Chapter 1 An Overview of International Business

International business – business transactions between parties from more than one country.
The global economy – an economy in which national borders are irrelevant
The global manager –
The early era of international business – Basic Forms of Global Business Activities
Exporting and Importing
Exporting – the selling of products made in one’s own country for use or resale in other countries.
Importing – the buying of products made in other countries for use or resale in one’s own country.
Merchandise exports and imports (visible trade) – such as clothing, computers, and raw materials.
Service exports and imports (invisible trade) – such as banking, travel, and accounting activities.

International Investments
Foreign direct investments (FDI) – investments made for the purpose of actively controlling property, assets, or companies located in host countries.
Foreign portfolio investments (FPI) – purchases of foreign financial assets (stocks, bonds, and certificates of deposit) for a purpose other than control.
Home country – the country in which the parent company’s headquarters is located.
Host country – any other country in which the company operates. Other Forms of International Business Activity
International licensing – a contractual arrangement in which a firm in one country licenses the use of its intellectual property (patents, trademarks, brand names, copyrights, or trade secrets) to a firm in a second country in return for a royalty payment.
(The Walt Disney Company)
International franchising – a specialized form of international licensing, occurs when a firm in one country (the franchisor) authorizes a firm in a second country (the franchisee) to utilize its operating systems as well as its brand names, trademarks, and logos in return for a royalty payment.
(McDonald’s Corporation)
International management contract – an arrangement wherein a firm in one country agrees to operate facilities or provide other management services to a firm in another country for an agreed-upon fee.
(Marriott and Hilton)
Multinational corporation (MNC)
Multinational enterprises (MNEs)
Multinational organization (MNO)

The Contemporary Causes of Globalization
Strategic Imperatives 1. To leverage core competencies
Core competency – a distinctive strength or advantage that is central to a firm’s operations By utilizing its core competency in new markets, the firm is able to increase tis revenues and profits. 2. To acquire resources and supplies (such as materials, labor, capital, or technology)
In some cases organizations must go to foreign sources because certain products or services are either scarce or unavailable locally. 3. To seek new markets
When a firm’s domestic market matures, it becomes increasingly difficult to generate high revenue and profit growth.
Expansion into new markets carries with it two other benefits. First, a firm may be able to achieve economies of scale, lowering its average costs as its production increases. Second, such expansion diversifies a firm’s revenue stream. As it serves more countries, the firm becomes less dependent on tis sales in any one country; thereby protecting itself should that country’s economy turn sour. 4. To better compete with rivals
(Coca-Cola/Pepsi)
The Environmental Causes of Globalization 1. Changes in the political environment
(After World War I, many countries imposed tariffs and quotas on imported goods and favored local firms on government supply contracts. As a result, international trade and investment declined throughout the 1930s. However, after World War II these policies were reversed. The major trading powers negotiated reduction in tariffs and quotas and eliminated barriers to FDI within their borders. Many of the reductions were negotiated through the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO).) 2. Technological changes
Globalization and Emerging Markets
Emerging markets – countries whose recent growth or prospects for future growth exceed that of traditional markets.
BRIC countries – Brazil, Russia, India and China
Big Ten

Chapter 3 Legal, Technological, Accounting, and Political Environments

The Legal Environment
An international business must obey the laws not only of its home country but also the laws off all the host countries in which it operates

Differences in Legal Systems
Common Law – based on the cumulative wisdom of judges’ decisions on individual cases through history. These cases create legal precedents, which other judges use to decide similar cases.
(Manufacturers of defective products are more vulnerable to lawsuits in the U.S. than in the U.K. as a result of evolutionary differences.)
Statutory Law – subset of Common Law and enacted by legislative action/government body.
(Business transactions between firms and the British government are shielded from public scrutiny by Britain’s Official Secrets Act but in the U.S. the information is publicly available because of the U.S. Freedom of Information Act.)
(In the U.S. the plaintiff and the defendant in a lawsuit pay their own legal fees.)
Civil Law – based on a codification, or detailed listing, of what is and is not permissible.
Difference between Common Law and Civil Law – roles of judges and lawyers; Judge in Common is neutral and in Civil is more proactive.
Religious Law – based on the officially established rules governing the faith and practice of a particular religion.
An absence of due process and appeals procedures.
Theocracy – A country that applies religious law to civil and criminal conduct.
Bureaucratic Law – whatever the country’s bureaucrats say it is, regardless of the formal law of the land

Domestically Oriented Laws 1. Indirectly affect the ability of domestic firms to compete internationally by increasing their costs, thus reducing their price competitiveness relative to foreign firms
(Labor costs for manufacturers in Germany, France and Belgium are among the world’s highest as a result of government-mandated benefits packages.) 2. Inadvertently affect the business practices of foreign firms operating outside the country’s borders
(Often firms whose products are geared to the export market alter their production techniques to meet the regulations of the importing countries, even though the firms’ operations are legal within their home country.)

Laws Directly Affecting International Business Transactions
Sanctions – restraints against commerce with that country.
Country may attempt to induce a second country to change an undesirable policy by imposing sanctions.
Embargo – a comprehensive sanction against all commerce with a given country.
Dual-use – products that may be sued for both civilian and military purposes.
Extraterritoriality – countries may attempt to regulate business activities that are conducted outside their borders.
(Firms are vulnerable to U.S. antitrust lawsuits if they engage in activities outside the United States that diminish competition in the U.S. market.)
(U.S. antiboycott law prohibits U.S. firms from complying with any boycott ordered by a foreign country that prohibits trade with a country friendly to the U.S.)
The Helms-Burton Act – simply designed to ensure that foreign companies do not profit from Cuban property that was stolen from U.S. owners

Dispute Resolution in International Business
Typically, four questions must be answered for an international dispute to be resolved: 1. Which country’s law applies? 2. In which country should the issue be resolved? 3. Which technique should be used to resolve the conflict: litigation, arbitration, mediation, or negotiation? 4. How will the settlement be enforced?
If a contract does not contain answers to the first two questions, each party to the transaction may seek to have the case heard in the court system most favorable to its own interests - Forum shopping
(Forum shopping allegedly places U.S. manufacturers at a disadvantage in international market. Monetary awards are higher in U.S. courts, so many plaintiffs’ layers attempt to use these courts to adjudicate foreign lawsuits for product defects in U.S.-made good sold internationally.)
Principle of comity – A country will honor and enforce within its own territory the judgments and decisions of foreign courts, with certain limitation. For the principle to apply, countries commonly require three conditions to be met: 1. Reciprocity is extended between the countries; that is, country A and country B mutually agree to honor each other’s court decisions. 2. The defendant is given proper notice. 3. The foreign court judgment does not violate domestic statutes or treaty obligations.
Because of the costs and uncertainties of litigation, many international businesses seek less expensive means of settling disputes over international transactions.
Arbitration – the process by which both parties to a conflict agree to submit their cases to a private individual or body whose decision they will honor.
(Because of the speed, privacy, and informality of such proceedings, disputes can often be resolved more cheaply than through the court system.)
Foreign Sovereign Immunities Act of 1976 – the actions of foreign governments against U.S. firms are generally beyond the jurisdiction of U.S. courts.
(If France chose to nationalize IBM’s French operations or to impose arbitrary taxes on IBM computers, IBM could not use U.S. courts to seek redress against the sovereign nation of France. However, the Foreign Sovereign Immunities Act does not grant immunity for the commercial activities of a sovereign state. If the French government contracted to purchase 2,000 servers from IBM and then repudiated the contract, IBM could sue France in U.S. courts.)
Countries often negotiate bilateral treaties to protect their firms from arbitrary actions by host country governments. These treaties commonly require the host country to agree to arbitrate investment disputes involving the host country and citizens of the other country.

Chapter 4 The Role of Culture

Elements of Culture
The basic elements of culture are social structure, language, communication, religion, and values and attitudes. 1. Social Structure 1) Individuals, Families, and Groups
(The U.S. -> nuclear family (father, mother, and offspring), other cultures -> extended family (Arabs consider uncles, brothers, cousins, and in-laws as parts of their family unit to whom they owe obligations of support and assistance)) a. These differing social attitudes are reflected in the importance of the family to business.
(In the U.S., firms discourage nepotism, and the competence of a man who married the boss’s daughter is routinely questioned by coworkers. In Chinese-owned firms, family members fill critical management positions and supply capital from personal savings to ensure the firms’ growth) b. Cultures also differ in the importance of the individual relative to the group.
(The U.S. culture promotes individualism, but in group-focused societies such as Japan, children are taught that their role is to serve the group) 2) Social Stratification
All societies categorize people to some extent on the basis of their birth, occupation, educational achievements or other attributes; however, the importance of these categories in defining how individuals interact with each other within and between these groups varies by society.
In less stratified societies, firms are freer to seek out the most qualified employee. In highly stratified societies, advertisers must tailor their messages more carefully to ensure that they reach only the targeted audience and do not spill over to another audience that may be offended by receiving a message intended for the first group.
Social mobility – the ability of individuals to move from one stratum of society to another. Social mobility tends to be higher in less stratified societies. In more socially mobile societies (the U.S., Singapore, and Canada), individuals are more willing to seek higher education or to engage in entrepreneurial activities, knowing that if they are successful, they and their families are free to rise in society. 2. Communication
Even though communication can often go awry between people who share a culture, the chances of miscommunication increase substantially when the people are from different culture. 1) Nonverbal Communication – members of a society communicate with each other using more than words.
(People in the U.S. tend to abhor silence at meetings that reflects an inability to communicate or to empathize. In Japan, silence may indicate nothing more than that the individual is thinking or that additional conversation would be disharmonious.) 2) Gift giving and Hospitality – important means of communication in many business cultures.
(The business culture of Arab countries also includes gift-giving and elaborate and gracious hospitality as a means of assessing these qualities. Unlike in Japan, however, business gifts are opened in public so that all may be aware of the giver’s generosity)
(Hospitality: Executives in the U.S. -> conspicuous but people in China -> private dinning room of expensive restaurant. The American executive’s “see and be seen” desire is the antithesis of the Chinese executive’s desire for privacy)
Norms of hospitality even affect the way bad news id delivered in various cultures. 3. Religion 1) Religion shapes the attitudes its adherents have toward work, consumption, individual responsibility, and planning for the future.
(Protestant ethic – stress individual hard work, frugality, and achievement as means of glorifying God. In contrast, Hinduism emphasizes spiritual accomplishment rather than economic success. Islam, while supportive of capitalism, places more emphasis on the individual’s obligation to society. Profits earned in fair business dealings are justified, but a firm’s profits may not result from exploitation or deceit, for example, and all Muslims are expected to act charitably, justly, and humbly in their dealings with others.) 2) Religion affects the business environment in other important ways.
(Often religions impose constraints on the roles of individuals in society.) 3) Religion affects the types of products consumers may purchase as well as seasonal patterns of consumption.
The impact of religion on international business varies from country to country, depending on the country’s legal system, its homogeneity of religious beliefs, and its toleration of other religious viewpoints. 4. Values and Attitudes 1) Time a. Attitudes about time differ dramatically across cultures.
(U.S. and Canadian businesspeople expect meetings to start on time, and keeping a person waiting is considered extremely rude. In Latin American cultures, however, few participants would think it unusual if a meeting began 45 minutes after the appointed time. In Arab cultures, meetings not only often start later than the stated time, but they also may be interrupted by family and friends who wander in to exchange pleasantries.) b. The content of business meetings can vary by country.
(In contrast, in Japan or Saudi Arabia the initial meeting often focuses on determining whether the parties can trust each other and work together comfortably, rather than on the details of the proposed business.) 2) Age
(In Asian and Arab cultures, age is respected and a manager’s stature is correlated with age.)
(In Japan, senior managers will not grant approval to a project until they have achieved a consensus among junior managers.) 3) Education
(In contrast, the UK, reflecting its past class system, has historically provided an elite education to a relatively small number of students.) 4) Status
In some societies status is inherited as a result of the wealth or rank of one’s ancestors. In others, it is earned by the individual through personal accomplishments or professional achievements.
(In the U.S., hard-working entrepreneurs are honored, and their children are often disdained if they fail to match their parents’ accomplishments)
(In Japan, a person’s status depends on the status of the group to which he or she belongs.)

Chapter 5 Ethics and Social Responsibility in International Business

The Nature of Ethics and Social Responsibility in International Business
Ethics – an individual’s personal beliefs about whether a decision, behavior, or action is right or wrong.
Ethical behavior – behavior that conforms to generally accepted social norms.

* Individuals have their own personal belief system about what constitutes ethical and unethical behavior. (Most people will be able to readily describe simple behaviors (such as stealing or returning found property) as ethical or unethical.) * People from the same cultural contexts are likely to hold similar – but not necessarily identical – beliefs as to what constitutes ethical and unethical behavior. (A group of middle-class residents of Brazil will generally agree with one another as to whether a behavior such as stealing form an employer is ethical or unethical.) * Individuals may be able to rationalize behaviors based on circumstances. (The person who finds a 20-euro banknote and knows who lost it may quickly return it to the owner. But if the money is found in an empty room, the finder might justify keeping it on the grounds that the owner is no likely to claim it anyway.) * Individuals may deviate from their own belief systems based on circumstances. (In most situations people would agree that it is unethical to steal and therefore they do not steal. But if a person has no money and no food, that individual may steal food as a means of survival.) * Ethical values are strongly affected by national cultures and customs. (In Japan, status is often reflected by group membership. As a result, behavior that helps the group is more likely to be seen as ethical, whereas behavior that harms the group is likely to be viewed as unethical.)

Ethics is a distinctly individual concept, rather than an organizational one.

Ethics in Cross-Cultural and International Contexts
A useful way to characterize ethical behaviors in cross-cultural and international contexts is in terms of how an organization treats its employees, how Employees Treat the Organization, how Employees and the Organization Treat Other Economic Agents.

How an Organization Treats Its Employees
In practice, the areas most susceptible to ethical variation include hiring and firing practices, wages and working conditions, and employee privacy and respect. In some countries both ethical and legal guidelines suggest that hiring and firing decisions should be based solely on an individual’s ability to perform the job. But in other countries it is perfectly legitimate to give preferential treatment to individuals based on gender, ethnicity, age, or other non-work-related factors.

How Employees Treat the Organization
The central ethical issues in this relationship include conflicts of interest, secrecy and confidentiality, and honesty. A conflict of interest occurs when a decision potentially benefits the individual to the possible detriment of the organization.
(Many companies have policies that forbid their buyers from accepting gifts from suppliers. Differences existed between America and Japan)
(Divulging company secrets is viewed as unethical in some countries, but not in others.)
(Honesty. Relatively common problems in this area include such things as using a business telephone to make personal long distance call, stealing supplies, and padding expense accounts.)

How Employees and the Organization Treat Other Economic Agents
The primary agents of interest include customers, competitors, stockholders, suppliers, dealers, and labor unions. The behaviors between the organization and these agents that may be subject to ethical ambiguity include advertising and promotions, financial disclosures, ordering and purchasing, shipping and solicitations, bargaining and negotiation, and other business relationships.
Differences in business practices across countries create additional ethical complexities for firms and their employees.
(In some countries small bribes and side payments are a normal and customary part of doing business; foreign companies often follow the local custom regardless of what is considered an ethical practice at home.)

Managing Ethical Behavior Across Borders

Guidelines and Codes of Ethics
Codes of ethics – written statements of the values and ethical standards that guide the firms’ actions.
It must be backed up by organizational practices and the company’s corporate culture.
A multinational firm must make a decision as to whether to establish one overarching code for all of its global units or to tailor each on to its local context.

Ethics Training
Some multinational corporations address ethical issues proactively, by offering employees training in how to cope with ethical dilemmas.
On decision for international firms is whether to make ethics training globally consistent or tailored to local contexts.

Organizational Practices and the Corporate Culture
(If the top leaders in a firm behave in an ethical manner and violations of ethical standards are promptly and appropriately addressed, then everyone in the organization will understand that the firm expects them to behave in an ethical manner.) Chapter 6 International Trade and Investment

Mercantilism – a sixteenth-century economic philosophy that maintains that a country’s wealth is measured by its holdings of gold and silver. According to mercantilists, a country’s goal should be to enlarge these holdings by promoting exports and discouraging imports.
Most members of society, however, are hurt by such policies. (Governmental subsidies of exports of certain industries are paid by taxpayers in the form of higher taxes. Governmental import restrictions are paid for by consumers in the form of higher prices because domestic firms face less competition from foreign producers.)
Because mercantilism does benefit certain members of society, mercantilist policies are still politically attractive to some firms and their workers. Modern supporters of such policies, call neomercantilists or protectionists, include such U.S. groups as the American Federation of Labor-Congress of Industrial Organizations, textile manufacturers, steel companies, sugar growers, and peanut farmers.

Absolute advantage – a country should export those goods and services for which it is more productive than other countries are and import those goods and services for which other countries are more productive than it is.

Comparative advantage - a country should produce and export those goods and services for which it is relatively more productive than other countries are and import those goods and services for which other countries are relatively more productive than it is.
The opportunity cost of a good is the value of what is given up to get the good.

Product Life Cycle Theory
Firm-based theories have developed for several reasons: 1. The growing importance of MNCs in the postwar international economy; 2. The inability of the country-based theories to explain and predict the existence and growth of intraindustry trade 3. The failure of Leontief and other researchers to empirically validate the country-based Heckscher-Ohlin theory.

Product life cycle theory, which originated in the marketing field to describe the evolution of marketing strategies as a product matures, was modified by Raymond Vernon of the Harvard Business School to create a firm-based theory of international trade and international product life cycle consists of there stages: new product, maturing product, and standardized product.

In stage 1, the new product stage, a firm develops and introduces an innovate product, in response to a perceived need in the domestic market. Because the product is new, the innovating firm is uncertain whether a profitable market for the product exists. The firm’s marketing executives must closely monitor customer reactions to ensure that the new product satisfies consumer needs. Quick market feedback is important, so the product is likely to be initially produced in the country where its research and development occurred typically a developed country. Further, because the market size also is uncertain, the firm usually will minimize its investment in manufacturing capacity for the product. Most output initially is sold in the domestic market, and export sales are limited.

In stage 2, the maturing product stage, demand for the product expands dramatically as consumers recognize its value. The innovating firm builds new factories to expand its capacity and satisfy domestic and foreign demand for the product. Domestic and foreign competitors begin to emerge, lured by the prospect of lucrative earnings.

In stage 3, the standardized product stage, the market for the product stabilizes. The product becomes more of a commodity, and firms are pressured to lower their manufacturing costs as much as possible by shifting production to facilities in countries with low labor costs. As a result, the product begins to be imported into the innovating firm’s home market (by either the firm or its competitors.) In some cases, imports may result in the complete elimination of domestic production. The production of the good shifts to lower-cost manufacturing sites, but the branding and marketing functions remain in the innovating country.

Country Similarity Theory
Interindustry trade – the exchange of goods produced by one industry in country A for goods produced by a different industry in country B.
Intraindustry trade – trade between two countries of goods produced by the same industry.

In 1961, Swedish economist Steffan Linder sought to explain the phenomenon of intraindustry trade. Linder hypothesized that international trade in manufactured goods results from similarities of preferences among consumers in countries that are at the same stage of economic development.
(The Japanese market, provides BMW with well-off, prestige and performance-seeking automobile buyers similar to the ones who purchase its cars in Germany. The German market provides Toyota with quality-conscious and value-oriented customers similar to those found in its home market.)
Linder’s country similarity theory – most trade in manufactured goods should be between countries with similar per capita incomes and that intraindustry trade in manufactured goods should be common.
Differentiated goods – (such as automobiles, expensive electronics equipment, and personal care products) for which brand names and product reputations paly an important role in consumer decision-making.
Undifferentiated goods – (such as coal, petroleum products, and sugar) for which brand names and products reputations play a minor role at best in consumer purchase decisions.

New Trade Theory (the impact of economies of scale on trade in differentiated goods)
Economies of scale – if a firm’s average costs of producing a good decrease as its output of that good increases.
Like Linder’s approach, the new trade theory predicts that intraindustry trade will be commonplace. It also suggests multinational corporations within the same industry will continually play cat-and-mouse games with one another on a global basis as they attempt to expand their sales to capture scale economies.
Firms competing in the global marketplace have numerous ways of obtaining a sustainable competitive advantage. * Owning intellectual property rights * Investing in research and development * Achieving economies of scope * Exploiting the experience curve

Chapter 7 The International Monetary System and the Balance of Payments

History of the International Monetary System
The Gold Standard
Gold standard – countries agree to buy or sell their paper currencies in exchange for gold on the request of any individual or firm and, in contrast to mercantilism’s hoarding of gold, to allow the free export of gold bullion and coins.

The gold standard effectively created a fixed exchange rate system. An exchange rate is the price of one currency in terms of a second currency. Under a fixed exchange rate system, the price of a given currency does not change relative to each other country. The gold created a fixed exchange rate system because each country tied, or pegged, the value of its currency to gold.

From 1821 until the end of World War I in 1918, the most important currency in international commerce was the British pound sterling, a reflection of the United Kingdom’s emergence from the Napoleonic Wars as Europe’s dominant economic and military power. Most firms worldwide were willing to accept either gold or British pounds in settlement of transactions. As a result, the international monetary system during this period is often called a sterling-based gold standard.

The Collapse of the Gold Standard
During World War I, the sterling-based gold standard unraveled. After the war, conferences at Brussels (1920) and Genoa (1922) yielded general agreements among the major economic powers to return to the prewar gold standard. Most countries, readopted the gold standard in the 1920s despite the high levels of inflation, unemployment, and political instability that were wracking Europe.
Due to the economic stresses triggered by the worldwide Great Depression. The Bank of England was unable to honor its pledge to maintain the value of the pound. On September 21, 11931, it allowed the pound to float, meaning that the pound’s value would be determined by the forces of supply and demand and the Bank of England would no longer redeem British paper currency for gold at par value.
After the United Kingdom abandoned the gold standard, primarily members of the British Commonwealth, pegged their currencies to the pound and relied on sterling balances held in London as their international reserves. Other countries tied the value of their currencies to the U.S. dollars or the French franc. The harmony of the international monetary system degenerated further as some countries (the United States, France, the United Kingdom, Belgium, Latvia, the Netherlands, Switzerland, and Italy) engaged in a series of competitive devaluations of their currencies. By deliberately and artificially lowering (devaluing) the official value of its currency, each nation hoped to make tis own goods cheaper in world markets, thereby stimulating its exports and reducing its imports. Any such gains were offset, however, when other countries also devalued their currencies. Most countries also raised the tariffs they imposed on imported goods in the hope of protecting domestic jobs in import-competing industries. Yet as more and more countries adopted these beggar-thy-neighbor policies, international trade contracted hurting employment in each country’s export industries. More ominously, this international economic conflict was soon replaced by international military conflict – the outbreak of World War II 1939.

The Bretton Woods Era
The Bretton Woods conferees agreed to renew the gold standard on a greatly modified basis. They also agreed to the creation of two new international organizations that would assist in rebuilding the world economy and the international monetary system.

The International Bank for Reconstruction and Development (IBRD) is the official name of the World Bank.
Established in 1945, The World Bank’s initial goal was to help finance reconstruction of the war-torn European economies. With the assistance of the Marshall Plan, the World Bank accomplished this task by the mid-1950s. It then adopted a new mission – to build the economies of the world’s developing countries.
As its mission has expanded over time, the World Bank has created three affiliated organizations: 1. The International Development Association (IDA) 2. The International Finance Corporation (IFC) 3. The Multilateral Investment Guarantee Agency (MIGA)
Together with the World Bank, these constitute the World Bank Group.
In reaching its decisions, the World Bank uses a weighted voting system that reflects the economic power and contributions of its members. From time to time the voting weights are reassessed as economic power shifts or as new members join the World Bank. The World Bank must follow a hard loan policy – it may make a loan only if there is a reasonable expectation that the loan will be repaid.
The hard loan policy was severely criticized in the 1950s by poorer countries, which complained it hindered their ability to obtain World Bank loans. In response, the World Bank established the International Development Association (IDA) offering soft loans – loans that bear some significant risk of not being repaid. IDA loans carry no interest rate, although the IDA collects a small service charge from borrows. The loans also have long maturities, and borrowers are often granted a 10-year grace period before they need to begin repaying their loans. The IDA’s leading efforts focus on the least-developed countries.
The International Finance Corporation (IFC) is charged with promoting the development of the private sector in developing countries. Acting like an investment banker, the IFC, in collaboration with private investors, provides debt and equity capital for promising commercial activities.
The Multilateral Investment Guarantee Agency (MIGA) – overcome private sector reluctance to invest in developing countries because of perceived political riskiness. MIGA encourages direct investment in developing countries by offering private investors in insurance against noncommercial risks.
Paralleling the efforts of the World Bank are the regional development banks.

The Bretton Woods attendees believed that the deterioration of international trade during the years after WWI was attributable in part to the competitive exchange rate devaluations that plagued international commerce. To ensure that the post-WWII monetary system would promote international commerce -
International Monetary Fund (IMF) – oversee the functioning of the international monetary system. 1. To promote international monetary cooperation 2. To facilitate the expansion and balanced growth of international trade 3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation 4. To assist in the establishment of a multilateral system of payments 5. To give confidence to members by making the general resources of the IMF temporarily available to them and to correct maladjustments in their balance of payments 6. To shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members
To join, a country must pay a deposit, called a quota, partly in gold and partly in the country’s own currency.
The size of a quota is important for several reasons: 1. A country’s quota determines its voting power within the IMF. 2. A country’s quota serves as part of its official reserves 3. The quota determines the country’s borrowing power from the IMF. Each IMF member has an unconditional right to borrow up to 25 percent of its quota from the IMF. IMF policy allows additional borrowings contingent on the member country’s agreeing to IMF-imposed restriction – called IMF conditionality.

The IMF and the World Bank provided the institutional framework for the post-World War II international monetary system. The Bretton Woods participants also addressed the problem of how the system would function in practice. All countries agreed to peg the value of their currencies to gold. However, only the U.S. pledged to redeem its currency for gold at the request of a foreign central bank. Why this central role for the U.S. dollar? During the early postwar years, only the U.S. and Canadian dollars were convertible currencies, this is, ones that could be freely exchanged for other currencies without legal restrictions. The effect of the Bretton Woods conference was thus to establish a U.S. dollar-based gold standard.
Because each country established a par value for its currency, the Bretton Woods Agreement resulted in a fixed exchange rate system. Under the agreement each country pledged to maintain the value of tis currency within +1-1 percent of its par value.

The End of the Bretton Woods System
These runs on the British and French central banks were a precursor to a run on the most important bank in the Bretton Woods system – the U.S. Federal Reserve Bank.
As foreign dollar holdings increased, however, people began to question the ability of the U.S. to live up to its Bretton Woods obligation. This led to the Triffin paradox.
As a means of injecting more liquidity into the international monetary system while reducing the demands placed on the dollar as a reserve currency, IMF members agreed in 1967 to create special drawing rights (SDRs). IMF members can use SDRs to settle official transactions at the IMF. Thus, SDRs are sometimes called “paper gold.” An SDR’s value is currently calculated daily as a weighted average of the market value of four major currencies – U.S. dollar, euro, Japanese yen, and British pound sterling.
After Nixon’s speech most currencies began to float, their values being determined by supply and demand in the foreign-exchange market. At the Smithsonian Conference, agreed to restore the fixed exchange rate system but with restructured rates of exchange between the major trading currencies.

Performance of the International Monetary System since 1971
Free-market force disputed the new set of par values established by the Smithsonian conferees. Speculators sold both the dollar and the pound, believing they were overvalued, and hoarder currencies they believed were undervalued.
By March 1973 the central banks conceded they could not successfully resist free-market forces and so established a flexible exchange rate system. Under a flexible (or floating exchange rate system), supply and demand for a currency determine its price in the world market.
Since 1973, exchange rates among many currencies have been established primarily by the interaction of supply and demand. We use the qualifier primarily because central banks sometimes try to affect exchange rates by buying or selling currencies on the foreign-exchange market. Thus, the current arrangements are often called a managed float (or, more poetically, a dirty float) because exchange rates are not determined purely by private sector market forces.
Jamaica Agreement – each country was free to adopt whatever exchange rate system best met its own requirements.
Crawling pegs – allowing the peg to change gradually over time.
Plaza Accord – the central banks agreed to let the dollar’s value fall on currency markets.
Louvre Accord – the commitment of theses five countries to stabilizing the dollar’s value.
Baker Plan – stressed the importance of debt rescheduling, tight IMF imposed controls over domestic monetary and fiscal policies, and continued lending to debtor countries in hopes that economic growth would allow them to repay their creditors.
Brady Plan – focused on the need to reduce the debts of the troubled countries by writing off parts of the debts or by providing the countries with funds to buy back their loan notes at below face value.