International Business - Test 1

Globalization

Shift towards an integrated world economy

Multinational Enterprise (MNE)

Business with activities in multiple countries

Foreign Direct Investment (FDI)

Investment in activities outside the home country

Globalization of Markets

Merging of distinct national product markets

• Degree of globalization differs depending on the product

• Some products are very similar worldwide

• Others have significant regional and national differences

Globalization of Production

Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production (land, labor, capital, energy)

Companies can• lower their overall cost structure• improve quality or functionality of product offerings

Changes in World Output & Trade

Shifts in US and developing nations' economic activity

In 1960, the US accounted for almost 40% of world economic activity, but by 2012 the US accounted for just 23%

In contrast, the share of world output accounted for by developing nations is rising (about 60% of world economic activity)

Changes in Foreign Direct Investment (FDI)

Evolution of FDI flows towards developing countries

Today, the United States accounts for less than one-fifth of worldwide FDI flows
Other developed countries have followed a similar pattern•

In contrast, the share of FDI accounted for by developing countries has risen

Drivers of Globalization

Factors like technological advancements and global institutions

Declining barriers to the free flow of goods, services, and capital

Technological change: Telecommunications, internet, and transportation
technology

Global innovation and cross-national cooperation

Increase in global institutions: UN, WTO, IMF, World Bank

Emergence of Global Institutions

Creation of bodies to manage the global marketplace

Institutions needed to help manage, regulate, and police global marketplace.

General Agreement on Tariffs and Trade (GATT)

World Trade Organization (WTO)

International Monetary Fund (IMF)

World BanküUnited Nations (UN)

Group of Twenty (G20)

Debate over Globalization

• Jobs• Distribution of income• Labor policies• The environment• Immigration• National sovereignty• Economic opportunities

Why do companies study International Business (IB)

As globalization is inevitable, firms must understand
1) Countries are different
2) Problems facing in global operationsare complex
3) Government intervention and regulations matter
4) International business require the understanding of various aspects of countries.

Political economy of a nation

How the political, economic, and legal systems of a country are interdependent

Political system

The system of government in a nation

Democracy

A political system in which government is by the people, exercised either directly or through elected representatives

Most modern democracies practice representative democracy where citizens periodically elect individuals to represent them

The Presidential Relationship

Voters elect the Legislature and the Chief Executive who is part of the Executive Branch. The legislature and executive are independent and coequal.

The Parliamentary Relationship

Voters elect the Legislature. The Chief Executive is drawn from the Legislature.

Totalitarianism

Form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties

Types of Totalitarianism

• Communist • Theocratic • Tribal• Right-wing

market economy

Productive activities are privately-owned and production is determined by the interaction of supply and demand

Government encourages free and fair competition between private producers

Tend to be associated with democracies

command economy

Government plans the goods and services a country produces, their price, and the quantity produced

All businesses are state- owned, and governments allocate resources for "the good of society"

Tend be associated with totalitarian regimes

mixed economy

Certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning

Government may own or influence firms considered important to national security

Legal system

the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained

Common law

based on tradition,precedent, and custom

Civil law

based on detailed set of laws organized into codes

Theocratic law

law is based on religious teachings

Implications for IB

Starting a business involves activities (such as registering its name, identifying the appropriate tax classification, obtaining licenses and permits, arranging credit, and securing insurance).

Entering and enforcing contracts

Hiring and firing

Product safety, liability, labor regulations

Intellectual property laws

Gross Domestic Product (GDP)

monetary value of all the finished goods and services produced within a country's borders in a specific time period

Gross National Income (GNI)

total annual income received by residents of a nation

World Bank classification (in GNI/capita)

• Low income: $1045 or less• Lower-middle income: between $1,046 and $4,095• Upper-middle income: between $4,096 and $12,695• High income: $12,696 or more 5

the Human Development Index (HDI) which is based on

life expectancy at birth

educational attainment

whether average incomes are sufficient to meet the basic needs of life in a country

the presence of basic health care and basic education

economic progress requires the democratization of political communities to give citizens a voice

Property rights

the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource

Gini coefficient

measure of statistical dispersion intended to represent the income or wealth distribution of a nation's residents

Countries are more likely to have higher sustained rates of economic growth with:

ü Democratic regimes.ü Market-based economic policies. ü Strong property rights protection.

Benefits of Doing Business Internationally

ü Based on size of the market, as well as current and futurepurchasing power of its consumers.
ü First-mover advantages
ü A country's economic system, property rights regime, and education systems are good predictors of economic prospects.

culture

a system of values and norms that are shared among a group of people

values

abstract ideas about what a group believes to be good, right, and desirable

norms

are the social rules and guidelines that prescribe appropriate behavior in particular situations

cross-cultural literacy

an understanding of how cultural differences across and within nations can affect the way in which business is practiced

cultural intelligence

the capability to relate and work effectively across cultures

power distance

Measures the extent to which hierarchical differences are accepted in society

uncertainty avoidance

Refers to the extent to which uncertainty and ambiguity are tolerated

masculinity/feminity

Extent to which traditional masculine values such as aggressiveness and assertiveness are emphasized

individualisms/collectivism

Refers to whether the self or the group constitutes the center point of identification for the individual

social structure

refers to the basic social organization of a society.

Social Stratification

are hierarchical social categories often based on family background, occupation, and income.

Four basic principles:
1. Is a trait of society.
2. Carries over into next generation.
3. Is generally universal but variable.
4. Involves not just inequality but also beliefs.

A caste system

is a closed system of stratification in which social position is determined by the family and change in that position is generally not possible.

A class system

is a less rigid form of social stratification and a person can move its class through achievements or luck.