Maseco 3 midterms

International business

involves economic transactions across national borders to meet the needs of individuals, companies, organizations, and countries.

Trade

Foreign Direct Investment (FDI)

International business includes:

Foreign Direct Investment (FDI)

Establishing or funding companies in other countries.

Domestic or home trade

happens within a single country but supports international trade by linking local markets.

Domestic business

deals only with local issues.

International business

handles:

Domestic forces (home environment)

Foreign forces (host countries)

International forces (global rules and interactions)

to Increase Profit and Sales

To Protect Markets and Revenue

WHY DO COMPANIES GO INTERNATIONAL?

1. Factor Endowment

2. Climate Differences

3. Technical Know-how

WHY NATIONS ENGAGE IN INTERNATIONAL TRADE?

Factor Endowment

Countries trade due to unequal resource distribution.

Climate Differences

Certain goods grow only in specific climates.

Technical Know-how

Less developed nations trade with advanced countries to access technology and machinery.

Accounting

ensures accurate tracking of cross-border transactions.

ABSOLUTE ADVANTAGE

A country has this when it can produce a good using fewer resources or at lower cost than another country.

ADAM SMITH

proponent of the theory of absolute advantage

COMPARATIVE ADVANTAGE

A country has this advantage when it can produce a good at a lower opportunity cost than another country even if it has absolute advantage in all goods.

DAVID RICARDO

proponent of the theory of comparative advantage

FACTOR ENDOWMENT THEORY

Trade is driven by differences in this (e.g. land, labor, capital).

HECKSCHER-OHLIN

proponent of the theory of factor endownment

MYTH 1

Free trade is beneficial only if your country is strong enough to stand up to foreign competition.

MYTH 2

Foreign competition is unfair and hurts other countries when it is based on low wages.

MYTH 3

Trade exploits a country and makes it worse off if its workers receive

much lower wages than workers in other nations.

barrier to trade

is a government-imposed restraint on the flow of international goods or services.

GOVERNMENT INTERFERENCE

They may restrict imports and exports through tariffs, quotas, and import permits. These limit the free flow of goods and reduce the benefits of open trade.

CURRENCY DIFFERENCES

This makes trade complex. Exchange rate fluctuations can increase costs or reduce profit margins.

LANGUAGE & COMMUNICATION ISSUES

Miscommunication in negotiations, contracts, or documentation can cause delays or disputes.

LEGAL SYSTEM DIFFERENCES

Each country has different laws on trade, contracts, taxation, and dispute resolution.

CULTURAL DIFFERENCES

Different consumer habits, business etiquette, or preferences can affect market success.

INTERNATIONAL TRADE POLICY

these instruments are tools governments use to regulate international trade and protect domestic industries.

TARIFFS

Taxes placed on imported goods to raise their prices, making local alternatives more competitive.

SUBSIDIES

Financial aid to local producers to reduce their cost and help them compete with imports.

IMPORT QUOTAS

Limits on the quantity of goods that can be imported, controlling foreign competition.

LOCAL CONTENT REQUIREMENTS

Policies requiring a certain percentage of a product to be made domestically to promote local industry.

ADMINISTRATIVE POLICIES

Deliberate use of rules and procedures to discourage imports, like complex licensing or inspections.

ANTI-DUMPING POLICIES

Measures to prevent foreign firms from selling goods below cost just to drive local competitors out.

Political Argument for Trade Intervention

refers to the justification by governments for restricting or controlling international trade to achieve non-economic objectives, such as protecting jobs, ensuring national security, safeguarding consumers, upholding human rights, or using trade as a bargaining tool in foreign policy.

Political Argument for Trade Intervention

Protecting Jobs and Domestic Industries

Ensuring National Security

Retaliation or Bargaining Tool

Upholding Human Rights

Protecting Jobs and Domestic Industries

Governments may impose tariffs or restrictions to protect local industries from cheaper foreign competition.

Ensuring National Security

Sectors related to defense, energy, and communication are often protected to safeguard public interest.

Retaliation or Bargaining Tool

Trade threats or sanctions are used to force other countries to comply with fair trade practices.

Consumer Protection

Trade restrictions help prevent the entry of unsafe, counterfeit, or substandard goods.

Upholding Human Rights

Governments may reduce trade ties with countries involved in forced labor or human rights abuses.

Economic Argument for Trade Intervention

refers to the justification for restricting or regulating trade to support domestic economic growth, such as protecting new or emerging industries (infant industries) or helping local firms gain advantages in global markets through government support.

Economic Argument for Trade Intervention

Infant Industry Argument

Strategic Trade Policy

Infant Industry Argument

New or emerging industries may need short-term protection from international competition to develop skills, technology, and scale.

Strategic Trade Policy

Governments can invest in promising sectors to boost national income and global competitiveness.

Foreign Direct Investment (FDI)

refers to a business investment made by a firm or individual in one country into business interests located in another country.

Greenfield investment

is a type of foreign direct investment where a parent company builds a brand-new business operation, facility, or office in a foreign country from the ground up.

Mergers and acquisitions (M&A)

refer to financial transactions where companies combine, consolidate, or transfer ownership to a single entity

joint venture

is a business arrangement where two or more parties pool their resources and expertise to achieve a specific goal while keeping their separate business identities

multinational enterprises (MNEs)

Firms engaging in FDI are known as

High Transportation Costs

Trade Barriers

ADVANTAGES OVER EXPORTING

High Transportation Costs

For low-value or bulky goods like cement and soft drinks, local production is more economical.

Trade Barriers

Tariffs and quotas can make exporting costly.

Example: Japanese car manufacturers build plants in the U.S. to

bypass tariffs.

Protection of Intellectual Property

Operational Control

Transfer of Skills

ADVANTAGES OVER LICENSING

Protection of Intellectual Property

Licensing may lead to loss of proprietary technology. Example: RCA licensed to Sony, which later became a major competitor.

Operational Control

FDI gives firms better control over quality, branding, and strategy

Transfer of Skills

Complex management practices and systems are hard to transfer through licensing.

Overpayment

Cultural Differences

Integration Issues

Insufficient Due Diligence

CHALLENGES & RISKS OF ACQUISITIONS

Overpayment

Companies may bid too high due to overconfidence in projected returns (Hubris Hypothesis).

Cultural Differences

Misaligned values and management styles may cause friction and employee turnover.

Integration Issues

Combining two organizations’ operations and systems can be complex and slow.

Insufficient Due Diligence

Acquiring troubled firms without proper evaluation may lead to poor post-acquisition performance.

Product Life Cycle Theory

Firms begin production abroad as product demand grows and matures in international markets.

Example: As demand for Coca-Cola products expanded internationally, the company established production and bottling operations in countries such as the Philippines to serve growing local demand.

Raymond Vernon

Proponent of Product Life Cycle Theory

Eclectic Paradigm

FDI happens when firms combine internal strengths (technology, management) with location-specific advantages (resources, skilled labor).

Example: Texas Instruments combines its semiconductor technology and expertise with the Philippines’ skilled workforce and competitive costs, leading to FDI in the country.

John Dunning

Proponent of Eclectic Paradigm

Radical View

FDI is seen as exploitation by capitalist firms of host countries. This theory has lost popularity.

Example: OceanaGold extracts mineral resources in the Philippines and has faced environmental and community concerns, illustrating this as the potential exploitation of host-country resources.

Free Market View

FDI is viewed as a way to improve global efficiency by allocating resources where they are most productive, in line with comparative advantage.

Example: Nestlé invests in Philippine food production, leveraging local agricultural resources, labor, and the country’s growing consumer market.

Pragmatic Nationalism

FDI is welcomed if the benefits (employment, tech transfer, infrastructure) outweigh the drawbacks (profit repatriation, competition). Governments regulate FDI to protect national interest.

Example: In New Clark City, the government welcomes FDI that creates jobs, develops infrastructure, and brings technology while regulating investments to protect national interests.

Multinational Corporation (MNC)

is a large business organization that owns or controls production, services, or operations in more than one country.

It establishes branches, subsidiaries, or joint ventures abroad to access global markets and resources.

By Size

By Structure

By Performance

By Behavior

TYPES OF MULTINATIONAL CORPORATION (MNC)

By Size

MNCs are generally large firms in terms of sales, profits, or global reach. However, size alone does not define a company as multinational.

By Structure

MNCs have a presence in multiple countries and often have top executives and owners from diverse national backgrounds.

By Performance

MNCs generate a significant portion of their revenue, employment, or assets from operations outside their home country.

By Behavior

MNCs differ in management orientation

Ethnocentric

Centralized management and decisions from the home country; foreign markets are secondary.

Polycentric

Decentralized approach where local managers in host countries make decisions.

Geocentric

Global mindset where operations are integrated and managed worldwide.

Economic Development

Technology Transfer

Social Responsibility

Balanced Global Economy

BENEFITS OF MULTINATIONAL CORPORATIONS

Economic Development

MNCs contribute to job creation, infrastructure, and capital investment in host countries.

Technology Transfer

They introduce new technologies, management skills, and innovations to less developed markets.

Social Responsibility

Many MNCs support community projects.

Balanced Global Economy

MNCs help distribute goods, capital, and expertise across nations, reducing economic inequality.

Exploitation of Resources

Profit-Driven Relocation

Cultural Erosion and Sovereignty Issues

CRITICISMS OF MULTINATIONAL CORPORATIONS

Exploitation of Resources

MNCs may extract profits from host countries without reinvesting locally.

Profit-Driven Relocation

Firms sometimes relocate to countries with lower costs, leaving workers jobless.

Cultural Erosion and Sovereignty Issues

Some countries see MNCs as threats to local culture and autonomy.

Regional Cooperation Groups

Free Trade Areas (FTA)

Customs Union

Common Market

Political Union

PATTERNS OF MULTINATIONAL CORPORATIONS

Regional Cooperation Groups

Countries agree to collaborate on shared infrastructure or industries.

Free Trade Areas (FTA)

Member nations remove or reduce tariffs and trade barriers among themselves, but retain separate policies for non-members.

Customs Union

Like an FTA but with a common external tariff policy.

Common Market

Promotes full economic integration by allowing free movement of goods, services, capital, and labor. Adds harmonized economic policies.

Political Union

The highest level of integration, combining full economic and political unity.

World Bank

An organization known as an "international financial institution" that provides development funds to developing countries in the form of interest-bearing loans, grants, and technical assistance.

Low-income countries (LICs)

In the World Bank classification, countries with a GNI per capita of less than $1,025 in 2011.

Middle-income countries

In the World Bank classification, countries with a GNI per capita between $1,025 and $12,475 in 2011.

Newly industrializing countries (NICs)

Countries at a relatively advanced level of economic development with a substantial and dynamic industrial sector and with close links to the international trade, finance, and investment system.

Least developed countries

A UN designation of countries with low income, low human capital, and high economic vulnerability.

Human capital

Productive investments in people, such as skills, values, and health resulting from expenditures on education, on-the-job training programs, and medical care.

Gross national income (GNI)

The total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP) plus factor incomes earned by foreign residents, minus income earned in the domestic economy by nonresidents.