realatism
o FDI- foreign direct investment. Hands on management of foreign assets. An equity stake of 10% or more in a foreign based enterprise. o FPI (foreign portfolio investment)- Investment in a portfolio of foreign securities such as stocks and bonds, do not entail active management of foreign assets. Indirect investment.
2 ways of international investment
• Classical Trade Theories: static picture o Mercantilism • International trade as a zero sum game. Wealth of the world is fixed and a nation that exported more and imported less would become richer, other nation would become poorer • Ancestor of modern day protectionism: the idea that governments should actively protect domestic industries from imports and vigorously promote exports. o Absolute Advantage: win-win game • The economic advantage one nation enjoys that is absolutely superior to other nations. • Theory of absolute advantage A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage. o Comparative Advantage • Theory of Comparative advantage: A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. • When a country doesn't have an absolute advantage • Produced net gains from trade. Opportunity costs. o Absolute and Comparative Advantages • Stem from different factor endowments
3 Classical Theories of trade
o Product Life Cycle • The first dynamic theory to account for changes in the patterns of trade over time. Divided the world into 3 categories: Lead innovation nation Other developed nations Developing nations • Every product has 3 life cycle stages New- commands price premium concentrates in US Maturing- demand and ability to produce in other nations Standardized- previous new product is standardized, production moves to low cost developing nations which export to developed nations. Comparative advantage may change over time. • Criticisms: assumes US will always be the lead innovation nation for new products & assumes a stage by stage migration of production taking at least several years. However new products are often simultaneously released around the world. o Strategic Trade • Suggests that strategic intervention by governments in certain industries can enhance their odds for international success. • Industries which are capital intensive and high barrier entries in which domestic firms have little chance without government assistance • Industries also have first mover advantages • Strategic trade policy Government policy that provides companies a strategic advantage in international trade through subsidies and other supports. Criticisms • Governments that are not sophisticated and objective enough to do this job o National Competitive Advantage of Industries • Also known as diamond theory • This theory focuses on why certain industries (but not other industries) within a nation are competitive internationally. • Comparative advantage depends on 4 aspects County Factor endowments • which refer to the natural and human resource repertoires Domestic demand condition • Ability to satisfy a tough domestic crowd makes it possibly to successfully deal with demanding customers overseas Domestic firm strategy, structure, and rivalry: • in one industry play a huge role in firm success or failure Related and supporting industries • Provide foundation upon which key industries an excel • * The dynamic interaction of these four aspects explains what is behind the competitive advantage of leading industries in different nations. • First multilevel theory to realistically connect firms, industries, and nations. Criticisms: Puts too much emphasis on domestic conditions
3 Modern theories of trade
• 1. Location- savvy manager leverage comparative advantage of location • 2. Comparative advantage is not fixed. Managers need to constantly nurture their current comparative advantages and take advantage of new locations • 3. Managers need to be politically active to demonstrate, safeguard, and advance the gains from international trade. Free trade is not free.
3 implications of action
Brazil Russia India China Emerging economies that demand more attention
BRIC
Different package of things works better to accumulate wealth centers on state ownership and government intervention. A view that questions Washington Consensus' belief in the superiority of private ownership over state ownership in economic policy making, which is often associated with the position held by the Chinese government. Countries that got rich after WW11 1. South Korea 2. Hong Kong 3. Tiwan 4. Singapore 5. China
Beijing Consensus
1. Trade deficit versus surplus Deficit w/ china is huge problem -greedy exporters -caused deflation -IP violator -Currency Manipulator -will make U.S. poorer Deficit not a problem -eager foreign investors -cheaper prices -IP violation is in inevitable step on development and will improve -currency not relevant -does not cause fall in standard of living -gains from trade
Debates and Extensions
o 1. Drivers of economic development -culture: harder working / smarter people -instituions: structure for economic development -geography: natural resources o 2. Private ownership versus state ownership
Debates and Extensions Table 2.4
• Turnkey project- A project in which clients pay contractors to design and construct new facilities and train personnel. • Build-operate-transfer (BOT) agreement- A non-equity mode of entry used to build a longer-term presence by building and then operating a facility for a period of time before transferring operations to a domestic agency or firm. • R&D contract Outsourcing agreement in R&D- between firms. • Co-Marketing- efforts among a number of firms to jointly market their products and services • Joint-venture- a new corporate entity created and jointly owned by two or more parent companies • Wholly owned subsidiary (WOS)- A subsidiary located in a foreign country that is entirely owned by the parent multinational • Greenfield operations- Building factories and offices from scratch
Definitions of projects
trade between Canada and the United States grew twice as quickly as it had before NAFTA. Expanding even faster, US exports to Mexico grew threefold, from $52 billion to $161 billion. US FDI in Mexico averaged $12 billion per year, three times what India took in. Mexico's US-bound exports grew threefold, and its GDP rose to become the 9th in the world, up from the 15th in 1992.
Effects of NAFTA
A perspective that suggests that "there is one set of Ethics (with a capital E) and we have it."
Ethical imperialism
A perspective that suggests that all ethical standards are relative.
Ethical relativism
• Refers to the principles, standards, and norms of conduct governing individual and firm behavior. • Code of conduct: guidelines for making ethical decisions • Managing ethics over seas Ethical relativism- A perspective that suggests that all ethical standards are relative. refers to an extension of the cliché "When in Rome, do as the Romans do." Ethical imperialism o A perspective that suggests that "there is one set of Ethics (with a capital E) and we have it." • Respect for human dignity and basic rights • Respect for local decisions • Respect for institutional context • Ethics and corruption o Corruption- The abuse of public power for private benefits, usually in the form of bribery.
Ethics
• Pros o (1) Disputes are handled constructively o (2) Consistent rules make life easier and discrimination impossible for participating countries within one region o (3) Free trade and investment raise incomes and stimulate economic growth • Cons o Politically, regional integration, centered on preferential treatments for firms within a region, discriminates against firms outside a region, thus undermining global integration. o Loss of sovereignty
Regional Economic Integration
1.Direct exports Advantages Economies of scale in production concentrated in home country Better control over distribution Disadvantages High transportation costs for bulky product Marketing distance from customers Trade barriers and protectionism 2. Indirect exports Advantages: Focus on production Avoid export processes Disadvantages Less control over distribution Inability to learn how to compete overseas 3. Others
Exports
Total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually several years).
FDI stock
• Foreign exchange risk, price changes for buyer/seller based on currency value
FX Risk
McKenzie Boston consulting group Bain
Top consulting firms
Big ideas --> come up with ways to monetize them -KKR: leveraged buyouts, borrow money to buy companies -Blackstone: Private money --> big ideas --> flip -Carlyle Group's
Top private equity firms
Per capita GDP/GNI $20,000 > approx. 1 billion people Triad- North America Western Europe Japan
Top tier / Triad
culture laws taxes language currency political systems
How IB differs from business
• Not a zero sum game • Negotiations characterized by the three C's o Common interests o Conflicting interests o Compromises • Obsolescing bargaining: Typically has rounds o In Round One, Negotiate a deal. MNE needs government assurance of property rights and incentives (such as tax holidays). o In Round Two, the MNE enters and, if all goes well, earns profits. o In Round Three, the government pressured by domestic political groups, may demand renegotiations of the deal that seems to yield "excessive" profits to the foreign firm (which, of course, regards these as "fair" and "normal" profits). The previous deal, thus, becomes obsolete. The government's tactics include removing incentives, demanding a higher share of profits and taxes, and even expropriation (confiscating foreign assets) (see the Closing Case).
How MNE's and host governments bargain
*there has to be a point where you face consequences Snapchat ex.- combination of civil and criminal to get enforcement because money not enough but going to jail is.
How is law enforced?
• Scale of Entry: The amount of resources committed to entering a foreign market. o Large Scale Entry • Benefits a demonstration of strategic commitment to certain markets. This helps to assure local customers and suppliers • Drawbacks (1) limited strategic flexibility elsewhere (2) huge losses if these large-scale "bets" turn out to be wrong. o Small Scale Entry • Less costly • Focuses on learning by doing while limiting downside risk
How to Enter?
When entering a new country, do your homework by having a thorough understanding of the formal institutions governing firm behavior. When doing business in countries with a strong propensity for informal relational exchanges, insisting on formalizing the contract right away may backfire.
Management Savvy
o 1. Enhance cultural intelligence: An individual's ability to understand and adjust to new cultures. • Acquisition of cultures 3 phases (1) awareness (2) knowledge (3) skills o 2. Managers need to be aware of the prevailing norms and their transitions globally
Management savvy
-people with most options go into private equity -private equity funds raise money -money is PRIVATE/ owned be individuals -sometimes buys public companies -sme (small medium enterprises) takes private money and invests in public/other smaller companies Sectors to invest in right now: oil, self driving technology, 3D printers, where is the creative destruction? -cable companies -(SWF public money owned by country)
Private equity
o Ownership and management control rights o FDI v. Licensing • FDI: High degree of direct management control that reduces the risk of firm-specific resources and capabilities being opportunistically taken advantage of. • Dissemination risk- The risk associated with unauthorized diffusion of firm-specific know-how. Can happen with licensing. More direct and tighter control over foreign operations Certain knowledge calls for FDI • Knowledge o Explicit- o Implicit- tactics hands on practice
Ownership benefits
purchasing power parity A conversion that determines the equivalent amount of goods and services that different currencies can purchase. which is an adjustment to reflect the differences in cost of living
PPP
• Strategies for Financial companies o 1. Profit from the foreign exchange market- The market where individuals, firms, governments, and banks buy and sell foreign currencies. o Specifically, the foreign exchange market has two functions: o (1) to service the needs of trade and FDI o (2) to trade in its own commodity—namely, foreign exchange. • 3 types of foreign exchange transactions o 1. Spot transaction- The classic single-shot exchange of one currency for another. o 2. Forward transaction- A foreign exchange transaction in which participants buy and sell currencies now for future delivery. • Currency hedging- A transaction that protects traders and investors from exposure to the fluctuations of the spot rate. • Forward discount- A condition under which the forward rate of one currency relative to another currency is higher than the spot rate. • Forward premium- A condition under which the forward rate of one currency relative to another currency is lower than the spot rate. • 3. Currency swap- A foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert it back to the original currency at a specified Time 2 in the future. Strategies for non-Financial companies • Currency risk The potential for loss associated with fluctuations in the foreign exchange market. • 2 strategies o (1) currency hedging (as discussed earlier) • risky o (2) strategic hedging • Spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions. Reduces exposure to unfavorable foreign exchange movements.
Strategic Responses to Foreign Exchange Movements
• 1. USD (largest economy) • 2. Euro • 3. Pound
Strongest (most wanted) currencies
give clock- symbolizes running out of time/death, pronounced the same as the phrase for saying goodbye to the deceased the #4 is disliked, considered unlucky, sounds similar to the word death general tso is a famous general not food scissors insinuate you want to cut off your relationship to them wearing a green hat means your being cheated on and clueless number 8 sounds like phrase "to get rich" China now 2 child policy rude to finish all of your food, questioning generosity don't eat first lower glass than the host/most senior person when toasting boss should do first toast, eat first let senior person sit at head of table back towards the wall and facing the door receive and offer business cards with both hands use family name when addressing. (family name comes first when written) use titles when addressing also Mr. China - ate strange food: fish eyes, deer whip
Things not to do in China
Set of agreements expansion in rounds, uraguay round transformed GAAT to WTO o Six main areas • An umbrella agreement, simply called the Agreement Establishing the WTO. • An agreement governing the international trade of goods, still using the old title as the General Agreement on Tariffs and Trade (GATT)—technically, as noted earlier, it is "GATT 1994." • An agreement governing the international trade of services, the General Agreement on Trade in Services (GATS). A WTO agreement governing the international trade of services. • An agreement governing intellectual property rights, the Trade-Related Aspects of Intellectual Property Rights (TRIPS)—see Chapter 2. A WTO agreement governing intellectual property rights. • Trade dispute settlement mechanisms, which enable the WTO to adjudicate trade disputes among countries in a more effective and less time-consuming way (discussed next). • Trade policy reviews, which enable other members to "peer review" a country's trade policy. trade in services
WTO
• Basic supply and demand • (1) relative price differences o The theory suggests that in the absence of trade barriers (such as tariffs), the price for identical products sold in different countries must be the same. • (2) interest rates and monetary supply o the exchange rate is sensitive to changes in monetary supply • (3) productivity and balance of payments o A country experiencing a current account surplus will see its currency appreciate; conversely, a country experiencing a current account deficit will see its currency depreciate. Will happen over years and decades. • (4) exchange rate policies o (1) floating rate • tend to be free market believers, willing to let the demand-and-supply conditions determine exchange rates—usually on a daily basis via the foreign exchange market. Floating currencies: US Canadian Australian o (2) fixed rate • A government policy to set the exchange rate of a currency relative to other currencies. • (5) investor psychology o Bandwagon effect- The effect of investors moving in the same direction at the same time, like a herd. o Capital flight- A phenomenon in which a large number of individuals and companies exchange domestic currency for a foreign currency. This would push down the demand for, and thus the value of, the domestic currency.
What Determines Foreign Exchange Rates?
Business around the globe International business (IB) (1) A business (or firm) that engages in international (crossborder) economic activities and/ or (2) the action of doing business abroad. Multinational enterprise (MNE) A firm that engages in foreign direct investment (FDI). Foreign direct investment (FDI) Investment in, controlling, and managing value-added activities in other countries.
What is Global Business?
Globalization: the close integration of countries and peoples of the world. • A new force sweeping through the world in recent times Driven by recent technological innovation. Arguments against globalization focus on environmental stress, social injustice, and sweatshop labor but present few clearly worked-out alternatives to the present economic order. Nevertheless, anti-globalization advocates and protesters often argue that globalization needs to be slowed down, if not stopped. Driven by recent technological advances • A long-run historical evolution since the dawn of human history globalization has always been part and parcel of human history. • A pendulum that swings from one extreme to another from time to time Globalization is neither recent nor one-directional. has ups and downs good/bad times changes over time Closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders. Makes most sense Overall, economic recovery is likely to be slow in developed economies, whereas emerging economies are likely to rebound faster.
What is globalization? 3 views
First-mover advantages- Benefits that accrue to firms that enter the market first and that late entrants do not enjoy. o Examples of first mover advantages • Proprietary, technological leadership • Pre-emption of scare resources • Establishment of entry barriers for late entrants • Avoidance of clash with dominant firms at home • Relationships with key-stake holders such as governments Late mover advantages- Benefits that accrue to firms that enter the market later and that early entrants do not enjoy. o Examples of late mover advantages • Late movers can free-ride on first movers pioneering investments • First movers face greater technological and market uncertainties • Late movers may be able to take advantage of the inflexibility of first movers by leap frogging them. (First movers may be locked into a given set of fixed assets or reluctant to cannibalize existing product lines in favor or new ones.)
When to Enter?
(1) strategic goals o Location-specific advantages- The benefits a firm reaps from the features specific to a place. • (1) knowledge spillovers among closely located firms that attempt to hire individuals from competitors • (2) industry demand that creates a skilled labor force whose members may work for different firms without having to move out of the region, • (3) industry demand that facilitates a pool of specialized suppliers and buyers to also locate in the region. o 4 Strategic Goals: See Table 10.1 • Natural resource seeking • Market seeking • Efficiency seeking • Innovation seeking (2) Cultural and institutional distances o Cultural distance- The difference between two cultures along identifiable dimensions such as individualism. o Institutional distance -The extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries.
Where to enter (location)