CAPÍTULO 1-9

The globalization of markets refers to the merging of historically distinct and

separate national markets into one huge global marketplace.

*Global tastes,benefits small companies,differences vs national markets, products

need to be global not universal, competitors may not change among nations.

1. Falling barriers to cross-border trade and investment have made it easier to

sell internationally.
2. Tastes and preferences of consumers in different nations are beginning to
converge on some global norm, thereby helping create a global market..
3. By offering the same basic product worldwide, they help create a global
market..
4. A company does not have to be the size of these multinational giants to
facilitate,and benefit from, the globalization of markets.

The globalization of production refers to sourcing of goods and services from

locations around the globe to take advantage of national differences in the cost
and quality of factors of production (such as labor, energy, land, and capital).

*Boeing buy all its parts from another countries, Indian Radiology,Technology and
U.S.A

1. lower the cost structure or improve the quality or functionality of their

product. because these suppliers are the best in the world at their
particular activity.
2. Products of global nature “Global products”
3. IMPEDIMENTS: Formal and informal barriers to trade,Transportation costs,
political and economical risks and coordination.

THE EMERGENCE OF GLOBAL INSTITUTIONS

Institutions that are needed to help manage, regulate, and police the global
market-place and to promote the establishment of multinational treaties to
govern the global business system.

World Trade Organization (WTO)

Responsible for policing the world trading system and making sure nation-states
adhere to the rules laid down in trade treaties signed by WTO member states. 164
nations, 98% of world trade.
● facilitating the establishment of additional multinational agreements
● lowering of barriers to cross-border trade and investment
● e a more open global busi-ness system unencumbered by barriers to trade
and investment between countries.

International Monetary Fund (IMF)

Created in 1944 by 44 nations that met at Bretton Woods, New

Hampshire
● maintain order in the international monetary system
● Lender of last resort to nation-states whose economies are in turmoil and
whose currencies are losing value against those of other nations.
● Requires nation-states to adopt specific economic policies aimed at
returning their troubled economies to stability and growth.

World Bank
Created in 1944 by 44 nations that met at Bretton Woods, New
Hampshire
● Promote economic development.
● Less controversial
● Focused on making low-interest loans to cash-strapped governments in
poor nations that wish to undertake significant in-frastructure investments
(such as building dams or roads).

United Nations (UN)

October 24, 1945, by 51 countries commit-ted to preserving peace through
international cooperation and collective security (Now 193 countries)

● the obligations of the UN Charter, establishes basic

principles of international relations that have four
purposes :maintain international peace and security,
develop friendly relations among nations,cooperate in
solving international problems and promote respect for
human rights, be a center for harmonizing the actions of
nations.
● Promotion of higher standards of living, full employment,
and conditions of economic and social prog-ress and development.
Group of Twenty (G20)
Established in 1999,the G20 comprises the finance ministers
and central bank governors of the 19 largest economies in the
world, plus representatives from the European Union and the
European Central Bank.
● Response to financial crises in developing nations
● Represents 90 percent of global GDP

DRIVERS OF GLOBALIZATION
Two macro factors underlie the trend toward greater globalization:

DECLINING TRADE AND INVESTMENT BARRIERS

-International trade 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.
❏ During the 1920s and 1930s, many of the world’s nation-states erected
formidable barriers to international trade and foreign direct investment.
❏ Barriers to international trade are high tariffs on imports of manufactured
goods to protect domestic industries from foreign competition.
❏ “Beggar thy neighbor” retaliatory trade policies, with countries
progressively raising trade barriers against each other.
❏ Having learned from the Great Depression of the 1930s, the advanced
industrial nations of the West com-mitted themselves after World War II to
progressively reducing barriers to the free flow of goods, services, and
capital among nations., enshrined in the GATT.
❏ The most recent negotiations to be completed, known as the Uruguay
Round, were finalized in December 1993. The Uruguay Round further
reduced trade barriers; extended GATT to cover services as well as
manufactured goods; provided enhanced protection for patents,
trademarks, and copy-rights; and established the World Trade Organization
to police the international trading system.

Knowledge Society and Trade Agreements

-Trade across country borders is 2.6 times higher than world production.
-The value of world trade in merchandised goods has grown consistently faster
than the growth rate in the world economy since 1950.
-The larger the difference between the growth rates of world trade and world
production, the greater the extent of globalization and the more important it
becomes to understand international business.
- Such customer pressures and restrictions removal by countries have been
driving both the globalization of markets and the globalization of production.
- Another important facilitator of trade across country borders is the increased
number of trade agreements that have been implemented in the world.

ROLE OF TECHNOLOGICAL CHANGE

“Internet of Things.”

Communications
Satellite, optical fiber, wireless technologies
The microprocessor enabled the explosive growth of high-power, low-cost
computing, vastly increasing the amount of information that can be
processed.Encode, transmit, and decode the vast amount of information that
flows along these electronic highways.

1. The Moore’s law phenomenon, predicts that the power of microprocessor

technology doubles and its cost of production falls in half every 18 months.

Internet of Things
The explosive growth of the Internet was since 1994, The Internet makes it much
easier for buyers and sellers to find each other,expand their global presence at a
lower cost than ever before and it enables enterprises to coordinate and control a
globally dispersed production system.

Transportation Technology
Have occurred since the 1950s.
● the development of commercial jet aircraft and
superfreighters.
● the introduction of containerization, which
simplifies transshipment from one mode of
transport to another;Has revolutionized the
transportation business, significantly lowering
the costs of shipping goods over long distances.

Implications for the Globalization of Production (Dell)

● Dispersal of production to geographically separate locations has become
more economical.
● A worldwide communications network has become essential for many
international businesses
Implications for the Globalization of Markets
● Low-cost transportation has made it more economical to ship products
around the world, thereby helping create global markets.
● bring some convergences of consumer tastes and preferences,creating a
worldwide culture.

The Changing Demographics of the Global Economy

THE CHANGING WORLD OUTPUT AND WORLD TRADE PICTURE

1. In 1960, the United States accounted for 38.3 percent of world output,
measured by gross do-mestic product (GDP).
2. China’s share of world output increased from a trivial amount to 17.1
percent, making it the world’s largest economy in terms of its share in
world output..
3. Many of tomorrow’s economic opportunities may be found in the
developing nations of the world, and many of tomorrow’s most capable
competitors will prob-ably also emerge from these regions.

THE CHANGING FOREIGN DIRECT INVESTMENT PICTURE

1. Beginning in the 1970s, European and Japanese firms began to shift
labor-intensive manufacturing operations from their home markets to
developing nations where labor costs were lower.
2. Non-U.S. firms are increasingly investing across national borders.
3. Stock of foreign direct investment (FDI) refers to the total cumulative value
of foreign investments as a percentage of the country’s GDP.

THE CHANGING NATURE OF THE MULTINATIONAL ENTERPRISE

1. A multinational enterprise (MNE) is any business that has productive
activities in two or more countries.
2. Non-U.S. Multinationals
-The rise of mini-multinationals: a small and medium-sized multinationals
-Medium-and small-sized businesses are becoming increasingly involved
in international trade and investment.
-Internet is lowering barriers.

THE CHANGING WORLD ORDER

The Soviet Union receded into history, having been replaced by 15 independent
republics.Czechoslovakia divided itself into two states, while Yugoslavia
dis-solved into a bloody civil war.For half a century, these countries were
essentially closed to Western international businesses. Now, they present a host
of export and investment opportunities.
 ● The economies of many of the former com-munist states are still relatively
undeveloped.
● Their continued commitment to democracy and market-based economic
systems cannot be taken for granted.
● Disturbing signs of grow-ing unrest and totalitarian tendencies continue to
be seen in several eastern European and central Asian states.
● China continues to move progressively toward greater free market reforms.
● Thus, the changes in China are creating both opportunities and threats for
established international businesses.
● The poorly managed economies of Latin America were characterized by low
growth, high debt, and hyperinflation—all of which discouraged investment
by international businesses. In the past two decades, much of this has
changed. Throughout most of Latin America, debt and inflation are down,
governments have sold state-owned enterprises to private investors,
foreign investment is welcomed, and the region’s economies have
expanded.

GLOBAL ECONOMY OF THE TWENTY-FIRST CENTURY

Barriers to the free flow of goods, services, and capital have been coming
down.Globalization is not all good, the risks associated with global financial
contagion are also greater.

The Globalization Debate

In favor arguments:They say increased international trade and cross-border

investment will result in lower prices for goods and services. They believe that
global-ization stimulates economic growth, raises the incomes of consumers, and
helps create jobs in all countries that participate in the global trading system.

★ ANTI GLOBALIZATION PROTESTS : December 1999,

when more than 40,000 protesters blocked the
streets of Seattle in an attempt to shut down a
World Trade Organization meeting being held in
the city. they “were protesting against a wide range
of issues, including job losses in industries under
attack from foreign competitors, downward pressure
on the wage rates of unskilled workers,
environmental degradation, and the cultural
imperialism of global media and multinational enterprises, which was seen as
being dominated by what some protesters called the “culturally impov-erished”
interests and values of the United States”
 ★ GLOBALIZATION, JOBS, AND INCOME
People against say: falling trade barriers allow firms to move
manufacturing activities to countries where wage rates are much lower (the
american clothing manufactured paid less in Honduras, but quit jobs). that
the decline in unskilled wage rates is due to the migration of low-wage
manufacturing jobs offshore and a corresponding reduction in demand for
unskilled workers.

★ Supporters of globalization argue: that free trade benefits all countries

that adhere to a free trade regime.They argue that free trade will result in
countries specializing in the production of those goods and services that
they can produce most efficiently, while importing goods and services that
they cannot produce as efficiently.The share of national income received by
labor, as opposed to the share received by the owners of capi-tal (e.g.,
stockholders and bondholders), should have declined in advanced nations
as a result of downward pressure on wage rates and even though labor’s
share of the economic pie may have declined, this does not mean lower
living standards if economic growth and rising living standards in
advanced economies have offset declines in labor’s share.The decline in
labor’s share of national income must be due to moving production to
low-wage countries, as opposed to improvement in production technology
and productivity. They maintain that the weak growth rate in real wage
rates for unskilled workers owes far more to a technology-induced shift
within advanced economies away from jobs where the only qualification
was a willingness to turn up for work every day and toward jobs that require
sig-nificant education and skills.

★ What Data says: over the past two decades, the share of labor in national
income has declined;the share of national income enjoyed by skilled labor
has actually increased, sug-gesting that the fall in labor’s share has been
due to a fall in the share taken by unskilled labor.It is possible that
economic growth in developed nations has offset the fall in the share of
national income enjoyed by unskilled workers, raising their living
standards.

GLOBALIZATION, LABOR POLICIES, AND THE ENVIRONMENT

➔ People against say: that they lack adequate regulations to protect labor
and the environment from abuse by the unscrupulous and adhering to
labor and environmental regulations significantly increases the costs of
manufacturing enterprises and puts them at a competitive disadvantage in
 the global marketplace vis-à-vis firms based in developing nations that do
not have to comply with such regulations.
➔ Supporters say: tougher environmental regulations and stricter labor
standards go hand in hand with economic progress

GLOBALIZATION AND NATIONAL SOVEREIGNTY

➢ Critics say: that today’s increasingly interdepen-dent global economy
shifts economic power away from national governments and toward
supranational organizations such as the World Trade Organization, the
European Union, and the United Nations and limiting the nation’s ability to
control its own destiny.
➢ Supporters say: bodies such as the United Nations and the WTO exist to
serve the collective interests of member states, not to subvert those
interests.

GLOBALIZATION AND THE WORLD’S POOR

❖ Critics say: that if globalization is such a positive development, this
divergence between the rich and poor should not have occurred.Many of the
world’s poorest countries have suffered from totalitarian governments,
economic policies that destroyed wealth rather than facilitated its creation,
endemic corruption, scant protection for property rights, and prolonged
civil war.
❖ Supporters say: that the best way for these countries to improve their lot is
to lower their barriers to free trade and investment and to implement
economic policies based on free market economics.

Managing in the Global Marketplace

An international business is any firm that engages in international trade or

invest-ment.. Manag-ers need to recognize that the task of managing an
international business differs from that of managing a purely domestic business
in many ways.

❏ Countries are different: Differ in their cultures, political systems, economic

systems, legal systems, and levels of economic devel-opment,vary its
practices country by country.”Marketing a product in Brazil may require a
different approach from marketing the product in Germany”
❏ Then they must decide how best to coordinate and control globally
dispersed produc-tion activities .
❏ They must choose the appropriate mode for entering a particular foreign
country.
❏ They must find ways to work within the limits imposed by specific
governmental interventions.
 ❏ Must develop policies for dealing with exchange rate movements.
❏ The range of problems confronted by a manager in an international
business is wider and the problems them-selves more complex than those
confronted by a manager in a domestic business.
❏ International trans-actions involve converting money into different
currencies.

CHAPTER 2: NATIONAL DIFFERENCES

Political economy to stress that the political, economic, and legal systems of a
country are interdependent; they interact with and influence each other, and in
doing so, they affect the level of economic well-being. Zimbabwe is a case study in
how not to run a country.
Political Systems
The political system of a country shapes its economic and legal systems, is the
system of government in a nation.Democracy and individualism go hand in hand,
as do the communist version of collectivism and totalitarianism

COLLECTIVISM AND INDIVIDUALISM

● Collectivism refers to a political system that stresses the primacy of

collective goals over individual goals,the needs of society as a whole are
generally viewed as being more important than individual freedoms;an
individual’s right to do something may be restricted on the grounds that it
runs counter to “the good of society” or to “the common good.” (Plato
believed that society should be stratified into classes)

● Socialism trace their intellectual roots to Karl Marx:the pay of workers does
not reflect the full value of their labor,His logic was that if the state owned
the means of production, the state could ensure that workers were fully
compen-sated for their labor.Social democratic government in some
nations national-ized some private companies, transforming them into
state-owned enterprises to be run for the “public good rather than private
profit.”.

● Individualism Includes David Hume,Adam Smith and John Stuart Mill.The

opposite of collectivism,a philosophy that an individual should have
freedom in his or her economic and political pursuits.(Aristotle argued that
individual diversity and private ownership are desirable,private property is
more highly productive than communal property and will thus stimulate
progress,whereas property that is owned by an individual will receive the
 greatest care and therefore be most productive) ,is an emphasis on the
importance
of guaranteeing individual freedom and self-expression and the welfare of
society is best served by letting people pursue their own economic
self-interest.

DEMOCRACY AND TOTALITARIANISM

● Democracy refers to a political system in which government is by the
people, exercised either directly or through elected
representatives.The United States, is a constitutional republic that
operates as a representative democracy.Here elected representatives who
fail to perform this job adequately will be voted out of office at the next
election.

SAFEGUARDS OF REPRESENTATIVE DEMOCRACY:An individual’s

right to freedom of expression, opinion, and organization; a free
media; regular elections in which all eligible citizens are allowed to
vote; universal adult suffrage; limited terms for elected
representatives; a fair court system that is independent from the
political system; a nonpolitical state bureaucracy; a nonpolitical
police force and armed service; and a relatively free access to state
information.

● Totalitarianism is a form of government in which one person or

political party exercises absolute control over all spheres of human
life and prohibits opposing political parties.

-Communist totalitarianism: Deny many basic civil liberties to their populations

like China, Vietnam, Laos, North Korea,Venezuela and Cuba.

-theocratic totalitarianism: Where political power is monopolized by a party,

group, or individual that governs according to religious principles like Arabia
Saudita.

-Tribal totalitarianism: In African countries such as Zimbabwe, Tanzania,

Uganda, and Kenya.Occurs when a political party that represents the interests of a
particular tribe (and not always the majority tribe) monopolizes power

- Right-wing totalitarianism:permits some individual economic freedom but

restricts individual political freedom, frequently on the grounds that it would lead
to the rise of communism.
-Pseudo-Democracies: where authoritarian elements have captured some or
much of the machinery of state and use this in an attempt to deny basic political
and civil liberties like Russia.

Economic Systems
We can iden-tify three broad types of economic systems: a market economy, a
command economy, and a mixed economy.

1. MARKET ECONOMY: 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, consumers are sovereign.Private
ownership ensures that entrepreneurs have a right to the profits
generated by their own efforts.

2. COMMAND ECONOMY: The government plans the goods and services

that a coun-try produces, the quantity in which they are produced,
and the prices at which they are sold.Instead of growing and
becoming more prosperous, such economies tend to stagnate.

3. MIXED ECONOMY: Can be found between market and command

economies

Legal Systems

Rules, or laws, that regulate behavior along with the processes by which the laws
are enforced and through which redress for griev-ances is obtained.There are three
main types of legal systems—or legal traditions—in use around the world: common
law, civil law, and theocratic law.

-Common Law- evolved in England,based on tradition, precedent, and

custom.Tradition refers to a country’s legal history, precedent to cases that have
come before the courts in the past, and custom to the ways in which laws are
applied in specific situations. As new precedents arise, laws may be altered,
clarified, or amended to deal with new situations.

-Civil Law- based on a detailed set of laws organized into codes,including

Germany, France, Japan, and Russia.Judges under a civil law system have less
flexibility than those under a common law system.,contracts tend to be much
shorter and less specific
-Theocratic Law- the law is based on religious teachings,Islam,Hindu and Jewish.

DIFFERENCES IN CONTRACT LAW

--- A contract is a document that specifies the conditions under which an
exchange is to occur and details the rights and obligations of the parties involved.
---Contract law is the body of law that governs contract enforcement. The parties
to an agreement normally resort to contract law when one party feels the other has
violated either the letter or the spirit of an agreement.,tend to be very detailed with
all contingencies spelled out

The United Nations Convention on Contracts for the International Sale of

Goods (CISG) 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

PROPERTY RIGHTS AND CORRUPTION

● Property: refers to a resource over which an individual or business holds a
legal title, that is, a resource that it owns.include land, buildings,
equip-ment, capital, mineral rights, businesses, and intellectual property
(ideas, which are protected by patents, copyrights, and trademarks)

● Property rights: refer to the legal rights over the use to which a resource is
put and over the use made of any income that may be derived from that
resource.

Ways in which Property rights can be violated

Private Action: theft, piracy, blackmail, and the like by private individuals or
groups,a weak le-gal system allows a much higher level of criminal action

Public Action and Corruption: when public officials, such as politicians and
government bureaucrats, extort income, resources, or the property itself from
prop-erty holders or corruption.

Foreign Corrupt Practices Act This law makes it illegal to bribe a foreign
govern-ment official to obtain or maintain business over which that foreign
official has authority.

THE PROTECTION OF INTELLECTUAL PROPERTY

Intellectual property refers to property that is the product of intellectual activity,
such as computer software, a screenplay, a music score, or the chemical formula
for a new drug.
1. A patent grants the inventor of a new product or process exclusive rights
for a defined period to the manufacture, use, or sale of that invention.
2. Copyrights are the exclusive le-gal rights of authors, composers,
playwrights, artists, and publishers to publish and dis-perse their work as
they see fit..
3. Trademarks are designs and names, officially registered, by which
merchants or manufacturers designate and differentiate their products.
4. The World Intellectual Property Organization: All of which have signed
international treaties designed to protect in-tellectual property
5. The Paris Convention for the Protection of Industrial Property: which
dates to 1883 and has been signed by more than 170 nations.
6. Product safety laws set certain safety standards to which a product must
adhere.
7. Product liability involves holding a firm and its officers responsible when a
product causes in-jury, death, or damage

National Differences in Economic Development

Differences in Economic Development:

➔ Gross national income (GNI): It measures the total annual income

received by residents of a nation; Japan, Sweden, Switzerland, and U.S. have
high GNI–China and India have low GNI–GNI does not consider differences in
the cost of living•Need to adjust GNI figures using purchasing power parity
(PPP).

BROADER CONCEPTIONS OF DEVELOPMENT: AMARTYA SEN

--Nobel Prize–winning economist Amartya Sen says that “development should be
assessed less by material output measures such as GNI per capita and more by the
capabilities and opportunities that people enjoy”.
-- Development requires the removal of major impediments to freedom: poverty as
well as tyranny, poor economic opportunities as well as systematic social
deprivation, and neglect of public facilities as well as the intolerance of repressive
states.--
● Requires the “democratization” of political communities to give citizens a
voice in the important decisions made for the community.
● Emphasize basic health care, especially for children, and basic education,
especially for women.
● Has developed the Human Development Index (HDI) to measure the
quality of human life in different nations; Based on three measures: life
expectancy at birth , educational attainment and whether average incomes

Political Economy and Economic Progress

❏ INNOVATION AND ENTREPRENEURSHIP ARE THE ENGINES OF GROWTH

INNOVATION:Includes new products, new processes, new organizations, new
management practices, and new strategies

ENTREPRENEUR: first commercialize innovative new products and processes,

and entrepreneurial activity provides much of the dynamism in an
economy.

❏ INNOVATION AND ENTREPRENEURSHIP REQUIRE A MARKET ECONOMY

-the economic freedom associated with a market economy creates greater
incentives for innova-tion and entrepreneurship than either a planned or a
mixed economy.In a market economy, any individual who has an innovative
idea is free to try to make money out of that idea by starting a business (by
engaging in entrepreneurial activity).Strong relationship between economic
freedom and economic growth
❏ INNOVATION AND ENTREPRENEURSHIP REQUIRE STRONG PROPERTY RIGHTS.
Without strong property rights protection, businesses and individuals run
the risk that the profits from their innovative efforts will be expropriated,
either by criminal elements or by the state by Soto.

❏ THE REQUIRED POLITICAL SYSTEM

Democratic regimes are probably more conducive to long-term economic
growth,Totalitarian states are detrimental to progress because they limit
freedom and they suppress human development.

❏ ECONOMIC PROGRESS BEGETS DEMOCRACY

Economic progress leads to adoption of a democratic regime
underlies the fairly permissive attitude that many Western governments
have adopted toward human rights violations in China.

❏ GEOGRAPHY, EDUCATION, AND ECONOMIC DEVELOPMENT

 The Economist Jeffrey Sachs argues that countries with favorable
geography are More likely to engage in trade and More open to
market-based systems.
Nations that invest more in education will have higher growth rates
because an educated population is a more productive population

States in Transition

1. During the late 1980s and early 1990s, a wave of democratic revolutions
swept the world,Totalitarian governments fell and were replaced by
democratically elected governments committed to free market capitalism.

2. There has been a move away from centrally planned and mixed economies
and toward a more free market economic model.

THE SPREAD OF DEMOCRACY

● “free” countries, citizens enjoy a high degree of political and civil freedoms
● “Partly free” countries are characterized by some restrictions on political
rights and civil liberties
● “not free” coun-tries, the political process is tightly controlled and basic
freedoms are denied.

Three main reasons account for the spread of democracy:

1. Many totalitarian regimes failed to deliver economic progress to the vast
bulk of their populations.
2. New information and communication technologies—including satellite
televi-sion, desktop publishing, and, most importantly, the Internet and
associated social media—have reduced a state’s ability to control access to
uncensored information, allowing democratic ideals .
3. In many countries, economic advances have led to the emergence of
increasingly prosperous middle and working classes that have pushed for
democraticreforms.

THE NEW WORLD ORDER AND GLOBAL TERRORISM

Author Francis Fukuyama argues the new world order will be characterized by
democratic regimes and free market capitalism
-Political scientist Samuel Huntington argues that while many societies are
modernizing, they are not becoming more Western
-Predicts a world split into different civilizations that will be in conflict making
business difficult
-Political position is more likely to be somewhere between Fukuyama and
Huntington.

The Nature of Economic Transformation

➔ DEREGULATION: Removing legal restrictions to the free play of markets, the

establishment of private enterprises, and the manner in which private
enterprises operate.They also prohibited private enterprises from operating
in most sectors of the economy, severely restricted direct investment by
foreign enterprises, and limited international trade.(INDIA)
➔ PRIVATIZATION: Started in Great Britain in early 1980 ,transfers the
ownership of state property into the hands of pri-vate individuals,
frequently by the sale of state assets through an auction, seen as a way to
stimulate gains in economic efficiency by giving new private owners a
powerful incentive—the reward of greater profits—to search for increases in
productivity, to enter new markets, and to exit losing ones.
➔ LEGAL SYSTEMS: Laws protecting private property rights and providing
mechanisms for contract enforcement

Implications of Changing Political Economy

1. Costs: Political factors, a company may be pushed to pay off politically

powerful entities in a country before the government allows it to do
business there,Economic factors, one of the most important variables is
the sophistication of a country’s economy,for legal factors, it can be more
costly to do business in a country where local laws and regulations set
strict standards with regard to product safety, safety in the workplace,
environmental pollution.

Political system: is it necessary to pay bribes to get market access?

Economic level: are the necessary supporting business and infrastructure
in place?
Legal system: how do local laws and regulations affect business decisions?
Are there well-established contract laws?

2. Risks:
● Political risk : likelihood that political forces will cause drastic
changes in a country’s business environment that adversely affect
the profit and other goals of a business enterprise. (terrorism)
● Economic risk: The likelihood that economic mismanagement will
cause drastic changes in a country’s business environment that hurt
the profit and other goals of a particu-lar business enterprise.
 ● legal risk: The likelihood that a trading partner will opportunistically
break a contract or expropriate property rights

3. Overall Attractiveness :
Depends on balancing the benefits, costs, and risks associated with doing
business in that country

Differences in Culture
Cross-cultural literacy, an under-standing of how cultural differences across and
within nations can affect the way business is practiced.
1. Anthropologist Edward Tylor defined culture: as “that complex whole which
includes knowledge, belief, art, morals, law, custom, and other capabilities
acquired by man as a member of society.”
2. Geert Hofstede:“the collective programming of the mind which
distinguishes the members of one human group from another.”
3. Culture as a system of values and norms that are shared among a group of
people and that when taken together constitute a design for living.(authors
definition).
 4. Values: we mean ideas about what a group believes to be good, right, and
desirable. (authors definition).
5. Norms: we mean the social rules and guidelines that pre-scribe appropriate
behavior in particular situations..(authors definition).
6. Society: to refer to a group of people sharing a common set of values and
norms.

VALUES AND NORMS

VALUES: society’s attitudes toward such concepts as individual freedom,
democracy, truth, justice, honesty, loyalty, social obligations, collective
responsibility, women, love, sex, marriage, and so on.Often reflected in the
economic systems and emphasizes individual freedom.

NORMS: the social rules that govern people’s actions toward one another
subdivided into two major categories: folkways and mores.
-Folkways are the routine conventions of everyday life, like appropriate dress
code in a particular situation, good social manners.
- Mores is a term that refers to norms that are more widely observed, have great
moral significance than other norms,Violat-ing mores can bring serious
retribution like drinking alcohol in Arabia Saudita.

CULTURE, SOCIETY, AND THE NATION-STATE

The relationship between a society

and a nation state is not strictly
one-to-one, Nation-states are
political creations, A nation can have several cultures, and a culture can embrace
several nations,Different levels of culture.

DETERMINANTS OF CULTURE
1. Social Structure: its basic social organization, how a society is organized
in terms of its values, norms, and the relationships that are part of the
society’s fabric:the degree to which the basic unit of a social organization is
the indi-vidual, as opposed to the group, or even company for which a
 person works and the degree to which a society is stratified into classes or
castes.

INDIVIDUALS AND GROUPS

★ Group: 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.
★ The Individual: In many Western societies, the individ-ual is the basic
building block of social organization,also finds expression in a high degree
of managerial mobility between companies, as our “personal brand”.
★ The Group: The primary unit of social organization in many other
societies,Importance of group membership/identification.

SOCIAL STRATIFICATION
All societies are stratified on a hierarchical basis into social categories divided in
4 principles:
1. is a trait of society, not a reflection of individual differences.
2. carries over a generation to the next generation.
3. is generally universal but variable.
4. involves not just inequality but also beliefs.

Social Mobility
The extent to which individuals can move out of the strata into which they are
born

Caste system
Is a closed sys-tem of stratification in which social position is determined by the
family into which a per-son is born, and change in that position is usually not
possible during an individual’s lifetime.(Shoemakers)

Class system
is a less rigid form of social stratification in which social mobility is
possible. It is a form of open stratification in which the position a person has by
birth can be changed through his or her own achievements or luck.
Significance
The stratification of a society is significant if it affects the operation of business
organizations,Class consciousness refers to a condition by which people tend to
perceive themselves in terms of their class background, and this shapes their
relationships with members of other classes.

Religious and Ethical Systems

 ● Religion may be defined as a system of shared beliefs and rituals that are
concerned with the realm of the sacred.
● Ethical system refers to a set of moral principles, or values, that are used to
guide and shape behavior

CHRISTIANITY:
1. Is the most widely practiced religion in the world with some 2.20 billion
followers.
2. IMPLICATIONS: Max Weber, Protestant ethics, and the spirit of capitalism

ISLAM:
1. The second largest of the world’s major reli-gions. Islam dates to a.d. 610
when the Prophet Muhammad began spreading the word,monotheistic
religion,requires unconditional acceptance of the uniqueness, power, and
authority of God and the understanding that the objective of life is to fulfill
the dictates of His will in the hope of admission to paradise.
2. IMPLICATIONS:Many pro-free enterprise principles, protection of private
property, concern with social justice•Prohibits the payment or receipt of
interest

HINDUISM
1. Began in the Indus Valley in India more than 4,000 years ago, making it the
world’s oldest major religion,not linked to a particular person,belief in
reincarnation, or rebirth into a different body, after death.
2. IMPLICATIONS: Hinduism does not encourage the kind of entrepreneurial
activ-ity in pursuit of wealth creation that we find in Protestantism, Gandhi
advocated had a negative impact on the economic develop-ment of post
independence India.

BUDDHISM
1. Siddhartha renounced his wealth to pursue an ascetic lifestyle and
spiritual perfection,Siddhartha became known as the Buddha (which
means “the awakened one”).
2. IMPLICATIONS: The lack of support for the caste system and extreme
ascetic behavior sug-gests that a Buddhist society may represent a more
fertile ground for entrepreneurial activity than a Hindu culture.
CONFUCIANISM
1. Principally in China, Korea, and Japan,teaches the importance of attaining
personal salvation through right action, is built around a comprehensive
ethical code that sets down guidelines for relationships with others.
2. Guanxi is an important mechanism for building long-term business
relationships and getting business done in China.
 3. IMPLICATIONS: Three key teachings of Confucianism -loyalty, reciprocal
obligations, and honesty -may all lead to a lowering of the cost of doing
business in Confucian societies.

Language

SPOKEN LANGUAGE
Helps define cul-ture, English is increasingly becoming the language of
international business throughout the world.Chinese is the mother tongue of the
largest number of people.
UNSPOKEN LANGUAGE
Nonverbal communication,the raising of eyebrows

Education
It is usually the medium through which individuals learn many of the languages
and other skills that are indispensable in a modern society, Formal education also
supplements the family’s role in socializing the young into the values and norms
of a society and Provides a national competitive advantage.

Culture and Business

HOFSTEDE'S DIMENSIONS OF CULTURE

1. Power distance: How a society deals with the fact that people are unequal
in physical and intellectual capabilities.
2. Individualism versus collectivism : the relationship between the
individual and his or her fellows.
3. Uncertainty avoidance:Dimension measured the extent to which different
cultures socialized their members into accepting ambiguous situations
and tolerating uncertainty.
4. Masculinity versus femininity: The relationship between gender and work
roles
5. Long-term versus short-term orientation : the extent to which a culture
programs its citizens to accept delayed gratification of their material,
social, and emotional needs.

Hofstede’s work is the leading research on culture, but has received criticism:
Assumes a one-to-one correspondence between culture and the nation-state when
many countries have more than one culture,Research may be culturally
bound,Research focused on a single industry.

World Values Survey (WVS)

Explores people’s values and norms, how they change over time, and what impact
they have in society and business.Support for democracy; tolerance of foreigners
and ethnic minorities; support for gender equality; the role of religion and
changing levels of religiosity; the impact of globalization; attitudes toward the
environment, work, family, politics, national identity, culture, diversity, and
insecurity; and subjective well-being

Cultural Change

Cross-Cultural Literacy

-Ethnocentrism: Connection between culture , national competitive and between

culture and ethics in decision making

Ethics, Corporate Social Responsibility, and Sustainability

Ethics refers to accepted principles of right or wrong that govern the

conduct of a person.
★ Business ethics are the accepted principles of right or wrong
governing the conduct of business people.
★ Ethical strategy is a strategy, or course of action, that does not
violate these accepted principles.

Ethics and International Business

EMPLOYMENT PRACTICES
-Establish minimal acceptable standards that safeguard the basic rights and
dignity of employees.

HUMAN RIGHTS
- Freedom of association, freedom of speech, freedom of assembly, freedom of
movement, and freedom from political repression.

ENVIRONMENTAL POLLUTION
Is it ethical for a company to escape regulations by moving production to a
nation with lax regulations?
- Ethical issues can arise when environmental regulations in host nations are
inferior to those in the home nation,regulations governing the emission of
pollutants, the dumping of toxic chemicals, the use of toxic materials in the
workplace, and so on.The problematic part of this argument and equation for
measuring pollution is that no one owns the atmosphere or the oceans, but
polluting both, no matter where the pollution originates, harms all.
-The tragedy of the commons occurs when a resource held in common by all but
owned by no one is overused by individuals resulting in its degradation.
.Corporations can contribute to the global tragedy of the commons by moving
productionto locations where they are free to pump pollutants into the
atmosphere or dump them in oceans or rivers, thereby harming these valuable
global commons.

CORRUPTION
Are bribes the price to pay to do a greater good?,Do bribes reduce businesses’
incentive to invest?
- There always have been and always will be corrupt government officials.
International businesses can and have gained economic advantages by making
pay-ments to those officials.

Ethical Dilemmas
Situations in which none of the available alternatives seems ethically acceptable.

Roots of Unethical Behavior

➔ PERSONAL ETHICS: The generally ac-cepted principles of right and wrong

governing the conduct of individuals, that guides our behavior comes from
a number of sources, including our parents, our schools, our religion, and
the media.
 ➔ DECISION-MAKING PROCESSES: “Is this decision or action ethical?

➔ ORGANIZATIONAL CULTURE: The values and norms that are shared among
employees of an organization

➔ UNREALISTIC PERFORMANCE GOALS: The combination of an organizational

culture that legitimizes unethical behavior, or at least turns a blind eye to
such behavior, and unrealistic perfor-mance goals may be particularly toxic.

➔ LEADERSHIP: Help establish the culture of an organization, and they set the
example, rules, and guidelines that others follow as well as the structure
and processes for operating.

➔ SOCIETAL CULTURE: Cultures that emphasize individualism and uncertain

to avoid an ceare more likely to stress ethical behavior than cultures where
masculinity and power distance are emphasized.

Philosophical Approaches to Ethics

STRAW MEN: to demonstrate that they offer inappropriate guidelines for

ethical decision making in a multinational enterprise.These approaches
can be characterized as the Friedman doctrine: Milton Friedman wrote an
article where his basic position is that “the social responsibility of business
is to increase profits”.

Cultural Relativism: The belief that ethics are nothing more than the reflection of a
culture all ethics are culturally determined—and that accordingly, a firm should
adopt the ethics of the culture in which it is operating.

The Righteous Moralist: Claims that a multinational’s home-country standards of

ethics are the appropriate ones for companies to follow in foreign countries.

The Naive Immoralist: Asserts that if a manager of a multinational sees that firms
from other nations are not following ethical norms in a host nation, that manager
should not either

UTILITARIAN AND KANTIAN ETHICS

Utilitarian approaches to ethics

•Philosophers David Hume, Jeremy Bentham, and John Stuart Mill
•Actions are desirable if they lead to the best possible balance of good
consequences over bad consequences
•Best decisions are those that produce the greatest good for the greatest number
of people•Drawbacks (Inconvenientes)
•Difficult to measure benefits, costs, and risks of an action.

Kantian ethics: Based on the philosophy of Immanuel Kant says that

People should be treated as ends and never as purely means to the ends of
others,People have dignity and need to be respected,Contemporary moral
philosophers view Kantian ethics as incomplete and the System has no place for
moral sentiments such as sympathy or caring.

RIGHTS THEORIES
Human beings have fundamental rights and privileges that transcend national
boundaries and cultures.

Article 23 of this declaration, which relates directly to employment, states:

1. Everyone has the right to work, to free choice of employment, to just and
favor-able conditions of work, and to protection against unemployment.
2. Everyone, without any discrimination, has the right to equal pay for equal work.
3. Everyone who works has the right to just and favorable remuneration ensuring
for himself and his family an existence worthy of human dignity, and
supplemented, if necessary, by other means of social protection.
4. Everyone has the right to form and to join trade unions for the protection of his
interests.

JUSTICE THEORIES:
- focus on the attainment of a just distribution of economic goods and
ser-vices.
- John Rawls argued that all economic goods and services should be
distributed equally except when an unequal distribution would work to
everyone's advantage
-
HOW TO MAKE ETHICAL DECISIONS
● Build an organizational culture that places a high value on ethical behavior
● Articulate values that place a strong emphasis on ethical behavior
● Emphasize the importance of a code of ethics
● Implement a system of incentives and rewards that recognize people who
engage in ethical behavior and sanction those who do not
International Trade Theory
Free trade refers to a situation in which a government does not attempt to
influence through quotas or duties what its citizens can buy from another country
or what they can produce and sell to another country by Smith.

THE BENEFITS OF TRADE

Some international trade is beneficial even for products a country can produce for
itself•Allows specialization•Limit on imports are often in the interests of domestic
producers but not domestic consumers

During the 1980s, economists such as Paul Krugman developed what

has come to be known as the new trade theory.

Mercantilism:
The principle assertion of mercantilism was that gold and silver were the
mainstays of national wealth and essential to vigorous commerce (A
zero-sum
game is one in which a gain by one country results in a loss by another.)

Absolute Advantage

1776 the landmark book The Wealth of Nations, Adam Smith

1. A country has an absolute advantage in the production of a product when it
is more efficient than any other country at producing it.

Comparative Advantage
 1817 book Principles of Political Economy, Ricardo
2. it makes sense for a country to specialize in the production of those goods
that it produces most efficiently and to buy the goods that it produces less
efficiently from other countries, even if this means buying goods from other
countries that it could produce more efficiently itself. Explain why countries
engage in international trade even when one country's workers are more
efficient at producing every single good than workers in other countries

The Invisible Hand of the Market:

Is a metaphor for how, in a free market economy, self-interested individuals
can promote the general benefit of society at free market

Heckscher-Ohlin theory:
Is an economic theory that proposes that countries export what they can most
efficiently and plentifully produce.

Qualifications and Assumptions:

● Simple world with 2 countries and 2 goods

● No transportation costs

● No differences in price of resources

● Resources can move freely

● Constant returns to scale

● Each country has a fixed stock of resources and free trade does not change
the efficiency with which a country uses its resources

● No effects of trade on income distribution within a country

Extensions of Ricardian Model:

● Political opposition to the adoption of a free trade regime typically comes from
those whose jobs are most at risk

● Immobile resources: Resources can’t move from one economic activity to

another

● Resources do not always move easily from one economic activity to another
● Diminishing returns: Refer to a point at which the level of profits or benefits
gained is less than the amount of money or energy invested

● Constant returns to specialization: The units of resources required to

produce a good are assumed to remain constant no matter where one is on a
country’s production possibility frontier
● Diminishing returns to specialization

● All resources are not the same quality

● Different goods use resources in different proportions

● Dynamic Effects and Economic Growth.

Heckscher- Ohlin Theory

● Factor endowments: The amount of land, labor, capital, and
entrepreneurship that a country possesses and can exploit for
manufacturing
● Mentioned:
● Countries will export those goods that make intensive use of factors
that are locally abundant.
● Countries will also import goods that make intensive use of factors
that are locally scarce
● The Leontief Paradox: Is that a country with a higher capital per worker
has a lower capital/labor ratio in exports than in imports
Mentioned:

● Raised questions about the validity of the Heckscher-Ohlin theory

● Found that U.S. exports were less capital intensive than U.S. imports

The Product Life-Cycle Theory

Raymond Vernon proposed this in 1980’s: (explained before)
1. Most new products were developed and first sold in the U.S.
2. The wealth and size of the U.S. market gave U.S. firms a strong incentive to
develop new consumer products.
3. The high cost of U.S. labor gave U.S. firms an incentive to
develop cost-saving process innovations.
4. Over time demand grows in other countries, and price becomes
competitive Product Life-Cycle Theory in the Twenty-First
 Century: An accurate theory but nowadays seems ethnocentric
and increasingly
New Trade Theory
Economies of scale: Cost advantages associated with large-scale production
Mentioned:

● Major source of cost reductions

● he ability of firms to gain economies of scale can have important
implications for international trade.

Increasing Product Variety and Reducing Costs:

❏ World with Trade: Each nation can increase the variety of goods available
to its consumers and lower the costs of those goods and individual
national markets are combined into a larger world market
❏ World without Trade: The variety of goods that a country can produce and
the scale of production are limited by the size of the market
❏ Economies of Scale, First-Mover Advantages (are advantages
accruing to the first to enter a market), and the Pattern of Trade: Can
gain a scale-based cost advantage that later entrants find almost
impossible to match

Implications of New Trade Theory:

➢ Nations may benefit from trade even when they do not differ in
resource endowments or technology.
➢ A country may predominate in the export of a good simply because it was
➢ lucky enough to have one or more firms among the first to produce that
good.
➢ Luck, entrepreneurship, and innovation give a firm first-mover advantages.

National Competitive Advantage Porter’s Diamond

Porter: Explained why does a nation achieve international success in a particular
industry. Has four broad attributes of a nation shape the environment in which
local firms compete:
● Factor Endowments:

○ Basic Factors: Are natural resources (climate,

location, demographics)
○ Advanced Factors: Are a product of investment by
individuals, companies, and governments (Communication
infrastructure, sophisticated and skilled labor, research
facilities, and technological know-how)
 ● Demand Conditions: Firms gain competitive advantage if their
domestic consumers are sophisticated and demanding
● Related and Supporting Industries: The benefits of investments in
advanced factors of production by related and supporting industries
can spill over into an industry, thereby helping it achieve a strong
competitive position internationally
● Firm Strategy, Structure and Rivalry: There is a strong association
between vigorous domestic rivalry and the creation and persistence of
competitive advantage in an industry

Evaluating Porter’s Theory: Final thoughts of the theory:

★ Government policy can influence supporting and related industries
through regulation and influence firm rivalry through such devices as
capital market regulation, tax policy, and antitrust laws.
★ Porter’s theory has not been subjected to detailed empirical testing.

Government Policy and International Trade

- Instruments of Trade Policy

TARIFFS

-import tariffs reduce the overall efficiency of the world economy.

- tariffs are generally pro-producer and anticonsumer.

A tariff is a tax levied on imports (or exports).The government gains because

the tariff increases government revenues.Domestic produc-ers gain because
the tariff affords them some protection against foreign competitors by
increasing the cost of imported foreign goods.Consumers lose because they
must pay more for certain imports.

Tariffs fall into two categories:

1. Specific tariffs are levied as a fixed charge for each unit of a good
imported.
2. Ad valorem tariffs are levied as a proportion of the value of the
imported good
SUBSIDIES

A subsidy is a government payment to a domestic producer including cash

grants, low-interest loans, tax breaks, and government equity participation in
domestic firms,like in agriculture.

IMPORT QUOTAS AND VOLUNTARY EXPORT RESTRAINT

1. An import quota is a direct restriction on the quantity of some goods that

may be im-ported into a country.( like U.S with cheese )
2. Under a tariff rate quota, a lower tariff rate is applied to imports within the
quota than those over the quota,are common in agriculture, where their
goal is to limit imports over quota.
3. A voluntary export restraint (VER) is a quota on trade imposed by the
exporting country, typically at the request of the importing country’s
government. Can appease protectionist measures in a country.

EXPORT TARIFFS AND BANS

● An export tariff is a tax placed on the export of a good. The goal behind an
export tariff is to discriminate against exporting in order to ensure that
there is sufficient supply of a good within a country.
● An export ban is a policy that partially or entirely restricts the export of a
good.

LOCAL CONTENT REQUIREMENTS: A requirement that some specific fraction of a

good be produced domestically.

ADMINISTRATIVE POLICIES

Are bureaucratic rules designed to make it difficult for imports to enter a country.
For example, Japan's car market has been hard for foreigners to crack.

ANTIDUMPING POLICIES

Dumping is variously defined as selling goods in a foreign market at below their

costs of production or as selling goods in a foreign market at below their “fair”
market value.

Antidumping policies are designed to punish foreign firms that engage in

dumping (antidumping duties are often called countervailing duties)
 The Case for Government Intervention

Arguments for government intervention take two paths: political and economic.

1. Political arguments for intervention are concerned with protecting the

interests of certain groups within a nation (normally producers), at the
expense of consumers or with achieving some political objective such as
protecting the environment or human rights.

Cover a range of issues:

● Protecting Jobs and Industries from unfair foreign competition.

● Protecting National Security
● Retaliating (represalias) “play by the rules of the game.”
● Protecting Consumers from unsafe products.
● Furthering Foreign Policy Objectives :A government may grant
preferential trade terms to a country with which it wants to build
strong relations
● Protecting Human Rights

2. Economic arguments for intervention are typically concerned with

boosting the overall wealth of a nation (to the benefit of all, both producers
and consumers)
● The infant industry argument,Alexander Hamilton proposed it in
1792:many developing countries have a potential comparative
advantage in manufacturing, but new manufacturing industries
cannot initially compete with established industries in developed
countries, relies on an assumption that firms are unable to make
efficient long-term investments by borrowing money from the
domestic or interna-tional capital market.

● Strategic Trade Policy has two components

FIRST it is argued that by appropriate actions, a government can help

raise national income if it can somehow en-sure that the firm or
firms that gain first-mover advantages in an industry are domestic
rather than foreign enterprises.
 SECOND is that it 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.

The Revised Case for Free Trade

RETALIATION AND TRADE WAR:These policies will probably provoke retaliation and
help establish antidumping policies and rules that minimize trade-distorting
subsidies Krugman Mentioned: Strategic trade policies aimed at establishing
domestic firms in a dominant position in a global industry boost national income
at the expense of other countries

Domestic Policies: Interest groups may influence policy and the governments
don’t always act in the national interest Krugman Mentioned: Krugman
concludes that strategic trade policy is almost certain to be captured by
special-interest groups which will distort it to their own ends.

Development of the World Trading System

Since World War II an international trading framework has evolved that has
exactly these features.
- For its first 50 years, this framework was known as the General
Agreement on Tariffs and Trade (GATT)
- Since 1995, it has been known as the World Trade Organization (WTO).

FROM SMITH TO THE GREAT DEPRESSION

It is the case for free trade dates to late 18th century work of Adam Smith and
David Ricardo.
First Embraced by Great Britain in 1846: a major trading partners did not
reciprocate in free trade

Corn Laws: Placed a high tariff on imports of foreign corn

Smoot-Hawley Act: Enacted in 1930 by the U.S. Congress, this act erected a wall
of tariff barriers against imports into the United States.

1947–1979: GATT, TRADE LIBERALIZATION, AND ECONOMIC GROWTH

- After the debacle of the Great Depression, opinion in the U.S. Congress had
swung strongly in favor of free trade. Under U.S. leadership, the GATT was
established in 1947.
 - The GATT was a multilateral agreement whose objective was to liberalize
trade by eliminating tariffs, subsidies, import quotas, and the like,was by
most measures very successful.
- the move toward free trade under the GATT appeared to stimulate
economic growth.

1980–1993: PROTECTIONIST TRENDS

- the trading system erected by the GATT came under strain as pressures for
greater protectionism increased around the world.
- There were three reasons for the rise in such pressures:the economic
success of Japan ,the world trading system was strained by the persistent
trade deficit in the world’s largest economy, the United States and that
many countries found ways to get around GATT regulations.

THE URUGUAY ROUND AND THE WORLD TRADE ORGANIZATION

- In 1986, GATT members embarked on their eighth round of negotiations to

reduce tariffs, the Uruguay Round .
- The member countries sought to extend GATT rules to cover trade in
services. They also sought to write rules governing the protection of
intel-lectual property, to reduce agricultural subsidies, and to strengthen
the GATT’s monitor-ing and enforcement mechanisms.
- Contained the following provisions:

1. Tariffs on industrial goods were to be reduced by more than one-third,

and tariffs were to be scrapped on more than 40 percent of manufactured
goods.

2. Average tariff rates imposed by developed nations on manufactured

goods were to be reduced to less than 4 percent of value, the lowest level in
modern history.

3. Agricultural subsidies were to be substantially reduced.

4. GATT fair trade and market access rules were to be extended to cover a
wide range of services.

5. GATT rules also were to be extended to provide enhanced protection for

patents, copyrights, and trademarks (intellectual property).

6. Barriers on trade in textiles were to be significantly reduced over 10

years. 7. The World Trade Organization was to be created to implement the
GATT agreement.
 The World Trade Organization

The WTO acts as an umbrella organization that encompasses the GATT

along with two new sister bodies, one on services and the other on
intellectual property.

❏ The WTO’s Gen-eral Agreement on Trade in Services (GATS) has

taken the lead to extending free trade agreements to services.
❏ The WTO’s Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS) is an attempt to narrow the gaps in the way
intellectual property rights are protected around the world and to
bring them under common international rules.

WTO: Experience to Date:

● By 2016, 164 members who account for 98 percent of world trade

● Strong early start, since late 1990s unable to get agreements to further
reduce barriers

● Doha Round has shown very little progress

● Limited protectionism returned following global financial crisis of 2008-2009

● The Brexit vote and election of Donald Trump also suggest a move toward
greater protectionism.
● he first two decades in the life of the WTO suggest that its policing and

enforcement mechanisms are having a positive effect

● WTO as Global Police: Positive effect and Countries involved have mostly
adopted WTO’s recommendations

● Expanded Trade Agreements: Global telecommunication and financial

services industries

THE FUTURE OF THE WTO: UNRESOLVED ISSUES AND THE

DOHA ROUND

● The current agenda of the WTO focuses on:

● The rise of anti-dumping policies

● The high level of protectionism in agriculture
 ● The lack of strong protection for intellectual property rights in many
nations
● Continued high tariffs on nonagricultural goods and services in many
nations.

Antidumping actions:
● Ague definition of what constitutes “dumping”
● Concentrated in certain sectors: metal industries, chemicals, plastics,
and machinery and electrical equipment

Protectionism in agriculture:
● Tariff rates generally much higher on agricultural products
● Reflects desire to protect domestic agriculture
● Raises consumer prices

● Protection of intellectual property: TRIPS agreement (Is a minimum

standards agreement, which allows Members to provide more extensive
protection of intellectual property if they so wish)

Market access for nonagricultural goods and services:

● Most developed nations have average tariff rates of 3.8 percent of
value
● Certain imports still have high tariffs, which limits market access and
economic growth; Tariffs higher on services than industrial goods
● WTO goal is to reduce tariff rates to zero

Multilateral and Bilateral Trade Agreements: Reciprocal trade agreements

between two or more partners.
In response to the apparent failure of the Doha Round to progress, many nations
have pushed forward with multilateral or bilateral trade agreements, which are
reciprocal trade agreements between two or more partners

Foreign Direct Investment

Foreign direct investment (FDI) occurs when a firm invests directly in facilities
to produce or market a good or service in a foreign country.
 ★ The flow of FDI refers to the amount of FDI undertaken over a given time
period (normally a year).
★ The stock of FDI refers to the total accumu-lated value of foreign-owned
assets at a given time.
★ Outflows of FDI, mean-ing the flow of FDI out of a country
★ Inflows of FDI, the flow of FDI into a country

TRENDS IN FDI

● Increase in both flow and stock of FDI over past 25 years

● Growing more rapidly than world trade and world output
● Way to circumvent trade barriers
● Political and economic changes
● Shift toward democratic political institutions and free market economies
● Globalization: Refers to the shift toward a more integrated
and interdependent world economy

THE DIRECTION OF FDI

Has been directed at the developed nations of the world as firms based in
advanced countries invested in the others’ markets.

● U.S. is a target for FDI inflows

● Large and wealthy domestic market
● Dynamic and stable economy
● Favorable political environment and openness to FDI
● European inflows mainly from the U.S. and other European nations
● China has also been a recipient of FDI recently

THE SOURCE OF FDI

● China became a major foreign investor around 2005, especially in

less developed nations
● U.S. is the largest source since WWII
● Six Countries accounts for 60% of all FDI outflows:
U.S.,UK,France,Germany,Japan,The Netherlands

THE FORM OF FDI: ACQUISITIONS VERSUS GREENFIELD INVESTMENTS

● Greenfield investment: Establishing a new operation in a foreign country

● Acquisition: Is when one company purchases most or all of
another company's shares to gain control of that company
● Mergers: Is an agreement that unites two existing companies into one
new company
 Theories of Foreign Direct Investment

Eclectic paradigm: Attempts to combine the two other perspectives into a single
holistic explanation of foreign direct investment, the best aspects of other
theories are taken and combined into a single explanation.

1. WHY FOREIGN DIRECT INVESTMENT? FDI is expensive because a firm must

bear the costs of establishing production facilities in a foreign country or
of acquiring a foreign enterprise,is risky because of the problems
associated with doing business in a different culture where the rules of
the game may be very different.The first time will make costly mistakes
due to ignorance.
- Exporting involves producing goods at home and then shipping them to
the receiving country for sale.
- Licensing in-volves granting a foreign entity (the licensee) the right to
produce and sell the firm’s prod-uct in return for a royalty fee on every unit
sold.

Advantages of Foreign Direct Investment: When transportation costs or

trade barriers make exporting unattractive and when a firm wishes to
maintain control over its technological know-how, or over its operations and
business strategy, or when the firm’s capabilities are simply not amenable to
licensing.
Second Theory, The Pattern of Foreign Direct Investment: Has a strategic
behavior in relation with knickerbocker (relationship between FDI and rivalry in
oligopolistic industries).
- Oligopoly: An industry composed of a limited number of large firms
- Multipoint competition: Arises when two or more enterprises encounter
each other in different regional markets, national markets, or industries

Limitations of Exporting

❏ Transportation costs and trade barriers

❏ By limiting imports through quotas and tariffs, governments
increase the attractiveness of FDI and licensing

2. Licensing: Occurs when a firm (the licensor) licenses the right to

produce its product, use its production processes, or use its brand
name or trademark to another firm (the licensee). In return for giving
the licensee these rights, the licensor collects a royalty fee on every
unit the licensee sells.
Limitations of Licensing

❏ Market Imperfections: Imperfections in the operation of the market

mechanism
❏ Internationalization Theory:Marketing imperfection approach to FDI

THE RADICAL VIEW

Traces its roots to Marxist political and economic theory
-Attempts to look for the problem is beside the outside physically
-(MNE) is an instrument of imperialist domi-nation.
-By the early 1990s, the radical position was in retreat. There seem to be three
rea-sons for this: the collapse of communism in eastern Europe,the generally
abys-mal economic performance of those countries that embraced the
radical position,he strong economic performance of those developing
countries that embraced capitalism rather than radical ideology
THE FREE MARKET VIEW
- traces its roots to classical economics and the international trade theories of
Adam Smith and David Ricardo.
- argues that international production should be distributed among countries
accord-ing to the theory of comparative advantage.
-Countries should specialize in the production of those goods and services that
they can produce most efficiently.

PRAGMATIC NATIONALISM
-View is that FDI has both benefits and costs. FDI can benefit a host country by
bringing capital, skills, technology, and jobs, but those benefits come at a cost.
(has negative implications for the host country’s balance-of-payments position).

SHIFTING IDEOLOGY
-Oppose to the radicals and express a free market ideology a more liberal FDI
regimes

Benefits and Costs of FDI

HOST-COUNTRY BENEFITS: Employment effects, balance-of-payments

effects, and effects on competition and economic growth.

Resource-Transfer Effects: (Capital, technology, management resources)

Employment Effects:
 ● Brings jobs to a host country that would otherwise not be created
there
● May be offset by loss of jobs in home country

Balance-of-Payments Effects:

● Balance of Payments Accounts: National accounts that track both

payments to and receipts from foreigners
● Current Account: In the balance of payments, record transactions
● involving the export or import of goods and services. Arises when a
country is importing more goods and services than it is exporting
● FDI helps with a current account surplus
● By substituting for imports
● When the MNE uses a foreign subsidiary to export goods and
services to other countries
● Effect on competition and economic growth
● Greenfield investment creates new enterprise

HOST-COUNTRY COSTS

They arise from possible adverse effects on competition within the host
nation, adverse effects on the balance of payments, and the perceived loss
of national sovereignty and autonomy.

● Adverse effects on competition: Subsidiaries of foreign MNEs may

have greater economic power than indigenous competitors
● Adverse effects on the balance of payments: Subsequent capital
outflow and imports of inputs from abroad
● Possible effects on national sovereignty and autonomy: A loss
of economic independence

HOME-COUNTRY BENEFITS

● The home country’s balance of payments benefits from the inward

flow of foreign earnings
● Employment effects
● Reverse resource-transfer effect
● MNE learns valuable skills from its exposure to foreign markets that
can subsequently be transferred back to the home country.

HOME-COUNTRY COSTS

● Balance-of-payments effects of outward FDI

 ● Initial capital outflow
● The current account of the balance of payments suffers if the purpose of
the foreign investment is to serve the home market from a low-cost
production location.
● The current account of the balance of payments suffers if the FDI is a
substitute for direct exports.

HOME-COUNTRY POLICIES
● Encouraging outward FDI:

○ Government-backed insurance programs

○ Government loans

○ Elimination of double taxation of foreign income

○ Relaxation of restrictions on FDI by host countries

● Restricting outward FDI:

○ Limit capital outflows
○ Manipulate tax rules

○ Prohibit investment for political reasons

HOST-COUNTRY POLICIES

● Encouraging inward FDI: Incentives such as tax concessions,

low-interest loans, grants or subsidies
● Restricting inward FDI:
○ Ownership restraints

○ Performance requirements

International Institutions and the Liberalization of FDI: In charge of World

Trade Organization
❖ Push for liberalization of regulations governing FDI
❖ Two extensive multinational agreements were reached in 1997 to
liberalize trade in telecommunications and financial services
 Regional Economic Integration
Regional economic integration: Agreements among countries in a geographic
region to reduce and ultimately remove tariff and non-tariff barriers to the free
flow of goods, services, and factors of production between each other

Levels of Economic Integration

1. free trade area: All barriers are

removed.European Free Trade
Associa-tion (EFTA).
2. customs union: Eliminates trade
barriers between member countries
and adopts a common external trade
policy.
3. Common market: has no barriers to
trade among member countries,
includes a common external trade
policy, and allows factors of
production to move freely among
members.
4. economic union: Involves the free flow of products and factors of
production among member countries and the adoption of a com-mon
external trade policy.
5. Political union in which a central political apparatus coordinates the
economic, social, and foreign policy of the member states.

THE ECONOMIC CASE FOR INTEGRATION

The Economic Case for Integration:

● All countries gain from free trade and investment
● Assumes an absence of barriers
● Motivated by desire to exploit gains from free trade and investment

The Political Case for Integration:

❖ Linking countries together, making them more dependent on each

other, promotes political cooperation
❖ Reduces the likelihood of violent conflict
❖ Gives countries greater political clout when dealing with other nations

Impediments to Integration:

❏ Impediments to Integration
 ❏ While a nation as a whole may benefit from a regional free trade
agreement, certain groups may lose
❏ It implies a loss of national sovereignty

The Case against Regional Integration

The Regional Economic Integration: Is only beneficial if the amount of trade

it creates exceeds the amount it diverts
➔ Trade Creation: Trade created due to regional economic
integration; occurs when high-cost domestic producers are
replaced by low-cost foreign producers within a free trade area
➔ Trade Diversion: Trade created due to regional economic
integration; occurs when low-cost foreign suppliers outside a free
trade area are replaced by higher-cost suppliers within a free trade
area
WTO rules should ensure that a free trade agreement does not result in

trade diversi
regional Economic Integration in Europe
Europe has trade blocs:

★ European Union (EU): An economic and political union of 28

countries (2017) that are located in Europe. Britain may exit by 2019.
★ European Free Trade Area (EFTA): A free trade area made of 4 members
★ Evolution of the European Unions:
Product of two political factors:

-The devastation of western Europe during two world wars and the desire
for a lasting peace
-The European nations’ desire to hold their own on the world’s political and
economic stage
- Treaty of Rome: The 1957 treaty that established the European Community
and provided for the creation of a common market

Political Structure of the European Union:

1. European Commission: Responsible for proposing EU

legislation, implementing it, and monitoring compliance
➢ Run by commissioners appointed by member countries and approved by
the European parliament
 2. European Council: The heads of state of EU members and the president
of the European Commission
➢ The ultimate controlling authority within the EU
➢ One representative from the government of each member state.

3. European Parliament: Elected EU body that provides consultation on

issues proposed by the European Commission
● 751 members elected by the member states
● Debates legislation proposed by the commission and forwarded to it by
the council

4. Treaty of Lisbon: A European Union-sanctioned treaty that will allow the

❖ European Parliament to become the co-equal legislator for
almost all European laws and increased power of the parliament

5. Court of Justice: Supreme appeals court for EU law

The Singles European Act of 1987: The objectives of the
Act
❏ Remove all frontier controls among EC countries
❏ Apply the principle of “mutual recognition” to product standards
❏ Institute open public procurement to nonnational suppliers
❏ Lift barriers to competition in the retail banking and insurance businesses
❏ Remove all restrictions on foreign exchange transactions between
member countries by the end of 1992
❏ Abolish restrictions on cabotage by the end of 1992

The Establishment of the Euro:

● Maastricht Treaty: Treaty agreed to in 1992, but not ratified until January 1,
1994, that committed the 12 member states of the European Community to a
closer economic and political union

➔ Committed the EU to adopt a single currency (euro)

➔ Used by 19 of 28 member states (the euro zone)
➔ Second most widely-traded currency after dollar
➔ Great Britain, Denmark, Sweden don’t use euro

Benefits of the Euro:

 ★ Savings from having to handle one currency, rather than many
★ Makes it easier to compare prices across Europe
★ Producers forced to look for ways to reduce production costs
★ Boosts development of highly liquid pan-European capital market
★ Will open investment options

Costs of the euro:

1. Loss of control over national monetary policy
2. EU is not an Optimal Currency Area (Region in which similarities in
economic activity make a single currency and exchange rate feasible
instruments of macroeconomic policy)

The Euro Experience:

1. Volatile trading history since establishment in 1999

2. Euro has weakened since 2008
3. Slow economic growth and large budget deficits among EU member
states
4. Bailout package to rescue Greece in 2010
5. Some nations have put plans to adopt euro on hold

Enlargement of the European Union: The new members included the Baltic
countries, the Czech Republic, and the larger nations of Hungary and Poland.
The only new members not in eastern Europe were the Mediterranean island
nations of Malta and Cyprus
➔ Expansion into eastern Europe
➔ 13 countries applied by end of the 1990s
➔ Had to establish stable democratic governments
➔ Show respect for human rights
➔ New members had to wait to adopt euro
➔ Eastern European countries only account for 5 percent of the GDP of
current EU members
➔ Turkey has been denied entry because of human rights concerns

British Exit from the European Union (Brexit):

1. British electorate voted to leave in 2016
2. Based on loss of national sovereignty, immigration issues
 3. Treaty of Lisbon: Britain has two years to negotiate terms of
exit
4. Britain’s exit is a concern; seen as a counterweight to economic
power of Germany

Regional Economic Integration in the Americans

There is a move toward greater regional economic integration in the
Americas: The biggest effort is the North American Free Trade Agreement
(NAFTA) and other efforts include the Andean Community and Mercosur.
North American Free Trade Agreement (NAFTA): Free trade area
among Canada, Mexico and the U.S.
● Abolished tariffs on 99% of the goods traded between members
● Removed barriers on the cross-border flow of services
● Protects intellectual property rights
● Removes most restrictions on FDI between members
● Allows each country to apply environmental standards

Established two commissions to impose fines and remove trade privileges

when environmental standards or legislation involving health and safety,
minimum wages, or child labor are ignored

The Case for NAFTA:

Mexico would benefit from

1. Increased jobs as low cost production moves south and will see more
rapid economic growth as a result
2. U.S. and Canada would benefit from
3. Access to a large and increasingly prosperous market
4. The lower prices for consumers from goods produced in Mexico
5. Low cost labor and ability to be competitive in world markets
6. Increased imports by Mexico

The Case in against NAFTA:

❏ Jobs would be lost and wage levels would decline in the U.S. and Canada
❏ Pollution would increase due to Mexico's more lax standards
❏ Mexico would lose its sovereignty

NAFTA: The Results:

1. NAFTA’s early impact was subtle, and both advocates and detractors
may have been guilty of exaggeration
 2. Overall impact small, but positive

The Future of NAFTA:

❏ Continually a target of politically-motivated criticism

❏ Donald Trump wants to renegotiate NAFTA

The Andean Community: A 1969 agreement among Bolivia, Chile,

Ecuador, Colombia, and Peru to establish a customs union
Formed in 1969 using the EU model

● Had more or less failed by the mid-1980s

● Was re-launched in 1990, and now operates as a customs union
● Renamed the Adean Community in 1997
● Signed an agreement inn 2003 with Mercosur to restart negotiations
towards the creation of a free trade area

Mercosur: Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a

free trade area
● Originated in 1988 as a free trade pact between Brazil and Argentina
● Expanded in 1990 to include Paraguay and Uruguay and in 2005 with
the addition of Venezuela
● May be diverting trade rather than creating trade, and local firms are
investing in industries that are not competitive on a worldwide basis
● Efforts stalled on reducing trade barriers between member states

1. Central American Common Market, CAFTA, and CARICOM:

1. Central American Common Market: A trade pact among Costa

Rica, El Salvador, Guatemala, Honduras, and Nicaragua which
began in the early 1960s but collapsed in 1969 due to war.
2. Central American Free Trade Agreement (CAFTA): The
agreement of member states of the Central American
Common Market joined by the Dominican Republic to trade
freely with the United States
a. CARICOM: An association of English-speaking Caribbean
states that are attempting to establish a customs union
3. Caribbean Single Market and Economy (CSME): The six
CARICOM members that agreed to lower trade barriers and
harmonize macroeconomic and monetary policies.
 Regional Economic Integration Elsewhere
Various efforts at integration have been attempted in Asia, Africa,
and elsewhere:
● Association of Southeast Asian Nations (ASEAN): Formed in
1967, an attempt to establish a free trade area among Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, and Vietnam
○ Foster freer trade between member countries and
to achieve cooperation in their industrial policies
○ ASEAN Free Trade Area (AFTA) between the six original
members of ASEAN came into effect in 2003
○ ASEAN and AFTA are moving towards establishing a free trade
zone
● Regional Trade Blocs In Africa:

Many of these groups have been dormant for years. Significant political
turmoil in several African nations has persistently impeded any meaningful
progress. Also, deep suspicion of free trade exists in several African countries.

The argument most frequently heard is that because these countries have

less developed and less diversified economies, they need to be “protected” by

tariff barriers from unfair foreign competition. Given the prevalence of this
argument, it has been hard to establish free trade areas or customs unions.
● 17 trade blocs on the African continent
● Since many countries support the use of trade barriers to
protect their economies from foreign competition,
meaningful progress is slow
● The East African Community (EAC) re-launched in 2001
1. Established a common market in 2010 and is moving
toward goal of monetary union
2. Plan for Tripartite Free Trade Area (TFTA) began in 2015

● Other Trade Agreements: Renewed emphasis on bilateral and multilateral

trade agreements since collapse of Doha Round talks

1. Trans Pacific Partnership (TPP)

2. Transatlantic Trade and Investment Partnership (TTIP)
3. on, but they do not cover some non tariff barriers