International Business: Unit 2 Exam
Islamic law: impact on business
Family law in Egypt is Islamic --Family law determines who inherits the company --islamic law disallows leaving a whole company to a single heir. Because this destroyed Arab contractors in Egypt after its founder died. All the children fought over the company and then it failed. --Today many Muslims want to see more strict interpretation of Islamic Law and more stringent application of Islamic law to business. --EX: Islamic banking - does the Koran forbid the paying and collecting of interest? In the 1800s Muslim scholars said NO, but today they say YES. --Usery: paying super high interest rates
US Corporate Inversion Controversy
Many US companies have considered changing nationalities after they acquire or merge with a foreign company. Politicians have threatened to cut them off from US govt businesses. Target and Burger King wanted to be under Belgium or Irish ownership. But can they? The US signed a govt procurement agreement under the WTO with certain countries (Canada, EU, Switzerland). US companies who become Canadian, Dutch or Swiss would be protected from discrimination under this agreement.
NAFTA
North American Free Trade Agreement 1994: it eliminated tariffs and most nontariff barriers for products and services. It established trade and investment rules, uniform customer procedures, and intellectual property rights. Provided procedures for settling trade disputes. Canada, US, Mexico. It was facilitated by the maquiladora program through which US firms located factories just south of the US border to access low-cost labor without significant tariffs. It kept American businesses close and these products were mainly high labor products. Both Canada and Mexico have 80% of their trade with and 60% of their FDI stocks in the US
How could remittances hurt an emerging market?
The govt is worried about solely relying on remittances. A recession could lead to cut backs on the money that they are relying on. Receiving the money does not mean that new businesses are growing, it just means that more money is spent.
Regional Economic Integration
The growing economic interdependence that results when nations within a geographic region form an alliance aimed at reducing barriers to trade and investment. GATT (General Agreement on Tariffs and Trade) or today the WTO regulated this process. It is a multilateral trade agreement but regional trade agreements are allowed. Over 50% of the world trade today is under some kind of trade agreement.
4 Institutions that Govern the EU
1. Council of the EU: main decision making body on economic policy, budgets, foreign relations, allowing new countries in. 2. European Commission: Represents the interest of the EU as a whole. Proposes legislation and is responsible for implementing decisions of the Parliament and the Council. 3. European Parliament: 785 reps who meet every month to devise new EU legislation, supervise EU institutions, and decide on the EU budget. 4. European Court of Justice: interpret and enforces EU laws and settles legal disputes between member states.
Country Risk Arising from the Home Country Legal Environment
1. The foreign corrupt practices act (FCPA): prohibits US companies from bribing foreign officials and a company has to have accounting transparencies 2. anti boycott regulations: US firms can't boycott in other countries 3. accounting and reporting laws 4. transparency in financial reporting
How NAFTA benefitted the Mexican Economy and how it harmed it?
Benefits: Mexican exports to the US more than quadrupled. Access to Canada and the US helped launch many Mexican firms in industries such as cars, electronics, textiles, medical products, services. Mexico's per capita income rose to over $16,000 by 2014 making it a leading emerging market world wide. In 2014 the unemployment rate was less than 5%. Harms: small scale farmers were displaces by US agricultural imports. When the Mexican govt tried to help them with rural job programs, the US-based Cargill sued under NAFTA and won $77.3 million in damages.
Legal Risk: Big Cola vs Coke and Big Cola vs Modelo & Femsa
Big Cola vs Coke: Mexicos antitrust law supported Big Cola (Ajegroup from Peru) against Cola-Cola. Big Cola vs Modelo & Femsa: Mexicos antitrust law failed to protect the Ajegroup (Peru company) from Mexico's beer duoply.
Ebola and the Liberian Brain Drain
Brain Drain: the educated individuals in a population leave the poor country to find better work and lives. This leaves that poor country in worse shape than before. --A Liberian doctor earns $1500 a month. There are more Liberian doctors working abroad than there are in Liberia. Even the Liberian's presidents son is working in Albany, Georgia
The BRIC markets & controversies
Brazil, Russia, India, China --represent 40% of the world population and cover 25% of the world land mass. --popularized by Jim O'Neill of Goldman Sachs --Some suggested South Africa, South Korea or Mexico should be added in. A non trade economic bloc with South Africa and seeks greater geopolitical clout --many govt believe being added to BRIC would help attract FDI. --Jim O'Neill is promoting MINT economies (Mexico, Indonesia, Nigeria, Turley) --CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa
Economic Impediments
Economies of emerging markets can be volatile (depends on the export of products). --despite industrialization, many are significantly dependent on exports of natural resources. --EX: the Russian Ruble rises and falls with the price of oil --Boom economies are prone to bust --Brazil:in 2009 Brazil was a great market for MNEs, but now they are in trouble. FDI has slowed = economy to decline. There are rapidly rising consumer debt and inflation = the middle class has to cut consumption. Brazils PPP rate is lower than its market exchange rate. There are also low commodity prices that have hurt the economy and exports (sugar)
Competitive Threat
Emerging markets are globally dominant in certain industries. In 2009, China was #1 merchandise exported --competitors from emerging markets are SOE, business groups, or family conglomerates --emerging markets chocolate lovers boost cocoa prices: appetite for chocolate in developing countries have sparked rally in cocoa.
Political/Regulatory Impediments & Protectionism
Emerging markets are more politically risky than developed economies and they have more regulation and govt corruption. --protectionism: emerging markets tend to be more protectionist. Local businesses receive preference over MNEs. --psychic distance: MNEs tended to prefer markets culturally similar to their own. (USA to UK is good, but USA to Saudi Arabia is not)
What is Country Risk?
Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and legal environments. --it is just a risk of something bad happening in that country --it is the sum of: political, regulatory, and legal risk
The EuroZone
A group of European Union nations whose national currency is the euro. Denmark and the UK are not members. Between 2006-2009: Slovenia, Cyprus, Malta, Slovakia join.
Confiscation vs expropriation vs nationalization
Confiscation: seizure of corporate assets without compensation Expropriation: asset seizure with compensation Nationalization: takeover of an entire industry with or without compensation.
Offensive Rationale for Government Intervention
1. National strategic priorities: protection helps to ensure the development of industries that bolster the nations economy. --countries create better paying jobs and higher tax revenues when they support high value industries (IT, automotive, pharmaceuticals) 2. Increased employment: protection helps preserve domestic jobs (short term). However protected industries become less competitive over time, especially in global markets, leading to job loss in the long run.
What is the relationship between economic and political freedom?
As you increase economic freedom you increase political freedom.
The GATT to WTO
1995 GATT was taken over by WTO and grew to 161 nations. Both of them presided over the greatest global declines in trade barriers in history.
Diaspora
Is from the Greek meaning 'a scattering or sowing of seeds' Def: an emigrant community with strong attachments to the homeland that endures across generations. They usually have a vision of returning home at some point.
Classifying Economies
1. Advanced economies: post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure. --The richest countries:US, Canada, Western Europe, Australia, Japan = sometimes called the Triad 2. Developing economies: low income countries with limited industrialization and stagnant economies. --Bangladesh, Bolivia, Zaire 3. Emerging market economies: former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth --Brazil, indonesia, Malaysia, Mexico, Poland, turkey
MNE's Manage Political Risk
--Choose entry/finance options that put little capital at risk --seek insurance options from home govt or transnational organizations (World Bank) --make money fast --diversify: dont put all your business in one risky country
MNE's Managing Regulatory Risk
--Pay attention to government policy statements --Understand how economic situation could affect regulations --Utilize scenario planning This is more predictable than political risk.
MNEs Managing Legal Risk
--know and obey the laws --stay out of court --stay out of jail
Market Potential for Emerging Markets
--large consumer markets. --elites are MNEs traditional markets --growing middle class while the poor are increasingly of interest --business markets (B2B) are important to MNEs --In asia is the most important region for new elevator sales --emerging market and developing countries May have more purchasing power than is at first due to purchasing power parity and the informal economy.
The Palestinian Study (follow-up)
-Little actual investment -the obstacles remained = corrupt govt -actual investors held extreme opinions concerting the Palestinian Authority -the re-acculturation challenge = culture shock -the ethnic advantage paradox = maybe someone never had an ethnic advantage.
Other dimensions of culture
1. Ethnicity: different heritages tend to perceive reality differently. 2. Gender: men and women experience the world differently 3. Age: seniors, baby boomers, teenagers, etc perceive the world differently 4. Language: both reflects and is reflected by cultural differences 5. Occupation: perspectives differ among blue collar workers, professionals, or artists.
Why do nations pursue economic integration?
1. Expand market size: it increases the size of the marketplace for firms since the economic bloc. Buyers can access larger selections of goods = more options for buyers. 2. Enhance productivity and economies of scale: bigger market facilitates economies of scale. Internationalization inside the bloc helps firms learn to compete outside the bloc. Competition and efficient resource usage inside the bloc leads to lower prices for bloc customers. 3. Attract investment from outside the bloc: compared to investing in stand-alone countries, foreign firms prefer to invest in countries belonging to an economic bloc (General Mills, Samsung = EU) 4. Acquire stronger defensive and political posture: bloc member countries have a stronger defensive posture relative to other nations and world regions. (this was a key motives for the EU forming).
Levels of Regional Integration
1. Free trade area: simplest, most common arrangement. The countries agree to eliminate formal trade barriers within the bloc, which maintaining an independent international trade policy with countries outside the bloc. (NAFTA) 2. Customs Union: similar to free trade except the members have the same trade policies towards nonmember countries by having a common tariff and nontariff barriers on imports from those nonmember countries (MERCOSUR) 3. Common market: like customs union, except that products, services, and factors of production (capital, labor, tech) can move freely among member countries (EU) 4. Economic Union: like a common market, but members aim for common fiscal and monetary policies and standardizes commercial regulations. (The EU is moving towards this by trying to have the Euro as the single currency)
Implications of Regional Integration for the Firm
1. Internationalization by firms inside the economic bloc: regional integration facilitates company Internationalization. (Home Depot expanded into Mexico after NAFTA was passed) 2. Rationalization of operations: by restructuring and consolidating company operations, managers can develop strategies and value-chain activities suited to the region as a whole, not just individual countries. --the goal: cut costs, redundancy, increase efficiency via scale economies. Firms need to centralize production and marketing 3. Mergers and Acquisitions: economic bloc lead to mergers and acquisitions. It is the tendency of one firm to buy another to merge and form a larger firm. --the EU was responsible for the emergence of pan-European companies (Europe buys Europe) 4. Regional products and marketing strategies: firms cut costs by standardizing products and services. --Case Inc. reduced its Magnum line of tractors from 17 to only a few versions in Europe = rationalized the brand across borders = Eurobrands (Pan-regional products = same brands across many countries) There are over 400 integration agreements worldwide. Mexico is the happiest because they want to join everything.
Characteristics of The European Union: A full Economic Union
1. Market access: tariffs and most nontariff barriers have been eliminated. 2. Common market: barriers to cross border movement of production factors have been removed. 3. Trade rules: cross-national custom procedures and regulations have been eliminated, which has streamlined transportation and logistics within Europe. 4. Standard harmonization: technical standards, regulations, and enforcements have been harmonized. 5. Common fiscal, monetary, taxation, and social welfare policies is the ultimate goal over time.
Defensive Rationale for Government Intervention
1. Protection of the national economy: weak or young companies need protection from foreign competitors. --India imposed barrier to shield its huge agricultural sector. 2. Protect of an infant industry: a young industry might need protection to give it a change to grown and succeed. --Japan long protected its car industry. 3. National security: the US prohibits plutonium to North Korea 4. National culture and identity: Canada restricts foreign investment in its movie and TV industries.
Consequences of Protectionism
1. Reduced supply of goods and buyers 2. price inflation 3. reduced variety, fewer choices available to buyers 4. reduced industrial competitiveness The US steel industry: has tariff on imported foreign steel to protect local companies from foreign competition. This gives the US steel industry time to restructure and revive itself. This will result in... --higher steel costs --increased production costs for firms that use steel (Ford) --reduced prospects for selling products in the world market, making US steel firms less competitive. Steel tariffs were removed within two years.
What can diasporas do for the homelands?
1. Remittances: Money earned abroad and sent home to families. --in 2017 $613billion was sent home: this far exceeds official development assistance. --remittances vs exports: 38% of exports in the Philippines were remittances. Half of the exports in Sri Lanka were remittances and 200% of exports in Nepal were remittances. 2. Encourage exports from the homeland: --Tulumba.com: is a website where you can buy anything from Turkish culture. 3. Invest in the homeland because of ethnic advantage: I know my homeland country best, therefore I know what they want and how to sell stuff efficiently. --Ethnic advantage could also be imagined. You do not know what your country likes. --Motivation: altruism/normative motivation (being nice to others) "the diaspora should invest and not just donate to the homeland" There is also social motivation: doing something good so that you look good in that country.
Three major types of Political systems & country examples
1. Totalitarianism: govt controls all economic and political matters. --either theocratic (religion based) or secular (communist party) --power is sustained via secret police, propaganda, and regulation of free discussion and criticism. --EX: Cuba, North Korea, some of Africa (Sudan) 2. Socialism: govt's role is to control the basic means of production, distribution, and commercial activity. --capital is vested in the state and used primarily as a means of production for use rather than profit. --group welfare outweighs individual welfare. --state owned enterprises dominates sectors --govt intervention in the private sector is extensive = corporate income tax rates are higher. --some socialist countries aren't actually 'socialist' --EX: China, Bolivia, Egypt, India, Russia, Venezuela (could also be totalitarianism), Romania 3. Democracy: limited government meaning the govt performs only essential functions that serve all citizens (national defense, law and order, foreign relations, basic infrastructure) --private property rights: ability to own property and assets and to increase these by accumulating private wealth. --'openness' meaning lack of regulation and barriers in foreign markets. Competition on quality (improves overall product) and increased competition (increase efficiency and lower prices). --EX: Australia, Canada, Japan, New Zealand, US, European countries, latin countries
Country Risk Arising from the Host Country Legal Environment
1. foreign investment laws 2. controls on operating forms and practices 3. marketing and distribution laws 4. laws regarding income repatriation 5. environmental laws 6. contract laws 7. inadequate or underdeveloped legal systems 8. internet and e-commerce regulations
Types of Government Intervention
1. tariffs 2. quotas 3. Local content requirements 4. subsidies 5. countervailing duties 6. regulations and technical standards 7. administrative and bureaucratic procedures 8. FDI and ownership restrictions
Economic Bloc
A geographic area consisting of two or more countries that agree to pursue economic integration by reducing tariffs and other barrier to the cross border flow of products, services, capital, ~labor. EX: EU, NAFTA, APEC, ASEAN, MERCOSUR
The European Union today
28 members and the founders are Belgium, Italy, France, Germany, Luxembourg, and Netherlands. New members (Poland, Hungary, Czech Republic) are low-cost manufacturing sites. (Croatia joins in 2013) New members are typically from Eastern Europe (once part of Soviet Union) and they are mostly emerging markets with fast economic growth rates.
Political system
A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The system also defines how these groups interact with each other.
Religion
A system of common beliefs or attitudes regarding a system of thought that people consider sacred, divine, or the highest truth; and the associated moral values, traditions, and rituals. --religion influences culture, and therefore business and consumer behavior. --major religions: christianity, islam, hinduism, buddhism, judaism in that order --EX: Protestant work ethic: they emphasized hard work, individual achievement and a sense that people can control their environment (capitalism)
Tariff & its practical effects Harmonized System
A tax imposed on imported products. --It increases cost to the importer, exporter, and usually the buyer of the product --discourages product imports --generates govt revenue --some countries have export tariffs because they have a depreciation of currency --EX: Switzerland (charged 37% tariff on imported agricultural products) and Bolivia (charged 35% tariff on apparel and textiles.) Harmonized system: internationally standardized system of names and numbers to classify products. Countries must based their tariffs on these product classifications.
Government Policy Towards Diaspora Investment
Aiding diaspora investors --One-stop shop: Afghan Investment Support Agency, ProNicaragua --Distinct office for diasporas: Ghana and there are high level access in Afghanistan, DR. --India has overseas facilitation centers.
What role can diasporas play in business development in emerging markets? What problems might they face?
Business development means leading to investments in emerging market.
Famous Business Diasporas
Chinese Web: the Chinese famine caused many Chinese families to spread out across Asia. But they still had ties to the homeland. Indian High-tech community: many Indians went to Silicon Valley and to do tech/math stuff. But they wanted to be more creative and venture out of tech but the US system said no.
Common Law vs Civil Law vs Islamic Law
Common law: a legal system that originated in England and spread to Australia, Canada, USA, British. (AKA: Case Law) --belief that law of the land depends on past laws --The basis of law is tradition, past practices, and legal precedents set by courts. --judges have the power to interpret laws based on the given circumstances of the case. So common law is flexible. --EX: Australia, Canada, Ireland, New Zealand, UK, US Civil law: strict law that are not subject to interpretation. --the laws have become 'codified' and clearly written by legislative bodies. --most of W. Europe, Latin America, Japan, Russia, South Korea Islamic law: based on holy writings and religious traditions --in modern era, commercial or business law in Muslim countries often adopted from European law.
Administrative and Bureaucratic Procedures & its practical effects
Complex producers or requirements imposed on importers or foreign investors that hinder trade and investment. --it slows the import of products or services --hinders or delays firms investment activities --EX: Russia imposes extensive inspections on bureaucratic procedures on the import of alcoholic beverages
Strategies for doing business in Emerging markets
Customize offerings to unique emerging market needs: successful firms develop an understanding of what buyers, local suppliers, and distribution channels in emerging markets want and they adapt to it. --EX: Nestle in Brazil: smaller packaging means lower prices, so they made their candy in smaller packaging to reduce prices to meet the low standards of living in Brazil. --EX: Disney in India: Disney sells school bags in India hat are larger than those sold in the US because Indian schools do not have lockers. --EX: Cadillacs in China: have more legroom for rear-seat passengers because wealthy Chinese ride in chauffeur driven cars
Temporal Orientation
Depicts the relative significance individuals attach to past, present, or future --Future: USA (people think about future jobs, schools, money) --Present: Mexico (not going to work all the time, just living in the moment) --Past: Arab world (always looking at the past as if it were yesterday. Xenophobia) --Time is money! Don't waste time. Never do today what you can put off until tomorrow.
Beyond Takeovers
Direct sales in China were forbidden with two days notice. There was an increase in scandals in direct sales, so the Chinese govt shut DS companies down. Advertisements during the Year of the Pig was forbidden in China because the govt said so. There was no reason why = discontinuity. Both of these changes were politically motivated.
Remittances are more stable than FDI and are anti-cyclical. Why?
During a recession FDI are doing poorly, but remittances increases even more because those family members are struggling during the recession and the diaspora family send them even more money to compensate.
Diaspora Investment Importance
Generates new jobs & increased income Turns "brain drain" into "brain gain" --people study abroad and take that knowledge back to the homeland Contributes to the diffusion of technology and production knowledge Assists in the internationalization of domestic firms --Diaspora investors can serve as repetitional intermediaries for domestic firms in foreign markets = stimulating foreign investment from non-diaspora sources. --Diaspora is good in countries that do not have MNEs because it increases their reputation. Investment can take many forms: real estate, equity purchases, new ventures, or other mutual funds. --investment in diaspora countries could be useful for countries that are less attractive by non-diaspora investors due to small markets, inadequate infrastructure, etc. (MNEs not interested in them)
Demographics (Demographic dividend) and Emerging Markets
Human population will peak in 2070 but populations in countries will shrink before that. Largely due to the high cost of raising a child in modern society. --EX: China's one child policy and favoring boys. Now they can not get the population up. In 2050 60% of the population will be over 60 because of this. --EX: Mexican population is aging 5x faster than US population. --Demographic dividend: when fertility rates fall this decreases household size and encourages consumer spending. This dividend helped the Asia-Pacific region to become an exciting market in the past generation. --Supporting an old age population is very expensive and this is where emerging markets are headed. They will become old before they become rich. --Emerging markets are exciting, difficult, challenging
Role of Religion in Islamic Societies
Islam is the basis for govt, legal and social systems. Muslims view God as the source of all outcomes, they are relatively fatalistic and reactive. --the Qur'an prohibits drinking, gambling, usury, immodest exposure. These prohibitions affect firms dealing in various goods. --Food has to be Halal and no pork --EX: Nokia launched a mobile phone that shows Muslims the direction towards Mecca --EX: Heineken launched a non-alcoholic malt drink called Fayrouz
Cultural Differences in Entrepreneurship
It is said that when someone starts a new business in ... --Hong Kong: the whole family works to make it a success --USA: friends put up their money for entrepreneur --Turkey: friends will ask the entrepreneur to hire their sons --India: the administrative system will impose red tape.
The USA supported both Israel and Jordan with the US-Israel and US-Jordan Free Trade Agreements. What did this mean?
It means that we are not choosing Jews over Arabs. We support them both equally.
Chicken Noodle Soup for the African Soul
Kenyans seek answers to problems in US self-help books. --This is an example of how some standardized products can be successful overseas. But it also showed that adaptation and new product development is necessary. --the cultural fit reflects social change: as more people move from rural to urban areas, traditional problem-solving mechanisms no longer work. There are also new problems that occur in urban areas (self-esteem, illnesses, divorce) --But cultural differences cause much to be lost in translation: extended families, arranged marriages (opposite of self help books), and how weight can be depicted differently in countries
Hall's Context of Language
Low-context cultures: communication is explicit and words tend to retain their meaning in all situations. (English, German, Swiss, Scandinavian) High-context cultures: communication is more implicit and the meanings of words change deepening on who is speaking to whom, where that person is speaking, and under what circumstances they are speaking. (Japanese, Chinese, Korean, Viet, Arab)
Trouble in MERCOSUR
MERCOSUR was traumatized when Brazil devalued its currency significantly against the dollar while Argentina did not. Products in Brazil could then be cheaper than in Argentina, flooding Argentina with Brazilian exports and diverting most FDI to Brazil. *Mercosur is the South American trade bloc
Macro vs micro risk
Macro: threat to all firms in a country (a revolution breaks out at Iran ports and now that effects imports/exports) Micro: threat to an industry or a firm, or firms from a certain home country (nationalization of oil, raising the prices of a countries goods because you dont like them) --EX: Russia had to close down 4 McDonalds because of sanitary violations.
Euroskeptics & BREXIT
Many europeans believe the European Parliament is too powerful and they want the power to shift back to the national govt. BREXIT: is the 'British exit' meaning the UK is leaving the EU.
Bad EU laws
May 2013, EU publishes a law forbidding restaurants to serve olive oil in refillable bottles. It was to protect the restaurant patrons (they do not know what kind of oil they are eating) But a week later, the law was removed cause it was dumb.
Diaspora Investment: Post-conflict The Liberian Post-conflict diaspora
May contribute to peace by providing capital stability. May create a stabilization-signaling effect to non-diaspora investors thus promoting future investments. Liberia: population was displaced by war, 3% of the population live outside the country, brain drain, and they depend on remittances. --Liberian diaspora investment interest is drive by social-status motivations, emotional motivations, and a perception of diaspora investment advantage.
Differences among Emerging Markets vs difference within Emerging Markets
Mexico vs China: different locations, languages, cultures, geography, environment, industries. Mexico vs Mexico: rich cities vs poor cities. What you sell or how you sell matters.
Monochronic vs Polychronic Use of Time
Monochronic: time is planned and schedules are set in stone. There are no interruptions during meetings and be on time. --companies want to be monochronic Polychronic: accept more multitasking. People can take precedence over agendas. It's okay to be late and to interrupt. Acceptable to interruption shows interest in the conversation. --Latin cultures, asian cultures, French culture
Halal Revolution
Nestle is the largest producer of halal food in the world.
USMCA (US-Mexico-Canada Agreement) 2018
North American content for Mexican assembled automobiles increased to 75%. Ten-year protection program against generic drug production on expanded list of pharmaceutical products. Better access to Canadian market for US dairy products. Currently it has only been ratified by Mexico. This only addresses the smaller problems, not the larger ones.
Purchasing Power Parity
PPP adjustment prices a more realistic indicator of purchasing power of consumers in emerging and developing economies. PPP adjust per capita GDP represent the amount of products that consumers can buy in a given country, using their own currency and consistent with their own standard of living. --in PPP emerging markets look better and not as poor --the US market exchange rate and PPP are the same. --PPP exchange rates make countries look better than if they were using the market exchange rate --but the high prices do not reflect buying power.
Obstacles to Diaspora Homeland Investment
Perceptions are similar to other potential investors: realistic problems they had to face --infrastructure --lack of institutions --political risk --economic risk --corruption
Regulatory change vs political risk
Political risk: more unexpected and drastic changes Regulatory change: more moderate and predictable changes in the business environment due to changes in law. People are more prepared for these changes.
Managing country risk
Proactive environmental scanning: --risk publications: Business Monitor --consulting firms: Business entrepreneurial risk intelligence --embassy and trade association officials --consultants experienced in the host country --employees working in the host country
The Hidden Economy
The informal sector where income is not reported to authorities. --EX: Peru has a very large hidden economy because they have many hoops and barriers to have legal companies. These hidden economy companies generate work without govt interference. (42% construction, 45% transportation, 16% manufacturing) --disadvantages: govt can shut you down easily, can not get loans easily
Evolution of Government Intervention: Trade
Protectionist tendencies, the Great Depression, and isolationism shaped early 1900 world trade. The Smoot-Hawley Act 1938: raised US tariffs to more than 50% (today it is 3%) In 1947: 23 nations signed the GATT which promised: --reduced tariffs via continuous worldwide trade negotiations --created an agency to supervise world trade --created a forum for resolving trade disputes.
Quota & its practical effects
Quota: quantitative restriction on imports of a product during a specified time. (when tariffs are not working) --it can give early importers monopoly power and the ability to charge higher prices. --harms late importers --usually results in higher prices to the buyer because that country has a specific quota to reach. --EX: apple vs US: apple wants to use less Chinese influences and instead wants to expand production in Texas. But only if apple can import materials from China. --EX: Japan maintains strict quotas on various types of seafood.
Regional Integration in Emerging Markets
Regional integration in developing countries has been much more challenging than in European countries. Lebanon-Syria FTA soon fell apart because Lebanon had very low tariffs and Syria had very high tariffs.
Local Content Requirement & its practical effects
Requirement that firms include a minimum percentage of locally sourced inputs in the production of a given product or service. (Sometimes a quota is put on locally sourced objects so the govt can benefit) --EX: at least 50% of the value of all cars assembled in Venezuela must be from parts or other inputs produced in Venezuela. --There is a motivation to support local industry and employment --It also fosters transfer of technology --It discourages imports of raw materials, parts, and supplies, which harms manufacturers sourcing options. --May result in higher costs and lower product quality for buyers.
FDI and Ownership Restrictions & its practical effects
Rules that limit the ability of foreign firms to invest in certain industries or acquire local firms --it limits how much foreigners can invest in a country and the proportion of ownership that foreigners can hold in firms in the country. --EX: In Switzerland, foreign-owned insurance companies must be managed by a Swiss national and most board members must be European citizens. --investment incentives were common during the 1970-1990s but they are less common today
Regulations and Technical Standards & its practical effects
Safety, health or technical regulations; labelling requirements. --it May hinder the entry of imported products --reduce the quantity of available products resulting in higher costs to importers and buyers. --EX: Saudi Arabia bans imports of firearms and used clothing. --EX: the EU requires extensive testing on thousands of imported chemicals.
Culture and Nationality
Shared culture has been a building block of the modern nation state but... --many countries are multicultural --border lands May be bicultural (they are very different from mainland cities) --colonialism resulted in non-cultural boundaries in many developing countries.
International Law: code vs common law
Some International law is a blend of common and civil law traditions. Trademark protection is monitored under the WTO. --Code law: first to register the brand owns the brand. (who registered the name first) --Common law: but you can contest this if you already use the brand. (who used the name first)
Protecting Cultural Identity
Some countries protect cultural content in movies and TV shows. France was once renowned for this. In 2014, China limited foreign-media content to 30% on Chinese video-streaming sites.
Subsidies & its practical effects
Subsidy: financing or other resources that a govt grants to a firm or group of firms to ensure their survival or success (infrastructure) --Subsidies increase the competitive advantage of the grantee, while diminishing the competitive advantage of those that do not receive the subsidy. --EX: Turkey gives export subsidies up to 20% to local Turkish producers of wheat and sugar. --EX: Europe and US provide huge agricultural subsidies to farmers. EU subsidies represent 40% of its budget. --EX: in China the automotive and other MNEs owned by SOE hybrids receive huge financial resources. --EX: Solyndia was subsidized by the US govt unsuccessfully.
Anti-dumping duty & its practical effects
Tax charged on an imported product whose price is below usual prices in the local market or bowl the cost to manufacture the product. --reduces or eliminates the competitive advantage of imported products prices at abnormally low levels. --these laws protect local industries from foreign competition --if there are no local competitions, then the govt would enjoy the very low prices --EX: US imposed anti-dumping duties on imports of low-cost steel to support US based steel manufacturers. --Increasingly developing countries often bring charges to the WTO against the US for dumping.
International Business and Religion
The Starbucks in Japan are blessed at store openings by Shinto Priests,
Government as Regulator: Ease of doing business ranking
The World Bank site ranks these countries by ease of doing business in their national environments. 1. New Zealand 2. Singapore 3. Denmark 4. Hong Kong 5. South Korea The US is #8 because we have more regulation now. Even though a country might be high on the 'easy of doing business' does not mean that it is great at every sector in every industry. (Hong Kong #4 overall but #61 for registering property). You should check your country for specific elements that your business wants before internationalizing. 'Doing Business Rankings' exist for cities as well: Moscow vs Russia. The city has better infrastructure and schooling.
Culture
The learned, shared, and enduring orientation patterns in a society. People demonstrate their culture through values, ideas, attitudes, behaviors, and symbols. --traditions, morals, habits, religion, art, social systems, language --culture is learned through socialization: the process of learning the rules and behavioral patters appropriate to ones society. (From ages 0-12) --culture is normative: it establishes what is expected in society (right vs wrong) --culture is like an iceberg: above surface are visible characteristics, Below the surface are assumptions, attitudes, and strong values that influence decision making, relationships, etc --EX: When prof went to Switzerland, the city and apartments were decorated in black and orange, which for the US means halloween. But for the Swiss it was pretty. We think the Swiss are wrong because of our culture.
What is Political Risk and example of countries that are risky
The likelihood the business environment will change in a way that encompasses: 1. discontinuities: big sudden changes (govt buying out an industry) 2. uncertainty: unable to predict govt stability 3. political forces motivate the change: who has the authority to say what is right or wrong. 4. significant business impact as a result: EX: Not risky: USA, UK, Switzerland, Canada, Germany, Japan Moderate: Poland, Hungary, China, Mexico, India, Egypt Risky (war struck): Iraq, Sudan, Cuba, Armenia, Russia, Congo Most of International business is in moderate countries. Nationalist govt is Xenophobic (scared of foreigners).
Countervailing Duty & its practical effects
They are duties imposed on products imported into a country to offset subsidies given to producers in the exporting country. It levels the playing field by wiping out competitive advantage of the subsidiary company. --it reduces or eliminated the competitive advantages provide by subsidies. --EX: india imposes countervailing duties on import of many products.
How do remittances help an emerging market?
They are sending more money into the economy based on consumerism. In dire times, remittances are good.
Why does the government intervene in trade?
They intervene in trade and investment to achieve political, social, or economic objective. Govt intervention is an important dimension of country risk. Govt impose trade and investment barriers that benefit interest groups (domestic firms, industries, labor unions) Govt intervention alters the competitive landscape by hindering or helping the ability of firms to compete internationally
Evolution of Government Intervention: FDI
This has been harder to liberalize at a multilateral level. However, bilateral agreements and economic bloc have liberalized the environment for FDI. --these agreements have give foreign investors the same rights and protections as local investors have.
Regulatory Risk
This is where international business usually loses money. EX: A beer company in Russia was closing down its 3rd brewery because of steep declines in consumption driven by tougher regulation and higher taxes.
Cultural Attitudes Towards Rules
Tight cultures: many rules, norms, and standards for correct behavior. --they criticize and punish rule breakers --more isolated and less influences by other cultures Loose cultures: few rules, norms, and standards for correct behavior.
The importance of language in international business Languages of the world & USA
To get translations right and to have the correct context of the sentence. Context is complicated based on the language. --Belgium: Dutch, French, English --Cameroon: French, English --Pakistan: Urdu, English --Singapore: Chinese, English, Malay, Tamil --USA: does not have an official language
Three types of economies (of the three political systems) --Which one does Iran fall under?
Total: 'command economies' where the state makes all decisions on what to produce, how much to product, and what prices to charge. They concept of 'profit' is unknown. Democracy: 'market economies and capitalism' where decisions are largely left to the market forces = supply and demand. Socialism: 'mixed economies' which have features of both market and command economies, combining state intervention and market mechanisms (Singapore) --Iran
Risks Across Countries
Trade Sanctions: bans on International trade --could be due to economic war --Does one country have the economic power to hurt another? --a large coalition of countries work best --requiring a minor change tends to work --requiring a major shift in a target's worldview is harder to accomplish. Extraterritoriality: the application of home-country laws to actions in other countries. --Foreign Corrupt Practices Act 1977: prohibits US companies from bribing foreign officials and a company has to have accounting transparencies. Any American company falls under US law, no matter where they are in the world.
Renegotiating NAFTA
Trump wants to renegotiation stating as a top priority in the US trade deficit with Mexico but is also concerned about US inability to impose tariffs on partners, subsidized state-owned enterprises, and currency manipulation
Cultural differences: Walmart vs India
Walmart was only allowed to act as a supplier to small business. So the company handed out cards in English explaining that merchants would have to present their business license to buy for Walmart. The problems: --India did not want Walmart --the cards were in English but Indians don't speak English. --india has an informal economy = so people do not have business licenses
Income Distribution
Wealth concentration --Belgium the top 10% = 20% income --Colombia the top 10% = 46% income
