MGMT1101 Exam 1
lecture notes (1)
~regional trade agreement- Agreement among countries in a geographic region to enhance cooperation in order to bring down trade barriers among themselves. RTAs involve greater integration of member economies. [Examples of regional economic groups: EU, NAFTA, MERCOSUR, ASEAN, APEC] ~free trade area (abolition of barriers to trade of goods and services) > customs union (FTA + common external trade barriers) > common/single market (Customs union + free flow of factor conditions (labour, capital)) > economic union (Common market + harmonisation of economic policies ) > political union (Economic union + political integration, i.e. 'super-state') ~EU structure- (1) European council- Sets political direction/priorities (Heads of Govt and Commission President) (2) european commission- Proposing, implementing, monitoring, legislation (28 commissioners appointed by members for 5-year term) (3) european parliament- Propose amendments to legislation, veto power over budget and singlemarket legislation, approve commissioners. (Directly elected MPs) (4) court of justice- Hears appeals of EU Laws. (1 judge from each member) (5) council of ministers- Ultimate controlling authority. No EU laws without approval. (1 minister from each member) ~problems with EU- (1) Single Market liberalisation not complete, with some outstanding sectors (2) Trade liberalisation with external countries a concern in the area of agriculture (Common Agricultural Policy) (3) Challenge of enlargement (i.e. membership of Central and Eastern European countries) (4) French/Dutch 'no' vote against EU constitution in 2005, followed by Irish 'no' vote in 2008; Lisbon Treaty effective in December 2009 (5) Countries in crisis, e.g. PIGS (6) Further impetus for greater integration with a common fiscal policy? (7) Disintegration with 'ever closer union' stalled? (8) UK referendum on EU membership in 2016 and Brexit, with potential followers? (9) EURO/EU sustainability? ~Implications of EU Integration for MNEs: Opportunities/Threats- (1) lower cost of cross-border operations (e.g. reduction in conversion costs) (2) more locational choices (3) efficiency gains: standardisation/scale economies (4) reduction in protectionism (5) increased competition from pan-European operators (6) pressure on prices due to introduction of euro (7) many differences still remain, e.g. culture ~regional economic integration- The benefits of REI outweigh the costs only if the amount of trade it creates exceeds the amount it diverts [Trade creation: occurs when a member's higher-cost producers are replaced by the lower-cost producers of other members within the bloc] [Trade diversion: occurs when lower-cost non-member suppliers are replaced by higher-cost suppliers from within the bloc] ~Why eurozone crisis?- integration [Too wide and diverse membership, Deeper integration not achieved, e.g. fiscal harmonisation?], structural [No provision for expelling members in case of non-compliance, Decision making processes- consensus?, Dispersed authority], members [Unsustainable fiscal policies, Implementation?]
managerial implications of foreign exchange rate
~risk- quotes/invoices in other currencies gives exchange rate risk, transaction exposure- extent to which income from individual transactions is affected by fluctuations in foreign exchange values, translation exposure- reported consolidated results and balance sheets of corporation are affected by fluctuations in foreign exchange values, economic exposure- firms future international earning power is affected by changes in exchange rates ~steps for managing foreign exchange risk- (1) central control of exposure is needed to protect resources efficiently and ensure that each subunit adopts the correct mix of strategies (2) firms should distinguish b/w transaction and translation exposure and pay more attention to economic exposure (3) need to forecast future exchange rate movements (4) firms should produce monthly foreign exchange exposure reports (identify how cash flows and balances might be affected in exchange rates)
ethical decisions in international business
~(1) favor hiring and promoting people w/ well grounded sense of personal ethics (2) build organization culture that places high value on ethical behavior and make sure that leaders within business not only articulate ethical behavior but also act that way (3) put decision making process in place that requires people to consider ethical dimension of business decisions (4) hire ethics officers (5) develop moral courage ~code of ethics- formal statement of ethical priorities to which business adheres
bribery and corruption
~1977 foreign corrupt practices act - outlawed paying of bribes to foreign government officials to gain business [allowed for facilitating payments- not payments made to secure contracts they would otherwise not get but payments to ensure there is no obstruction to interaction] [Australia has bribery act] ~corruption can harm countrys economic development but also side payments to government officials can remove bureaucratic barriers to investment that creates jobs ~moral obligations- multinational corporations have power that comes from control over resources and some people argue that w/ power comes social responsibility to give back something to socities that allow them to prosper and grow [social responsibility- business should consider the social consequences of economic actions and give preference to outcomes w/ positive social and economic consequences when making business decisions]
lecture notes (3)
~AGREEMENTS of WTO- GATT (Goods), GATS (Services), TRIPS (Intellectual property), DSU (Dispute settlement) ~GATT- Relates to goods including agriculture, Non-discrimination principles (Most favoured nation (MFN), National treatment), Reciprocity: a country's trade liberalising measures matched by trading partners, Fair (rule-based/transparent) competition, Further trade liberalisation ~GATS- Extension of GATT principles to services particularly MFN treatment, Schedule of specific market access commitments by individual members, Extended by later agreements on financial services and telecommunications, Progressive liberalisation, Council for Trade in Services oversees operation of agreement ~TRIPS- Extends GATT principles to intellectual property (MFN, National treatment), Specific norms of protection for forms of IP (e.g. copyright, patents, trademarks), Sets out obligations for the domestic enforcement of IP rights, TRIPS Council set up to monitor compliance; GATT dispute settlement procedures apply ~WTO dispute settlement- (1) consultations- dispute triggered when a WTO member feels another member is violating WTO rules, a WTO member/s may then decide to request consultations of another WTO member; the respondent must enter into consultations within 30 days, only WTO member governments may initiate disputes (i.e., not companies), if no resolution within 60 days, the complainant(s) may request the establishment of a panel (2) panel appointments and hearings- panels consist of 3-5 experts from countries not party to the dispute, the panel conducts hearings from both parties to the dispute and compiles a report, if the panel decides the respondent's trade measure does violate WTO rules, it recommends the measure be made to conform with WTO rules, the panel process should be completed within 6-9 months (3) appeal- however the respondent may appeal the panel's legal interpretation, each appeal is heard by members of a permanent Appellate Body, the appellate body's report becomes the Dispute Settlement Body's (DSB) ruling unless there is a consensus of countries against it ('negative consensus'), the appeals process is allowed a maximum of 90 days (4) implementation- if it 'loses', the respondent must notify the DSB how it intends to implement the panel's recommendations, the respondent may request 'a reasonable period of time' in which to comply, however if the respondent fails to comply within the specified period it must enter into negotiations over compensation, if no agreement on compensation is reached the complainant may ask the DSB for permission to impose limited trade sanctions
business ethics
~Accepted principles of right and wrong governing the conduct of business people [ethical strategy- strategy or course of action that doesn't violate these principles] ~good safeguards against ethical abuse includes establishing minimal acceptable standards that protect basic rights and dignity of employees, auditing foreign subsidiaries and subcontractors on regular basis and taking corrective action if standards aren't met ~human rights considerations, environmental pollution considerations (might move production to developing nation b/c costly pollution controls aren't required and company can despoil environment and endanger local people in quest to lower production costs and gain competitive advantage) [tragedy of the commons- atmosphere and oceans are global commons from which everyone benefits but no one is specifically responsible], child labor considerations
lecture notes (2)
~Market size - estimating potential sales [Common measures: population size/growth/age distribution, economic size/growth (GDP: all goods and services produced within a country (no distinction between foreign or national ownership), GNI: all goods and services produced by national firms (no distinction for location), GNI vs. GDP: GNI defined by residents and GDP defined by location, Growth: how GDP and GNI change over time)] ~Market size - estimating potential sales [income/purchasing power (GNI per capita, PPP) (Rank or relative performance of national economies by standardising by population (per capita)), Purchasing Power Parity: How many units of a local currency you would need to buy a basket of goods and services in the local market that one US$ can buy in the US > Ability to purchase products or spending power, income distribution (GINI coefficient) (Income inequality between the rich and the poor, Ranges from 0 to 1, The lower the more equal)] ~stages of economic development- (1) LOW INCOME (LDC) (GNI p.c. $US1035 or less) [ rural-based economy, low literacy, high population growth, heavy foreign debt, reliance on foreign aid, political instability, poor infrastructure, dualism] (2) LOWER MIDDLE ($1036-4085) [industrialisation, diversification, expanding consumer markets, cheap labour - competitive, location for manufacture of mature standardised products] (3) UPPER MIDDLE ($4086-$12615) [drop in % of population engaged in agriculture, rapid industrialisation, export growth, competitive wage costs yet more advanced education improving technological capacity] (4) HIGH ($12616 or more) [industrialised, developed infrastructure, high living standards, large service sector (change in industrial structure), high tech economy, low population growth, skilled labour] ~Managing foreign exchange (FX) risk- (1) Hedging through use of instruments in forward exchange market (e.g. forward contracts, options , currency swaps)- not remove all risk and can prove costly (2) Diversifying markets (natural hedging): spreading risk by earning in multiple currencies (3) Adjusting operational decisions, e.g. move production offshore, make productivity gains, sign longer-term contractual commitments, switch to domestic suppliers, differentiate product on quality not price
multinational enterprise
~Since the 1960s, two notable trends in the demographics of the multinational enterprise have been (1) the rise of non-U.S. multinationals and (2) the growth of mini-multinationals ~country after country we have seen state-owned businesses privatized, widespread deregulation adopted, markets opened to more competition, and commitment increased to removing barriers to cross-border trade and investment. This suggests that over the next few decades, countries such as the Czech Republic, Mexico, Poland, Brazil, China, India, and South Africa may build powerful market-oriented economies. In short, current trends indicate that the world is moving rapidly toward an economic system that is more favorable for international business ~arguments for globalization- They argue that falling barriers to international trade and investment are the twin engines driving the global economy toward greater prosperity. They say increased international trade and cross-border investment will result in lower prices for goods and services. They believe that globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that participate in the global trading system ~source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous [ Because free trade enables developing countries to increase their economic growth rates and become richer, this should lead to tougher environmental and labor laws] ~today's increasingly interdependent global economy shifts economic power away from national governments and toward supranational organizations such as the World Trade Organization, the European Union, and the United Nations ~managing an international business is different from managing a purely domestic business for at least four reasons: (1) countries are different, (2) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business, (3) an international business must find ways to work within the limits imposed by government intervention in the international trade and investment system, and (4) international transactions involve converting money into different currencies ~trends- rise of non-US multinationals and growth of mini multinationals ~emerging markets - met standards relating to (1) size of economy in terms of population and national production (2) wealth of country in terms of rising per capita incomes, middle class and reduced poverty (3) openness of country to foreign trade and investment (4) rate of growth of economy (5) prospect of further growth and development as indicated by its people/resources and maturity/stability of economic, political and social institutions (6) transition to more business friendly market economy
globalization (2)
~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 labor, energy, land, and capital) [By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively] ~impediments include formal and informal barriers to trade between countries, barriers to foreign direct investment, transportation costs, and issues associated with economic and political risk ~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 ~more firms are dispersing parts of their production process to different locations around the globe to drive down production costs and increase product quality [the economies of the world's nation-states are becoming more intertwined. As trade expands, nations are becoming increasingly dependent on each other for important goods and services] ~outsourcing- tasks that were previously performed in house are now purchased from another firm [offshoring- form of outsourcing where task previously performed in one country is now being undertaken abroad]
political economy
~We use the term political economy to stress that the political, economic, and legal systems of a country are interdependent; they interact and influence each other, and in doing so they affect the level of economic well-being ~political systems are assessed by (1) The first is the degree to which they emphasize collectivism as opposed to individualism. (2 )The second is the degree to which they are democratic or totalitarian. These dimensions are interrelated; systems that emphasize collectivism tend toward totalitarian, whereas those that place a high value on individualism tend to be democratic. However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist ~In a pure command economy, the government plans the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold. Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for "the good of society." [all businesses are state owned, the rationale being that the government can then direct them to make investments that are in the best interests of the nation as a whole rather than in the interests of private individuals] [In a command economy, stateowned enterprises have little incentive to control costs and be efficient, because they cannot go out of business. Also, the abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs; hence, dynamism and innovation are absent from command economies. Instead of growing and becoming more prosperous, such economies tend to stagnate] ~pragmatic nationalism- view that supports private enterprise and foreign investment when such enterprise and investment are assessed by those in power to be in their political interest and the national interest
managerial implications
~benefits- form foreign country's resource endowments (both created and natural), from location (to its markets or essential resources), long run benefits are function of size of market/present wealth and purchasing power of consumers/likely future wealth of consumers [country's economic system, property rights and quality of institutions are good predictors of economic prospects] ~costs- may be more costly to do business in undeveloped economy b/c lack of quality of infrastructure, more costly in country that lacks well established laws for regulating business practice, macroeconomic instability ~costs of inflation to business- (1) diminished purchasing power (2) reduced international competitiveness (3) increased tax burden (4) income redistribution (5) adverse policy responses ~economic risks- likelihood that economic mismanagement and macroeconomic instability will cuase such changes in country's business environment that the profit and other outcomes of particular business will be adversely affected [use GDP per capita, annual inflation rate, domestic budget balance]
economic environment
~characteristics that enter into firms primary assessment of country- size [level of national income and production and its population] [measure of market potential for firms products and suggest diversity of human and physical resources], endowments (geography, people, infrastructure), competitiveness ~GDP measures production in country no matter who owns that factors of production (domestic or foreign resident) while GNI measures value of incomes of residents no matter where income is earned [GNI equals GDP plus net income from abroad] ~market analysis of population size and growth and population distributions according to age/gender/location can provide indicators of potential market size for firms product (also look at income growth and income distribution) ~competitiveness- sources from within firm include product differentiation/new products/process redesign/innovative organizational arrangements [sources outside firm are quality of infrastructure and country of origin effects] [external economies- cost efficiencies in production and marketing that firm enjoys as result of action of others external to firm (include pool of skilled labor, industry specific research, knowledge spillovers b/w firms)] ~productivity- ratio of output to factors of production [W x 1/p x (1+pi) x 1/r = P] [W=price of unit of labor input, p=productivity, pi=percentage markup, r=exchange rate b/w market currencies, P=foreign currency price] ~firms international competitiveness depends on price of inputs, productivity and foreign exchange rate
turnkey projects
~contractor agrees to handle every detail of project for foreign client including training of operating personnel [most common in chemical, pharmaceutical industries which use complex expensive production technologies] ~advantages- know how required to assemble/run complex process ~disadvantages- firm inters into deal will have no long term interest in foreign country, firm that enters w/ foreign enterprise may inadvertently create a competitor, if firms process technology is source of competitive advantage that selling this through turnkey is also selling competitive advantage to potential competitors
legal systems (1)
~customary law- system of law based on shared rules and customs of community that have developed over a long period of time (more local level) ~common law- based on tradition, precedent and customs which is flexibly interpreted by judges as it applies to the unique circumstance of each case (uk, australia, usa) ~civil law- system of law based on very detailed set of written laws and codes ~theocratic law- system of law based on religious teachings ~contract- document that specifies conditions under which exchange is to occur and details the rights and obligations of parties involved [contract law governs contract enforcement] [because common law is relatively ill specified contracts drafted under common law tend to be very detailed with contigencies all spelled out] [in civil law however contracts are much shorter and less specific b/c many of the issues are already covered in civil code] ~property rights- legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource ~private action- theft/piracy/blackmail by private individuals or groups [public action- extortion of income or resources from property holders by public officials]
economic performance and development
~economic development includes- (1) providing life sustaining basic needs (2) raising general standards of living in form of improved literacy/health standards/economic security (3) expanding range of economic opportunities and political choices (4) attaining sustainable development ~human development index- measures quality of human life in different nations (based on life expectancy at birth, educational attainment and literacy, whether average incomes are sufficient to meet basic needs of life)
economic systems
~economic performance is influenced by natural and created resource endowments, level of development and technological sophistication, place of economy in global economy, policies and strategies of government, random events, economic system ~systemic features are (1) whether or not locus of economic decision making is centralized or decentralized (2) whether central planning or market system informs and determines resource allocation (3) nature of incentive system (4) property ownership and control ~market economy- interaction of individual decision makers on questions of supply and demand determines quantity in which goods are produced ~command economy- allocation of resources including determining what goods should be produced and in what quantity is planned by government ~mixed economy- certain sectors are left to private ownership and free market while others have government ownership and planning
joint ventures
~establishing firm that is jointly owned by two or more independent firms ~advantages- firm benefits from local partners knowledge of host country, when development costs or risk are high firm gains by sharing the costs w/ local partner, political considerations might make joint venture only feasible mode of entry (low risk of being subject to nationalization or adverse government interference) ~disadvantages- risks giving control of technology to partner, doesnt give tight control over subsidiaries, shared ownership can lead to conflicts and battles for control b/w firms if goals or objectives change
foreign exchange and international monetary system
~exchange rate considerations arise in following areas- where will firm get best return on foreign investment, where will the firm locate production, from where will firm source its supplies, in which currency will firm borrow, in which currency will firm quote prices, what will be forecast earnings of firms subsidiaries in home currency terms, is there need to protect future foreign cash flows against currency volatility and risk ~carry trade- borrowing in one currency where interest rates are low and then using proceeds to invest in another currency where interest rates are high [currency speculation- moving funds from one currency to another over the short term in hope of profiting from changes in exchange rates] ~hedging- insuring ones business against foreign exchange risk by using forward exchanges and foreign exchange swaps [spot exchange is when 2 parties agree to exchange currency and execute deal immediately so spot exchange rate is rate on that particular day] [forward exchange is when 2 parties agree to exchange currency at exchange rate agreed today and execute deal at some specific date in future] [foreign exchange swap- exchange of 2 currencies on specified date coupled w/ reversal of exchange of 2 currencies at a later date at rates agreed at time of contract (do this when its desirable to move out of one currency into another for limited period w/o incurring foreign exchange risk)]
international monetary system
~exchange rate regimes range from pure free float (floating exchange rate) where rate is determined by market forces of supply and demand to a fixed peg system (fixed exchange rate system/pegged exchange rate) ~functions of international monetary system- (1) provide adjustment- process of restoring external balance (2) provide liquidity- money supply used to finance trade and investment and as reserves by central banks to achieve exchange rate and balance of payments policy goals (3) building confidence- belief that institutions and relations among countries are sufficiently robust to sustain stability of system in times of major imbalances ~currency crisis- when speculative attack on exchange rate threatens sharp depreciation in value of currency and capacity of authorities to defend value [banking crisis- loss of confidence in banking system leads to run on banks as individuals and companies withdraw their deposits] [foreign debt crisis- when foreign debt has become so large that country cant service its debt obligations of loan and interest payments] ~role of IMF- (1) surveillance- monitors and consults members w/ regards to national and international consequences of their domestic and macroeconomic and financial policies (2) technical assistance- build institutional capacities to design and implement sound economic policies (3) lending- based on conditionality where countries that borrow commit to specified economic and financial policies
globalization
~external environment of IB- (1) potentially different currencies (2) national differences [legal/political/cultural/economic/social/technological] (3) liability of foreignness [costs of distance/operating in unfamiliar environment] (4) lack of supranational authority [no final arbiter to set rules, resolve disputes, enforce agreements] ~ Firms can expand their revenues by selling around the world and reduce their costs by producing in nations where key inputs, including labor, are cheap ~Since the collapse of communism at the end of the 1980s, the pendulum of public policy in nation after nation has swung toward the free market end of the economic spectrum. Regulatory and administrative barriers to doing business in foreign nations have come down, while those nations have often transformed their economies, privatizing state-owned enterprises, deregulating markets, increasing competition, and welcoming investment by foreign businesses. This has allowed businesses both large and small, from both advanced nations and developing nations, to expand internationally ~service industries now also face foreign competition- Advances in technology, lower transportation costs, and the rise of skilled workers in developing countries imply that many services no longer need to be performed where they are delivered (even health services) ~The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace [significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations]
determination of exchange rate
~factors that impact in the long run on future exchange rate movements- price inflation, interest rates and market psychology ~purchasing power parity (exchange value of currencies based on comparison of prices b/w nations) theory says that exchange rate will change if relative prices change [predicts that country where price inflation is running high should expect to see its currency depreciate against that of countries in which inflation rates are lower] ~Fisher effect- in countries where inflation is expected to be high interest rates will also be high b/c investors want compensation for decline in value of money over time [country's nominal interest rate i is sum of required real rate of interest r and expected rate of inflation I over period for which funds are to be lent (i=r+I)]
wholly owned subsidiaries
~firm owns 100% of shares and can be set up as new operation in that country (greenfield venture) or it can acquire established firm in host nation and use firm to promote products ~advantages- reduces risk of losing control of competence (if firms competitive advantage is based on technological competence), gives firm tight control over operations, may be required if firm is trying to realize location and experience curve economies ~disadvantages- most costly method of entering foreign market (bear full capital costs and risks of setting up overseas operation), acquisition also raises problems (merging cultures)
philosophical approaches to ethics
~friedman doctrine- only social responsibility of business is to increase profits so long as company stays within rules of law ~cultural relativism- ethics are reflection of culture and firm should adopt ethics of culture in which its operating ~righteous moralism- multinationals home country standards of ethics are appropriate ones for companies to follow in foreign countries ~naïve immoralism- belief that if manager of multinational sees that firms from other nations are not following ethical norms in host nation that manager should not do so either ~utilitarian and Kantian ethics- utilitarian approach says that moral worth of actions is determined by their consequences (action is desirable if it leads to best possible balance of good consequences over bad consequences- best decisions are those that produce greatest good for greatest number of people) [Kantian ethics- people should be treated as ends and never as means to ends of others] ~rights theories- belief that human beings have fundamental rights and privileges that transcend national boundaries and cultures (UN universal declaration of human rights) ~justice theories- ethical approach that focuses on attainment of a just distribution of economic goods and services [all economic goods and services should be distributed equally except when unequal distribution would work to everyones advantage]
emergence of global institutions
~general agreement on tariffs and trade (GATT)- international treaty that committed signatories to lowering barriers to free flow of goods across national borders ~world trade organization (WTO)- suceeded GATT and now acts to police world trading system [some say its usurping national sovereignty of individual nation states and failing to respond to fundamental shifts in global economy] ~international monetary fund (IMF) and world bank- set up to maintain international monetary system and to promote economic development by offering low interest loans to governments of poorer nations ~united nations- UN has 4 purposes- to maintain international peace and security, develop friendly relations among nations, cooperate in solving international problems and promoting human rights, centre for harmonizing actions of nations [UNCTAD- UN body that promotes integration of developing countries into world economy]
countertrade
~governments can restrict convertibility of currency to preserve foreign exchange reserves so countertrading is barter-like agreements that allow firms to trade goods for goods when they cant be traded for money ~barter- direct exchange of goods b/w 2 parties w/o cash transaction (most restrictive and used for one time only deals in transactions w/ trading partners who arent credit worthy or trustworthy) ~counterpurchase- firm agrees to purchase certain amount of materials back from country to which it made a sale (China pays for australian goods in dollars and then australia buys chinese goods so some of china's money come back) ~offset- firm agrees to purchase goods from any firm within country to which it made a sale (same as counterpurchase but w/ any firm in that country so gives greater flexibility about goods to be purchased) ~switch trading- using specialized third party trading house in countertrade agreement [third party buys firms counterpurchase credits and sells them to another firm that can use them better] ~buy back- firm builds plant in country and agrees to take a certain percentage of plants output as partial payment of contract
government policy instruments and FDI
~home country policies- (1) encouraging outward FDI- government back insurance programs to cover major types of foreign investment risk, eliminated double taxation of foreign income, host countries relax restriction on inbound FDI (2) restricting outward FDI- these policies are enacted when trying to create jobs at home or for political reasons ~host country policies- (1) encouraging inward FDI- government offer incentives to foreign firms to invest in country (like tax concessions, low interest loans, grants, subsidies) (2) restricting inward FDI- controls include ownership restraints (foreign companies are excluded from specific fields or it may be permitted but significant portion must be owned by local investors) and performance requirements (controls over behavior of foreign firms local subsidiary and conditions control local content/exports/technology transfer/local participation in top management)
why governments intervene in FDI
~host country benefits and costs- (1) resource transfer effects- FDI makes positive contribution to economic growth by supplying capital and technology (2) employment effects- FDI can create new jobs either directly or indirectly (3) balance of payments effects- can help reduce current account defecit (4) effect on competition and economic growth- new competition can broaden choice and drive down price of goods for consumers and increase productivity/product and process innovation [FDI may have negative effect on competition if subsidiaries of foreign firms have greater economic power than local firms] (5) national sovereignty and autonomy- FDI is accompanied by some less of economic independence [concern that investments are being undertaken to secure control of strategically important industries to gain political and financial leverage] ~home country benefits and costs- (1) balance of payments effects- benefits from inward flow of foreign earnings [balance of payments suffers from initial capital outflow required to finance FDI] (2) employment effects- creates demand for home country exports [negative when creates foreign operations that replace domestic production (offshoring)] (3) reverse resource transfer effect- home country firm learns valuable skills from its exposure to foreign markets that can be transferred back to home country
drivers of globalization
~individual consumer and firm actions (micro factors)- like consumers willingness to accept and source products globally, outsourcing of production to take advantage of national differences, increased pressure on business to compete globally and match market moves of rivals ~macro factors (underlie trend towards greater globalization)- decline in barriers to free flow of goods and technological change ~international trade is when firm exports goods to buyers in another country while foreign direct investment occurs when firm invest resources in foreign business giving it some control over those activities ~more production by firms is destined for export markets not just domestic markets, more firms are dispersing parts of production process to different locations to drive down production costs and increase product quality, economies of world are becoming more intertwined, world as become significantly wealthier ~FDI flow- amount of FDI undertaken over given time, FDI stock- total accumulated value of foreign owned assets at given time, FDI outflow- flow of FDI out of the country, FDI inflow- flow of FDI into country ~Moore's law- power of microprocessor technology doubles and its cost of production falls by half every 18 months (cost of global communications plummets which lowers cost of controlling global company) ~factors that affect logistics performance and explain disruption to trade and add to trade costs- efficiency of clearance process by border control, quality of trade and transport infrastructure, ease of arranging competitively priced shipments, competence and quality of transport operators, ability to track consignments, timeliness of delivery
legal systems (2)
~intellectual property- patents, copyrights, trademarks [international businesses have a number of possible responses to violations of intellectual property- lobby government to push for international agreements to ensure intellectual property rights are protected and law is enforced, firms can file lawsuits on their own behalf, stay out of countries where intellectual property laws are lax ~product safety laws- product liability involves holding a firm and its officers responsible when a product causes injury/death/damage to users [product liability is greater if product doesnt conform to required safety standards] ~competition law- aims to prevent businesses from obtaining or using market power to conduct anticompetitive practices [reducing barriers to trade is another way of promoting competition]
licensing
~licensor grants the rights to intangible property to another entity for specified period and in return receives a royalty fee [includes patents, inventions, formulas, processes, designs, copyrights, trademarks] ~advantages- licensee puts up most of capital necessary for overseas operation, firm doesnt have to bear development costs/risks associated w/ opening foreign market, useful for when firm wants to participate in foreing market but is prohibited from doing so by barriers to investment, used when firm possess some intangible property that might have business applications but doesnt want to develop those applications itself ~disadvantages- doesnt give firm tight control over manufacturing/marketing/strategy, limits firms ability to realize experience curve and location economies, requires firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another, risk associated w/ licensing technology know how to foreign companies (cross licensing agreement- arrangement where company licenses valuable intangible property to partner and receives license for partners valuable knowledge which reduces risk)
macroeconomic stability
~macroeconomic stability- occurs when economy grows w/o persistent and major fluctuations in levels of economic activity, inflation rates, unemployment and balance of payments imbalances ~generally governments have 4 main stabilization goals- low inflation, low level of unemployment, positive economic growth, balance of international payments and receipts ~fiscal policy- form of policy that uses changes in government expenditures and taxes to stabilize economy [monetary policy- uses changes in interest rates and money supply to stabilize economy] ~sources of economic growth- include availability of more resources, qualitative changes that lead to more productive use of resources (enhanced labor skills, innovate products, etc) ~external viability/balance of payments- whether or not country is able to pay its way internatioanlly [includes exports, imports, transport services, education services, current transfers, international capital transfers, financial flows arising from capital transactions] [current account deficit- amount by which payments to foreigners exceed receipts from foreigners for current account items] ~debt service ratio-percentage of export earnings used to pay interest on debt [indicator of nations capacity to pay its debt obligations]
lecture notes (1)
~measuring internationalization- (1) Performance- Degree of success of foreign operations, e.g. foreign sales, operating income of foreign affiliates, export growth (2) Structural- What resources are overseas, e.g. transnationality index, degree of local responsiveness vs. global integration (3) Attitudinal- International orientations, e.g. ethnocentrism, international experience of top management ~Transnationality index is a composite index of the following three ratios: Foreign assets/total assets, Foreign sales/total sales, Foreign employees/total employees ~why go international- (1) push factors- market saturation, restrictive government regulations (2) pull factors- new market for sales growth, efficiency increase (cheap labor), access to key resources, access to technology/skills [other factors- React to/preempt competition, Follow domestic customers, Chance factors] ~drivers of globalization- Declining trade/investment barriers, Technological advances, Information revolution, Ideological shifts (Central planning to market-driven), MNEs [inhibitors- Restriction on market access, e.g. NTBs, National differences (e.g. culture, economic development), Protectionism, Organisational culture (Ethnocentrism, management myopia) ~Political risk: Macro vs micro- Macro political risk exists when all foreign firms are affected in much the same way E.g. revolutions, civil wars, nation-wide strikes, protests, riots, mass expropriations [Micro political risk occurs when changes affect only selected industries, firms, projects E.g. selective expropriations, discriminatory taxes, import restrictions directed at specific foreign firms] ~Political risk: dimensions- (1) sources- Change in political philosophy, Public corruption, Impending/recent independence, Armed conflict/terrorism, Worsening economic conditions, Social unrest, Nationalism, etc. (2) agents- Current government, Opposition groups, Organised interest groups, Terrorist/guerilla groups, International organisations, Foreign governments, etc (3) effects- Expropriation of assets, Indigenisation, Cancellation/revision of contracts, Loss of earnings, increased taxes, Restriction of operating and financial freedom, Kidnapping of employees, etc ~Extraterritoriality- the application of a country's laws beyond its borders i.e. governments apply their laws to their domestic companies' foreign operations
uppsala model
~model that explains how firms move from supplying domestic markets to overseas ones ~4 stages of entering international market- (1) no regular export activity (2) export via independent representatives/agents (3) establishment of overseas subsidiary (4) overseas production/manufacturing units [outcome of one stage is input to next stage] ~assumed that market commitment affects not only commitment decisions but also way the current activities are performed - these lead to changes in knowledge and commitment] [physic distance- firms target markets that are physically close (language, culture, economic/political systems)] ~internationalization is incremental process of progressive reduction of psychic distance through managers gradual accumulation of knowledge of foreign markets
exporting
~most firms begin as exporters and later switch to another mode for serving foreign market ~exporting stimulates both national economy and firms involved (export represents additional jobs and positive trade balance as well as benefits from multiplier effect - increase in spending causes increase in income and consumption that is greater than initial injection of funds) [exporting enables firm to achieve economies of scale by expanding size of market thereby lowering its unit costs] ~indirect exporting- using agent located within home country (avoid need to manage export documentation and procedures) [direct exporting- deal directly with overseas customer] ~advantages- avoids substantial costs of establishing manufacturing operations in host country, may help firm achieve experience curve and location economies ~disadvantages- may not be appropriate if lower cost locations for manufacturing product can be found abroad, high transportation costs can make it uneconomical, tariff barriers can make it uneconomical, firm has to delegate its marketing/sales/service in each country to other companies
trade and FDI liberalization
~non discrimination principles of WTO- (1) most favored nation principle- requires member of WTO to extend to all its trading partners the same trading concessions that it gives to its most favored trading partner (2) national treatment principle- requires that national and foreign trade and investment are treated equally ~bound tariffs- listed rates that are the highest rates that WTO members agree to levy
roots of unethical behavior
~personal ethics, decision making processes (lies in processes that don't incorporate ethical considerations into business making decisions), organization culture (culture that de-emphasizes business ethics reducing all decisions to purely economic), unrealistic performance expectations, corporate governance and leadership (corporate governance- way in which boards oversee the running of a company by its managers and accountability of board members to shareholders and company) ~8 essential corporate governance principles- (1) lay solid foundations for management and oversight (2) structure board to add value (3) promote ethical and responsible decision making (4) safeguard integrity in financial reporting (5) make timely and balanced disclosure (6) respect rights of shareholders (7) recognize and manage risks (8) remunerate fairly and responsibly
lecture notes (3)
~why invest in transition states- High-growth potential, Emergence of middle class; adoption of Western-style consumption patterns, Access to skilled but lower-cost labour, Mostly improving country risk profiles, 'first-mover' advantages (albeit having waned), EU membership for Central Europe/Baltic states; WTO membership for e.g. China, Russia, Vietnam ~why not invest in transition states- Government's arbitrary and inconsistent political decisions, Barriers to investment [restrictions on foreign ownership, financial controls: FX controls, local content requirements, restrictions on foreign employment], Lack of rule of law/enforcement [corporate governance / competition / taxation / IP protection], Lack of managers with experience in the market system
political risk
~political risk- likelihood that political forces and events will cause drastic changes in countrys business environment that adversely affect the profit and other goals of business [these forces may originate in broader or macro-political environment and affect all businesses in country or may be forces that arise and affect just particular business or micro-section of economy] ~macro risks- may arise from actions of government or from non-government groups, source may be foreign or domestic [domestic- stability of government in terms of party unity and popular support, socioeconomic conditions like unemployment and poverty, investment uncertainties related to property protection/contract enforcement/repatriation of profits, extent of internal conflict like terrorism and civil disorder, levels of corruption, ethnic tensions, role of military or religious groups in politics, quality of beaurocracy and governance] [foreign- regional instability, cross border conflict, political and economic pressures from foreign groups] ~social unrest is more likely to be found in countries that (1) contain more than one major ethnic nationality (2) competing ideologies battling for political control (3) economic mismanagement creating high inflation/high unemployment/falling living standards (4) countries straddle the faultlines b/w civilizations ~micro risks- may arise b/c business operates in politically sensitive industry like finace/aviation, there are policies that impose industry specific charges and controls ~legal risk- (subset of political risk) which is likelihood that legal system adversely affects conduct of business
why governments intervene in trade
~political- concerned w/ protecting interests of certain groups within nation (producers) at expense of consumers [economic- boosting overall wealth of nation] ~political arguments for intervention- (1) protecting jobs and industries (2) security [necessary to protect or restrict certain industries b/c they are important for national security] (3) retaliation- use threat as bargaining tool to force policy changes (4) protecting consumers- restrict trade to protect human/animal health (5) furthering foreign policy objectives- trade sanctions used to pressure or punish countries that dont abide by international laws or norms (6) protecting human rights (7) protecting the environment ~economic arguments for intervention- (1) infant industry argument- calls for protection of emerging industry until it becomes efficient enough to compete in world market (2) strategic trade policy- government policy aimed at helping country's domestic firms gain first mover advantages or overcome first mover advantages of foreign firms in global markets that will profitably support only a few firms
greenfield venture vs acquisition
~pros of acquisition- quick to execute, firms make acquisitions to pre-empt competitors, less risky than greenfield ventures (known revenues and profits while greenfield is new company so unknown) (also acquires firms assets and brand name) ~cons of acquisitions- acquiring firm often overpays for assets of acquired firm (hubris hypothesis- firm is too optimistic about value that can be created via acquisition), clash b/w cultures of firms causing high turnover, attempts to realize synergy b/w operations can take much longer than forecasted, fail due to inadequate pre-acquisition screening ~reducing risks- screening foreign enterprise can make sure firm (1) doesnt pay too much (2) doesnt uncover surprises after acquisition (3) acquires firm whose culture isnt antagonistic to other firm ~pros of greenfield- gives firm ability to build organizational culture from scratch, easier to establish operating routines than convert [disadvantages- slower to establish, risky, possibility of being preempted by more aggressive global competitors that enter via acquisition and build big market presence which limits potential for greenfield venture]
regional economic integration
~regional economic integration arises from agreements to reduce to varying degrees the barriers to free flow of goods across borders ~levels of economic integration- from least integrated to most integrated it goes free trade area, customs union, common market, economic union, full political union [free trade area- all barriers to trade of goods are removed (each country is allowed to determine its own trade policies w/ regard to non members)] [customs union- group of countries that adopts common external trade policy] [common market- has no barriers to trade b/w members and includes common external trade policy but also involves greater degree of integration by allowing factors of production to move freely b/w members] [economic union- also requires common currency, harmonization of tex rates, significant sacrifice to national sovereignty to supra-national institutions] [political union- central political apparatus coordinates economic, social and foreign policy of member states] ~case for regional economic integration- allows businesses and countries to shift resources and specialize in production of goods they can produce most efficiently resulting in economic growth, access to larger markets and more intense competition (stimulates innovation), reduces potential for political conflict ~case against regional economic integration- creates trade diversion (occurs within free trade area when low cost external suppliers are replaced by high cost suppliers inside area), increasing bureaucracy associated w/ administration and enforcement of rules that govern free trade areas
economies in transition
~shift towards market based economy includes deregulation, privatization and creation of effective institutions including legal system to safeguard property rights/viable financial sector/credible government ~deregulation- removing legal restrictions to free play of markets, the establishment of private enterprises and manner in which private enterprises operate [removing price controls and allowing price to be set by supply and demand, abolishing laws regulation operation of private enterprises, removing restrictions on direct foreign investment and international trade] ~privatization- transfers ownership of state property into hands of private individuals [stimulate gains in economic efficiency by giving private owners incentive (reward of greater profits) to search for increases in productivity and to enter new markets] ~institutional weaknesses that limited success of market based reforms in early transitional economies- unpredictable changes in laws and policies, unstable government, insecurity of property, unreliable judiciary, corruption ~ingredients for economic growth and development- (1) leadership and governance [credible commitment to growth and inclusion over long term, capable administration, consensus building and social contracts] (2) market allocation [reliance on markets and prices to allocate resources, protection of property rights] (3) macroeconomic stability [low inflation, sustainable public and foreign debt] (4) global engagement [strong export orientation, openness to imports of new knowledge and technology] (5) future orientation [high rates of savings and investments, investment in infrastructure, policy flexibility]
differences in culture
~social structure- degree to which basic unit of social organization is the individual opposed to the group, degree to which society is stratified into classes or caste ~social mobility- extent to which individuals can move out of strata into which they were born [class consciousness- people tend to perceive themselves in terms of their class background and this shapes their relationships w/ members of other classes] ~low context culture- culture where speakers message is conveyed explicitly by spoken words (canada, usa, nz) ~high context culture- context of discussion is as important as actual words spoken (latin america, middle east) ~Hofstede's dimensions of culture- power distance, uncertainty avoidance, individualism vs collectivism, masculinity vs femininity [power distance- extent to how much society allows inequalitites of physical and intellectual capabilities b/w people to grow into inequalities of power and wealth] [uncertainty avoidance- extent to which cultures socialize members to accept ambiguous situations and to tolerate uncertainty] [masculine cultures means sex roles are sharply differentiated and traditional masculine values like exercise of power while feminine means less sharp sex roles and little differentiation was made b/w men and women in the same job] ~managerial implications- (1) employing local citizens to help do business in particular culture (2) transfer executives overseas at regular intervals to expose them to different cultures (3) on guard against ethnocentric behavior (belief in superiority of ones own ethnic group or culture)
franchising
~specialized form of licensing where franchiser not only sells intangible property but also insists franchisee agrees to abide by strict rules as to how it does business [licensing is usually manufacturing firms and franchising is usually service firms] ~advantages- firm is relieved of costs and risks of opening in foreign market on their own, can build global presence quickly and at low cost ~disadvantages- quality control/foreign franchesee may not be concerned about quality and result of poor quality can extend beyond lost sales in foreign market to decline in firms worldwide reputation
managing political risk exposures
~steps in managing political risk- (1) be aware of what political risks are that confront business (2) assess the extent of the risk to which the firm may be exposed in host country ~ownership control risk- risk that government actions will require a counterproductive change to the preferred ownership or corporate governance structure of business ~operational risk- risk that government actions will impose counterproductive constraints on how a business wishes to operate ~transfer risk- risk that government actions will limit transfer of resources and funds across international borders ~political risk assessment- attempt to quantify the degree of political risk by identifying and rating political events that are likely to impact business operations and decisions ~measures taken to mitigate or reduce degree of exposure to long term political risk (once a venture has been established in foreign country)- (1) choosing appropriate mode of entry (exporting, licensing, joint venture) (2) building political support at home and in host country (lobbying political decision makers, building relationships w/ key stakeholders) (3) leveraging international trade and investment agreements (4) sharing burden risk (taking out risk insurance and co-financing ventures w/ multilateral agencies) (5) establish low tolerance policy towards corruption (6) increasing bargaining power when negotiating w/ host governments on conditions of market entry (bargaining power is increased when it has something unique and of high value to offer host government)
instruments of trade policy
~tariff- tax levied on imports/exports [specific tariff- fixed charge for each unit of good imported] [ad valorem tariff- levied as proportion of value of imported good] [tariffs produce revenue for government and protect domestic producers from foreign competition by raising price of foreign goods] [tariffs are pro producer and anti consumer b/c restriction raises domestic prices and tariffs reduce overall efficiency of world economy b/c encourage domestic firms to produce products at home that could be produced more efficiently abroad] ~subsidy- government payment to domestic producer which helps by allowing firms to compete against foreign imports and gain export markets ~import quota- direct restriction on quantity of some good that may be imported into country [tariff rate quota- lower tariff rate is applied to imports within quota than those over quota] [quota rent- extra profit producers make when supply is artificially limited by import quota] ~local content requirement- requirement that some specific fraction of good be produced domestically ~dumping- selling goods in foreign market at below their costs of production or below fair market value (way to unload excess production to foreign markets) [antidumping policies- punish firms for dumping and protect domestic producers from unfair foreign competition]
lecture notes (2)
~transition economies- Transition economies are economies which are moving from command to market economies [Examples of countries with transition economies: (1) Central Europe, Baltic states, Southeast Europe (2) Former Soviet Union: e.g. Russia, Ukraine (3) Asia: e.g. China, Vietnam, Laos, Mongolia] ~market economies- private property rights, freedom of enterprise within the framework of government regulations, resources allocated through market forces (supply/demand), consumer preferences/buyer orientation, profit motive for firms/incentive for individual entrepreneurship ~command economies- state ownership of resources, state allocation of resources through five-year plans, political preferences/production orientation, firms seek to fulfill quotas not make a profit, lack of individual incentives ~transition process- (1) Political change [introduction of liberal democracy, especially multi-party system and protection of political/civil rights] (2) Marketisation [price liberalisation, privatisation/enterprise-level efficiency gains, liberalisation of foreign trade (internationalisation of economy)] (3) Macroeconomic stabilisation [reducing budget deficits, controlling inflation, stabilising currencies] (4) Institutional development [establishing/protecting private property rights, ensuring freedom of enterprise, enforcing rule of law (e.g. on competition, taxation, accounting, IP protection)] ~transition dilemmas- How fast?, How to privatise?, How much discipline?, How to sequence reforms?, How to involve foreign investors?, How to encourage new enterprises?, How to reduce the human cost of transition?
selecting entry mode
~when firms competitive advantage is based on technology it should avoid licensing and joint ventures to minimize risk of losing control over that ~when firms competitive advantage is based on management their valuable asset is their brand name (which is generally well protected by international trademark laws) so this may favor combination of franchising and subsidiaries ~greater the pressure for cost reductions the more a firm will want to pursue combination of exporting and wholly owned subsidiaries (export finished product to marketing wholly owned subsidiaries in various countries)
