INTERNATIONAL BUSINESS LECTURE NOTES 1 Introduction to International Business Definition: “Business which crosses international borders”. (Czinkota et al) Types and sectors of international business L International trade 2. Foreign manufacturing 3. Transport 4. Tourism 5. Banking, Insurance and Financial Services 6. Advertising and Marketing 7. Construction 8. Retailing and Wholesaling 9. Mass Media and Communication 10 International Human Resource Management Economy is now a GLOBAL ECONOMY with the INTERNATIONALIZATION OF MARKETS - products produced by companies; GLOBAL BRANDING and GLOBALIZATION”. International business is dominated by very large companies which operate across international borders. Companies operate in THREE ENVIRONMENTS: DOMESTIC, FOREIGN and INTERNATIONAL. Types of international company: Multinational company (MNC) “An organis: strategy based on perceived market differences”. (eg. Tesco H ion with multi-country affiliates, each of which forms its own business gary) 2. Global company (GC) “An organisation which attempts to standardise operations, (ie. Manufacturing, marketing, distribution) in all functional areas but that responds to national market differences where necessary”. (eg. McDonalds). story of International Business Ancient times; Greeks, Romans, Phoenicians, trading companies, eg. East India Company 1600, Dutch East India Company 1590, British companies, eg. Raffles, Singapore 1830's, swing Machines established in Scotland 1868, By 1914 thirty seven US companies had facilities in two or more countries. In the 1920's all cars soldin Japan were made in the USA. A global firm searches the world for a, Market opportunities b. Threats from competitors c. Sources of products, raw materials and Finance d. Human ResourcesINTE) L LE 2._Trade Theory Mercantalism Dominated European trade and world trade between European states - notably Britain, France, Spain, Portugal and Holland - from the 15 to the late 18 century Involved with concepts of state power and security, its central feature was the idea of a favourable balance of trade which would result in an influx of coin or treasure. These ideas led to legislation designed to reduce imports and inerease national self sufficiency as expressed in the Navigation Acts Colonies eg North and South America, were exploited as sources of raw material for manufactured goods, primarily in the interests of the mother country, Mercantalism led to early colonial rivalry between the European powers, eg, between Britain and France in north America and India. Doctrine ‘was challenged by Smith in 1776: Smith held that labour not trade was the real source of wealth. Absolute advantage Set out Adam Smith in “The Wealth of Nations” 1776. For Smith the value of labour - not trade - was the true source of wealth, the latter depending not on “piling up treasure” but on the competitiveness and openness of an economy. Specialisation and the division of labour would result, Smith contended, in absolute advantage, ie. a nation would use its natural advantages to produce goods more profitably than another country. Thus “a country has an absolute advantage in the production of a good if an equal quantity of resources can produce more of the good than another country. This does not mean it necessarily has a comparative advantage. Although it might be able to make more X’s than another country it might also involve a greater sacrifice of other goods such as Y”. For Smith, therefore, Britain should “sacrifice” agricultural goods for manufactured goods. The whole system depended on the maintenance of free trade where there are no barriers to importing or exporting, ie. no protectionism, so trade occurs unhindered. Government should, therefore, promote the free market “the hidden hand” at home and free trade abroad. Comparative advantage Smith’s ideas were developed further by David Ricardo 1828 using originally the example of the trade in cloth and wine between Britain and Portugal. Ricardo introduced the concept of “opportunity cost”, the cost of making one good rather than another. Trade is based on the principle of comparative advantage, which is in turn based on the concept of opportunity cost. If a country can produce good X with a lower opportunity cost than another country, it has a comparative advantage in the production of X. This means it sacrifices less of other goods to make one unit of X. By comparison, if its opportunity cost of producing good Y is higher than another country, it has a comparative disadvantage, ‘Thus by Ricardo’s example Britain had a comparative advantage over Portugal in the production of cloth and wine. So, even if one country could produce two products efficiently, it should specialise in the production and export of one good in exchange for the importation of the other: “opportunity cost”‘The Theory of Factor Production Part of “modem” as opposed to classical trade theory put forward by Swedish economists Heckescher and Ohlin contends that a country’s production and trade specialization will reflect its particular factor endowments, ie, Natural resources, labour and capital. lapping Pi Range Theot Linder introduces produet range theory, based not on supply but on demand, Trade in natural resources determined by relative costs of production and factor endowments- land, labour, capital, natural resources and energy- but trade in manufactured goods determined by demand Product Life Theory ~ Introduces technology into the equation. erfect Mar! Monopolistic competition: model developed by Robinson in the UK and Chamberlin in the USA(1933) to explain the situation where neither the perfectly competitive model nor the pure monopoly model applied. Monopolistic competition is characterised by a. A significant number of firms in a highly competitive market due to the freedom of entry into the industry. b. Differentiated products c. The existence of advertising This may lead to internal economies of scale and trading advantage at the micro level, resulting in national trading advantage at a global level. ‘The Competitive Advantage of Nations The focus of early trade theory was on the country or nation and its inherent, natural, or endowment characteristics that might give rise to increasing competitiveness. As trade theory evolved, it shifted its focus to the industry and product level, leaving the national-level competitiveness question somewhat behind. Recently many have turned their attention to the question of how countries, governments, and even private industry can alter the conditions within a country to aid the competitiveness of its firms. The leader in this area of research has been Michael Porter of Harvard As he states “National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labour pool, its interest rates, or its currency’s values, as classical economics insists “A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. ‘They benefit from having strong domestic rivals, aggressive home based suppliers and demanding local customers”. “Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions and histories all contribute to competitive success; no nation can or will be competitive in every or even most industries...” Porter argued that innovation is what drives and sustains competitiveness. A firm must avail itself of all dimensions of competition, which he categorized into four major components of “ the diamond of national advantage”1. Factor conditions: The appropriateness of the nation’s factors of production to compete successflly in a specific industry. However, although these factor conditions are very important in the determination of trade, they are not the only source of competitiveness as suggested by the classical, or factor proportions, theories of trade. Most importantly for Porter, itis the ability of a nation to continually create, upgrade, and deploy its factors (such as skilled labour) that is important, not the initial endowment. 2, Demand conditions: The degree of health and competition the firm must face in its original home ‘market. Firms that can survive and flourish in highly competitive and demanding local markets are ‘much more likely to gain the competitive edge. Porter notes that it is the character of the market, not its size, that is paramount in promoting the continual competitiveness of the firm. And Porter translates character as demanding customers. 3. Related and Supporting Industries: The competitiveness of all related industries and suppliers to the firm. A firm that is operating within a mass of related firms and industries gains and maintains advantages through close working relationships, proximity to suppliers and timeliness of product and information flows. The constant and close interaction is successful if it occurs not only in terms of physical proximity but also through the willingness of firms to work at it. 4. Firm Strategy, Structure and Rivalry: The conditions in the home nation that either hinder or aid in the firm’s creation and sustaining of international competitiveness. Porter notes that no one managerial, ownership or operational strategy is universally appropriate. It depends on the fit and flexibility of what works for that industry in that country at that time.INTEL INESS 3.The Legal, Political and Cultural Context of International Bi Managers must be aware of the legal, political and cultural context in which international business is carried out, since it will affect the success of business dealings International Law a Public international law - includes those rules of law which govern the relations of states inter ‘se (among themselves), particularly rules of war. Certain writers hold that there is no world authority with power to enforce the rules or laws and that, as public international law is incompatible with national sovereignty, the essential characteristics of law are absent b. Private international law - (sometimes called Conflict of Laws) refers to that law which is applied in determining, for example, what system of State law should be applied in English courts in cases containing a ‘foreign’ element Thus Jenkins, a British citizen, makes a contract in Rome with Boussac, a Frenchman, for the supply of footballs to a team in Madrid. If Jenkins now takes action against Boussac in an English court of law for alleged breach of contract, the court will have to determine which law is to be applied: English, Italian, French or Spanish. The rules of private international law will have to be consulted. Examples of public international law include bi-lateral treaties and other agreements between states as well as multi-lateral agreements establishing military, political and economic organisations and international bodies. eg, The Geneva and Warsaw Conventions, the United Nations and its Agencies, NATO, the European Union and its Treaties, ‘The Law of the Sea’, the WTO and international patent co-operation. Included is the setting up of international courts and tribunals such as the European Court of Human Rights and War Crimes Tribunals etc. Governments use legislation which can support or hinder business. For example, export sanctions or embargoes to further policy objectives, eg before WW11 against Italy and sanctions against Rhodesia 1960's, Libya 1980's, Serbia and Iraq 1990's, These measures are of limited effect. Governments also use export controls to protect national security. Certain states are placed on a “black list” ie. the US government refused to allow US companies to sell certain technology to the USSR and China and continues a trade embargo against Cuba. There have also been attempts to enforce laws against bribery, corruption and measures against terrorism, However, how far is public international law enforceable? States are sovereign and are still the main actors in the international system. Problems of (a) jurisdiction: different legal systems, cultural and political factors. (b) Enforcement and arbitration of disputes: states cannot be forced to sign or adhere to intemational agreements if they choose not to do so, eg. The Nuclear Test Ban Treaty, The Kyoto Agreement, the International Whaling Agreement, etc. In addition, states may be unable to enforce laws or agreements, even if they wish to do so; governments may be weak, unstable, or lack the necessary resources. Political, economic or cultural factors may prevent enforcement.Companies face political risk, ie. nationalisation of their assets, “domestication”: Sudan 1958, (cotton), Uganda 1971, (appropriation of Asian businesses by Idi Amin). Companies may also fall foul of their own or other governments and face prosecution for their actions, eg. Matrix Churchill, a UK company sold military equipment to Iraq, 1991, in spite of sanctions imposed by the British government at the time. Companies may need insurance or have to take legal action, which is expensive and time consuming, Thus arbitration in commercial matters is a cheaper alternative (International Court, of Arbitration 1923) but still requires international agreement to have any meaning, eg. Incoterms used in international trade and accepted world wide.3.The Cultural Context of International Business Understanding the cultural aspects of international business is of crucial importance and is a challenge Broadly speaking, Culture can be defined as ; ‘A system of learned behaviour within which the individual lives and works’ Nevertheless, culture has to be ‘lived’ it cannot be ‘learned. National cultures can be seen as group’, eg, China, Japan, India, and Korea or ‘individualistic’, eg. The USA, the UK, and most of continental Europe . Culture is influenced by cultural, historical and political experience. Elements of Culture: 1. Language; verbal and non-verbal. 2.Religion. 3.Values, Manners and Customs. 4.Material Elements: eg. Economic infrastructure, health and education systems. S.Aesthetics: eg. Sex in adverting, use of colours. 6.Educational Level. 7.Social institutions: Family, Trade Unions, Colleagues etc. How to deal with cultural diversity? Two schools of thought : 1.Globalization is a fact of life-”Business is business, around the world” Eg. The Pepsi approach. However, cultural differences remain and are far from converging; eg. The Islamic boycott of Coke over Iraq war. 2.Companies must tailor business to different cultures. ‘The answer probably lies somewhere between the two approaches: have patience, know your competitor and know your customer.INTERNATIONAL BUSINESS. LECTURE NOTES 4, nal Financial Markets a, Serve as links between each individual country and as independent markets outside the jurisdiction of any one country. World-wide financial markets are an important part of the phenomenon of globalization, This raises questions of national sovereignty and control. b. Trading in currencies is at the heart of the international financial market. International trade and investment is often denominated in foreign currency, so the purchase of currency often precedes the purchase of goods, services or assets. However, the cost of the above depends in part on the value, or ‘cost’ of one currency or another. If the value of sterling is ‘too high’, British exports become expensive, Therefore, foreign currency exchange rates - the price of one currency in terms of another - are crucial to international trade Market Structure, Size and Composition ‘A. world-wide market, informal in structure, with no single ‘trading floor’. The market is made up of thousands of telecommunication links between financial institutions around the globe, open 24 hours a day. The speed and volume of transactions may lead to problems of security and control. eg. Barings Bank, Singapore, Nick Leeson, Financial Future. Barings collapsed, bought for one pound. Leeson convicted of fraud and sent to prison Astronomical growth of financial markets in the last thirty years, eg. April 1998 daily trading on the world financial markets exceeded $1,500,000,000,000,000 (a trillion dollars). Compare this with the annual US budget deficit - never more than 300 billion - and US trade deficit never more than 200 billion. The market is centred in London, Frankfurt, New York and Tokyo Reasons for the growth in financial markets 1. The deregulation of international capital flows, 2. Increased use of technology and improved transaction cost efficiency, 3. Swings in share values and interest rates International trade depends on the ability to exchange currencies. This applies to both firms and states. Linked to the value of a currency and purchasing power parity = the price of the same product in two different countriesMonetary Systems of the Twentieth Century. ‘The Gold Standard 1880-1914 A system of fixed exchange rates between participating countries in which money issued by member countries had to be backed by reserves of gold. Gold would act as an automatic adjustment if imbalances in trade or investment did occur. 1919-1939 During the Depression world trade collapsed. States followed isolationist policies and protectionism in trade, Britain came off the Gold Standard in 1931 and the United States followed in 1933. The Bretton Woods Agreement 1944 The Bretton Woods Agreement recognized the politcal and economic realities of the post-war world; the old Gold Standard system had failed and could not ensure economic and political stability and furthermore, the United States had become the dominant political and economic power. The Agreement set up; a. A system of fixed exchange rates based on the value of the dollar. b. The International Monetary Fund (IMF), to provide loans to member states of the Fund. ¢. The World Bank to provide credit for development projects. ‘The system depended on the strength of the dollar and the stability of the US economy. Exchange Rate Crisis 1971-1973 ‘The rising cost of the Vietnam War led to a huge budget deficit in the USA and an end to the Bretton Woods system. The introduction of floating exchange rates marked the end of US and British dominance of world currency markets Floating Exchange Rates 1973 to Present Since 1973 the world’s major currencies have floated in value against each other. A floating exchange rate is a harsh reality for countries. To control the value of their currency countries have to buy or sell their currency in the market using currency reserves The success of such direct intervention depends on the amount of currency reserves and can lead to great difficulties for governments, eg. After a sustained ‘run on the pound’ in the 1970's the UK was forced to go ‘cap in hand’ to the IMF for a large loan. However, governments must often choose between an ‘international policy’, raising interest rates to attract investment thus strengthening the currency-the UK ‘strong pound- and a ‘domestic policy’, lowering interest rates to stimulate domestic activity. These problems and the strength of the US dollar since 1985 have led to attempts at ‘co-ordinated intervention’ by groups of countries eg. Go and G7. This approach has met with limited success because the domestic policies of states and international events conflict.‘The European Monetary System (EMS) ‘The EMS developed from 1971 when the United States suspended dollar convertibility to gold. Some European countries within the EEC hoped to maintain the fixed parities of their currencies independent of the US dollar. (A French idea!) Introduced a “currency snake” where each currency would have a variable value (2.25%) and a group value (4.5%) against the US dollar. The OPEC oil price shock in 1974 meant that the system could not be maintained and a more comprehensive solution was required. In 1979 the European Exchange Rate Mechanism (ERM) established fixed exchange rates among ‘member countries but within a band limit plus 2.25%, This system of bilateral exchange rates allowed some currencies more variance because of their volatility, eg, the Italian lira was allowed to move within a band of 10%. The UK had to leave the ERM in 1992 when speculation on the pound put intense pressure on the government and worsened the UK’s recession ‘The EMS also introduced the European Currency Unit - or ECU - which was not “real” currency but a.unit of account, The need for fixed exchange rates within the EU is clear but the end result depends cn the performance of individual countries. ‘The Maastricht Treaty of 1991 looked ahead to currency union in 1997. The aim was to coordinate economic and monetary policy. Economic and Monetary Union (EMU) 1989 Stage 1 - Free movement of capital, strengthening competition and increasing policy coordination Stage 2 - Transition period - states were urged towards greater monetary convergence by avoiding excessive budget deficits, keeping inflation rates and interest rates in line with each other and maintaining stable exchange rates, Stage 3 - Introduction of a single currency, the “euro” in January 1999, Consisted of eleven countries which formed “the euro area”. The European Central Bank operates the monetary policy which includes determining exchange rate policy, managing exchange reserves, controlling the money supply and taking decisions on interest rates. The new notes and coins were introduced on Ist January 2002. Reasons for the Euro a. The growth of global markets. b. The increasing competitiveness of the USA and Asia. ¢. There is also a political imperative; the EU as “an alternative” to the United States. The European project goes back to 1957, “The Founding Fathers”, Monet, Gaspari and Schumann saw a federal Europe as the only hope. On the other hand there is a political need for enlargement, Can we “widen” and “deepen” at the same time? Fiscal and Monetary Policy ‘The European Central Bank (ECB) determines policy and has a single focus but tension remains between France and Germany. Is the euro the deutschmark “writ large”? In addition, not all countries are members of the euro zone. The UK has the largest economy in the EU and the fourth largest economy in the world but has still not adopted the euro. Can stability be achieved under these conditions. 7INTERNATIONAL BUSINESS LECTURE NOTES ‘The Meaning and Legal Effect of Intellectual Property. Knowledge and information are fast replacing material production as the engines of economic growth. Intellectual Property (IP) has a key role to play in converting, knowledge into earnings, so it is a prerequisite for creating wealth and improving the lives of people throughout the world. Economic trends show that a nation’s ability to generate wealth and protect its cultural heritage depends on its access to and use of the intellectual property system, Definition of Intellectual Property: Ownership rights to intangible assets, such as patents, trademarks, copyrights and “know how” is “owned” and can be protected. Intellectual property rights (IPR) are used as “an instrument of public policy” 4,___ Patent “A right granted by a sovereign power or state for the protection of an invention or discovery, against infringement”. Invention not only gives the firm a competitive edge over its rivals but can also lead to extra revenue from licence fees. An invention can be protected from unofficial use by the granting of a patent. This is a legal recognition of the firm's exclusive right to a product or process for anything up to 20 years. The benefits to a firm of receiving a patent include: © Legal protection from unofficial copies. © Exclusive access to the market for a period of time. © The encouragement of investment in research and development. + The opportunity to command a premium price and higher profits in order to recover research costs and to fund further investigative work. ‘© The opportunity to earn royalties from licensing the use of the invention to other businesses, Trademark: “A name or logo distinguishing a company, product or brand, A legal protection to stop others using a logo or symbol.” In the UK protection of a trademark is obtained by registering the trademark at the Patent Office. It is important to register a trademark because: ‘© A great deal of advertising expenditure is devoted to establishing the product or company name in the minds of consumers © Customers also benefit in that they are presented with greater variety, more choice, lower prices and better value for money. © A registered trademark does not prevent other firms from copying the product but it does stop them from using the name of the product. Often the name becomes animportant marketing advantage in large-scale production but this may not be a useful form of protection for the small-scale producer. 3. Copyriagl “The exclusive right to use or authorise others to use literary, dramatic, musical or artistic works, sound recordings, films or radio and television broadcasts.” Intellectual Property Rights (IPR): are a legally enforceable but limited monopoly to “creative ideas, expertise and intangible insights” which give an individual, company or country a competitive advantage over others. IPR allow the commercialisation of the product, the recouping of investment and offer potential profits. Without the protection of IPR companies would have no incentive to invest or develop new products to meet consumer needs, thus it is argued, IPR has both commercial and social benefit. However, critics contend that the cost, both financial and social of protecting IP is high; for example, the cost of providing drugs in South ‘Africa to combat Aids, Pressure on both governments and pharmaceutical companies in the developed world has led to a slackening of global patent laws; developing nations are being granted the freedom to either manufacture or import generic anti- retroviral drugs to combat HIV/AIDS. Industrial countries offer strong protection to IP. Historically, ideas and inventions have come from the industrialised countries, which have the skills, infrastructure and financial resources. Most developing countries do not produce intangible assets and have little to gain from protecting IPR. In addition, weak protection in the developing world allows low price copies to be made, without payment, to companies which own the IPR. However: © The above situation may be changing as the international business environment is transformed. ‘* The rapid growth of certain “emerging economies” in recent years - India IT and pharmaceuticals, China manufactured goods - means that knowledge, skills and expertise are transferring from “west to east” © The question of research and production costs is paramount, Emerging economies are becoming more efficient producers of goods and, in addition, “intellectual property” will increasingly originate within those economics, International Agreements Covering Intellectual Pros 1883- Paris Convention on Patents Patent Co-operation Treaty European Patent Convention Universal Copyright Convention The World Intellectual Property Organisation. (WIPO). Its aim is to ensure that all countries are able to capitalise on the opportunities presented by the knowledge - economy and to tap into the limitless creative resources of their people in order togenerate sustainable social and economic development. WIPO is committed to empowering member states to develop, enforce, manage and commercially exploit IP. Efficient enforcement of IPR particularly against counterfeiting and digital piracy, requires international co-operation. The WIPO fosters such co-operation. Counterfeiting now costs 500 billion dollars a year or 9% of the value of all world trade, The advent of digital technologies and the explosive growth of internet use have generated a host of challenges for IP policy- makers. The global, anonymous character of the intemet and its technical sophistication have underlined the inadequacy of conventional approaches in protecting the rights of IP owners in cyberspace. The WIPO Digital Agenda 2001 aims to address these issues. The WIPO also launched its Patent Agenda in 2001 in order to help create a more modern, flexible and affordable international patent system. The WIPO is also working to enhance its global protection systems (GPS) for patents, trademarks and industrial designs. Securing protection of IP rights where registration is required as a formality can be lengthy, complex and costly. In addition, under existing international agreements-the Trademark Registration Treaty- trademarks must be used within three years of registration internationally. The WIPO is trying to make the GPS a more user-friendly, cost-effective and attractive option, particularly for developing and least developed countries, by simplifying and improving procedures and reducing costs. In the area of IPR technology has overtaken legislation. The development of international IP law is a crucial element in creating a flexible and responsive intemational system; implementing and enforcing it are major undertakings for countries. The WIPO’s Arbitration and Mediation Centre Service acts as a global forum for resolving disputes relating to domain names, Since its inception in 1999 the centre has dealt with over 20,000 domain-name-related cases. These services offer a cost-effective and rapid way of resolving disputes about the abusive registration of trademarks as domain names. The protection of intellectual property and the enforcement of intellectual property rights are at the heart of the changing global economy. The rise of the knowledge- based economy has put a premium on knowledge and information of all types. Consumers, companies and countries all have, from differing perspectives, an interest in IP issues. Consumers are protected from unsatisfactory or dangerous products, e.g. unsafe medicines, by the proper enforcement of IPR. For companies, if quality brands are routinely undersold by their faked counterparts, there is little incentive to innovate or nurture brand recognition. States also have every interest in workable and more equitable international rules governing intellectual property. As the balance of the world economy shifts from west to east and economic integration continues apace, both domestic and international law need to adjust. The World Trade Organisation (WTO) has the power to protect IP and ‘can impose trade sanctions on countries which fail to enforce IPR.Intellectual Property and International Trade, The importance of intellectual property to international trade was recognised as a result of the Uruguay Round of trade talks between 1986 and 1994. The Uruguay Round provided for the replacement of the GATT as an organisation by the WTO. Essentially, the WTO now presides over a framework of agreements for the continuing liberalisation of the international trading environment. The GATT itself continues as an agreement alongside the newer parts of the liberalisation agenda such as The General Agreement on Trade in Services(GATS). The emergence of GATS reflects the increasing importance of service trade in the world economy. This now accounts for about one fifth of total trade, The IMF estimates that, during the 1990s, service trade grew at an average rate of 7 percent per year, slightly faster than merchandise trade (trade in goods). The agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is intended to provide international safeguards for copyrights, patents and trademarks. The agreements above reflect the important changes which have taken place in the nature of international trade.