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International Business - MGT520 VU Unit 1 AN OVERVIEW Learning Objectives: z To define international business and describe how it differs from domestic business. z To explain why companies engage in international business and why its growth has accelerated. z To introduce different modes a company can use to accomplish its global objectives. z To illustrate the role social science disciplines play in understanding the envi ronment of international business. z To provide an overview of the primary patterns for companies’ international expansion. z To describe the major countervailing forces that affect international business. Lesson Overview: The first part of the chapter is designed to give a brief overview of international business in terms of why companies get involved, why there has been a recent gr owth in international business, the major modes of international business activities, the relationship to othe r disciplines, and the need to adjust operations to different operating environments. The second part of the chapter introduces features that will be covered in other chapters as well. These include the internaionalization process, coun tervailing forces, ethical dilemmas, and looking to the future. 1 © Copyright Virtual University of Pakistan International Business - MGT520 VU Lesson 01 INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS International business is all commercial transactions (private and governmental) between two countries. A. Why Companies Engage in International Business 1. Expand Sales. Going international allows companies to increase the size of the market to which they offer their products. 2. Acquire Resources. Foreign capital, technology, labor, components all can help a firm become more competitive. 3. Diversify Sources of Sales and Supplies. By operating in multiple co untries, firms help protect themselves from economic downturns in any single country. In the same way, having suppliers in multiple countries helps protect the firm from shortages due to economic , social, or political disruptions in any single country. 4. Minimize Competitive Risk. Companies expand intern ationally to competitors’ home markets in order to maintain a competitive balance across markets. B. Reasons for Recent International Business Growth—From Carrier Pigeons to the Internet. 1. Expansion of Technology. Air travel, the internet, e-mail, e-commerce, direct dial international phone calls, fax, and other technologies have brought down the cost and increased the efficiency of doing business internationally. 2. Liberalization of Cross-Border Movements. The World Trade Organization (WTO, discussed in Chapter 6) and other international trade agreements have reduced barriers to the movement of goods and services across national boundaries. 3. Development of Supporting Services. International banking, international document delivery, and other services have tremendously simplified the conduct of international business. 4. Increase in Global Competition. It is becoming increasingly important that firms have international operations in order to be able to shift production across countries and take advantage of new production location and marketing opportunities to stay ahead of other international competitors. 5. Exports are goods and servicesproduced in one country and then sent to another country. Imports are goods and services produced in one country and then brought in by another country. Information about exports and imports helps us to explain the pact of international business on the economy. 6. Foreign direct investment (FDI)is equity funds invested in other nations. Industrialized countries have invested large amounts of money in other industrial ized nations and smaller amounts in less developed countries (LDCs), such as those in Eastern Europe, or in newly industrialized countries (NICs), such as Hong Kong, South Korea, and Singapore. Most of th e world’s FDI is in the US, the European Union (EU), and Japan. As nations have become more affluent, they have pursued FDI in geographic areas that have economic growth potential. The Japanese, for exam ple, have been investing heavily in the EU in recent years. © Copyright Virtual University of Pakistan 2 International Business - MGT520 VU 7. Over 50 per cent of world trade and over 80 per cent of foreign direct investment is conducted by three regional economic hubs: the US, the EU and Japan. Collectively, these areas are referred to as the “triad”. The triad is a group of three major trading and investment blocs in the international arena. © Copyright Virtual University of Pakistan 3 International Business - MGT520 VU Lesson 2 MODES OF INTERNATIONAL BUSINESS A. Merchandise Exports and Imports: Merchandise exports are tangible products (goods) manufactured in one country and sent out of that country to another one. Merchandise imports are ta ngible products (goods) brought in from another country. B. Service Exports and Imports: Service exports and imports are international earnings that do not come from a tangible product which physically crosses a border. The company receiving payment is making a service export. The company paying is making a service import. Exports are goods and services produced in one country and then sent to another country. Imports are goods and services produc ed in one country and then brought in by another country. Information about exports and imports helps usto explain the impact of international business on the economy. 1. Tourism and Transportation. When an American flies to Germany on Lufthansa (a German airline) and spends a few days in a German hotel, the payments made to Lufthansa and the hotel are service exports for Germany and service imports for the United States. 2. Performance of Services. When an American engineering firm receives a payment for designing a plant in France, it is a service export for the United States and a service import for France. 3. Use of Assets. International licensing agreements and franchising allow foreign entities to use another firm’s trademarks, patents, or technology. Payments for the right to use these assets are a service export for the country receiving those pa yments and a service import for the country making the payments. C. Investments: Foreign investment means ownership of foreign property is exchanged for a financial return (e.g., interest and dividends). Direct Investment: 1. Foreign direct investment (FDI) occurs when an investor gains a controlling interest in a foreign company. That controlling interest can be 100% or much less. (See “Going Global” additional Exercise 1.3 at end of chapter.) When discussing foreign direct investment , it is important to distinguish between the flow of FDI and the stock of FDI. The flow of FDI refers to the amount of FDI undertaken over a given time period (normally one year). The stock of FDI refers to the total accumulated value of foreign owned assets at a given point in time. 2. Figure 6.1 illustrates the great increase in th e flows of FDI between 1992-2001. The significant growth in FDI has both to do with the political economy of trade as outlined in the previous chapter and the political and economic changes that have been taking place in developing countries. © Copyright Virtual University of Pakistan 4 International Business - MGT520 VU 3. The opening case on Starbucks helps illustrate on e very important trend in FDI - the globalization of the world economy is causing firms to invest worldwide in order to assure their presence in every region of the world. 4. Another important trend is has been the rise of inflows into the US. The stock of foreign FDI in the US increased more rapidly than US FDI abroad. 5. The rapid increase in FDI growth into the US may be due to the attractiveness of the US market, the falling value of the dollar, and a belief by some foreign corporations that they could manage US assets and workers more efficiently than their American managers could. 6. It is difficult to say whether the increase in the FDI into the US is good for the country or not. To the extent that foreigners are making more productive use of US assets and workers, it is probably good for the country. 7. Figures 6.2, 6.3, 6.4 and 6.5 provide some insi ght into the countries that have been the major recipients and sources of foreign direct investment in recent years. 8. The management focuses box details the techni ques of Mexican cement manufacturer Cemex for its aggressive international expansion of cement manufacturing. Because cement is a product that is not easily exported due to its low ratio of value to weight, Cemex sought international expansion by acquisition. Portfolio Investment: Portfolio investment is a non-controlling investment in a foreign company. It is usually a purchase of stock in a foreign company or loan to (bond purchase) a foreign firm. International Companies and Terms to Describe Them: The term “collaborative arrangements” between international companies comprises joint ventures, licensing, and manufacturing contracts. “Strategic alliances” are collaborative arrangements that are of critical importance to the competitive viability of one or more of the collaborating firms. Multinational enterprise (MNE), multinational company (MNC), transnational company (TNC) are other terms used to describe organizations operating in multiple countries. A “global company” tends to integrate its international operations in order to efficiently produce a globally standardized product. A “multidomestic company” tends to be locally responsive and tailors its products to each national market where it operates. MNC(Multinational Enterprises): 1. MNEs have a number of characteristics, including: (a) responsiveness to environmental forces such as competitors, customers, suppliers, financial institutions, and government; (b) drawing on a common pool of resources, including assets, patents, trademarks, information, and human resources; and (c) affiliates that are linked by a common strategic vision. 2. Under the premise that foreign markets are ri sky, companies expand their operations abroad incrementally and cautiously. Setting up a wholly-owned subsidiary is usually the last stage of doing business abroad. A typical internationalization process for a firm producing a standardized product © Copyright Virtual University of Pakistan 5 International Business - MGT520 VU might begin with a licensing agreement: a contractual arrangement in which one firm provides access to some of its patents, trademarks, or technology to another firm in exchange for a fee or royalty. Apart from a licensing agreement, a firm might export via an agent or distributor. This might be followed by the direct hiring of a domestic representative or the establishment of a foreign sales subsidiary. The next step might be the establishment of local packaging and/or assembly operations. This is typically followed by foreign direct investment. 3. Firms become multinationals for a number of reasons. Some of these include: (a) a desire to protect themselves from the risks and uncertainties of the domestic business cycle; (b) a growing world market for their goods or services; (c) a response to increased foreign competition; (d) a desire to reduce costs; (e) a desire to overcome tariff barriers; and (f) a desire to take advantage of technological expertise by manufacturing goods directly rather than allowing others to do it under a license agreement. 4. Multinational enterprises are different from companies that confine their activities to the domestic market. MNEs make decisions based primarily on what is best for the company, even if this means transferring funds or jobs to other countries. Multinationals in action: 1. Most MNEs are not giant corporations, but the giants are almost all MNEs. Some of the exceptions are major utilities, banks, and retailers that restrict their operations to the home country. 2. MNEs range from extremely large to fairly smal l in terms of both sale s and employment, and they can be found in a variety of different industr 3. The strategic management process involves four major functions: strategy formulation, strategy implementation, evaluation, and the control of operations. 4. Strategic planning typically begins with a review of the company’s basic mission. This is determined by answering the questions: What is the firm’s bu siness? What is its reason for existence? By answering these questions, the company reaffirms the direction in which it wants to go. In recent years many MNEs have revised their strategic plan because they realized that they had drifted too far away from their basic mission. 5. After determining its mission, the MNE will evalua te the external and inte rnal environment. The goal of external environmental analysis is to iden tify opportunities and threats that will need to be addressed. The purpose of internal environmental analysis is to evaluate the company’s financial and personnel strengths and weaknesses. 6. Internal and external analysis helps the MNE identify both long-range goals (typically two to five years) and short-range goals (less than two years). The plan is then broken down into major parts, and each affiliate and de partment will be assigned goals and responsibilities. This begins the implementation process. Progress is then periodically evaluated and changes are made in the plan. © Copyright Virtual University of Pakistan 6 International Business - MGT520 VU 7. There are many ways in which MNEs use the stra tegic management process. Citibank’s expansion to China has historically been in fluenced and restricted by the government’s policies. Zara has created a lightning-speed production and distribution system that is highly responsive to changing demand. Nissan is looking into ways of evaluating and controlling its operations. External Influences on International Business: A. Understanding a Company’s Physical and Societal Environments: International business is affected by politics, culture, currency value fluctuations, transportation costs, and other factors that domestic businesses face only in a limited way. The international manager must therefore have a deeper understanding of political science, anthropology, sociology, psychology, geography, and economics. B. The Competitive Environment: The “competitive environment” varies by industry, company, and country. Some firm compete based on the price of their products; others compete based on different product features. These different competitive strategies lead to different modes of competition between firms. Companies must understand their industries and competitors as they develop and implement their international business strategy. Evolution of Strategy in the Internationalization Process: Patterns of Expansion: Firms tend to follow a pattern of increasing intern ational involvement. Compan ies usually are initially reluctant to undertake international activity, but that reluctance diminishes as they become more experienced. © Copyright Virtual University of Pakistan 7 International Business - MGT520 VU Lesson 3 AN OVERVIEW Patterns of Expansion: Firms tend to follow a pattern of increasing intern ational involvement. Compan ies usually are initially reluctant to undertake international activity, but that reluctance diminishes as they become more experienced. Passive to Active Expansion: Initially, firms simply respond to international demand for their product. Later, they start planning how to best expand internationally. External to Internal Handling of Operations: Initially, firms use freight forwarders, customs brokers, and other external companies to help handle the details of international business. Later, once the firm has learned more about international operations, it will often perform these functions itself. Deepening Mode of Commitment: Firms usually begin international activities by either importing or exporting. These activities require no overseas investment and minimal commitment to international opportunities. As the rewards of international business beco me more apparent and fo reign markets become more familiar, the firm may expand its international commitment and begin even producing some of its products abroad. Geographic Diversification: At first, companies will do business only in one or tw o other countries (usually countries nearby and with cultural similarities to the compan y’s home country). As time goes by and the company learns more, it will tend to expand its operations into more distant and varied location Leapfrogging of Expansion: Despite the common patterns of expansion discussed above, technological and political changes have made it possible for firms to bypass the common expansion patterns. The World Wide Web, for example, allows firms to seek out global markets for their products with ease. Countervailing Forces: A. Globally Standardized versus Nationally Responsive Practices On the one hand, offering a globally standardized product enables the firm to engage in mass production and mass marketing which can generate economies of scale giving the firm a big cost advantage over competitors. On the other hand, being nationally responsive and tailoring your product to consumers in each country where you operate can make your produc t more desirable than something mass-produced for a global market. (See “Going Global” Exercise 1.2 at end of chapter.) B. Country versus Company Competitiveness Sometimes the interests of a firm coincide with the interests of the firm’s home country (e.g., “What’s good for General Motors is good for the U.S.”). However, sometimes what is good for the firm may be bad for the firm’s home country (e.g., shipping jobs from the home country to cheaper foreign locations). © Copyright Virtual University of Pakistan 8 International Business - MGT520 VU Businesses need to understand the complex ways in which their operations affect their home and host countries in order to make the most prudent economic and political decisions. C. Sovereign versus Cross-National Relationships Countries may collaborate with each other or compete. Collaboration often involves a country giving up some of its sovereignty (for example, making treaties may limit a country’s ability to act autonomously). Though countries normally prefer to maintain their sovereignty, they will of ten collaborate to gain reciprocal advantages (e.g., through trade agreements), to attack problems that a single country acting alone cannot solve (e.g., environmental agreements), or to deal with areas of concern that lie outside the territory of all countries (e.g., Antarctic exploration). © Copyright Virtual University of Pakistan 9 International Business - MGT520 VU Unit 2 GLOBALIZATION Learning Objectives: 1. Introduce the student to the co ntemporary issues in internatio nal business that illustrates the unique challenges of international business. 2. Point out the macro-economic and political changes that have taken place in the last 30 years, and suggest the implications of these changes for international business. 3. Illustrate the importance of information techno logy and technological changes in driving the globalization of products and markets. 4. Explore the changing nature of firms that do bu siness outside their national borders, many small firms in remote locations can now market their products and services world wide through the internet. 5. Highlight some of the concerns raised by critics of globalization, and the adverse effects globalization can have on some firms and individuals. 6. Explore the challenges that globalization holds for managers within an international business. Lesson Overview THE GLOBAL GROCER INTRODUCTION WHAT IS GLOBALIZATION? The Globalization of Markets The Globalization of Production DRIVERS OF GLOBALIZATION Declining Trade and Investment Barriers The Role of Technological Change THE CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY The Changing World Output and World Trade Picture The Changing Foreign Direct Investment Picture The Changing Nature of the Multinational Enterprise The Changing World Order The Global Economy of the 21st Century THE GLOBALIZATION DEBATE: PROSPERITY OR IMPOVERISHMENT? Anti-globalzrtiests, Globalization, Jobs, and Incomes Globalization, Labor Policies, and the Environment Globalization and National Sovereignty Globalization and the World’s Poor © Copyright Virtual University of Pakistan 10 International Business - MGT520 VU Lesson 4 GLOBALIZATION What is globalization? 1. There is a movement towards a globalization of markets, as the tastes and preferences of consumers in different nations are beginning to converge upon some global norm. The global acceptance of Coca-Cola, Levi's jeans, Sony Walkmans, and McDonald's hamburgers are all examples. Yet there are still significant differ ences - Germany still lead s in per capita beer consumption, with a local pub on almost every corner and in so me cities, women selling beer out of their front windows to passers by on the street. The French lead in wine consumption, and the consumption of wine is a natural part of life anywhere in France. Italians lead in pasta eaten, and these differences are unlikely to be eliminated any ti me soon. Hence, often there is still a need for marketing strategies and product features to be customized to local conditions. 2. There is a movement towards a globalization of production, as firms disperse parts of their production processes to different locations around the globe to take advantage of national differences in the cost and quality of factors of production. The examples of Boeing and Swan Optical illustrate how production is dispersed. While part of the rationale is based on costs and finding the best suppliers in the world, there are also other factors. In Boeing’s case, if it wishes to sell airliners to countries like China, these co untries often demand that domestic firms be contracted to supply portions of the plane - otherw ise they will find another supplier (Airbus) who is willing to support local industry. Drivers of globalization: 1. Two key factors seem to underlie the trend towa rds the increasing globalization of markets and production: 1) the decline of barriers to trade and investment and 2) technological change. 2. After WWII, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. Under GATT, over 140 nations negotiated even further decreases in tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services). With the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws. 3. This removal of barriers to trade has taken place in conjunction with increased trade, world output, and foreign direct investment. 4. The growth of foreign direct inve stment is a direct result of naons liberalizing their regulations to allow foreign firms to invest in facilities and acquire local companies. With their investments, these foreign firms often also bring expertise and global connections that allow local operations to have a much broader reach than would have been possible for a purely domestic company. 5. While lowering trade barriers has made the globalization of markets and production a possibility, technological changes have made it a reality. © Copyright Virtual University of Pakistan 11 International Business - MGT520 VU Lesson 5 GLOBALIZATION Technology Improvement: Improved information processing and communication allow firms to have better information about distant markets and coordinate activities worldwide. Th e explosive growth of the World Wide Web and the Internet provide a means to rapid communication of information and the ability of firms and individuals to find out about what is going on worldwide for a frac tion of the cost and hassle as was required only a couple of years ago. Improvements in transportation technology, including jet transport, temperature controlled containerized shipping, and coordinated ship-rail-truck systems have made firms better able to respond to international customer demands. As a consequence of these trends, a manager in today's firm operates in an environment that offers more opportunities, but is also more complex and competitive than that faced a generation ago. People now work with individuals and companies from many countries, and while communications technology, with the universality of English as the language of business, has decreased the absolute level of cultural difficulties individuals face, the frequency with which they face inter-cultural and international challenges has increased. Exports are goods and services produced in one country and then sent to another country. Imports are goods and services produced in one country and then brought in by another country. Information about exports and imports helps us to explain the impact of international business on the economy. 1. Foreign direct investment (FDI) is equity funds invested in othe r nations. Industrialized countries have invested large amounts of money in other industrialized nations and smaller amounts in less developed countries (LDCs), such as those in East ern Europe, or in newly industrialized countries (NICs), such as Hong Kong, South Korea, and Singapore. Most of the world’s FDI is in the US, the European Union (EU), and Japan. As nations have become more affluent, they have pursued FDI in geographic areas that have economic growth potential. The Japanese, for example, have been investing heavily in the EU in recent years. 2. Over 50 per cent of world trade and over 80 per cen t of foreign direct investment is conducted by three regional economic hubs: the US, the EU and Japan. Collectively, these areas are referred to as the “triad”. The triad is a group of three major trading and investment blocs in the international arena. Today’s global environment Over the last few decades an increasing number of countries have embraced trade and investment liberalization. Notwithstanding, triad countries have often had disagreements about implementation. A number of mechanisms to solve disputes among countr ies have evolved; the main one is the World Trade Organization (WTO), established in 1995. Today, the WTO is the umbrel la organization that governs the international trading system. When member countries have a dispute they turn to the WTO’s dispute- settlement mechanism to help resolve it. For example, the US and the EU have brought cases against each © Copyright Virtual University of Pakistan 12 International Business - MGT520 VU other in such matters as banana imports, beef hormones, steel, and foreign sales corporations. The WTO can enforce its decisions. Countrie s that refuse to comply can find themselves suffering severe consequences in the form of trade retaliation. Technology is having a major impact on the way multinational enterprises MNEs do business. Over the last few years, communication technology has allowed all business to use computers, mobile phones and to rely on the World Wide Web to access and send information. New technological developments have also been applied to the production of goods and services. Companies can now implement quality programs and improve manufacturing flexibility, among other things. International business is not limited to giant multin ational enterprises. Many small and medium-sized businesses are also involved in this arena. These include service industries, which currently employ about 70 per cent of all workers in the US and Canada. Globalization and strategic management: A. A common misconception about international business is that MNEs have far-flung operations and earn most of their revenues overseas. In fact, mo st MNEs earn the bulk of their revenues either within their home countr y or by selling in nearby locale s. Of the largest 500 MNEs, 198 are headquartered in North America, 156 are in the EU and 125 are in Japan/Asia. These firms are not spread around the world but are clustered in the triad and engage in triad/regional competition. MNEs do not develop homogeneous products for the world market but must adapt their product to local markets. For example, there is no global car but regional-based auto factories that are supported by regional/local suppliers and design cars to meet the preferences of local/regional customers. B. There are three things a nation must do to gain and hold strong international trading and investment positions: (a) maintain economic competitiveness; (b) influence trade regulations so that other countries open their doors for its goods and services; and (c) develop a global orientation that allows firms to operate as MNEs, not just as local firms doing business overseas. C. Research shows that the best way for companies to achieve competitive advantage is through innovation. Often this is accomplished through ongoing improvement of goods or services. A second way is by making existing products obso lete, by developing new and better products that replace old ones. D. Why can some firms innovate consistently while others cannot? According to Porter, the answer rests in four broad attributes that individually and interactively determine national competitive advantage: factor conditions, demand conditions , related and supporting industries, and firm strategy, structure and rivalry. E. Factor conditions include land, labor, and capital that are used to develop international market niches and tap world markets. Demand conditions require a sophisticated local demand that helps businesses fashion and shape the goods and services that will later be offered on the world market. Related and supporting industries help MNEs remain abreast of low-cost inputs and knowledge © Copyright Virtual University of Pakistan 13 International Business - MGT520 VU regarding what is happening in their industry. Firm strategy, structure, and rivalry help organizations create, organize, and manage their operations in the face of competitiveness. F. Each of the four determinants in Porter’s model often depends on the others. For example, if a country has sophisticated buyers that can provid e a company with feedback regarding how to modify or improve its product (demand conditions), this information will not be useful if the firm lacks personnel with the skills to carry out these functions (factor conditions). Similarly, if suppliers can provide the company with lo w-cost inputs and fresh ideas for innovation (related and supporting industries), but the firm clearly and easily dominates the industry (firm strategy, structure, and rivalry) and does not feel a need to upgrade the quality of its products and services, it will eventually lose this competitive advantage. G. Porter notes that government and chance influence the four determinants in Figure 1.1. Government policies, for example, can have serious consequences for international trade, since government intervention for the purpose of prot ecting home industries us ually results in less competitive national companies. There is often strong domestic pressure to provide such protection. Yet research shows that a government’s major role in international business may well be that of world trade negotiator. H. Many companies do business in other countries, but they have not developed the needed international perspective. This requires attention in three areas: experience, focus, and attitude. One way to create an international perspective is to hire individuals with international experience. A second way is to emphasize the im portance of international activities. A third way is to change the attitudes that many managers have toward their work. The changing demographics of the global The U.S. share of world output has declined dramatica lly in the past 30 years , and a much more balanced picture is now developing among industrialized countries. Looking ahead into the next century, the share of world output of what are now referred to as “developing countries” is expected to greatly surpass that of the current “industrialized countries.” © Copyright Virtual University of Pakistan 14 International Business - MGT520 VU Lesson 6 GLOBALIZATION The changing demographics of the global economy: 1. The U.S. share of world output has declined dram atically in the past 30 years (See Table 1.2), and a much more balanced picture is now developing among industrialized coun tries. Looking ahead into the next century, the share of world output of what are now referred to as “developing countries” is expected to greatly surpass that of the current “industrialized countries.” 2. The source and destinations of FDI has also dram atically changed over recent years, with the US and industrialized countries becoming less impor tant (although still dominant) as developing countries are becoming increasingly considered as an attractive and stable location for investment (See Figures 1.3 and 1.4). 3. A number of large multinationals are now non-U.S. based, and many are recognizable brand names in the worldwide (e.g. Sony, Philips, Toshiba, Honda, BMW). The new large multinationals are not only are originating in other developed countries, but there are an increasing number of multinationals based in developing countries. Table 1.3 shows the change in the home country of multinationals since 1973. The country focus on Korea’s new multinationals clearly illustrates the growth of developing country multinationals. 4. An increasing number of small firms are becoming global leaders in their field, giving rise to the mini-multinational. The mana gement focus segment on Ha rry Ramsden’s illustrates the opportunities available to small firms. 5. The fall of communism and the development of free markets in Eastern Europe and the former Soviet Union create profound opportunities, challenges, and potential threats for firms. 6. The economic development of China presents huge opportunities and risks, in spite of its continued Communist control. 7. For North American firms, the growth and market reforms in Mexico and Latin America also present tremendous new opportunities both as markets and sources of materials and production. 8. The path to full economic liberalization and open markets is not without obstruction. Economic crises in Latin America, South East Asia, and Ru ssia all caused difficulties in 1997 and 1998. In response, much trade was curtailed, and some countries imposed new co ntrols. Malaysia, for example, suspended foreigners from trading in its equity and currency markets to “prevent destabilizing influences.” While firms must be prepared to take advantage of an ever more integrated global economy, they must also prepare for political and economic disruptions that may throw their plans into disarray. The globalization debate: prosperity or impoverishment? 1. Is the shift toward a more integrated and interd ependent global economy a good thing? While many economists, politicians and business leaders seem to think so, globalization is not without its critics. Globalization stimulates economic growth, raises the incomes of consumers, and helps to © Copyright Virtual University of Pakistan 15 International Business - MGT520 VU create jobs in all countries that choose to participate in the global economy. (Your textbook is strongly in favor of free trade). Some of this growth, however, creates “sweatshop” jobs, increases pollution, and draws people from the countryside in to ever more crowded cities and slums. (On some college campuses there have been student prot ests that the clothing sold in the bookstore is made in overseas sweatshops. In response, some college bookstores have altered their procurement decisions. But does th at action change the conditions of the sweatshops or merely deny jobs to foreign workers?) 2. In developed countries, labor leaders lament the loss of good paying jobs to low wage countries. When the NAFTA agreement was signed, some polit icians warned of a hearing a “giant sucking sound” as jobs left the USA for Mexico. Even if the jobs are not lost, it creates downward pressure on wages in industries where overseas production is a viable option. The availability of jobs for unskilled workers is clearly thre atened when those jobs can be more efficiently performed elsewhere. One solution to this problem is to increase the education and training of workers in developed countries to maintain employment, and simply let the unskilled jobs go to locations where unskilled workers will accept lower wages. 3. Lower labor costs are only one of the reasons why a firm may seek to expand in developing countries. These countries may also have lower standards on enviro nmental controls and workplace safety. Nevertheless, si nce investment typically leads to higher livin g standards, there is often pressure to increase safety regulations to international levels. No country wants to be known for its poor record on health and human safety. Thus supporters of globalization argue that foreign investment often helps a country to raise its standards. 4. There is also political and economic pressure on firms not to exploit labor or the environment in overseas operations. Western firms have been the subjects of consumer boycotts when it has been revealed that they, or their independent suppliers, operate at standards below that in developed countries. 5. With the development of the WTO and other multilateral organizations such as the EU and NAFTA, countries and localities ne cessarily cede some authority ov er their actions. If the USA wanted to “protect its domestic lumber industry ” by preventing imports of lumber from Canada, the dispute would likely be settled by an international arbitration panel set up by the NAFTA agreement or the WTO. Because of its trade agre ements, the USA would likely be forced to open its markets to importation of lowe r cost, higher quality Canadian lu mber. While this would clearly be good for consumers, the domestic lumber industry would protest. While clearly some sovereignty has been ceded, it has been done to protect the best interests of consumers. If a nation wanted to retreat into a more protectionist positi on, it could clearly choose to withdraw from its international agreements. © Copyright Virtual University of Pakistan 16 International Business - MGT520 VU Managing in the global marketplace: 1. As their organizations increasingly engage in cross-border trade and investment, it means managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. Coun tries differ in their cult ures, political systems, economic systems, legal systems, and levels of economic development. 2. These differences require that business people vary their practices country by country, recognizing what changes are required to operate effectively. It is necessary to strike a balance between adaptation and maintaining globa l consistency, however. Coca-Cola would not be as successful, nor would Coke be Coke, if it tasted like ginseng in one country, lemon in another, and rhubarb in a third. Clearly some adaptations need to be made to correspond with local regulations and distribution systems, but some things need also remain consistent in order to benefit from economies of scale in advertising and production. 3. As a result of making local adaptations, the complexity of international business is clearly greater than that of a purely domestic firm. Firms need to decide which countries to enter, what mode of entry to use, and which countries to avoid. Rules and regulations also differ, as do currencies and languages. 4. Managing an international business is different from managing a purely domestic business for at least four reasons: 1) countries differ, 2) the range of problems and manager faces is greater and more complex, 3) an international business must find ways to work within the limits imposed by governmental intervention and the global trading system, and 4) international transactions require converting funds and being susceptible to exchange rate changes. © Copyright Virtual University of Pakistan 17 International Business - MGT520 VU Lesson 7 GLOBALIZATION COUNTERVAILING FORCES: Countervailing forces influence the conditions in which companies operate and their options for operating internationally. Rivalries among countries, cross-national treaties and agreements and ethical dilemmas can inhibit a firm’s quest for maximum global profits. A. Globally Standardized versus Nationally Responsive Practices: Trends that influence the worldwide growth in international business often favor the use of a global strategy, i.e., standardization, thus capturing gains froeconomies of scale. On the other hand, a firm may choose to use a multidomestic strategy , i.e., to be nationally resp onsive, thus increasing its effectiveness by adjusting to the different conditions it encounters in the various countries in which it operates. B. Country versus Company Competitiveness: At one time the performance of a country and that of its domestic companies were considered to be mutually dependent and beneficial. However, many companies now choose to compete by seeking maximum production efficiency on a global scale, even if it means moving production activities abroad. If as a result high-value activities increase sufficiently in the home country, it will realize an economic gain; if not, the country’s economic position will deteriorate. Countries continue to en tice both domestic and foreign firms to locate activities within their borders through regulations, on the one hand, and incentives on the other. C. Sovereign versus Cross-National Relationships: Although governments act in their own self-interest, they may choose to cooper ate with one another and even cede limited sovereignty through treaties and other agreements. 1. Countries enter into a variety of bilateral and multilateral treaties and agreements with other countries regarding commercial activities in order to gain reciprocal advantages for themselves and their domestic firms. 2. Countries enact treaties and agreements to coordinate activities along their shared borders and deal with problems that a single country acting alone cannot solve. 3. Countries enact treaties and agreements to deal with areas of concern that lie outside the territory of all countries, i.e., the non-coastal areas of the oceans, outer space and Antarctica. Ethical dilemmas and social responsibility: Sorting through the World of Right and Wrong in International Business: Firms take many actions that elicit almost universal agreement about what is right or wrong. In the international arena, however, religio us beliefs, social attitudes, laws, regulations and policies may vary significantly. No set of workable corporate guidelines is universally accepted and observed. An MNE may find it has either more or less latitude in making decisions in the foreign countries in which it operates. Cultural relativism holds that ethical truths depend upon the groups holding them; thus intervention in © Copyright Virtual University of Pakistan 18 International Business - MGT520 VU local traditions is seen as unethical. On the other hand, normativism holds that there are universal standards of behavior everyone should follow, thus making non-intervention unethical. From a business standpoint, two possible objectives are to (a) proactively create competitive advantages though socially responsible behavior that leads to trust and commitment and (b) avoid being perceived as irresponsible. Looking into the future: Seizing That Window of International Business Opportunity: At this time there is much confusion about the future growth of international business. Nonetheless, a firm that wants to capitalize on international opportunities must not wait too long. By envisioning different ways in which the future may evolve, a company can be better prepared to develop the facilities and people needed to succeed in an uncertain environment. Advantages and challenges of globalization: Productivity: Productivity is improved by producing in countries where production is most efficient. However, this often means workers in one country lose jobs as their work moves to more efficient locations. Consumers: Consumers benefit from a wider array of competitively priced goods. However, they have less control over supplies coming from abroad than over goods produced domestically. Employment: Employment may increase as economic growth an d specialization take ho ld. However, domestic employment fluctuates according to foreign conditio ns (such as economic crises elsewhere that reduce demand for domestically produced goods). The Environment: As global consumption increases due to globalization, more natural resources deplete. Differing environmental standards across coun tries create opportunities for businesses to exploit resources in countries with the least amount of environmental protection regulation. Monetary and Fiscal Conditions: As money moves more freely, it is better able to seek out the best investment opportunities on a global scale. However, governments have less control over the inflow and outflow of funds. Furthermore, capital seems to be flowing more freely to countries with lo wer tax rates and less regulatory restrictions, putting additional pressures on national fiscal and monetary policies. Sovereignty: Globalization may undermine national sovereignty in two ways: First, contact with other countries creates more cultural borrowing and may dilute a country's cu ltural uniqueness. Second, countries are concerned that important decisions may be made abroad by foreign owners of domestically located firms. © Copyright Virtual University of Pakistan 19 International Business - MGT520 VU What makes international business different? Different National Environments Legal-Political Environment: Companies that do business in ternationally are subject to the laws and political systems of each country in which they operate. When laws differ greatly from those at home, firms may encounter substantial operating problems (Blockbuster in Germany is used as an example). Economic Environment: Countries differ significantly in terms of their GDP pe r capita. Poor countries have smaller markets, less disposable income, higher illiteracy r ates, and lower life expectancy rate s. All these factors and others require attention and adaptation on the part of international firms. Cultural Environment: Country norms, based on attitudes, values, beliefs, and information processing frameworks, differ from country to country. Many of these cultural issues, such as attitude toward work and leadership styles, have a direct impact on whether a foreign firm will succeed or fail in a particular cultural setting. Mobility: Countries place substantial restrictions on the international movement of goods. Some countries also restrict the conversion of their currency to other curre ncies. Immigration laws may restrict the transfer of personnel. Mobility restrictions help make international business very different from business in a domestic setting. © Copyright Virtual University of Pakistan 20 International Business - MGT520 VU Unit 3 NATIONAL DIFFERENCES IN POLITICAL ECONOMY Learning Objectives 1. Describe how the variation of political systems of countries often follows 'collectivist vs. individualist' and 'democratic vs. to talitarian' dimensions. That tendency can be best visualized by looking at the degree of economic and political freedom enjoyed by a country's citizens. 2. Explain the differences in economic systems between countries. Examining specifically the characteristics of market economies, commandeconomies, mixed economies, and state-directed economies achieves that objective. 3. Examine the differences in the economic development of different countries. The chapter presents and describes economic development measures like GDP, purchasing power, and human development indices. 4. When considering international expansion, suggest that the potential for future economic growth and the growth rate may be as or more important than static measures of economic development. 5. Explain how differences in the legal systems of countries can dramatically affect the attractiveness and ease of doing business in different countries. The chapter highlights differences in protections of intellectual property (patents, copyrightd trademarks), product sa fety and liability, and contract law to suggest how legal systems affect the conduct of international business. 6. Show how changes in the world order in the1980s and 1990s affected countries in Europe, Asia, Latin America, and Africa, and how these changes present both great new opportunities and risks for international business. 7. Summarize issues that affect the attractivenof doing business in differ ent countries, including the benefits, costs, and risks determined by the political economy of nations. 8. Present some ethical concerns of doing business in countries that have different standards, political ideologies, economic systems, and patterns of acceptable and expected behavior (i.e. bribes). Lessons Outlines THE CHANGING POLITICAL ECONOMY OF INDIA INTRODUCTION POLITICAL SYSTEMS ColIedavismalism DeTmotcitaacryianism ECONOMIC SYSTEMS MEcroetmy Com Ecannomy Mcixeomy State-Direteomy LEGAL SYSTEMS © Copyright Virtual University of Pakistan 21 International Business - MGT520 VU PrRoigrtsy Country Focus: Forty Years of Corruption in Nigeria The Protection of Intellectual Property Management Focus: Drug Patents and the AIDS Epidemic in South Africa Product Safety and Product Liability CoLnaract THE DETERMINANTS OF ECONOMIC DEVELOPMENT Differences in Economic Development Broader Concepts of Development: Amartya Sen Political Economy and Economic Progress GeogE rapana,tion d Economic Development STATES IN TRANSITION The Spread of Democracy The New World Order? The Spread of Market-Based Systems The Nature of Economic Transformation Country Focus: Privatization in Brazil Implications IMPLICATIONS FOR BUSINESS Attractiveness EItsiesl Introduction: 1. As it can be pointed out in this chapter, and in deed in almost every chapter to follow, the issues that face international businesses are entirely different from those that face domestic firms. This is a point that I frequently repeat with many chapters: whether the subject is political differences, cultural differences, trade and tariff issues or even corporate makeup, the major issues of international business are issues that simply do not occur in domestic businesses. One cannot expect to understand international business by learning the tenants of domestic business and then superimposing them on an international scene. Differences between countries are profound, and they have a profound affect on how managers and firms work and act internationally. In this chapter we look at the political, economic, and legal infrastructures of different countries, while in the next chapter we will consider differences in culture, religion, and education. 2. The opening case on the political economy of India shows the difficulty nations may experience when they attempt to move from a largely state-driven economy to one of privatization. Even when change appears to be merited, the results of a particular change can be mixed and inconclusive. Changing political views on the ownership of business enterprises can have dramatic effects on economic efficiency and foreign investment. © Copyright Virtual University of Pakistan 22 International Business - MGT520 VU Lesson 8 NATIONAL DIFFERENCES IN POLITICAL ECONOMY Political Systems: 1. There are two separate polarities to consider when discussing political systems: collectivism vs. individualism and democracy vs. totalitarianism. 2. The general premise of collectivism is that the st ate must manage enterprises if they are to benefit society. Democratic Socialism sees itself as part of the historical trend toward democracy and universal enfranchisement that has taken place worldwide since the 1700s. In fact, it sees socialism as the ultimate democracy-- putting faith in the common person's ability not only to vote on Election Day, but also to govern his and her workplace and community. According to philosopher Jonathan Kandell, “What distinguishes Democratic Socialists from more radical communist groups is the unwavering be lief that socialism must come through democratic means or not at all (along with all the standard individual rights to free speech and assembly). Democratic Socialists distinguish themselves from Liberals in that they feel the basic structure of capitalism is inherently biased against a large grou p of people and must be structurally rectified, instead of just tiny tinkerings. The government must take an active, radical stance in favor of workers, equality, basic human needs, workplace democracy, and against greed, capital and property rights.” Communists generally believed that state control could only be achieved though revolution and totalitarian dictatorship, while Social Democrats wo rked to achieve the same goals by democratic means. Examples of communism include the Soviet Union, most Eastern European nations from 1950 to 1989, Cuba, and China. China remains the on ly major country in the world today still under communist rule. Social Democratic nations in clude Sweden, Germany, France, and Norway, although Social Democratic parties have not always held power in these nations. Don’t be surprised if your students have only a vague idea about Co mmunism. I find that many students are shocked to believe that a country could hope to control the ideology of its people by building a wall around a city (Berlin). In this day of rapid, instantaneous exchange of electronic information, the concept of a government trying to create physical barriers to control the flow of information is often difficult for them to grasp. 3. The inefficiencies of government are well known, and students can often offer many examples. (The $100 hammer, for instance.) State owned firms promot ing the public interest have had a poor track record. The reasons are often obvious: state owned firms are often protected from competition and are poorly motivated to achieve any financial self -sufficiency. Often their major purpose is to perpetuate their existence, rather than bringing anything positive to the country they are supposed to serve. Thus, both former communist and Western European countries have privatized enterprises that were previously state owned. © Copyright Virtual University of Pakistan 23 International Business - MGT520 VU 4. While advocated by Aristotle, individualism, in modern days was encouraged by David Hume, Adam Smith, John Stuart Mill, and most recently, Hayek and Milton Friedman. Individualism focuses on i) guaranteeing individual freedom and self-expression, and ii) letting people pursue their own economic self-interest in order to achieve the best overall good for society. The US Declaration of Independence and the Bill of Rights embody the spirit of individualism, but more familiar to today’s students are forces like MTV, which encourage people the world over to vote for their favorite video—even in countries where voting in elections is impossible and the concept of voting is not understood. 5. Collectivism advocates the good of the collective group over the individual; individualism asserts the opposite. This ideological difference shapes much of recent history and especially the Cold War. [An interesting digression one can take here (at the risk of getting sidetracked) is to discuss environmentalism, in the context of collectivism vs . individualism. While one might expect that countries with a collectivist approach would have much higher environmental standards "for the common good" than individualist countries wher e “anyone can do what they want on their own land,” the record is less clear. While the Social Democratic countries of Norway and Sweden have some of the best overall environmental records, the pollution problems in many of the former communist states are horrendous. And the US has an environmental record similar to many other social democratic countries in Western Europe. In fact, as we will see in later discussions on GAT
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