International Business Exam 1

Globalization of Markets

The merging of historically distant and separate national markets into one huge global marketplace

Globalization of Production

Sourcing goods to take advantage of differences in the cost and quality of factors of production (labor, energy, land, and capital)

The Emergence of Global Institutions

Needed to help manage, regulate, and police the global marketplace

• General Agreement on Tariffs and Trade (GATT)

• World Trade Organization (WTO)

• International Monetary Fund (IMF)

• World Bank

• United Nations (UN)

• Group of Twenty (G20)

Word Trade Organization (WTO)

Policies the world trading systems

International Monetary Fund (IMF)

• Established to maintain order in the internal monetary system

• Often seen as the lender of last resort

• In return for loans, the IMF requires nation-states to adopt specific economic policies aimed at returning their economies to stability and growth

World Bank

• Promotes economic development

• Focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments

United Nations (UN)

• Promotes peace through international cooperation and collective security

• One hundred and ninety-three member countries

UN charter has four basic purposes

• Maintain international peace and security

• Develop friendly relations among nations

• Cooperate in solving international problems and in promoting respect for human rights

• Be a center for harmonizing the actions of nations

Group of Twenty (G20)

• Comprises finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank

• Represents 85 percent of global GDP and 85 percent of international trade

International Trade

when a firm exports goods or services to consumers in another country

Foreign Direct Investment (FDI)

when a firm invests resources in business activities outside its home country

GATT lowered barriers

Urugay Round extended GATT established WTO

Microprocessor

the single most important innovation since World War II

Moore’s law

predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months

Transportation Techonology

commercial jets, super freighters, and containerization

Role of Technological Change

• Communications

• The internet

• Transportation Technology

Changing Demographics of the Global Economy

• The changing world output and world trade picture

• This reflected the faster economic growth of several other economies, particularly China

• As barriers to the free flow of goods and services fell, non-US firms increasingly invested across national borders

• Changing Nature of the Multinational Enterprise

• The changing world order

Outward stock of foreign direct investment (FDI):

the total cumulative value of foreign investments by firms domiciled in nations outside of that nation’s border

Multinational Enterprise (MNE):

is any business that has productive activities in two or more countries

The rise of MNEs

• Growth in the number of medium- and small-sized businesses

• The Internet is lowering barriers that smaller firms face in building international sales

Equalizer

The internet acts as this for business

Economical Dispersed Production

primary implication of transportation technology for the globalization of production

Service Activties

Modern communications technology has advanced outsourcing today

The United Nations has

193 member countries

The percentage of global GDP represented by G20 is

85 percent

Outward stock of foreign direct investment measures

cumulative value of foreign investments

Globalization is not inevitable

• Countries may pull back

• Risks are high

Antiglobalization Protests

Began with 1999 protests at WTO meeting in Seattle

Protestors believe globalization causes

detrimental effects on living standards, wage rates, and the environment

Critics of globalization argue:

• Falling trade barriers allow firms to move manufacturing activities to countries where wage rates are much lower

• Services also being outsourced

Supporters argue:

• Benefits outweigh the costs

• Free Trade will result in countries specializing in the production of goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently

Critics argue the gap between the rich and poor nations has gotten wider but has been due to:

• Totalitarian governments

• Poor economic policies

• Corruption and lack of property rights

• Expanding populations in developing countries

• Debt burdens

Managing international business differs from managing purely domestic business

• Countries are different

• The range of problems is wider, and problems are more complex

• Must find ways to work within limits imposed by the government

• Transactions involve converting money into different currencies

Political System

the system of government in a nation

Political Economy assessed according to two dimensions

1. the degree that is required to which collectivism is emphasized as opposed to individualism

2. Degree to which they are democratic or totalitarian

Collectivism

Emphasizes collective goals over individual goals

Socialism

• Public owner of the means of production for the common good

• Karl Marx

• Communists versus social democrats - privatization

Karl Marx

the few benefit at the expense of the many in a capitalist society where individual freedoms are not restricted

Individualism

• An individual should have freedom in economic and political pursuits

• The interests of the individual should take precedence over the interests of the state

• Two tenets of individualism: Guarantee of individual freedom and self expression

Democracy

A government is by the people, exercised either directly or through elected representatives

Totalitarianism

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

Representative Democracy

citizens periodically elect individuals to represent them

Democracy includes a multitude of safeguards that are typically based in constitutional law, including:

• Right to freedom of expression, opinion, and organization

• Free media

• Universal adult suffrage

• Fair court system

Communist totalitarianism

socialism can be achieved only though a totalitarian dictatorship

Theocratic totalitarianism

monopolized by a party, group, or individual that governs according to religious principles

Tribal Totalitarianism

when a political party, group or individual that represents the interests of a particular tribe monopolizes power

Right wing totalitarianism

generally permits individual economic freedom but restricts individual political freedom, including free speech, on the grounds that it would lead to the rise of communism

Psuedo-democracies

• Lie between pure democracies and complete totalitarian systems

• Authoritarian elements have captured some or much of the machinery of the state and use this to deny basic political and civil liberties

Market Economy

• All productive activities are privately owned

• Production is determined by the interaction of supply and demand

• To work, supply must not be restricted

• The role of government is to encourage vigorous, free and fair competition

Command Economy

• Government plans the goods and services, quantity and price, then allocates them for “the good of society”

• All businesses are state-owned

• Historically found in communist countries

• No incentive for individuals to look for better way s to serve consumer needs

Mixed Economy

• Some sectors are privately owned, and some are government-owned

• Once common in the developed world, they have become less so

• Government may aid troubled firms whose operations are vital to national interests

Legal Systems

• Rules or laws that regulate behavior

• Process through which laws are enforced

• Process through which redress for grievances is obtained

The legal system is influenced by

the prevailing political sysem

Common Law

• Evolved in England over hundreds of years

• Based on tuition, precedent, and custom

• More flexible than other systems

Civil Law

• Based on detailed laws organized into codes

• Less adversarial than a common law system

Theocratic Law

• Based on religious teachings

• The most common theocratic legal system is Islamic law

Contract

specifies conditions under which an exchange is to occur and details the rights and obligations or parties involved

Contract Law

Body of law that governs contract enforcement

Under common law:

• Contracts are very detailed, with all contingencies spelled out

• More expensive and can be adversarial

Under civil law

• Contracts tend to be much shorter and less specific

United Nations Convention on contracts for the international sale of goods (CISG)

• Establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations

• Applies automatically to all contracts for the sale of goods between different firms based in countries that have ratified the convention, unless the parties opt out

Property

A resource that an individual or business holds legal title to

• Land, buildings, equipment, capital, mineral rights, businesses, and intellectual property

Property Rightrs

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

Private action

Theft, piracy, and blackmail by private individuals or groups

Public action and corruption

• Public officials extort income, resources, or property

• Can be done legally

Foreign Corrupt Practices Act (FCPA)

• Illegal to bribe a foreign government official to obtain or maintain business over which that foreign official has authority

• Requires all publicly traded companies to keep detailed records that would reveal whether a violation of the act has occurred

Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997):

• Make the bribery of foreign public officials a criminal offense

• Allow for facilitating or expediting payments

Intellectual property

property that is the product of intellectual activity, such as computer/ software/ a screenplay/ a music score

Patent

inventors exclusive rights for a defined period

Copyrights

exclusive legal rights of authors, composers, playwrights, artists, and publishers

Trademarks

officially registered designs and names used to differentiate products

World Intellectual Property Organization

international organization whose members sign treaties to protect intellectual property

Product safety laws

set certain safety standards to which a product must adhere

Product liability

involves holding a firm and its officers responsible when a product causes injury, death, or damage

• Can be much greater if a product does not conform to safety standards

• Criminal and civil laws exist

• Raise ethical issues when doing business abroad

The macro environment influences

market attractiveness

two broad implications for International business

Political, economic, and legal systems of a country raise important ethical issues that have implications for internal business and clearly influence the attractiveness of that country as a market or investment site