Exam 1 Material
Exam 1 Material ibus 380
Minnesota State University, Mankato
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This 15 page Bundle was uploaded by Tia Notetaker on Thursday March 17, 2016. The Bundle belongs to ibus 380 at Minnesota State University - Mankato taught by Turgut Guvenli in Spring 2016. Since its upload, it has received 46 views. For similar materials see Principles of International Business in International Business at Minnesota State University - Mankato.
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Date Created: 03/17/16
International business: (Crossborder business) performance of trade & investment activities by firms across national borders. Internationalization: when companies tend to systematically increase the international dimension of their business activities 6 elements of IBUS 1. Globalization of markets: ongoing economic integration & growing interdependency of countries worldwide 2. International trade: exchange of products & services across national borders. Involves products & services. a. Exporting: sale of product or service to customers abroad, outbound. Ex, China (world leading exporter) exports are increasing as GDP is decreasing b. Importing: (Global sourcing) products or services coming from suppliers abroad, inbound 3. International Investment: the transfer of assets to another country or acquisition of assets in that country. Assets are referred to Factors of production: capital, technology, managerial talent, & manufacturing infrastructure. a. International portfolio investment: passive ownership of foreign securities such as stocks & bonds for the purpose of generating financial returns. Does not mean they have control over these assets, generally short term interests in ownership. b. Foreign Direct Investment: FDI strategy a firm establishes a physical presence abroad acquisition of productive assets: capital, land, labor, technology, plant & equipment. i. Most firms engage in FDI to establish: a facility to produce products or services, a sales representative office to conduct marketing or distribution activities, or a regional headquarters ii. FDI is the ultimate stage of internationalization & encompasses the widest range of IBUS iii. Companies undertake FDI for longterm & retain partial or all ownership of the assets they acquire 4. International business risk: a. Crosscultural risk a situation of event where a cultural misunderstanding puts some human value at stake. Caused by cultural differences, negotiation patterns, decision making styles, ethical practices. b. County risk potentially adverse effects on operations & profitability caused by harmful or unstable political system, laws & regulations unfavorable to foreign firms, undeveloped legal systems, corruption, barriers to trade & investment, ect., c. Currency risk adverse fluctuation in exchange rates, currency exposure, asset valuation, & foreign taxation. d. Commercial risk a firms potentially loss from poorly developed business strategies, tactics, or procedures, weak partner, operational problems, timing of entry, & competitive intensity. 5. Participants: firms, intermediaries, facilitators, governments a. Multinational enterprise: (MNE) a large company with substantial resources that performs various business activities through a network of subsidiaries & affiliates located in multiple countries. Ex. Verizon wireless, tech support located in india b. Small & medium size enterprise: (SME) a company with 500 or less employees, they use exporting to expand i. Born global firm: young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets 6. Foreign market strategies Chapter 2 Globalization of markets: ongoing economic integration & growing interdependency of countries worldwide In terms of IBUS, globalization of markets can be viewed simultaneously as; 1) Consequence of economic, technological, & government policy trends, 2) driver of economic, political, & social phenomena, & 3) driver & consequence of firm level internalization Phases of Globalization Why its not new Phase Period Triggers characteristics First 1830 to late 1800s, Railroads & ocean transport Rise of peaked in 1880 manufacturing: cross border trade of commodities, largely by trading companies Second 1900 to 1930 Electricity & steel production Emergence & dominance of early MNEs in manufacturing, extractive, & agricultural industries Third 1948 to 1970s General Agreement on Tariff & Trade Focus by (GATT) end of WWII & Marshall plan to industrializing reconstruct Europe Western countries to reduce trade barriers; rise of MNEs from Japan; development of global capital markets; rise of global trade names Fourth 1980s to present Privatization of state enterprises in Rapid growth in cross transition economies; revolution in border trade of information, communication, & products, services, & transportation technologies; remarkable capital; rise of growth of emerging markets internationally active SMEs & services firms; rising prosperity of emerging markets An organizing framework for examining market globalization ` 1. Drivers of market globalization a. Worldwide reduction of barriers to trade & investment i. Tariffs have been reduced to nearly 0, encouraging freer international trade ii. Falling trade barriers are by WTO b. Market liberalization & adoption of free markets i. Privatization of previously stateowned industries in China, India, & Eastern Europe, has encouraged economic efficiency & foreign capital into their economies c. Industrialization, economic development, & modernization i. Emerging markets are moving from, lowvalueadding commodity producers dependent on lowcost lobar, to competitive producers & exporters of premium products. ii. Such as electronics, computers, & aircraft d. Integration of work financial markets i. Raise capital, borrow funds, & engage in foreign currency transactions e. Advances in technology i. Advances in information, communications, manufacturing, & transportation are the means for internationalization to happen 1. Information technology: IT has had a revolutionary effect on business 2. Communications: has reduced costs for firms in many ways, online, phones, speed, reliability, faxing, ect. 3. Manufacturing: CAD computer Aid Design of products, robotics, & production lines managed by microprocessorbased controls have reduced costs 4. Transportation: now we have wide variety of cost efficient, reliable ways to ship products & travel worldwide 2. Dimensions of market globalization a. Integration & interdependence of national economies i. Firms use trade, investment, geographic dispersal of company resources, & integration & coordination of value chain activities ii. Valuechain: the sequence of valueadding activities performed by the firm in the course of developing, producing, marketing, & servicing a product iii. Aggregate activities give rise to economic integration iv. Governments facilitated this integration by lowering barriers & harmonizing their monetary & fiscal policies within regional economic integration blocs b. Rise of regional economic integration blocs i. NAFTA: North American Free Trade Agreement. APEC: Asia Pacific Economic Cooperation zone. & Mercosur in Latin America ii. Groups of countries within trade & investment flows are facilitated through reduced barriers c. Growth of global investment & financial flows i. Firms & governments buy & sell currency ii. Commercial & investment Banking is a global industry iii. Bond market is worldwide now iv. Not always good; the US banking crises in 2008 spread quickly & triggered a global recession d. Convergence of buyer lifestyles & preferences i. Movies, clothing, cars, goods, ect. are all becoming standardized & we are now losing traditional lifestyles e. Globalization of production activities i. Global competition forces firms to reduce costs of production & marketing by shifting manufacturing & procurement to foreign locations with cheap labor f. Globalization of services 3a. societal consequences of market globalization a. Contagion: rapid spread of financial or monetary crises from one country to another i. Trade slows, GDP drops because loss of consumer confidence in trade b. Loss of national sovereignty i. Sovereignty: ability of a nation to govern its own affairs, is a fundamental principle that underlines global relations ii. Globalization fucks with sovereignty because you cant enforce laws in another country iii. Governments should strive for open & liberalized economic regimes to minimize harm c. Offshoring & the flight of jobs I. Globalizing has opened countless jobs around the world (but it creates layoffs in the US) II. Offshoring: is the relocation of manufacturing & other value chain activities to costeffective locations abroad. III. it reduces jobs in mature countries d. Effect on the poor I. Child labor, lowwages, exploiting workers are all concerns II. But working conditions have improved as globalizations is developing e. Effect on the natural environment I. Globalization promotes pollution, habitat destruction, & deterioration of ozone, indirectly. II. Desctruction diminishes in the long run as the economies develop & it raises living standards. (in developing countries) f. Effect on national cultures I. Opens the doors to foreign companies, global brands, unfamiliar products, & new vlues II. Advertising is one way society values are merging & expanding III. Information & communication technologies speeds up the exposure process g. Globalization & Africa I. less then 3% of world trade II. businessbased models will help alleviate African poverty 3b. Firmlevel consequences of market globalization: internationalization of the firm’s valuechain a. Countless new business opportunities for internationalizing firms b. New risks& intense rivalry from foreign competitors c. More demanding buyers who source from suppliers worldwide to find the best deals d. Greater emphasis on proactive internationalization e. Internationalization of firms valuechain a. The ValueChain concept is useful in IBUS, it clarifies what activity is preformed where in the world b. Stages in ValueChain 1. Research & development (R&D) 2. Procurement (sourcing) 3. Manufacturing 4. Marketing 5. Distribution 6. Sales Chapter 6 Comparative advantage: superior features of a country that provides unique benefits in global competition, typically derived from either natural endowment or deliberate national policies. o Also known as countryspecific advantages, they include: inherited resources, such as labor, climate, arable land, & petroleum reserves, others you require over time: entrepreneurial orientation, availability of venture capital, & innovative capacity Competitive advantage: distinctive assets or competencies of a firm that are difficult for competitors to imitate, & are typically derived from specific knowledge, capabilities, skills, or superior strategy o Also known as firm specific advantage Theories of international trade & investment 1. National level a. Why do nations trade? [CLASSICAL THEORIES] i. Mercantilism: the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports & minimizing imports Exports seen as good while imports seen as bad. It explains why nations attempt to run a trade surplus (exports more good than import) It harms importing firms, import raw materials to finish manufacturing products It harms the consumers, limits product choices Product shortages may occur & result in higher prices (may cause inflation) Free Trade: relative absence of restrictions to the flow of goods or services between nations. Leads to: cheaper imports, reduce company expenses, consumer saves ii. Absolute Advantage Principle: a country benefits by producing only those products in which it has absolute advantage or that it can produce using few resources than another county. Adam Smith Argues against mercantilism. Minimizing imports wastes its national resources while producing goods not efficiently. Products can be cheaper if you import from a country who is more efficient Factors of Production: labor, capital, technology Ethical connectionsA Market Failure: is an interruption in free trade, resulting in inefficient allocation of goods & services, in developing countries corruption is a source iii. Comparative Advantage Principle: it can be beneficial for 2 countries to trade without barriers as long as one is relatively more efficient at producing that good or service needed by the other country. What matters is the relative efficiency with which a country can produce the product but not the absolute cost of production. David Ricardo Ratio of production costs between 2 countries. (Germany is 4 times in cloth & only 1.5 times as much wheat, making them have a comparative advantage in cloth, page 153) Also think of opportunity cost! Limitations to early trade theories: factors that make contemporary trade complex: o Traded products are commodities & are characterized by strong branding & differentiated trade features o International transportation adds cost of importing o Government restrictions like tariffs, import barriers, & regulations can hamper international trade o More on page 155 iv. Factor Proportions Theory: endowments theory. This view sets on 2 premises: 1) Products differ in types & quantities of factors (labor, natural resources, & capital) required for their production 2) Countries differ in the type & quantity of production factors they possess Import goods you don’t have a lot Export goods you have an abundant of st 1 different from the others because it focus on each nations factors of production Leontief Paradox: international trade cant be explained in one theory v. International Product Life Cycle Theory: (IPLC) each product & its manufacturing technologies go through 3 stages 1) Introduction stage: new product stage, advanced economies with high income consumers willing to try it, often expensive 2) Maturity stage: mass production, seek to export it to other advanced economies, more routines, alternative versions, competition intensifies & export orders begin from low income countries 3) Standardization phase: knowledge of products is wide spread, mass production now, low cost labor vi. New Trade Theory: reached out to small countries to get into the internationalization, says trade is beneficial for them b. How can nations enhance their competitive advantage? [CONTEMPORARY THEORIES] i. Competitive Advantage of Nations: depends on the collective competitive advantages of the nations firms. Innovation grows advantages. (look at page 158 ex5) Determinants of National Competitive Advantage: 1) Demand conditions home market demand, strength of buyer 2) Factor conditions nations position in factors of production 3) Related & supporting industries, suppliers, competitors, & complementary factor endowments ii. Michael Porter’s Diamond Model: the competitive advantage of a nation depends on the collective competitive advantages of the nation’s firm iii. National Industrial Policy: a proactive economic development plan initiated by the government often in collaboration with the private sector, that aims to develop or support particular industries within the nation. Pg 162 has a list of the factors 2. Firm level a. Why & how do firms internationalize? [FIRM INTERNATIONALIZATION] i. Internationalization Process of the Firm: internationalization process model: Domestic Focus> pre export stage > experimental involvement > active involvement > committed involvement ii. Born Globals & International Entrepreneurship: young companies that internationalize early b. How can internationalizing firms gain & sustain competitive advantage? [NON FDI BASED EXPLANATIONS] i. International Collaborative Ventures: 1) Equity based joint ventures that result in the formation of a new entity 2) And nonequity based partner alliances in which firms temporarily to work on projects related to R&D, design, manufacturing, or any other valueadding activity ii. Networks & Relational Assets: firm level –relational assets represents a distinct competitive advantage –international marketing & purchasing (IMP) Look at pg167 ex11 Chapter 8 Page 205 Governments intervene in trade & investment to achieve political, social, or economic objectives. They create trade barriers to benefit specific interest groups (domestic firms, industries, labor unions), support homegrown firms. Free trade: unrestricted flow of products, services, & capital across national boarders. Supports economic growth & national living standards The nature of Government Interaction Protectionism: national economic policies designed to restrict free trade & protect domestic industries form foreign competition. –motives government intervention Tariff: also known as duty, is a tax imposed on imported products, effectively increasing the cost of acquisition for the customer Nontariff trade barrier: a government policy, regulation, or procedure that impedes trade through means other than explicit tariffs Customs: check points at the parts of entry in each country where government officials inspect imported products & levy tariffs Quota: quantitative restriction placed on imports of specific product over a specific period of time Unintended consequences are unfavorable outcomes from policies or laws Rationale for Government Intervention 1) Generate revenue: tariffs generate more than 25% of gov revenue 2) Ensure citizen safety, security, & welfare: laws prevent harm products being imported 3) Pursue economic, political, or social objectives: tariffs for job growth & economic development 4) Serve company & industrial interests: regulations stimulate development of homegrown industries Defensive Rational Pg 211 1) Protect national economy protectionists demand trade barriers because of the fear advanced economies manufacturers will be undersold, wages will fall, & home country jobs will be lost 2) Protection of an infant industry temporary protection from foreign competitors. Governments will temporarily make trade barriers on imports for a country, it may be hard to remove the temp barriers because industries want to preserve protections 3) National security products critical to national security & defense have restriction on things like military technology & computers export control: government measure intended to manage or prevent the export of certain products or trade with certain countries 4) National culture & identity certain occupations & industries & public assets are seen as central to National Culture & governments may impose restricitons to importing harmful products to them & impose trade barriers to preserve tradition. Ex: the US cant own the Eiffel Tower Offensive Rationale 1) national strategic priorities a. a protective variation of the infant industry rationale & related to national industry policy. Governments aim to encourage developing industries that bolster the national economy 2) increasing employment a. governments impose import barriers, protect from foreign competition & leading to more jobs Government Intervention Instruments Pg 213 exhibit 3 (contemporary Examples in book) Intervention type definition Practical effect on customers, firms, or government tariff Tax imposed on imported Increases cost to the importer, exporter, & products usually the buyer of the product. Discourages product imports. Generates gov revenue Quota Quantitative restriction on Gives early importers monopoly power & the imports of a product ability to charge higher prices. Harms late during a specified period importers. Usually results in higher prices to the of time buyer Local content Requirement that firms Discourages imports of raw materials, parts, & requirements include a minimum % of supplies, which harms manufactures’ sourcing locally sourced inputs in options. May result in higher costs and lower the production of given product quality for buyers products or services Regulations & Safety, health, or May hinder the entry of imported products; & technical standards technical regulations; reduce the quantity of available products, labeling requirements resulting in higher costs to importers & buyers Administrative & Complex procedures or Slows the import of products or services. Hinders bureaucratic requirements imposed on or delays firms’ investment activities procedures importers or foreign investors that hinder trade & investment FDI & ownership Rules that limit the ability Limits how much foreigners can invest in a restrictions pg216 of foreign firms to invest incountry, and or proportion of ownership that certain industries or foreigners can hold in firms in the country acquire local firms Subsidy Financing or other Increases the competitive advantage of the resources that a grantee, while diminishing the competitive government grants to a advantages of those that do not receive the firm or group of firms to subsidy ensure their survival Countervailing duty Duties imposed on Reduces or eliminates the competitive products imported into a advantages provided by subsidies country to offset subsidies given to producers in the exporting country Antidumping duty Tax charged on an Reduces or eliminates the competitive advantage imported product whose of imported products priced at abnormally low price is below usual prices levels in the local marker or below cost to manufacture the product Tariffs Continued export tariff: taxes on products exported by their own companies import tariff: assessed as a % of the value of the product specific tariff: a flat rate per unit of product based on weight, volume, ect revenue tariff: raise money for governments protective tariff: protect domestic industries from foreign competition prohibitive tariff: so high no one can import ay of the items tariff amounts are determined by a products Harmonized Code Non tariff trade barriers include: quotas import license: government authorization granted to a firm for importing a product. It restricts imports similar to quotas. Do not confuse with licensing Licensing: strategy for entering foreign markets in which one firm allows another the right to use its intellectual property for a fee. On a first comes first served basis Local content requirements Government regulations & technology standards Administrative or bureaucratic procedures Investment barriers FDI & ownership restrictions Currency control: restrictions on the outflow of hard currency from one country or on the inflow of foreign currencies. Can reduce the risk of capital flights, common in developing economies Subsidies & other Government support programs Govs retaliate against subsidies with Countervailing Duty: tariff imposed on products imported into a country to offset subsidies given to producers or exporters in the exporting country Dumping: pricing exported products at less than normal value, generally less than their price in the domestic or thirdcountry markets, or a less than production cost. But it violates WTO rules because it amounts to unfair competition Investment incentives: transfer payment or tax concession made directly to foreign firms to entice them to invest in the country Procurement policies: restrict purchases to homecountry suppliers Consequences of Government Intervention Firms that participate in international trade & investment contribute to reducing global poverty Economic freedom: people are free to produce, consume, & invest in the ways they feel are most productive), is used to evaluate the effects governments make. How Government Intervention has evolved Trade barriers & tariffs started way higher than they are now General Agreement on Tariffs & Trade GATT was the first major effort to reduce trade barriers worldwide: 1) Process to reduce tariffs through continuous negotiations among member nations, 2) An agency to serve as watchdog over worldwide trade; & 3) A forum for resolving trade disputes Intervention & the Global Financial Crisis Governments worldwide increased regulations & way to improve enforcement, some governments increased protectionism to attempt to safeguard jobs & wages How firms can respond to Government Intervention Strategies to manage harmful gov intervention: 1) Research: to gather knowledge & intelligence plan market entry strategies & hostcountry options, they review ROI 2) Choose: the most appropriate entry strategy. a. Investment barriers apply to FDI b. Tariffs & nontariff trade barriers apply to exporting 3) Take advantage of foreign trade zones: in effort to create jobs & stimulate local economies. FTZ: an area within a country that receives imported goods for assembly or other processing & reexporting for customs purposes the FTZ is treated as if it is outside of the country boarders. a. Products brought into FTZ are not subject to duties, taxes, or quotas until the product made from them enter the nonFTZ b. A successful experiment with FTZs has been Maquiladoras: exporting assembly in northern Mexico by US boarders that produce components & typically finished products destined for US on a tariff free basis 4) Seek favorable customs classifications: for exported products. Shift into appropriate harmonized code to lowest tariff code 5) Take advantage of investment incentives & other government support programs 6) Lobby for freer trade & investment Pg 225
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