International Business: The New Realities (CH. 1)

International business
Performance of trade and investment activities by firms across national borders
Globalization of markets
ongoing economic integration and growing interdependency of countries worldwide
International Trade
Exchange of products and services across national borders, typically through exporting and importing.
Exporting
The strategy of producing products or services in one country (often the producer’s home country), and the selling and distributing them to customers located in other countries
Importing or global sourcing
procurement of products or services from suppliers located abroad for consumption in the home country or a third country
International investment
The transfer of assets to another country or the acquisition of assets in that country
International portfolio investment
Passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns.
Foreign direct investment (FDI)
An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment
Cross-cultural risk
A situation or event where a cultural misunderstanding puts some human value at stake.
Country risk
Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments.
Currency risk
potential harm that arises from changes in the price of one currency relative to another
Commercial risk
firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures.
Multinational enterprise (MNE)
A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries
Small and medium-sized enterprise (SME)
A company with 500 or fewer employees
(as defined in Canada and the US)
Born global firm
a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets.
STARTING CHAPTER 2
GLOBALIZATION AND THE INTERNATIONALIZATION OF THE FIRM
Does distance not matter anymore?
Yes; investing in Mexico versus Japan (from the U.S.), but advances in technology have made distance less of a problem.
ICT?
Information and Communications Technology. Levels the playing field, we are able to outsource work now.
Globalization affects everyone, but it affects some industries more than others. Globalization especially affects industries that experience:
Expensive product development costs
Fast changing technology
Similar buyer wants and needs worldwide
Low trade barriers and few regulatory constraints
Firm’s Value Chain
Upstream value chain activities:
Market Research->R&D->Sourcing

Production

Downstream value chain activities:
Marketing->Distribution->After-sales service

Offshoring and the Flight of Jobs:
Jobs are lost as firms shift production of goods and services abroad in order to cut costs and obtain other advantages. Firms benefit, but communities and industries may be disrupted.

Firms benefit; individuals/industries detrimental from offshoring.

National prosperity is strongly associated with
-Participation in international trade and investment
-The nation’s level of economic freedom
Economic freedom….
Economic freedom is the extent of government interference in business, strictness of the nation’s regulatory environment, and the ease with which economic activity can be carried out
Who has Profited Most
from Liberalization?
Biggest winners of liberalization were the super poor and super rich countries.

After 25 years, it appeared that both rich and poor countries grew faster than middle income countries

But some middle income countries are now doing well again.

Contagion
the tendency of a financial or monetary crisis in one country to spread rapidly to other countries, due to the ongoing integration of national economies.

Caused the global recession. Began in the U.S. and spread rapidly because of globalization.

Globalization of Markets
ongoing economic integration and growing interdependency of countries worldwide.
World Trade Organization
a multilateral governing body empowered to regulate international trade and investment
value chain
the sequence of value-adding activities performed by the firm in the course of developing, producing, marketing, and servicing of product.
Reciprocity
increasingly enforced by the WTO.
Exporting is the fastest, easiest and least risky way to enter foreign markets… T of F
True
MNEs leverage ICTs to optimize their performance, managing operations around the world.
leveled the playing field… able to outsource work.
ICTs opened the global marketplace to firms that historically lacked the resources to internationalize.
T or F
True
CAD
computer-aided design of products
SECTION 2
PARTICIPANTS IN INTERNATIONAL BUSINESS
Focal firm
are primarily large multinational enterprises (MNEs) and small and medium-sized enterprises (SMEs). Some are manufacturing businesses, while others are in the service sector.
Distribution channel intermediary
is a specialist firm that provides various logistics and marketing services for focal firms as part of the international supply chain, both in the focal firm’s home country and abroad. Typical intermediaries are independent distributors and sales representatives, usually located in foreign markets where they provide distribution and marketing services to focal firms on a contractual basis.
Facilitator
is a firm or an individual with special expertise in banking, legal advice, customs clearance, or related support services that helps focal firms perform international business transactions. Facilitators include logistics service providers, freight forwarders, banks, and other support firms that assist focal firms in performing specific functions. A freight forwarder is a specialized logistics service provider that arranges international shipping on behalf of exporting firms, much like a travel agent for cargo. Facilitators are found in both the home country and abroad.
Freight forwarder
a specialized logistics service provider that arranges international shipping on behalf of exporting firms.
Governments
are active in international business as suppliers, buyers, and regulators. State-owned enterprises account for a substantial portion of economic value added in many countries, such as Russia, China, and Brazil. Governments in advanced economies like France and Sweden have significant ownership of companies in telecom, banking, and natural resources. The global financial crisis that began in 2008 led governments to step up their involvement in business, especially as regulators.
Diasporas
emigrant communities with ties to the homeland. Ex) Jews living outside of Israel.
Largest MNEs in the Fortune Global 500
A notable transition in the first decade of the 21st century is the rise of emerging market MNEs. This trend is illustrated in the exhibit, which shows the number of MNEs listed in Fortune magazine’s “Global 500”, the 500 largest multinational firms worldwide. The exhibit reveals that just as the number of MNEs based in the United States and Japan has declined steadily during the 2000’s, the number of MNEs based in Brazil, China, India, and Russia has risen. The increase of Global 500 MNEs in China, from nine firms in 2001 to 61 today, is particularly significant. We should note that during the 2000’s the number of Global 500 MNEs based in each of France and Germany has remained relatively stable at about 36 firms each. The number of MNEs based in the United Kingdom has held steady at about 33, and South Korea has remained at about 13 firms. The trend suggests a sort of “balancing” of MNE power – where the United States and Japan once dominated the Global 500, today emerging market MNEs are on the rise.
Can Local Firms Compete With MNEs?
“These days new local brands are always coming at you. And we take them very seriously, whereas five years ago all eyes were on the other multinationals.”
Defender Strategy for Local Firms:
Local firms can leverage
-Knowledge of local tastes/ customs
-Good relationships with local distributors and/or suppliers

Local governments may show preference to local firm

Extender Strategy for Local Firms
Assets that work for defenders may also work in similar markets abroad
Contender Strategy for Local Firms
Local firms upgrade capabilities to compete globally in global industries that requires global scale R&D and/or manufacturing

Turkey’s Arcelik (Beko) was a successful contender in Europe

Dodger Strategy for Local Firms
Local firms cooperate with global competitors rather than compete with them

They agree to a joint venture
They sell out to MNEs

Example) In the documentary about Kosmos energy company doing off shore drilling off the west coast of Africa… the new government stepped in and made the entities combine their venture.

The Power of Market Preemption
-Disney in Hong Kong faced surprisingly tough Chinese competition
-Local firms increasingly expect MNEs to arrive in their markets and prepare for this
SOEs
State-Owned Enterprise

-Mid-20th century
-Especially in communist countries and developing countries
-These firms were established to support government development plans

Advantages of SOEs
-Priority to government financing
-Protected from bankruptcy
-Often granted a monopoly at home
Disadvantages of SOEs
-Lack of funding due to government cutbacks
-Lack of competitiveness
-Forced to administer auxiliary government objectives
Privatization
-The sale of state-owned enterprises or their assets
-A major trend worldwide in 1990s
-Still, SOEs remain formidable competitors in some markets
SOEs in China
Still important part of the economy

Many Chinese companies are SOE hybrids – companies where government holds a partial (though usually significant) equity position

SOE hybrids: government holds partial ownership (equity)

SOEs are adversaries for foreign firms but they also like to hire foreign managers!

Small and Medium-sized Enterprise (SME) as a Focal Firm
-A relatively small player in its respective industry, usually defined as firms with 500 or fewer employees.
-Constitutes the great majority of firms worldwide
SMEs usually create the most new jobs.

Characterized by limited resources, which often prevents internationalizing via FDI. Instead, SMEs usually internationalize via exporting.

Many more SMEs do international business today than ever before.

Distribution Channel Intermediary
Specializes in physical distribution and marketing. Connects the focal firm with the end user in the foreign market.

Assists the focal firm by providing logistics services such as warehousing and customer support

Especially critical to exporters
that do not engage in FDI

Based either in the
foreign market or
in the home country

Intermediaries Based in the Foreign Market
Foreign Distributor:
Takes title to the exporter’s goods and performs marketing functions such as sales, promotion, and after-sales service on the exporter’s behalf.

Serves as the extension of the focal firm in the foreign market.

Also arranges for local transportation and advises focal firms on how to function effectively in the local market.

Intermediaries Based in the Foreign Market
Agent:
Also known as a broker.
Does not take title to the goods.
Works on a commission basis to bring the buyer
and seller together.
Intermediaries Based in the Foreign Market
Manufacturer’s Representative:
Works under contract by the exporter to represent and sell its merchandise in designated territories.
Acts as a contracted salesperson in a designated territory.
Intermediaries Based in the Home Country
Trading Company:
An intermediary that handles imports and exports of various raw materials, parts, and finished products.

Large trading companies are typically high-volume, low-margin resellers.

Many deal primarily in commodities such as grains, minerals, coal, and metals (e.g., Cargill in the USA).

In Japan, trading companies are key players in international trade. E.g., Mitsubishi, Marubeni, Mitsui, Sumitomo – all firms in Fortune’s Global 500.

World’s largest trading companies
The exhibit provides a list of the largest trading companies in the world. What strikes you about these firms? First, they tend to be high-volume, low-margin resellers dealing largely in commodities such as grains, minerals, and metals. Second, note that five of the ten are based in Japan, where trading companies long have played a critical role in external trade. Being an island country with few natural resources, over time Japan became very good at importing parts and materials needed in manufacturing. Trading companies are also common in South Korea, India, and Europe.
In Japan, large trading companies are known as sogo shosha. The sogo shosha usually engage in both exporting and importing and are specialists in low-margin, high-volume trading. They may also supply a range of manufacturing, financial, and logistical services. To stay close to foreign markets, managers of the sogo shosha travel widely, employ extensive networks of local offices, participate in trade shows, and establish business relationships with agents and distributors worldwide.
The sogo shosha include giant firms that are little known in the West, such as Mitsui, Sumitomo, Itochu, and Marubeni, all firms on the Fortune Global 500. In the 1990s, total trade of the nine top sogo shosha averaged about 25 percent of Japan’s total GDP. They typically have extensive global operations. For example, Marubeni (www.marubeni.com) has hundreds of subsidiaries in seventy countries. It is consistently ranked in the upper end of the Global 500 and had recent annual sales of more than $25 billion.
In the United States, trading companies have had a relatively negligible impact on the volume of export activity. One deterrent is the preference of U.S. firms to pursue international expansion independently of other firms.
Intermediaries Based in the Home Country
Export Management Company (EMC):
Common in the USA and numerous other countries.

Acts as an export agent on behalf of the focal firm. Finds export customers, negotiates terms of sale, and arranges for international shipping, typically for smaller exporters.

Most specialize in specific industries and geographic areas.

Disintermediation
‘Disintermediation’ – bypassing traditional intermediaries – is made possible by the Internet.

Examples include Amazon and eBay

Traditional retailers such as Tesco and Wal-Mart have also established an online presence.

One negative outcome is that unscrupulous marketers prey on unsuspecting customers with fake products (e.g., pharmaceuticals).

Disintermediation 2
Some focal firms use the Internet to sell products directly to customers rather than going through traditional wholesale and retail channels. By eliminating traditional intermediaries, companies can sell their products faster and more cheaply. This benefits SMEs in particular because they usually lack the often substantial resources needed to undertake conventional international operations.
Countless online intermediaries broker transactions between buyers and sellers worldwide. Emergent technologies offer—and sometimes require—new roles that intermediaries have not taken previously. Many traditional retailers establish Web sites or link with online service providers to create an electronic presence. The electronic sites of retailers like Tesco (www.tesco.com) and Wal-Mart (www.walmart.com) complement existing physical distribution infrastructure and bring more customers into physical outlets. Read more about Internet-based international intermediaries in the Global Trend feature.
Born global firm
a young entrepreneurial company that initiates international business activity early in its evolution, moving rapidly into foreign markets.
Licensor
a firm that enters a contractual agreement with a foreign partner to allow the partner the right to use certain intellectual property for a specified period of time in exchange for royalties or other compensation
Franchisor
a firm that grants another the right to use an entire business system in exchange for fees, royalties, or other forms of compensation.
Turnkey contractors
Focal firms or a consortium of firms that plan, finance, organize, manage, and implement all phases of a project and then hand it over to a foreign customer after training local personal.
Joint venture partners
a focal firm that creates and jointly owns a new legal entity through equity investment or pooling of assets.
project based, nonequity venture partners
a collaboration in which the partners create a project with a relatively narrow scope and a well defined timetable, without creating a new legal entity.
foreign distributor
a foreign based intermediary that works under contract for an exporter, takes title to, and distributes the exporter’s products in a national market, often performing marketing functions such as sales, promotion, and after-sales service.
Agent
an intermediary (often an individual or a small firm) that handles orders to buy and sell commodities, products, and services in international business transactions for a commission.
Manufacturer’s representative
an intermediary contracted by the exporter to represent and sell its merchandise or services in a designated country or territory
Trading company
an intermediary that engages in import and export of a variety of commodities, products, and services
Export management company (EMC)
a domestically based intermediary that acts as an export agent on behalf of a client company.
Logistics service provider
a transportation specialists that arranges for physical distribution and storage of products on behalf of focal firms, as well as controlling information between the point of origin and the point of consumption.
Customers brokers
specialist enterprises that arrange clearance of products through customs on behalf of importing firms.
Soverign wealth fund (SWF)
a state-owned investment fund that undertakes systematic, global investment activities.
T or F
A belief by certain diasporas that they would fare better than an MNE in their homelands because they better understand their homelands. This belief may or may not be true.
Since 2008, Germany requires parliamentary approval or foreign investments that acquire more than 25% of a German company. T or F
T
Sovereign wealth funds
are state-owned investment funds that undertake systematic, global investment activities to generate income or to achieve policy objectives.

Governments make and enforce laws and regulations and devise fiscal and monetary policies. Many governments have developed new legislation aimed at protecting the natural environment. For example, the U.S. and European governments are cooperating to develop policies to cut carbon dioxide emissions. Multilateral environmental regulations are deemed necessary to address climate change, which can lead to harmful cross-national events such as crop failures and business calamities. Increasingly, governments also regulate markets.
During the recent global financial crisis, governments moved to stimulate national economies through such programs as the Economic Stimulus Act in the United States, the European Union stimulus plan, and the Economic Stimulus Plan in China.
Central banks are the monetary authorities in each country that issue currency and regulate national money supplies. Australia, Canada, China, Indonesia, the United States, and numerous European countries cut bank interest rates and injected billions into national money supplies. The European Central Bank (www.ecb.int) devised new banking regulations with the goal of averting future crises.
Sovereign wealth funds are state-owned investment funds that undertake systematic, global investment activities to generate income or to achieve policy objectives, such as reviving a collapsed economy. In 2007 China invested billions in Blackstone, a New York-based private-equity firm. In 2008, the governments of Singapore, Kuwait, and South Korea provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two banks that lost fortunes in the global financial crisis. In 2012, China’s SWFs dramatically increased investments in Europe, to acquire debt-ridden European firms.

U.S. Exon-Florio Amendment
Part of Omnibus Trade and Competitiveness Act of 1988

The President of the United States may block foreign investment if “the foreign interest exercising control might take action that threatens to impair the national security.”

Conclusion
As long as sovereign wealth funds own a very small percentage of a local firm, the local government should feel confident

Large purchase could face push-back similar to FDI by SOEs

Dubai Ports World (DPW)
State-owned DPW purchased management contracts for six major U.S. ports from a British company in 2006.
President George W Bush supported the sale but Democrats and Republicans in Congress opposed it.
Dubai Ports World (DPW) cont.
Reasons to Support
The UAE was a Strategic Partner
Allowed the US Military access to its land, ports and airspace
An ally in the War on Terror
Port security was always the responsibility of the US government
Blocking the transfer appeared discriminatory towards Arabs

What happened?

DPW graciously withdrew

Mercantilism
The belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports
Who Gets Hurt By Mercantilism
Importers

Consumers
-Imports can increase purchase options
-Imports can reduce prices

Neomercantilism
Today, some argue for neomercantilism — the idea that the nation should run a trade surplus.

Supporters of neomercantilism include:
Labor unions (who want to protect domestic jobs),
Farmers (who want to keep crop prices high)
Some manufacturers that rely on exports.

Free Trade
The absence of restrictions to the
flow of goods and services among nations.

Free trade is usually best because it leads to
More and better choices for consumers and firms

Lower prices of goods for consumers and firms
Higher living standards for consumers because their costs are lower.

Higher profits and better worker wages because imported input goods are usually cheaper.

Greater prosperity in poor countries.

Absolute Advantage Principle
A country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country
Comparative Advantage Principle
It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product
Factor Proportions Theory
Also known as the factor endowments theory, it argues that each country should produce and export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scarce factors of production.

Basically, they should export products that they have abundant, and import products that are scarce to them.

International Product Life Cycle Theory
Each product and its associated manufacturing technologies go through three stages of evolution:

1-Introduction: the inventor country enjoys a monopoly both in manufacturing and exports.

2-Maturity: the product’s manufacturing becomes relativelyt standardized; other countries start producing and exporting the product.

3-Standardization: manufacturing ceases in the original innovator country, which then becomes a net importer of the product. Today under globalization, for many products, the cycle occurs quickly.

Leontief Paradox
In the 1950’s, Leontief Paradox revealed that countries can successfully export products that use less abundant resources (e.g., the U.S. often exports labor-intensive goods).

Implies that international trade is complex and cannot be fully explained by a single theory.

Labor productivity should be considered as well as hourly wages.

Competitive Advantage
A foundation concept that explains how individual firms gain and maintain distinctive competencies, relative to competitors, that lead to superior performance.

It refers to the distinctive assets, competencies, and capabilities that are developed or acquired by the firm.

The collective competitive advantages held by the firms in a nation are the basis for the competitive advantages of the nation at large.

Competitive advantage describes organizational assets and competencies that are difficult for competitors to imitate and thus help firms enter and succeed in foreign markets. These competencies take various forms, such as specific knowledge, capabilities, innovativeness, superior strategies, or close relationships with suppliers. Competitive advantage is also known as firm-specific advantage. In recent years business executives and academics such as Michael Porter have used competitive advantage to refer to the advantages possessed by both nations and individual firms in international trade and investment. To be consistent with the recent literature, we adopt this convention as well.

New Trade Theory
Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages. Some industries succeed best as their volume of production increases.

“Economies of Scale” basically means if you produce more you save costs. Cost savings and level of production are proportionate.

Ex) The commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability.

Monopolistic Advantage Theory
Argues that MNEs prefer FDI because it provides the firm with control over resources and capabilities in the foreign market and allows them to enjoy a degree of monopolistic power relative to foreign competitors.

Key sources of monopolistic advantage include proprietary knowledge, patents, unique know-how, and sole ownership of other assets such as brands.

Michael Porter’s Diamond Model: Sources of National Competitive Advanatage
1-Factor conditions: ex)An abundance of cost-effective and well-educated workers give China a competitive advantage in the production of laptop computers.

2-Demand Condition: The strengths and sophistication of customer demand.
Ex) Japan is a densely populated, hot, and humid country with very demanding consumers. These conditions led Japan to become one of the leading producers of superior, compact air conditioners

3-Domestic Rivalry: Firm strategy, structure, and rivalry – The nature of domestic rivalry, and conditions that determine how a nation’s firms are created, organized, and managed. Ex) Italy has many top firms in design industries such as textiles, furniture, lighting, and fashion. Vigorous competitive rivalry puts these firms under constant pressure to innovate, which has propelled Italy to a leading position in design, worldwide.

4-Related and Supporting industries: The presence of suppliers, competitors, and complementary firms that excel within a given industry.
Ex) The Silicon Valley in California is a great place to
launch a computer software firm because it is home to thousands of knowledgeable firms and workers in the software industry

5-industrial cluster: A concentration of suppliers and supporting firms from the same industry located within the same geographic area.

A strong cluster can serve as an export platform for the nation.
Ex)Silicon Valley; pharmaceutical cluster in Switzerland; footwear industry in Pusan, South Korea; IT industry in Bangalore, India; fashion cluster in northern Italy; and Silicon Valley North near Ottawa, Canada.

How Firms Gain and Sustain
International Competitive Advantage
Since the MNE was traditionally the major player in international business, scholars have offered numerous explanations of what makes these firms pursue, and succeed in, internationalization

Because FDI has been MNEs’ main strategy in the 20th Century international expansion, theoretical explanations have tended to emphasize it.

Internalization Theory
Explains how the MNE chooses to acquire and retain one or more value-chain activities inside itself.

Such ‘internalization’ provides the MNE with greater control over its foreign operations.

Internalization avoids the drawbacks of dealing with external partners, such as reduced quality control and the risk of losing proprietary assets to outsiders.

Ex) In China, Intel owns much of its value chain, to ensure that Intel knowledge, patents, and other assets are not misused or illicitly obtained by potential rivals.

Relationships Matter!
Cooperation among partners and firms can create value and competitive advantage even among competitors.
Dunning’s Eclectic Paradigm
Three conditions determine whether or not a company will enter a given foreign country via FDI:

Ownership-specific advantages – knowledge, skills, capabilities, relationships, or physical assets that the firm owns and which are the basis of its competitive advantages

Location-specific advantages – similar to comparative advantages, they are specific advantages that exist in the country that the MNE has entered, or is seeking to enter, such as natural resources, low-cost labor, or skilled labor

Internalization advantages – control derived from internalizing foreign-based manufacturing, distribution, or other value chain activities

International Collaboration
Starting in the 1980s, firms increasingly began using collaborative ventures to expand abroad

Collaboration provides access to foreign partners’ know-how, capital, distribution channels, or marketing assets and helps overcome government imposed obstacles

The advantages of collaboration challenge the advantage of internationalization

SECTION 5
SECTION 5
Three Major Types of Political Systems
Totalitarianism
Socialism
Democracy
Democracy
Limited Government: The government performs only essential functions that serve all citizens, such as national defense, maintaining law and order, foreign relations, and providing basic infrastructure.

Private Property Rights: The ability to own property and assets and to increase these by accumulating private wealth.

Democracy is associated with market economies and capitalism in which decisions are largely left to market forces, that is, supply and demand

Totalitarianism
Government controls all economic and political matters.

Either theocratic (religion based) or secular.

Power is sustained via secret police, propaganda, and regulation of free discussion and criticism.

Totalitarianism is associated with command economies, wherein the state makes all decisions on what to produce, how much to produce, and what prices to charge.

The concept of “profit” is unkown

Socialism
Capital is vested in the state and used primarily as a means of production for use rather than for profit.

Group welfare outweighs individual welfare.

Government’s role is to control the basic means of production, distribution, and commercial activity.

State-owned enterprises dominate some if not all sectors.

Government intervention in the private sector is extensive.

Corporate income tax rates are higher

Socialism is associated with mixed economies, which have features of both market and command economies, combining state intervention and market mechanisms (e.g. Sweden, Singapore, many developing countries).

Common Law:
A legal system that originated in England and spread to Australia, Canada, USA, and other former members of the British Commonwealth (also known as case law).

The basis of law is tradition, past practices, and legal precedents set by courts.

Judges have much power to interpret laws based on the circumstances of individual cases. Thus, common law is relatively flexible.

Australia, Canada, Ireland, New Zealand

Civil Law
Based on an all-inclusive system of laws that have been “codified”—clearly written by legislative bodies.
Laws are more ‘cast in stone’ and not strongly subject to interpretation by courts.

Much of Western Europe and Latin America
-America, Japan, Russia, South Korea

Does Civil Law travel well?
Property laws in civil law countries vs non-civil law countries
-we would think civil law would be better, but the study found the opposite.
-lots of countries borrowed laws from Europe
-research concluded: when you adopt something from another culture, it doesn’t’t travel well.
Limited gov’t
The government performs only essential functions that serve all citizens, such as national defense, maintaining law and order, foreign relations, and providing basic infrastructure.
Private Property Rights
The ability to own property and assets and to increase these by accumulating private wealth.
What is democracy associated with?
Openness, lack of regulation and barriers to the entry of firms in foreign markets.

Openness is associated with:
-Competition on quality, which improves overall product quality.
-Increased competition, which leads to efficiencies and lower prices

Democracy is associated with market economies and capitalism in which decisions are largely left to market forces, that is, supply and demand

Totalitarianism is associated with?
Totalitarianism is associated with command economies, wherein the state makes all decisions on what to produce, how much to produce, and what prices to charge.

The concept of “profit” is unkown

Socialism is associated with?
Socialism is associated with mixed economies, which have features of both market and command economies, combining state intervention and market mechanisms (e.g. Sweden, Singapore, many developing countries).
See s5, slide 22 pic
see it
Islamic Law
Based on holy writings and religious tradition
In modern era, commercial or business law in Muslim countries was often adopted from European law.

Most commercial law will come from different European traditions. However, there are certain areas of business that Islamic Law has had impact (family law), one example is inheritance. Because of this, property/money will be divided among decedents.

Islamic Law: Impact on Business
Family law in Egypt is Islamic

Family law determines inheritance

Islamic law disallows leaving a whole company to a single heir.

This destroyed Arab Contractors in Egypt after its founder died

Today many Muslims want to see a more strict interpretation of Islamic law and a more stringent application of Islamic law to business.

Example: Islamic Banking
Does the Koran forbid the paying and collecting of interest?
In 19th century most Muslims scholars said “no”.
Today, most say “yes”.

In the 19th century they wouldn’t’t charge interest, they would charge “fees”

see s5 slides 26 and 27
see it
Government Takeover of Corporate Assets
Confiscation: Seizure of corporate assets without compensation.

Expropriation: Asset seizure with compensation.

Nationalization: Takeover of an entire industry, with or without compensation.

When China liberalized… a lot of companies were doing very well (Amway, Avon) because they were selling products via sales associates to China… But once China liberalized, it became that they couldnt do direct sales anymore… So they were required to open stores in China (this was against their business models) so they went out of business.
yep
Macro risk
Threat to all firms in a country
Micro risk
Threat to an industry or a firm, or firms from a certain home country
Firm-specific risks – directed at a particular company are rare. Government will nullify its contract with a given firm or that a terrorist group will target the firm’s physical operations are firm-specific. It is easier to reduce the likelihood and impact of firm-specific risks by incorporating strong arbitration language into a contract or by enhancing onsite security to protect against terrorist attacks.

Country-specific risks – not directed at the firm but are countrywide are more common. Examples include a government’s decision to forbid currency transfers or the outbreak of civil war in the country. Firms usually have little control over the impact of country-level political risks aside from stop operating in the country of question.

Government risks – Arise from the actions of a governmental authority, where that authority is used legally or not. Examples include a legitimately enacted tax hike or an extortion ring that is allowed to operate and is led by a local police chief may both be considered government risks.

Instability risks – Arise from political power struggles. Conflicts could be between members of a government fighting over succession or mass riots in response to deteriorating social conditions.

yep
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

www.doingbusiness.org
This World Bank site ranks countries by ease of doing business in their national environments
Country Risk Arising from the Host Country Legal Environment
Foreign investment laws

Controls on operating forms and practices

Marketing and distribution laws

Laws regarding income repatriation

Environmental laws

Contract laws

Inadequate or underdeveloped legal systems

Internet and e-commerce regulations

Country Risk Arising from the Home Country Legal Environment
The Foreign Corrupt Practices Act (FCPA)

Anti-boycott regulations

Accounting and reporting laws

Transparency in financial reporting

MNE’s Manage Political Risk
Chose entry/finance options that put little capital at risk

seek insurance options from home governments or transnational organizations (e.g. World Bank)

Make money fast

Diversify: Dont put all your business in one risky country

Managing Regulatory Risk
Pay attention to government policy statements

Understand how economic situation could affect regulations

Utilize scenario planning

Be proactive!

Trade sanctions
Bans on international trade

The point of “Sanctions” is trying to change a country without bombing, war, etc.

Extraterritoriality
Extraterritoriality: the application of home-country laws to actions in other countries.
U.S. Foreign Corrupt Practices Act
Forbids U.S. citizens to bribe foreign government employees or politicians – or to give money to agents that is subsequently used to bribe – in order to obtain or retain business

Overseas bribery remained legal in Germany – and tax-deductible for another 20 years!

END OF SECTION 5
END OF SECTION 5
industrial cluster
a concentration of businesses, suppliers, and the supporting firms in the same industry as a particular location, characterized by a critical mass of human talent, capital, or other factor endowments.
National industrial policy
a proactive economic development plan initiated by the government, often in collaboration with the private sector, that aims to develop or support particular industries within the nation.
internationalization theory
an explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm, minimizing the disadvantages of dealing with external partners and allowing for greater control over foreign operations.
Rule of law
a legal system in which rules are clear, publicly disclosed, fairly enforced, and widely respected by everyone.
transparency
the degree to which companies regularly reveal substantial information about their financial condition and accounting practices.
extraterritoriality
application of home-country laws to persons or conduct outside national borders.
anti-dumping duty
-tax on imported product whose price is below domestic price level
countervailing duty
-A duty put on an imported good to offset unfair subsidies in the exporting country
-reduces competitive advantage from subsidies
protectionism
national economic policies designed to restrict free trade and prtect domestic industries from foreign competition.
tariff
tax on imported products, effectively increasing the cost of acquisition for the customer
nontariff trade barrier
a government policy, regulation, or procedure that impedes trade through means other than explicit tariffs
customs
checkpoints at the ports of entry in each country where government officials inspect imported products and levy tariffs.
quota
a quantitative restriction placed on imports of a specified product over a specified period of time
export control
a government measure intended to manage or prevent the export of certain products or trade within countries.
import license
government authorization granted to a firm for importing a product
subsidy
-financing from gov. to ensure success
-intended to encourage exports or to facilitate the production and markerting of products at reduced prices
-increases competitive advantage

Ex) farmers

countervailing duty
-A duty put on an imported good to offset unfair subsidies in the exporting country
-reduces competitive advantage from subsidies
dumping
price exported products at less than their normal value, generally less than their price in the domestic or third-country markets, or at less than production costs
anti-dumping duty
a tax imposed on products deemed to be dumped and causing injury to producers of competing products in the importing country.
investment incentive
transfer payment of tax concession made directly to foreign firms to entice them to invest in the country.
foreign trade zone (FTZ)
an area within a country that receives imported goods for assembly or other processing and re-exported. For customs purposes the FTZ is treated as if it is outside country’s borders.
maquiladoras
export-assembly plants in northern Mexico along the U.S. border that produce components and typically finished products destined for the U.S. on a tariff-free basis
Motivators of Government Intervention
1.self-preservation
2.Security
3.Prosperity
4.Cultural Identity
Types of Government Intervention
1.Tariff
2.Quotas
3.Local content requirements
4.Subsidies
5.Countervailing duties
6.anti-dumping duties
7.regulations and technical standards
8.administrative procedures
9.ownership restrictions
Local content requirements
-require minimum percentage of local goods
-discourages imports
Regulations and technical standards
-safety, health, or technical regulations
-hinder entry of foreign products
administrative procedures
-requirements & procedures imposed on importers/exporters that hinder trade
ownership restrictions
-limit ability of foreign firms to invest in certain industries
-limits foreign stake within host country
Developing Economies
Low-income countries characterized by limited industrialization and stagnant economies. Called 3rd world countries and are the largest group of countries.
Ex: Bangladesh, Bolivia, Zaire.
Frontier Economies
Currently classified as developing economies, but have the potential to become emerging markets in the near future.
Ex: Estonia, Latvia, Lithuania, Slovakia, Uruguay, Kazakhstan, and United Arab Emirates.
Emerging Economies
Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth.
Ex: Indonesia, Mexico, Poland, Turkey.
Transition Economies
These countries were once socialist states that have largely transitioned into capitalist-based systems, partly through the processes of privatization (transfer of state-owned assets to private concerns) and trade liberalization.
Ex: China, Russia, and several Eastern European countries.
Advanced Economies
Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure. 14% of the world’s population and nearly two-thirds of world GDP. Home to largest MNEs.
Ex: Australia, Canada, Japan, U.S., and Western Europe.
What are the four (4) key characteristics that most global challengers share?
– Pose growing competitive challenge to companies from advanced economy countries
– Benefit from rapidly growing markets
– Usually enjoy low-cost labor
– Have complex operating environments, which produce some very capable firms
Emerging Markets as Target Markets
Many have huge middle classes with significant income for buying electronics, cars, health care services, etc. Many exhibit high economic growth rates. Doubled their share of world imports in the last few years.
Emerging Markets as Manufacturing Bases
Home to low-wage, high-quality labor for manufacturing and assembly operations.
Large reserves of raw materials and natural resources as in South Africa, Brazil, Russia
Emerging Markets as Source Destinations
MNEs have undertaken outsourcing – or subcontracting non-core business activities to specialized subcontractors.
MNEs have established numerous call centers in Eastern Europe, India, the Philippines, and elsewhere.
Dell and IBM outsource certain technological functions to knowledge workers in India.
Intel and Microsoft have much of their programming activities performed in Bangalore, India.
PPP adjusted per capita GDP
Represents the amount of products that consumers can buy in a given country, using their own currency and consistent with their own standard of living.
Political Instability
Corruption, weak legal systems, and unreliable government authorities increase business risks and costs and hinder forecasting
Bureaucracy, red tape, and lack of transparency
Burdensome rules, excessive requirements for licenses, approvals, and paperwork; not accountable legal and political systems.
Ex: It may take years, or many bribes, to obtain permissions to do business. China, India, and Russia are particularly problematic.
Poor Physical Infrastructure
Basic infrastructure such as high-quality roads, drainage systems, sewers, and electrical utilities – are often sorely lacking in emerging markets.
Dominance of Family Conglomerate
Dominance of Family Conglomerate Economies are often dominated by privately-owned, local companies that are highly diversified and control supplies and employment. They are common in South Korea (chaebols), India (business houses), Latin America (grupos), and Turkey (holding companies).
Customize Offerings to Unique Emerging Market Needs
Needs Successful firms develop a deep understanding of the distinctive characteristics of buyers, local suppliers, and distribution channels in emerging markets, and customize offerings and business models accordingly.
Partner with a family conglomerate (FC)
Reduce risks, time, and capital requirements.
Develop relationships with governments and other key players.
Target market opportunities more rapidly and effectively.
Overcome infrastructure hurdles.
Leverage FC resources and local contacts, including financing, bank services, local suppliers, and distribution channels
Target Governments / Government Agencies
Buy enormous quantities of products, such as computers, furniture, office supplies, and motor vehicles, as well as services. State enterprises operate in key areas such as railways, airlines, banking, oil, chemicals, and steel.
The public sector influences procurement in a variety of private and or semi-private entities
Skillfully Challenge Emerging Market Competitors
New global challengers and other emerging market firms possess various advantages that require skillful strategies and due diligence to overcome.
Outsourcing
The procurement of selected value-chain activities, including production of intermediate goods or finished products, from independent suppliers.
Global Sourcing
The procurement of products or services from independent suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country.
Privatization
transfer of state-owned industries to private concerns.
Purchasing Power parity (PPP)
an adjustment for prices that reflects the amount of goods that consumers can buy in their home country, using their own currency and consistent with their own standard of living.
tenders
formal offers made by a buyer to purchase certain products or services.
RANDOM QUESTIONS BELOW
RANDOM QUESTIONS BELOW
Globalization especially affects industries that experience:
Expensive product development costs
-Airplane very high, beer very low

Fast changing tech
-Airplane industry is higher compared to breweries

Similar buyer wants/needs across countries
-similar for airplane, beer varies worldwide

Low trade barriers and few regulatory constraints relative to price of commodity/service
-few trade/regulatory barriers for Airplane, however beer is expensive to move across borders relative to its price and industry is highly regulated e.g. tariffs and taxes on beer

CONCLUSION: Globalization affects the Airplane industry more than the beer industry!!!

Monopolistic advantage theory describe…
how companies succeed internationally by developing resources and capabilities that few other firms possess.
T or F. Islamic law allows you to leave a whole company to a single heir?
False; it forbids it that.
Which is more predictable? Political risk or regulatory change?
Regulatory change is more predictable as compared to political risk.
What are trade sanctions?
bans on international trade – tariffs, quotas, boycotts
What does the U.S. Foreign Corrupt Practices Act do?
forbids U.S. citizens to bribe foreign government employees or politicians – basically can’t bribe.
Types of economies:

Democracy, Totalitarianism, Socialism

Democracy is associated with market economy, Totalitarianism is associated with command economy, Socialism with mixed economies.
What is protectionism?
a policy designed to restrict free trade and protect domestic industries from foreign competition.
Explain the trouble that happened in Mercosur?
Mercosur was traumatized when Brazil devalued its currency significantly against the dollar and Argentina did not. Products in Brazil could then be produced cheaper than in Argentina, flooding Argentina with Brazilian exports and diverting most FDI to Brazil.
Regional Integration in Emerging Markets
Lebanon-Syria FTA soon fell apart because Lebanon had very low tariffs and Syria had very high tariffs
Levels of Regional Integration:
For countries to become members of an economic bloc, there are various stages of regional integration.

(1) Free trade area: eliminates tariffs and other trade barriers.
(2) Customs union: a free trade area in which common trade barriers are imposed on nonmember countries.
(3) Common market: a customs union in which factors of production move freely among the members.
(4) Economic union: a common market in which some important economic policies are harmonized among the member states.

Which stage is NAFTA in?
only the free-trade area