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Globalization

- has had periods of stops and starts (ex. stopped during WW2)
- about ideas, not necessarily about trade
- Thomas Friedman (Globalization 1.0, 2.0, 3.0) suggests that imperialism and religion
contributed to globalization 1.0
- globalization 2.0 was driven by multinational corporations and technological
innovation, this period ended w/ the breakdown of the USSR
- globalization 3.0 is right now. individuals, moreso than countries or companies, are
the ones causing it. Caused by software and NOT hardware. Driven mainly by nonWesterners
- accelerated by education, liminited liability forms of business ownership

Political Economy
- political, economic and legal systems of a country are interdependent
- political systems are trending towards individualism and economic systems are
trending towards free-market
Types of Economies:
- market: privatization, supply and demand
- command: goods and their prices controlled by government
- mixed: combination, govt. takes control when necessary. MOST COMMON

Legal Systems:
- common law system: based on tradition, precedent and custom. originated in Britain.
This is the US law system
- civil law system: relies on detailed legal codes, judges have less flexibility
- theocratic law system: law is based on religious teachings (ex. Islamic law)
there are many legal barriers in IB. for example, in France there are restrictions on
using English in marketing
- you’re usually dealing with two sets of laws in IB and one set has more clout
contract law: specifies conditions of an exchange and the obligations of parties
involved. CIGS is a UN convention that many countries have ratified to establish
uniform contract rules
property rights are applicable to any resource that an individual or business owns,
including the income that is derived from that resource
Can be violated through either Private Action or Public Action:
- private action: theft, piracy blackmail, etc. by private individuals or groups (ex. the
Russian mafia charging business owners for ”protection”)

excessive taxation or expensive permits) intellectual property laws: no worldwide patent system but there are worldwide treaties for protecting IP. High corruption reduces FDI and economic growth Foreign Corrupt Practices Act: passed in the 1970’s by the US.corruption across countries is measured by Transparency International.still.useful theory.IMPOSSIBLE to keep a trade surplus in the long run . CAN be done through legal mechanisms (ex.controversial because often times Fair Trade cooperatives make a lot of the money from fees .also controversial because it focuses too much on US corruption and it prevents US companies from being able to “play ball” in foreign markets . but it limits the world to two countries Product Life Cycle Theory: a product is initially made in the area in which it was invented but eventually production shifts to foreign countries and the original country becomes an importer .controversial because it allows “grease payments” and expediting the performance of a govt. action .the definition of a “company” in the FCPA is very broad FAIR TRADE: . Fair Trade is slightly more lucrative than the open market for most growers Trade Theory Types of International Trade Theories: Mercantilism (1500 to 1800): a country will gain wealth when exports exceed imports .neo mercantilists are protectionists Comparative Advantage: it makes sense for a country to specialize in goods that it produces most efficiently and to buy goods that it produces less efficiently . Computer printers . Makes it illegal for US businessmen to bribe foreign officials to win lucrative contracts .increased exports and wealth eventually lead to growth and inflation. Imports keep inflation lower . resources or property itself from property holders. piracy) . Often the laws are weakly enforced (ex.public action: when public officials extort income..goal is to maximize profit at all points in the cycle .ex.

ex.New Trade Theory: emerged in the 1970’s. $3 per box) . labor). Says that through economies of scale (unit cost reductions through a large scale output) trade can increase the variety of goods available to consumers. buying local . must give preference to American products when putting contracts out unless foreign products have a significant price advantage (Buy America Act) Administrative Policies: bureaucratic rules making it difficult for imports to enter a country . (+) good for producers (protects them from foreign competitors) .specific tariffs are levied as a fixed charge for each unit of a good (ex.agriculture is usually one of the largest beneficiaries of subsidies import quotas: a direct restriction on the quantity of a god that can be imported into a country . More industry focused than previous trade theories National Competitiveness Advantage: industry is a function of factor endowments (position in infrastructure.helps domestic producers to compete with foreign imports and gain new export markets . demand conditions (home demand for the industry).ad valorem tariffs are levied as a proportion of the value of the imported good subsidies: a government payment to a domestic producer. a % of component parts or a % of the value of the good ex. . and firm strategy Apple Article ex.(+) good for government because it generates revenue $. can be direct or indirect .hurts consumers (raises prices of imported goods) and helps producers (limits competition) local content requirements: a requirement that a specific fraction of a good be produced domestically . Apple moved to China because of faster supply chain and scaling up and down in factories Trade Policies The Seven Instruments of Trade Policy: tariffs: oldest form of protection . low-interest loans (indirect).(-) bad for consumers .lead to inefficiency . etc. relating and supporting industries (presence or absence of competitors). Firms who were first-movers can dominate world trade in certain products. tax breaks.US Govt.has many forms: cash grant (direct).

includes the current account and the financial account . gifts given.dumping is often used to unload excess production .positive (+) transactions on current account result from receipt of payment from foreigners (exports. usually a year .potentially profitable . etc.negative (-) transactions on current account result from making payments to foreigners (imports.circumvents potential future trade barriers and transportation costs . gifts received.) .ex. Licensing restrictions – Limit on foreign artists on Quebec radio Antidumping Policies: protects against foreign goods that are sold below “fair market value” or production costs . there are always statistical discrepancies Foreign Direct Investment (FDI): when a firm invests directly in facilities to produce or market a product in a foreign country . forward if the firm’s outputs are sold abroad) Pros of FDI: .protects domestic producers from unfair foreign competition BOP and FDI Balance of Payments (BOP) accounts for a company’s international transactions for a period of time. though. R&D or raw materials .if there is no managerial involvement. it’s considered a portfolio investment FDI takes on two forms: 1) a greenfield investment: the establishment of a new operation in a foreign country 2) acquiring or merging with an existing firm (can be a minority stake as long as it’s more than 10% ownership) can be horizontal (FDI is in the same industry as the firm’s home operation) or vertical (backward if the firm is providing production inputs. etc.current account surplus occurs when a country exports more than it imports . income paid on investments.) .involves at least 10% ownership in: production. aid received. In practice.each current account entry is offset by a financial account entry .current account deficit occurs when a country imports more than it exports the sum of the current account balance and the financial account should ALWAYS BE ZERO. Customs formalities – “protection of culture” by Mexican customs officials when opening packages ex. income received. marketing.

USD and EUR are primary hard (or liquid) currencies law of one price – in competitive markets free of trade barriers. 1 USD = . 3) economic (future) – the extent to which a firm’s future international earning power (or costs) are affected by changes in exchange rates GBP.6 euro. but it can be found by comparing a bundle of different items ex. $100=60 euros for a pair of jeans purchasing power parity: it’s hard to determine PPP by comparing identical items.risky and expensive in comparison to licensing or exporting free-market view is that FDI should be encouraged because it increases world economic efficiency radical view says that inbound FDI is harmful because its an exploitative. open) – the extent to which income from individual transactions is affected by fluctuations in foreign exchange. it shows trends in how currencies move against one and other trading at a premium – when a currency’s forward rate is stronger than the spot (in comparison to the other currency) trading at a discount – weaker than the spot . JPY. imperialist tool used by home countries Currencies and Exchange Rates Three types of foreign exchange risk: 1) translation (past) – the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values 2) transaction (current. identical products sold in different countries must be sold for the same price (ex. you are buying something and there’s a currency difference between the time it takes you to place the order and pay.Cons: . the Big Mac index tells us that prices are not always uniform across nations. .ex. This can vary due to many factors including cost of labor.