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moving toward a world in which barriers to cross-border trade and investment are declining; national economies are emerging into an interdependent, integrated global economic system.
Cons of Globalization
- - unemployment in developed nations to environmental degradation and the americanization of popular culture
- - downward pressure on the wage rates of unskilled workers, environmental degradation, and cultural imperialism of global media and multinational enterprises
- - argue that tougher environmental regulations and stricter labor standards go hand in hand with economic progress
impact of foreign competition
Advances in technology, lower transportation costs, and the rise of skilled workers in developing countries imply that many services no longer need to be performed where they are delivered
globalization of markets
- - the merging of historically distinct and separate national markets into one huge global marketplace.
- - different countries have different regulations, thus companies must make specific plans for each country
- -uniformity replaces diversity
globalization of production
- the sourcing of goods and services from locations around the globe to take advantage of national difference in the cost and quality of factors of production
- yields a better final product
factors of production
labor, energy, land and capital
General Agreement on Tariffs and Trade (GATT)
- - International treaty that committed signatories to lowering barriers to the free flow of goods across national borders , let to the WTO.
- - Voluntary agreement between individual nation-states, and their functions are shrined in international treaties.
World trade Organization
The organization that succeeded the GATT and now acts to police the world trading system.
International Monetary Fund
- - Was established to maintain order in the international monetary system
- - Loans come with strings attached, in return, it requires nation-states to adopt specific economic policies aimed sat returning their troubled economies to stability and growth.
- - set up to promote economic development.
- - Make low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments
- An international organization made up of 191 counties charged with keeping international peace, developing cooperation between nations, and promoting human rights.
- VIBRANT GLOBAL ECONOMY - promotes: higher standards of living, full employment, and conditions of economic and social progress and development
Two macro factors that underlie the trend toward greater globalization
- 1. decline in barriers to the free flow of goods, services, and capital.
- 2. technological change (communication, information processing, and transportation technologies.)
occurs when a firm exports goods or services to consumers in another country.
foreign direct investment (FDI)
occurs when a firm invests resources in business activities outside its home country.
- the premise that the power of microprocessor technology doubles and its cost of production drops in half every 18 months.
- cost of global communications plummets
Globalization at General Electric
- - Country managers have more power
- -local nationals are invaluable when trying to sell to local companies and governments...deep understanding of local language and culture is critical (china)
- - to succeed internationally you must be close to your customers
The Role of Technology Change
- Telecommunications is creating a global audience
- Transportation is creating a global village
intro to containerization
- simplifies transshipment from one mode of transport to another
- lowered the costs of shipping goods over long distances
- jet aircraft and super frighters
Changing world output and world trade picture
- the 1st nations to industrialize slipped in value for world GDP.
- the relative decline reflects the growing economic development and industrialization of the world economy
stock of foreign direct investment
refers to the total accumulated value of foreign owned assets (investments) at a given time
multinational enterprise (MNE)
is any business that has productive activities in two or more countries
two trends in the demographics of multinational enterprise
- 1. the rise of non-US multinationals (decline in the dominance of u.S firms in the global marketplace)
- 2. the growth of mini-multinationals (medium-size and small businesses involved in int. trade and investment)
Russia and globalization
Russia has experienced considerable economic pain as it tries to shift from a centrally planned economy to a market economy.
- - a firm that engages in international trade or investment
- - Managers in an international business must not only be sensitive to these differences, but they must also adopt the appropriate policies and strategies for coping with them.
- - must decide where to site production activities to minimize costs and to max value added, appropriate mode of entering
Flat Panel television and the Global Economy
- - flat panel industry migrates around the world to low-cost locations
- - consumers win from cheap prices
- - efficient manufacturers take advantage of supply chains to make and sell low cost high quality
- - Vizion in California outsources most of its works
- Economic reform movement - privatization in some areas was opened
- Attempts to further reduce import tariffs have been stalled by oppositions who fear that if barriers come down, a flood of inexpensive chinese products will enter India
stressed that the political, economic, and legal systems of a country are interdependent; influence each other
influence the benefits, costs, ad risks associated with doing business in different countries
the system of government in any nation
- assessed according to 2 dimensions
- 1. degree to which they emphasize collectivism as opposed to individualism
- 2. degree to which they are democratic or totalitarian
- Collectivism =totalitarian
- Individual = democratic
refers to a political system that stresses the primacy of collective goals over international goals.
Needs of a society as a whole "good of society"
Plato (The republic) that individual rights should be sacrificed for the good of the majority and that property should be owned in common.
- The political system that believers in state ownership of a county's means of production, distribution, and exchange so that all can benefit.
- Karl Marx advocated state ownership of the basic means of production, distribution, and exchange (i.e businesses)
- ensure rokers were fully compensated for their labor...benefit society as a whole.
believed that socialism could be achieved only through violent revolution and totalitarian dictatorship.
- committed themselves to achieving socialism by democratic means
- after WWII nationalized private companies in certain industries, transforming them into state-owned enterprises "public good rather than private profit' ....ran counter to the public interest
transfers the ownership of state property into hands of private individuals, frequently by the sale of state assetes through an action.
- refers to a philosophy that an individual should have freedom in his or her economic and political pursuits.
- Aristotle - argued that private property is more highly productive than communal property...stimulate progress and most productive
- David Hume Adam Smith and John Stuart Mill
- Built on 2 central tenants...
- 1. the importance of guaranteeing individual freedom and self expression
- 2. the welfare of society is best served by letting people pursue their own economic self interest
a political system in which government is by the people, exercised either directly or through representatives.
- a form of government in which one person o political party exercises absolute control over all spheres of human life and prohibits opposing political parties.
- individual freedom in the economic sp
- 1. freedom of expression, opinion, and organization
- 2. media
- 3. regular elections
- 4. universal adult suffrage
- 5. limited terms for elected representatives
- 6. fair court system...independent from political system
- 7. nonpolitical state bureaucracy
- 8. nonpolitical police force and armed service
- 9. relatively free access to state information
A version of collectivism advocating that socialism can only be achieved through a totalitarian dictatorship
political power is monopolized by a party, group, or individual that governs according to religious principles (iran and Saudi arabia)
right wing totalitarism
- permits some individual economic freedom but restricts individual political freedom, frequently on the grounds that is would lead the the rise of communism.
- backed by military
- all productive activities are privately owned, as opposed to being owned by the state.
- Production is determined by the interaction of supply and demand and signaled to producers through the price system
- role of government: encourage vigorous free and fair competition between private producers
- Market Based Economy shift:
- 1. deregulation
- 2. privatization
- 3. creation of legal system
- the government plans the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold.
- business ares state owned..."good of the society"
- little incentive to control costs and be efficient
- economie tend to stagnate
- between market and command economy - certain sectors are left to private ownership and free market mechanisms other sectors have state ownership and government planning.
- governments tend to take into state ownership troubled firms whose continued operation is thought to be vital to national interests.
- rules, laws, that regulate behavior along with the process by which the laws are enforced and through which redress for grievances is obtained
- regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions.
- is based on tradition, precedent, and custom
- tradition: a country's legal history
- precedent: to cases that have come before the courts in the past
- custom: to the ways in which laws are applied in specific situations
civil law system
- is one in which the law is based on religious teachings
- islam law govern all aspects of life
- riba: acceptance of interest payments is seen as a grave sin; the giver an the taker
- contract: specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved
- the body of law that governs contract enforcement
- United Nations Convention and Contracts for International Sale of Goods (CIGS): 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
- fewer than 70 nations
- refer to the legal rights over the use to which resource is put and over the use made of any income that may be deprived from that resource.
- can be violated through private or public action
theft, piracy, blackmail, and the like by private individuals of groups
- public officials extort income, resources, or the property itself from property holders
- Corruption is so endemic in some countries that politicians and bureaucrats regard it as a perk of office and openly flout laws against corruption
- Foreign Corrupt Practices Act: US, makes i illegal to bribe a foreign government official to obtain or maintain business over which that foreign official has authority, and it requires all publicly traded companies to keep detailed records that would reveal wether a violation of the act has occurred.
- significantly reduces the foreign direct investment, level of international trade, and economic growth rate in a country
- grease payments or speed money: exception, facilitating or expediting payments; expedite or to secure the performance of duties that already obligated to perform
- property that is the product of intellectual activity
- patents: grants the inventor of a new product or precess exclusive rights for a defined period to the manufacture, use, or sale of the invention
- Copyrights: exclusive legal rights of authors, composers, playwrights, artists, and publishers and dispose of their work as they see fit.
- Trademarks: Designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products.
World Intellectual Property Organization
An international organization whose members sign treaties to agree to protect intellectual property
Paris Convention for the Protection of Industrial Property
The oldest international treaty concerning protection of intellectual property, which has been signed by 170 nations
product safety laws
set certain safety standards to which a product must adhere
involves holding a firm and its officers responsible when a product causes injury, death, or damage
Gross National Income (GNI)
- The yardstick for measuring economic activity of a country, this measures the total annual income of a nation's residents
- misleading because they don't consider differences in the cost of living
- adjustment by Purchasing Power Parity (PPP)
Purchasing Power Parity (PPP)
- An adjustment in gross domestic product per capita to reflect differences in the cost of living
- base of the adjustment is the cost of living in the U.S
Broader conception of development
- Amartya Sen
- measured by the capabilities and opportunities the people enjoy
- Human Development Index (HDI): an attempt by the UN to assess the impact of a number of factors on the quality of human life in a country
Human Development Index (HDI
- three measures:
- life expectancy at birth
- educational attainment
- average incomes based on PPP estimates are sufficient to meet the basic needs of life in a country
- scale 0-1
- <.5 = poor
- .5 - .8 = medium
- >.8 = high
- engine to growth
- development of new products, processes, organizations, management practices, and strategies
- require a a market economy
- engine to growth
- Those who first commercialize innovations
- require a market economy
involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate
First mover advantages
advantages accruing to the first to enter a market
Late mover disadvantages
- handicaps experienced by being a late entrant to a market
- they lack the brand loyalty and experience necessary to achieve a significant presence in the market.
Costs of doing business in another country
- country's economy...
- it may be more costly to do business in underdeveloped countries because of the lack of infrastructure and supporting businesses
- legal factors...
- local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution
Risks of doing business
legal risk: the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
balancing the benefits, costs, and risk associated with doing business in the country
Chap 2 Closing Case
- most regulated economies; state controls over business activities gave public officials ample opportunities to enrich themselves by demanding bribes.
- Socialist - taken various enterprises into state ownership and has required that other enterprises into state ownership and has required that other enterprises be restructured as "worker's cooperatives" (foreign oil)
McDonald's in India
Chap 3 Opening Case
- Hindu culture has revered cattle
- Cow represents the Divine Mother that sustains all human beings
- Muslims in India don't eat pork
- Responded to this dilema: Big Mac=Maharaja Mac made from mutton
- All foods segregated into vegetarian and non vegetarian
- Concealing existence of beef in french fries
- Lead to: vandalism, picketed the company's headquarters, asked prime minister to close McDonald stores in the country
- Indian customers: children enjoyed the American experience , food consistent quality, and toilets were always clean
cross cultural literacy
- an understanding of how cultural differences across and within nations can affect the way business is practiced
- guanxi (china)- network of social relationships with others backed by reciprocal obligations
- culture is NOT static
- a system of values and norms that are shared among a group of people and that when taken together constitute a design for living
- values: abstract ideas about what a group believes to be good, right, and desirable.
- norms: the social rules and guidelines that prescribe appropriate behavior in particular situations.
- society: a group of people who share a common set of values and norms
- Routine conventions of everyday life, rituals and symbolic behavior
- Little moral significance, define the way people are expected to behave.
- are norms that seen as central to the functioning of a society and to its social life
- violating mores can bring serious retribution
- Certain mores have been enacted into law
Factors of culture
evolutionary product of, prevailing political and economic philosophies, the social structure of a society and the dominant religion, language, and education.
- the basic social organization
- two dimensions differences between cultures
- 1. the degree to which the basic unit of social organization is the individual, as opposed to the group.
- 2. degree to which a society is stratified into classes or castes
- is an association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other's behavior
- Strong identification with the group is argued to create pressures for mutual self-help and collective actions
while helping to create a dynamic entrepreneurial economy may raise the costs of doing business due to its adverses impact on managerial stability and cooperation.
- The hierarchical categories within a society, defined on the basis of such elements as family background, income, and occupation
- Individuals born into a stratum toward the top of the social hierarchy tend to have better life chances than those born into a stratum toward the bottom
refers to the extent to which individuals can move out of the strata into which they are born
- is a close system of stratification in which social position is determined by the family into which a person is born, and change in the position is usually not possible during an individual's lifetime.
- rural Indian society
- is a less rigid form of social stratification in which social mobility is possible.
- can work their way... can slip down
- Britain, mobility was limited, it could not normally be achieved in one generation. Sometimes not accepted into an income level b/c of their accent and background.
- a condition where people tend to perceive themselves in terms of their class background and this shapes their relationships with members of other classes
- In Britain it has decreased
- China it has increased
- Rigid class system = low cooperation, decrease in production and decrease in competitive nature
A system of shared beliefs and rituals that are concerned with the realm of the sacred
- A set of moral principles, or values, that are used to guide and shape behavior.
- Product of religion
- affects cost of doing business
Christianity - Protestants
- importance of hard work and wealth creation
- individual economic and political freedom (free market)
islam economic implications
- Koran establishes some explicit economic principles, many of which are pro-free enterprise and of earning legitimate profit through trade and commerce.
- Protection of private property (regarded as trustees NOT owners)
- riba: banks cannot pay or charge interest, they must find a different way of making money
Hinduism economic implications
- individuals should be judged not by their material achievements but by their spiritual achievements
- less likely to engage in entrepreneurship activity
Buddhism economic implications
- does not support the caste system
- may represent a more fertile ground for entrepreneurship activity than a hindu culture
Confucianism economic implications
- guanxi- favors are repaid, obligations are met, and relationships are honored.
- superiors are obliged to reward the loyalty of their subordinates by bestowing
- structures the way we perceived the world
- Countries with more than one language often have more than one culture
- Unspoken- culturally bound
- personal space U.S 5 to 8 feet
- determinant of national competitive advantage
- important factor guiding the location choices of international business
- extent to which a society allows inequalities of physical and intellectual capabilities between people to grow into inequalities of power and wealth
- high power distance: let inequalities grow over time into inequalities of power and wealth
- low power distance: play down such inequalities as much as possible
individualism versus collectivism
extent to which a society teaches individuals either to prize personal achievement or to conversely look after the interests of their collective first and foremost.
- extent to which cultures socialize members to accept ambiguous situations and to tolerate uncertainty
- high: place a premium on job security, career patterns, retirement benefits... strong need for rules and regulations.
- Lower: greater readiness to take risks and less emotional resistance to change
masculinity versus feminity
extent to which a society differentiates and emphasizes traditional gender and work roles; a masculine characterization means there is more differentiation, whereas a feminine level means there is less.
captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, reciprocation of gifts and favors.
- Increase urbanization and improvements in the quality and availability of education
- as countries get richer, a shift occurs away from "traditional values" linked to religion, family, and country, and toward "secular rational" values.
- In an increasingly modern and materialistic world, some societies are trying to reemphasize their cultural roots and uniqueness.
a belief in the superiority of one's own ethnic group culture
Culture and Comparative advantage
- the costs of doing business in a country influence the ability of firms to establish comparative advantage in the global marketplace.
- Important for 2 reasons
- 1. connection suggests which countries are likely to produce the most viable competitors
- 2. implications for the choice of countries in which to locate production facilities and do business
Wal-Mart's Foreign Expansion
Closing Case Chap 3
- adjusted its strategy to meet the local conditions in Mexico
- company believed that it could gradually change the shopping culture
- The customization, persistance, and low prices paid off, Mexicans started to change their shopping habits
- Developed countries (fail): going head to head against well established local rivals who had matched their offerings to local habits
- China: must embrace unions, don't bargain for labor contracts, they are an arm of the state, providing funding for the Communist Part securing social order. Food freshly harvested and killed in front of them.
Food Prices Soaring
Opening Case Chap 6
- 2 Explanations
- 1. increased demand and the trade-distorting effects of tariffs barriers and subsidies for biofuels
- subsidies have created an incentive for farmers to plant more crops that can be turned into biofuels (corn and soybeans).
- alternative products that can be turned into biofuels , most notably sugarcane
- Corn is cheaper than sugarcane b/c of barriers to trade
- the removal of subsides and tariffs would promote the production of ethanol from sugarcane and divert valuable land back to the business of growing gains for food, driving down food prices
- refers to a situation in which a government does not attempt to restrict what its citizens can buy from or sell to another country.
- static economic gains (supports a higher level of domestic consumption and more efficient utilization of resources)
- dynamic economic gains (because stimulates economic growth and the creation of wealth)
- a tax levied on imports or exports
- to protect domestic producers from foreign competition and produce revenue for the government
- Specific tariff: levied as a fixed charge for each unit of a good imported
- Ad valorem tariffs: levied as a proportion of the value of the imported good
- March 2002 US government placed a Ad valorem tariff of 8 percent to 30 percent on imports of foreign steel (WTO declared it as a violation)
- Pro-producer and anti-consumer
- Export tariffs: less common than import tariffs
- tariffs on services remain higher than industrial goods
- ultimate aim is to reduce tariffs to zero
- is a government payment to a domestic producer which must be paid back typically by taxing individuals and corporations.
- help domestic producers, tend to protect the inefficient and promote excess production...
- 1. competing against foreign imports
- 2. gaining export markets
- Agriculture tends to be one of the largest beneficiaries
- main gains accrue to domestic producers; international competitiveness is increased as a result.
- can help a firm achieve a first mover advantage in an emerging industry
- a direct restriction on the quantity of some good that may be imported into a country
- Cheese, sugar and textile imports and the US
voluntary export restraint (VER)
- a quota on trade imposed by the exporting country, typically at the request of the importing country's government
- US vs Japan (automobile producers)
- agree to VERs because they fear more damaging punitive tariffs or import quotas might follow
Local content requirement
- requirement that some specific fraction of a good be produced domestically
- developed countries: try to protect local jobs and industry from foreign competition (51% of product is produced domestically to be made in US)
- developing: to shift their manufacturing base from the simple assembly of products whose parts are manufactured elsewhere into the local manufacture
- Higher final prices
Administrative trade policies
- bureaucratic rules designed to make it difficult for imports to enter a country.
- Japanese vs Netherlands Tulip bulbs
- Japanese vs FedEx (check a large proportion of packages and delayed the "express")
- France (VCRs) vs Japan - imported videotape recorders must be checked
- variously defined as selling goods in a foreign market below their costs of production or as selling goods in a foreign market at below their "fair" market value
- method by which firms unload excess production in foreign markets
- designed to punish foreign firms that engage in dumping
- protect domestic producers from unfair foreign competition
- File petition = impose antidumping duty (countervailing duties)
- 1. Commerce Department
- 2. International Trade Commission
Case for Government Intervention (Political)
- protecting the interests of certain groups within a nation (producers), at the expense of other groups (consumers)
- Protecting jobs and industries from unfair foreign competition
- National Security
- Retaliation- use threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to play by the rules
- Protect consumers from unsafe products
- Furthering Foreign Policy Objectives - build strong relations and to pressure or punish rogue states that do not abide by international law or norms
- Protecting Human Rights- US and China (MFN) trade policy should be used as a political weapon to force China to change its internal policies toward human rights
Passed in 1996, this law allows Americans to sue Cuban property confiscated from them during Cuba's 1959 revolution.
Passed in 1996, this law allows Americans to sue foreign firms that use property in Libya or Iran confiscated from Americans.
Case for Government Intervention (Economic)
- Infant industry argument: many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries...government should temporarily support new industries until they have grown strong to meet international competition
- 1. Protection of manufacturing from foreign competition does no good unless the protection help make the industry efficient 2. relies on an assumption that firms are unable to make efficient long term investments by borrowing money from the domestic or international market
- Strategic Trade Policy- 1. by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first mover advantages in an industry are domestic rather than foreign enterprises (subsidies)
- 2. might pay a government to intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first mover advantages
Retaliation and Trade War
- Krugman argues that a strategic trade policy aimed at establishing domestic firms in a
- dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries
- The answer is probably not to engage in retaliatory action but to help establish rules of the game that minimize the use of trade distorting subsidies
- This policy is almost certain to be captured by special interest groups within the economy, who will distort it to their own ends.
- acts as an umbrella to encompass the GATT along with two sister bodies, one on services and the other on intellectual property.
- Seattle: aimed at further reducing barriers to cross boarder trade in investment and the reduction of barriers to cross boarder trade in agricultural products and trade and investment in services EU and US could not agree on eliminating subsidies to agriculture, b/c EU has a politically powerful farm lobbyEnvironmentalist (global deforestation) and human rights (outlawing the ability of nations to stop imports from countries where child labor is used)labor unions (opposed trade laws that allow imports from low wage countries and result of in a loss of jobs in high wage countries)
trade related of intellectual property rights TRIPS
- attempt to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rules.
- encouraged to extend its reach to encompass regulations governing foreign direct investment (global telecommunications and financial services industries)
- pharmaceutical industry, computer software and music
Future of WTO- DOHA Qatar
- increase in antidumping policies, the high level of protectionism in agriculture, the lack of strong protection for intellectual property rights in many nations, and continued high tariff rates on non-agricultural goods and services in many nations
- free trade would raise global economic welfare by $128 billion annually or 182 billion
Closing Case Chap 6
- Largest recipients have been cotton farmers
- result in over production, which depress the world price for cotton
- Benin and Mali: 40 percent reduction in the price of cotton reduces income to cotton growers by 21%, cause est 334,000 people in Benin to fall below poverty line...loss in Benin exceeds the foreign aid
- that US gave
- Brazil complained to the WTO that US should remove subsidies. US did not remove the majority of the subsides. Being investigated by the WTO