Country-specific advantages Country-specific advantages

International business environmentRegional vs. global

Triad and IB activitiesPolitics, culture, trade and finance

International business environmentRegional vs. global

Triad and IB activitiesPolitics, culture, trade and finance

Firm-specific advantages and firm managementOrganizationProductionMarketing

International HRMPolitical risk management

International financial management

Firm-specific advantages and firm managementOrganizationProductionMarketing

International HRMPolitical risk management

International financial management

Locational choice and regional management European Union, North America, Japan, and Emerging

Markets

Locational choice and regional management European Union, North America, Japan, and Emerging

Markets

Course structure

Classes 1-4

Classes 5-9

Class 10

Classes 11-14

Review of the First Assignment Question 1

Monitor by the Chinese government in social media The Great Firewall Govt paid monitors and volunteers

Reliance on smartphones The cellphone carriers are predominantly state-owned Content control

Language issues Facebook sounds “You have to die” in Chinese. Lack of background in local languages and cultures

Review of the First Assignment Question 2

Professional managers/shareholders Max (shareholder values) / profitability/growth

Visionaries/founder(s) “Facebook’s mission is to give people the power to share and make

the world more open and connected” Pragmatic Chinese government reformists

Free access to information/ideas Introduction of foreign technology Openness to foreign investment

Conservative Chinese government officials Political sovereignty (control of information/content censorship) Social stability (content censorship/no inciting of potential social

conflicts/unrest) Assertive to foreign investors/business

INTERNATIONAL TRADE

Theory of absolute advantageTheory of comparative advantage

Theory of absolute advantage

A trade theory which holds that by specializing in the production of goods, which they can produce more efficiently than any others, nations can increase their economic well-being.An example

Assume: labor is the only cost of production; lower labor-hours per unit of production

means lower production costs and higher productivity of labor.

North has an absolute advantage in the production of cloth. South has an absolute advantage in the production of grain.

Without trade: with 30 labor hours, each nation can only produce 1 Cloth and 1 Grain. The total production will be 2 Cloth and 2 Grain.

It follows that: If North produces cloth and South produces grain, and an exchange ratio can be arranged,

both the countries will benefit from trade. With 30 labor hours, North: 3 Cloth; South: 3 Grain. The total production to be shared by both nations will be 3 Cloth and 3 Grain. If exchange rate is 1 Cloth : 1 Grain, North can trade 1.5 Grain for 1.5 Cloth, and in the end, each one can get 1.5 Cloth and 1.5 Grain.

Theory of absolute advantage (Continued)

Theory of comparative advantage

A trade theory which holds that nations should produce those goods for which they have the greatest relative advantage. An example

Assume: labor is the only cost of production; lower labor-hours per unit of production

means lower production costs and higher productivity of labor.

North has an absolute advantage in the production of both cloth and grain but the relative costs differ (i.e. gains from trade).

In North, one unit of cloth costs 50/100 hours of grain. In South, one unit of cloth costs 100/100 hours of grain.

Without trade: with 400 labor hours, North 6 Cloth and 1 Grain, and South 1 Cloth and 1 Grain. The total production will be 7 Cloth and 2 Grain.

It follows that: If North can import more than a half unit of grain for one unit of cloth, it will gain from trade. If South can import one unit of cloth for less than one unit of grain, it will also gain from trade. Under the circumstance presented in the above example, both countries can benefit from

trade. With 400 labor hours, North: 8 Cloth, and South: 2 Grain. Total production to be shared between the two nations will be 8 Cloth and 2 Grain. If exchange rate is 1.5 Cloth : 1 Grain, North can trade 1.5 Cloth for 1 Grain, and in the end, North: 6.5 Cloth and 1 Grain, and South: 1.5 Cloth and 1 Grain.

Theory of comparative advantage (Continued)

Other theories

Factor endowment theory Nations will produce and export products that use large amounts of

production factors that they have in abundance and will import products requiring a large amount of production factors that they lack.

Heckscher-Ohlin theory Extending comp. adv. Theory with endowment and cost of factors of

production: e.g., countries with abundant labor will focus on labor-intensive goods, others with more capital on capital-intensive goods.

Leontief paradox Focus on quality of labor input: e.g., the US exports more labor-

intensive goods and imports capital-intensive goods.

International product life cycle (IPLC) theory Incorporating new “know-how”: e.g., production starts at the parent

firm, then its subsidiaries, and finally anywhere in the world where the costs are the lowest.

Reasons for trade barriers

Protect local jobs by shielding home-country business from foreign competition

Encourage local production to replace imports Protect infant industries that are just getting

started Reduce reliance on foreign suppliers Encourage local and foreign direct investment Reduce balance of payments problems Promote export activity Prevent foreign firms from dumping (selling

goods below cost in order to achieve market share)

Promote political objectives such as refusing to trade with countries that practice apartheid or deny civil liberties to their citizens

Commonly used trade barriersPrice-based barriers (e.g., tariff)

Quantity limits (quotas)

e.g., embargo (Cuban cigars into US; arms from EU into Syria)

International price fixing

e.g., cartel (OPEC seeks to control price and profit by fixing the supply)

Non-tariff barriers

e.g., Slow processing of import permits

e.g., The establishment of quality standards that exclude foreign producers

e.g., A “buy local” policy

Financial limits

Exchange control

Foreign investment controls

Limits on FDI or transfer/remittance of funds

INTERNATIONAL FINANCE

Introduction• International financial markets are relevant to

companies, whether or not they become directly involved in international business through exports, direct investment, and the like.

• Purchases of imported products or services, borrowing and investment in other countries or currency, all involve exchange risk.

• Exchange risk: The risk of financial loss or gain due to an unexpected change in a currency’s value.– e.g., a late payment for exports, consolidating

investment value in foreign subsidiaries into the parent firm financial statement

Foreign exchange: any financial instrument that carries out payment from one currency to another.

Exchange rate: the amount of one currency that can be obtained for another currency. Spot rate is the rate quoted for current

foreign currency transactions. Forward rate is the rate quoted for the

delivery of foreign currency at a predetermined future date such as 90 days from now.

Cross rate is an exchange rate that is computed from two other rates.

Introduction (Continued)

Foreign exchange markets

The foreign exchange markets

The foreign exchange market is a mechanism, through which financial instruments (cash, cheques or drafts, wire transfers telephone transfers and contracts to sell or buy currency in the future) that are denominated in different currencies can be transacted.

There are four major ways of conducting foreign exchange in the US: Between banks: the interbank market for

foreign exchange involves transactions between banks.

Brokers: the brokers’ market consists of a small group of foreign exchange brokerage companies that make markets in foreign currencies. These brokers do not take currency positions. They simply match buyers and sellers and charge a commission for their services.

The foreign exchange markets (Continued)

– Forward transactions: let a customer “lock in” an exchange rate and thus be protected against the risk of an unfavourable change in the value of the currency that is needed.

– Futures market: the futures market is very similar to the forward foreign exchange market except in that the amount of currency transacted is fixed to be transferred at a future date at a fixed exchange rate.

The foreign exchange markets (Continued)

Exchange rates in different countries An example of selling100 Canadian

dollars

Charlotte, USA vs. Vancouver, Canada

Determination of the exchange rate

Purchasing Power Parity

PPP theory states that the exchange rate between two currencies will be determined by the relative purchasing power of these currencies.

Infl = InflationXR = Exchange Rate = domestic $ / foreign $t = time

InflUS – InflGer ≈ XRt+1 - XRt

The International Fisher Effect Fisher effect:

describes the relationship between inflation and interest rates in two countries and holds that as inflation rises, so will the nominal interest rate.

The Fisher effect holds that the interest rate differential between two countries is an unbiased predictor of future exchanges in the spot market.

i = interest rateXR = exchange ratet = time

iUS – iforeign ≈ XRt+1 - XRt

Combined equilibrium

The future exchange rate, XRt+1, will be partially determined by both of the above factors (PPP and IFE) in the absence of government intervention (e.g., trade costs and barriers and control of international financial flows).

Figure 7.3 Exchange rate determination

Other factors on spot rates

News Rumors Speculation Supply and demand imbalances Central bank intervention

Protecting against exchange risk

Protecting against exchange risk

Alternatives to minimize exchange risk Risk avoidance: avoid foreign currency transactions. Risk adaptation: this strategy includes all methods of

“hedging” against exchange rate changes. Risk transfer: the use of an insurance contract or

guarantee that transfers the exchange risk to the insurer or guarantor.

Diversification: spreading assets and liabilities across several currencies.

THE LOST DECADES IN JAPAN

失われた 20年

The Lost Decades (1991-present)

The Lost Decades (1991-present) 失われた 20年 The strong economic growth of the

1980s ended abruptly at the start of the 1990s.

In the late 1980s, abnormalities within the Japanese economic system had fueled a speculative asset price bubble of massive scale by Japanese companies, banks and securities companies.

The Lost Decades (1991-present) 失われた 20年 The Plaza Accord

Signed on Sep 22,1985 at New York City’s Plaza Hotel

Finance ministers Gerhard Stoltenberg of W Germany; Pierre

Beregovoy of France; James A. Baker III of the USA; Nigel Lawson of Britain; and Noboru Takeshita of Japan.

The Lost Decades (1991-present) 失われた 20年 To depreciate the U.S. dollar against the

Japanese yen and German Deusche Mark by intervening in the currency markets

The Lost Decades (1991-present) 失われた 20年 Devaluing the dollar made U.S. exports cheaper

and others more expensive; X-rate of the dollar vs. the yen declined by 51%

during 1985-87, largely due to the $10 billion spent by the participating central banks.

It cut trade deficit with Western Europe but not Japan partially due to Japan’s structural restriction on imports.

The Lost Decades (1991-present) 失われた 20年 In Japan, the strengthened yen in Japan’s export-

dependent economy created an incentive for the expansionary monetary policies and credit expansion that led to the Japanese asset price bubble (1986-1991) of the late 1980s.

Too much hot money flew into Japanese real estate and stock markets, which were greatly inflated.

The Louvre Accord was signed in 1987 to halt the continuing decline of the U.S. dollar.