IBM 2702 International Business Environment

Chapter 1 Globalization
Globalization refers to the shift toward a more integrated and interdependent world economy. Globalization of market: the merging of historically distinct and separate national markets into one huge global marketplace. o It has been argued for some that the taste and preference of consumer in different nation are beginning to converge on some global norm. o It create global product. Globalization of production: the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factor of production (such as labor, energy, land, and capital). Drivers of Globalization Declining trade and investment barriers o International trade occurs when firm exports goods or services to consumers in another country. o Foreign direct investment (FDI) occurs when a firm invests resource in business activities outside its home country. o Lower barriers to international trades then firm will increase export and import so the market will be a single market. The role of technological change o Microprocessors and telecommunications o Internet and world wide web o Transportation technology Globalization debate Globalization , jobs and income o Protest: Globalization destroy manufacturing jobs in wealthy develop nations.

 Income inequality between skilled and unskilled labor in develop nations. o Support: Countries specialize in production of goods that they can produce efficiently. Import goods that produce inefficiently cheaper. Labor policies and the environment o Protest : Free trade leads to increase pollution and exploit the labor of less developed nation. o Support : Growth rate and income of developing country is increasing and tougher environment and labor law. Globalization and nation sovereignty o Protests: Globalization limits nations ability to control its own destiny It shift economic power away from national government and toward supranational organization o Support: WTO and UN exist to serve the collective interest of members If they fail to serve collectives, member-state will withdraw support and thy will collapse. Globalization and the worlds poor o Protests: Globalization is widening gap in income between rich and poor nations. o Supports: Reason for economic stagnation of poor nation Suffered from totalitarian government Rapidly expanding population Highly indebted poor countries

Chapter 2 National differences in political economy

Political system is the system of government in a nation. Collectivism and individualism o Collectivism A political system that emphasizes collective goals over individual goals. Need of society as a whole are more important than individual freedom. Individual rights should be sacrificed for the good of majority. Property should be owned in common(No private property) Socialism is a political philosophy advocating substantial public involvement, through government ownership, in the means of production and distribution. 1. Communist: socialism can be achieved only though revolution and totalitarian dictatorship. 2. Social Democrats: those committed to achieving socialism by democratic means. o Individualism Emphasis on the important of guaranteeing individual freedom and self-expression The welfare of society is best served by letting people pursue their own economic interest Interest individual should take precedence over the interests of the state Private property is more highly productive than communal property Democracy and totalitarianism o Democracy is a political system in which government is by the people, exercised either directly or through elected representative Pure democracy: all citizens directly involve in political decision making Representative Democracy: 1. Citizens periodically elect individuals to present them

2. Elected representatives from a government, to make a decisions on the behalf of electorate An Ideal Representative Democracy in constitutional law 1. An individuals right to freedom expression, opinion and organization 2. A free media 3. Regular election 4. Universal adult suffrage 5. Limited terms for elected representatives 6. A fair court system that is independent from the political system 7. A nonpolitical state bureaucracy 8. A nonpolitical police force and armed services 9. Free access to information o Totalitarianism Communist Totalitarianism: A version of collectivism advocating that socialism can be achieved only though a totalitarian dictatorship Theocratic Totalitarianism: A political system in which political power is monopolized by a party, group, or individual that governs according to religious principles. Tribal Totalitarianism: A political system in which a party, group, or individual that represents the interests of a particular tribe (ethnic group) monopolizes political power. Right wing totalitarianism: A political system in which political power is monopolized by a party, group, or individual that generally permits individual economic freedom but restricts individual political freedom, including free speech, frequently on the ground that it would lead to the rise of communism.

Economic system 1. Market economy o All productivities activities are privately owned o Demand and supply determines price and quantity produced o Purchasing patterns of consumers determine what is produced and in what quantity o Supply must not be restricted(no monopoly exists) o Role of government: encourage free and fair competition between private producers. o Free market system is more likely in individualism country 2. Command economy o All productivities activities are state owned o Government plans: what the goods and services that a country produces, quantity and price o Economy where collective goals are dominant 3. Mixed economy o Some sectors of economy are private ownership while some others have state ownership o Number of mixed economies in the world today is falling due to poor state-own enterprise management o Government tend to take over troubled firms that are considered to be vital to national interest Legal system: Refer to the rules, or law, that regulate behavior Processes by which the laws of a country are enacted & enforced Through which redress for grievances is obtained Three types of legal system 1. Common law Originated in England, it is used in U.S. legal system Based on tradition precedent and usage Common law system is flexible

 Business contracts tend to be lengthy because they must consider the many possible contingencies that can arise 2. Civil law Civil law based on a detailed set of written rules and law that organizes into a code Less adversarial than common law Less flexibility Found in over 80 countries, including Germany, France, Japan, and Russia 3. Theocratic law Based on religious teachings Three prominent theocratic legal system are Islamic, Hindu, and Jewish law Property right and corruption Property: a resource that an individual or business owns Property right: legal rights over the use and made of any income that may be derived from that resource Property rights can be violated in two ways 1. Private action Theft, piracy, blackmail, and the like by private individuals or groups 2. Public action Public officials export income or resources from property holders i. Excessive taxation ii. Requiring expensive licenses or permits from property holders iii. Expropriation: taking assets into state ownership without compensating the owners iv. Corruption: demand bribes from businesses

Protection of intellectual property Intellectual property o Property that is the product of intellectual activity Intellectual property rights o Patent: Give in inventor of a product or process exclusive rights to the manufacture, use, or sale of that invention for a define period o Copy right: Exclusive legal right of authors composers, playwrights, artists, and publisher to publish and dispose of their work as they see fit o Trademarks: designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products Product safety and product liability Product safety laws o Set certain safety standards to which a product must adhere, ex. Health Product liability law o Holding a firm and its officers responsible when a product causes injury, death, or damage o Liability laws are usually least extensive in less developed countries Determinants of economic development Gross national income (GNI) per head of population o Measures the total annual income received by a nations residents o Yardstick for measuring economics growth o GNI per person can be misleading because they dont consider differences in cost of living A purchasing power parity(PPP) o Adjustment GNI to reflect difference in cost of livings in different country o Not only GNI &PPP must consider growth rates also

 Human development index (HDI) o Measurement the quality of human life in a different countries o UN creates HDI based on 3 factors Life expectancy Education attainment Average income Nature of economic transition 1. Deregulation Removing legal restrictions on the free play of markets Private enterprises are permitted Removing price control Removing barriers on foreign direct investment & international trade 2. Privatization Transfers the ownership of state property into the hands of private investors The sales of state assets through an auction Private investor are motivated by potential profit to increase productivity For privatization to work, it must also be with deregulation and opening economy 3. Legal system Require law that protects property rights Private mechanisms for contract enforcement

Chapter 3 differences in culture

What the culture? Culture is a system of values and norms that are shared among a group of people and that when taken together constitute a design for living Collective programming of the mind which distinguishes the member of one group to another Society is a group of people who share a common set of values and norms. o Value Abstract idea about what a group believes to be good, right, and desirable Values from the bedrock of culture Values can affect attitudes toward political and economic system Value provide the context to establish a societys norms o Norms The social rules and guidelines that prescribe appropriate behavior in particular situations Folkways: Routine conventions of everyday life like dress codes, social banner, and neighborly behavior. : Violation of folkways are not to a serious matter, but can have a negative effect on business Mores o Norms that is central to functioning of a society and its social life. o Much greater significant than folkways o Violating mores can bring serious retribution ex. Indictment against theft, adultery o In many societies, mores may be enacted to become laws The determination of culture Political Economic philosophy

Social structure Religion Language Education

Social structure 1. Individual and group a. Individual i. western countries emphasize the individual achievement ii. benefit: high level of entrepreneurship innovation iii. harmful: lack of loyalty and commitment, difficult to build work team group, no cooperation b. Group i. An association of two or more individuals who have a share sense of identify ii. Interact with each other on the basis of a common set of expectations about each others behavior iii. Group-oriented is common in many Asian societies, such as japan iv. Benefit: high level of cooperation & teamwork 2. Social stratification : Social strata is hierarchy social categories based on family background, occupation and income Two dimension of society Degree of social mobility o The extent to which individuals can move out the strata into which they are born o Castes system: closed and most rigid system stratification. Social position is determined by the family into which a person is born. Cant change in that position. o Class system: open and less rigid system. The position a person has by birth can be changed through achievement or luck. Social mobility is possible. Significance of social stratification for business

o Depend on class consciousness: a condition where people tend to perceive themselves in term of their class background o Highly class conscious : less mobility, greater class conflict, high antagonism between labor and management o lower class conscious: encourage mobility, less conflict 3. Religion & ethical system a. Religion i. A system of shared beliefs and rituals that are concerned with the realm of the sacred b. Ethical systems i. A set of moral principles, or value that are used to guide and shape behavior ii. Ethical practices are often closely intertwined with religion 4. Language a. Spoken language i. Include both spoken and written vocabulary. ii. Language shapes the way people perceive the world b. Unspoken language i. Hand gestures ii. Facial expressions iii. Physical greetings 5. Education a. Medium through which individuals learn many of language, conceptual, and mathematical skills b. Benefit of high education: high skilled workers, higher productivity, higher economic growth Hofetede framework 1. Power distance a. How society deal with the fact that people are unequal in physical and intellectual capabilities b. High: inequality in power and wealth, High distance between supervisor and subordinates c. Low: greater equality

2. Individualism versus collectivism a. Focus on relationship between the individual and his or her follows b. Individual i. Ties between people are loose ii. Individual achievement and freedom iii. Hard work, faster innovation c. Collectivism i. Ties between people are tight ii. Work toward collective goal iii. Feel strong association to group 3. Uncertainty avoidance a. The extent to which the members can accept ambiguous situation and tolerate uncertainty b. High: value job security, retirement benefits and strong need for rules and regulations, lower employee turnover c. Low: great readiness to take risk and change, innovation & entrepreneurship 4. Masculinity versus femininity a. Masculinity: sex roles are sharped differentiated b. Femininity: little differentiation between men and women in same job, relax lifestyles 5. Long-term orientation a. Confucian teaching affect attitude toward time and persistence b. High: strong long term business relationship c. Low: think about present status only i. Protection of face ii. Respect for tradition iii. Reciprocation of gifts

Implication for international business Cross cultural literacy o An understanding of how cultural differences across and within nations can affect the way in which business practiced o Should be developed o Doing business in different cultures require adaptation to conform with value & norm of that culture o Company may employ local managers Ethnocentricity o Belief that ones own culture is superior to that of others o Often result in disregard or contempt for the culture of other countries o Should be avoid

Chapter 4 ethics in international business

Ethical issues in international business 1. Employment practice a. Wage, working hours, and working environment b. Ethical question: when working conditions in a host nation are poorer to those in a multinationals home nation, what standard should be applied? Home (b) host (c)something in between It depends on your ethic 2. Human right a. Basic human rights still are not respected in many countries b. Human rights such as freedom of speech, freedom of assembly, freedom of movement, and so on c. Those are taken for granted in developed countries, but are not universally accepted d. Ethical question: Is it ethical for MNE to do business in nation that violates human right? e. MNE can be a force of political and social progress that ultimately improves the right of people in regressive regime. 3. Environmental pollution a. Arise when environmental regulations in host nations are far inferior to those in the home nation. b. Ethical question: should MNE feel free to pollute in a developing nation to have cost advantage? 4. Corruption a. Ethical question: Is it ethical to make payments to foreign government officials to gain economic advantage? b. Foreign corrupt practices act Outlawed the payment of bribes to foreign government officials in order to gain business But allow for facilitating payment=grease payment=speed money

 It is not payments to receive contracts or to obtain preferential treatment They are payments to ensure receiving the standard treatment c. Convention on combating bribery of foreign public officials in international business transactions Adopted by the organization for economic cooperation and development Obliges member states to make the bribery of foreign public officials a criminal offense Exclude facilitating payments made a expedite routine government action are allowed 5. Moral obligation a. Ethic question: should MNE have a responsibility to give something back to the societies that made them grow and prosper b. Social responsibility Idea that business people should take the social consequences of economic actions into account when making business decisions Successful business need to know noblesse oblige and give something back to society Focus on managerial implications What then is the best way for managers in a multinational firm to make sure that ethical considerations figure into international business decisions? 1. Hiring and promotion a. Favor hiring and promoting people with well-grounded sense of personal ethics b. Hire people who have a strong sense of personal ethics c. Should not promote those who have displayed poor ethic d. Prospective employee should find out as much as they can about the ethical climate in an organization

2. Organization: build an organizational culture that places a high value on ethical behavior by a. Business must explicitly articulate values that place a string emphasis on ethical behavior i. Code of ethics: a formal statement of the ethical priorities a business adheres to b. Leader should give life and meaning to the code of ethics c. Business should put in place a system of incentives 3. Leadership a. Make sure that leaders within the business not only articulate the rhetoric of ethical behavior b. But also act in manner that is consistent with that rhetoric 4. Decision making process a. Require people to consider the ethical dimension of business decisions Five step manager need to 1. Identify which stakeholder a decision would affect and in what way a. Internal stakeholders: people who work own the business include all employees, the board of directors, and stockholder b. External stakeholders: the individuals or group who have some claim on firm include customer, suppliers, lender, government, union and general public c. Moral imagination: stand in shoes of a stakeholder and ask how a proposed decision might impact the stakeholder 2. Determine whether a proposed would violate the fundamental rights of any stakeholders 3. Establish moral intent: business must resolves to place moral concerns ahead of other concerns 4. Company should engage in ethical behavior 5. Audit decision: business should review decision to ensure that they were consistent with ethical principle

5. Develop moral courage Employees in an international business may need significant moral courage Manager need to be able to walk away from decisions that are profitable, but unethical Employees need to be able to say no action that are unethical

Chapter5 international trade theory

Free trade A situation where a government does not attempt to influence international trade No tariffs & quotas Citizens can guy from another country sell to another country freely International trade theory I. Mercantilism a. An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports b. Government intervention to achieve a surplus in the balance of trade. c. Recommended policies to maximize exports and minimize imports. d. Imports were limited by tariffs and quotas, while exports were subsidized. e. The flaw with mercantilism was that it viewed trade as a zero-sum game. f. A zero sum game is one in which a gain by one country results in a loss by another Absolute advantage a. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. b. This trade is a zero-sum game c. Countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries Comparative advantage a. Occur when a country can produce a good with lower opportunity cost than other b. Comparative advantage arises from differences in labor productivity

II.

III.

c. Comparative advantage is also positive sum game d. Even a country does not have absolute advantage in any product, both countries can benefit from trade. Qualifications and assumptions 1. We have assumed a simple world in which there are only two countries and two goods. In the real word, there are many countries and many goods. 2. We have assumed away transportation costs between countries. 3. We have assumed away differences in the prices of resources in different countries. 4. We have assumed that resources can move freely from the production of one good to another within a country. In reality, this is not always the case. 5. We have assumed constant return to scale; units of resources required to produce a good are assumed to remain constant. 6. We have assumed that each country has a fixed amount of resource, resources cant move between countries. 7. We have assumed away the effects to trade on income distribution within a country. Heckscher-Ohlin theory They argued that comparative advantage arises from differences in national factor endowment By factor endowments they meant the extent to which country is endowed with such resource as land, labor, and capital. The more abundant a factor, the lower cost They predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. The Leontief Paradox The United States was relatively abundant in capital compared to other nations; the United States would be an exporter of a capitalintensive goods and importer of labor-intensive goods.

 He found that U.S. exports were less capital intensive than U.S. imports One possible explanation in that the United States has a special advantage in producing new products or goods made with innovative technologies. The product life-cycle theory A country will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle and eventually become its import. Raymond Vernon initially proposed the product life-cycle theory. Vernon argued that wealth and size of the U.S. market gave U.S. firm a strong incentive to develop new consumer products. Over time, demand for the new product start to grow in other advanced countries. As it does, it becomes worthwhile for foreign producers to begin producing for their home markets. U.S. firms might set up production facilities for those advanced countries where demand is growing. As the market in the United States and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. The cycle by which the United States lost its advantage to other advanced countries might be repeated once more, as developing countries. New trade theory 1. Increasing product variety and reducing cost Economies of scale: unit cost reductions associated with a large scale of output. Ability to spread fixed cost over a large volume Volume of production is higher :specialization is increase : cost per unit will be decrease 2. Economies of scale (EOS) and first mover advantage

 Economic and strategic advantages accruing to the first(early) to enter the market Ability to capture EOS ahead of later entrant First movers can create a barrier to entry Country can dominate in the export of certain goods because I. EOS are important II. World market is not large enough to support many firms III. Firms located in countries where the first to capture EOS Implications of new trade theory I. Nation may benefit from trade even when they do not differ in resource endowments or technology. II. A country may predominate in the export of good simply because it was lucky enough to have one or more firms among the first to produce that good. National competitive advantage Explain why a nation achieves international success in particular industry Attributes of a nation shape the environment in which local firm compete These attributes promote or impede competitive advantage Porters diamonds o Factor endowments: a nations position in factor of production such as skilled labor or the infrastructure necessary to compete in a given industry. o Demand condition: the nature of home demand for the industrys product or service. o Relating and supporting industries: the presence or absence of supplier industries and related industries that is internationally competitive. o Firm strategy, structure, and rivalry: the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry

Focus on managerial implications I. Location a. Difference countries have advantages in different productive activities b. Influence a firms decision about where to locate productive activities c. A firm should disperse its productive activities to those countries where they can be performed most efficiently First mover advantage a. Firm that establish a first-mover advantage in the production of a new product may later dominate global trade in that product b. A firm can invest resources in trying to build first mover advantage c. Even if it means losses for a few years before a venture becomes profitable Government policy a. Business can exert a string influence on government policy b. Lobbying to promote free trade or trade restriction c. Business should urge government to i. Increase investment in education, infrastructure, and basic research ii. Adopt policies that promote strong competition within domestic market.

II.

III.

Chapter 6 The Political Economy of International Trade

Instruments of trade policy I. Tariffs is a tax levied on imports a. Specific tariff: a tariff levied as a fixed charge for each unit of good imported. b. Ad valorem tariff: a tariff levied as a proportion of the value of an imported good. Subsidy is a government payment to a domestic producer. a. Cash grants, low-interest loan, tax break, and government equity participation in domestic firm. b. Help domestic producer in two ways i. Competing against foreign imports ii. Gaining export markets

II.

Import quotas and voluntary export restraints Import quota is a direct restriction on the quantity of some good that may be imported into a country. Tariff rate quota is the process of applying a lower tariff rate to imports within the quota than those over the quota. Voluntary export restriction is a quota on trade imposed by the exporting country, typically at the request of the importing countrys government. Quota rent is the extra profit producers make when supply is artificially limited by an import quota. Local content requirements A requirement that some specific traction of a good be produced domestically. Administrative policy Bureaucratic rules designed to make it difficult for import to enter a country.

Antidumping policy Dumping is selling goods in a foreign market at below their costs of production or below their fair market value. Antidumping policy is designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition. The case for government intervention Political arguments for intervention o Protecting job & industry from unfair foreign competition. o National security It is necessary to protect certain industries because they are important for national security. It is dangerous to rely primarily on foreign producers. Limit export to other nations o Retaliation Argue that government should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets. And force trading partners to play by the rule of the game. o Protecting consumers Argue that government use trade policy to protect consumers from unsafe products. Government should limit or ban import of unsafe product o Furthering foreign policy objective Government used trade policy to support their foreign policy objective. Government may grant preferential trade terms to a country which it wants to build strong relations Trade policy also is used to pressure or punish rouge states that do not abide by international law. o Protecting human rights Government used trade policies to improve human rights for trading partners.

o Protect environment Suggests the relationship between income levels and pollution is not a linear one. It is argued that government should place tariff on import goods from countries where environmental regulation are lax. Economic arguments for intervention o Infant industry argument New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations. o Strategic trade policy Government policy aimed at improving the competitive position of a domestic industry or domestic firm in the world market. The revised case for free trade Retaliation and trade war o Strategic trade policies are beggar-thy-neighbor policy o That boosts national income at the expense of other countries. o Using trade policies may provoke retaliation o Result a trade war: all countries will worse off than if a hands off approach. Domestic policy o Government do not always use trade policies for national interest o They can be influenced by special interest groups.