IBUS%3100%–%TEXTBOOK%NOTES%
CHAPTER%1%–%GLOBALIZATION%
WHAT%IS%GLOBALIZATION?%
• Globalization:+ shift% towards% a% more% integrated% and% independent% world% economy% –% away% from% distinct% national% economic%units,%towards%one%huge%global%market% Merging%of%historically%distinct%and%separate%national%markets%into%one%huge%global%marketplace% Argument%–%tastes/preferences%of%consumers%in%different%nations%beginning%to%converge%to%some%global%norm%% Standardized%products%such%as%CocaTCola,%McDonald’s%and%iPods%help%create%a%global%market%% Significant%differences%still%exist%between%national%markets%along%many%dimensions,%i.e.%tastes/preferences,%distribution% channels,%value%and%business%systems,%and%legal%regulation% Most%global%markets%–%markets%for%industrial%goods%and%materials%that%serve%universal%need% Sourcing%of%goods/services%from%locations%around%the%globe%to%take%advantage%of%national%differences%in%cost%and%quality% of%factors%of%production%+ Aim%is%to%lower%overall%cost%structure%of%an%entity%and/or%improve%quality/functionality%of%product%offering%+ Impediments% to% global% production% include% –% formal/informal% barriers% to% trade,% barriers% to% foreign% direct% investment,% transportation%costs,%and%issues%associated%with%economic%+%political%risk+ Regulation,%management,%and%policing%of%global%marketplace%necessary%as%markets%globalize%further% General+Agreement+on+Tariffs+and+Trade+(GATT):+international%treaty%that%committed%signatories%to%lower%barriers% to%the%free%flow%of%goods%across%national%borders%–%led%to%WTO% World+Trade+Organization+(WTO):%responsible%for%policing%world%trade%system%and%ensuring%nationTstates%adhere%to% rules%laid%down%in%trade%treaties%% o Promoted%lowering%of%barriers%to%crossTborder%trade%and%investment%% International+Monetary+Fund+(IMF):+int’l%institution%set%up%to%maintain%order%in%international%monetary%system%% World+Bank:%international%institution%set%up%to%promote%general%economic%development%in%world’s%poorer%nations% IMF%seen%as%lender%of%last%resort%to%nations%whose%economies%are%in%turmoil%and%currencies%are%losing%value%% IMF%offers%loans%but%sets%specific%policies%for%receiving%nations%to%adopt%to%return%economy%to%stability%and%growth%% United+Nations+(UN):+international%organization%made%of%192%nations,%serves%four%purposes:% (1) Maintain%international%peace%and%security% (2) Develop%friendly%relations%among%nations% (3) Cooperate%in%solving%international%problems%and%in%promoting%respect%for%human%rights% (4) Be%a%centre%for%harmonizing%actions%of%nations%%

Globalization+of+Markets+
• • • • • • • •

Globalization+of+Production+

THE%EMERGENCE%OF%GLOBAL%INSTITUTIONS%%
• • •

• • • • •

DRIVERS%OF%GLOBALIZATION%
Declining+Trade+and+Investment+Barriers+
• • • • • • • • • International+trade:+occurs%when%a%firm%exports%goods/services%to%consumers%in%another%nation% Foreign+direct+investment:%direct%investment%in%business%operations%in%another%nation%% Barriers%to%trade%erected%in%1920T30s,%in%the%form%of%high%tariffs%on%imports%of%manufactured%goods%% Depressed%world%demand%contributed%to%Great%Depression%% PostTWWII,%nations%committed%to%removing%barriers%to%free%flow%of%goods/services%and%capital%between%nations% WTO%efforts%to%reduce%tariffs%+%restrictions%to%foreign%investments%–%facilitates%globalization%of%markets%and%production%% Allows%organizations%to%base%production%at%optimal%location%for%that%activity%% World%trade%has%expanded%almost%20Tfold%from%1950T2000% Speeds%process%of%globalization%(i.e.%sending%a%letter%in%two%weeks%vs.%receiving%an%email%in%seconds)%

The+Role+of+Technological+Change+
Microprocessors%and%Telecommunications:%%

o o o o

Enabled%explosive%growth%of%highTpower,%lowTcost%computing%% Basis%of%development%in%satellite,%optical%fibre,%wireless%technologies,%and%the%internet%% Cost%continues%to%fall%(Moore’s%law%–%number%of%transistors%on%computer%chip%doubles%every%24%months)% Cost%of%global%communication%is%plummeting%%

The%Internet%and%World%Wide%Web:+ o Changed%the%way%people%communicate%and%sell%(eTcommerce)%% o Promise%to%develop%into%information%backbone%of%tomorrow’s%global%economy%% o Consists%of%both%B2C%and%B2B%transactions%and%international%trade%% Transportation%Technology:%% o Innovations%such%as%the%commercial%jet%aircraft%and%superfreighters%simplify%shipment%% o Reduce%time%needed%to%get%from%one%location%to%another,%effectively%shrinking%globe%% o Containerization%–%revolutionized%transportation%business,%lowering%costs%of%shipping%goods%long%distance%% o Dispersal%of%production%to%geographically%widespread%locations%has%become%more%economical%%

THE%CHANGING%DEMOGRAPHICS%OF%THE%GLOBAL%ECONOMY%
Changing+World+Output+and+World+Trade+Picture++
• • • • • • • • • • • • • • From%1960sT2000s,%many%developed%nations%(i.e.%USA,%Germany,%France,%UK)%saw%relative%standing%in%world%trade%slip% Prediction%–%rapid%rise%in%share%of%world%output%accounted%for%by%developing%nations%(i.e.%India,%China,%Mexico),%decline% in%share%enjoyed%by%rich%industrialized%countries%(i.e.%UK,%Germany,%Japan)% World%Bank%estimate%–%60%%of%world%economic%activity%by%2020%will%be%conducted%by%developing%nations%% Trend%towards%shifting%labourTintensive%manufacturing%operations%to%developing%nations%(labour%costs%lower)% Stock+of+foreign+direct+investment:+total%accumulated%value%of%foreignTowned%assets%at%a%given%time% Multinational+enterprise+(MNE):+a%business%that%has%productive%activities%in%two%or%more%countries%% Two%notable%trends%I%demographics%of%MNEs:+ 1960s%–%global%business%activity%dominated%by%large%US%multinational%corporations%(approx.%2/3%of%FDIs)% 2nd%largest%–%UK,%at%18.8%%of%largest%multinationals%% Reflection%of%US%economic%dominance%in%3%decades%after%WWII,%and%British%industrial%dominance%in%early%20th%century% Globalization%–%caused%relative%decline%in%dominance%of%US%firms%in%global%marketplace%% Significant%growth%in%number%of%multinationals%from%developing%nations%% Trend%of%growth%in%mediumTsized%and%small%multinationals%(miniTmultinationals)%% Most% international% trade/investment% still% conducted% by% large% firms,% but% many% smallTmed% businesses% becoming% increasingly%involved%% 1989T91%–%Communist%gov’ts%collapsed%and%gave%way%to%democratic%revolutions% Former%Communist%nations%–%share%a%commitment%to%democratic%politics%and%free%market%economics%% Opportunities%for%international%businesses%may%be%enormous%if%this%continues%% Countries%in%very%poor%economic%condition%–%have%signs%of%growing%unrest% Risks%involved%in%doing%business%in%such%countries%are%very%high%(returns%may%be%as%well)% China%represents%huge%and%largely%untapped%market%–%could%emerge%from%Third%World%to%industrial%powerhouse%% Latin%America%emerging%as%attractive%market%for%exports%and%FDIs% Many%countries%now%viewed%as%developing%could%emerge%as%major%players%in%the%global%industry% Move%towards%global%economy%further%strengthened%by%widespread%adoption%of%liberal%economic%policies%% Seeing%privatization%of%stateTowned%businesses,%widespread%deregulation,%markets%being%opened%to%more%competition,% increased%commitment%to%removing%barriers%to%crossTborder%trade/investment%% Russia%–%hesitation%in%moving%towards%market%economy%(experienced%economic%pain)% Globalization%is%not%all%good%–%risks%associated%with%it%%

Changing+Foreign+Direct+Investment+Picture++

The+Changing+Nature+of+the+Multinational+Enterprise+

(1)%Rise%of%nonTUS%Multinationals%%

(1)%Rise%of%MiniTMultinationals%%%

The+Changing+World+Order+
• • • • • • • • • • • •

The+Global+Economy+of+the+21st+Century+

THE%GLOBALIZATION%DEBATE%
AntiNGlobalization+Protests++
• • • • • • • • • • • • • • • • • • Globalization% blamed% for:% job% losses,% downward% pressure% on% wage% rates,% environmental% degradation,% cultural% imperialism%of%global%media/MNEs%% Multiple%protests%have%arisen%against%globalization%% Evidence%of%outsourcing%Canadian%jobs%to%developing%countries%–%fears%arising%of%harmful%effects%on%Canada’s%wellTbeing% Outsourcing%reduces%jobs%locally,%shifting%them%overseas% Wage%rate%enjoyed%by%unskilled%workers%in%advanced%economies%have%declined%in%recent%years%% Supporters%of%globalization%–%argue%that%declining%real%wage%rates%due%to%increase%in%technology%(solution%=%education)%% Concern:% transferring% manufacturing% facilities% to% developing% nations% that% may% lack% adequate% regulations% to% protect% labour%and%environment% Argument%–%adhering%to%labour%and%environmental%regulations%significantly%increase%cost%of%manufacturing%% Supporters% of% globalization% –% argue% that% tougher% environmental% regulations% and% stricter% labour% standards% go% hand% in% hand%with%economic%progress%% Richer%countries%enact%tougher%environmental/labour%laws% Also%argue%that%it%is%possible%to%tie%free%trade%agreements%to%implementation%of%tougher%environmental/labour%laws% o I.e.%NAFTA%passed%after%agreements%made%for%Mexico%increase%environmental%protection%regulations% Also%argue%most%businesses%are%staffed%by%managers%who%are%committed%to%behave%in%an%ethical%manner% Increasingly% interdependent% global% economy% shifts% economic% power% away% from% national% gov’ts% and% towards% supranational%organizations%(i.e.%WTO,%UN)% Unelected%bureaucrats%can%now%impose%policies%on%democratically%elected%gov’ts%of%nations%% Supporters% of% globalization% –% power% of% international% bodies% rests% largely% on% ability% to% persuade% members% to% follow% a% certain%action%(power%limited%to%that%which%nationTstates%collectively%agree%to%grant)% Real%power%resides%with%individual%nationTstates,%not%supranational%organizations% Argument%–%despite%supposed%benefits,%gap%between%rich%and%poor%nations%of%the%world%gotten%wider%in%the%last%100%yrs% Supporters%of%globalization%–%several%factors%affect%country’s%wealth%besides%globalization,%i.e.:% o World’s%poorest%countries%suffered%from%totalitarian%governments% o Economic%policies%destroyed%wealth%instead%of%facilitating%creation% o Scant%protection%for%property%rights% o War% Additionally,%rapid%population%growth%can%exacerbate%problems%% On%the%other%hand,%many%of%world’s%poorest%nations%also%held%by%back%large%debt%burdens%–%servicing%debt%leaves%little% for%investing%in%public%infrastructure%projects,%healthcare,%education,%etc.% International+business:+any%firm%that%engages%in%international%trade%or%investment% Countries%differ%in%cultures,%political,%economic,%and%legal%systems,%and%levels%of%economic%development% Businesses%must%alter%practices%country%by%country%–%must%develop%appropriate%strategies/policies%% Must%also%establish%policies%for%currency%exchange%–%can%be%source%of%wealth%or%loss%

Globalization,+Jobs,+and+Income+

Globalization,+Labour+Policies,+and+the+Environment++

Globalization+and+National+Sovereignty++

Globalization+and+the+World’s+Poor++

• •

MANAGING%IN%THE%GLOBAL%MARKETPLACE%
• • • •

CHAPTER%2%–%COUNTRY%DIFFERENCES%IN%THE%POLITICAL%ECONOMY%
POLITICAL%SYSTEMS%
• • • • Political+economy:+political,%economic,%and%legal%systems%of%a%country%–%interactively%affect%economic%wellTbeing% Economic%and%legal%systems%of%country%shaped%by%political%system%% Political+system:+system%of%government%in%a%nation%–%assessed%on%two%dimensions% Collectivism%vs.%individualism,%and%democratic%vs.%totalitarian%%

Collectivism+and+Individualism++
• • • Collectivism:+political%system%that%stresses%primacy%of%collective%goals%over%individual%ones%% Needs%of%a%society%as%a%whole%are%generally%viewed%as%more%important%than%individual%freedoms%% Individual’s%rights%may%be%restricted%if%seen%as%countering%“the%greater%good”%%

Socialism:% • Trace%intellectual%roots%to%Karl%Marx,%although%socialist%thought%predates%Marx%(Plato)% • Marx%–%few%will%benefit%at%the%expense%of%many%in%capitalist%society%where%individual%freedoms%not%restricted% o Pay%of%workers%does%not%reflect%full%value%of%their%labour% o State% ownership% of% basic% means% of% production/distribution/exchange% can% ensure% workers% are% fully% compensated%for%their%labour% o Benefit%society%as%a%whole,%rather%than%individual%capitalists% • Communist:+one%who%believes%socialism%can%only%be%achieved%through%revolution%and%totalitarian%dictatorship% • Social+democrat:%one%committed%to%achieving%socialism%through%democratic%means% • 1970s%–%majority%of%the%world’s%populations%lived%in%communist%states%(i.e.%Soviet%Union,%Poland,%China,%Laos)%% • MidT1990s%–%communism%in%retreat%worldwide% • Social%democratic%gov’ts%nationalized%private%companies%in%certain%industries%to%serve%public%good,%not%private%profit% • Protected%from%significant%competition%by%monopolizing%market%and%guaranteed%gov’t%investment%–%became%increasingly% inefficient%(led%to%higher%taxes%and%higher%prices)%% Individualism%% • Opposite%of%collectivism%–%emphasizes%importance%of%guaranteeing%individual%freedom%and%selfTexpression% • Interests%of%individual%>%interests%of%the%state%% • Aristotle%–%argued%private%property%is%more%highly%productive%than%communal%property%–%stimulates%progress%% • Built%on%two%central%tenets:% (1) Importance%of%guaranteeing%individual%freedom%and%selfTexpression% (2) Welfare%of%society%is%best%served%by%letting%people%pursue%own%economic%selfTinterest%% • Translates%into%advocacy%for%democratic%political%systems%and%free%market%economics%%

Democracy+and+Totalitarianism+
• • • Democracy:+political%system%in%which%gov’t%is%by%the%people,%exercised%either%directly%or%though%elected%representatives%% Totalitarianism:%form%of%gov’t%in%which%one%person/political%party%exercises%absolute%control%over%all%spheres%of%human% life,%opposing%political%parties%are%prohibited% Democracy%and%individualism%go%hand%in%hand,%and%collectivism%and%totalitarianism%go%hand%in%hand%

Democracy% • Belief%that%citizens%should%be%directly%involved%in%decision%making%–%impractical%in%today’s%large%societies%% • Representative+democracy:+political%system%in%which%citizens%periodically%elect%individuals%to%represent%them%in%gov’t% • Representatives%make%decisions%on%behalf%of%the%electorate%–%rests%on%assumption%that%if%reps%fail,%can%be%voted%out%later% • Ideal%representative%democracy%has%safeguards:% (1) Individual’s%right%to%freedom%of%expression,%opinion,%and%organization%% (2) Free%media%% (3) Regular%elections%in%which%all%eligible%citizens%are%allowed%to%vote% (4) Universal%adult%suffrage% (5) Limited%terms%for%elected%representatives%% (6) Fair%court%system%that%is%independent%from%political%system%% (7) NonTpolitical%state%bureaucracy%% (8) NonTpolitical%police%force%and%armed%service% (9) Relatively%free%access%to%state%information%% Totalitarianism%% • Safeguards%in%representative%democracy%denied%to%citizens%% • Political%repression%is%widespread%–%those%who%question%right%of%rulers%often%imprisoned%or%beheaded% • Communist+ totalitarianism:+ version% of% collectivism% advocating% that% socialism% can% be% achieved% only% through% totalitarian%dictatorship%

• • •

Theocratic+ totalitarianism:%political%system%in%which%political%power%is%monopolized%by%a%party,%group,%or%individual% that%governs%according%to%religious%principles% Tribal+ totalitarianism:% political% system% in% which% a% party% representing% interests% of% a% particular% tribe% (ethnic% group)% monopolizes%political%power% RightNwing+totalitarianism:+political%power%monopolized%by%party%that%generally%permits%individual%economic%freedom% but%restricts%individual%political%freedom%including%free%speech,%often%on%grounds%that%it%would%lead%to%communism%

ECONOMIC%SYSTEMS%
Market+Economy++
• • • • • • • • • • • • • • • • • Economic%system%in%which%interaction%of%supply%+%demand%determines%quantity%in%which%goods/services%are%produced% Productive%activities%privately%owned,%not%stateTowned% Cannot%be%any%restrictions%on%supply%% Role%of%gov’t%–%encourage%vigorous%competition%between%private%producers%% Can%do%this%by%outlawing%monopolies%and%restrictive%business%practices%designed%to%monopolize%a%market%% Private%ownership%also%encourages%competition%and%economic%efficiency% Entrepreneurial%incentive%to%constantly%improve%products%and%processes%–%positive%impact%on%growth%and%development% Goods%and%services%that%country%produces,%quantity,%and%price%all%determined%by%the%government%% Objective%–%gov’t%allocates%resources%for%the%good%of%society%% All%business%state%owned,%gov’t%can%direct%them%to%make%investments%in%best%interest%of%nation%as%a%whole%% Historically%found%in%communist%countries%% StateTowned%businesses%have%little%incentive%to%control%costs%and%be%efficient%–%cannot%go%out%of%business% No%need%for%individuals%to%look%for%better%ways%to%serve%consumer%needs%–%can%lead%to%stagnation% Certain% sectors% of% economy% are% left% to% private% ownership% and% free% market% mechanisms,% others% have% significant% state% ownership%and%gov’t%planning% Gov’ts%tend%to%take%into%state%ownership%troubled%firms%whose%continued%operations%seen%as%vital%to%national%interests% Country’s%rules/laws%that%regulate%behaviour%along%with%processes%by%which%laws%are%enforced%% Laws%can%regulate%business%practice,%define%manner%in%which%business%transactions%are%to%be%executed,%and%set%down%the% rights/obligations%of%those%involved%in%business%transactions%

Command+Economy+

Mixed+Economy++

LEGAL%SYSTEMS%%

Different+Legal+Systems++
Common%Law% • Based%on%tradition%(country’s%legal%history),%precedent%(cases%that%come%up%in%the%past),%and%custom%(ways%in%which%laws% are%applied%in%specific%situations)% • Gives%common%law%system%degree%of%flexibility%that%other%systems%lack%% • Judges%have%power%to%interpret%law%to%apply%to%unique%circumstances%of%an%individual%case%% • New%interpretations%set%precedent%to%be%followed%in%future%cases%–%laws%may%be%altered/clarified/amended%over%time% Civil%Law% • Based%on%detailed%set%of%laws%organized%into%codes%% • Tends%to%be%less%adversarial%than%common%law%system%–%judges%rely%heavily%on%legal%codes%% • Less%flexibility%than%common%law%system%–%judges%have%no%power%to%interpret,%only%to%apply% Theocratic%Law% • Based%on%religious%teachings%% • Most%prevalent%–%Islamic%law,%intended%to%govern%all%aspects%of%life%% • Basic%foundations%of%theocratic%law%cannot%be%changed%

Differences+in+Contract+Law+
• • • • Contract:+document%specifying%conditions%under%which%an%exchange%is%to%occur%and%details%rights/obligations%of%parties% Contract+law:%body%of%law%that%governs%contract%enforcement%% Parties%in%agreement%resort%to%contract%law%when%one%party%believes%other%has%violated%letter/spirit%of%agreement%% Under%common%law,%contracts%tend%to%be%detailed%with%all%contingencies%spelled%out%

• • • • • • • • • •

Under%civil%law,%contracts%tend%to%be%shorter%and%less%specific%–%many%issues%already%covered%in%civil%code% More%expensive%to%draw%up%contracts%under%common%law,%and%resolving%contracts%can%be%difficult%% Common% law% –% have% advantage% of% greater% flexibility% and% allow% for% judges% to% interpret% contract% dispute% in% light% of% prevailing%situation%% United+Nations+Convention+on+Contracts+for+the+International+Sale+of+Goods+(CISG):+set%of%rules%governing%certain% aspects%of%making%and%performance%of%commercial%contracts%between%sellers/buyers%between%nations%% Adopting%CISG%signifies%to%other%nations%that%it%will%treat%the%rules%as%a%part%of%its%own%law%% Property:+resource%over%which%an%individual%or%business%holds%a%legal%title%(that%it%owns)% Property+rights:%bundle%of%legal%rights%over%the%use%to%which%a%resource%is%put%and%over%the%use%made%of%any%income%that% may%be%derived%from%that%resource% Countries%–%can%differ%in%extent%to%which%their%legal%systems%protect%property%rights%% Almost%all%countries%have%laws%protecting%property%rights,%but%not%all%are%enforce%heavily% Can%be%violated%through%private(and%public(action%

Property+Rights++

Private%Action% • Theft,%piracy,%blackmail,%etc.%by%private%individuals%or%groups%% • Occurs%in%all%countries,%but%weak%legal%system%allows%for%much%higher%level%of%criminal%activity%% Public%Action%and%Corruption% • Occurs%when%public%officials%such%as%politicians%and%gov’t%bureaucrats%extort%income%or%resources%from%property%holders% • Can% be% done% through% legal% mechanisms,% i.e.% excessive% taxation,% requiring% expensive% licenses/permits% from% property% holders,%or%taking%assets%into%state%ownership%without%compensating%owners%% • Can%also%be%done%by%illegal%measures%or%corruption,%i.e.%demanding%bribes%from%businesses%in%return%for%right%to%operate% in%a%country/industry/location%% • High%level%of%corruption%=%significantly%reduces%economic%growth%rate%in%country%% The%American%Foreign%Corrupt%Practices%Act%and%Canadian%Bill%ST21% • Foreign+ Corrupt+ Practices+ Act:+ passed% in% 1970s% (USA)% after% US% companies% bribed% gov’t% officials% abroad% to% win% contracts%–%regulates%behaviour%regarding%conduct%of%IB%in%taking%of%bribes%and%other%unethical%actions%% o Requires%public%companies%to%keep%records%to%determine%whether%violation%of%act%has%occurred%% • Bill+ SN12:+ Canadian% legislation% making% bribery,% or% other% business% corruption% “tool”% of% foreign% official% by% Canadian% business,%a%criminal%offence%% • Bills%have%loopholes%pertaining%to%gift%giving%in%other%countries%(seen%as%cultural%practice)%

Protection+of+Intellectual+Property++
• • Intellectual%property%–%product%of%intellectual%activity,%i.e.%software,%screenplay,%formulas%% Ownership%rights%established%through:% o Patents+–+grants%inventor%of%product%or%process%exclusive%rights%to%manufacture/use/sale%of%invention% o Copyrights+–+exclusive%legal%rights%of%authors/artists%to%publish%and%dispose%of%work%as%they%see%fit%% o Trademarks+–%designs%and%names,%often%officially%registered,%by%which%merchants%or%manufactures%designate% and%differentiate%their%products% Increasingly%important%source%of%economic%value%for%businesses%% Protection%of%intellectual%property%becoming%increasingly%problematic;%easy%to%copy%and%distribute%% Regulations%for%intellectual%property%varies%from%country%to%country% Paris+ Convention+ for+ the+ Protection+ of+ Industrial+ Property+ –% international% agreement% to% protect% intellectual% property%–%signed%by%96%countries% Canada’s%intellectual%property%laws%fall%behind%in%the%world%–%one%of%11%countries%on%watch%list%% Trade+ Related+ Aspects+ of+ Intellectual+ Property+ Rights+ (TRIPS)+ –+ agreement% among% members% of% WTO% to% enforce% stricter%intellectual%property%regulations,%i.e.%granting/enforcing%patents%lasting%min.%20%years%+%copyrights%lasting%50+%% Product+safety+laws:+set%certain%safety%standards%to%which%product%must%adhere% Product+liability:%involves%holding%a%firm%and%officers%responsible%when%product%causes%injury,%death%or%damage% Civil%laws%call%for%payment%and%monetary%damages,%criminal%laws%result%in%fines%or%imprisonment%% Countries%have%different%strictness%in%liabilities%laws%–%presents%problems%with%conducting%business%internationally%

• • • • • •

Product+Safety+and+Product+Liability+
• • • •

DETERMINANTS%OF%ECONOMIC%DEVELOPMENT%%
Differences+in+Economic+Development++
• • • • • • • • GNP%and%GNI%(gross%national%product/income)%often%used%as%determinants%of%economic%well%being% Purchasing+power+parity+(PPP)+–+adjustment%in%GDP%per%capita%to%reflect%differences%in%cost%of%living%% Canada’s%ranking%has%fallen%to%#28%in%terms%of%GDP%–%Canadians%now%poorer%than%they%used%to%be% Argument% –% development% should% be% assessed% less% by% material% output% (i.e.% GNP),% more% by% capabilities/opportunities% people%enjoy% Development%should%be%seen%as%process%of%expanding%real%freedoms%that%people%experience%% Development%requires%removal%of%major%impediments%to%freedom:%i.e.%poverty,%tyranny,%social%deprivation% Development%–%not%strictly%an%economic%process,%also%a%political%one%% Human+Development+Index+(HDI)+–%assesses%impact%of%number%of%factors%on%quality%of%human%life%in%a%nation%(by%UN)% o Based%on%life%expectancy%at%birth,%educational%attainment,%and%average%incomes%

Broader+Conceptions+of+Development+–+Amartya+Sen+

Political+Economy+and+Economic+Progress++
Innovation%and%Entrepreneurship%are%the%Engines%of%Growth%% • Innovation+–+development%of%new%products,%processes,%organizations,%management%practices%+%strategies% • Seen%as%product%of%entrepreneurial%activity% • Can% be% argued% that% if% country’s% economy% is% to% sustain% longTrun% economic% growth,% business% environment% must% be% conducive%to%consistent%production%of%product/process%innovations%+%entrepreneurial%activity%% Innovation%and%Entrepreneurship%Require%a%Market%Economy%% • Economic%freedom%associated%with%market%economy%creates%greater%incentives%for%innovation/entrepreneurship%% • In%market%economy,%any%individual%with%an%innovative%idea%free%to%make%money%out%of%that%idea%by%starting%a%business% • In% planned% economy,% state% owns% all% means% of% production% –% entrepreneurs% have% little% economic% incentive% to% develop% valuable%new%innovations%(state%will%capture%most%of%the%gain)% Innovation%and%Entrepreneurship%Require%Strong%Property%Rights% • Individuals%and%businesses%require%opportunity%to%profit%from%innovative%ideas%% • Without%rights%protection,%profits%from%innovative%efforts%can%be%expropriated%% The%Required%Political%System%% • In%the%West%–%assumption%is%that%representative%democracy%is%linked%to%market%economic%system%and%progress%% • Totalitarian%regimes%in%the%past%have%fostered%a%market%economy%and%experienced%rapid%economic%growth%% • Only%certain%kinds%of%totalitarian%regimes%capable%of%promoting%economic%growth%–%must%be%dictatorship%committed%to% free%market%system%and%strong%protection%of%property%rights%% • Democratic%regimes%far%more%conducive%to%longTterm%economic%growth%than%dictatorships%% Economic%Progress%Begets%Democracy%% • Economic%growth%often%leads%to%establishment%of%democratic%regime%% • Democracy%may%not%always%be%cause%of%initial%economic%progress,%but%seems%to%be%consequence%of%it%

Geography+Education,+and+Economic+Development++
• • • • • • • % Geography%has%potential%to%influence%economic%development%% By%virtue%of%favourable%geography,%certain%societies%are%more%likely%to%engage%in%trade%than%others%–%more%likely%to%open%% In%turn,%can%promote%faster%economic%growth%% Adverse%geographic%conditions,%i.e.%poor%soils,%hostile%climates,%can%have%negative%impact%on%development%% Study%–%landlocked%countries%grew%more%slowly%than%coastal%economies%% Education%plays%key%role%in%economic%development%–%investing%in%education%increases%growth%rates%% Educated%population%=%more%productive%population%%

Political*Economy*&*Economic*Progress* • Innovation(and(entrepreneurship(are(the(engines(of(growth( o Innovation(–(development(of(new(products,(processes,(organizations,(management( practices,(and(strategies.((( Innovation(and(Entrepreneurship(require(a(market(economy( o The(economic(freedom(associated(with(a(market(economy(creates(greater(incentives(for( innovation(and(entrepreneurship(than(either(a(planned(or(a(mixed(economy.(( o In(a(planned(economy,(the(state(owns(all(means(of(production.(( ! Entrepreneurial(individuals(have(little(economic(incentive(to(develop(valuable( new(innovations,(since(it(is(the(state,(rather(than(the(individual,(that(captures( most(of(the(gains.(( Innovation(and(Entrepreneurship(require(strong(property(rights( o Both(individuals(and(businesses(must(be(given(the(opportunity(to(profit(from(innovative( ideas.(( The(required(political(system( o Democratic(regimes(are(far(more(conducive(to(long8term(economic(growth(than(are( dictatorships,(even(benevolent(ones.( o Only(in(a(well8functioning,(mature(democracy(are(property(rights(truly(secure.(( Economic(progress(begets(democracy(( o Subsequent(economic(growth,(often(leads(to(an(establishment(of(a(democratic(regime.((

•

•

•

•

Geography,*Education*and*Economic*Development** • Favourable(geography(allows(society(to(more(likely(engage(in(trade(than(others(and(to(be(open( to(and(to(develop(market8based(economic(systems,(which(in(turn(would(promote(faster( economic(growth.(* Nations(that(invest(more(in(education(will(have(higher(growth(rates(because(an(educated( population(is(a(more(productive(population.(*

•

States*in*Transition** The(political(economy(of(many(of(the(world’s(nation(states(has(changed(radically(since(the(late(1980s.( two(trends(have(been(evident:( 1. During(the(late(1980s(and(early(1990s,(a(wave(of(democratic(revolutions(swept(the(world.(Thus,( there(was(a(marked(shift(towards(greater(democracy.(( 2. Strong(move(away(from(centrally(planned(and(mixed(economies(and(toward(a(more(free(market( economic(model.(( The(spread(of(democracy(( • Three(main(reasons(account(for(the(spread(of(democracy((

o o

o

Many(totalitarian(regimes(failed(to(deliver(economic(progress(to(vast(bulk(of(their( populations.(( New(info(and(communication(technologies,(including(shortwave(radio,(satellite( television,(fax(machines,(desktop(publishing,(and(now(the(internet(have(broken(down( the(ability(of(the(state(to(control(access(to(uncensored(info.(These(technologies(have( created(new(conduits(for(the(spread(of(democratic(ideals(and(info(from(free(societies.(( In(many(countries(the(economic(advances(of(the(last(quarter(century(have(led(to(the( emergence(of(increasingly(prosperous(middle(and(working(classes(who(have(pushed(for( democratic(reforms.((

The(New(World(Order?( • • • Fukuyuma(envisions(a(world(dominated(by(a(universal(civilization(characterized(by(democratic( regimes(and(free(market(capitalism.(( Huntington(argues(that(there(is(no(“universal”(civilization(based(on(widespread(acceptance(of( western(liberal(democratic(ideals.(( Evolution(of(a(global(political(system(is(positioned(somewhere(between(Fukuyamas(universal( global(civilization(based(on(liberal(democratic(ideals(and(Huntingtons(vision(of(a(fractured(world.((

The(Spread(of(Market8Based(Systems( • • Paralleling(the(spread(of(democracy(since(the(1980s(has(been(the(transformation(from(centrally( planned(command(economies(to(market8based(economies.(( In(general(command(and(mixed(economies(failed(to(deliver(the(kind(of(sustained(economic( performance(that(was(achieved(by(countries(adopting(market(based(systems,(such(as(the(US,( Switzerland,(Hong(Kong(and(Taiwan.(( The(shift(toward(a(market8based(economic(system(often(entails(a(number(of(steps.( o Deregulation(( ! Involves(removing(legal(restrictions(to(the(free(play(of(markets,(the( establishment(of(private(enterprises,(and(the(manner(in(which(private( enterprises(operate.(( ! Removes(price(controls,(allowing(prices(to(be(set(by(demand(and(supply(( ! Abolishing(laws(that(regulate(the(establishment(and(operation(of(private( enterprises.(( ! Relaxing(or(removing(restrictions(on(direct(investment(by(foreign(enterprises( and(international(trade.(( o Privatization( ! Transfers(the(ownership(of(state(property(into(the(hands(of(private(individuals,( frequently(by(the(sale(of(state(assets(through(an(auction.(( ! Seen(as(a(way(to(unlock(gains(in(economic(efficiency(by(giving(new(private( owners(a(powerful(incentive(–(the(reward(of(greater(profits(–(to(search(for( increases(in(productivity,(to(enter(new(markets(and(to(exit(losing(ones.(( o Legal(systems((

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!

Without(a(legal(system(that(protects(property(rights,(and(without(the(machinery( to(enforce(that(system,(the(incentive(to(engage(in(economic(activity(can(be( reduced(substantially(by(private(and(public(entities,(including(organized(crime,( that(expropriate(the(profits(generated(by(the(efforts(of(private(sector( entrepreneurs.((

The*Rocky*Road* • • • a(shift(towards(a(market(economy(caused(hyperinflation(in(many(countries* Another(shift(towards(a(market(economy(was(collapsing(output(as(inefficient(state8owned( enterprises(failed(to(find(buyers(for(their(goods.(* Post8communist(states(that(have(been(successful(at(shifting(towards(a(market(economy( followed(a(shock(therapy.(Prices(and(trade(were(liberalized(quickly,(inflation(was(held(in(check( by(tight(monetary(policy,(and(the(privatization(of(state8owned(industries(was(implemented( rapidly.(*

Implications** • • • • • It(is(unlikely(that(China,(Russia,(Poland,(or(any(of(the(other(states(now(moving(toward(a(free( market(economy(will(attain(the(living(standards(of(the(west(anytime(soon.(* There(is(no(guarantee(that(democracy(will(thrive(in(the(newly(democratic(states(of(Eastern( Europe,(particularly(if(these(states(have(to(grapple(with(severe(economic(setbacks.(* Totalitarian(dictatorship(could(return.* The(world(could(be(dominated(by(a(number(of(civilizations.(* In(such(a(world,(much(of(the(economic(promise(inherent(in(the(global(shift(toward(market8based( economic(systems(may(evaporate(in(the(face(of(conflicts(between(civilizations.(*

(

Chapter(3:(The(Cultural(Environment( ( • Business'success'in'different'countries'requires'cross/cultural'literacy'–' understanding'of'how'cultural'differences'affect'business' • Guanxi'–'relationships'backed'by'reciprocal'obligations,'are'central'to'getting' business'done' • There'may'be'a'link'between'culture'and'the'cost'of'doing'business'in'a'country'or' region' • Diff'cultures'are'more'or'less'supportive'of'capitalist'mode'of'pdn'and'this'may' affect'cost'of'doing'business' • Culture'is'not'static,'it'evolves'' ( What(is(Culture?( • Hofsted,'Namenwirth'and'Weber'define'culture'as'a'system'of'values'and'norms' that'are'shared'among'a'group'of'people'and'that'when'taken'together'constitutes'a' design'for'living' • Values(!(abstract'ideas'about'what'a'society'believes'to'be'good,'right'and' desirable' • Norms(!(social'rules'and'guidelines'that'prescribe'appropriate'behaviour'in' particular'situations' • Society(!(a'group'of'people'who'share'a'common'set'of'values'and'norms' Values(and(Norms:( - These'reflect'what'a'society'identifies'with' - Values'provide'a'context'into'how'individual'freedom'is'looked'at,'truth,'justice,'etc.' - We'can'relate'value'back'to'political'and'economic'systems' - i.e.'democratic'systems'value'individual'freedoms'and'thus'the'value'of'freedom'is' given'great'emphasis'upon'in'countries'that'are'democratic' - Another'convention'of'culture'is'defined'by'norms'(which'are'the'social'rules'that' govern'people’s'actions'towards'one'another)' There(are(two(subsets(of(norms:( (1)(folkways'!'routine'conventions'of'everyday'life' o Folkways'are'generally'things'that'concern'with'attributes'such'as'dress' code,'good'social'manners,'neighbourly'behaviour,'etc.' o People'who'violate'folkways'don’t'need'to'worry'about'it,'because'it'doesn’t' matter'that'much' o i.e.'foreigners'are'excused'if'they'violate'folkways'because'they'are'not' considered'bad'or'evil' o even'with'time,'for'example,'in'Canada'we'really'care'about'time'and'what'to' be'early' o but'in'other'countries,'like'Argentina,'when'a'dinner'host'says'come'at'any' time'after'8,'they'mean'that'do'NOT'come'at'8'because'it'is'too'early'

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(2)(mores(!(seen'as'central'to'the'functioning'of'a'society'and'to'its'social'life' o These'mores'have'much'more'significance'than'folkways' o These'deal'with'factors'such'as'indictments'against'theft,'adultery,'incest,' cannibalism'and'violating'these'rules'have'serious'retribution' o i.e.'in'Western'societies'you'are'allowed'to'consume'alcohol,'however'in' Saudi'Arabia'you'could'be'imprisoned'for'drinking'alcohol'

Culture,(Society(and(the(NationFState:( - there'are'many'cultural'differences'even'in'one'set'of'culture'that'you'may'think'is' all'the'same' - i.e.'in'Canada,'we'have'Anglo'culture,'French'Speaking'culture'and'First'Nations' culture' - in'Africa,'there'are'many'tribal'differences,'i.e.'in'Rwanda'in'which'civil'wars'have' broken'out'and'genocide'has'occurred' - but,'we'could'also'talk'about'cultures'that'embrace'several'nations' - i.e.'Islamic'Society'is'shared'by'many'nations'in'the'Middle'East,'Africa'and'Asia' - these'expansive'cultures'embrace'several'nations'that'underpin'Samuel' Huntington’s'point'of'view'that'the'world'has'fragmented'into'3'civilizations:' Western,'Islamic,'Chinese' - even'in'Canadian'society,'we'have'many'different'sub/cultures'due'to'immigration' and'the'various'amounts'of'ethnicities'we'have'in'the'country' - you'must'always'recognize'that'the'national'culture'of'a'country'is'a'mosaic'of'many' smaller'sub/culture'within'that'nation' - relationship'is'often'ambiguous'and'no'country'has'a'homogenous'cultre**'' The(Determinants(of(Culture:( - Social(Structure(!(this'refers'to'a'society’s'basic'social'organization' - The'first'is'degree'to'which'the'basic'unit'of'social'orgs'it'eh'individual'as'opposed' to'the'group'(defined'as'two'or'more'people'w/'shared'identity)' - In'some'societies,'individual'attributes'and'achievements'are'viewed'as'being'more' important'than'group'membership'' - The'second'factor'is'how'society'has'been'stratified'into'classes'or'castes' - For'example,'in'the'India,'the'caste'system'exists'while'in'Canada'there'is'more' mobility'to'be'free'to'do'what'you'like'beyond'your'‘class’' - Individuals(and(Groups(!(where'you'have'people'who'share'the'same'sense'of' identity'with'you'and'how'each'person'interacts'with'each'other'on'a'common'set'of' expectations'about'each'other’s'behaviours' - Individualism:'besides'being'a'political'philosophy,'in'western'societies,'it'serves'as' the'basic'building'block'of'social'orgs***'' - Individualism'can'be'a'good'thing'for'e.g.'entrepreneurs'and'new'ideas'created'by' these'people'happen'at'individual'level'

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i.e.'in'some'societies'individual'achievements'are'more'important'than'which'group' you'are'associated'with' for'example,'in'Japan,'group'membership'is'key'and'your'loyalty'to'a'Japanese'group' is'very'important' when'the'individual’s'worth'is'linked'to'the'achievements'of'the'group,'there'is' strong'incentive'for'individual'members'of'the'group'to'work'together'for'the' common'good**' in'Japan,'the'importance'of'group'membership'and'working'towards'a'common'goal' with'others'is'so'important'that'some'people'might'even'die'from'being'overworked' the'word'KAROSHI'means'to'die'from'overworking' this'also'encourages'workers'to'stay'with'eh'same'company,'because'they'would' have'a'strong'identification'with'their'groups' Japanese'have'been'renowned'for'widespread'diffusion'of'self/managing'teams' within'companies;'there'is'greater'cooperation'bw'individuals'within'a'co'and' amongst'companies'as'well'(i.e.'departments'cooperate'better)' Cooperation'is'dfiven'by'the'need'to'improve'the'performance'of'the'business' firm***' in'comparison,'individualism'can'have'people'jumping'from'co'to'co'(while'this'may' be'good'at'individual'level,'it'is'bad'for'company)'–may'also'lead'to'good'general' skills'but'lack'of'knowledge,'experience,'and'network'of'interpersonal'contacts'that' comes'from'years'of'experience***'' i.e.'individualism'leads'to'high'degree'of'managerial'mobility***'(pros:'breadth'of' exposure'that'western'execs'can'use'(i.e.'use'techniques'from'one'firm'to'improve' their'own);'cons:'low'commitment'and'loyalty'from'employees)' A'con'of'individualism'is'that'it'leads'to'excessive'competition'and'low'levels'of' cooperation'which'hurts'the'company'in'the'long/term'' Con'of'group'is'that'there'is'less'dynamism'and'entrepreneurship'' (3)'Social(stratification(!(heretical'social'categories'often'based'on'family' backgrounds,'occupation'and'income' Children'belong'to'the'social'category'of'what'their'parents'belonged'in' People'at'the'top'will'have'more'opportunities'than'people'at'the'bottom' Two'key'differences'in'strata:'1)'degree'of'mobility'bw'strata'2)'significance' attached'to'strata'in'business'context' Social(mobility(!(the'term'in'which'how'much'flexibility'people'have'in'moving' out'of'their'social'strata' Caste(system(!(determined'by'what'family'a'person'is'born'into'and'usually'deals' with'the'occupation'of'that'person' Change'in'the'person’s'caste'is'not'possible'within'their'lifetime' In'India,'the'caste'system'still'remains'

o Even'though'the'caste'system'was'abolished'in'1949,'in'rural'societies,'the' caste'system'is'still'very'important' o Class(system(!(a'less'rigid'form'of'social'stratification'and'this'where' mobility'is'very'much'possible' o i.e.'your'position'that'you'were'born'in'can'easily'be'changed'by'yourself'if' you'want'to'move'out'of'that'class' o as'well,'some'people'might'argue'that'there'is'more'class'mobility'between' people'in'Britain'and'people'in'Canada' o In'Britain'there'was'an'upper'class,'middle'class'and'lower'class'and'each' classification'had'certain'attributes'in'which'an'individual'belonged'to' o In'Modern'Day'England,'though'the'class'system'still'exists'in'small'ways,'it' is'being'taken'out'slowly'generation'by'generation' o Upward'mobility'was'definitely'possible,'however'it'took'time'for'the'class' structure'to'get'to'the'way'it'is'today' o In'the'US,'it’'s'a'different'story,'because'even'if'you'were'born'poor,'with' your'own'individual'economic'achievements'you'can'easily'make'it'to'the' top…'just'think'of'the'American'Dream' o Class(consciousness(!(a'tendency'for'ppl'to'perceive'themselves'in'terms' of'their'class'background'–'this'then'shapes'their'relationships'with'other' members'of'other'classes' o this'is'more'prevalent'in'Britain'and'not'in'the'US'or'Japan,'as'people'in' Britain'think'they'are'different'than'others'because'of'their'background'and' thus'they'will'act'differently,'even'in'business'settings' o There'is'an'antagonistic'relationship'in'Britain'bw'mgmt.'and'labour'and'the' lack'of'cooperation'and'industrial'disruption**'leads'to'higher'costs'of'pdn'' o however,'the'class/struck'British'society'is'getting'rid'of'this'type'of' sentiment'towards'class'and'thus'it'is'becoming'more'like'Japan'or'US,'where' your'background'doesn’t'matter,'even'in'business'dealings'or'the'way'you' run'your'businesses'and'trade'with'others' Religious(and(Ethical(Systems:( • religion(!(system'of'shared'beliefs'and'rituals'concerned'with'the'realm'of'the' sacred' • ethical(systems(!(cultural'beliefs'of'what'is'proper'behaviour'and'conduct' • most'of'the'world’s'moral'principles'are'a'product'of'religion' • there'are'4'main'religions:'Christianity,'Islam,'Hinduism,'Buddhism'and'even'though' there'are'many,'many'more'religions/'not'all'of'them'are'a'part'of'the'intricate' moral'systems'of'nations' • you'cannot'make'generalizations'of'religion'and'the'way'business'is'conducted'and' the'effects'of'those'moral'systems'on'the'way'those'businesses'are'conducted'

Economic(implications(of(Christianity:(The(Protestant(Work(Ethic( • Protestant'is'the'most'important'because'Max'Weber'said'that'the'Protestant' division'closely'relates'to'the'spirit'of'capitalism' • Weber'emphasized'that'Protestants'value'hard'work'and'the'creation'of'wealth'and' assistance'from'worldly'pressures' • And'so'when'these'Protestants'became'wealthy,'they'would're/invest'into'their' businesses,'etc.'and'expand'their'wealth'even'more' • The'Catholics'promoted'a'sense'of'salvation'in'the'next'world'which'is'why'they' didn’t'foster'the'same'kind'of'work'ethic' • Protestants'also'believed'in'allowing'individuals'to'create'their'own'relationships' with'God,'which'Weber'correlated'with'the'fact'that'in'the'free'market,'you'are' allowed'to'pursue'your'own'freedoms'and'economic'pursuits\' • Link'bw'Protestantism'and'individualism'as'well***'(but'be'sure'to'not'emphasize' on'these'general'relations'too'much)' • Thus'Protestant'nations'such'as'Britain,'Germany'and'US'were'the'first'with'the' industrial'revolutions,'there'are'many'other'Catholic'nations'and'Orthodox' majorities'that'do'just'as'well' Islamic(Fundamentalism:( • This'is'the'extremist'form'of'Islam' • Caused'by'move'toward'modernization'and'the'influence'of'Western'ideas' (democracy,'rights'for'women,'Western'attitudes'towards'sex,'marriage)' • Modernization'in'many'countries'has'exacerbated'the'gap'bw'rich'minority'and' rural'majority' • As'a'result,'religious'studies'have'become'more'popular,'religious'clothing'more' common,'etc.'to'counter'the'encroachment'of'Islamic'beliefs**'' • Western'influence'is'blamed'for'a'range'of'social'ils'and'many'fundamentalist' actions'are'directed'towards'western'gov’t,'cultural'symbols,'businesses,'and' individuals'' • In'certain'countries'lik'iran,'fundamentalists'are'using'the'Koran'as'law'of'the'land,' guide''to'statecraft,'and'arbiter'of'social'behaviour*''/'everything'is'done'within'the' purview(of(the(faith' • And'Islamic'fundamentalism'is'also'present'in'countries'such'as'Pakistan,'Egypt,' Sudan,'Saudi'Arabia' Economic(Implications(of(Islam:( • There'are'explicit'ECONOMIC'principals'that'are'set'in'the'Koran' • Many'principals'in'Islam'favour'free'enterprise' • And'the'Koran'speaks'freely'of'earning'legitimate'profit'through'trade'and' commerce'

• • • • • •

The'protection'of'the'right'to'have'property'is'also'embedded'in'the'religion' There'is'also'a'sense'of'social'justice'in'Islam,'where'you'should'not'earn'profits'by' exploiting'others' As'long'as'the'profit'is'justly'earned/'it'is'earned'righteously'(Islam'is'critical'of' those'who'make'profit'by'exploiting'others***)' Muslim'countries'are'likely'to'be'receptive'to'international'business'because'of'the' favouring'towards'market/based'systems' You’re'accepted'as'long'as'profit'is'earned'justly,'not'deceptive,'and'not'breaking' contractual'obligations'' In'Islam,'you'are'not'allowed'to'take'the'interest'from'payments'and'this'is'not'only' in'theology'but'has'also'been'made'into'law'in'Pakistan'in'1992'and'that'Islamic' banking'methods'be'used'in'2001'

Economic(Implications(of(Hinduism:( • Weber'said'that'the'ascetic'principals'of'Hinduism'do'not'encourage'the'kind'of' entrepreneurial'activity'to'pursue'wealth'that'of'Protestants' • He'thought,'that'because'of'the'Hindu'lifestyle'that'was'not'devoted'materially'but' rather'spiritually/'they'would'not'be'as'entrepreneurial'as'the'Protestants' • Gandhi'embodied'everything'of'a'en'ascetic'Hindu'and'some'people'believe' • Today,'India'has'many'hard'working'entrepreneurs'and'is'very'entrepreneurial' • Hinduism'also'supported'the'nation’s'caste'system,'because'you'could'be' reincarnated'into'a'higher'caste'in'your'next'life' • Some'people'don’t'make'it'up'in'organizations'because'of'their'caste'' • Now,'the'caste'system’s'influence'is'fading'because'it'has'been'abolished' • Buddhism'doesn’t'adovocate'extreme'ascetic'lifestyle;'is'a'better'ground'for' entrepreneurship'' Economic(Implications(of(Confucianism:( • Three'values'central'to'Confucian'system'of'ethics'loyalty,(reciprocal(obligations,( honesty' • Loyalty'to'superiors'is'an'obligations;'this'loyalty'can'reduce'conflict'bw'mgmt.'and' labour'–'however,'it'isn’t'BLIND'loyalty' • There'is'reciprocal'loyalty''(give'loyalty,'and'receive'“blessings”)'and'obligation'that' comes'into'play,'which'can'be'seen'in'Japan' • In'Japan,'this'is'seen'through'lifetime'employment'where'hard'working'employees' are'reward'for'their'work'by'their'superiors' • This'naturally'can'lead'to'better'economic'performance'(more'knowledgeable' employees'and'less'turnover)' • Honesty'is'extremely'important'and'dishonesty'is'not'acceptable' • This'means'that'costs'of'business'are'lower,'because'companies'trust'each'other'

• • •

In'Japan'for'example,'we'can'look'at'the'car'companies'where'there'is'a'relationship' between'the'manufacturers'and'the'big'corporations' Their'business'dealings'are'combined'with'the'fact'that'there'are'trust'and' reciprocal'obligations'for'doing'business' In'China,'if'you'are'getting'favours'through'the'GUANXI'network,'then'you'must'be' willing'to'return'the'favour'as'well'or'are'reprimanded''

Language:( • Language'shapes'the'way'ppl'perceive'the'world' • In'Canada,'we'have'an'English'speaking'culture'and'a'French'speaking'culture' • The'most'widely'spoken'languages'are'English,'Spanish,'Russian,'and'Arabic'with' Chinese'being'the'largest'mother/tongue'language'of'the'world' • While'English'is'increasingly'becoming'the'language'of'business,'there'are' significant'advantages'to'learning'the'mother'tongue'of'country'so'you'can'build' rapport' • E.g.'think'Mark'Zuckerberg'and'his'delivery'of'speech'in'China'in'Mandarin' • Unspoken'language'refers'to'non/verbal'communication,'which'is'culturally'bound' • You'must'be'able'to'understand'non/verbal'cues'in'other'countries,'i.e.'giving'a' thumbs'up'in'Canada'is'seen'as'a'good'gesture'while'in'Greece'and'Turkey'it'is'NOT' seen'the'same'way' • You'also'need'to'consider'personal'space'and'in'Canada'there'is'greater'distance' that'is'needed'than'in'Latin'America' Education:( • Education'plays'major'role'as'a'determinant'of'national'competitive'advantage***'' • Michael'Porter:'Take'for'example'Japan,'because'it’s'education'system'was'well' established,'even'after'the'World'War,'their'recovery'was'remarkable'because'of' their'educated'population' • Education'is'a'key'factor'into'determining'how'successful'a'country'will'be'if'you' have'invested'in'your'people'and'how'much'economic'growth'you'could'conceive' from'your'investments' Culture(and(the(Workplace:( • Society’s'culture'impacts'the'values'found'in'the'workplace' • Power(distance(!(focuses'on'how'a'society'deals'with'the'fact'that'people'are' unequal'in'physical'and'intellectual'capabilities' • High'power'distance'is'in'inequality'countries'while'low'power'distance'is'with' countries'who'played'down'inequalities' • Individualism(versus(collectivism(!(focused'on'the'relationship'between'the' individual'and'his'or'her'fellows'

• • •

• • •

•

• •

In'individualistic'societies,'ties'were'loose'while'in'more'group/cohesive'societies,' ties'were'much'stronger' Uncertainty(avoidance(!(how'different'cultures'socialized'with'different'people' and'how'they'dealt'with'ambiguity'and'uncertainty' Higher'uncertainty'avoidance'cultures'meant'that'people'would'want'stricter'rules' and'more'job'security'while'people'who'had'lower'uncertainty'avoidance'cultures' meant'that'they'had'a'greater'readiness'to'take'on'tasks,'etc.' Masculinity(vs.(femininity(!(looked'at'between'genders'and'work'roles' In'masculine'cultures,'there'was'a'greater'differentiation'between'gender'roles' while'in'feminine'culture,'no'such'distinctions'quite'existed' LongFterm(versus(shortFterm(orientation(!(theory'that'deals'with'virtue' regardless'of'truth,'values'associated'with'long/term'orientation'are'thrift'and' perseverance,'values'associated'with'short/term'orientation'are'respect'for' tradition,'fulfilling'social'obligations'and'protecting'one’s'face' Criticisms'on'Hofstede’s'research:'1)'assumes'one/to/one'correspondence'bw' culture'and'nation/state,'2)'research'may'not'be'culturally'bound'3)'conducted' within'one'industry'and'one'company'4)'outdated'work;'culture'evolves'over'time'' Confucian(dynamism:(attitude'towards'time,'persistence,'reciprocation'of'gifts'and' favours,'etc' Hof'said'that'countries'that'ranked'high'on'this'had'lower'economic'growths'

Cultural(Change:( • Gender'roles'have'changed,'role'of'women'in'business'and'society'have'changed' • There'is'a'shift'in'Japan'for'greater'individualism'as'they'stress'group'work'very' much' • Westerners'in'Japan'will'not'act'the'same'way'as'the'Japanese'do'in'terms'of'their' devotion'to'their'work' • As'Japan'has'become'richer,'there'is'a'greater'trend'towards'individualism'than' collectivism' • The'merging'of'cultures'is'done'through'globalization' • Just'because'you'where'blue'jeans'and'eat'McDonalds…'does'NOT'mean'you'have' adopted'North'American'values' '

Chapter Four: Ethics in International Business ! ! ! ! ! This chapter focuses on ethical issues that arise when companies do business in different nations There is now increasing pressure on companies to act ethically Ethics refers to accepted principles of right/wrong that govern conduct of person, members of profession, or actions of organization Business ethics: accepted principles of right/wrong governing conduct of business people Ethical strategy: strategy or course of action that doesn’t violate these accepted principles

Ethical Issues in IB ! Many issues are rooted in fct that political systems, law, economic development, and culture vary significantly from culture to culture and nation to nation ! These differences give rise eot ethical issues (what’s unethical somewhere, may be ethical elsewhere) ! Most common ethical issues involve exchange of money, employment practices, human rights, environmental regulations, corruption, and moral obligation of multinational corporations ! Challenge today is these issues are facilitated by the “technological environment” Employment Practices ! What stds should be applied when work conditions are inferior to those in multinational’s home nation? ! Should home stds be followed, the country’s stds? OMG so confusing! Human Rights ! Basic human rights still not respected in many nations – rights we take granted like freedom of association, freedom of speech, etc are not universally accepted ! E.g. effects of apartheid in South Africa ! Inward investment by multinational can be a force for economic, political, and social progress that ultimately improves the rights of people in repressive regimes o Ethical for multinational to do businesses that lack the democratic structures and HR records of developed nations (e.g. investment in China) ! However, some regimes are so repressive that investment cannot be justified on ethical grounds (e.g. Myanmar with dictatorship where all the “safe places” to mine and extract copper are fully exploited) Environmental Pollution ! Ethical issues can arise when environmental regulations in host nations are inferior to those in home nation ! Regulations governing emission of pollutants, dumping of chemicals, and use of toxic materials is often lacking in developing nations ! Should multinational feel free to pollute in developing nation?

! !

Since controls are laxer, the company can despoil the environment and may endanger local people to maintain low pdn costs and competitive advantage* E.g. Asarcho – US-Based subsidiary of Mexican company Grupo Mexico o Original agreement allowed the company to discharge “limitless amount of smoke, dust, and fumes” without threat of being responsible for consequences o This is unethical and led to subsequent ramifications for the company

Corruption ! Is a problem in every society in history ! IB can and have gained economic advantages by making payments to these officials ! 1997 – members of OECD followed the US and adopted the Convention on combating bribery of foreign public officials in international business transactions o Convention went into force in 1999 o Obliges member states to make the bribery of foreign public officials a criminal offence ! Corruption also reduces the returns on business investment and leads to low economic growth – side payments to officials may siphon profits from business activity o This reduces business’ incentive to invest and retard economic growth rate ! Quebec in Canada receives tax money from other provinces to fund questionable practices – 2010: MacLeans called Quebec “The Most Corrupt Province in Canada” Moral Obligations ! MNCs have power coming from resources and ability to move pdn from country to country ! Some philosophers argue that with power comes social responsibility (CSR – idea that business people should consider social consequences of economic actions when making business decisions, and they should favour decisions that have both good economic and social consequences) ! Advocates of this approach argue that businesses need to recognize their noblesse oblige (term for honourable behavior) and give something back to society ! There are examples of companies that have abused their power for private economic gain: o East India company which deployed over 40 warships, dominated Indian continent, and became the biggest ruler ! Power itself is morally neutral** - how it is used is what matters o Can be for good or bad o Good: BP in Algeria - where it built to plants to provide drinking water to residents o Bad: News Corporation, Rupert Murdoch used power of company to gain entry into Chinese media market Ethical Dilemmas ! Some argue what is ethical depends on one’s cultural perspective ! E.g. Gift giving is acceptable in many cultures, but can be viewed as bribery in other regions as well

! !

Ethical dilemmas are situations in which none of th avlbl alternatives seems ethically acceptable They exist because real-world decisions are complex, difficult to frame, and involve first, second-, and third-order consequences that are hard to quantify*

Roots of Unethical Behaviour ! Why do managers act unethical? (example in book: investors interested in restoring SS United States, had to remove asbestos, got that from Ukraine-based company for a fraction of cost, but that company had bad ethical standards) o First, business ethics are not separate from personal ethics ! Personal ethics influences our behaviours and comes from different sources including parents, schools, religion, media ! Home-country managers working abroad in multinational firms may experience more than the usual degree of pressure to violate their personal ethics • There may be pressure to meet unrealistic goals which may lead mangers to commit unethical actions ! Two faults: • 1) Intense competitiveness of international business env puts pressure on companies to squeeze every advantage they have and cut costs in all ways possible • 2) Fault also lies in processes that do not incorporate ethical considerations into decision making ! Third cause of unethical behavior: Organization Culture: values and norms shared among employees of organization o Org culture has important influence on ethics of business decision making o Example: look at the actions of Kenneth Lay, the ex-CEO of notorious Enron ! Fourth cause: pressure from parent company to meet unrealistic performance goals attained only by cutting corners or acting in unethical manner o Leads to myopic focus on short-term performance o The Enron scandal shows that orgs culture can legitimize behavior that society would judge as unethical, esp when it is mixed with focus on reaching unrealistic performance goals, and maximizing short-term performance*** ! Fifth cause: leadership – helps establish the culture of orgs, and they set the example for others to follow o If business leaders don’t behave ethically, then that influences the entire organization

Philosophical Approaches to Ethics ! Straw Men o Approach to business ethics that offer inappropriate guidelines for ethical decision making in multinational corporation o Four key approaches: Friedman doctrine, cultural relativism, righteous moralist, and naïve moralist*** o Straw man analogy: straw in scarecrow to scare people – not a serious effort but to really fake people into thinking that it’s a real danger Friedman Doctrine ! Milton Friedman: business only social responsibility is to increase profits, so as long as it stays within the rules of law ! Rejects the idea that business should undertake social expenditures beyond those mandated by the law and required for efficient running of business ! Firm needs to maximize profits so that it can satisfy the owners of the firm (shareholders) ! Shareholders can invest in social expenditures if they want, but it is not the decision of managers ! He still states that businesses should behave in an ethical manner and not engage in deception and fraud – his ideologies are not against business ethics, they oppose social responsibility Cultural Relativism ! Is the belief that ethics are nothing more than reflection of culture- that ethics are culturally determined and accordingly, businesses should adopt the ethics of the culture in which it is operating ! “When in Rome, do as the Romans do” ! If culture supports slavery, then it’s cool to use slave labour in ! **Reject s the idea that universal notions of morality transcend culture ! Some elements of this straw man are useful (i.e. considering societal values and norms that vary rom culture to culture, and different customs apply as well – so business practices may be ethical in one country, but unethical in another) Righteous Moralist ! Claims that multinational’s home country standards of ethics are the right ones to follow in foreign countries ! Can run into problems caused by prevailing cultural norms in the country where doing business o E.g. in Italy where it is expected you understate earnings, the manager may disregard and state accurately based on his North American ethics, but this may lead to earnings being understated by three times*** ! Main criticism: go too far; while there are some universal moral principles that shouldn’t be violated, it doesn’t always follow appropriate thing to do is adopt home-country standards Naïve Moralist

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Asserts that if mger of multinational sees firms from other nations are not following ethical norms in a host nation, the manager shouldn’t either You do it because everyone else is doing ti There are two objections: o 1) To imply that you do bc everyone else is doing, is not sufficient ! The company has a clear choice – does not have to abide by local practices or even better, don’t invest in a country where unethical practices are routine o 2) Multinational must recognize that it does have ability to change the prevailing practice in country – can use power for moral purpose ! BP and their adoption of zero-tolerance policy for facilitating payments

Utilitarian and Kantian Ethics ! Utilitarian: moral worth of actions is determined by their consequences; action is desirable if it lads to the best possible balance of good consequences and minimization of harm o Recognizes that actions have multiple consequences that are good and bad o Requires the weighing of social benefits and costs of business action and pursue only those where benefits > costs o The best actions are those that create greatest good for greatest number of people ! Has serious drawbacks: o Hard to measure the benefits, costs, and risks of a course of actions; limited knowledge makes this impossible sometimes o Second problem is that it omits consideration of justice; the action that makes greatest good may result in unjust treatment of minority ! Kantian ethics: people should be treated as ends never means as to the ends of others; people re not instruments, they have dignity and need to be respected o Employing people in sweatshops Is unethical because it treats people as mere cogs in machine and not conscious moral beings that have dignity o His philosophy is seen as incomplete because it has no place for moral emotions or sentiments but respected bc of the notion that people should be treated w/ dignity Rights Theories ! Recognize that humans have fundamental rights an privileges that transcend national boundaries and cultures; establish minimum level of morally acceptable behavior ! E.g. right to free speech is a fundamental right that takes precedence over all but the most compelling collective goals ! Fundamental human rights form the basis of moral compass that managers should navigate by when making decisions with an ethical component ! This led to the UN Universal Declaration of Human Rights – which has been ratified by almost every country on planet and lays down basic principles that should be adhered to irrespective of the culture in which one is doing business ! With rights come obligations – we are obligated to provide benefits or services that secure the rights of others

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Obligation rests on shoulders of all moral agents whose actions might harm or contribute to harm of workers and residents**

Justice Theory ! Just distribution – one that is considered fair and equitable ! John Rawls’ theory of justice: o Argues that economic goods and services should be distributed equally EXCEPT when unequal distribution works to everyone’s advantage o Veil of Ignorance - everyone is ignorant of his/her particular characteristics of sex, intelligence, race, etc and then asks what system people would design under a veil of ignorance o Under these conditions, people would unanimously agree on two fundamental principles of justice: ! 1) Each person be permitted the max amt of basic liberty (political liberty, freedom of speech and assembly, liberty of conscience and freedom of thought, freedom and right to hold personal property, and freedom from arbitrary arrest and seizure) ! 2) Once equal basic liberty is assured, inequality in social goods – income and wealth distribution, and opportunities – is to be allowed only if such inequalities benefit everyone • Inequalities can be just if the system that produces them is to the advantage of everyone; difference principle – inequalities are justified if they beneeift the position of the leat-advantaged person o Rawls’ veil of ignorance is a conceptual tool that contributes to the moral compass that managers can use to help navigate through difficult dilemmas ! It can be just, for example, to pay workers lower wages in comparison to home country as long as the inequality benefits the least-advantaged members of global society Ethical Decision Making ! What’s the best way for managers to make decision? ! It is important to enhance the morale so that employees feel motivated to work under more stressful conditions created by the competitive international landscape o If company behaves unethically, it jeopardize morale and negatively effect productiviytiy ! Can do five things to make sure ethical issues are considered in business decisions

Hiring and Promotion: ! Hire people w/ strong sense of personal ethics; can filter employees through psychological tests, check prior employment history, etc Orgs Culture and Leadership ! To foster ethical behavior, businesses need to build ethical orgs culture ! Things important in building orgs culture that prioritizes ethical behavior: o 1) Code of ethics: formal statement of ethical priorities business adheres to o 2) Having articulated these values, leaders must give life and meaning by emphasizing on their importance and then acting on them Decision-making Process: ! In addition to establishing right kind of ethical culture in orgs, business people must think through ethical implications of decisions in systematic way ! Need moral compass, and both rights and Rawls’ theory of justice to do this o Step one (STAKEHOLDER ANALYSIS): identify which stakeholders (individuals who have interest, claim or stake in company, in what it does, and how well it performs) – internal (people work for or own business – employees, shareholders, BOD) and external (customers, lenders, gov’t, etc) ! Each stakeholder group supplies the organization with important resources and in exchange, expects interests to be satisfied in some way ! Customers for e.g. provide revenue, and expect quality products o Stakeholder analysis involved moral imagination (standing in shoes of stakeholder and asking how proposed decision might impact that stakeholder) o Step two (judging ethics): determine whether proposed decision violates fundamental rights of stakeholders; whether they would allow the decision if it were designed under veil of ignorance?* ! Judgment at this stage should be guided by various moral principles that should not be violated o Step three (moral intent): business must resolve to place moral concerns ahead of other where either fundamental rights or key moral principles have been violated ! Upper-management needs to be involved o Step four (engage in ethical behavior) o Step five (audit decisions): review decision to make sure they are consistent with ethical principles such as those stated in code of ethics; without auditing, people may not know if decision process is working and if changes should be made or not*** Ethics Officers: ! People responsible for making sure all employees are trained to be ethically aware, that ethical considerations enter the business’ decision-making process and that company’s code of ethics is adhered to ! May also audit decisions ! Act as internal ombudsperson with responsibility for handling confidential inquires from employees, investigating complaints from employers or others, reporting findings, recommending change

Moral Courage ! Enables managers to walk away from decision that is profitable, but unethical ! Strength to say no to superior who instructs to commit unethical action ! Whistle blowing* (companies should not fire people who do this, instead should set up mediums like hotline for employees to voice conerns)

Chapter(5(–(International(Trade(Theories( Two'goals:'1)'review'number'of'theories'that'explain'why'it'is'beneficial'for'country'to' engage'in'international'trade'2)'pattern'of'international'trade'observed'in'world'economy' ' An'Overview'of'Trade'Theory' Mercantilism'!'Big'in'the'16th'&'17th'century,'encouraged'exports,'discouraged'exports' ' Adam'Smith'encourages'Free(Trade,(which'is'the'absence'of'barriers'to'the'free'flow'of' goods'and'services'between'countries;(gov’t'doesn’t'influence'(through'quotas'or'duties)' what'its'citizens'can'buy'from'another'country'or'what'they'can'produce'and'sell'to' another'country'' ( We'will'explore'three'theories,'Adam'Smith’s'Invisible'Hand,'David'Ricardo’s'Comparative' advantage'and'Heckshcer/Ohlin'theory' ( The'Benefits'of'Trade' Encourages'countries'to'specialize'in'the'manufacture'and'export'of'products'that'can'be' produced'most'efficiently'in'that'country'' ' Country’s'economy'may'gain'if'citizens'buy'certain'products'from'other'countries'that'can' be'produced'at'home;'gains'arise'bc'international'trade'allows'country'to'specializine'in' manfacutre'and'import' ' The'Pattern'of'International'Trade' - Ricardo'/>'competitive'advantage'(international'differences'in'labour'productivity)' - Hecskscher/Ohlin'Theory'/>'differences'in'endowments'of'factors'of'production**' ( - Product(life(cycle(theory(!'Raymond'Vermon;'products'exported'from'their' original'developer'country'at'first,'when'they'become'internationally'accepted'they' are'manufactured'in'low'cost'countries'' ' - In'early'life'of'product,'starts'manufactured'in'base,'then'liked'internationally'(gains' acceptance),'then'pdn'starts'elsewhere,'then'pdct'exported'back' ' New(Trade(Theory(!(Paul(Krugman;'Stresses'that'in'some'cases'countries'specialize'in' the'production'and'export'of'particular'products'not'because'of'underlying'differences'in' factor'endowments'but'because'in'certain'industries'the'world'market'can'support'only'a' limited'number'of'firms'(airplane)'–'firms'are'able'to'capture'first/mover'advantage***'' ' Trade'Theory'and'Government'Policy' - All'theories'agree'that'international'trade'is'beneficial'to'a'country,'they'lack' agreement'in'their'recommendations'on'gov’t'policy' - Mercantilism'advocates'for'greater'gov’t'involvement'(increase'exports,'limit' imports);'the'other'three'say'unrestricted'free'trade;'and'new'trade'theory'alon' with'national'competitive'advantage'by'Porter'advocate'for'limited'gov’t' intervention'to'support'the'development'of'export'industries''

' Mercantilism' - !'An'economic'philosophy'advocating'that'countries'should'simultaneously' encourage'exports'and'discourage'imports'(gain'more'gold'&'silver'by'exporting)' - /Government'should'intervene'to'ensure'trade'surplus'' - /Imports'erelimited'by'tarrifs'and'quotas,'while'exports'were'subsidized***' - /David'Hume'pointed'out'major'flaw'that'more'gold'&'silver'='higher'prices' (inflation)'which'would'make'neighbouring'countries'buy'less''‘english’'product' resulting'in'a'loss'of'the'trade'surplus' - /Mercantilism'takes'trade'as'a'zero(sum(game'!'A'situation'in'which'an'economic' gain'by'one'country'results'in'an'economic'loss'by'another' - positive(sum(game(!'a'situation'in'which'all'countries'can'benefit'even'if'some' benefit'more'than'othes' ' Absolute'Advantage' - !'A'country'has'this'in'the'production'of'a'product'when'it'is'more'efficient'than' any'other'country'at'producing'it' - Countries'should'specialize'in'the'pdn'of'goods'for'which'they'have'advantage'and' then'trade'these'for'goods'produced'by'other'countries' - Country'should'never'produce'goods'at'home'that'it'can'buy'for'cheaper'from'other' countries' - Trade'is'a'positive'sum'game,'because'after'specialization'and'trade,'both'countries' consume'more' ' Comparative'Advantage'' - !'The'theory'that'countries'should'specialize'in'the'production'of'goods'and' services'they'can'produce'most'efficiently.' - Basic'message'is'that'potentitial'world'pdn'is'greater'when'unrestricted'free'trade' than'it'is'with'restricted'trade' - Since'trade'results'in'more'output,'consumers'in'all'nations'can'consumer'more' without'trade'restiictions' - Theory'of'competitive'advantage'suggests'that'trade'is'positive=sum'game'in'which'all' countries'that'participate'realize'economic'gains***' ' Qualifications'and'Assumptions' 1) 2'countries'and'2'types'of'goods'' 2) No'trans.'Costs' 3) No'exchange'rates' 4) Cross'functional'resources'(produce'everything)' 5) Constant'returns'to'scale'' 6) No'changes'in'country’s'stock'of'resources'' 7) No'impact'on'income'distribution'within'the'country' ' Trade'and'Simple'Extensions'of'Ricardian'Theory' - Immobile'resources:'resources'do'not'easily'move'from'one'economic'activity'to' another'–'process'creates'friction'and'human'suffering'too'

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Diminishing'returns:'more'units'are'required'to'produce'each'additional'units' Realistic'to'assume'for'two'reasons:' Not'all'resources'are'of'same'quality'(marginal'reosources'may'be'empoloyed'to' increase'output)' Different'goods'use'resources'in'different'proportions'and'there'are'diminishing' returns'

' Dynamic'effects'and'economic'growth' If'we'relax'assumption'of'changing'country’s'stock'of'resources,'there'are'two'economic' gains'to'be'realized' 1)'free'trade'may'increase'stock'of'resources'as'increased'supplies'of'labour'and'capital' from'abroad'become'avlbl'for'use''(e.g.'western'countries'investing'in'former/soviet'EU' countries)' 2)'free'trade'may'also'increase'efficiency'with'which'country'uses'its'resources'' economies'of'scale,'better'technology'and''increased'productivity'from'labour'and'capital' competition'from'foreign'economies'may'stimulate'domestic'producers'to'innovate**' ' The'Samuelson'Critique' - Looks'at'what'happens'when'rich'country'like'US'enters'agreement'with'poorer' country'like'China' - The'lower'prices'that'US'consumers'pay'for'goods'imported'from'China'may'not'be' enough'to'make'net'gain'for'the'US'economy'if'the'dynamic'effect'of'free'trade'is'to' lower'real'wage'rates'in'the'US' - Free'trade'comes'at'the'expense'of'lower'market'clearing'wage' - Says'that'free'trade'tends'to'benefit'richer'countries'and'that'introducing' protectionist'measures'may'produce'far'worse'situation' Greater'growth'in'countries'that'have'open'economies'' ' Evidence'for'link'bw'trade'and'growth' - Adopt'economy'and'embrace'free'trade,'and'over'time,'nationl'will'be'rewarded' with'highr'economic'growth'/'/'higher'growth'='higher'income'and'living'standards'' - Jeffrey'Frankel'and'David'Romer'–'one'%'point'increase'in'the'ratio'of'country’s' trade'to'its'GDP'increase'income'per'person'by'0.5%'at'least' ' Heckscher'Ohlin'Theory'(key'assumption'(which'is'also'a'limitation)'is'that'technologies( are(same(across(contries)(( - Ricardo’s'theory'stresses'that'comparative(advantage(arises(from(diff(in( productivity'(i.e.'Ghana'is'more'efficient'than'SK'in'pdn'of'cocoa'depends'on'how' productively'it'ses'its'resources)'–'ricardo'stressed'labour'productivity'and' differences'in'labour'productivity'bw'nations'as'underlie'the'notion'of'comparative' advantage' - Explain'the'idea'of'comparative'advantage'by'relating'it'to'the'fact'that'different' countries'are'endowed'with'different'resources'(labour'land,'capital'–'the'more' abundant'a'factor,'the'lower'its'cost)'(export'things'that'by'using'factors'which'are' locally'abundant,'import'goods'that'use'factors'that'are'locally'scarce)'

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Like'Ricardo,'this'theory'says'free'trade'is'beneificial;'unlike'ricardo,'they'say'that' pattern'of'intl'trade'is'determined(by(differences(in(factor(endowments,(not( productivity*(

( The'Leontief'Paradox' Wassily'Leontif'pointed'out'that'US'was'relatively'abundant'in'capital'compared'to'other' nations,'how'come'it'wasn’t'an'exporter'of'capital'intensive'goods'and'an'importer'of' labour'intensive'goods.' ' The'Product'life/cycle'Theory' • Argued'that'new'products'were'first'manufactured'in'America,'as'they'got'more' popular'became'produced'abroad' • At'first'not'enough'high'income'ppl'interested'in'these'products'in'different' countries'as'such'they'import'from'America' • Overtime'demand'increasese'as'such'it'sratrs'to'make'sense'to'set'up'pdn'facilities' in'those'advanced'countries'where'demand'is'growing'–'pdn'within'other'countries' limts'potential'for'exports'from'US'' • When'they'start'to'do'so,'products'become'standardized,'and'price(becomes(main( competitive(factor(( • Other'countries'have'lower'cost'of'manufacturing,'as'such'they'begin'exporting'to' the'US'and'the'US'stops'producing' • US'swtiches'from'being'an'exporter'of'product'to'an'importer'as'pdn'becomes' concentrated'in'lower/cost'foreign'locations*' • Pg'174'for'diagrams' ' The'New'Trade'Theory' Economies(of(Scale(!'Unit'Cost'reductions'associated'with'a'large'scale'of'output' If'international'trade'results'in'specialization,'then'there'shouldn’t'be'diminishing'returns;' rather'increasing'returns'as'a'result'of'lower'costs'each'time'a'product'is'produced'' ' Aerospace'Example' Dominated'by'Airbus'and'Boeing'' Economies'of'scale'here'come'from'the'ability'to'spread'fixed'costs'over'a'large'output' The'more'units'you'make'the'more'the'fixed'cost'is'spread'out…''taking'the'total'cost/unit' down' Fixed'costs'drops'aas'more'units'are'produced'while'variabl'costs'remain'the'same**'' ' Learning(effects!'Cost'savings'from'learning'by'doing'(drops'bc'of'increase'in' productivity**)' ' Implications'' /A'country'may'dominate'the'export'of'a'good'simply'because'it'was'lucky'enough'to'be' one'of'the'first'producers'(gain'economies'of'scale'and'learn'very'fast)' /Argues'with'the'Heckscher/Ohiil'theory'that'the'US'is'dominant'in'the'aircraft'market'not' because'it'is'endowed'with'those'materials,'rather'the'first'to'do'it'

/Not'at'varieance'however'with'comparative'advantage'because'economies'of'scale'and' learning'effects'both'increase'the'efficiency'of'resource'utilization'and'increases' productivity'' /Encourages'government'intervention'and'strategic'trade'policy'in'order'to'get'local' companies'the'economies'of'scale'they'need'(e.g.'Britain’s'DeHavilland'could'have'kicked' Boeing’s'ass'but'didn’t'because'Iits'first'jet'airliner'was'full'of'serious'technological'flaws)'–' government'can'use'subsidies'and'allow'firms'to'become'first'movers'in'newly'emerging' industries'' ' National'Competitive'Advantage:'Porter’s'Diamond' Porter'sought'to'answer'why'certain'nations'achieve'international'success'in'a'particular' industry?' ' 4'attributes'of'a'nation'shape'the'environment'in'which'local'firms'compete'and'these' attributes'then'promote'or'impede'the'creation'of'competitive'advantage:****' Factor'Endowments'!'a'nation’s'position'in'factors'of'production'such'as'skilled'labour'or' the'infrastructure'necessary'to'compete'in'a'given'industry'' ' Demand'Conditions!'The'nature'of'home'demand'for'the'industry’s'product'or'service' ' Relating'and'supporting'industries!'The'presence'or'absence'of'supplier'industries'and' related'industries'that'are'internationally'competitive'' ' Firm'strategy,'structure,'and'rivalry'!'The'conditions'governing'how'companies'are' created'organized'and'managed'and'the'nature'of'domestic'rivalry' ' Look'at'pg'178'for'diamond' - All'aspects'of'the'diamond'are'correlated'(tough'to'find'one'without'the'others)'also' two'factors'can'help'in'positioning'that'diamond'correctly,'Chance'and'Government.' Chance'simply'through'major'innovations'or'international'events,'and'gov’t'through' policies'' ' Factor'Endowments' - Lie'at'the'centre'of'Heckscher/Ohlin'Theory'' - Basic'Factors'(natural'resources,'climate,'location)' - Advanced'Factors'(communication'infrastructure,'skilled'labour,'research'facilities)' - Advanced'factors'much'more'important,'and'lack'of'basic'factors'puts'pressure'on' developing'advanced'factors'' - Advanced'factors'are'a'product'of'investment'by'individuals,'companies,'and'gov’ts' ' Demand'Conditions' - Firms'most'sensitive'to'the'needs'of'their'closest'consumers,'thus'sophisticated'and' demanding'home'demand'is'important'to'put'pressure'on'producers'to'innovate' and'maintain'high'quality.'

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Sophisticated'and'demanding'consumers'at'home'pressure'firms'to'meet'high' standards'of'product'quality'and'to'produce'innovative'products'(e.g.'camera' buyers'in'Japan'have'influenced'the'stimulation'of'Japanese'industry)''

' Related'and'Supporting'Industries'' - Investment'into'one'industry'can'create'strong'spinoff'industries.'Ex'Sweden’s' success'in'pharmaceuticals'related'to'previous'international'success'in'related'dye' industry'' - Successful'industries'in'a'country'usually'grouped'into'clusters/'this'is'important'as' it'allows'for'knowledge'flow**'(employees'move'between'firms'within'the'cluster,' and'when'they'are'united'from'diff'companies'through'conferences'and'workshops)' ' Firm'Strategy,'Structure'and'Rivalry'(2'ponits'he'makes'here)' - /Different'nations'are'characterized'by'different'management'ideologies.'Ex'in'Japan' and'Germany'top'execs'all'engineers'as'such,'big'focus'on'improving'the' manugacturing'process' - In'America,'a'lot'of'execs'are'finance''related,'as'such'increase'in'short'term'gains' - /Strong'association'between'vigorous'domestic'rivalry'&'the'creation'and' persistence'of'international'competitive'advantage'in'an'industry.'(rivalry'forces' firms'to'be'more'efficient'(reduce'costs,'improve'quality,'etc),'which'then'makes' them'better'intl'competitors)' ' Evaluating'Porter’s'Theory' - Porter'contends'that'the'degree'to'which'a'nation'is'likely'to'achieve'international' success'in'a'certain'industry'is'a'function'of'the'combined'impact'of'the'4'attributes.' - Gov’t'can'affect'all'4'of'the'factors:' - factor'endowments'!'subsidy,'policies'towards'education.' - Demand!'Local'product'standards'or'regulations'that'influence'buyer'needs' - Support'industries!'Policy'through'regulation' - Rivalry'!'capital'market'regulation,'tax'policy,'anti'trust'laws.' ' Implications'for'Business' - Location'Implication' - Activities'should'take'place'where'they'are'most'efficient'(ex:'Design'in'France,' Assembled'in'Singapore,'&'Manufactured'in'China)' - First'Mover'Implications' - Being'the'firs'to'produce'a'product'can'be'source'of'global'comparative'advantage' (esp'if'the'industry'can'only'support'a'few'firms'ex:'aerospace)' - Must'invest'a'lot'upfront'however'before'reaping'any'benefits' - Policy'Implications' - Businesses'can'influence'trade'policy'by'lobbying'in'order'to'promote'free'trade'or' trade'restrictions' - Read'Summary'Pg'185!' ' ' '

Chapter(6:(The(Political(Economy(of(International(Trade(( Instruments)of)Trade)Policy)) • Tariffs( o Is(a(tax(levied(on(imports( o Tariffs(fall(into(two(categories:(specific(tariffs((levied(as(a(fixed(charge(for(each(unit(of(a( good(imported.(Ad(valorem(tariffs((levied(as(a(proportion(of(the(value(of(the(imported( good).(( o Tariffs(are(put(into(place(to(protect(domestic(producers(from(foreign(competition.(( o The(government(gains(through(tariffs,(because(it(increases(government(revenue.( o Domestic(producers(gain(because(the(tariff(affords(them(some(protection(against( foreign(competitors(by(increasing(the(cost(of(imported(goods.(( o Consumers(lose(because(they(must(now(pay(more(for(certain(imports.(( o Tariffs(reduce(the(overall(efficiency(of(the(world(economy(( ! Protective(tariff(encourages(domestic(firms(to(produce(products(at(home(that(in( theory(could(be(produced(more(efficiently(abroad.(((inefficient(utilization(of( resources)( Subsidies( o Is(a(government(payment(to(a(domestic(producer( o Help(domestic(producers(compete(against(foreign(imports(and(gain(export(markets.(( o Domestic(producers(gain(from(subsidies(because(their(international(competitiveness(is( increased(as(a(result(of(them( o Subsidies(can(help(a(firm(achieve(firstImover(advantage(in(an(emerging(industry,(further( gains(to(the(domestic(economy(arise(from(the(employment(and(tax(revenues(that(a( major(global(company(can(generate.(( o In(practice(many(subsidies(are(not(successful(at(increasing(the(international( competitiveness(of(domestic(producers.(( ! Agricultural(subsidies(allow(inefficient(farmers(to(stay(in(business( ! Encourage(countries(to(overproduce(heavily(subsidized(agricultural(products(( ! Encourage(countries(to(produce(products(that(could(be(grown(more(cheaply( elsewhere(and(imported( ! Reduce(international(trade(in(agricultural(products.(( Import(quotas( o Direct(restriction(on(the(quantity(of(some(good(that(may(be(imported(into(a(country.(( o Limits(import(competition( Voluntary(export(constraints( o Quota(on(trade(imposed(by(the(exporting(country,(typically(at(the(request(of(the( importing(country’s(government.(( o Limits(import(competition( o The(extra(profit(producers(make(when(supply(is(artificially(limited(by(an(import(quota(is( referred(to(as(a(quota(rent.((

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Exporting(country(voluntarily(limits(exports(without(being(asked(to(limit(quantity( exported.(( Local(content(requirements( o Demands(that(some(specific(fraction(of(a(good(be(produced(domestically.(( Administrative(policies( o Bureaucratic(rules(designed(to(make(it(difficult(for(imports(to(enter(a(country.(( Antidumping(duties( o Dumping(–(selling(goods(in(a(foreign(market(at(below(their(costs(of(production,(or(as( selling(goods(in(a(foreign(market(at(below(their(“fair”(market(value.(( o The(“fair”(market(value(of(a(good(is(normally(judged(to(be(greater(than(the(costs(of( producing(that(good(because(the(former(includes(a(“fair”(profit(margin.(( o Antidumping(policies(–(designed(to(punish(firms(that(engage(in(dumping.(( ! Product(domestic(producers(from(“unfair”(foreign(competition.(( o

The)Case)for)Government)Intervention)) Political)Arguments)for)Intervention)) • Protecting(jobs(and(industries) o Government(intervention(is(needed(to(protect(jobs,(culture(and(industries(from(foreign( competition.() o Canadian(Foreign(Investment(Review(Act(–(came(into(existence(as(a(means(to(monitor( and(control(foreign(corporate(acquisitions(of(Canadian(companies.() o The(unpopularity(of(FIRA(reached(its(peak(during(the(early(1980s(and(evolved(to(gentler( version(of(protecting(jobs(and(industries(from(foreign(encroachment(with(the(signing(of( the(1985(Investment(Act.(This(paved(the(way(for(the(1988(Free(Trade(Agreement.() National(security() o It(is(necessary(to(protect(certain(industries(because(they(are(important(for(national( security.() Retaliation) o Governments(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(rules(of(the(game”.() o If(the(trading(partners(refuse(to(back(down,(the(results(could(be(higher(trade(barriers(all( around(and(an(economic(loss(to(all(involved.() Protecting(consumers) o Many(governments(have(long(had(regulations(in(place(to(protect(consumers(from( “unsafe”(products.() Furthering(foreign(policy(objectives) o Governments(sometimes(use(trade(policy(to(support(their(foreign(policy(objectives.() o A(government(may(grant(preferential(trade(terms(to(a(country(it(wants(to(build(strong( relations(with.() Protecting(human(rights)

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Protecting(and(promoting(human(rights(in(other(countries(is(an(important(element(of( foreign(policy(for(many(democracies.() Governments(sometimes(use(trade(policies(to(try(to(improve(the(human(rights(policies( of(trading(partners.()

Economic)Arguments)for)Intervention)) • The(infant(industry(argument() o Many(developing(countries(have(a(potential(comparative(advantage(in(manufacturing,( but(new(manufacturing(industries(cannot(initially(compete(with(wellIestablished( industries(in(developed(countries.() o To(allow(manufacturing(to(get(a(toehold,(the(argument(is(that(governments(should( temporarily(support(new(industries(until(they(have(grown(strong(enough(to(meet( international(competition.() o GATT(has(recognized(the(infant(industry(argument(as(a(legitimate(reason(for( protectionism.() ! Many(economists(remain(critical(of(this(point(for(two(reasons) • Protection(of(manufacturing(from(foreign(competition(does(no(good( unless(the(protection(helps(make(the(industry(efficient.() • The(infant(industry(argument(lies(on(an(assumption(that(firms(are( unable(to(make(efficient(longIterm(investments(by(borrowing(money( from(domestic(or(international(capital(market.() • Today,(if(a(developing(country(truly(does(have(a(comparative(advantage( in(a(manufacturing(industry,(firms(in(that(country(should(be(able(to( borrow(money(from(the(capital(markets(to(finance(the(required( investments.() • Given(financial(support,(firms(based(in(countries(with(potential( comparative(advantage(have(an(incentive(to(go(through(the(necessary( period(of(initial(losses(to(make(longIrun(gains(without(requiring( government(protection.() Strategic(trade(policy() o The(new(trade(theory(argues(that(in(industries(where(the(existence(of(substantial(scale( economies(implies(that(the(world(market(will(profitably(support(only(a(few(firms,( countries(may(predominant(in(the(export(of(certain(products(simply(because(they(had( firms(that(were(able(to(capture(firstImover(advantages.() o The(strategic(trade(policy(consists(of(two(components) ! First(it(is(argued(that(by(appropriate(actions,(a(government(can(help(raise( national(income(if(it(can(somehow(ensure(that(the(firm(or(firms(to(gain(firstI mover(advantages(in(such(an(industry(are(domestic(rather(than(foreign( enterprises.()

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Thus(according(to(a(strategy(trade(policy,(a(government(should(use( subsidies(to(support(promising(firms(that(are(active(in(newly(emerging( industries.() Second(component(of(strategic(trade(policy(argues(that(it(might(pay( government(to(intervene(in(an(industry(if(it(helps(domestic(firms(overcome(the( barriers(to(entry(created(by(foreign(firms(that(have(already(reaped(firstImover( advantages.() Governments(should(target(technologies(that(may(be(important(in(the(future( and(use(subsidies(to(support(development(work(aimed(at(commercializing(those( technologies.() Furthermore,(governments(should(provide(export(subsidies(until(the(domestic( firms(have(established(firstImover(advantages(in(the(world(market.() •

The)Revised)Case)for)Free)Trade) Retaliation(and(Trade(War( • Krugman(argues(that(a(strategic(trade(policy(aimed(at(establishing(domestic(firms(in(a(dominant( position(in(a(global(industry(is(a(beggarIthyIneighbour(policy(that(boosts(national(income(at(the( expense(of(other(countries.(A(country(that(attempts(to(use(such(policies(will(probably(provoke( retaliation.(( The(resulting(trade(war(between(two(or(more(interventionist(governments(will(leave(all( countries(involved(worse(off(than(if(a(handIoff(approach(had(been(adopted(in(the(first(place.(( The(problem(is,(how(to(respond(when(one’s(competitors(are(already(being(supported(by( government(subsidies?(Not(to(engage(in(retaliatory(action,(but(to(help(establish(rules(that( minimize(the(use(of(tradeIdistorting(subsidies.((

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Domestic(Politics(( • Governments(do(not(always(act(in(the(national(interest(when(they(intervene(in(the(economy;( politically(important(interest(groups(often(influence(them.((

Development)of)the)World)Trading)System) • both(governments(recognize(that(their(respective(nations(will(benefit(from(lower(trade(barriers( between(them,(but(neither(government(is(willing(to(lower(barriers(for(fear(that(the(other(might( not(follow.() Both(governments(could(set(up(an(independent(body(whose(function(is(to(act(as(a(referee.(This( referee(could(monitor(trade(between(the(countries,(make(sure(that(no(side(cheats,(and(impose( sanctions(on(a(country(if(it(does(cheat(in(the(trade(game.) The(GATT(which(is(now(known(as(WTO(support(this(international(trading(framework.()

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From)Smith)to)the)Great)Depression)

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Free(trade(came(into(place(in(the(late(eighteenth(century(but(was(buried(by(the(Great( Depression.(( The(great(depression(paved(the(way(for(the(SmootIHawley(act(which(erected(an(enormous(wall( of(tariffs,(diverting(consumer(demand(away(from(foreign(products(towards(domestics(products( to(enhance(economic(growth.((

1947E1979:)GATT,)Trade)liberalization)and)Economic)Growth) • • GATT(was(a(multilateral(agreement(whose(objective(was(to(liberalize(trade(by(eliminating( tariffs,(subsidies,(import(quotas,(and(etc.(( The(move(towards(free(trade(under(GATT(appeared(to(stimulate(economic(growth(

1980E1993:)Disturbing)Trends) • • the(world(trading(system(erected(by(GATT(came(under(strain(pressures(for(greater( protectionism(increased(around(the(world) three(reasons(caused(the(rise(in(such(pressures(during(the(198s) o The(economic(success(of(Japan(strained(the(world(trading(system.(Despite(low(tariff( rates(and(subsidies,(Japanese(markets(were(closed(to(imports(and(foreign( investment(by(administrative(trade(barriers.() o Second,(the(world(trading(system(was(strained(by(the(persistent(trade(deficit(in(the( world’s(largest(economy(the(US.) o Third(reason(for(the(trend(towards(greater(protectionism(is(that(many(countries( found(ways(to(get(around(GATT(regulations.(()

The)Uruguay)Round)and)The)World)Trade)Organization)) • • Member(countries(sought(to(extend(GATT(rules(to(cover(trade(in(services() They(also(sought(to(write(rules(governing(the(protection(of(intellectual(property,(to(reduce( agriculture(subsidies,(and(to(strengthen(the(GATT’s(monitoring(and(enforcement( mechanisms.()

Services)and)Intellectual)Property) • The(extension(of(GATT(rules(to(cover(intellectual(property(will(make(it(much(easier(for(highI technology(companies(to(do(business(in(developing(nations(where(intellectual(property( rules(have(historically(been(poorly(enforced.(HighItechnology(companies(now(have(a( mechanism(to(force(countries(to(prohibit(the(piracy(of(intellectual(property.()

The)World)Trade)Organization) • • Acts(as(an(umbrella(organization(that(encompasses(GATT(along(with(two(new(sister(bodies,( one(on(services(and(the(other(on(intellectual(property.) Extends(free(trade(agreements(to(services)

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Has(taken(responsibility(for(arbitrating(trade(disputes(and(monitoring(the(trade(policies(for( member(countries.)

Expanding)Trade)Agreements) • • • • The(WTO(was(given(the(role(of(brokering(future(agreements(to(open(global(trade(in(services) The(WTO(was(also(encouraged(to(extend(its(reach(to(encompass(regulations(governing(FDI) Two(of(the(first(industries(targeted(for(reform(were(the(global(telecommunication(and( financial(services(industries.() Many(telecommunication(companies(responded(positively(to(the(deal,(pointing(out(that(it( would(give(them(a(much(greater(ability(to(offer(their(business(customers(“oneIstop( shopping”(–(a(global(seamless(service(for(all(their(corporate(need(and(a(single(bill.()

The)future)of)the)WTO) • Antidumping(actions) o WTO(rules(allow(countries(to(impose(antidumping(duties(on(foreign(goods(that(are( being(sold(cheaper(than(at(home,(or(below(their(cost(of(production,(when(domestic( producers(can(show(that(they(are(being(harmed.() o A(tendency(towards(less(antidumping(can(be(attributed(towards(globalization,(it(still( reflects(persistent(protectionist(tendencies,(and(is(pushing(members(to(strengthen(the( regulations(governing(the(imposition(of(antidumping() Protectionism(in(agriculture) o Focus(on(high(level(tariffs(and(subsidies(in(the(agricultural(sector(of(many(economies.() o WTO(argued(that(removing(tariffs(barriers(and(subsidies(could(significantly(boost(the( overall(level(of(trade,(lower(prices(to(consumers,(and(raise(global(economic(growth(by( freeing(consumption(and(investment(resources(for(more(productive(uses.() o The(biggest(defenders(of(the(existing(system(are(advanced(economies(who(want(to( protect(their(agricultural(sectors(from(competition(by(low(cost(producers(in(developing( nations.() o Developing(nations(have(been(pushing(hard(for(reforms(allowing(their(producers(greater( access(to(the(protected(markets(of(the(developed(nations.() Protecting(intellectual(property) o Since(innovation(is(a(central(engine(of(economic(growth(and(therefore(rising(living( standards,(the(argument(has(been(that(a(multilateral(agreement(is(needed(to(protect( intellectual(property.() Launching(a(new(round(of(talks:(Doha) o (The(agenda(for(WTOO(agreed(upon(at(Doha(has(been(seen(as(a(game(plan(for( negotiations(over(the(last(and(the(next(few(years.() o It(includes(cutting(tariffs(on(industrial(goods(and(services,(phasing(out(subsidies(to(agri( products,(reducing(barriers(to(crossIborder(investment,(and(limiting(the(use(of(antiI dumping(laws.()

•

•

•

o

The(WTO(argued(for(the(worlds(poorer(nations,(who(cannot(afford(patented(drugs,(that( they(can(make(or(buy(generic(equivalent(to(fight(such(killers(as(AIDS(and(malaria.() ! If(they(are(successful,(agricultural(producers(in(these(nations(will(ultimately(see( global(markets(for(their(goods(expand.() ! Developing(nations(also(gain(from(the(lack(of(language(on(labor(standards,( which(many(saw(an(attempt(by(the(rich(nations(to(erect(trade(barriers.() ! The(sick(and(poor(of(the(world(also(benefit(from(guaranteed(access(to(cheaper( medicines.()

) ) )

Regional)Ecoomic)Integration:)agreements(among(countries(in(geographic(region( to(reduce,(and(ultimately(remove(tariff(and(nontariff(barriers(to(free(flow(of(goods,( services(and(factors(of(production(b/w(each(other.((World(Trade(Organization( members(are(required(to(notify(the(WTO(of(any(regional(trade(agreements(they( participate( ( Golden)Brick)Countries:((BRIC(stands(for(the(big(4,(or(Brazil,(Russia,(India(and( China).(Important(for(number(of(reasons( • Economically(important((4(largest(economies(outside(OECD)( • Seen(to(be(roughly(at(same(stage(of(economic(development( • With(exception(of(Russia,(sustained(themselves(well(through(economic(crisis( • Only(developing(economies(with(annual(GDP(of(over($1(trillion( • All(4(countries(account(for(about(40%(of(worlds(total(foreign(exchange(reser( ( Differences:( • Two(are(democracies( • Two(have(authoritarian(regimes( • Two(have(permanent(seat(in(UN’s(security(council( • Country(incomes(vary( • Not(formal(economic(block(like(EU(or(common(currency( ( Model(for(Economic(Integration( • Larget(movement(toward(regional(economic(integration(is(in(Europe.( o European(Union(has(implemented(the(Euro(as(single(currency( • Similar(moves(have(been(made(b/w(Canada(Mexico(and(US(with(NAFTA( o Have(pros(and(cons(with(cons(being(Canadian(and(US(job(losses(to( Mexico.(( • Many(regional(trade(blocs(are(appearing(and(observers(worry(itll(lead(to( world(where(they(compete(against(each(other.(( o Free(trade(will(exist(within(each(block,(but(each(block(will(protect( market(from(outside(competition(with(hih(tariffs.(( ( Levels(of(Economic(Integration( Free)Trade:)all(barriers(to(trade(of(goods(among(member(countries(removed.( (European(Free(Trade(Association)( Customs)Union:))eliminates(trade(barriers(b/w(members(countries(and(adopts( common(excternal(trade(policy.(( \ External(trade(policy(uses(administrative(machinery(to(oversee(trade( relations(with(nonmembers.(( \ Most(countries(enter(customs(union(with(desire(for(even(greter(economic( integration((EU(began(as(custom(union(and(moved(beyond)( Common)Market:)no(barriers(to(trade(b/w(member(countries(and(has(a(common( external(trade(policy.((

Chapter(8(

Unlike(customs(union,(allows(factors(of(production(to(move(freely(b/w( members.(( \ Labour(and(capital(are(free(to(move(as(no(restrictions(on(immigration,( emigration(or(cross\border(flows(of(capital.(( Economic)Union:)even(closer(economic(integration(than(common(market.( Economic(Union(involves(free(flow(of(products(and(factors(of(production(b/w( member(contries(and(adoption(of(common(external(trade(policy.(( \ Unlike(common(market,(a(full(economic(union(requires(a(common)currency,( harmonization(of(members(tax(demands.(( Political)Union:)move(toward(economic(union(raises(issue(to(coordinate( bureaucracy(accountable(to(citizens(of(member(nations.(( \ European(parliament(has(been(elected(by(citizens(of(EU(countries.(( ( The(Case(for(Regional(Integration((Economic)) • Unrestricted(free(trade(will(allow(countries(to(specialize(in(production(of( goods(and(services(they(can(produce(most(efficiently( • Result(is(greater(world(production(than(with(trade(restrictions( • Stimulates(economic(growth(in(the(country(through(free(trade(( • Foreign(direct(investment(can(transfer(technological,(marketing(and( managerial(know\how(to(host(nations( • Attempts(at(regional(economic(integration(motivated(by(desire(to(exploit( gains(from(free(trade(and(investment.(( ( Case(for(Regional(Integration((Political)( • Linking(neighbouring(economies(and(making(them(increasingly(dependent( on(each(other(creates(incentives(for(political(cooperation(b/w(neighbouring( states.(((reduces(potential(for(violent(conflict(between(the(states).( • United(Europe(makes(plead(for(another(war(to(be(unthinkable.(Wanted(to( stand(together(in(order(to(avoid(possibility(of(another(war( ( Impediments(to(Integration( • Economic(integration(has(its(costs,(some(groups(lose.(Canadian(and(US( wokrers(after(the(NAFTA,(lost(their(jobs(as(Canadian(and(US(firms(moved( production(to(US.(( • Concerns(over(national(sovereignty,(Mexico’s(concerns(about(maintaining( control(of(oil(interests(resulted(in(agreement(with(Canada(and(US(to(exempt( Mexican(oil(industry(from(any(liberalization(of(foreign(investment( regulations(achieved(under(NAFTA.((an(example(is(British(as(they(do(not( want(the(common(currency(to(be(a(Euro(and(stick(to(the(Pound)( ( Case(Against(Regional(Integration(( Trade)Creation:)when(high\cost(domestic(producers(replaced(by(low\cost( producers(within(free(trade(area.(( Trade)Diversion:)when(lower\cost(external(suppliers(replaced(by(higher\cost( suppliers(within(free(trade(area.((

\

( Regional(Economic(Integration(in(Europe(( ( Europe(has(two(trade(blocs:( • European(Union((EU)(–(has(27(members(( • European(Free(Trade(Association((EFTA)\(has(4(members( ( Evolution(of(the(European(Union( • The(EU(is(a(product(of(two(political(factors:(( o The(devastation(if(two(world(wars(on(Western(Europe( o The(European(nations(desire(to(hold(their(own(on(the(world(stage( ( • Originally(formed(in(1951(by(Belgium,(France,(West(Germany,(Italy,( Luxembourg,(and(the(Netherlands( ( Political(Structure(of(EU( ( The(five(main(institutions(in(the(structure(are:( ( • European(Council( • Council(of(Ministers( • European(Commission( • European(Parliament( • Court(of(Justice( ( \ The(European(council(is(composed(of(the(heads(of(state(from(countries(that( are(members(in(the(EU.(The(council(meets(at(least(twice(a(year(and(resolves( major(policy(issues(and(sets(policy(directions( \ The(European(commissions(is(responsible(for(proposing(EU(legislation,( implementing(it,(and(monitoring(compliance(with(EU(laws(by(member(states.( The(commission’s(role(in(competition(policy(has(became(increasingly( important(in(recent(years(to(ensure(no(one(enterprise(uses(its(market(power( to(drive(out(competitors(and(monopolize(markets.( \ The(council(of(Ministers(represents(the(interests(of(member(states((as(they( are(the(ultimate(controlling(authority(with(the(EU.(This(is(because(draft( legislation(from(the(commission(can(only(become(EU(law(if(the(council(agree.( Council(is(made(of(one(representative(from(the(government(of(each(member( state.( \ European(Parliament(is(directly(elected(by(the(populations(of(the(member( states(and(acts(as(a(consultative(body.(They(debate(legislation(and(propose( amendments( \ The(Court(of(Justice(is(comprised(of(one(judge(from(each(country,(and(is(the( supreme(appeals(court(for(EU(law.(The(judges(are(required(to(act(as( independent(officials(rather(than(as(representatives(of(national(interests.(( ( (

( Single(European(Act( ( The(purpose(of(the(Single(European(Act(was(to(have(a(single(market(in(place(by( December(31,(1992.(The(act(proposed(the(following(changes:( ( • Remove(all(frontier(controls(between(EC(countries( • Apply(the(principal(of(‘mutual(recognition’(to(product(standards.(A(standard( developed(in(one(EC(country(should(be(accepted(in(another( • Open(public(procurement(to(non\national(suppliers.(Reducing(costs(directly( by(allowing(lower\cost(suppliers(into(national(economies(and(indirectly(by( forcing(national(suppliers(to(compete.( • Lift(barriers(to(competition(in(the(retail(banking(and(insurance(businesses,( which(should(drive(down(the(costs(of(financial(services( • Remove(all(restriction(of(foreign(exchange(transactions(between(member( countries( • Abolish(restrictions(on(cabotage\(the(right(of(foreign(truckers(to(pick(up(and( deliver(goods(within(another(member(states(borders(( ( Establishment(of(the(Euro( ( \ 17(member(states(out(of(27(currently(se(the(euro(and(are(referred(to(as(‘(the( euro(zone’(( \ Britain(and(Denmark(have(decided(not(to(participate(and(are(exempt(from( adopting(the(euro.(( \ Euro(coins(were(not(actually(issued(until(Jan(1st,(2002.( ( Benefits(of(the(Euro( ( \ Belief(that(business(and(individuals(will(realize(significant(savings(from( having(to(handle(once(currency(rather(than(many.(These(savings(come(from( lower(foreign(exchange(and(hedging(costs( \ The(adoption(of(a(common(currency(makes(it(easier(to(compare(process( across(Europe.(( \ Faced(with(loser(prices,(European(producers(will(be(forced(to(look(fro(ways( to(reduce(their(production(costs(to(maintain(profits(margins.(This(should( ultimately(produce(long\run(gains(in(the(economic(efficiency.( \ Give(a(strong(boost(to(the(development(of(a(highly(liquid(pan\European( capital(market.(Such(a(capital(market(should(lower(the(cost(of(capital(and( lead(to(an(increase(in(both(the(level(of(investment(and(efficiency(in(which( investments(funds(are(to(be(allocated.(( \ The(development(of(a(pan\European(euro(dominated(capital(market(will( increase(the(range(of(investment(options(open(to(both(individuals(and( institutions.(( (

( ( Costs(of(the(Euro( ( \ National(authorities(have(lost(control(over(monetary(policy.(Thus(it(is(crucial( that(the(EU(monetary(policy(is(well(managed.((As(a(result(the(European( Central(Bank((ECB)(was(established(which(is(very(similar(to(the(US(Federal( Reserve.(The(ECB(manages(the(monetary(policy(to(ensure(price(stability.(The( ECB(sets(interest(rates(and(determines(monetary(policy(across(the(euro(zone.(( \ The(EU(is(not(an(optimal(currency(area.(This(is(because(the(economies(of( some(member(states(are(very(dissimilar(making(it(difficult(to(use(a(single( exchange(rate(as(an(instrument.( ( Regional(Economic(Integration(in(the(Americas( ( North(American(Free(Trade(Agreement( ( The(content(of(NAFTA(include:( ( \ Abolition(within(ten(years(of(tariffs(on(99(percent(of(the(goods(traded( between(Mexico,(Canada,(and(US( \ Removal(of(most(barriers(on(the(cross\border(flow(of(services,(allowing( financial(institutions,(for(example,(unrestricted(access(to(the(Mexican(market( by(2000.( \ Protection(of(intellectual(property(rights( \ Removal(of(most(restriction(on(foreign(direct(investment(between(the(three( member(countries,(although(special(treatment(will(be(given(to(Mexican( energy(and(railway(industries,(American(airline(and(radio(industries,(and( Canadian(culture( \ Application(of(national(environmental(standards,(provided(such(standards( have(a(scientific(basis( \ Establishment(of(two(commissions(with(the(power(to(impose(fines(and( remove(trade(privileges(when(environmental(standards(or(legislation( involving(health(and(safety,(minimum(wages,(or(child(labor(are(ignored.(( ( The(Case(for(NAFTA( ( \ NAFTA(should(be(viewed(as(an(opportunity(to(create(an(enlarged(and(more( efficient(productive(base(for(the(entire(region( \ US(and(Canadian(firms(move(some(production(to(Mexico(to(take(advantage(of( lower(labor(costs( ( The(Case(Against(NAFTA(( (

\ \

\ ( The(Andean(Community(of(Nations( ( \ Formed(in(1969(when(Bolivia,(Chile,(Ecuador,(Colombia,(and(Peru(signed(the( agreement.(( \ Was(largely(based(on(the(EU(model( \ By(mid\1980’s(the(Andean(Pact(collapsed(and(failed(to(achieve(any(of(the( objectives.(Some(objectives(included(a(tariff(free(trade(between(member( countries,(common(external(tariff,(and(harmonization(of(economic(policies.( \ In(the(late(1980’s(after(years(of(economic(decline(the(governments(of(Latin( America(adapted(free(market(economic(policies.(( ( MERCOSUR( ( \ originated(in(1988(as(a(free(trade(pact(between(Brazil(and(Argentina.( Because(of(the(success,(the(pact(expanded(to(include(Paraguay(and(Uruguay( in(1990.(( \ MERCOSUR(made(a(positive(contribution(to(the(economic(growth(rates(of(its( member(states(by(growing(the(GDP(annually(by(3.5%(on(average.(( ( Central(American(Common(Market(and(CARICOM( ( \ In(the(early(1960’s(Costa(Rica,(El(Salvador,(Guatemala,(Honduras,(and( Nicaragua(attempted(to(set(up(a(Central(American(common(market.(It( collapsed(in(1969(when(war(broke(out(between(Honduras(and(El(Salvador( over(a(soccer(game(riot.(( \ In(1991,(a(customs(union(was(created(between(the(English(speaking( Caribbean(countries(referred(to(as(CARICOM.(( ( Free(Trade(Areas(of(the(Americas( ( \ In(December(1994,(a(Free(Trade(Area(of(the(Americas((FTAA)(was(proposed.((( \ 34(heads(of(state(were(included( ( Regional(Economic(Integration(Elsewhere( ( Association(of(Southeast(Asian(Nations((ASEAN)( ( \ Formed(in(1967(and(had(an(objective(to(foster(freer(trade(between(member( countries(and(to(achieve(cooperation(in(their(industrial(policies.((

A(mass(exodus(of(jobs(from(the(United(States(and(Canada(into(Mexico(would( occur(as(employers(sought(to(profit(from(Mexicos(lower(wages(and(less(strict( environmental(and(labor(laws.( Environmentalists(voiced(there(opinions(about(NAFTA(as(employers(move(to( Mexico(were(the(environment(is(less(policed.(( A(loss(of(national(sovereignty(in(Mexico(

Until(recently(only(5%(of(intra\ASEAN(preferential(trade(consisted(of(goods( whose(tariffs(had(been(reduced(through(the(trade(agreement.(Some(member( countries(refuse(to(bring(down(tariffs(to(protect(local(companies.(( Asia\Pacific(Economic(Cooperation((APEC)( ( \ founded(in(1990(and(has(21(members,(which(account(for(approx.(41%(of(the( worlds(population,(and(approx.(56%(of(the(worlds(GDP.(( \ The(aim(of(APEC(is(to(increase(multilateral(cooperation(in(view(of(the( economic(rise(of(the(Pacific(nations(and(the(growing(independence(with(the( region.(( \ Struggles(to(get(the(free(trade(area(going(has(held(it(back.(( \ If(it(does(transform(itself(into(a(free(trade(area,(then(it(would(be(the(worlds( largest.( ( ( (

\

CHAPTER(9(–(THE(FOREIGN(EXCHANGE(MARKET(
INTRODUCTION((
• • • • • • • • Happenings of foreign exchange market can have significant impacts on sales, profits, and strategy of enterprises Changes in institutional structure of international monetary system exerts strong influence on development of foreign exchange markets Foreign exchange market – market for converting currency of one country into that of another Exchange rate – rate at which one currency is converted into another (price of one currency in terms of another) Makes international trade and investment possible One function of foreign exchange market – provides some insurance against risks arising from volatile chnges in exchange rates (foreign exchange risk) International businesses can suffer losses due to unpredicted changes in exchange rates Currency movements can open or close export opportunities, and alter attractiveness of imports

THE(FUNCTIONS(OF(THE(FOREIGN(EXCHANGE(MARKET((
• Serves two main functions: (1) To convert currency of one country into currency of another (2) Provide insurance against foreign exchange risk (risk that changes in exchange rate will hurt profitability) Generally, within borders of one country, same currency used to price goods/services Tourists – minor players in foreign exchange market; companies engaged in int’l trade/investment are major ones Int’l businesses have four main uses of foreign exchange markets: (1) Payments a company receives for its exports, income received from foreign investments, income received from licensing agreements with foreign firms may be in foreign currencies • To use funds in home country, company must convert to home country’s currency (2) Used when businesses need to pay foreign company for products/services in home country’s currency • Must convert to foreign currency before payment (3) Used when businesses have spare cash they wish to invest for short terms in money markets • Returns may be greater in other nation (true return dependent on interest and exchange rate) (4) Currency speculation – short-term movement of funds from one currency to another in hope of profiting from shifts in exchange rates Canadian dollar – is a secondary currency Being recognized as a “petrocurrency” (linked to raw materials, oil, and gas that Canada exports) Movements of CAD increasingly correlated with price of oil – not immune to speculation Generally, business transactions internationally rarely use CAD Small businesses more reliant on CAD + exchange rate than larger ones One theory: higher exchange rates = less trade and loss exports = less jobs

Currency(Conversion(
• • •

The(World(and(the(Canadian(Dollar((
• • • • • •

Insuring(Against(Foreign(Exchange(Risk((
Spot(Exchange(Rates( • Spot exchange – when two parties agree to exchange currency and execute deal immediately (‘on the spot’) • Spot exchange rate – rate at which foreign exchange dealer converts one currency into another on particular day • Reported daily on financial pages of newspapers • Direct terms – reporting exchange rate as price of foreign currency in terms of dollars (i.e. 0.02 USD per yen) • Indirect terms – reporting exchange rate as price of dollars in terms of foreign currency (i.e. 82 yen per USD) • Spot rates continually change – determined by demand/supply of currency relative to demand/supply of others Forward(Exchange(Rates(( • Forward exchange – when two parties agree to exchange currency and execute deal at specific time in the future

• • • • • •

Forward exchange rates – exchange rates governing forward exchange transactions Usually quoted for 30, 90, and 180 days in the future Businesses can sign deals guaranteeing exchange rate at a future time (i.e. 50 yen/USD 60 days from now) Dollar is selling at discount when spot exchange rate > forward exchange rate Dollar selling at premium when spot exchange rate < forward exchange rate Option to buy forward is very important to companies engaging in int’l trade

Currency(Swaps(( • Currency swap – simultaneous purchase + sale of given amount of foreign exchange for two different value dates • Transacted b/w int’l businesses and banks, between banks, and b/w gov’ts • Used when it is desirable to move out of one currency into another for limited period without incurring risk • Example: pg. 307

THE(NATURE(OF(THE(FOREIGN(EXCHANGE(MARKET((
• • • • • Not located in any one place; is a global network of banks, brokers, and foreign exchange dealers connected by electronic communication systems Companies typically exchange through local banks – not through directly entering market Current estimates - $4 trillion exchanged every day globally Key money trading centers: London, New York, Tokyo, Singapore London – dominant in foreign exchange market due to history + geography o Capital of world’s first industrial trading nation o Central position between Tokyo/Singapore in the east and New York in the west Foreign exchange market never sleeps – Tokyo, London, and New York shut for only 3 hours daily Extremely integrated worldwide – computer links global trading centers effectively into single market Implication: no significant difference in exchange rates quoted in trading centres Arbitrage: buying currency low and selling it high (purchase in one market for immediate resale in another to earn a profit from price discrepancy) Few opportunities for arbitrage exist – disappear within minutes USD plays significant role in foreign exchange market – most transactions involve it on one side USD – vehicle currency due to central role in foreign exchange deals (other vehicle currencies: euros, pounds)

• • • • • • •

ECONOMIC(THEORIES(OF(EXCHANGE(RATE(DETERMINATION((
• • • Exchange rates determined by demand and supply of one currency relative to demand/supply of another If demand rises, price rises; demand falls, price falls Many other aspects that help determine exchange rate

Prices(and(Exchange(Rates(
The(Law(of(One(Price( • States that in competitive markets free of transportation costs and barriers to trade (i.e. tariffs), identical products sold in different countries must sell for same price • I.e. if a jacket costs $100 in the States and the exchange rate is $2/1 pound, must cost 50 pounds in England Purchasing(Power(Parity(( • If law of one price is true for all goods/services, PPP exchange rate can be found • Assumption would be of efficient markets – markets where prices reflect all available information • Relatively efficient markets – markets in which few impediments to international trade/investment exist • In relatively efficient markets, price of a “basket” of goods in one country should be relatively = to another Money(Supply(and(Price(Inflation(( • Theoretically, country in which price inflation is running while should see currency depreciate against others • Possible to predict country’s future exchange rate if future inflation rate is predictable • Growth rate of country’s money supply determines likely inflation rate • Can use information about growth in money supply to forecast exchange rate movements

• • •

Inflation – occurs when quantity of money in circulation rises faster than stock of goods/services (money supply rises faster than output increases) When inflation is high, currency depreciates relative to other currencies Gov’t policies determine money supply and growth

Empirical(Tests(of(the(PPP(Theory(( • Prediction: exchange rates determined by relative prices; changes in relative prices results in shift of exchange rate • Theory seems accurate in long-run, but less on point in short run • Best used for predicting exchange rates for countries with high inflation rates and underdeveloped capital markets (less accurate in predicting short-term exchange rate movements between currencies of industrialized nations with low inflation rates) • PPP puzzle – failure to find strong link between relative inflation rates and exchange rate movement • Many factors can explain failure of PPP theory: o Transportation costs assumed to = 0; not the case in real life o Assumption of no barriers to trade; also not true in real life • PPP theory may not hold if national markets dominated by handful of MNEs with sufficient market power to influence prices, control distribution, and differentiate product offerings between nations • Large MNE’s can exercise price discrimination depending on demand in varying parts of the world o Only works if arbitrage is limited

Interest(Rates(and(Exchange(Rates(
• • • Interest rates reflect expectation about likely future inflation rates If inflation expected to be high, interest rates are also high – investors want compensation for decline in value Fisher Effect – country’s nominal interest rate (i) is sum of required real interest rate (r) and expected inflation rate over period for which funds are being lent (I) o i=r+I When investors are free to transfer capital between countries, real interest rate is same in every country If differences in real interest rates emerge between countries, arbitrage soon equalizes them International Fisher Effect (IFE) – for any two countries, spot exchange rate should change in an equal amount but in the opposite direction to difference in nominal exchange rates between countries Neither PPP theory nor IFE good at explaining short-term movements in exchange rates Can be due to impact of investor psychology on short-run exchange rate movements Effects of investor psychology and bandwagon effects are ard to predict Investor psychology – can be influenced by political factors, microeconomic events, etc.

• • •

Investor(Psychology(and(Bandwagon(Effects((
• • • •

EXCHANGE(RATE(FORECASTING((
• • Question arises whether it is worthwhile for company to invest in exchange rate forecasting services Two schools of thought: (1) Efficient market school – argues forward exchange rate does best possible job of forecasting future spot exchange rates, and therefore (no need for investing in exchange rate forecasting services) (2) Inefficient market school – argues companies can improve foreign exchange market’s estimate of future exchange rates (forward rate) by investing in forecasting services Forward exchange rates – represent market participants’ collective predictions of likely spot exchanges in future If fwd exchange rates = best predictors, no need to invest in separate forecasting services Efficient markets are those that have prices reflecting all available public information If market is efficient, fwd exchange rates should be unbiased predictors of future spot rates o Does not mean errors don’t exist, just that they are not biased up or down, but random Inefficient market – one in which prices do not reflect all available information Fwd exchange rates not best predictors of future spot rates

Efficient(Market(School((
• • • •

Inefficient(Market(School((
• •

•

In this case, worthwhile for companies to invest in foreign exchange rate forecasting services

Approaches(to(Forecasting((
Fundamental(Analysis(( • Draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements • Variables include money supply, inflation, interest rates • Running deficit on country’s balance-of-payments account (imports > exports) creates pressures resulting in depreciation of country’s currency Technical(Analysis(( • Uses prices and volume data to determine past trends, which are expected to continue in the future • Does not rely on consideration of economic fundamentals • Based on premise that there are analyzable market trends + waves, previous ones can be used to predict future • No theoretical rationale for assumption of predictability – many economists are sceptical of analysis

CURRENCY(CONVERTIBILITY((
• • • • • • • • Due to gov’t restrictions, significant # of currencies not freely convertible to other currencies Freely convertible – when gov’t of country allows both residents and non-residents to purchase unlimited amounts of foreign currency with domestic currency Externally convertible – non-residents can convert holdings of domestic currency into foreign currency, but residents’ ability to convert is limited in some way Nonconvertible – both residents and non-residents prohibited from converting holdings of currency into another Restriction can range from relatively minor (i.e. restricting amount of money allowed on business trips) to major (i.e. restricting domestic businesses’ ability to invest abroad) Serious problems can arise under policy of nonconvertibility (i.e. previous Soviet Union) Gov’t limit convertibility to preserve foreign exchange reserves Capital flight – residents converting domestic currency into foreign currency (most likely to occur when value of domestic currency is depreciating rapidly) o Can lead to depreciation in exchange rate (increase in supply of money) Countertrade – trade of goods and services for other goods and services Makes sense when country’s currency is nonconvertible

Countertrade(
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IMPLICATIONS(FOR(BUSINESS((
Transaction(Exposure((
• • • • • • • • • • • Extent to which income from individual transactions is affected by fluctuations in foreign exchange values Includes obligations for purchase or sale of goods/services at previously agreed prices Includes borrowing/lending of funds in foreign currencies Impact of currency exchange rate changes on reported financial statements of a company Concerned with present measurement of past events Resulting accounting gains or losses are unrealized – simply “paper” gains/losses, but still important Extent to which a firm’s future international earning power is affected by changes in exchange rates Concerned with long-run effect of changes in exchange rates on future prices, sales, and costs Entering into forward exchange rate contracts and currency swaps Leading and lagging payables and receivables (paying suppliers and collecting payments early or late depending on expected exchange rate movements) Lead strategy – collecting foreign currency receivables early when foreign currency expected to depreciate and paying foreign payables before they are due when currency expected to appreciate

Translation(Exposure((

Economic(Exposure((

Reducing(Translation(and(Transaction(Exposure((

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Lag strategy – delaying collection of foreign currency receivables if currency expected to appreciate and delaying payables if currency expected to depreciate Lead/lag strategies difficult to implement – firm must be in position to exercise control over payment terms Requires strategic choices that go beyond realm of financial management Key – to distribute firm’s productive assets to various locations so L/T financial well-being not severely affected by adverse changes in exchange rates Firm needs to develop mechanisms for ensuring maintenance of appropriate mix of tactics and strategies for minimizing foreign exchange exposure Central control of exposure needed to protect resources efficiently and ensure each subunit adopts correct mix of tactics and strategies Should distinguish between transaction/translation exposure, and economic exposure o Need to develop strategies to minimize both Need to forecast future exchange rate movement without overstatement Need to establish good reporting systems to central finance function can regularly monitor firm’s exposure positions Firm should produce monthly foreign exchange exposure repots

Reducing(Economic(Exposure((

Other(Steps(for(Managing(Foreign(Exchange(Risk((
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Chapter 10: The Global Monetary System
! INTRODUCTION • • • How does the international monetary system determine exchange rates? International Monetary System: refers to the institutional arrangements that countries adopt to govern exchange rates Floating Exchange Rate: a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand for the currency o Four major trading currencies= US dollar, Euro, Yen, and Pound Sterling o They all float against each other o Thus their exchange rates are determined by market forces and fluctuate against each other on a daily basis Pegged exchange rate: currency value is fixed relative to a reference currency (like US dollar) Dirty float system: a system under which a country’s currency is nominally allowed to float freely against other currencies, BUT in which the government will intervene (by buying and selling currencies) if it believes that the currency has deviated too far from its fair value Central bank: is the generic name given to a country’s primary monetary authority o Has the responsibility of issuing currency, administering monetary policy, holding members banks’ deposits, and facilitating the nation’s banking industry Fixed exchange rate: a system under which the exchange rate for converting one currency into another is fixed at some mutually-agreed upon exchange rate Pegged, dirty float, and fixed exchange rate systems all require some degree of government intervention in the foreign exchange market to maintain the value of a currency A country can try to maintain the value for the currency by using foreign exchange currency held in reserve to buy its currency from the market (therefore taking out dollars), therefore, increasing demand for the currency and raising its price The IMF does not just lend out money like that- they insist that the country create policies to correct their economic mistake before receiving the money

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THE GOLDEN STANDARD • • • • The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value Used to be the method of payment until the Industrial Revolution where a more convenient method was needed Paper currency was created as a result of this Gold standard: The practice of pegging currencies to gold and guaranteeing convertibility

Strength of the Gold Standard • It contained a powerful mechanism for achieving balance of trade equilibrium by all countries

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Balance-of-trade-equilibrium: when the income its residents earn from exports is equal to the money its residents pay for imports Greater money supply = greater inflation = greater prices Lower money supply = low inflation = low prices In the end, with gold standard, a balance of trade equilibrium will always be reached in the world.

THE BRETTON WOODS SYSTEM • • • • In 1944, at the height of World War 2, 44 country reps met at Bretton Woods, New Hampshire to design a new international monetary system Were determined to build an enduring economic order that would facilitate postwar economic growth General consensus that fixed exchange rates were desirable The agreement reached at Bretton Woods established two multinational institutions o The International Monetary Fund o the World Bank Would be able to promote general economic development Agreement also called for a system of fixed exchange rates that would be policed by the IMF All countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold Only the dollar remained convertible into gold (at $35 per ounce) Each country decided what it wanted its exchange rate to be vis-à-vis the dollar and then calculated the gold par value of the currency based on that selected dollar exchange rate Countries made a commitment not to use devaluation as a weapon of competition trade policy

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The Role of the IMF • IMF Articles of Agreement were heavily influenced by the worldwide financial collapse

Discipline: • A fixed exchange rate regime imposes discipline in two ways: 1) the need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment; 2) fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation The fixed exchange rate would force the gov to control money supply to keep the value regulated

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Flexibility: • • creators wanted to create high unemployment so they built limited flexibility into the system two major flexibility features: IMF lending facilities, and adjustable parities

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IMF lending facilities: IMF stood ready to lend foreign currencies to members to tide them over during short periods of balance-of-payments deficits, (only when a rapid tightening of monetary or fiscal policy would hurt domestic employment) pool of gold and currencies contributed by IMF members provided the resources for these lending operations IMF would buy time for countries to bring down their inflation rates and reduce their balance-of-payments deficits would reduce pressures for devaluation and allow for a more orderly and less painful adjustment

The Role of the World Bank • • • • Official name is International Bank for Reconstruction and Development Banks initial mission after the world wars was to help finance the building of Europe’s economy by providing low-interest loans Bank turned its attention to development and began lending money to third world countries and helped them develop railroads, agriculture, education etc. The bank lends under two schemes; 1) IBRD scheme, money is raised through bond sales in the international capital market 2) the International Development Agency gives out funds through subscriptions from wealthy member countries and the borrower country has 50 years to repay

THE COLLAPSE OF THE FIXED EXCHANGE RATE SYSTEM • The fixed exchange rate system worked well until the late 1960s • Finally collapsed in 1973 • Remember that in the fixed exchange rate system, the US dollar was the only currency that mattered and it was the only currency that could be converted into gold so any pressures on the US dollar would wreak havoc • The US decided to increase the money supply in the 60s and this lead to inflation which lead to higher prices, but a devalued dollar, which led Americans to import more than they were exporting. Then Germany tried to fix the fixed exchange rate between the dollar and the deutschemark and so they bought $2 billion in currency in order to limit the supply of US dollars in the market and increase demand to raise the value of the dollar. However, it was getting hard to keep up so they let the exchange rate float. This problem continued an eventually the system failed entirely THE FLOATING EXCHANGE RATE REGIME • • This system followed the fixed exchange rate Met in Jamaica and agreed to the rules for the international monetary system

The Jamaica Agreement • • Floating rates were deemed acceptable Gold was abandoned as a reserve asset

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The amount member countries contribute to the IMF was increased to $41 billion US

Exchange Rates Since 1973 • • • The value of the dollar has been determined by both market forces and government intervention Under a floating exchange rate regime, market forces have produced a volatile dollar exchange rate Governments have responded by intervening in the market (buying and selling dollars) in an attempt to limit the market’s volatility and to correct what they see as overvaluation of potential undervaluation of the dollar Dollar value is also influenced by statements from government officials The frequency of government intervention in the foreign exchange markets explains why the current system is often referred to as the a dirty-float system

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FIXED VERSUS FLOATING EXCHANGE RATES • • Disappointments with the floating rates in recent years has led to renewed debates about the merits of fixed exchange rates Fixed vs floating arguments

The Case FOR Floating Exchange Rates • Has two main elements: monetary policy autonomy, and automatic trade balance adjustments

Monetary Policy Autonomy: • • • • • • Argued that under a fixed system, a country’s ability to expand or restrict its money supply as it sees fit is limited by the need to maintain exchange rate parity Monetary expansion= lead to inflation which decreases the value of the domestic currency Monetary restriction= higher interest rates (to reduce demand for taking out money) = higher inflow of foreign currency = appreciation of domestic currency Thus to maintain exchange rate parity under a fixed system, countries are limited in their ability to use monetary policy to expand or contract their economies ** by removing the obligation to maintain exchange rate parity, it would restore monetary control to a government If unemployment is an issue, government can easily increase its money supply which will lower prices, which will increase domestic demand, which will create jobs (can do so easily if the government doesn’t have to worry about the fixed exchange rate)

Trade Balance Adjustments • Under the fixed system, if a country had a permanent deficit in its balance of trade, this could not be corrected by domestic policy- instead the IMF would have to agree to a currency devaluation

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Argue that if there is a floating exchange rate this problem could be fixed because the excess of supply of domestic currency in the foreign market would drive down the value of the domestic currency, which would make exports cheaper so there would be an increase in exports which would eventually balance out the balance of trade

The Case FOR Fixed Exchange Rates • Monetary discipline, speculation uncertainty, and lack of connection between the trade balance and exchange rates

Monetary Discipline: • • • The need to maintain a fixed exchange rate parity ensures that governments do not expand their money supplies at inflationary rates Argue governments give in to political pressures and expand their monetary supply far too rapidly, causing unacceptably high price inflation Fixed exchange rates ensure hyperinflation does not occur

Speculation: • • Critics of floating exchange rate regimes also argue that speculation can cause fluctuations in exchange rates Argue that when foreign exchange dealers see a currency depreciation, they tend to sell the currency in the expectation of future depreciation regardless of the currency’s longer-term prospects As more traders join in and sell the currency, the depreciation of the currency value has been realized because more of the currency is in circulation so the currency depreciates in value Argue that a fixed exchange rate regime system will prevent speculation from depreciating the value of a currency and potentially damaging the economy

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Uncertainty • • • • • Uncertainty surrounding future currency movements that characterizes floating exchange rate regimes Uncertainty of floating rates cause business uncertainty Makes exporting, importing and foreign investments risky activities Uncertainty dampens the growth of international trade and investment Impact of uncertainty on the growth of international trade and investment has been overstated

Trade Balance Adjustments • • • Floating exchange rates help adjust trade imbalances critics question the closeness of this statement critics claimed trade deficits are determined by the balance between savings and investment in a country, not by the external value of its currency

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Argue that depreciation in a currency will lead to inflation and not actually fix the trade deficit (due to the resulting increase in import prices)

Who Is Right? • • • • Evidence is unclear to say whether international businesses would be better off under a fixed regime, or flexible rates A fixed exchange rate regime modeled along the lies in the Bretton Woods system will not work Speculation ultimately broke the system of Bretton Woods Nevertheless, a different kind of fixed exchange rate system might be more enduring and might foster the ability that would facilitate more rapid growth in international trade and investment

EXCHANGE RATE REGIMES IN PRACTICE • • • • • • Exchange rates range from “free float” (determined by market forces), to a pegged system (pre-Bretton Woods system of fixed exchange rates) 20% of the IMF’s members allow their currency to float freely 25% intervene in only a limited way (the so-called managed/dirty float) 22% of IMF members have no separate legal tender of their own (countries who have given up their currencies for the Euro in the EU) 25% peg their currencies to other currencies such as the US dollar or the euro Other countries allow their currency to float between a determined range (adjustable peg system)

Pegged Exchange Rates • • • • • • A country will peg the value of its currency to that of a major currency so that, for example, as the US dollar rises in value, its own currency rises too. Pegged exchange rates are popular among many of the world’s smaller nations It imposes monetary discipline on a country and leads to low inflation Inflation rates of both countries should be similar Evidence shows that adopting a pegged exchange rate regime does moderate inflationary pressures in a country Many countries operate with only a nominal peg and in practice are willing to devalue their currency rather than pursue a tight monetary policy

Currency Boards • • • Currency Board: means of controlling a country’s currency. Commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate The currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100% of the domestic currency issued

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Domestic currency must be backed 100% in foreign currency The currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back it This prevents the government from printing money and creating inflation under a strict currency board system, interest rates adjust automatically Ex. If investors want to switch out of domestic currency into another currency, the supply of domestic currency will shrink and will cause interest rates to rise

CRISIS MANAGEMENT BY THE IMF • • Many believed that the collapse of the Bretton Woods system in 1973 would diminish the role of the IMF within the international monetary system IMF’s original function was to provide a pool of money from which members could borrow, in the short term, to adjust their balance-of-payments position and maintain their exchange rate some believed that the demand for short-term loans would be diminished in a floating exchange rate system (devalued currency made exports cheaper so this increased exports and balanced out the balance of trade) IMF activities expanded over the past 30 years Expanded because of periodic financial crises have continued to hit many economies around the world IMF repeatedly lent money to nations experiencing financial distress in exchange that the governments enact certain macroeconomic policies

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Financial Crises in the Post-Bretton Woods Era • Currency crisis: occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency OR forces authorities to send out large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate Banking crisis: refers to a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits Foreign debt crisis: situation in which a country cannot service its foreign debt obligations, whether private or government debt Have common underlying macroeconomic results: high inflation, a widening current account deficit, excessive expansion of domestic borrowing, and asset price inflation Globalization results in greater frequency and reach of financial crises

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Third World Debt Crisis • • • Third World debt crisis had its roots in the OPEC oil price hikes in the 70’s. Resulted in massive flows of funds from the major oil-importing nations to the oil-producing nations of OPEC Commercial banks stepped in to recycle this money, borrowing from OPEC countries and lending to governments and businesses around the world

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Much of the recycled money ended up in the form of loans to Latin American and African countries Loans based on optimistic assessments of the nation’s growth prospects World economic growth stopped in the early 1980s by a combination of factors including high inflation, rising short term interest rates, and recession conditions in many industrialized nations Consequence was the Third World debt crisis At one point, commercial banks had $1 trillion in bad debts on their books IMF’s solution to the debt crisis contained a major weakness: it depended on the rapid resumption of growth in the debtor nations If this occurred, their capacity to repay the debt would grow faster than the debt and the problem would be solved The IMF imposed macroeconomic policies did bring trade deficits and inflation rates of many debtor nations under control, BUT it created sharp contractions in their economic growth rates The Brady Plan: the IMF, the World Bank, and the Japanese government would each contribute $10 billion toward debt reduction ! to gain access to these funds, a debtor nation would once again have to submit to imposed conditions for macroeconomic policy management and debt repayment

Mexican Currency Crisis of 1995 • IMF told Mexico that the Mexican peso that was pegged against the US dollar was able to move between the tolerance band of plus or minus 3% against the dollar, and they believed that the need to maintain the exchange rate within a fairly narrow trading band would force the Mexican government to adopt stringent financial policies to limit the growth in the money supply and control inflation Mexican producer prices went up 45% more than prices in US but the exchange rate did not adjust so they ran a $17 billion trade deficit uncomfortable rapid expansion in the country’s public/private sector debt

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Russian Ruble Crisis • IMF’s involvement in Russia came about as the result of a persistent decline in the value of the Russian ruble (which happened because high inflation rates and growing public sector debt) this fall occurred while Russia was implementing an economic reform program designed to transform the country’s crumbling, centrally planned economy into a dynamic market economy Reform program involved a number of steps, including removal of price controls Russia’s high inflation= prices had been held at artificially low levels by state planners during the Communist era + many basic goods were in short supply so Russians kept their money and didn’t have anything to spend money on + when price controls were released, people suddenly went ape on spending on the same limited supply of goods so they bid up prices

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Government continued to subsidize the operation of many money-losing establishments in the fear that they will privatize and Russia would face big unemployment = large government debt Government announced a tight budget plan that placed tight controls on the money supply IMF agreed to offer a $10 billion US loan Russia, in return, had to limit the growth of its money supply, reduce public sector debt, increase government tax revenues, and peg the ruble to the dollar Initially the plan worked 1997, economy grew for the first time since the breakup of former Soviet Union BUT public-sector debt didn’t improve tax revenues were low because of large black market spent more than agreed in IMF targets Russia didn’t listen to the IMF and did their own thing and suffered

The Asian Crisis • • • 1997, Southeast Asia financial crisis Biggest financial crisis after the 2008 crisis The Investment Boom o Wealth created by export led growth helped fuel an investment boom in commercial and residential property, industrial assets, and infrastructure o Value of commercial and residential real estate soared o Success of Asian exporters encouraged them to make bolder investments o Boom occurred and much of it was financed with borrowed money Excess Capacity o Volume of investments increased during the 1990s (often at the request of national governments) o Quality of investments declined o Investments were made on the basis of unrealistic projections about future demand conditions o Result was significant excess capacity o Prices fell o Earnings fell o Made it difficult for Asian companies to make scheduled debt payments

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The Debt Bomb • Massive investments in industrial assets and property had created excess capacity and plunging prices, while leaving the companies that had made the investments groaning under huge debt burdens that they were now finding difficult to repay If the governments could not maintain the dollar peg and their currencies started to depreciate against the dollar, this would increase the size of the debt burden when measured in the local currency Currency depreciation would raise borrowing costs and could result in a company’s defaulting on their debt obligations

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Expanding Imports • • The investments in infrastructure, industrial capacity, and commercial real estate were bringing in foreign goods at unprecedented rates countries in Southeast Asia had account deficits and it was difficult for the governments to maintain the currency level against the dollar

The Crisis • • • • • • • Asian meltdown became clear when financial institutions in Thailand were on the verge of default These institutions had been borrowing dollars from international banks at low interest rates and lending Thai baht at higher interest rates to local property developers. Due to speculative overbuilding, these developers could not sell their commercial and residential property, forcing them to default on their debt obligations sold baht, bought dollars and therefore brought down the baht value IMF agreed to provide the Thai government with $17.2 billion in loans, but the conditions were restrictive IMF told Thai government to increase taxes, cut public spending, privatize several stateowned businesses and raise interest rates Designed to cool Thailand’s overheated economy

EVALUATING THE IMF’S POLICY PRESCRIPTIONS Inappropriate Policies o IMF’s “one size fits all” approach to macroeconomic policy is inappropriate for many countries o In the Asian crisis, critics argued that the tight macroeconomic policies imposed by the IMF were not well suited to countries that suffered not from excessive government spending and inflation, but from a private-sector debt crisis o The IMF insists on applying the same policies that it applies to countries all suffering from the same problem Moral Hazard • • • • Moral hazard: arises when people have recklessly because they know they will be saved if things go wrong Countries feel that the IMF will save them in a financial crisis so they spend recklessly or engage in poor financial decisions IMF closes off banks that lend carelessly IMF protects financial crisis’ turning into global crisis’

Lack of Accountability

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IMF has become too powerful for an institution that lacks any real mechanism for accountability IMF with a staff of 1000 lacks the skills to do a good job

Observations • • • One side argues that IMF’s policies are counterproductive On the other hand, the IMF has notable accomplishments (including the success with the Asian crisis) While a government may commit to taking corrective action in return for an IMF loan, internal political problems may make it difficult for a government to act on the commitment

IMPLICATIONS FOR BUSINESS The implications for international businesses of the material discussed in this chapter fall into three main areas: currency management, business strategy, and corporate-government relations Currency Management • • • • The current system is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market Speculative buying/selling of currencies can create very volatile movements in exchange rates Saw that exchange rate movements did not seem to be strongly influenced by relative inflation rates The foreign exchange markets have developed a number of instruments, such as the forward market and swaps, that can help to insure against foreign exchange risk

Business Strategy • • • • • • • The volatility of the present global exchange rate regime presents a problem for international businesses Exchange rate movements are difficult to predict, and yet their movement can have a major impact on a business’s competitive position Firms can utilize the FORWARD EXCHANGE MARKET to make “safe” investments The forward market tends to offer coverage for exchange rate changes a few months, not year, ahead It makes sense to pursue strategies that will increase the company’s strategic flexibility in the face of unpredictable exchange rate movements Strategic flexibility ex/ dispersing production to different locations around the globe Strategic flexibility ex2/ contracting out manufacturing o Allows a company to shift suppliers from country to country in response to changes in relative costs brought about exchange rate movements o This strategy only works for low-value-added manufacturing (ex/textiles) (manufacturers have few firm specific skills)

o For high-value-added manufacturing, switching supplies will lead to a reduction in the value that is added, which may offset any cost gains arising from exchange rate fluctuations Corporate- Government Relations • • • • As major players in the international trade and investment environment, businesses can influence government policy toward the international monetary system businesses can and should use its influence to promote an international monetary system that facilitates the growth of international trade and investment exchange rate volatility creates an environment less conducive to international trade and investment compared to an environment with more stable exchange rates In the interests of international business, it should promote an international monetary system that minimizes volatile exchange rate movements, particularly when those movements are unrelated to long-run economic fundamentals

Part%Five:%Competing%in%a%Global%Marketplace% Chapter%11:%Global%Strategy%
• Focus&of&chapter:&how&firms&can&compete&more&effectively&as&an&international&business& STRATEGY%AND%THE%FIRM:% • Strategy:&Actions&managers&take&to&attain&the&firms&goals& o Primary&goals&for&firms&is&to&maximize&long>term&profitability&& o Profitability&=&Return&on&Sales&=&Profit&/&Total&Revenues& 2&conditions&determine&a&firm’s&profits& & 1)&Amount&of&value&customers&place&on&the&firm’s&goods&and&services& & 2)&Firm’s&costs&of&production& Value&Creation:&Activities&performed&that&increase&the&value&of&goods&and&services&to&consumers.& o A&company&creates&value&by&converting&inputs&that&cost&C&into&a&product&on&which& consumers&place&a&value&of&V& o Value&added&=&V>C& o Low>Cost&Strategy:&Strategy&focused&on&lowering&production&costs& o Differentiation:&Strategy&that&focuses&on&increasing&the&attractiveness&of&a&product& o Michael&Porter&believe&the&“low>cost&strategy”&and&the&“differentiation&strategy”&are&two& ways&firms&can&create&value&and&attain&a&competitive&advantage&in&an&industry& The&firm&as&a&value&chain:&

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& PROFITING%FROM%GLOBAL%EXPANSION:% & • Firms&that&operate&internationally&are&able&to&:& &1)&Realize&location&economies&by&dispersing&individual&value&creation&activities&to&those&locations& around&the&globe&where&they&can&be&performed&most&efficiently&and&effectively.& &2)&Realize&greater&cost&economies&from&experience&effects&by&serving&and&expanding&global& market&from&a¢ral&location,&thereby&reducing&the&costs&of&value&creation& &3)&Earn&a&greater&return&from&the&firm’s&distinctive&skills&or&core&competencies&by&leveraging& those&skills&and&applying&them&or&other&entities&within&the&firm’s&global&network&of&operations& &4)&Earn&a&greater&return&by&leveraging&any&valuable&skills&developed&in&foreign&operations&and& transferring&them&to&other&entities&within&the&firm’s&global&network&of&operations&& • Location&Economies:&Cost&advantages&from&performing&a&value&creation&activity&at&the&optimal& location&for&that&activity&& o Lowers&costs&of&value&creation& o Helps&firm&achieve&a&low>cost&position& o and/or&enables&a&firm&to&differentiate&its&product&offerings&from&competitors& o Ex.&Japan&excels&in&production&of&cars,&Canada&excels&in&the&production&of&energy&products& o Global&Web:&When&different&stages&of&value&chain&are&dispersed&to&those&locations&around& the&globe&where&value&added&is&maximized&or&where&costs&of&value&creation&are&minimized& o Factors&that&hinder&pursuing&location&economies:&& ! Transportation&costs& ! Trade&barriers& ! Ex.&Many&US&firms&are&shifting&their&production&from&Asia&to&Mexico&because&of& closer&proximity&(therefore,&lower&transportation&costs),&and&reduction&of&trade& barriers&(because&of&the&NAFTA).&& • Experience&Effects:&Systematic&reductions&in&production&costs&that&have&been&observed&to&occur&over& the&life&of&a&product.&Two&things&explain&this:& & 1)&Learning&effects:&Cost&savings&from&learning&by&doing& & 2)&Economies&of&scale:&cost&advantages&associated&with&large>scale&production&(ex.&spreading& & fixed&costs&over&a&larger&volume)& ! Economies&of&Scope:&Cost&advantages&associated&with&using&specialized& competencies&across&two&or&more&products&or&product&types&(ex.&Honda’s&small> engine&competency&realized&in&motorcycle,&auto&and&lawn&mower&businesses)&

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& Pressures&for&Costs&Reductions:& o Resort&to&mass&production& o Create&a&standardized&product&& o Produce&at&optimal&location&in&world&to&realize&location&and&experience&curve&economies& o Pressures&for&costs&reductions&highest&in&industries&producing&commodity>type&products&(ex.& steel,&sugar)&because&differentiation&is&difficult&and&firms&compete&solely&on&price& Pressures&for&Local&Responsiveness:& o Arise&from&differences&in&consumer&tastes&and&preferences& ! Ex.&automobile&makers&can’t&standardize&offerings&worldwide&because&many&North& American&consumers&want&Pickup&Trucks&but&in&Europe&individuals&don’t&typically& purchase&pickup&trucks&

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o

o % STRATEGIC%CHOICES%WHEN%CHOOSING%A%STRATEGY:% %

Arise&from&differences&in&infrastructure&and&traditional&practices& ! Ex.&automobile&makers&have&to&make&right>hand&drive&cars&for&people&in&Great&Britain& who&drive&on&left&side&of&the&road& Arise&from&differences&in&distribution&channels& ! Ex.&In&Germany&there&are&a&handful&of&food&retailers&with&a&lot&of&buying&power,&in&Italy&it& is&very&fragmented,&and&food&retailers&have&little&buying&power& Arise&from&host&government&demands&

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•

& International&Strategy:&Firms&try&to&create&value&by&transferring&valuable&skills&and&products&to& foreign&markets&where&indigenous&competitors&lack&those&skills&and&products.&& o Centralize&product&development&functions&at&home& o tend&to&establish&manufacturing&and&marketing&functions&in&each&major&country&in&which& they&do&business&& o Regardless,&head&office&retains&tight&control&over&marketing&and&product&strategy&& o Makes&most&sense&to&pursue&this&strategy&when&firm&has&valuable&core&competency&that& competitors&in&foreign&markets&lack&and&face&relatively&weak&pressures&for&local& responsiveness&and&cost&reductions& o Ex.&When&MTV&first&expanded&into&Europe&it&kept&content&same&as&in&US&(this&strategy&failed)& o Ex.&Zara&keeps&offering&the&same&across&countries&and&standardizes&pricing& o ADVANTAGES:&& >&Transfer&core&competencies&to&foreign&markets& o DISADVANTAGES:&& >&Lack&of&local&responsiveness& & & & >&Inability&to&realize&location&economies& & & & >&Failure&to&exploit&experience&curve&effects& Multidomestic&Strategy:&Firms&orient&themselves&toward&achieving&maximum&local&responsiveness& by&customizing&both&their&product&offering&and&marketing&strategy&to&match&different&national& conditions.&& o Typically&have&high&cost&structure&from&operating&individually&in&each&nation& o Ex.&MTV&customizes&the&programming&that&is&shown&on&its&channels&within&dozens&of& countries,&including&New&Zealand,&Portugal,&Pakistan,&and&India.&

•

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Ex.&Because&some&Indians&will¬&eat&garlic&and&onion,&for&example,&Heinz&offers&them&a& version&of&its&signature&ketchup&that&does¬&include&these&two&ingredients.& o ADVANTAGES:&& >&Customize&product&offerings&and&marketing&in&accordance&with&local&& & & & responsiveness& o DISADVANTAGES:&& >&Failure&to&transfer&core&competencies&to&foreign&markets& & & & >&Inability&to&realize&location&economies& & & & >&Failure&to&exploit&experience&curve&effects& Global&Strategy:&Firms&focus&on&increasing&profitability&by&reaping&the&cost&reductions&that&come& from&experience&curve&effects&and&location&economies.&(low>cost&strategy)& o Global&strategies&also&can&be&very&effective&for&firms&whose&product&or&service&is&largely& hidden&from&the&customer’s&view,&such&as&silicon&chip&maker&Intel& o ADVANTAGES:&& >&Exploit&experience&curve&effects& & & & >&Exploit&location&economies& o DISADVANTAGES:&& >&Lack&of&local&responsiveness& Transnational&Strategy:&Plan&to&exploit&experience>based&cost&and&location&economies,&transfer&core& competencies&with&the&firm,&and&pay&attention&to&local&responsiveness& o Ex.&McDonald’s&–in&India&they&offer&beef>free&burgers,&in&France&they&offer&Wine&but&must& remain&low>priced&because&of&competitive&nature&of&fast>food&industry&around&the&world& o ADVANTAGES:&& >&Exploit&experience&curve&effects& & & & >&Exploit&location&economies& & & & >&Customize&product&offerings&and&marketing&in&accordance&with&local&& & & & responsiveness& & & & >&Reap&benefits&of&global&learning&(sharing&of&information&across&&& & & & subsidiaries)& o DISADVANTAGES:&& >&Difficult&to&implement&due&to&organizational&problems& o

& STRATEGIC%ALLIANCES:%% & • Strategic&alliances:&Cooperative&agreements&between&two&or&more&firms&& o Advantages:& ! Facilitate&entry&into&foreign&markets& ! Enable&partners&to&share&the&fixed&costs&and&risks&associated&with&new&products&and& processes& ! Facilitate&the&transfer&of&complementary&skills&between&companies& ! Help&firms&establish&technical&standards&& o Disadvantages:&& ! Firm&risks&giving&away&technological&know>how&and&market&access&to&alliance& partner&in&return&for&very&little&& • Making&alliances&work:&& o Building&Trust&and&informal&communications&networks&between&partners&(ex.&Ford&and& Mazda&have&managers&to&meet&to&discuss&matters&pertaining&to&alliance&and&also&have&time& to&get&to&know&each&other)& o Learn&from&partners&and&apply&knowledge&within&its&own&organization&

Chapter 12: Entering Foreign Markets BASIC ENTRY DECESIONS - Three basic decisions a firm contemplating foreign expansion must take ! which markets to enter, when to enter those markets, and on what scale Which Foreign Markets? - Not all countries have the same profit potential for a firm contemplating foreign expansion - Choice must be based on an assessment of a nation’s long-run profit potential - Economic and political factors can influence the potential attractiveness of a foreign market o Depends on balancing the benefits, costs, and risks associated with doing business in that country - Long-run economic benefits of doing business in a country are a function of factors such as the size of the market (in terms of demographics), the present wealth (purchasing power) or consumers in that market, and the likely future wealth of consumers - Low living standards may imply limited purchasing power and a relatively small market when measured in economic terms even if the market is large as measurement of number of consumers - Costs and risks associated with doing business in a foreign country are typically lower in economically advanced and politically stable democratic nations - Long-run benefits depend on likely future economic growth rates, and economic growth appears to be a function of a free market system and a country’s capacity for growth (which may be greater in lessdeveloped nations) - Leads to the conclusion, that other things being equal, the benefit-cost-risk trade-off is likely to be most favourable in politically stable developed and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation rates or private-sector debt - Trade-off is likely to be least favourable in politically unstable developing nations that operate with a mixed or command economy in developing nations where speculative financial bubbles have led to excess borrowing - The value an international business can create in a foreign market is quite notable o Depends on the sustainability of its product offering to that market and the nature of indigenous competition o If the international business can offer a product that has not been widely available in that market and that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if the international business imply offers the same type of product that indigenous competitors and other foreign entrants are already offering Timing of Entry - Once attractive markets have been identified, it is important to consider the timing of entry ! entry is early when an international business enters a foreign market before other foreign firms and late when it enters after other international businesses have established themselves - First-mover advantages: advantages associated with entering a market early o Ability to pre-empt rivals and capture demand by establishing a strong brand name o Ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants – cost advantage may enable the early entrant to cut prices below that of later entrants, thereby driving them out of the market o Ability of early entrants to create switching costs that tie customers into their products or services – switching costs make it difficult for later entrants to win business - First-mover disadvantages: disadvantages associated with entering a foreign market before other international businesses o Disadvantages may give rise to pioneering costs – costs that an early entrant has to bear that a later entrant can avoid. Arise when the business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game o Pioneering costs include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes major mistakes o Certain liability associated with being a foreigner, and this liability is greater for foreign firms that enter a national market early o Late entrant may benefit by observing and learning from the mistakes made by early entrants

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Pioneering costs also include the costs of promoting and establishing a product offering, including the costs of educating customers Later entrants may be able to ride on an early entrant’s investments in learning and customer education by watching how the early entrant proceeded in the market, by avoiding costly mistakes made by the early entrant, and by exploiting the market potential created by the early entrant’s investment in customer education Early entrant may be a big disadvantage, relative to a later entrant, if regulations change in way that diminishes the value of an early entrant’s investments

Scale of Entry and Strategic Commitments - Entering a market on a large scale involves the commitment of significant resources - Strategic commitment: a decision that has a long-term impact and is difficult to reverse, such as entering a foreign market on a large scale - Strategic commitments affect the competitive playing field and unleash a number of changes, some of which may be desirable and some of which will not be - Important for a firm to think through the implications of large-scale entry into a market and act accordingly o Try to identify how actual and potential competitors might react to large-scale entry into a market o Large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand pre-emption, scale economies, and switching costs o Value of the commitments that flow form large-scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments o However, strategic inflexibility can also have value - Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of a small-scale entry o Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market o Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter o Time to collect information allows for the reduction of risks associated with a subsequent large-scale entry o The lack of commitment associated with small-scale entry may make it more difficult for the smallscale entrant to build market share and to capture first-move or early-mover advantages Evaluating the Level of Risk - Entering a large developing nation (such as China or India) before most other international businesses in the firm’s industry, and entering on large scale, will be associated with high levels of risk ! liability of being foreign is increased by the absence of prior foreign entrants whose experience can be a useful guide o The potential long-term rewards associated with such a strategy are great o Early large-scale entrant into a major developing nation may be able to capture significant first-mover advantages that will bolster its long-run position in that market - In contrast, entering developed nations (such as Australia or Canada) after other international businesses in the firm’s industry, and entering on a small scale o first learn more about these markets, will be associated with much lower levels of risk o Potential long-term rewards are also likely to be lower because the firm is essentially forgoing the opportunity to capture first-mover advantages and because the lack of commitment signalled by smallscale entry may limit its future growth potential ENTRY MODES - Once a firm decides to enter a foreign market, the question arises as to the best mode of entry - Firms can use 6 different modes to enter foreign markets: exporting, turnkey projects, licensing, franchising, establishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary in the host country Exporting - Many manufacturing firms begin their global expansions as exporters and later switch to another mode for serving a foreign market - Advantages

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Exporting avoids the often-substantial costs of establishing manufacturing operations in the host country o Exporting may help a firm achieve experience curve and location economies o By manufacturing the product in a centralized location and exporting it to other national markets, the firm may realize substantial scale economies from its global sales volume Disadvantages o Exporting from the firm’s home base may be appropriate if there are lower-cost locations for manufacturing the product abroad (i.e., if the firm can realize location economies by moving production elsewhere) " May be preferable to manufacture where the mix of factor conditions is most favourable from a value creation perspective and to export to the rest of the world from that location o High transport costs can make exporting uneconomical, particularly for bulk products " Get around this by manufacturing bulk products regionally o Tariff barriers can make exporting uneconomical " The threat of tariff barriers can make exporting very risky o Another drawback to exporting arises when a firm delegates its marketing in each country where it does business to a local agent " Foreign agents often carry the products of competing firms and so have divided loyalties " Foreign agent may not do as good a job as the firm would if it managed its marketing itself " One way to avoid this is to set up a wholly owned subsidiary in the country to handle local marketing – tight control over marketing while reaping cost advantages of manufacturing the product in a single location o

Turnkey Projects - Turnkey project: a project in which a firm agrees to set up an operating plant for a foreign client and hand over the “key” when the plant is fully operational - Contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel - At completion of the contract, the foreign client is handed the “key” to a plant that is ready for full operation - Common in chemical, pharmaceutical, and petroleum refining, and metal refining industries - Advantages o The know-how required to assemble and run a technologically complex process such as refining petroleum or steel, is a valuable asset – Turnkey projects are a way of earning great economic returns from that asset o This strategy is useful where FDI is limited by host-government regulations o Turnkey strategy can also be less risky than conventional FDI – especially true in unstable political and economic environments - Disadvantages o The firm that enters into a turnkey deal will have no long-term interest in the foreign country " This can be a disadvantage if the country subsequently proves to be a major market for the output of the process that has been exported – a way around this is to take a minority equity interest in the operation o The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor o If the firm’s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors Licensing - Licensing agreement: an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee - Intangible property – patents, inventions, formulas, processes, designs, copyrights, and trademarks - Advantages o In typical international licensing deals, the licensee puts up the most capital necessary to get the overseas operation going. Thus, a primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market

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" Very attractive for firms lacking the capital to develop operations overseas Licensing can be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market o Licensing is also often used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment o Licensing is frequently used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself Disadvantages o Licensing does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies " Licensing typically involves each licensee setting up its own production operations which limits the firm’s ability to realize experience curve and location economies by producing its product in a centralized location o Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. Licensing limits a firm’s ability to do this. A licensee is unlikely to allow a multinational firm to use its profits (beyond those due in the form of royalty payments) to support a different licensee operating in another country o Risk associated with licensing technological know-how to foreign companies. Technological knowhows constitutes the basis of many multinational firms’ competitive advantage. A firm can quickly lose control over its technology by licensing it " Ways of reducing the risks of this occurring • One way is by entering into a cross-licensing agreement with a foreign firm ! an arrangement in which a company licenses valuable intangible property to a foreign partner and receives a license for the partner’s valuable knowledge. Like holding each other hostage • Another way is to link an agreement to license know-how with the formation of a joint venture in which the licensor and licensee take important equity stakes. This aligns the interest of both sides o

Franchising - Tends to involve longer-term commitments than licensing - Franchising: a specialized form of licensing in which the franchiser sells intangible property to the franchisee and insists on rules to conduct the business ! ex: McDonald’s has specific control over the menu, cooking methods, staffing policies, design, location, etc. - The franchiser will often assist the franchisee to run the business on an ongoing basis - Franchiser typically receives a royalty payment - While licensing is usually pursued by manufacturing firms, franchising is employed primarily by service firms - Advantages o Firm is relieved of many of the costs and risks of opening a foreign market on its own – franchisee typically assumes those costs and risks o Using a franchising strategy, a service firm can build a global presence quickly and at a relatively low cost and risk - Disadvantages o Franchising may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another o A significant disadvantage of franchising is quality control " The firm’s brand name conveys a message to consumers about the quality of the firm’s product – thus consumers will expect the same quality in different parts of the world • Presents a problem in that foreign franchisees may not be as concerned about quality as they are supposed to be, and the result of poor quality can extend beyond lost sales in a particular market to a decline in the firm’s worldwide reputation • Geographical distance and high number of franchise can make poor quality hard to detect • One way to avoid this is to set up a subsidiary in each country in which the firm expands – subsidiary might be wholly owned by the company or a joint venture with a foreign company. Subsidiary assumes the rights and obligations to establish franchises throughout the particular country or region. Having a master franchisee/subsidiary will allow them to

reduce the number of franchises to oversee and makes the quality control challenge easier to handle Joint Ventures - Joint venture: a cooperative undertaking between two or more firms - A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms - Establishing a joint venture with a foreign firm has long been a popular mode for entering a new market - The most typical joint venture is a 50-50 arrangement in which there are two parties, each of which hold a 50 percent ownership stake and contributes a team of managers to share operating control - Some firms, however, have sought joint ventures in which they have a majority share and thus tighter control - Advantages o A firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems " For example: for many U.S. firms, joint ventures have involved the U.S. company providing technological know-how and products and the local partner providing the marketing expertise and the local knowledge necessary for competing in that country o When the development costs and/or risk of opening a foreign market are high, a firm might gain by sharing these costs and/or risks with a local partner o In many countries, political considerations make joint ventures the only feasible entry mode " Research suggests that joint ventures with local partners face a low risk of being subject to nationalization or other forms of adverse government interference ! because local equity partners, who may have some influence on host-government policy, have a vested interest in speaking out against nationalization or government interference - Disadvantages o As with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner ! might unwittingly give away technology " Joint-venture agreements can be constructed to minimize this risk • One option is to hold majority ownership in the venture – this allows the dominant partner to exercise greater control over its technology. Only drawback is that it might be difficult getting a partner who will agree to a minority ownership • Another option is to “wall off” technology that it central to the core competence of the firm, while sharing other technology o Second disadvantage is that a joint venture does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies " Nor does it give a firm the tight control over a foreign subsidiary that it might need for engaging in coordinated attack against its rivals o Another disadvantage Is that the shared ownership arrangement can lead to conflicts and battle for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be " Research indicates that conflicts of interest over strategy and goals often arise in joint ventures and these conflicts tend to be greater when the venture is between firms of different nationalities, and they often end in the dissolution of the venture " Such conflicts tend to be triggered by shifts in the relative bargaining power of venture partners. In the case of ventures between a foreign firm and a local firm, as a foreign partner’s knowledge about local market conditions increases, it depends less on the expertise of a local partner. This increases the bargaining power of the foreign partner and ultimately leads to conflicts over control of the venture’s strategy and goals Wholly Owned Subsidiaries - Wholly owned subsidiary: a subsidiary in which the firm owns 100 percent of the stock - 2 ways to establish a wholly owned subsidiary in foreign market o Firm can set up a new operation in that country ! called a greenfield venture o It can acquire an established firm in that host nation and use that firm to promote its products - Advantages o When a firm’s competitive advantage is based on technological competence, a wholly owned subsidiary is preferred because it reduces the risk of losing control over that competence

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A wholly owned subsidiary gives a firm tight control over operations in different countries " This is necessary for engaging in global strategic coordination (using profits from one country to support competitive attacks in another) o A wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies " When cost pressures are intense, it may make sense for a firm to configure its value chain in such a way that the value added at each stage is maximized • A national subsidiary may specialize in manufacturing only part of the product line or certain components of the end product, exchanging parts and products with other subsidiaries in the firm’s global system. This requires a high degree of control over the operations of each affiliate Disadvantages o Generally the most costly method " Firms doing this must bear the full costs and risks of setting up overseas operations • Risks associated with learning to do business in a new culture are less if the firm acquires an established host-country enterprise • Acquisitions raise additional problems o

SELECTING AN ENTRY MODE - Trade-offs are inevitable when selecting an entry mode - Despite the existence of trade-offs, it is possible to make some generalizations about the optimal choice of entry mode Core Competencies and Entry Mode - Firms often expand internationally to earn greater returns from their core competencies, transferring the skills and products derived from their core competencies to foreign markets where indigenous competitors lack those skills ! such firms are pursuing an international strategy - The optimal entry mode depends on the nature of their core competencies - Distinction can be drawn between firms whose core competency is in technological know-how and those whose core competency is in management know-how Technological Know-How - If a firm’s competitive advantage is based on control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible to minimize the risk of losing control over that technology - Should probably go through a wholly owned subsidiary route - If a licensing or joint-venture arrangement can be structured so as to reduce the risks of a firm’s technological knowledge being expropriated by licensees or joint venture partners then it should still be considered - Another exception exists when a firm perceives its technological advantage to be only transitory, when it expects rapid imitation of its core technology by competitors – in such cases, the firm might want to license its technology as rapidly as possible to foreign firms to gain global acceptance for its technology before the imitation occurs o Deter competitors form developing their own, possibly superior, technology o Establish its technology as the dominant design in the industry Management Know-How - The competitive advantage of many service firms is based on management know-how - The risk of losing control over the management skills to franchisees or joint-venture partners is not that great - Many service firms favour a combination of franchising and subsidiaries to control the franchises within particular countries or regions - Subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint ventures with local partners work best for the controlling subsidiaries

Pressures for Cost Reductions and Entry Mode - The greater the pressures for cost reductions are, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries - By manufacturing in those locations where factor conditions are optimal and then exporting to the rest of the world, a firm may be able to realize substantial location and experience curve economies - The firm might then want to export the finished product to marketing subsidiaries in various countries - Subsidiaries will typically be wholly owned and have the responsibility for overseeing distribution in their particular countries - This method gives tight control over marketing that might be required for coordinating a globally dispersed value chain - Also gives the firm the ability to use the profits generated in one market to improve its competitive position in another market ESTABLISHING A WHOLLY OWNED SUBSIDIARY: GREENFIELD VENTURE OR ACQUISITION? - Greenfield strategy ! establishing a wholly owned subsidiary in a country by building a subsidiary from the group up - Acquisition ! buying an established enterprise in the target market Pros and Cons of Acquisitions Benefits of Acquisitions - They are quick to execute o A firm can rapidly build its presence in the target foreign market o Quickest way to establish a sizeable presence in the target market - Firms make acquisitions to pre-empt their competitors o Need for pre-emption is particularly great in markets that are rapidly globalizing o In such markets, there can be concentrated waves of acquisitions as firms race each other to attain global scale - Managers may believe acquisitions to be less risky than greenfield ventures o When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream o Not only acquires a set of tangible assets, such as factories, logistics systems, customer service systems, and so on, but it also acquires valuable intangible assets including a local brand name and managers’ knowledge of the business environment Why Do Acquisitions Fail? - Acquiring firms often overpay for the assets of the purchased firm o Management of the acquiring firm is often too optimistic about the value that can be created via a takeover and is thus willing to pay a significant premium over a target firm’s market capitalization ! this is called the “hubris hypothesis” - Many acquisitions fail because there is a clash between the cultures of the acquiring and acquired firm o After an acquisition, many acquired companies experience high management turnover, possibly because their employees do not like the acquiring company’s way of doing things " The loss of management talent and expertise can materially harm the performance of the acquired unit - Sometimes acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast o Differences in management philosophy and company culture can slow the integration of operations - Many acquisitions fail due to inadequate pre-acquisition screening o Firms sometimes fail to thoroughly analyze the potential benefits and costs o Sometimes fear another competitor may pre-empt them so they move too quickly o May not fully understand the target firm’s different national culture and business system Reducing the Risks of Failure - Problems can be overcome if the firm is careful about its acquisition strategy - Screening of the foreign enterprise to be acquired, including a detailed auditing of operations, financial position, and management culture, can help make sure the firm (1) does not pay too much for the acquired

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unit, (2) does not uncover any surprises after the acquisition, and (3) acquires a firm whose organization culture is not antagonistic to that of the acquiring enterprise Important for acquirer to dispel any concerns that management in the acquired enterprise might have Managers must move quickly after an acquisition to put an integration plan into action

Pros and Cons of Greenfield Ventures Benefits - Big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants - Much easier to build an organization culture from scratch than it is to change the culture of an acquired unit - Easier to establish operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit - This is important for many international businesses, where transferring products, competencies, skills, and know-how form the established operations of the firm to the new subsidiary are principal ways of creating value Disadvantages - Greenfield ventures are slower to establish - They are also risky ! degree of uncertainty is associated with future revenue and profit prospects o If the firm has already been successful in other foreign markets and understand what it takes to do business in other countries, these risks may not be that great - Possibility of being pre-empted by more aggressive global competitors, who enter via acquisitions and build a big market presence that limits the market potential for the greenfield venture Greenfield or Acquisition - If the firm is seeking to enter a market where there are already well-established incumbent enterprises and where global competitors are also interested in establishing a presence, it may pay the firm to enter via an acquisition - If the firm is considering entering a country where there are no incumbent competitors to be acquired, then a greenfield, then a greenfield venture may be the only mode - Even when incumbents exist, if the comparative advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines, and culture, it may still be preferable to enter via a greenfield venture