Chapter 3

International Institutions
from an International
Business Perspective
 Learning Objectives

• LO1: Explain the importance of international

business institutions to business decision makers and
their firms.
• LO2: Describe the various types of institutions,
drawing on institutional theory.
• LO3: Outline the United Nations as an institution
and its relevance to international business.
• LO4: Describe the purposes of the two global
monetary institutions, the IMF and the World Bank.
 Learning Objectives

• LO5: Discuss the purpose of the World Trade

Organization and its impact international business.
• LO6: Discuss the resources of the Organisation for
Economic Cooperation and Development
• LO7: Identify the levels of economic integration and
the effectiveness of the major trading blocks.
• LO8: Discuss the EU, its impact and its challenges
going forward.
 What Are Institutions?
Why Are They Useful?

• Organizations of groups, societies, or cultures to

achieve a common goal: “to provide stability and
meaning to social life”

• A collection of norms that “regulate the

relations of individuals to each other.”
 Institutions Influence Behavior
New Institutional Theory
Institutions are social constructs, norms that structure
relations between people

• Formal Institutions
Influence behavior through laws and regulations
• Informal Institutions
Influence behavior through norms, values, customs,
ideologies
Examples
Institutions Influence Behavior
Formal Institutions:
• City, state, and national governments
• EU
• Organizations that operate through laws &
rules

Informal Institutions:
• Normative: operate through agreed upon
standards (NGOs & professional
organizations)
• Cognitive: operate through shared conceptual
ideals (organizational culture, national-level
culture)
Examples
Institutions Influence Behavior
Formal Institutions
• Tax Laws, Speed Limits
• Membership Rules

Informal Institutions
• Normative
Organizational standards & Principles
• Cognitive:
Function as frameworks for behavior
Ø China – guanxi
Ø Japan – “supplier game”
 The United Nations (UN)
• 192 member countries
dedicated to world peace
and stability
• Fosters global business
relationships
• Helps write
international law
• Helps stabilize global
economy
• HQs in New York City,
agencies globally
dispersed
 The UN Impacts IB
UN Center for Trade UN Educational,
Facilitation and Scientific and
Electronic Business Cultural
(UN/CEFACT) Organization
• Technical standards (UNESCO)
and norms • Investment in
• Standardized trade emerging economies
documents • Development support
• Standards for E-data of health, education,
exchange governance &
political stability
 The UN Impacts IB
UN Agencies deal with UN Environmental
downsides to Programme (UNEP)
globalization: • Climate Control
• Terrorism Convention
• Crime • Kyoto Protocol
• Drugs • Sustainable business
• Arms traffic practices
 The UN Impacts IB
Global Education & • UN Economic and
Health Issues Social Council
• The Global Compact promotes
• facilitates private • Social Justice
industry/developing • Human Rights
nation partnerships • Labor Rights
 The UN and the
Conduct of Global Business
• Ships sail protected across international waters.
• Commercial airlines fly across borders and land in emergencies –
International Civil Aviation Organization.
• WHO sets quality standards for drug names and quality.
• Universal Postal Union protects mail and allows cross-border
mailing.
• International Telecommunications Union keeps airwaves
unclogged and avoids radio interference.
• World Meteorological Organization shares global weather data.
• UN Sales Convention and UN Convention on Carriage of Goods
by Sea set rights and obligations of international buyers/sellers.
 UN Organization
• 5 working bodies/organs:
1. The General Assembly
2. The UN Security Council
3. Economic and Social Council
(ECOSOC)
4. International Court of Justice (ICJ)
5. The Secretariat
 UN Organs
• General Assembly • The UN Security
(1 vote/member) Council
– Adopts resolutions – Maintains international
– Decisions reflect world peace & security
opinion • 15 members including 5
permanent members
– Decisions NOT legally
binding
 UN Organs
• Economic and Social • International Court
Council (EOCSOC) of Justice (ICJ) or
Economic & social issues World Court
• Trade & Transport
• Industrialization
• 15 judges
• Economic development • worldwide
• Population growth
jurisdiction
• Children
• Housing • legal decisions
• Women’s rights between national
• Racial discrimination
governments
• Illegal drugs & crime
• Social welfare & youth
• The human environment
 UN Organs
The Secretariat

• UN staff – 40,000 people worldwide

• Headed by the Secretary General
• Secretary General recommended by Security
Council, appointed by General Assembly, 5 year
term
 International Monetary
Institutions
IMF – coordinates and enforces
international monetary rules

World Bank –World lends money

for development projects
 IMF
Basic Premise:
all nations seek a workable international monetary
system which transcends their conflicting national
interests

IMF Promotes
International monetary cooperation
Orderly exchange and payment systems
Available funds for BOP corrections
 IMF and Exchange Rates
Articles of Agreement (1945)

• Set fixed exchange rates between member nations

• Par value – based on U.S.$ and gold @ $35/oz
• U.S. would redeem U.S.$ for gold
• U.S.$ was only currency redeemable for gold
• U.S.$ was method of international payment and
reserve currency
 The World Bank

2 Major Institutions 3 Minor Institutions

• International Bank for • International Finance
Reconstruction and Corporation (IFC)
Development (IBRD) • Multilateral Investment
• International Guarantee Agency
Development Association (MIGA)
(IDA) • International Center for
the Settlement of
Investment Disputes
(ICSID)
 WTO
Goal: Reduce or eliminate trade barriers and
restrictions among trading nations

• Established in 1995
• 153 members set and implement trade rules among
nations
• Minimize government action against trade
 WTO
WTO Principles:

1. Trade without discrimination (MFN

Principle)
2. Freer trade through negotiation
3. Predictability through binding and
transparency
4. Promoting fair competition
5. Encouraging development and economic
reform
 WTO
Trade-related Intellectual Property Rights (TRIPS)
• copyright, trade mark, trade secrets and intellectual property
protection

Doha Development Agenda

• provides market access to least developed nations
• duty and quota-free imports on manufactured goods
• agriculture hard to agree on
 Economics Integration
Agreements
Free Trade Area (FTA)
• tariffs among members eliminated but
external tariffs remain

Customs Union
• collaboration that adds common external
tariffs to an FTA
 Economics Integration
Agreements

Common Market
customs union that includes mobility of
services, people and capital

Complete Economic Integration

integration on economic and political
levels
Insert Table 3.1 here
 Examples of
Economic Integration Agreements
North America
North American Free Trade
Agreement (NAFTA)
Central & South America
Mercosur
Central American Free Trade
Union (DR-CAFTA)
Andean Community (CAN)
Europe
European Union (EU)
Africa
Economic Community of West
African States (ECOWAS)
Common Market for Eastern and
Southern Africa (COMESA)
Southern African Development
Community (SADC)
African Free Trade Zone (AFTZ)
African Union (AU)
Asia
Association of Southeast Asian
Nations (ASEAN & ASEAN+3)
 The European Union

EU Development
• countries committed to economic and political integration
• established in 1993 by the EC in the Maastricht Treaty

3 Areas of Integration
1. Economic Community
2. Foreign Policy
3. Domestic Affairs
 EU Profile Today

• 27 member countries
• 500 million people
• 7.3%+ of world population
• 20% of global output
• 17.3% global merchandise trade
• supranational body with regional government
• euro used in 17 member countries and by
others
EU Institutions
European Parliament
legislative body; members popularly elected
from member nations
Council of the European Union
primary policy setting institution
European Commission
27 commissioners responsible for daily
operations
European Court of Justice
rules on EU policies under the Treaty of Rome
• EU Institutions, cont’d.

Court of Auditors
reviews spending of EU funds
European Economic and Social
Commission (EESC)
focuses on occupational & social interests
Committee of Regions (CoR)
local views on transportation, education & health
European Investment Bank
finances projects of EU objectives
European Central Bank (ECB)
sets and implements EU monetary policy
 EU Impact on IB
The Changes
• harmonized national standards, labeling laws, testing
procedures & consumer protection issues
• eliminated shared border taxes and customs laws of member
nations
• introduced common currency – the €
The Results
• world’s largest trading economy
• FDI outflow = 26% of world output
• cost of Doing Business in EU is reduced
• EU regulations set new global standards
 Thank you for …

• … your attention
• ... your participation
• … your commitment
• … your happiness

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