International management

Comprehensive Study Guide for Exam on International Business and Multinational Management

Chapter 1: Multinational Management in a Challenging World

International Business Management

• What is International Business Management?

  • "International Business Management" refers to how companies operate across national borders.

  • Example: Apple Inc. sources production from China (Foxconn) and other nations (U.K. and Brazil) while conducting R&D in California and Israel.

• Why is International Business Management Important?

  • Four basic motivations for international business:

    • Resource seeking

    • Efficiency seeking

    • Market seeking

    • Knowledge seeking

  • Economic perspective:

    • Increase profitability

    • Diversify market risk (IB portfolio strategy)

    • Diversify cost and risk of R&D

Globalization

• "The world is moving away from self-contained national economies toward an interdependent, integrated global economic system."

• Globalization refers to "the shift toward a more integrated and interdependent world economy."

• Two main components:

  1. Globalization of Markets: Merging of historically distinct and separate national markets into one global market.

  2. Globalization of Production: Sourcing goods and services from different locations globally.

Drivers of Globalization

1. Decline in Trade Barriers:

   • "Since 1950, average tariffs have fallen significantly and are now at 4%."

   • Market liberalization: Opened markets to FDI (Foreign Direct Investment).

2. Innovation in Transportation and Communication:

   • "The technological changes of the 19th Century in transport and communications include the steam ship, the railroad, the telegraph, and the internet (www)."

   • Air transportation, FedEx, and UPS have enabled faster global trade.

3. Technological Advancements:

   • "Radically changing technologies induce firms to invest abroad to exchange, exploit, and create technological knowledge."

   • Strategic alliances, Joint ventures, and Global M&A (Mergers & Acquisitions).

Outcomes of Globalization

• Changes in the Nature of MNCs:

  • "International, Multinational (aka. Multi-domestic or Localization), Global, Transnational."

• Changes in the World Economy:

  • "Increased trade and cross-border investment have led to lower prices for goods and services, greater economic growth, higher consumer income, and more jobs from FDI."

• Changes in the Global Environment:

  • "CO2 emissions from fuel combustion have increased."

Chapter 2 & 13: Culture and Multinational Management

Definition of Culture

• "Culture is a system of values and norms that are shared among a group of people and that, when taken together, constitute a design for living."

• Components of Culture:

  1. Values: "Abstract ideas about what a group believes to be good, right, and desirable."

  2. Norms: "The social rules and guidelines that prescribe appropriate behavior in particular situations."

     • Folkways: "Routine conventions of everyday life."

     • Mores: "Norms central to the functioning of society and its social life."

Determinants of Culture

1. Social Structure:

   • "Social structure refers to a society’s basic social organization."

   • Individualism vs. Collectivism

   • "Degree of mobility between social strata."

2. Religious and Ethical Systems:

   • "Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred."

   • "Confucianism is important in influencing behavior and culture in many parts of Asia."

3. Language:

   • "Language refers to the spoken means of communication."

   • "You cannot perfectly translate one language into another."

4. Education:

   • "Education is important in determining a nation’s competitive advantage."

   • "General education levels can also be a good index for the kinds of products that might sell in a country."

Hofstede’s Six Dimensions of Culture

1. Power Distance: "Focuses on how a society deals with the fact that people are unequal in physical and intellectual capabilities."

2. Individualism vs. Collectivism: "Focuses on the relationship between the individual and his or her fellows."

3. Uncertainty Avoidance: "Measures the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity."

4. Masculinity vs. Femininity: "Looks at the relationship between gender and work roles."

5. Long-Term vs. Short-Term Orientation: "Captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors."

6. Indulgence vs. Restraint: "Free gratification of basic and natural human desires related to enjoying life and having fun."

Cultural Difference in Communication

• High-context cultures (South America, Asia, Middle East, Africa): "Relational, intuitive, collectivist, and contemplative."

• Low-context cultures (U.S., Canada, Germany, Australia, New Zealand): "Individualistic and action-oriented."

Chapter 3: The Institutional Context of Multinational Management

Political Economy of Nations

• "The political economy of a nation refers to how the political, economic, and legal systems of a country are interdependent."

Political System

• "The system of government in a nation can be assessed according to the degree to which the country emphasizes collectivism vs. individualism and whether it is democratic or totalitarian."

• Types of Totalitarianism:

  • Communist: "China, Vietnam, North Korea."

  • Right-wing: "Chile, South Korea (historically)."

Economic System

• Market Economy: "All productive activities are privately owned, and production is determined by the interaction of supply and demand."

• Command Economy: "Government plans the goods and services a country produces."

• Mixed Economy: "Certain sectors are private, while others have significant state ownership."

Legal System

• "Refers to the rules that regulate behavior."

• "Contract law governs contract enforcement."

• "Intellectual property rights protect patents, trademarks, and copyrights."

Institutional Factors in International Business

• "Political stability."

• "Government effectiveness."

• "Control of corruption."

• "Intellectual property protection."

Changing Trends in Political & Economic Systems

• "Transformed from planned command economies to market-based economies."

• "Market liberalization: Opened to foreign direct investment, removed price controls."

• "Privatization: Transformation of ownership structure."

PART I: Government Intervention in Trade

Objectives:

• Understand the world trading system

  • History of the G.A.T.T. and World Trade Organization

  • The role of WTO in International Trade

• Describe the policy instruments used by governments

  • Tariffs

  • Government Subsidies

  • Import Quotas

  • Antidumping Duties

• Understand why governments intervene in international trade

• Managerial implications: Trade barriers and firm strategies

History of the GATT and WTO

• Until the Great Depression of the 1930s, most countries had some degree of protectionism (e.g., Smoot-Hawley tariff in the U.S.).

• After WWII, the U.S. and other nations realized the value of free trade.

• Established the GATT in 1947: A multilateral agreement to liberalize trade.

• In the 1980s and early 1990s, protectionist trends emerged:

  • Japan’s perceived protectionist policies created intense political pressures in other countries.

  • Persistent trade deficits by the U.S. led to increased unemployment and protectionism against imports.

  • Use of non-tariff barriers increased.

• Creation of the WTO:

  • Despite efforts to spread freer trade under GATT, it did not have an effective dispute settlement system.

  • To reduce the number of unilateral trade actions initiated by the U.S. and to settle trade disputes, the Uruguay Round of GATT negotiations began in 1986.

  • The WTO was finally established in 1995.

Roles of WTO in International Trade

• Location: Geneva

• Established on January 1, 1995

• Created by Uruguay Round negotiations (1986–1994)

• Members: 166 countries (as of August 2024) and 23 observers

Instruments of Trade Policy

1. Tariffs:

   • Specific tariffs: Fixed charge per unit.

   • Ad valorem tariffs: Proportion of the value of the imported good.

   • Impacts:

     • Positive: Protects domestic producers.

     • Negative: Increases consumer prices.

2. Subsidies:

   • A government payment to a domestic producer.

   • Benefits: Helps domestic firms compete against foreign imports.

   • Case: DISPUTE SETTLEMENT-DISPUTE DS357

     • Title: United States—Subsidies and Other Domestic Support for Corn and Other Agricultural Products.

     • Complainant: Canada.

     • Third parties: Argentina, Australia, Chile, European Union, India, Japan, Mexico, New Zealand, Nicaragua, South Africa, Chinese Taipei, Thailand, Turkey.

3. Import Quotas:

   • A direct restriction on the quantity of goods that may be imported.

   • Example: U.S. has a quota on cheese imports.

4. Anti-dumping duties:

   • Designed to punish foreign firms engaging in dumping.

   • Protects domestic producers from “unfair” foreign competition.

Why Do Governments Intervene in Trade?

1. Political Arguments:

   • Protecting jobs: Most common reason for trade restrictions.

   • National security: Industries like aerospace and electronics are protected.

   • Retaliation: Governments impose tariffs in response to unfair trade practices.

   • Protecting consumers: Example – Japan/Korea banned U.S. beef imports in 2003.

2. Economic Arguments:

   • Infant industry argument: An industry should be protected until it can develop.

   • Strategic trade policy: Governments help firms attain first-mover advantages.

PART II: Regional Economic Integration and Anti-Globalization

Objectives:

• Understand the regional economic integration system:

  • EU (European Union)

  • NAFTA (North American Free Trade Agreement)

  • MERCOSUR

• Understand pros and cons of regional economic integration.

• Understand the implications for business.

Regional Economic Integration System

• Definition: Agreements between countries in a geographic region to reduce tariff and non-tariff barriers.

• Levels of Economic Integration:

  1. Free Trade Area (FTA): No internal tariffs, but each country sets its own external tariffs.

     • Example: NAFTA (now USMCA).

  2. Customs Union (CU): FTA + common external trade policy.

     • Example: Andean Community (Bolivia, Colombia, Ecuador, Peru, Venezuela).

  3. Common Market (CM): CU + free movement of labor and capital.

     • Example: MERCOSUR.

  4. Economic Union: CM + common currency and fiscal policies.

     • Example: European Union (EU).

Case Study: NAFTA/USMCA

• Began on January 1, 1994.

• Eliminated most trade barriers between the U.S., Canada, and Mexico.

• Advantages of NAFTA:

  • Increased trade ($297 billion in 1993 to $1.6 trillion in 2009).

  • Increased FDI (Foreign Direct Investment) among members.

• Disadvantages:

  • U.S. manufacturing jobs shifted to Mexico.

  • Trade disputes (e.g., U.S. corn subsidies challenged by Canada).

Case Study: European Union (EU)

• 1951: European Coal and Steel Community.

• 1957: Treaty of Rome → European Economic Community.

• 1991: Maastricht Treaty → Creation of the EU.

• 1999: Introduction of the EURO currency (used by 20 of 27 members as of 2024).

• Advantages: Free movement of goods, services, labor, and capital.

• Disadvantages: Loss of sovereignty, economic disparities.

Pros & Cons of Regional Economic Integration

• Pros:

  • Access to more goods at lower prices.

  • Trade creation.

  • Employment opportunities.

• Cons:

  • Trade diversion.

  • Loss of sovereignty.

  • Barriers for non-members.