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D 301

by: Edward Wuckert I

D 301 BUS

Edward Wuckert I
GPA 3.89

Paul Coulis

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Paul Coulis
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This 0 page Class Notes was uploaded by Edward Wuckert I on Sunday November 1, 2015. The Class Notes belongs to BUS at Indiana University taught by Paul Coulis in Fall. Since its upload, it has received 14 views. For similar materials see /class/233446/bus-indiana-university in Business at Indiana University.


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Date Created: 11/01/15
W 0 Globalization enables us to get more variety better quality or lower prices 0 Private companies go into International Business for pro t 0 Governments go into International Business for pro t or political reasons 0 As a manager in almost any industry you ll need to consider two things 1 Where to obtain the inputs you need of the required quality and at the best price 2 Where you can best sell the product or service 0 The best way of doing business abroad may not be the same as the best way at home Why 1 International modes of business differ from domestic modes of business 2 Physical social and competitive conditions differ among countries and affect the optimum ways to conduct business 0 Figure 11 0 Operating Environment I Physical and Social Factors 0 Political Policies and Legal Practices 0 Cultural Factors 0 Economic Factors 0 Geographical In uences I Competitive Factors 0 Competitive Product Strategy 0 Company Resources and Experience 0 Competitors in Each Market 0 Factors in Increased Globalization 1 Increase in and Expansion of Technology Liberalization of CrossBorder Trade and Resource Movements Development of Services that support International Business Growing Consumer Pressures Increased Global Competition Changing Political Situations Expanded CrossNational Cooperation 8995 o Multinational Problem Solving 0 Why i To gain reciprocal advantages ii To attack problems jointly 0 Why a Resources needed may be too great for one country to manage b One country s policies may affect those of others 0 Coordinate activities along mutual borders 0 Cooperate to solve problems that cannot solve by themselves iii To deal with concerns that lie outside the territory of any nation 0 Why Companies Engage in International Business 1 Expanding Sales I More potential consumers in the world than in any single country I Additional sales may reduce perunit costs by covering fixed costs 2 Acquiring Resources I Sometimes domestic supplies are inadequate I Sometimes rms gain competitive advantage by improving product quality or differentiating their products from competitors 3 Minimizing Risk I Countries with different business cycles minimize swings in salesprofits I Defensive reasons 7 counter competitors advantages in foreign markets Globalization ithe broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations 0 The integration of world economies through the reduction of barriers to the movement of trade capital technology and people International Business 7 all commercial transactions that take place between two or more countries 0 Modes of Operations in International Business 0 Merchandise Exports and Imports I Goods we can actually see 7 visible exportsimports I Exporting and importing 7 most popular modes of international business 0 Service Exports and Imports I Products that generate nonproduct international earnings I Fastest growth sector in international trade 0 Tourism and Transportation 0 Service Performance 0 Asset Use 0 Investments I 2 Types 0 Foreign Direct Investment FDI 7 controlling interest 0 Portfolio 7 noncontrolling nancial interest I Dividends and interest paid on foreign investments 7 considered service exports and imports because they represent the use of assets W 0 Cultural Awareness 0 Problem areas that can hinder managers cultural awareness I Subconscious reactions to circumstances I The assumption that all societal subgroups are similar 0 Language as both a Diffuser and Stabilizer of Culture 0 When people from different areas speak the same language culture spreads more easily I More cultural homogeneity among countries that speak the same language 0 Englishspeaking people account for over 40 of the world s production I English 7 the world s most important second language 0 MNE s largely headquartered in Englishspeaking countries decide the language for communicating among employees in the different countries where they operate 0 MNE s from nonEnglishspeaking countries have adopted English as their operating language 0 English is the international language of business 0 English may fade out because the percentage of people speaking English as a first language will decrease while the languages of China and India will grow rapidly with their economies 0 Does Geography Matter 0 The more isolated people are the less likely they are to in uence and be in uenced by other people The effect of proximity 7 people generally have more contact with nearby groups 0 than with those that are far away Birds of a feather ock together 7 immigration patterns often re ect the O tendency of people to go where they can find a subcultural support group 0 Issues of Social Stratification 0 Social Stratification 7 some people are valued more highly than others o In business one s ranking is determined by 2 factors I You as an Individual I Your affiliation with or membership in certain groups 0 Ascribed Group Memberships o Determined by Birth 0 Prevalent in More Open Societies 0 Acquired Group Memberships o Determined by Choice 0 Prevalent in LessOpen Societies o Other Factors of Social Strati cation I Gender I Age I FamilyBased Groups I Education I Social Connections 0 The MasculinityFemininity Index 0 Compares the attitudes of employees toward work and achievement 0 High Masculinity Score I Admired successful work achievers I Harbored little sympathy for the unfortunate I Preferred to be better than others rather than on par with them I MoneyandThings oriented rather than Peopleoriented I Believe it s better to live to wor than to work to live I Preferred performance and growth over quality of life and the environment 0 Hierarchies of Needs 0 HierarchyofNeeds Theory 7 people try to fulfill lowerlevel needs before moving on to higherlevel needs I Physiological Needs food water seX I Security Needs physically and emotionally safe I Affiliation Needs social peer acceptance I Esteem Needs selfimage recognition attention appreciation I SelfActualization becoming all that we are capable of being 0 RiskTaking Behavior o 4 Types of RiskTaking Behavior I Uncertainty Avoidance 0 Employees follow set of rules no matter what 0 Plan to stay with a company for a long time I Trust 0 Cost of doing business tends to be lower because managers don t spend much time fussing over every possible contingency 0 Managers spend time producing selling and innovating I Future Orientation o Motivate workers through delayedcompensation programs ie retirement I Fatalism 0 Believe every event in life is inevitable 0 Less likely to accept the causeandeffect relationship between work and reward 0 Information and Task Processing 0 Cues 7 features that inform us about the nature of something 0 LowContext Cultures I Little time spent on small talk I Get right to the point I See highcontext cultures as inefficient in their use of time o HighContext Cultures I More laid back and personal I View lowcontext cultures as overly aggressive 0 Information Processing I Every culture has its own systems for classifying information I Different processing systems create challenges in sharing global data 0 Different alphabets and alphabetizing systems 0 Monochronic Cultures I People work sequentially I Finish with one customer before moving onto the next one o Polychronic Cultures I Work simultaneously on a variety of tasks o Idealism I Establish overall principles before they try to resolve small issues 0 Pragmatism I People focus more on the details than on abstract principles 0 Company and Management Orientations o Polycentrism I Believes that business units in different countries should act like local companies 0 Ethnocentrism I The conviction that one s own culture is superior to that of other countries 0 Geocentrism I Preferred for companies to succeed in foreign cultures and markets I Integrates company practices hostcountry practices and some new ones I Requires companies to balance informed knowledge of their own organizational cultures with both home and hostcountry needs Cultural Collision 7 a condition that occurs When divergent cultures come in contact with each other W o Individualism versus Collectivism o Individualism I Emphasizes the primacy of individual freedom selfexpression and personal independence I Presumes that the task of the political system is to develop a form of government that protects the liberty of individuals to act as they wish as long as their actions do not infringe on the liberties of others I LaissezFaire 7 leave things alone 0 Government should not interfere with business affairs 0 Collectivism I Emphasizes the primacy of the collective over the interest of the individual I The group as a whole is greater than the sum of its parts I Believes that in business the ownership of assets the structure of industries the conduct of companies and the actions of managers must improve the welfare of society I Governments should intervene to ensure that business practices benefit society 0 Totalitarianism o Totalitarian System 7 subordinates the individual to the interests of the collective I Monopolizes political power I Uses their power to regulate public and private life I Works to eliminate dissent within the state I Does not tolerate any ideas interests or activities that run counter to the ideology of the state I Classified as Partly Free and Not Free categories of Freedom House 0 Types of Totalitarianism I Authoritarianism o Tolerates no deviation from state ideology 0 Just controls the political not economic and social structure I Fascism o The control of people s minds souls and daily existence I Secular Totalitarianism o A single political party forms a government O 0000 Only party members hold office Elections controlled through unfair laws Dissent is tolerated as long as it doesn t challenge the state Organized religions are suppressed Grants individual freedoms as long as they don t challenge the state I Theocratic Totalitarianism 0 Government is an expression of the preferred deity o Leaders claim to represent the deity s interests on earth 0 Political Risk 0 O The potential loss arising from a change in government policy The likelihood that political decisions events or conditions will affect a country s business environment in ways that will cost investors some or all of the value of their investment or force them to accept lower rates of return 0 Primary types of political risk from least to most disruptive I Systemic impacts all firms I Procedural political corruption for foreign companies to pay more I Distributive gradual elimination of foreign companies property rights I Catastrophic devastate companies and countries 0 PCP Should Political Risk Management be an Active Strategy 0 Yes Statistical Modeling Judgment of Local Experts I Managers apply data in one country to benchmark analysis in other countries with similar processes of political change Political Risks are unpredictable hazards No model can predict the degree of political risk in a country o The Legal Environment 0 Legal System Specifies the rules that regulate behavior of individuals and companies the processes by which the laws of a country are enforced and the procedures used to resolve grievances The mechanism for creating interpreting and enforcing the laws in a speci ed jurisdiction Modern Legal Systems share 3 Components 0 Constitutional Law 0 Translates the constitution of the country into an open and just legal system 0 Criminal Law 0 Specifies what conduct is criminal and prescribes punishment to those who breach these standards 0 Civil and Commercial Laws 0 Ensures fairness and efficiency in business transactions 0 Types of Legal Systems I Common Law 0 Based on tradition judgemade precedent o Doctrine of Stare Decisis o A legal system of jurisprudence based on judicial precedents I Civil Law 0 Based on the systematic codification of laws and codes 0 Charge political officials with responsibility for specifying accessible detailed and written law that applies to all citizens o A legal system of jurisprudence based on statutory laws I Theocratic Law 0 Relies on religious doctrine precepts and beliefs to define the legal system Legal authority is vested in religious leaders 0 No separation of church and state 0 A legal system of jurisprudence based on religious teachings I Customary Law 0 Anchored in the wisdom of daily experience 0 Based on norms of behavior practiced over a long period Mixed o A nation uses two or more of the preceding legal systems 0 Trends in Legal Systems The pushback against democracy powers a rise in totalitarianism o Emphasizes collective order at the expense of individual freedoms 0 Uses the legal system to regulate business activity so that it supports the regime No separation of law and state Justice is no longer blind but arbitrary oppressive and state serving The emergence of developing countries is resetting how managers interpret the legal environments of international business 0 Emerging markets require managers to ask What is the basis of rule in a given country 7 is it the rule of man or the rule of law 0 Rule of Man 7 ultimate power resides in a person I The principle that every member of a society except the ruler must follow a system of law that is arbitrarily speci ed and inconsistently enforced I Totalitarian countries base their legal systems on the rule of man I Prevails in the legal systems of the poorer non Westem nations 0 Rule of Law 7 a hallmark of democracy I No individual is above laws that are clearly speci ed commonly understood and fairly enforced I Law is independent of the state justice is omnipresent I Prevails in wealthier westemized countries 0 Legal theory holds that countries will eventually adopt Rule of Law General Relationships 0 Richer countries regulate less 0 Poorer countries regulate more o The majority of topranked countries have a I Democratic Political System I Common or CivilLaw Legal System I Doctrine of the Rule of Law 0 The majority of lowerranked countries have a I Totalitarian Political System I Mixed ciVil customary and theocratic Legal System I Doctrine of the Rule of Man Table 34 0 Introduction Chapter 4 0 Different countries have different levels of economic development performance and potential 0 When a company wants to do business in another country it studies I Conventional Wealth I Income I Employment I Policy Standards 0 Managers need to assess foreign markets they operate in as well as those in which they do not operate I Economic change in one country likely has consequences in other countries I Companies watch foreign markets in which their competition operates Improving economic performance or revised economic policies in a particular country may strengthen their rivals 0 Recent economic credit crisis has seen increased government involvement in economic affairs 0 Features of an Economy 0 GNI and its variations estimate the absolute and relative income of a country 0 Managers also study I In ation A sustained rise in prices measured against a standard level of purchasing power Measured by comparing two sets of products at two points in time and computing the increase in cost that is not re ected by an increase in the quality A measure of the increase in the cost of living Hyperin ation 7 a rapidly accelerating rate of in ation that if unchecked leads to money losing value and markets moving to barter Chronic In ation 7 occurs when a country experiences high in ation for a prolonged period of time Governments try to reduce in ation by 0 Raising interest rates 0 Installing wage and price controls 0 Imposing protectionist trade policies and currency controls De ation 7 a decrease in the general price level of goods and services 0 Often caused by a reduction in the supply of money or credit Unemployment Debt 0 The sum total of a government s nancial obligations Measures the state s borrowing from its population from foreign organizations from foreign governments and from international institutions The larger the total debt the more uncertain a country s economy Internal Debt the government spends more than it collects in revenues External Debt 7 the government borrows money from lenders outside the country Growing public debt is usually an indicator of 0 Tax Increases 0 Reduced Growth 0 Rising In ation Income Distribution Poverty Labor Costs Productivity The efficiency with which products are produced Balance of Payments Statement of International Transactions The statement of the balance of a country s trade and financial transactions with the rest of the world over a specific period 2 main accounts 0 Current Account I Tracks all trade activity in merchandise 0 Capital Account I Tracks both loans given to foreigners and loans received by citizens 0 Current Account Capital Account Total Account Managers use the BOP to assess a country s economic stability BOP data helps managers connect a company s strategy to macroeconomic activities and government policy Companies monitor the BOP to watch for factors that could lead to current instability or significant change in government policy 0 Types of Economic Systems 0 Economic System I The set of structures and processes that guides the allocation of resources and shapes the conduct of business activities in a country I Deals with the production distribution and consumption of goods and services 0 Capitalism I A free market system built on a doctrine of private ownership and control I The best allocation of resources follows from consumers exercising and producers responding accordingly in meeting aggregate demand I Holds that individuals free choice powers a country s progress toward prosperity and peace 0 Communism I An economic system and theory of government in which all factors of production are owned by a central government for the bene t of all citizens 0 Economic systems that fall between Capitalism and Communism I Market Economy I Mixed Economy I Command Economy 0 The Dynamic of Economic Transitions 0 Market Fundamentalism I A strategy to apply strict market principles 0 Free Trade 0 Privatization 0 Reduced Government Regulation 0 Countries with the freest economies have had the highest annual growth and greatest wealth creation 0 Economic Freedom I The liberty to engage in economic transactions without government interference but with government support of the institutions necessary to support that freedom I Economic Freedom Index 0 Estimates the extent to which the government of a country constrains free choice and free enterprise for reasons that go beyond the need to protect property liberty citizen safety and market efficiency Countries with greater degrees of economic freedom consistently outperform laggards 0 Free from I High Taxes I Extensive Regulations I Extreme Government Controls 0 Looking to the Future 0 30 countries 17 grant individuals substantial economic freedom 0 More and more people question whether a market economy is the best approach I Global Economic Crisis I France 0 Free Market advocates point out that government provided stability is not free Sacri ce of Freedom Slowness to Innovate The Peril of Slow Growth History shows that government control decreases the riskaffinitive behaviors of entrepreneurs and companies 0 The Means of Economic Transition 0 Managers cannot safely presume that markets will adopt reforms that increase economic freedom 0 Managers monitor key indicators that provide an earlywaming system on the direction and dynamic of transition from one type of economic environment to another I Privatization o The process of changing something from state to private ownership or control I Regulation 0 Imposing restrictions on the free operation of markets and business practices I Property Rights o The exclusive authority to determine how a resource is used 0 Entrepreneurs who come up with an innovation can legally claim the rewards of their idea effort and risk I Fiscal and Monetary Reform 0 Economic decision making by political officials often leads governments to adopt taX or spending policies that 0 Slow Growth 0 Increase Interest Rates 0 Increase In ation 0 Increase Unemployment I Antitrust Legislation Gross National Income GN 7 the income generated by both total domestic production as well as the international production activities of national companies 0 The broadest measure of economic activity for a country Gross National Product GNP 1 ithe value of all final goods and services produced within a nation in a given year plus the income earned by its citizens abroad minus the income earned by foreigners from domestic production 0 The total value of all final goods and services produced within a nation in a particular year Gross Domestic Product GDP 1 7 the total value of all final goods and services produced within a nation in a particular year 0 The total market values of goods and services produced by workers and capital within a nation s borders during a given period W 0 Considering the Logic of FDI o 3 Conditions that help explain the foreign production decision Ownership advantages of MNEs that give them an advantage over companies in the host countries Locationspecific advantages of the host country that make them attractive locations for FDI Internationalization advantages for the MNEs to utilize their speci c ownership advantages rather than sell or license them for outsiders to exploit 0 OwnershipSpecific Advantages of the MNE Investment Human Resources Technology Trade Environment 0 The stockholderversusstakeholder dilemma pits the demands of one stakeholder 7 the stockholder 7 against all the other stakeholders 0 Balance of Payments Effects 0 FDI brings both Capital In ows and Capital Out ows o On the import side the BOP effect is Positive if the FDI results in a substitution for imports Negative if it results in an increase in imports o On the export side the BOP effect is Positive if the FDI results in generating exports in the host country Negative if it produces only for the local market and stops exports o The BOP effects of FDI are usually Positive for the host country initially and negative for the home country Positive for the home country and negative to the host country later 0 Growth and Employment Effects 0 The argument that both home and host countries may gain from FDI rests on 2 assumptions I Resources aren t necessarily being fully employed I Capital and technology can t easily be transferred from one industry to another 0 Host countries may lose if investments by MNEs I Replace Local Companies I Take the Best Resources I Destroy Local Entrepreneurship I Decrease Local RampD Undertakings 0 National Initiative Foreign Corrupt Practices Act FCPA 0 Us legislation that makes bribery illegal I Applies to domestic or foreign operations and to company employees as well as their agents overseas o Inconsistencies I Legal to make payments to of cials to expedite otherwise legitimate transactions 0 Of cials can delay legal transactions inde nitely or until they receive payment I Illegal to make payments to of cials who aren t directly responsible for transactions in question 0 Ethical Dilemmas in the Pharmaceutical Industry 0 Tiered Pricing I Consumers in industrialized countries pay higher prices and those in developing countries pay lower subsidized prices 0 TradeRelated Aspects of Intellectual Property Rights TRIPS I Allows poor countries to counter the high cost of patented drugs by doing either of two things 0 Producing generic products for local consumptions o Importing generic products from other countries if they themselves don t have the capacity to produce generics I Major Concern for Pharmaceutical Companies 0 These generic products will nd their way back into the developed countries where they generate the majority of patent holders revenues Fakes Relativism 7 a theory stating that ethical truths depend on the groups holding them making intervention by outsiders unethical o The belief that behavior has meaning and can be judged only in its speci c cultural context Normativism 7 a theory stating that universal standards of behavior based on people s own values exist that all cultures should follow making nonintervention unethical Extraterritoriality ithe extension by a government of the application of its laws to foreign operations of companies Chapter 6 Review Free Trade Theories 0 Nations should NOT arti cially limit imports nor promote exports 0 Let the market decide 0 Specialization Absolute Advantage Theog 7 Because certain countries can produce some goods more ef ciently than other countries they should specialize in and export those things they can produce more ef ciently and trade for other things they need 0 3 Reasons Specialization Increases Efficiency Labor could become more skilled by repeating the same tasks 2 Labor would not lose time in switching from the production of one kind of product to another 3 Long production runs would provide incentives for the development of more effective working methods 0 2 Types of Advantages associated with Specialization 1 Natural Advantag 7 Climatic conditions access to certain natural resources or availability of labor which gives a country an advantage in producing some product 2 Acguired Advantage 7 A form of trade advantage due to technology I Product Technology 7 enables a country to produce a unique product or one that is easily distinguished from those of competitors I Process Technology 7 a country s ability to ef ciently produce a homogeneous product ones not easily distinguished from that of competitors 0 Figure 62 7 Production Possibilities under Conditions of Absolute Advantage 0 Adam Smith Theory of Comparative Advantag 7 The theory that there is global efficiency gains from trade if a country specializes in those products that it can produce more efficiently than other products regardless of whether other countries can product those products more ef ciently o Gains from trade will occur even in a country that has absolute advantage in all products because the country must give up less ef cient output to produce more ef cient output David Ricardo A country gains if it concentrates its resources on the commodities it can produce MOST efficiently 0 Example I The US produces wheat 25 times more efficiently than Costa Rica I The US produces coffee 2 times more efficiently than Costa Rica 0 The United States has an absolute advantage in both wheat and coffee production but a comparative advantage in only wheat production F actor Mobility Theogy 7 The movement of factors of production such as labor and capital from one location to another 0 Why Production Factors Move 0 Capital Most internationally mobile production factor Transferred because of differences in expected return Can be wired instantly at a low cost Shortterm capital is more mobile than longterm capital 0 There is more likely to be an active market through which investors can quickly buy foreign holdings and sell them if they want to transfer capital back home or to another country Businesses Governments NotforProfit Organizations and Individuals make international capital movements 0 People I Economic Motives 0 Work I Political Motives o Persecution 0 War Dangers Effects of Factor Movements o What Happens When People Move I Immigrants bring human capital with them 0 Skills 7 enable additional production of domestic products I Outward migration 0 Brain Drain 7 when educated people leave a country 0 In ux of money from people sending money back home 0 Increase in startup companies 0 Immigrants learn abroad and bring skills home 0 Countries receiving immigrants provide social services costly 0 Social Reproduction of lower class The Relationship Between Trade and Factor Mobility Free trade coupled with freedom of factor mobility intemationally usually results in the most efficient allocation of resources 242 o Substitution I Pressures for the most abundant factors to move to areas of scarcity I The lowest costs occur when trade and production factors are both mobile 0 Complementarity I 13 of exporting takes place among countries controlled entities I Factor mobility through foreign investment often stimulates trade because 0 The need for components 0 The parent s ability to sell complementary products o The need for equipment for subsidiaries In What Direction Will Trade Winds Blow 0 Few restrictions on foreign trade and factor mobility lead to reduced operating costs 0 Trade restrictions have been diminishing 0 Restrictions on the movement of capital and technology have become freer but not the movement of people 0 Loose restrictions may not last 0 Trade between developed and developing communities creates problems 0 Factor endowments I Population increases in developing countries I Urbanization will grow faster in developing countries 0 Finite supply of natural resources 0 3 factors that could cause product trade to become less significant in the future 1 As economies grow efficiencies of multiple production locations also grow because they can gain sufficient economies of scale 2 Flexible smallscale production methods especially those using robotics may enable even small countries to produce many goods efficiently for their own consumption 3 Services are growing more rapidly than products as a portion of production and consumption within developed countries Chapter 7 Review Introduction 0 Protectionism 7 Government restrictions on imports and occasionally on exports that frequently give direct or indirect subsidies to industries to enable them to compete with foreign production either at home or abroad 0 All countries regulate the ow of goods and services across their borders 0 Figure 71 7 Physical and Social Factors Affecting Flow of Goods and Services Conflicting Results of Trade Policies 0 All countries regulating trade have economic social and political objectives 0 The Role of Stakeholders 0 Those most affected by trade regulations are the most outspoken about them 0 The Role of Consumers Typically buy the best product they can find for the price often without knowing or caring about the product s origin I Most are uninformed of the effects of import restrictions nu nnnnmi for Governmental Intervention 0 Fighting Unemployment 0 Most effective pressure group 0 What s Wrong with Full Employment as an Economic Objective I Gaining jobs by limiting imports may result in high costs that must be borne by someone I The Prospect of Retaliation o Restring imports to create jobs may prompt other countries to retaliate with their own restrictions i i 0 Large countries have 0 Even if nobody retaliates the restricting country may lose jobs in certain sectors 3 reasons 0 Fewer imports of a product mean fewer importhandling jobs 0 Import restrictions may cause lower sales in other industries because they must incur higher costs for components 0 Imports stimulate exports although less directly by increasing foreign income and foreignexchange earnings which are then spent on new imports by foreign consumers I Analyzing TradeOffs 0 Possible costs of import restrictions include higher prices and higher taxes Such costs should be compared with those of unemployment o Protecting Infant Industries 0 O The position that holds that an emerging industry should be guaranteed a large share of the domestic market until it becomes efficient enough to compete against imports Underlying Assumptions I Over time production will become more competitive 0 Increased economies of scale 0 Greater worker efficiency Risks in Designating Industries I It is possible that costs will never fall enough to create internationally competitive products This creates 2 problems 0 Determining Probability of Success 0 Governments must identify industries that are likely to be successful 0 Who Should Bear the Cost o In order for infant industries to receive governmental assistance someone has to pay for it 0 Promoting Industrialization o Assumptions for Promoting Industrialization Surplus workers can more easily increase manufacturing output than agricultural output 0 Drawbacks o Demands on social and political services in cities may increase 0 Output increases if the marginal productivity of agricultural workers is very low Development possibilities in the agricultural sector may be 0 overlooked In ows of foreign investment in the industrial sector promote sustainable growth 0 Drawbacks o If import restrictions keep out foreignmade goods foreign companies may invest to product in the restricted area Prices and sales of commodities agricultural products and raw materials uctuate very much which is a detriment to economies that depend on few of them 0 Drawbacks 0 Putting all your eggs in one basket 7 Bad Idea Markets for industrial products grow faster than markets for commodities o Drawbacks 0 Terms of trade for emerging economies may deteriorate because I Demand for primary products grows more slowly I Production cost savings for primary products will be passed on to consumers I Industrial growth reduces imports and or promotes exports I Industrial activity helps the nationbuilding process 0 Strong relationship between industrialization and nationbuilding 0 Improving Comparative Position 0 BalanceofTrade Adjustments I A government takes action to reduce imports or encourage exports to balance its trade account Depreciates or devalues its currency 7 an action that makes all of its products cheaper in relation to foreign products Rely on scal and monetary policy to bring about lower price increases in general than those in other countries 0 Comparable Access or Fairness I Comparable Access Argument 7 Companies and industries often argue that they are entitled to the same access to foreign markets as foreign industries and companies have to their markets Domestic producers may be disadvantaged if their access to foreign markets is less than foreign producers access to their market 2 practical reasons for rejecting this argument 0 Titfortat market access can lead to restrictions that may deny one s own consumers lower prices Governments would nd it impractical to negotiate and monitor separate agreements for each of the many thousands of different products and services that might be traded O 0 Restrictions as a Bargaining Tool I Countries levy trade restrictions to coerce other countries to change their policies I This can be negative if each country escalates its restrictions 0 Export restrictions may 0 Keep up world prices Require more controls to prevent smuggling Lead to substitution Keep domestic prices down by increasing domestic supply Give producers less incentive to increase output OOOOO Shift foreign production and sales 0 PriceControl Objectives Countries withhold goods from international markets to raise prices abroad 0 Seldom works 7 leads to smuggling development of substitutes I Dumping 7 The underpricing of exports usually below cost or below the homecountry price I OptimumTariff Theory 7 The argument that a foreign producer will lower its prices if an import tax is placed on its products V 39 quot for Government Intervention o Maintaining Essential Industries 0 Essential Indust Argument 7 The argument holding that certain domestic industries need protection for national security purposes 0 In protecting essential industries countries must I Determine which ones are essential I Consider costs and alternatives I Consider political consequences 0 Dealing with Unfriendly Countries 0 Preventing shipments to unfriendly countries only works if the importing country cannot nd an alternative supply source 0 Maintaining or Extending Spheres of In uence 0 Form political alliances o A country s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not 0 Preserving National Identity 0 Countries limit imports to sustain national unity Instruments of Trade Control 0 2 Types that differ in their effects 0 Those that indirectly affect the amount traded by directly in uencing the prices of exports or imports 0 Those that directly limit the amount of a good that can be traded o Tariffs o The most common type of trade control 0 Atax that governments levy on a good shipped internationally 0 Export Tariff 7 a tax on goods leaving a country 0 Transit Tariffs 7 a tax placed on goods passing through a country 0 Import Tariff 7 a tax on goods entering a country Most common type of tariff Raise the price of imported goods by placing a tax on them that is not placed on domestic goods thereby giving domestically produced goods a relative price advantage I Source of governmental revenue 0 Criteria for Assessing Tariffs Specific Duty 7 a duty tariff assessed on a perunit basis Ad Valorem Duty 7 a duty tariff assessed as a percentage of the value of the item Compound Duty 7 a tax placed on goods traded internationally based on value plus units Effective Tariff 7 the real tariff on the manufactured portion of developing countries exports which is higher than indicated by the published rates because the ad valorem tariff is based on the total value of the products which includes raw materials that would have had dutyfree entry Dynamics and Complexity 0 Gains to consumers from freer trade may be at the expense of some companies and workers 0 The international regulatory situation is becoming more complex 0 Challenges companies to find the best locations in which to produce 0 New products are coming onto the market regularly which makes the task of tariff classification more complex Chapter 8 Review Introduction 0 Economic Integration 7 The abolition of economic discrimination between national economies such as within the EU 0 3 Types of Economic Integration I Bilateral Integration 7 A form of integration between two countries in which they decide to cooperate more closely together usually in the form of tariff reductions I Regional Integration 7 A form of integration in which a group of countries located in the same geographic proximity decide to cooperate I Global Integration 7 The uni cation of distinct national economic systems into one global market 0 Triad 7 refers to the three major economic regions of the world 7 Europe North America and Asia The World Trade 0 39 quot VVTO o A voluntary organization through which groups of countries negotiate trading agreements and which has authority to oversee trade disputes among countries 0 GATT Predecessor to the WTO 0 General Agreement on Tariffs and Trade GATT17 A multinational arrangement aimed at reducing barriers to trade both tariff and nontariff ones at the signing of the Uruguay round the GATT was designated to become the World Trade Organization WTO I Fundamental principle of GATT Each member nation must open its markets equally to every other member nation any sort of discrimination was prohibited 0 MostFavoredNation MFN Claus 7 a GATT requirement that a trade concession that is given to one country must be given to all other countries o What does the WTO do 0 O O O O Adopted the principles and trade agreements reached under GATT Expanded its mission to include trade in services investment etc The World Trade Organization is the major body for I Reciprocal trade negations I Enforcement of trade agreements Continued the MFN Clause but added some exceptions Developing countries manufactured products have been given preferential treatment over those from industrial countries Concessions granted to members within a regional trading alliance such as the EU have not been extended to countries outside the alliance Countries can raise barriers against member countries who they feel are trading unfairly A system is set up to handle disputes for unfair trade practices Major Reg39onal Trading Groups 0 The European Union EU 0 O O O A form of regional economic integration among countries in Europe that involves a free trade area a customs union and the free mobility of factors of production that is working toward political and economic union Largest and most comprehensive regional economic group Established common currency the Euro Predecessors I The European Economic Community EEC o Brought together the countries of Europe into the most powerful trading bloc in the world I The European Free Trade Association EFTA 0 Goal of eliminating internal tariffs but most of those countries eventually became part of the European Union 0 Current members include Iceland Liechtenstein Norway and Switzerland I The European Community EC 0 Formerly The European Economic Community 0 Now known as the European Union 0 Organizational Structure I Key Governing Bodies o The European Commission 0 Provides political leadership drafts laws and runs the various daily programs of the EU 0 The Council of the European Union European Summit 0 Composed of the heads of state of each member country 0 European Parliament 0 3 major responsibilities I Legislative power I Control over the budget I Supervision of executive decisions 0 The European Court of Justice 0 Ensures consistent interpretation and application of EU treaties o The Single European Act I Designed to eliminate the remaining nontariff barriers to trade is Europe o The Treaty of Maastricht I Sought to foster political union and monetary union 0 The Euro Common currency in Europe Administered by the European Central Bank Established on January 1 1999 Resulted in new bank notes in 2002 00000 Does not include the United Kingdom Denmark Sweden or eight of the new entrants to the EU 0 Expansion I The EU expanded from 15 to 25 countries in 2004 I Admitted Romania and Bulgaria in 2007 27 member countries 0 Implications of the EU for corporate strategy I Companies need to determine where to produce products I Companies need to determine what their entry strategy will be I Companies need to balance the commonness of the EU with national differences 0 The North American Free Trade Agreement NAFTA o A free trade agreement involving the United States Canada and Mexico that went into effect on January 1 1994 and will be phased in over a period of 15 years 0 Includes Canada the United States and Mexico 0 Went into effect on January 1 1994 o Involves free trade in goods services and investment 0 Why NAFTA I USCanadian trade is the largest bilateral trade in the world I The United States is Mexico s and Canada s largest trading partner 0 NAFTA calls for I The elimination of tariff and nontariff barriers I The harmonization of trade rules I The liberalization of restrictions on services and foreign investments I The enforcement of intellectual property rights I A dispute settlement process 0 Example of Trade Diversion I Some US trade with and investment in Asia have been diverted to Mexico 0 Rules of Origin and Regional Content I Rules of Origin Goods and services must originate in North America to get access to lower tariffs I Rules of Regional Content 0 The percentage of value that must be from North America for the product to be considered North American in terms of country origin 0 50 for most products 0 625 for automobiles 0 Additional NAFTA provisions I Workers rights I The environment I Dispute resolution mechanism 0 Illegal Immigration 7 major challenge for NAFTA 0 Regional Economic Integration in Asia 0 Association of Southeast Asian Nations ASEAN 1 7 a free trade area involving the Asian countries of Brunei Indonesia Malaysia the Philippines Singapore and Thailand 0 Third largest free trade agreement in the world after the EU and NAFTA o Formed the ASEAN Free Trade Area AFTA on January 1 1993 I Goal to cut tariffs on all intrazonal trade to a maximum of 5 by January 1 2008 0 Reduced tariffs o Attracted FDI 0 Turned the region into a huge network of production leading to what some call factory Asia 0 Calls for Closer Cooperation 0 Asia Paci c E 39 Connemtion APEC 7 A cooperation formed by 21 countries that border the Paci c Rim to promote multilateral economic cooperation in trade and investment in the Pacific Rim I No binding treaties o The Goal of Open Regionalism I Make it so that individual member countries can determine whether to apply trade liberalization to nonAPEC countries on an unconditional MFN basis or on a reciprocal free trade agreement basis 0 Other Forms of International Cooperation 0 The United Nations I Established in 1945 following World War II to promote international peace and security I Deals With economic development antiterrorism and humanitarian movements I The UN Conference on Trade and Development UNCTAD 0 Established to help developing countries participate in international trade 0 Nongovernmental Organizations NGOs I Private nonpro t institutions that are independent of the government Chapter 9 Review Exchange Rat 7 The price of one currency in terms of another currency Foreign Exchange Market 7 The market where foreign exchange is traded usually banks nonbank nancial institutions and exchanges such as the CME Bid Rate 7 The amount a trader is willing to pay for foreign exchange Offer 7 The amount for which a foreignexchange trader is willing to sell a currency Spread 7 In the forward market the difference between the spot rate and the forward rate in the spot market the difference between the bid buy and offer sell rates quoted by a foreignexchange trader Spot Transaction 7 Foreign exchange transactions involving the exchange of currency the second day after the date on which the two foreignexchange traders agree to the transaction Spot Market 7 The market in which an asset is traded for immediate delivery as opposed to a market for forward or future deliveries FX Swap 7 A simultaneous spot and forward transaction in foreign exchange Derivative 7 A foreignexchange instrument such as an option or futures contract that derives its value from the underlying currency Currency Swaps 7 The exchange of principal and interest payments Option 7 A foreignexchange instrument that gives the purchaser the right but not the obligation to buy or sell a certain amount of foreign currency at a set exchange rate within a speci ed amount of time Futures Contract 7 An agreement between two parties to buy or sell a particular currency at a particular price on a particular future date as speci ed in a standardized contract to all participants that currency futures exchange Commercial Bills of Exchang 7 An instrument of payment in international business that instructs the importer to forward payment to the exporter Letter of Credit 7 A precise document by which the importer s bank extends credit to the importer and agrees to pay the exporter Speculation 7 The buying or selling of foreign currency with the prospect of great risk and high return Arbitrag 7 The process of buying and selling foreign currency at a pro t that results from price discrepancies between or among markets Interest Arbitrag 7 Investing in debt instruments in different countries to take advantage of interest differentials The investment is covered if the investor converts money into foreign exchange at the spot rate invests it in the foreign market at a higher interest rate and enters into a forward contract so that it can convert principle and interest back into the home currency and earn more than if that money had been invested in the home currency Chapter 10 Review The International Monetary Fund 7 A multigovemmental association organized in 1945 to promote exchangerate stability and to facilitate the international ow of currencies 0 Origin and Objectives 0 29 countries initially signed 7 186 member countries by 2009 o Fundamental Mission I To ensure stability in the international monetary system I To promote international monetary cooperation and exchangerate stability I To facilitate the balanced growth of international trade I To provide resources to help members in balanceofpayments difficulties or to assist with poverty reduction 0 The Bretton Woods Agreement 7 An agreement among IMF countries to promote exchangerate stability and to facilitate the international ow of currencies I Established a par value or benchmark value for each currency initially quoted in terms of gold and the Us dollar 0 Par Value 7 The benchmark value of a currency originally quoted in terms of gold or the US dollar and now quoted in terms of Special Drawing Rights 0 The IMF Today 0 The Quota System I The IMF Quota 7 the sum of the total assessment to each country 7 becomes a pool of money that the IMF can draw on to lend to other countries It forms the basis for the voting power of each country 7 the higher its individual quota the more votes a country has O 0 Assistance Programs I The IMF lends money to countries to help ease balanceofpayments dif culties Special Drawing Right SDR I A unit of account issued to countries by the International Monetary fund to expand their of cial reserves bases I An international revenue asset given to each country to help increase its revenues I The unit of account in which the IMF keeps its nancial records I Currencies making up the SDR basket are the US dollar the euro the Japanese yen and the British pound o The Global Financial Crisis and the SDR 0 Because of the global nancial crisis the G20 voted to signi cantly increase reserves available to the IMF to help countries in distress 0 Evolution to Floating Exchange Rates 0 The Smithsonian Agreement 7 A 1971 agreement among countries that resulted in the devaluation of the Us dollar revaluation of other world currencies a widening of exchangerate exibility and a commitment on the part of all participating countries to reduce trade restrictions superseded by the Jamaica Agreement of 1976 I An 8 percent devaluation of the dollar an of cial drop in the value of the dollar against gold I A revaluation of some other currencies an of cial increase in the value of each currency against gold I A widening of exchangerate exibility from 1 to 225 percent on either side ofpar value o The Jamaica Agreement 7 A 1976 agreement among countries that permitted greater exibility of exchange rates basically formalizing the break from xed exchange rates I Eliminated the use of par values Determining Exchange Rates Demand for a country s currency is a function of the demand for that country s goods and services and nancial assets Central banks control policies that affect the value of currencies o The Federal Reserve Bank of New York is the central bank in the United States Central bank reserve assets are kept in 3 major forms 0 Gold 0 Foreignexchange reserves I 98 of reserve assets worldwide 0 IMFrelated assets Central banks intervene in currency markets by buying and selling currency to affect its price Governments vary in their intervention policies by country and by administration The Bank for International Settlements in Basel Switzerland is owned by and promotes cooperation among a group of central banks Black Market 7 The foreignexchange market that lies outside the official market 0 The black market closely approximates a price based on supply and demand for a currency instead of a govemmentcontrolled price Hard Currency 7 A currency that is freely traded without many restrictions and for which there is usually strong external demand 0 Often called a freely convertible currency Soft Currency 7 A currency that is not fully convertible 0 However even a hard currency can be weak relative to another currency because of the relative exchange rates over time Licensing occurs when a government requires that all foreignexchange transactions be regulated and controlled by it Multiple ExchangeRate System 7 A means of foreignexchange control whereby the government sets different exchange rates for different transactions 0 Advance Import Deposit 7 a government requires deposit of money prior to the release of foreign exchange to pay for imports o Varies to as long as a year in advance 0 Quality controls 7the government limits the amount of foreign currency that can be used in a specific transaction 0 Purchasing Power Parity gPPP17 A theory that explains exchangerate changes as being based on differences in price levels in different countries 0 Also the number of units of a country s currency to buy the same products or services in the domestic market that US 1 would buy in the United States 0 If the domestic in ation rate is lower than that in the foreign country the domestic currency should be stronger than that of the foreign country Business quot quot 0f W MW39D Rate Changes 0 Strengthening of a country s currency value could create problems for exporters 0 Companies might locate production in a weakcurrency because 0 Initial investment there is relatively cheap 0 Such a country is a good base for inexpensive exportation 0 Exchange rates can in uence the sourcing of nancial resources the crossborder remittance of funds and the reporting of nancial results Honey Badger Link httpwwwvoutubecornwatchv4r7wHMg5Yi g


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