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ADMS 3960 IB Notes

Ch 1- Globalization and International Business

Globalization- the integration of world economies through the elimination of barriers to movements of

goods, services, capital, technology and people

How Does International Business Fit In?-globalization enables us to get more variety, better quality, lower prices

IB- all commercial transactions that take place between 2+ countries

-goal of private business is to make profits

-government business may or may not be motivated by profit

Study of IB

-managers need to consider where to obtain the inputs needed of the required quality at the best price

-and also where they can best sell the product

Understanding the Environment/Operations Relationship

-companies operating internationally have more diverse and complex operating environments than

those at home due to cultures and values

Forces Driving Globalization

-import restrictions have been decreasing, and output from foreign-owned investments as a percentage

of world production has increased

-world trade has grown more rapidly than world production

-only a few counties sell over half their production abroad/ depend on foreign output for their cnsmpn

-the Foreign Policy Globalization Index ranks countries across four dimensions:

Economicintltrade and investment

TechnologicalInternect connectivity

Personal contact

intl travel/ tourism, intl telephone traffic, personal transfers of funds abroadPoliticalparticipation in intl orgs and gov monetary transfers

Factors in Increased Globalization

Increase in and the application of technology

-advances in technology in many dff countries

-is due to population growth, economic growth, freeing up more people to develop new products

-innovations in transportation mean more countries can compete for sales to any market

-it can speed up interactions, enhance a managers ability to oversee foreign operations

Liberalization of Cross-Border Trade and Resource Movements

-over time, most governments have reduced restrictions for three main reasons:-citizens want a greater variety of goods

-competition spurs domestic producers to become more efficient

-they hope other countries will reduce barriers as well

Development of Services that Support Intl Business

-bank credit agreements, clearing arrangements that convert one currency into another

Growing Consumer Pressures

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-we want more, newer, better products that are also differentiated from others

-it has spurred companies to spend more on R&D for innovations

Greater Global Competition

-present pressures can persuade companies to buy/sell abroad

-a firm might introduce products in markets where competitors are already gaining sales

Born-global companies- start out with a global focus because of their founders intl experience

-many new companies locate in areas with numerous competitors and suppliers (clustering)

Changing Political Situations

-end of communist countries and the rest of the world

-willingness of governments to support programs to foster speed and cost efficiencies

-help domestic companies sell abroad more

Expanded Cross-National Cooperation

-govs have recognized their interests can be addressed through treaties, agreements, consultation

Pursuing these policies is due to the three needs:

Gain reciprocal advantagesgovs join orgs for a variety of commercial activities

-allows the countries commercial ships & planes to use certain seaports for reciprocal port use

Multinational problem solvingthe resources needed to solve issue may be too big for one to handle

-one countrys policies may also affect those of others (Eg. Interest rate)

Areas outside national territoriesnobody owns the oceans, outerspace or Antarctica

-agreements are needed to specify the amounts and rights of taking those resources

Costs of Globalization

-antiglobalization can sometimes lead to protests and violent lashes

Threats to National Sovereignty

Sovereignty- freedom to act locally and without externally imposed restrictions

Local Objectives and Policies-countries fulfill their citizens objectives by setting rules reflecting national priorities

-some argue that countries priorities are undermined by opening borders to trade

Small Economies Overdependence

-small economics depend so much on larger ones for supplies and sales

-intl companies are powerful enough to dictate their operating terms

Cultural Homogeneity

- of products, cos, work methods, social structures, language

-it is harder to maintain the traditional ways of life

Economic Growth and Environmental StressArgument for Global Growth and Global Cooperation

-some argue globalization has positive results; it fosters uniform standards for combating environmental

problems so everybody can act together

-sustaining economic growth will continue to be a problem in the future though

Growing Income Inequality and Personal Stress

Income Inequality

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-global superstar system, creating access to a greater supply of low-cost labour

-in sports where stars earn more than other professionals in sports

-profits have disproportionately gone to the top execs

-the challenge is to maximize the gains from globalization while minimizing the costs by the losers

Personal Stress

-some are stressed from social status suffers, and those who fear the loss of their jobs

Why Companies Engage in IB

Expanding Sales

-higher sales create value only if the costs of making the addl sales dont increase disproportionately

-increased sales are a major motive for expanding into intl markets

Acquiring Resources

-distributors seek out products from foreign countries because domestic supplies are inadequate

-they look for anything that will create a competitive advantage, by improving the quality of their

product of by differentiating it

Reducing Risk-operating in countries with diff business cycles can minimize swings in sales

-by obtaining products domestically and internationally,companies can soften the impact of price swings

Modes of Operations in IB

Merchandise Imports and Exports

Merchandise imports- goods brought into a country

Merchandise exports- tangible goods sent out of a country

Service Imports and Exports

Service import-recipient and payer of paymentService export- provider and receiver of payment

-service exports take many forms:

Tourism and Transportationairlines, shipping companies, travel agencies, hotels

Service Performanceperformance of those services

Turnkey operations- construction projects done under contract &transferred to owners when completed

Management contracts- one company provides personnel to perform management fnctions for another

Asset useLicensing agreements-when a company allows another to use its assets

Royalties- earnings that are received

Franchising- when one party allows another to use a trademark as an asset of the franchisees business

Investments

-dividends and interest paid represent the use of assets

Direct InvestmentFDI- investor takes a controlling interest in a foreign company

Joint venture- when 2+ companies share ownership of an FDI

Portfolio InvestmentDefn- financial interest in another entity

-is either through stock in a company, or loans to a company in bonds, bills, or notes

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Types of International Organizations

Collaborative arrangements- companies who work together

Strategic alliance- an agreement that doesnt involve joint ownership

Multinational enterprise (MNE)-company with FDI; also called MNCompany

Why IB Differs from Domestic BusinessPhysical and Social Factors

Geographic Influences

-location, quantity, quality and availability of the worlds resources, and ways to exploit them

-since smaller countries have less access to domestic resources, theyre usually more dependent on

international trade than larger countries

-geographic barriers like mountains and deserts affect communications and distribution channels

-chance of natural disasters can make business riskier

Political Policies

-influences how IB takes place within its borders

-political disputes can disrupt trade and investment (eg. Terrorist bombing)Legal Policies

-domestic law includes regulations on taxation, employment, foreign-exchange transactions

-international law determines how earnings area taxed by all jurisdictions

-may also determine how companies can operate in certain places

-it can affect a firms foreign operations

Behavioral Factors

-different values, attitudes, beliefs

-can help managers make operational decisions abroad

Economic Forces

-why countries exchange goods and services, why capital and people travel among countries-helps explain why some countries can produce goods for less

The Competitive Environment

Competitive Strategy for Products

-products compete by cost or differentiation; differentiation by:

-favorable brand image through advertising

-unique characteristics

-mass-market or selling to a niche market

-different strategies may be used for different products

Company Resources and Experience-a companys size and resources compared to those of its competitors

-companies have to invest more resources to secure national distribution than in small markets

-they face more competitors in large markets

-a company with a dominant market position uses operating tactics differently from one whos new

Competitors Faced in Each Market

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-success in a market depends on whether the competition is also international, or local

-what they learn about each other in one country is useful in predicting the others strategies elsewhere

Ch 6- International Trade and Factor-Mobility Theory

Laissez-Faire vs. Interventionist Approaches to Exports and Imports

-policies influence which countries can produce given products more efficiently and whether countrieswill permit imports to compete against domestically produced goods

-with the laissez faire approach, it allows market forces to determine trading relations

-in free trade theories, the gov shouldnt intervene

-mercantilism and neomercantilism are the opposite extreme; prescribing government intervention

Interventionist Theories

Mercantilism

Defn- theory that states countries should export more than they import

Governmental Policies

-for this to happen, govs restricted imports and subsidized production

-some countries used their colonies to support this trade objective by having them supply commodities

that theyd otherwise have to buy from a nonassociated country

as mercantilism weakened after 1800, home based companies had technological leadership, ownership

of resources abroad, and also protection from foreign competition; which continued to make colonies

tie their trade to their mother country

Concept of Balance of Trade

Trade surplus- when a country exports more than it imports

Trade deficit- when a country imports more than it exports

-during mercantilism, the difference was made up by a transfer of gold; today it is granting credit

Neomercantilism

Defn- the approach of countries that try to run favorable balances of trade to achieve some social or

political objective

Free-Trade Theories

-holds that nations shouldnt limit imports, nor promote exports

-markets will determine which producers survive based on specialization

Theory of Absolute Advantage (Adam Smith)

Defn- holds that diff countries produce some goods more efficiently than others, and because of this,

citizens can buy them abroad rather than domestically since it costs lessThrough specialization, it can increase efficiency for three reasons:

-labour could become more skilled

-labour wouldnt lose time in switching production

-it would give incentives for developing more effective working methods

Natural advantage- comes from climatic conditions, access to certain resources and labour force

-can help explain where certain manufactured items might be best produced

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Acquired Advantage

Defn- consists of either product or process technology

adv of product technologyenables a country to produce a product that is easily distinguished from

those of competitors

adv of process technologycountrys ability to efficiently produce a homogenous product

-acquired advantage through tech has created new products and also changed trading-partner r/ns

Resource Efficiency

-specialization increases the production of both products

-global efficiency is optimized, and countries can have more than they would without trade

Theory of Comparative Advantage (David Ricardo)

Defn- global efficiency gains can still result if a country specializes in what it can produce most

efficiently, regardless of whether other countries can produce the same prods more efficiently

-a country can have C.A in both goods, whereas A.A is just one

-a country gains if it concentrates its resources on the commodities it can produce most efficiently

Theories of Specialization: Some Assumptions and Limitations

-the theories make assumptions that arent always correct

Full employmentboth assume that resources are fully employed; when countries have many

unemployed resources, they might begin to restrict imports

Economic efficiencycountries also pursue objectives other than output efficiency; they might avoid

overspecialization because of the vulnerability by changes in technology

-countries goals may not be limited to economic efficiency

Division of gainsif they perceive a trading partner is gaining too large a share of benefits, they may

prefer to forgo absolute gains to prevent others from gaining an economic adv

Two countries, two commoditiesthe same theory can be applied to multiproduct and multicountrytrade relationships to show the efficiency adv

Transport costsas long as the diversion reduces output by less than what the two countries gain, there

are still gains from trade

Statics and dynamicsmost trade today is due to acquired adv; technical dynamics cause countries to

gain or lose both absolutely and relatively

Servicestheories apply because resources must also go into the service production

-offering education to foreign countries, credit card systems

Production networkscosts are saved by having activities take place in countries where there is an

absolute or comparative adv for their production

Mobilitythe theories assume resources can move domestically from the production of one good to

another at no cost, but its not all true

Eg. steelworkers dont easily move into software jobs due to diff skills

-it also assumes the resources cant move internationally

Trade Pattern Theories

How Much Does a Country Trade?

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Nontradable goods- products that are rarely practical to export because of high transportation costs are

produced in every country

Theory of Country Size

Defn- large countries usually depend less on trade than small ones

-varied climates and different natural resources make large countries more self sufficient

-distance to foreign markets affects large and small countries differently

-the farther the distance, the higher the cost, and the greater the uncertainty

Size of the Economy

-developed countries produce so much that they have more to sell, and because they have so much to

sell, incomes are often higher and people can buy more from domestic/foreign sources

What Types of Products Does a Country Trade

Factor Proportions Theory

Defn- differences in countries funding of labour compared to land explains the differences in the cost

of production factors

People and Landcountries that have many ppl have high land price because its so limitedManufacturing Locationsmost successful industries in small countries are those that uses the least

amount of land relative to the number of people employed

Capital, Labour Rates, Specializationin countries with little capital for investment, managers might find

cheap labour rates and export competitiveness in products that need large amounts of labour

-labour skills vary among countries because of training and education differences

-a company may locate its R&D in countries with a highly educated population

Process Technologybecomes more complicated when the same product can be created by different

methods, such as with labour or capital

-companies may substitute capital for labour, depending on its costs

-cos may locate long production runs in small countries if they expect to export from them-bigger countries depend more on products requiring longer production runs

Product Technologytechnology depends on high educated people and a large amount of capital to

invest in R&D

With Whom Do Countries Trade

Country-Similarity Theory

Defn- companies create new products in response to market conditions in their home market

-they turn to markets they see as most similar to what theyre accustomed to

-devped countries trade with each other because they produce and consume more

-emphasize technical breakthroughs-produce differentiated products and services

Specialization and acquired advto export, a company must provide consumers abroad with an adv

over what they could buy from their domestic producers

-trade occurs because countries specialize to gain acquired adv

Product differentiationcompanies differentiate products, creating two-way trade in similar products

Effects of cultural similarityit is easier to do business in countries perceived as similar to home

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-is easier to continue business ties than to develop new arrangements

Effects of political r/n and economic agreementspolitical r/n and agreements among countries can

discourage or encourage trade between tem

Effects of distancegeographic distance between two countries; big distance = big transportation cost

Overcoming distancemethods to overcome distance drawbacks are difficult to maintain

-they can sell the good to a country, but the transportation costs are really high

Statics and Dynamics of Trade

Product Life Cycle (PLC) Theory

Defn- the production location for mayn products moves from one country to another as they go

through their life cycle; consists of four stages:

Changes Over the Cycle

-companies develop new products because they see needs for them

Introductioninnovation, exporting by the country thats innovating it, dvpmt of prod traits

Growthincrease in exports, more competition, increased capital intensity, some foreign production

Maturitydecline in exports, more product standardization, more capital intensity, increasedcompetitiveness of price, production start ups in emerging economies

Decline- concentration of production in developing countries, country now becomes an importer

Verification and Limitations of PLC Theory

-many products where locations usually dont shift:

-products with high transport costs, with short life cycles (some fashion)

-luxury products for which cost is of little concern to the consumer

-products for which a company can use a differentiation strategy to maintain consumer demand

without competing on the basis of price

-products that require specialized technical labour near the production

Diamond of National Competitive Advantage

Defn- theory showing four important features for competitive superiority:

-all four need to be favourable for an industry to maintain global supremacy

Demand Conditionsnew products arise from companies observation of need or demand

Factor Conditionscan influence choice of product to the choice of country; production factors

Related and supporting industriesimportance of transport costs in the theory of country size

Firm strategy, structure, rivalryability of the cos to develop and sustain a C.A; barriers to entry

Limitations of the Diamond of National Advantage Theory

-it doesnt guarantee an industry will develop in a given locale-resource limitations may cause a countrys firms to avoid competing, despite an A.A

-growth of globalization; foreign/demand conditions have spurred much of the Asian export growth

-companies may depend on foreign locations for portions of their production

-materials and components are more easily brought in from abroad

-prior domestic absence of any of the four conditions may not hinder companies from gaining

these conditions and becoming globally competitive

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Factor-Mobility Theory

Defn- the mobility of capital, technology and people affect trade and relative competitive positios

Why Production Factors Move

Capital

-most mobile production factor

-companies transfer capital because of differences in expected return (accounting for risk)

-ST capital is more mobile than LG

-businesses dont make all intl capital movements though; govs give foreign aid and loans, NFP, family

People

-if they move legally, there is a lot of paperwork, a lot of new adjusting and accommodating

-migration was major in globalization; of people who went abroad to work, some left permanently

Economic motivesthey may leave because the new country allows them to earn way more

Political motiveswar dangers; it is sometimes hard to distinguish because poor economic conditions

are often parallel with poor political conditions

Effects of Factor Movements-many immigrants brought human capital with them, thus adding to the base of skills

-some countries received foreign capital to develop infrastructure and natural resources

What Happens when People Move

-factor movements are substantial for many countries and insignificant for others

-labour and capital are diff production factors, but are still intertwined

Brain drain- when highly educated and skilled people leave a country

-the outward movement and remittances of people leads to an increase in start-up companies and

capital in their home countries

-on one side, there is a need for immigrants but on the other, theyre placing barriers to entry too

Relationship Between Trade and Factor Mobility

Substitution

-there are pressures for the most abundant factors to move to countries with greater scarcity, where

they can command a better return (move to a country where it is needed, where in turn they can

command a better pay)

-in countries where labour > capital, laborers are usually poorly paid

-there are restrictions on factor movements that make them only partially mobile internationally

though; immigration restrictions, capital ownership restrictions

-the lower costs occur when trade and production factors are both mobile

-the inability to gain access to foreign production factors may stimulate efficient methods ofsubstitution, like alternatives for traditional production methods

-many other jobs that dont need mechanization (busboys) are largely filled by unskilled immigrants

Complementarity

-many exports wouldnt occur without foreign investments

-domestic operating units may export materials to foreign facilities for use in a finished produce

-a companys foreign facility may produce part of the product line while serving as another position of

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its parents other products

-factor mobility through foreign investment often stimulates trade because of the need for components;

the parents ability to sell complementary products

Ch 2- The Cultural Environments Facing Business

Culture- learned norms based on the values, attitudes, beliefs of a group of people

The People Factor

-business employs, sells to, buys from, owned and regulated bypeople

-every business function is therefore subject to potential cultural differences

Cultural Diversity

-to gain global competitive adv, companies can foster cultural diversity

-bringing together people of diverse backgrounds and experience

Cultural Collision

-when divergent cultures come into contact

-the major problems arise when; when a co implements practices that are less effective than intended

-and when employees are distressed from trying to adjust to foreign behaviours

Sensitivity and Adjustment

-company must determine which of the host nations business practices differ from its own, and decide

what adjustments need to be made to operate efficiently

Cultural Awareness

-there isnt a single method for building cultural awareness

-people disagree on what they are; widespread/limited, deep-seated/superficial

-its not also easy to isolate culture from economic and politicalconditions

-some cultural differences are obvious, while others arent

-ppl in every culture react to situations by expecting the same responses they get in their own cultures

A Little Learning Goes a Long Way

-business people can learn to improve awareness and enhance their chance of succeeding this way

-languages, pronouns and verb forms can vary b/n countries using the same language

-businesses can consult with knowledgeable people at home and abroad

-comparing countries by what people say can be risky though; diff cultures may express things

differently (one culture complain when theyre happy, etc)

-when researches focus on national differences in terms of averages, they may overlook specific

variations within countries and thus believe in unrealistic stereotypes

-since cultures evolve, behaviour that reflects current attitudes can change in the future

The Idea of a Nation:Delineating Cultures

-the idea of a nation gives a defn of a culture; a nations people share the same values, race, language

-nations include diff subcultures, ethnic groups, races

-a national culture must be flexible enough to accommodate this combo

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-certain cultural attributes can link groups from diff nations more closely than groups in one nation

-so when business people compare nations, they need to compare relevant groups

How Cultures Form and Change

Sources of Change

Change by Choice-it may occur as a reaction to social and economic situations

Change by Imposition

Cultural imperialism- a forced change in laws that becomes part of the subject culture over time

-cultural diffusion occurs when contact among countries brings change

-creolization occurs when the change results in mixing cultural elements

Language as Both a Diffuser and Stabilizer of Culture

-language limits peoples contact with other cultures

-when people speak the same language from diff areas, culture is more easily spread

-nations that share the same language makes commerce easier

Why English Travels so Well

-it is the worlds most important second language

-MNEs decide on the language to use for communicating among their employees in diff countries

-is usually English; making it the intl language of business

-linguist predicts that English speakers will experience more difficulty in communicating worldwide

-with India and China growing rapidly, they will soon take over

-English is so successful because US media is so influential and originates a large % of new products

-when a US good enters a foreign market, its vocab enters the language as well

-some countries still prefer to coin their own terms rather than accept the English versions though

Religion as a Cultural Stabilizer

-profound religious influence continue to shape cultural values

-many of the dominant religions influence specific beliefs that may affect business, like inhibiting the

sale of certain products or the performance of work at certain times

-if cos dont take these into account, the ones theyre trying to work with may not look at them seriously

Behavioural Practices Affecting Business

Issues in Social Stratification

-social stratification dictates a persons class, status, and financial rewards within that culture

-it is determines by an individuals achievements/qualifications, and their affiliation in certain groups

Individual Qualifications and Their Limitations

-in most societies, individual achievement is important

-to conduct business, people are chosen to best match the intended audience

Ascribed group membershipsare based on gender, family, age, ethnic, racial origin

Acquired group membershipsare based on religion, political affiliation, professional, other associations

-the more open a society is, the less importance group membership is in determining rewards

-there may also be opposition to certain groups from other workers

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-two other factors are important; education, and social connections (networks)

Ethnic and Racial Groups

-in less open societies, laws may be designed to reinforce rigid stratification

-imposing racial or ethnic quotas for hiring purposes

-there may also be quotas in universities, government jobs, tv soap operas

Gender-Based Groups

-barriers to gender-based employment practices are decreasing in many areas of the world

-this is due to changes in attitudes and work requirements (eg Nurses)

Age-Based Groups

-age related laws are employed, like employment, driving, rights to obtain products, civic duty

-national differences toward age of employment practices do exist

Family-Based Groups

-in some cultures, the most important group membership is family

-a persons position in society is dependent upon the social status of the family

-in these cultures, there are many family run companies who end up successful

Work Motivation

-motivated employees are more productive than those who arent

Materialism and Motivation

-work is a pathway to salvation and material success doesnt impede salvation

-self discipline, hard work in a just world will foster work motivation, and in the end, economic growth

-there is proof that the individual desire for material wealth is a prime incentive to perform he kind of

work that leads to community wide economic development

Productivity/Leisure Trade-Off

-some cultures place less value on leisure time; they have longer work hours, less holidays

-most people today regard personal economic advancement as a worthwhile goal in life

Expectation of Success and Reward

-motivation toward work is influenced by the perceived likelihood of success and its rewards

-people have little enthusiasm when success seems to be too easy or difficult

Success and Reward across Borders

-in diff countries, the same tasks come with diff probabilities of success

-in countries with high economic failure, people do the work, but are unsatisfied with it

-if theres just a small diff in reward b/n working hard and not, theres also less motivation

Performance and AchievementMasculinity-Femininity Index

-it compares the attitudes of employees toward work and achievement

-those with a high masculinity score are successful work achievers, with little sympathy for unfortunate

-they focus more on money-and-things orientation

-the degree to which people are assertive or confrontational with others will vary across borders

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Hierarchies of Needs

-according to this theory, people fulfill lower needs before moving onto the higher ones

Physiologicalfood, water Esteemboosting self-esteem

Securitysafe physical environments Self-actualizationself fulfillment

Affiliationsecurity needs

-theory can help distinguish among the reward preferences of employees in different parts of the world

-compensation cant fully explain the differences in work motivation though

-the job may just be a stepping stone to higher level positions

-those from one culture may look at it as a casual job, while another may dress formal for it

Relationship Preferences

Power Distance

-employee preferences differ in terms of interacting with bosses

-people perform better when the nature of their interactions fits their preferencespower distance

-high power distance means people prefer little consultation

-two management styles fall under this; autocratic, and paternalistic-lower power distance means they prefer consultations

Individualism vs Collectivism

Individualism- employees preference to fulfill leisure time outside the org

-receive direct monetary compensation instead of fringe benefits

-challenges motivate individualists

Collectivism- employee has a dependence o the org through training and good benefits

-a safe work environment is what motivates them

Situational Differences: The Family

-individualists may be less motivated to receive material rewards b/c they have to divide among fam

-workers geographic mobility may be limited due to their family-interrelated familial roles may complicate purchasing decisions

-security/social needs may be met more effectively at home than the workplace

Risk Taking Behaviour

-cultures differ in peoples willingness to accept things the way they are

Uncertainty Avoidance

-when it is high, employees prefer to follow the set rules, even if breaking them is better

-they stay with current employers rather than moving elsewhere for their future

Trust

-when trust is high, the cost of doing business is lower because managers dont spend much time caring

for every contingency, or looking over every action for compliance

Future Orientation

-living for the future; employers may find it easier to motivate employees through compensation

programs for the future, like a retirement plan

Fatalism

-if people believe every event in life is inevitable, theyre less likelyto accept the cause-and-effect r/n

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b/n work and reward

-countries with a high rate of fatalism plan less for contingencies, like insurance

-religious differences will place an emphasis on God; to motivate them, use cause-and-effect logic

Information and Task Processing

Perception of Cues-cultural differences, especially language, may also reflect differences in perception of cues

-a deep vocab allows speakers to express subtle differences

-diff cultures will then perceive subjects more precisely than others

Obtaining Info: Low Context vs. High Context Cultures

-in low context cultures, people only look at info that is relevant to whats at hand; theyre more direct

-in high context cultures, people infer meanings from things that are said indirectly

-when people from the two diff cultures deal with each other, there may be disagreements; one may

think the other is inefficient, while the other thinks it is too aggressive

Info Processing

-every culture has its own systems for ordering and classifying info; some by last name, others by first-different processing systems create challenges in sharing global data

Monochronic vs Polychronic Cultures

Monochronic- people prefer to work sequentially; one after another

Polychronic- multitasking, simultaneously working on diff things

-some may be offended that theyre not getting their whole undivided attention

Idealism vs Pragmatism

Idealism- cultures that establish overall principles before they solve small issues

Pragmatism- those who focus on details before the general picture

CommunicationsSpoken and Written Language

-some words dont have direct translations; they transform into insults

-grammar or misuse of a word internationally can bring a different meaning

-references should be gathered for the people whos doing your companys translating

-make sure the tone will fit both own and recipients expectations

-use simple words, avoid slang

-recognize the need and budget for the extra time to translate the text

Silent Language (nonverbal cues)

Colors

-colours must be consistent with the consumers frame of reference-it invokes associations in diff countries, or being associated with diff business

Distance

-the accustomed distance people maintain during convos are different around the world

Time and Punctuality

-diff perceptions of time/punctuality may create confusion internationally

-diff ways of looking at time; some stick to schedules, some are late

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Body Language

-the way people talk, touch, move their bodies vary among countries as well

Prestige

-a persons status in an orgl setting; some may invest in material things, others may not

Dealing with Cultural DifferencesHost Society Acceptance

-host cultures dont always expect foreigners to adjust to them

-since what theyre introducing doesnt run counter to deep-seated attitudes, the culture will accept the

foreign product for what it is

-the local society regards foreigners and domestic citizens differently

Degree of Cultural Differences

Cultural Distance

-the number of countries apart

-when a company moves into a culturally similar foreign country, they will encounter less cultural

adjustments than entering a dissimilar country-managers may assume that closely clustered countries are more alike than they really are

-may make them overlook important subtleties

Hidden Cultural Attitudes

-even if a home and host country have similar cultures, people in the host country may reject forein

practices because they see them as ways to threaten their self-identities

-there may also be operating impediments that arent easily discerned by comparing countries on

cultural dimensions

Ability to Adjust: Culture Shock

-companies must decide if theyre ready to do business in places that countenance such practicesCulture shock- the frustration from having to absorb a large amount of new cultural cues

-people working in a culture thats different than their own go through stages:

-first theyre delighted to be somewhere new, and then they encounter culture shock

-they adjust to the new surroundings, and then reverse culture shock when they return home

Company and Management Orientations

Polycentrism

-polycentric org believes their bus units abroad should act like local companies

-management may be so overwhelmed by national differences that it wont introduce workable changes

-an intl company must perform some functions differently to have an adv

-they may need to produce old products diff, or bring out new prods

-because the firm is less receptive to the idea of risking such innovation, it may rely on host-country

practices instead of adopting new ones

Ethnocentrism

-they believe that their own culture is superior to that of other countries

-they think what works at home will work elsewhere

-it underestimates the complexity of introducing new management methods

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Geocentrism

-integrates company and host country practices, as well as new ones

-it encourages innovation and improves success

Strategies for Instituting Change

Value Systems-the more something contradicts our value system, the harder it is to accept

Cost-Benefit Analysis of Change

-companies introduction of practices abroad may be costly, or cheap

-some result in a huge improved performance, while others only improve a bit

Resistance to Too Much Change

-morale declines will lead to greater turnover if too much change at once

-firms should phase their change plans gradually

Participation

-firms should discuss proposed changes with stakeholders

-can stimulate stakeholders to recognize need for change, and ease their fears about the consequencesReward Sharing

-sometimes a proposed change may have no benefit for those whose support is needed

-an employer might develop bonus programs based on the new approach

Opinion Leadership

-by making use of local channels of influence, a firm may be able to facilitate the acceptance of change

Timing

-many well conceived changes fail because theyre ill-timed

-in more instances, many families dont run for the bus anymore, but is on the board of directors

Learning Abroad

-since companies gain more experience overseas, they should learn more about methods that work inthe host country so they can see if it works in the home country

-companies should examine economies abroad that are performing well to determine whether there are

practices that they can emulate back home

Ch 3- Political and Legal Environments Facing Business

The Political Environment

-the interplay of political ideologies, conceptions of freedoms, legacies of legality, presumptions of

fairness, exercise of power make for challenging political environments around the world

-execs see how gov officials exercise authority/ punish wrongdoers, monitor how politicians are elected

-then they decide whether freedom is a practical ideal or just wishful thinking, then forecastbusiness scenarios

Political system- the structural dimensions and power dynamics of its gov that specify institutions and

orgs, and define the norms that govern political activities

-its goal is to integrate the diverse elements of a society

Individualism vs Collectivism

Individualism

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-it focuses on the primacy of indiv freedom, self-expression, personal independence

-opposes the rules that a political system uses to constrain them

-the political system encourages a gov that protects the liberty of individuals to act as they wish

-the business implications of individualism hold that each person has the right to make economic

decisions free of rules and regulations (laissez faire)

Collectivism

-focuses on the primacy of the collective (a group) over the interests of the individual

-it stresses the interdependence within the context of the community

-the whole of the collective is greater than the sum of its individual parts

-in the bus world, it holds that the ownership of assets, allocation of resources, actions of managers

improves societal welfare; bus decisions are made by the group (joint responsibility)

-gov regulates the market to ensure that business benefits society

-it promotes social and income equality, labour rights

Political Ideology

Defn- outlines the procedures for converting ideas into actionsPluralism- when 2+ groups in a country differ in language, class structure, ethnic bg, religion

-multiple opinions about an issue, each containing part of the truth but none the whole

-pluralism requires managers to assess the interplay among groups

Spectrum Analysis

*Figure 3.2 for political spectrum of various forms of political ideologies

-it guides the assessment of a complex issue; in this case, political ideology

-cultural perspectives are help interpret these choices

Political freedom- measures the degree to which fair and competitive elections occur, the extent to

which freedoms are guaranteed, and existence of freedom for the press

-for managers, a key concern is how the political system determines the freedom that they have tomake investments and operational decisions

-where, how, why a company invests, how its managers run operations

Democracy

Defn- participation by citizens in a fair and just decision making process

-all citizens are politically and legally equal

-the scale and scope of modern society limits the practice of democracy

Business Implications

-democracy supports individualistic attitudes that permit MNEs to invest and operate based on

economic standards

-promotes commerce, expand trade, streamline exchange

-managers and consumers are free to do as they see fit

Totalarianism

Defn- subordinates the individual to the interests of the collective

-consolidates power in a single agent who then controls the political, economic, social activities

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-includes a persons occupation, income level, personal interests, religion

-tolerates few to no ideas; there is no alternative

-the state uses propaganda and incarceration to make citizens conform to laws; state controlled media

-citizens have few personal freedoms and civil liberties

Business Implications

-managers in this face markets that are diff from those in democracies

-endorses a statis approach, where private capitalism plays a supporting role to state control

-managers operating in these sorts of markets must adjust decision making to account for the intricacies

of political activities

-govs goal is to sustain state power; will favour local companies at the expense of foreign competitors

Standard of Freedom

Three types of freedom worldwide:

Freecountryopen political competition, respect for civil liberties, independent civic life/media

Partly free countrylimited political rights and civil liberties, corruption, weak rule of law, censorship

Not free countryfew to no political rights, gov allows minimal to no exercise of personal choice,constrains religious freedoms, controls a large share of business activity

Trends in Political Ideologies

The Third Wave of Democratization

-more people live in countries with democratic govs than at any time in history

-third major surge of democracy in the 20thcentury doubled the number of countries w/ democratic gov

Engines of Democracy

-failure of totalitarian regimes to deliver economic progress undermined their legitimacy; citizens

contested the right of officials to govern

-improved communications eroded totalitarian states control of info; things that used to take weekscould now take hours to send across

-freedom yielded economic dividends

-growing wealth correlated with property rights, more education, gender equality, rule of law

-this trend stabilized operating conditions and encouraged them to expand their investment horizon

-this in turn accelerated the globalization of business

Democracy: Recession and Retreat

-over the past 5 years, gains in freedom have given way to declines

-most countries want it for the wealth, education, expanding middle class

-studies have shown a shift over past few yrs;gains in freedom have given way to declines in freedom

-Economist Intelligence Unitconfirms democracys retreat

-EIU assesses the texture of democracy, and found many of the worlds democracies are just

democracies in name; majority are flawed democracies, while only some are full

Economic Development

-growing uncertainty of the r/n b/n economic development and democracy

-classic modernization hypothesis holds that economic development is a pre-condition of democracy

Inconsistencies and Double Standards

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-democracy setbacks; if democracy cant work there, why would it work here

-double standards in foreign policy eroded the credibility of democracy-promoters

Economic Problems

-global financial crisis has declined confidence in institutions throughout the west

-less people believe that political policies in democratic states will lead to a better future

-right wing totalitarian draw popular support from the middle class to preserve the status quo

-left wing develops from working class movements seeking to overthrow wealthy oppressors

Who Defines Democracy

-democracy has a diff meaning from the one understood by Westerners to others

-every country has their own meaning for it

Political Risk

-at diff times, diff parties champion diff ideologies that endorse diff political systems

-investing and operating internationally exposes companies to risks that arise from a countrys political

system

Political risk- potential loss arising from a change in gov policy-the threat that decisions in a country will negatively affect the profitability of an investment

-two trends are increasing political risk; many fast growing markets are on par with political risks, weak

legal systems, fragile regimes, volatile cities

-operating in these markets is diff from the more predictable politics in Western countries

-also, the global credit crisis aggravates political risk in developed and developing markets

Classifying Political Risks (4 classes)

Systemic Political Risk

-as a rule, a countrys political processes dont punish specific companies

-investors face political risk that follow from shifts in public policy-new political leadership reduces individual benefit of business activity

-a gov may target an economic sector that it sees dominated by foreign interests

-politically motivated policies alter the macro-env, thus creating systemic risks

-if democracy continues struggling, systemic political risk will increase

Procedural Political Risk

-people, products, funds, move from point to point

-each move makes a procedural transaction; political actions impose frictions that slow these transns

-they may raise business costs, make them pay additional monies

-in some states, governors have to personally sign off on every property sale

Distributive Political Risk-the gradual elimination of the local property rights of foreign companies

-as they generate profits, the host country may begin to question the distributive justice of rewards

-they may wonder if theyre getting their fair share of MNEs growing profits

-political officials launch programs where they take a bigger share of the rewards

-they may increase barriers to transfer personnel into the country, or profits out

Catastrophic Political Risk

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-political developments that affect the operations of every company in a country

-it usually arises from ethnic discord, illegal regime change, civil disorder that disrupts society

Legal Environment

Legal Systems

-specifies the rules that regulate behaviour, the processes by which laws are enforced, the proceduresused to resolve grievances

-it may differ across countries due to tradition, usage, custom, religion

-a legal system aims to support business formation, regulate transactions, stabilize relationships

Modern legal systems have three components:

Constitutional lawsets framework for the system of gov, defines authority to establish laws

Criminalspecifies what conduct is criminal, punishment to those who breach it

Civil and commercialfairness and efficiency in business transactions

-regulates conduct b/n individuals or organizations

Types of Legal Systems

-the type determines the conduct of business transactions, who has which rights and obligationsCommon Law

-relies on tradition, judge-made precedent

-statutory codes and legislation

-common-law courts base their decisions on prior judicial pronouncements

Civil Law

-relies on systematic codification of accessible, detailed laws

-it assigns political officials to translate legal principles into statues

-judges apply the relevant statues to resolve disputes; most widespread type

Theocratic Law

-relies on religious doctrine, there is no separation of church and state-law and religion are one

Customary Law

-reflects the wisdom of daily experience or philosophical traditions

-conforms to community standards; prevails in many developing counties

-also plays a role in countries that have a mixed legal system

Mixed System

-when a nation uses 2+ preceding types; found in Africa and Asia

Trends in Legal Systems

Rule of Man-holds that power resides in a person whose word is the law

-it is an instrumental device of totalitarianism; there is no justice

-it gives government free rein to suppress threats, or reward support for state authority

Rule of Law

-holds a just political and social environment; no indiv is above laws that are clearly specified

-safeguards property rights and individual freedom

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-citizens rely on it to validate laws; the law is independent of the state

-officials are accountable to the law of the hand

-laws are clearly developed and enforced transparently

-all citizens have access to a competent and ethical judiciary; justice is omnipresent

Implications for Managers-rule of man anchors the legal systems of many emerging countries

-tendency toward totalitarianism in developing countries complicates matters

-operating in western economies grants the benefit of a consistent application of legitimate laws

-few developing countries offer such safeguards

Legal Issues in International Business

Operational Concerns

-companies comply with local laws on starting, running, closing a business

Getting Startedregistering its name, tax structure, licenses and permits, insurance, credit

-some countries expedite this process, while others dont

Making/Enforcing Contractswith buyers and sellers; it is a legal agreement that exchanges promises,

the breach of which triggers legal actions

Hiring and Firinglegal issues around the world are rarely straightforward

-some may restrict firing employees and impose generous severance payments

Getting Out/Going Underreporting sale of assets, $ to subcontractors, termination of retirement plans

-some countries close the doors fast, while others take a long time, and is expensive

Key Relationshipsr/n b/n a nations general wealth and its tendencies to regulate business activity

-overall, richer countries regulate less

-legal systems in wealthier nations regular operational activities more consistently than poor

Strategic Concerns

-it shifts managers interest to long term issues

Country of Origin and Local Content

-national laws affect the flow of products across borders

-to determine charges for the right to import a product, host governments device laws that consider the

products country of origin (where it was grown, produced, manufactured)

-govs prefer MNEs make a greater share of a product in the local market

-politicians mandate buy-local programs to protect jobs, appease voters, preserve tax rev

Marketplace Behaviour

-national laws stipulate practices in all business activities, including sourcing, distributing, pricing prods

-MNEs adjust their manufacturing strategy accordingly

-countries where the rule of man is the basis of law, acceptable marketplace behaviour is unpredictable

-MNEs complain of trumped-up charges, bribes, favoritism, lack of intellectual property

Product Safety and Liability

-intl cos customize products to comply with local standards

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-countries often impose product safety laws that require a co to adapt

-wealthier countries impose stringent standards, while poor countries inconsistent ones

Legal Jurisdiction

-countries stipulate the criteria for litigation when agents are unable tore solve a dispute

-each company petitions its home country court in hopes of favorable treatment-the choice of law clause stipulates whose laws govern dispute resolution

-obliges both parties to negotiate a compromise

Intellectual Property: Rights and Protection

Intellectual property- creative ideas, expertise, intangible insights that grant its owner a C.A

International Property Rights

-it grants the registered owner of inventions the symbols, names, images and the right to determine the

use of their property

-the legal authority to decide who can use the property

-it specifies a period that others cant copy it (patents, trademark, copyrights)

-piracy shows how hard it is to enforce IPRs

-theres no shortcut to worldwide protection; there is no global patent, etc

-companies can go after makers and sellers of counterfeit products, not the users

Big Business, Big Money

-intellectual property theft is big business

-costs of counterfeit intellectual property is 5-7% of world trade

Legal Legacies

-counterfeit products is made in countries where the rule of man prevails

-there is sluggishness in protecting intellectual property in these countries

-many Chinese question he legitimacy of laws passed by foreign govs; hence, foreign made laws areinconsistently enforced in the local marketplace

-countries that observe the rule of law more aggressively protect intellectual property rights

Wealth, Poverty, and Protection

-developed countries reason that protecting intellectual property is the best way to energize innovation

-developed countries hold 95% of patents worldwide

-developing countries argue that intellectual property rights are better thought of as intellectual

monopoly rights that impose costs by

-stifling the creativity and innovation; lowering global welfare

-inflating prices that poor nations pay for

-stipulating licensing fees that increase the costCultural Orientation

-individualist countries regard individual ownership as intrinsically legitimate; if you create something

then you should have say in who can use/copy it

-collectivist countries prefer sharing; if you create something then it should improve societys welfare

-piracy is an increasingly mainstream behaviour

-on one hand, economics spurs piracy, but the piracy among teenagers in rich and poor countries

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reflects technological opportunism

Improving Protection

-WTO gives wealthy countries a year to comply with its new rules; poorer countries longer grace period

-countries that create intellectual property ultimately enforce property rights

-as countries evolve from idea consumers to idea creators, they market products based on own property

-at some point, the benefits of protection exceed the gains from piracy

Ch 5- Globalization and Society

Foundations of Ethical Behaviour

-companies try to hire individuals willing to work in the type of ethical env theyre trying to make

3 levels of moral development:

Preconventionalthey know whats right and wrong, but dont know why

Conventionalthey learn role-conformity from peers, and then from society

Postconventionalindividuals internalize moral behaviour because they believe the behaviour is right

Teleological approach- decisions are based on the consequences of the action

Utilitarianism- an action is right if it produces the greatest amount of goodDeontological approach- moral judgments are made, moral reasoning occurs

Why Do Companies Care about Ethical Behaviour

-it can be instrumental in achieving these objectives:

-to develop C.A; to avoid being perceived as irresponsible

-responsible behaviour fosters trust, which encourages commitment

-NGOs are becoming more active in monitoring corporate practices; they rank companies according to

their carbon emissions

-govs want to ensure corporate behaviour are consistent with the best interest of community

Cultural Foundations of Ethical Behaviour

Relativism vs Normativism

Relativism

Defn- ethical truths depend on the groups holding them

-adjust to what makes sense in diff environments

-you adapt to local customs out of respect for them

-values may vary from on society or country to another

Normativism

Defn- there are universal standards of behaviour that should be accepted by everybody

-there are other values and norms that people adopt as their own

distinguish between what is common and what is unique

Walking the Fine Line b/n Relative and Normative

-a company often faces pressures to comply with local norms, but these may take the form of laws that

permit practices that grant C.A

-orgs have laid out minimum levels of bus practices they say a company must follow, regardless of the

legal requirements

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Legal Foundations for Ethical Behaviour

Legal Justification: Pros and Cons

Cons: things that are unethical arent illegal; law isnt appropriate standard for regulating all bus activity

-it takes time to pass laws and test them in courts

-we must consider moral concepts whenever were considering legal ones

-the law often undergoes scrutiny by the courts

-the law isnt so efficient; its impossible to solve every ethical dilemma with a law

Pros: the law embodies many of a countrys moral principles

-provides a clearly defined set of rules that applies to everyone

-it represents a consensus derived from widely shared experience

Extraterritoriality

Defn- imposing domestic legal and ethical practices on foreign companies

Corruption and Bribery

-determinants of corruption include cultural, legal, political forces

-is the misuse of entrusted power for private gain

-bribery takes place to obtain gov contracts, or to get officials to do what they should be doing anyways

Consequences of Corruption

-bribed are payments or promises to pay cash or anything of value

-affects both company performance and country economies

-lower national growth rates, low levels of per capita income

-downfall of numerous heads of state, gov officials and business execs resign

-corruption is expensive, inflating a companys costs and bloating its prices

Whats Being Done About Corruption

-international multilateral accords for combating bribery at the global level;

Organization for Economic Cooperation and Development (OECD)sets legally binding standards to

criminalize bribery of foreign public officials in intl bus transactions

-member countries have too implement recommendations into national law

International Chamber of Commerce (ICC)issues a code of rules against corrupt practices, and is in

support of other multilateral approaches to combating bribery

United Nations Convention against Corruption (UNCAC)covers a broad range of corruption issues, and

doesnt just focus on bribery

Regional Initiative: European Union

-exec branch of the EU supports strong anti-corruption measures within the EU

-sanctions the work of the Commissions office of antifraud, OLAF

-has an internal auditing service

-a concern within the EU is the lack of uniformity and transparency of laws though; most antibribery

provisions are left up to the member govs

-regional approaches to antibribery within the EU remain ineffective

National Initiative: US Foreign Corrupt Practices Act (US)

-sometimes behaviours that might be considered inappropriate by individuals in one country would be

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considered fine in another

-US gov continues to step up anticorruption efforts at home and abroad

Industry Initiatives

-industries have stepped up their own efforts against bribery and corruption

-construction and natural resources cos signed a zero-tolerance pact against extortion by bribery

-called the Partnering Against Corruption Initiative (PACI)

Relativism, the Rule of Law, and Responsibility

-companies are now freer to establish policies and procedures that are consistent with both their own

domestic laws and those of other countries

-companies are finding that laws that once varied have become more uniform and easier to implement

Ethics and the Environment

What is Sustainability

Defn- meeting the needs of the present without compromising the ability of future generations to meet

their own needs while taking into account what is the best for the people and environment

-is important that bus that affect the env establish policies for responsible behaviour towards the earth-multinational cos are emerging to address the needs of intl bus and society by offering solutions that

address the worlds environmental concerns

-includes renewable energy services and production to environmental cleanup

Global Warming and the Kyoto Protocol

Kyoto Protocol

-theory that global climate change results from an increase in carbon dioxide that traps heat that would

normally be radiated back into space and thereby warming the planet

-the protocol reduces greenhouse gas emissions; it committed countries to reduce emissions

-one approach favored by many is to invest more in alternative and renewable energyNational and Regional Initiatives

-firms operating in countries that have adopted the Kyoto Protocol are under pressure to either reduce

emissions, or buy credits from companies that have reduced emissions

Company-Specific Initiatives

-voluntary emissions-reduction program

-companies are changing the way they do business, regardless of whether theyre bound by Protocol

Ethical Dilemmas and Other Business Practices

Ethical Dilemmas in the Pharmaceutical Industry

-GSK focuses on pharmaceuticals, and consumer healthcare products

-to continue developing new products, GSK spends 14% of its rev on R&D

-to fund their R&D, they sell their drugs at high prices as long as theyre covered by patents

-after a patent expires, the drug becomes generic and manufacturing is done at low costs

Tiered Pricing and Other Price-Related Issues

-tiered pricing is when a product is charged differently in a developed and developing country

-often theyre simply pirated versions of the real thing, which lacks key ingredients

Taking TRIPS for What Its Worth

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-WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) allows poor countries

to counter the high cost of patented drugs by either producing general products for local consumption;

-or import generic products from other countries if they dont have the capacity in their own

country to produce the generics

-in both cases though, the developing nation is compelled to license patented drugs from legal patent

holders so patent holders can generate revenue

R&D and the Bottom Line

-drugs are very expensive to develop

-India is a thriving industry in unlicensed generic drugs, but when it refused to secure patents by foreign

companies, they chose to leave the country

-many Indian R&D facilities have sprung up to develop drugs that can be legitimately produced and sold

by Indian companies

Ethical Dimensions of Labor Conditions

-major challenge facing MNEs is the problem of globalized supply chains and the labor conditions of

foreign workers (wages, child labour, working conditions, working hours, freedom of association)-retail, clothing, footwear, agricultural industries

*Figure 5.3

-Ethical Trading Initiative (ETI)focuses on MNEs employment practices

-objective is to get companies to adopt ethical employment policies

Problem of Child Labour

-two arguments for the use of children in the Indian carpet industry

-theyre better suited than adults to perform certain tasks

-if they werent employed theyd be worse off

-Bangladesh was forced to stop employing child workers; these girls moved to prostitution instead

-for MNEs, the basic challenge is negotiating business environments with diff rules than those at homeWhat MNEs Can and Cant Do

-frequently, MNEs operating in countries with diff labour policies fall to the pressure to leave the market

Corporate Code of Ethics: How Should a Company Behave

-UN Global Compact identifies 10 broad principles in human rights, labour, environment, anti-corruption

Motivations for Corporate Responsibility

-companies experience four motivations for acting responsibly:

-unethical behaviour can result in legal fights -can result in consumer action; boycotts

-can affect employee morale -you never know when bad publicity is going to cost you sales

Developing a Code of Conduct

Set one with global policies which everyone working anywhere for the company must comply

Communicate company policies to all employees, suppliers, subcontractors

Ensure the policies laid out are carried out

-GSK needs employees to confirm in writing

-Fair Labor Association submits its operations to external monitoring

Report the results to external stakeholders

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Ch 7- Governmental Influence on Trade

-governmental policies can affect the ability of foreign producers to complete in a home market

-they can limit or enhance a companys ability to sell abroad, or acquire needed foreign supplies

Protectionism- gov restrictions on imports/exports that give subsidies to industries to allow them to

compete with foreign production either at home or abroad

Conflicting Results of Trade Policies

-govs intervene to attain economic, social, political objectives

-determining how to influence trade is complicated by conflicting policy outcomes

Role of Stakeholders

Consumers- they buy the best product they can find for its price

-they dont realize how much retail prices rise because of import restrictions though

Economic Rationales for Governmental Intervention

Fighting Unemployment

-workers that are displaced due to imports are often the least able to find alternative work

-even when they do, they may earn less

-they often need to spend their unemployment benefits to survive ST

-when they do find retraining, they often lack the educational bg needed to gain the skills

-gaining jobs by limiting imports might not work; even if successful, the cost may be high

-import restrictions are less likely retaliated against by small economies

-less like to be met with retaliation if theyreimplemented by small economies

Prospect of Retaliation

-other countries normally retaliate with their own restrictions

-fewer imports of a product mean few import-handling jobs

-restrictions might cause lower sales in other industries; they need to incur higher costs for components

-imports stimulate exports by increasing foreign income,which foreign consumers spend on new imports

-restricting earnings abroad will negatively affect domestic earnings/employment

Analyzing Trade-Offs

-costs of import restrictions include higher prices and higher taxes

-comparing the costs of limiting imports with costs of unemployment from freer trade

-hard to put a price on people who lose their jobs due to import competition

-persistent unemployment pushes many groups to call for protectionism

Protecting Infant Industries

Infant-industry argument- a gov should shield an emerging industry from foreign competition by

guaranteeing a share of the domestic market until it can compete on its own

-presumes the output costs for an industry is so high that its output is noncompetitive in world markets

-eventual competitiveness is the result of the efficiency gains that take time

-production costs may decrease over time, but it doesnt always fall enough to create competitive

products, posing two problems:

1) Govs must identify the industries that have a high probability of success

-if infant-industry protection cant reduce costs to compete against imports, chances are its owners will

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constitute a pressure group that prevents the importation of the lower priced products

-the gov protection against import competition may also deter managers from adopting the innovations

needed to complete globally

2) If policy makers can determine the infant industries that can succeed, it doesnt fully mean they

should receive governmental assistance

-some segment of the economy must incur the higher cost when local production is still inefficient to

improve overall competitiveness

Developing an Industrial Base

-countries seek protection to promote industrialization

-it brings more income than primary products do

Surplus workers

-disguised unemployment is high where people from developing countries can move into the industrial

sector without reducing agricultural output

Industrialization argument- unregulated importation of lower-priced products prevents the

development of a domestic industry-shifting people can create problems though:

-the underemployed may lose the safety net of their extended families; many wont find

suitable jobs, housing or social services

-improved agriculture practices may be better than a drastic shift to industry

-few countries farm their land efficiently; they lose out on high benefits at low cost

Investment Flows

-it can increase FDI if import restrictions keep out foreign made goods

-foreign cos may transfer manufacturing to a country if they cant trade there

Diversification

-a greater dependence on manufacturing doesnt guarantee diversification of export earnings-can face competitive risks and potential obsolescence

Growth in Manufactured Goods

Terms of trade- quantity of imports that a quantity of a countrys exports can buy

-takes more low-priced primary products to buy the same amount of high-priced manufactured goods

-the quantity of primary products demanded doesnt rise as quick as manufactured p&s

Import Substitution and Export-Led Development

Export led development- rapid economic growth by promoting the development of industries that

export their output

Nation Building

-strong r/n b/n industrialization and aspects of nation building process

-industrialization helps countries build infrastructure and boost workforce skills

Economic Relationships with Other Countries

Balance-of-Trade Adjustments

-deficit creates problems for nations with low foreign exchange reserves; the funds that help finance

priority foreign goods and maintain the trustworthiness of a currency

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-if balance-of-trade difficulties arise, a gov may:

-devalue its currency, making its products cheaper in relation to foreign products

-rely on fiscal/monetary policy to bring lower price increases than other countries

-both those options take time to implement though

Comparable Access of Fairness

Comparable access argument- companies have the same access to foreign markets as foreign markets

have access to the companies markets

-domestic producers may be disadvantaged if their access is less than foreign producers access though

-two main reasons for rejecting the idea of fairness:

-can lead to restrictions that deny ones own consumers lower prices

-is impractical to negotiate and separate agreements for each diff prod&service

Restrictions as a Bargaining Tool

-the threat of important restrictions may be a retaliatory measure for persuading other countries to

lower their import barriers

-countries levy trade restrictions to coerce other countries to change their policies

To use restrictions successfully:

Believabilityhave access to alternative sources or be sure consumers can do without it

Importanceexports of the restricted product are significant to certain parties in the producer country

Price Control Objectives

-countries will withhold goods from intl markets to raise prices abroad

-this encourages smuggling, the development of technology, or diff ways to make the same product

-is ineffective for digital products

-if prices are too high, people will seek substitutes

-a country may also limit exports to favor domestic consumers

-favoring domestic consumers disfavors domestic producers

-foreign products may also price their exports low that they end up driving producers out of business in

the importing country

-if this successfully happens; there are consequences:

-foreign producers may be shifting their countries unemployment abroad, but taxpayers are

subsidizing the purchases by consumers abroad

-if there are high entry barriers, foreign producers can charge exorbitant prices once

competitors go out of business

Dumping- countries that export below cost of home-country price

-enforcement occurs if the imported product disrupts domestic production

-import restrictions may prevent dumping

-get foreign producers to lower their prices

Optimum-tariff theory- foreign producer will lower its prices if importing country places tax on its prods

-if this occurs then benefits shift to the importing country

Noneconomic Rationales for Government Intervention

Maintaining Essential Industries

Essential industry argument- states that govs apply trade restrictions to protect essential domestic

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industries during peacetime so the country isnt dependent on foreign supplies during war

-because of a high cost, the argument shouldnt be accepted without a careful evaluation of costs, real

needs and alternatives

-govs stockpile supplies of raw materials that might be in future short supply

Promoting Acceptable Practices Abroad

-govs limit trade to promote changes in foreign countries political policies

-export constraints are valid if exporting country assumes there wont be any retaliation

-import trade controls can also be used as a foreign policy weapon (placing sanctions)

-trade controls are also used to pressure foreign govs to alter their stances on issues from human rights

to environmental protection

Maintaining or Extending Spheres of Influence

-govs give aid and encourage imports from countries that join a political alliance or vote a preferred way

- the Cotonou Agreementformalized preferential trade relationships that strengthened political ties

Preserving National Culture

-prohibiting exports of art that deem to be part of their national heritage

-imports may be limited that conflict with their dominant values, or replace domestic sources of

production hat uphold these traditional values

Instruments of Trade Control

Two types:

-those that indirectly affect the amount traded by directly influencing the prices of exports/imports

-those that directly limit the amount of a good that can be traded

Tariffs

Defn- a tax that govs place o a good thats shipped internationally

Export tariffs- tariffs collected by the exporting country

Transit tariffs- those collected by countries that the goods pass throughImport tariffs- collected by importing countries

Import tariffs give domestically produced goods a price adv; a tariff might be protective if it raises the

price of some foreign production

-import tariffs in dvpg countries dont mean much, since it usually costs more to collect than they yield

-in many developing countries though, they are a big source of rev; gives the gov more control over

determining the types of goods crossing and collecting a tax than individual and corporate income tax

Specific duty- when the gov assesses a tariff on a per unit basis

Ad valorem duty- assessed as a percentage of the items value

Compound duty- combo of the two

-raw materials usually enter developed countries free of duty, but if they are processed, then developing

countries will assign an import tariff

-since ad valorem is based on the total value of the product, others argue that the effective tariffis

higher than the published tariff rate

-it challenges developing countries to find markets for their manufactured products

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-at the same time, the govs cant remove barriers easily because these imports are more likely to

displace workers who are least equipped to move to new jobs

Nontariff Barriers: Direct Price Influences

Subsidies

Defn- direct assistance to companies to make them more competitive-not everyone agrees that companies are being subsidized just because they lose money, nor that all

types of gov loans or grants are subsidies; leads to controversies

-agricultural products is one area that everybody agrees receives subsidies in developed countries

-food supplies are too critical; better for surplus than a shortage

-it doesnt give an excuse for agricultural subsidies for non-food products though

-rural areas have a disproportionately high representation in gov decision making

-internal politics prevents price supports for farmers, gov agencies and low interest loans to farmers

-most countries offer potential exports services to help their business, like market info, trade

expositions, foreign contracts, business development services

Aids and Loans-govs also give aid and loans to other countries

Tied aidwhen the recipient is required to spend the funds in the donor country

-some products can compete abroad that might otherwise be noncompetitive

-tied aid can slow the development of local suppliers in developing countries though

Customs Valuation

-tariffs depend on the product, price, origin

-there is temptation for exports and importers to declare them wrongly on forms

-since its hard for officials to determine the honesty of these invoices, they may increase the value, or

valuation procedures have been developed

-there are so many diff products that it may be easy to misclassify a product and its corresponding tariff-the disparity in duties can cost companies millions

-customs must also determine products origins since countries treat products from diff countries diffly

Other Direct-Price Influences

-special fees, requirements that customs deposits be placed in advance, minimum price levels at which

goods can be sold after they have customs clearance

Nontariff Barriers: Quantity Controls

Quota

Defn- limit of a quantity of a product hat can be imported or exported in a given time frame

Import quotas raise prices for two main reasons:

-to limit supply

-to give little incentive to use price competition to increase sales

-tariffs generate revenue for the government

-quotas generate revenue for companies that sell a portion of the limited supply of the product

-import quotas arent imposed to protect domestic producers

Voluntary export restraint (VER)-when country A asks country B to voluntarily reduce its exports to A

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Adv: easier to switch off than an import quota

-can do less damage to political relations than an import quota

-country can set export quotas to assure domestic consumers a sufficient supply of goods at a low price

Embargo- a quota that prohibits all trade

-govs impose embargoes to use economic means to achieve political goals

Buy Local Legislation

-govs favor domestic producers

-sometimes they specify a domestic content restriction; a % of product has to be from local origin

Standards and Labels

-classification, labeling, testing standards to allow selling domestic products but reject foreign-made

-these technicalities add to a firms production costs, esp if the labels need to be translated

-purpose of standards is to protect the safety or health of the domestic population

-some companies argue that standards are just to protect domestic producers though

Specific Permission Requirements

-importers or exporters secure permission from gov authorities before conducting trade transactions

-aka import or export license

-they give the gov authorities samples to obtain the license

-it can restrict the import/export by directly denying permission, or indirectly due to time and cost

Foreign exchange control- requires an importer to apply to a gov agency to secure the foreign currency

to pay for the product

Administrative Delays

-intentional administrative delays or those caused by inefficiency

-competitive pressure moves countries to improve their administrative systems

Reciprocal Requirements

-because of gov regulations, exporters sometimes take merchandise in exchange of receiving cash

-they buy something to export something

Countertrade- gov requirements I the importing country where the exporter has to give additional

economic benefits as part of the transactions (Eg. Jobs, technology)

-this has been criticized because large contractors usually keep their own sales in tact while transferring

their purchases from smaller domestic contractors to those in foreign countries, thus weakening

domestic defense capabilities

Restrictions on Services

-countries typically consider four factors:

Essentialityservice ahs to be essential; govs may prohibit private companies in some secotrs because

they feel the services shouldnt be sold for profit

Eg. Communications, banking, utilities, domestic transport

NFP Serviceswhere few foreign firms compete; when a gov privatizes these, it prefers local ownership

and control (Eg. Mail, education, hospital health services)

Standardsgovs limit entry into many service professions to ensure practice by qualified personne

Eg. Accountants, electricians, engineers, hairstylists, lawyers

Immigrationgov regulations require an org to search for local qualified personnel before going abroad

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Dealing with Governmental Trade Influences

-government intervention affects the flow of imports and exports

-companies can move operations to another country;

-concentrate on market niches that attract less international competition;

-adopts internal innovatio