Week 1:

➔ International Business: A business whose activities are carried out across national
borders
➔ Foreign Business: The operations of a company outside its home or domestic market
➔ Multidomestic Company: An organization with affiliates in many countries. Each
formulates its own business strategy. Strategy based on perceived differences in
markets.
➔ Global Company: Attempts to standardize and integrate operations worldwide in most or
all functional areas
➔ International Company: Denotes a global or multidomestic company.
➔ History: Early traders; Early BC Mesopotamian, Phoenician and Greek merchants; China
stimulated the emergence of an internationally integrated trading system
➔ Globalization:
◆ The world economic globalization process:
● Theodore Levitt’s (1983) view--now seen as simplistic: Tech advances
altered communication, transportation, travel to create a global consumer
who prefers standardized products. The entire world [or major regions of
it] is now a single entity; an organization can sell the same things in the
same way everywhere
● Today’s view: International integration of goods, technology, information,
labor, and capital; The process of making this integration happen
◆ Globalization outcome: Globality
● Globality: describes economic globalization’s unavoidable outcome;
Nothing that happens on our planet is only a limited local event; All
inventions, victories, and catastrophes affect the whole world.
◆ Globalization is a result of
● Political forces that reduce barriers to trade and foreign investment by
governments and induce privatization of industries of former communist
nations.
● Technological forces that lead to advances in computers and
communications technology and allow low cost network computing and
existence of Internet collaboration across borders
● Market forces lead to globalizing companies’ need for their suppliers to
globalize too and allow easier revenue seeking activity abroad due to
home market saturation
● Cost forces demand economies of scale -- product line and
manufacturing -- to reduce unit costs and lower cost production factor
seeking efforts in other countries
● Competitive forces more intense due to explosive growth internationally of
small and new businesses
◆ Concerns with globalization: Produces uneven results across nations and people;
Has deleterious effects on labor and labor standards; Contributes to the decline
of environmental and health conditions.
➔ International Business (IB): any business transaction across national borders: Trade in
goods; Cross-border services: consulting, advertising, legal, financial, accounting;
tourism, banking, communications/media, construction management, etc.
◆ Company activity inputs may involve IB activity even if outputs do notFirm’s
revenues may come entirely from the home country; Key raw materials,
knowledge, processes may come partially or entirely from other countries
◆ A company can become internationalized when :
● its top managers come from different countries;
● it operates abroad through subsidiaries, joint ventures, or strategic
alliances; it generates revenues, owns assets, or employs people in many
countries;
● it raises capital in financial markets abroad; it has major shareholders
from many countries.
◆ A company is involved in international business by
● working with others who are abroad
● Managers of its own subsidiaries; Customers, suppliers, agents
● Overseas service providers: bankers, advertising executives, lawyers,
auditors, government officials, transportation managers
● Service providers from home country who work with with the company’s
overseas operations; traveling overseas for company business
◆ The rapid growth of international business is a result of
● dramatic increases of foreign direct investment (FDI) and exports
● FDI: A firm invests in equipment, structures, and organizations in another
country while retaining significant management control
● Exports: Sale and transfer of any good or service from the firm’s home
country to another country
◆ Free trade
● enhances socioeconomic development
● promotes more and better jobs
➔ Two sets of forces in the IB environment influence the development and operations of a
firm
◆ External Forces (Uncontrollable): Those that management cannot control
◆ Internal Forces (Controllable): Those that management can develop and use to
formulate and execute the firm’s strategy given particular external forces
➔ External Forces That Affect IB Due To Cross-Border Differences
◆ Competitive : Competitor kinds, number, locations, activities
◆ Distributive: National and international agencies that distribute goods and
services
◆ Economic: Factors such as GNP, unit labor cost, and personal consumption
expenditures that matter to business and vary among countries
◆ Socioeconomic: Characteristics and distribution of human population
◆ Financial: Interest rates, inflation rates, and taxation
◆ Legal: Foreign, domestic, and international laws governing a firm’s IB operations
 ◆ Physical: Natural elements: natural resources (i.e., factors of production),
topography, climate
◆ Political: Government forms, international organizations
◆ Sociocultural: National culture similarities or differences that affect international
managers
◆ Labor: Composition, skills, attitudes of labor
◆ Technological: Technical skills and equipment that affect how resources are
converted to products
➔ Internal Forces That Managers Can Influence Across Borders
◆ Factors of production: Capital, raw materials, people
◆ Activities of the organization” Personnel management, finance, production,
marketing
➔ Why is IB different?
◆ In IB a firm operates in multiple environments
◆ Domestic environment - uncontrollable forces: Has forces that surround and
influence the firm’s behavior in the home country. These remain mostly the same
regardless of where in the country the firm operates
◆ Foreign environment country-by-country uncontrollable forces influence the firm’s
behavior and are different from those of the domestic environment based on
values that differ; difficult to assess for the firm’s home managers ; interrelated
◆ The international environment is characterized by interaction: between domestic
and foreign country environmental forces and among foreign country
environmental forces
◆ Hence, decision making is more complex due to environment force differences
and interactions; culture differences that are difficult to learn; the tendency of
manager’s to rely on their own culture’s reference points
Week 2: International Trade and Foreign Direct Investment
➔ Large Firms Lead Overseas Investment, They Also Export
◆ FDI from Large American international firms is at its highest level ever because
of global competition; liberalization by host governments in regard to and foreign
investment; advances in technology
➔ Why do Managers Focus on Major Trading Partner Countries?
◆ Export and import regulations are not insurmountable
◆ Favorable business climate in the importing nation
◆ Minimal cultural objections to buying that nation’s goods
◆ Satisfactory transportation facilities already established
◆ Import channel members (merchants, banks, customs brokers) are experienced
in handling the exporting country’s shipments
◆ Foreign exchange is available to pay for exports
◆ The trading partner’s government may be applying pressure on importers to buy
from the country’s good customer nation
➔ Major trading flows are among developed nations: Since 1990, trade flows among
developed nations and emerging nations (BRICs - Brazil, Russia, India, China) have
become important
 ➔ Two aspects of foreign investments
◆ Portfolio investment: The purchase of stocks and bonds of firms in other
countries to obtain a return on the funds invested
◆ Foreign Direct investment (FDI): The purchase of sufficient equity in a firm
located in another country to obtain significant management control.
➔ Two dimensions of foreign direct investment:
◆ Volume of Outstanding Stock of FDI: The book value of all foreign direct
investment
◆ Annual Inflows and Outflows of FDI: The amount invested each year across
national borders
➔ Foreign Investment:
◆ Level and Direction of FDI: Amounts of such investments and of the places in
which they are being made
◆ Trade Leads to FDI: Foreign trade is typically less costly and less risky than
making a direct investment into foreign markets
➔ Why Do Firms Enter Foreign Markets?
◆ Firms enter foreign markets to increase sales and profits
◆ New sales from new customer base ; better managerial control through improved
communications technologies
◆ Obtain greater profits increased revenues; lower cost of goods sold (maybe)
◆ protect their domestic market; attack in competitor’s home market and force
competitor to dedicate resources there
◆ guarantee supply of raw materials; acquire technology and management know-
how; diversify geographically
◆ follow customers overseas; satisfy management’s desire for expansion to a
particular country or region; bypass protectionist regulations
➔ Management globalizes a firm through : products, markets, promotion, where value is
added to the product, competitive strategy, use of non-home-country personnel, extent
of global ownership in the firm

Week 3: Theories of international trade and investment

➔ Currency Exchange Rates Influence The Direction of Trade
◆ Goods are valued in the currency of the country in which they are produced.
◆ An importer in another country must use the prevailing exchange rates to price
the product about to be imported
◆ The relative purchasing power of currencies is not always reflected in official
exchange rates
◆ Government policy can give an advantage to one currency over another to
induce export
➔ Some Newer Explanations For The Direction Of Trade
◆ 1. International Product Life Cycle (IPLC):
● Most new products initially conceived and produced in the U.S. in 20th
century. U.S. firms kept production close to the market
 ● Aids decisions and minimizes risk of new product introductions. Demand
not based on price yet so low production cost not an issue
● Limited initial demand in other advanced countries . Initially, exports to
these markets more attractive than production
● With demand increase in advanced countries: Production follows there
from the U.S..
● With demand expansion elsewhere: Product becomes standardized,
Production moves to low production cost areas, Product now imported to
U.S. and to advanced countries.
◆ 2. Linder Theory of Overlapping Demand
● Customers’ tastes are strongly affected by income levels
● income per capita determines the kinds of goods in demand
◆ 3. Technology Life Cycle
● Production technology application of the IPLC. Distinguishes between
new products and new technologies used in the production of products
● Technology follows the IPLC pattern
◆ 4. Economies of Scale and Learning Curve
● Economies of scale: as a plant gets larger, output increases, per unit
production cost decreases . Learning curve: as firms produce more
products, they learn ways to improve production efficiency further
reducing costs
● A nation’s industries are now low cost producers and exporters
◆ 5. First-Mover Theory
● Pattern of trade in goods subject to scale economies is determined by
historical factors that induce first movers
◆ 6. National Competitive Advantage
● National Competitiveness: a nation’s relative bility to design, produce,
distribute, or service products while earning increasing returns on
resources
● Four variables: factor endowments, demand conditions, related and
supporting industries, and firm strategy, structure, and rivalry
◆ Factor endowments: land, labor, capital, workforce, infrastructure
◆ Demand conditions: large, sophisticated domestic consumer base: offers an
innovation friendly environment and a testing ground. Related and supporting
industries, local suppliers cluster around producers and add to innovation
◆ Firm strategy, structure, rivalry; competition is good; national governments can
create conditions which facilitate and nurture such a condition
➔ Synopsis: Trade Theory
◆ Trade among countries results from relative price differences that stem from
different production costs.
◆ Different production costs come from differences in: Endowments of factors of
production: Levels of technology that determine the factor intensities used
Efficiencies with which factor intensities are used; Foreign exchange rates
 ◆ Differences in tastes can reverse the direction of trade predicted by theory .
Nations attain a higher quality of life by specializing in those products for which
they have a comparative advantage and by importing the rest. Trade restrictions
harm a nation’s welfare in the LR.
➔ Trade Theory and Foreign Direct Investment Theory are Linked
◆ Trade theory: focused at the national economy level
◆ Investment theory: focused at the company decision level
◆ Theory of foreign direct investment (FDI): Pertains to ownership and control of
investments across national borders; Involves real or physical assets (plants,
facilities)
◆ FDI occurs through: greenfield investment: new facilities from ground up; cross-
border acquisition of an existing business
◆ Strategic reasons that induce foreign direct investment: Find new markets,
Access raw materials, Achieve production efficiencies, Access new knowledge
(technology, knowhow), Mitigate political risk, Competition
◆ A company’s decisions on where to locate FDI activities is influenced by the
same economic differences among countries articulated in trade theory
● Endowments of factors of production; Levels of technology that determine
the factor intensities used; Efficiencies with which factor intensities are
used; Trade theory explains the flow of products and services given the
cross-national economic context; FDI explains how companies act within
the cross- national context

Week 4: International Institutions from an International Business Perspective

➔ What Are Institutions?

◆ Socially constructed groups; Have regulative, normative, cultural elements;
Provide stability and meaning to social life; Organized collections of basic rules
and unwritten codes of conduct; Set limit to firms’ conduct; Reduce uncertainty in
the firm’s environment
➔ New Institutional Theory
◆ Norms that regulate the relations of individuals to each other
◆ Formal Institutions: influence behavior through laws and regulations; EU’s
Directorate General for Competition; The International Court of Justice
◆ Informal Institutions: depend on customs and ideologies to mold behavior
➔ Institutions function to influence the range of actions the firm can take: Formal
institutions, Informal institutions, Professional organizations, Non-governmental
organizations, Doctors without borders
➔ Global Level institutions: United Nations, World Bank, World Trade Organization.
◆ Global Level Institutions The United Nations: Promotes peace and global
stability; 192 member-nations; Has many functions related to business; General
Assembly; Deliberative body of the UN; All member-nations, each with one
vote; Security Council ; Responsible for peace and security; 5 permanent
 members with veto power(U.S., Russia, China, France, UK); 10 elected
members
➔ Global Level Institutions International Monetary Fund
◆ Promotes international monetary cooperation; Coordinates multilateral monetary
rules and their enforcement. 185 members who contribute funds on quota base.
Quota determines the country’s number of votes; IMF lends out these funds to
members
◆ Facilitates expansion and balanced growth of international trade. Promotes
exchange stability and orderly exchange arrangements among members.
Establishes a multilateral system of payments. Makes funds available for balance
of payments corrections
➔ Global Level Institutions International Monetary Fund CURRENT ISSUES:
◆ Convince rising economies to accept multilateral responsibilities beyond their
economies. Prevent protectionism in U.S. and Europe as Asian economies grow
◆ Become action-prone as financial crises become global and more complex.
Support the process of regionalization of currencies. Help financial markets
spread risk from ecological issues.
➔ Global Level Institutions World Bank’s Major Institutions
◆ The World Bank funds development projects: Comprised of two major
institutions. International Bank for Reconstruction and Development (known as
the World Bank); Funds development loans to middle income, credit-worthy
countries
◆ International Development Association: Funds poorer nations’ development
➔ Global Level Institutions The World Trade Organization
◆ The World Trade Organization (WTO) provides and helps implement rules of
trade. 151 member nations; began in 1995. Negotiates core agreements among
member nations. Establishes rules for trade, Helps settle trade disputes,
Outgrowth of General Agreement on Tariffs and
◆ Trade (GATT) Induced trade liberalization from 1947 to 1995
◆ Uruguay Round
● Established the WTO, The last extended conference of GATT
negotiations
● WTO Principles
○ 1. Trade without discrimination
○ 2. Freer trade, gradually, through negotiation
○ 3. Predictability, through “binding” and transparency
○ 4. Fair competition
○ 5. Encouragement of development and economic reform
● WTO talks in Doha, Qatar (2001): members agreed to work on
implementing present agreements; Developing nations face unique
constraints that limit their ability to benefit from WTO trading system
● Aid-for-trade initiative (2008), Major problem: Agricultural subsidies and
tariffs, Trade-related intellectual property rights (TRIPS): protection of
copyrights, trademarks, trade secrets, other intellectual property matter
 ➔ Regional Institutions Cooperative Military and Security Agreements
◆ North Atlantic Treaty Organization (NATO) : Security alliance of 26 North
American and European nations
◆ Association of Southeast Asian Nations(ASEAN) : Ten-member body formed to
promote peace and cooperation in Southeast Asia
➔ Regional Institutions Organization For Economic Cooperation and Development
◆ Organization for Economic Cooperation and Development (OECD): Group of
developed countries dedicated to promoting economic expansion in its member
nations. Provides information on economic and other activities within its member
nations. Provides setting for discussion of shared economic policy issue
➔ Regional InstitutionsThe European Union
◆ A body of 27 European countries dedicated to economic and political integration.
European Parliament , Legislative body whose members are popularly elected
from member-nations.
◆ Council of the European Union : Group that is the EU’s primary policysetting
institution
➔ ECONOMIC ALLIANCES
◆ FTA – FREE TRADE AGREEMENT 1) customs duties (tariffs) among member
countries are abolished, 2) each member country independently decides customs
duties to be applied to goods imported from non-member countries
◆ CU – CUSTOMS UNION 1) customs duties (tariffs) among member countries are
abolished, 2) member countries jointly decide common customs duties to be
applied to goods imported from non-member countries.
◆ COMMON MARKET -1) customs duties (tariffs) among member countries are
abolished, 2) member countries jointly decide common customs duties to be
applied to goods imported from non-member countries,3) freedom of movement
of goods and citizens, 4) common administration.

Week 5; sociocultural forces

➔ Rules of Thumb for Business Conduct Across Cultures: Be prepared, Slow down,
Establish trust, Understand the importance of language, Respect the culture,
Understand the components of culture
➔ What is Culture? Culture is the sum total of beliefs, rules, techniques, institutions, and
artifacts that characterize human populations
◆ Culture is learned, Its aspects are interrelated, Culture is shared (as opposed to
individual traits), It defines the boundaries of different groups
➔ Ethnocentrism is the belief in the superiority of one’s own ethnic group
◆ To overcome ethnocentricity, Realize that there are many different cultures
Spend time in another country, Undergo training on culture and language
➔ Culture Affects All Business Functions: Marketing Variation in attitudes and values
affects marketing mix , Human Resource Management Evaluation of managers
Attitudes toward authority Production Attitude towards change
➔ Sociocultural Components Culture is reflected in aesthetics attitudes and beliefs
religion materialism language societal organization legal characteristics political
structure
➔ Aesthetics refers to culture’s sense of beauty and good taste Art conveys meaning
Colors, symbols, numbers Architectural style differences Feng shui Music and Folklore
Musical tastes vary Folklore discloses way of life
➔ Attitudes Toward Time Vary across cultures Difficult area for some Americans
Directness and drive may be perceived to be rudeness Deadlines Liability abroad
➔ Job Prestige The distinction between blue-collar workers and office employees
Professional order of hierarchy
➔ Religion is responsible for many of the attitudes and beliefs affecting human behavior
Work Ethic
◆ Protestant work ethic Duty to glorify God by hard work and the practice of thrift
◆ Confucian work ethic Drive toward hard work and thrift; similar to Protestant
work ethic
➔ Primary Asian Religions Hinduism Caste system Society is divided into four groups
(plus the outcasts) Each is assigned a certain class of work Buddhism Reform of
Hinduism Jainism (Mahavira a contemporary of Buddha) Nonviolence a major principle
Sikhism Bridge between Hinduism and Islam
➔ Islam Islam is the youngest and second largest faith 1.3 billion followers In
comparison, Christianity has 2 billion adherents Muhammad is Founder Prophet of God
and head of state Holy Book Koran
➔ Animism Spirit worship, including magic and witchcraft Everything in nature has its own
spirit or divinity.
➔ Material culture refers to all human-made objects Concerned with how people make
things (technology) and Who makes what and why (economics)
➔ Technology is a mix of usable knowledge that society applies and directs toward
attainment of cultural and economic objective
➔ Technology enables a firm to be competitive in world markets can be sold or be
embodied in the company’s products can give a firm confidence to enter a foreign
market enables the firm to obtain better than usual conditions for a foreign market
investment, enables a company with only a minority equity position to control a joint
venture can change the international division of labor causes major firms to form
competitive alliances
➔ Cultural aspects of technology Includes skills in marketing, finance, and management
People are not always ready to adapt to changes technology brings Technological
dualism The side-by-side presence of technologically advanced and technologically
primitive production systems
➔ Appropriate Technology The technology (advanced, intermediate, or primitive) that most
closely fits the society using it Boomerang Effect Situation in which technology sold to
companies in another nation is used to produce goods to compete with those of the
seller of the technology
 ➔ Spoken language is the most apparent cultural distinction between countries Spoken
languages demarcate cultures Switzerland has four separate cultures Many languages
can exist in a single country, but one usually serves as communication vehicle
➔ Translation The ability to speak the language well does not eliminate the need for
translator
➔ Nonverbal communication Gestures vary tremendously from one region to another
Closed doors convey different meanings Office size has different meanings in various
cultures Conversational distance small in Middle East Gift giving has specific etiquette
in each culture Gift or bribe? Questionable Payments
➔ Societal Organization Kinship Extended family includes blood and marriage relatives
Member’s responsibility Although the extended family is large, each member’s feeling of
responsibility to it is strong Associations Social units based on age, gender, or common
interest, not on kinship
◆ Associations Age is an important market segment criterion Gender As nations
industrialize, more women enter the job market and assume greater importance
in the economy Free association people joined together by a common bond:
political, occupational, religious or recreational
➔ Understanding National Cultures Hofstede’s Dimensions of Culture Individualism
versus Collectivism Large versus Small Power Distance Strong versus Weak
Uncertainty Avoidance Masculinity versus Femininity; Masculinity achievement of visible
and symbolic organizational rewards Femininity emphasize relationships, concern for
others, and the overall quality of life
➔ Collectivistic cultures People belong to groups that are supposed to look after them in
exchange for loyalty Individualistic cultures People look after only themselves and the
immediate family
➔ Large versus Small Power Distance Power distance refers to the extent to which
members of a society accept the unequal distribution of power among individuals In
large-power-distance societies employees believe their supervisors are right; employees
do not take any initiative in making non-routine decisions
➔ Strong versus Weak Uncertainty Avoidance Uncertainty avoidance refers to the degree
to which members of a society feel threatened by ambiguity and are rule-oriented
Employees in high uncertainty-avoidance cultures tend to stay with their organizations
Japan, Greece, and Portugal Those from low uncertainty-avoidance nations are more
mobile United States, Singapore, and Denmark

Week 6 Natural resources and environmental sustainability

➔ Factor Conditions The Cornerstone of Porter’s Diamond Basic Factors Derived from
the country’s location Inherited Topography,climate, natural resources Can be a
source of a nation’s competitive advantage Lack of such resources can lead to
innovation Advanced Factors Those a country can innovate Labor force, infrastructure
➔ Why Switzerland Makes Watches Switzerland capitalized on its basic factor conditions
to develop advanced factor conditions Educated, skilled, specialized workforce Reliable
transport system overcomes topographical challenges Position of neutrality keeps trade
 relationships open These actions have led to a competitive advantage in watches,
chocolate, cheese, and pharmaceuticals
➔ Natural Resources Key issues Location, topography, and climate Energy and non-
fuel minerals Environmental sustainability
➔ Location Affects Political Relationships Austria took advantage of its location to ¤
increase trade with the east ¤ become the principal financial intermediary between
western and eastern europe ¤ strengthen its role as the regional headquarters for
international businesses operating in Eastern Europe
➔ Geographic Proximity and Trade Relationships ¤ Geographic proximity is often the major
reason for trade between nations ¤ Faster delivery, lower freight costs ¤ Major factor in
formation of trade groups such as EUand NAFTA ¤ Chile exports grapes, peaches,
raspberries to the U.S. November - March
➔ Topography Topography refers to the surface features of a nation or region •
Differences in topography may require products to be altered such as internal
combustion engines Topography includes mountains and plains deserts and tropical
forests bodies of water
➔ Deserts and Tropical Plains Deserts and tropical plains can separate markets increase
the cost of transportation create concentrations of population Australia Continent the
size of the U.S. but with only 19 million inhabitants Population concentrated in coastal
areas; in and around state capitals
➔ Bodies of Water Bodies of water attract people and facilitate transportation Inland
waterways provide inexpensive access to markets
➔ Outlets to the sea permit low-cost transportation of goods and people from a country’s
coast to its interior Africa has 14 of the world’s landlocked developing countries Must
construct costly, long truck routes and extensive feeder networks Port countries exert
considerable political influence
➔ Climate refers to temperature, precipitation, and wind Climate is the most important
element of the physical forces sets the limits on what people can do both physically and
economically influences economic development can impede distribution
➔ Natural resources are anything provided by nature on which people depend. Principal
types of natural resources important to businesspeople include energy non-fuel
minerals
➔ Renewable Hydroelectric Solar Wind Geothermal Waves Tides Biomass (ethanol)
Ocean thermal energy Non–Renewable Petroleum Nuclear Power Coal Natural Gas
➔ Conventional sources - Oil Estimates of reserves change Discoveries continue in
proven fields Governments allow new exploration and production New techniques
enable greater output from wells already in operation Automated, less expensive
equipment lowers drilling costs
➔ Other non-renewable energy sources include Natural gas Fastest growing source of
energy Nuclear Power Generates low pollution in the normal process
➔ Hydroelectric has had the most extensive application 7% of world energy consumption
Wind and solar energy: improved technology, new support Solar: fastest-growing
energy technology in the world
 ➔ Hydroelectric has had the most extensive application 7% of world energy consumption
Wind and solar energy: improved technology, new support Solar: fastest-growing
energy technology in the world
➔ According to Michael Porter, innovation has a large role in the way natural resources
contribute to a country’s factor conditions Alternative sources of energy like wind and
solar power become more attractive when oil prices rise
➔ Sustainability: maintaining something A systems concept Environment, society, the
economy, health Greenhouse gas produced in China and the U.S. impacts people in
France even though France doesn’t produce greenhouse gas France uses nuclear
power Nuclear power has its own environmental implications
➔ A sustainable business refers to an economic state in which the demands placed upon
the environment by people and commerce can be met without reducing capacity of
environment for future generations

Week 7: Economic and socioeconomic forces

➔ Economic Forces are Uncontrollable Most significant forces for managers Firms assess
and forecast economic conditions National and international level Data published by
governments and international organizations World Bank, IMF, UN, OECD CIA Private
economic consultants The Economist Intelligence Unit Business International
➔ Purpose of Economic Analysis Appraise the overall economic outlook Assess the
impact of possible changes on the firm Foreign market entry makes economic analyses
more complex Foreign environment: many national economies International
environment: national economies’ interaction
➔ Levels of Economic Development Developed All industrialized nations Most technically
developed Developing Lower income nations Less technically developed Emerging
Markets BRIC: Brazil, Russia, India, China Most watched by businesses
➔ Important Economic Indicators Gross Domestic Product GDP/capita Income
Distribution Private consumption Labor cost per unit of production Exchange rates
Inflation rates Interest rates
➔ Important Economic Indicators Gross Domestic Product GDP/capita Income
Distribution Private consumption Labor cost per unit of production Exchange rates
Inflation rates Interest rates
➔ Forces Reducing Birthrates Government supported family planning programs Improved
levels of health, education along with enhanced status for women More even
distribution of income Greater degree of urbanization
➔ Concern in Developed Nations: Birthrate Decline Europe An increasing number of
Europeans not marrying Marriages are later, with fewer children By 2025, the present 9
percent unemployment rate in the EU will be replaced by a shortage of workers Japan
By 2025, Japan’s population aged 65 and older will make up 26.8 percent of total
population By 2025, Japan will have twice as many old people as children
➔ Socioeconomic Dimensions Population Density Number of inhabitants per area unit
Product distribution and communications simpler and cheaper in densely populated
countries Population Distribution How inhabitants are distributed across a nation Rural-
to-urban shift
 ➔ Increase in the number of working women May require marketers to alter promotional
mix Results in larger family income
➔ Purchasing Power Parity The number of units of a currency required to buy the same
amount of goods and services in a domestic market that $1.00 would buy in the U.S.
Helps to make comparisons possible across economies
➔ Income distribution is a measure of how a nation’s income is apportioned among its
people Reported as the percentage of income received by population quintiles Data
gathered by World Bank shows that income is more evenly distributed in richer nations
income redistribution proceeds slowly income inequality increases in early stages of
development but reverses in later stages
➔ Dimensions of the Economy Private Consumption Disposable income after-tax
personal income Discretionary income income left after paying taxes and making
essential purchases
➔ Dimensions of the Economy Unit Labor Costs Unit labor costs Total direct labor costs
divided by units produced Countries with slower-rising unit labor costs attract
management’s attention Reasons for relative changes in labor costs Compensation
levels Productivity Exchange rates International firms must monitor labor rates around
the world
➔ Large international debts of middle-income and low-income nations affect multinational
firms When foreign exchange must be used for loan repayment, import of components
used in local production is reduced Local industries must manufacture these
components or production must stop
➔ Human Development Index Economic growth is not synonymous with economic
development The human needs approach defines economic development as the
reduction of poverty, unemployment, and inequality in the distribution of income HDI
(UN index) measures Long and healthy life - life expectancy Ability to acquire
knowledge - adult literacy Access to resources needed for a decent standard of living -
GDP/capita
➔ Human Development Index Economic growth is not synonymous with economic
development The human needs approach defines economic development as the
reduction of poverty, unemployment, and inequality in the distribution of income HDI
(UN index) measures Long and healthy life - life expectancy Ability to acquire
knowledge - adult literacy Access to resources needed for a decent standard of living -
GDP/capita
➔ Economic Development No accepted theory Due to inclusion of noneconomic variables
Development economists examine Population growth Income distribution
Unemployment Transfer of technology Role of government Investment in human vs
physical capital Investment in human capital: education, training Import substitution
versus export promotion

Week 8 : political forces

➔ Ideological Forces Communism Government should own all the major factors of
production Labor unions are government-controlled This ideology persists in few
countries Capitalism An economic system in which the means of production and
distribution are for the most part privately owned and operated for private profit
➔ Socialism In an extreme form socialist governments can control public utilities and some
basic means of production Socialist governments rarely perform in ways consistent with
a “pure” doctrine Many European countries including Great Britain, France, Spain,
Greece, Germany, Italy, Austria, and others have practiced a form of socialism
➔ Conservative In recent U.S. terms a conservative believes in minimizing government
oversight of economic activity and maximizing the independence of the private sector
Liberal In recent U.S. terms a liberal urges greater government regulation and oversight
of the economy These terms usually have entirely different meanings outside the U.S
➔ Why firms are nationalized? The government suspects that the firms are concealing
profits To increase the firm’s profitability For ideological reasons - countries have
national, government run utility companies, control strategic industries (petroleum in
Mexico), etc. To preserve jobs by supporting failing industries that are important to the
economy As a consequence of previous government’s support to protect the public
investment
➔ Unfair Competition? Privately owned companies complain that government owned
companies Can cut prices because maximizing profit is not their main purpose Get
cheaper financing Get government contracts Get export assistance Can hold down
wages with government assistance
➔ Privatization Anywhere Any Way Privatization does not always refer to ownership
transfer from government to private entities Activities previously conducted by the state
may be contracted out Governments may lease state-owned plants to private entities
Governments may combine a joint venture with a management contract with a private
group to run a previously government operated business
➔ Government Protection Any government, regardless of ideology, must protect the
nation’s economic welfare National defense Protection from banditry, piracy Terrorism
➔ Terrorism Unlawful acts of violence committed for a wide variety of reasons, Economic
gain: ransom To overthrow a government To gain release of imprisoned colleagues To
exact revenge for real or imagined wrongs To punish nonbelievers of the terrorists'
religion
➔ World wide terrorist groups: a new trend Government-sponsored terrorism: act of war
Countries finance, sponsor, and train terrorists and/or provide sanctuaries for them
➔ Kidnapping for Ransom Victims held for large ransoms Columbia and Peru are
dangerous places for American executives U.S. executives practice “commando
management” to avoid kidnap risk Arrive secretly, meet for a few days and fly off before
kidnappers learn of their presence Such behavior is suggested when operating in
countries that are on the U.S. State Department’s warning list
➔ Countermeasures by Industry KRE (kidnap, ransom, and extortion) Insurance to cover
ransom payments, antiterrorist schools Cassidy and Davis The world’s largest
kidnapping and extortion underwriting firm is located in London Antiterrorist Schools
➔ Extreme Travel Checklist for Executives Personal and legal affairs in order prior to
departure Tell others about your travel plans on a need-to- know basis “Sanitize” all
documents from company logos Prepare for host country’s culture and political
environment Be sure that someone in your company knows the where, when and how
of your trip Have an established code of communication in case of extreme
circumstances Use State Department sources prior to your trip to learn about the host
political environment
➔ Nuclear Terrorism Failing security standards at former Soviet installations permit
uranium to be stolen, then sold to terrorists Chemical and Biological Terrorism Recipes
from self-taught terrorists that can be downloaded from the Internet
➔ Stable Government Maintains itself in power and whose fiscal, monetary and political
policies are predictable and not subject to sudden, radical changes Unstable
Government Cannot maintain itself in power or makes sudden, unpredictable, or radical
policy changes
➔ Traditional hostilities refer to long-standing enmities between tribes, races, religions,
ideologies, or countries Arab countries -Israel Hutus and Tutsis in Burundi and Rwanda
Tamils and Sinhalese in Sri Lanka
➔ International Companies and Political Forces International companies are powerful and
can influence their destiny make decisions about where to invest, where to conduct
research and development, and where to manufacture products The financial size of
many international companies relative to the host economy or economic sector gives
them a strong negotiating position
➔ A country risk assessment (CRA) is an evaluation by the firm that assesses a country’s
economic situation, policies and politics to determine how much risk exists of losing an
asset or not being pai
➔ Types of Country Risks Political: wars, revolutions, coups Economic Financial: BOP
deficits Labor: low productivity, militant unions Legal: underdeveloped laws concerning
business Terrorism
➔ Information needed to conduct CRA Nature of business - the needs of the company
Length of time required by economic activity being considered Utility of risk analyses of
social, political, and economic factors decreases precipitously over longer time spans
➔ Trade Restrictions Government officials sensitive to interest groups that are being hurt
by international competition Arguments for trade restrictions National defense
Sanctions to punish offending nations Protect infant or dying industry Protect domestic
jobs from cheap foreign labor Scientific tariff or fair competition
➔ Dumping is within the domain of the WTO The WTO defines dumping as selling a
product abroad for less than the average cost of production at home home market price
the price to third countries
➔ Dumping is used by a manufacturer to sell excess production without disrupting prices
in the home market as a response to cyclical or seasonal factors as a way to raise
market share Predatory dumping occurs when the manufacturer lowers the export price
to force the importing nation’s domestic producers out of business The manufacturer
expects to raise prices once the objective is met
➔ New Types of Dumping Social dumping occurs when firms in developing nations
capitalize on low wages and poor working conditions no worker benefits undermines
social support systems Environmental dumping refers to lax environmental standards
that lower costs; Financial services dumping refers to low requirements for bank capital-
asset ratios Cultural dumping occurs when cultural barriers aid local firms Tax dumping
refers to special tax rates or related breaks
➔ Subsidies are economic actions by a government to support exports or hinder imports
Countervailing duties are additional import taxes levied by the importing nation’s
government on imports that have benefited from export subsidies offered by the
exporting nation’s government
➔ Tariffs or import duties are taxes levied on imported goods to reduce their
competitiveness Ad valorem duties are assessed as a percentage of invoice value
Specific duties are assessed as a fixed sum per unit Compound duties are a
combination of ad valorem and specific duties A variable levy may guarantee the market
price of the import is equal to that of the domestic product
➔ Non-Tariff Barriers Forms of discrimination against imports other than import duties
such as Specifications Customs procedures Quotas are numerical limits on specific
classes of imports Absolute: once number is reached imports stop Global: no regard to
source Allocated or discriminating: assigned to specific countries; Voluntary export
restraints (VERs) are export quotas imposed by the exporting country Orderly marketing
arrangements are VERs based on formal agreements between exporting and importing
countries
➔ Non-Quantitative Non-Tariff Barriers Government participation in trade Procurement
policies Local content requirements Customs and other administrative procedures
Standards
➔