CHAPTER 1: GLOBALIZATION
marketplace.
GLOBALIZATION
• process by which this transformation is
occurring
• the shift toward a more integrated and
interdependent world economy.
• used to describe how trade and technology
have made the world into a more
connected and interdependent place.
• the process of interaction and integration
among people, companies, and
governments worldwide
• the spread of the flow of financial
products, goods, technology, information
and jobs across national borders and
cultures
ADVANTAGES
1. Increases economic growth
2. Makes production more affordable
3. Promotes working together
4. Brings opportunities to poorer countries
DISADVANTAGES
1. Unequal economic growth
2. Lack of local businesses
3. Increases potential global recessions
4. Exploits cheaper labor markets
5. Causes job displacement
IMPEDIMENTS OF GLOBALIZATION
▪ formal and informal barriers to trade
between countries,
▪ barriers to foreign direct investment
▪ transportation costs
▪ issues associated with economic and
political risk,
▪ the shear managerial challenge of
coordinating a globally dispersed supply
chain
facets of globalization
1. globalization of markets
• refers to the merging of
historically distinct and separate
national markets into one huge
• the tastes and preferences of of
consumers in different nations are
beginning to converge on some
global norm, thereby helping to
create a global market
• these are the markets for industrial
goods and materials that serve
universal needs all over the world
• these include the markets for
commodities such as aluminum, oil
and wheat; for industrial products
such as microprocessors, computer
memory chips (DRAMs) and
commercial jet aircraft; for
computer software; and for
financial assets
2. globalization of production
• refers to the sourcing of goods and
services from locations around the
globe to take the advantage of
national differences in the cost and
quality of factors of production
• companies hope to lower their
overall cost structure or improve
the quality or functionality of their
product offering, thereby allowing
them to compete more effectively
• FACTOR OF PRODUCTION -
inputs into the productive process
of firm
▪ labor
▪ management,
▪ land,
▪ capital
▪ technological know-how
The Emergence of Global Institutions
Global Institutions are needed to help manage,
regulate and police the global marketplace and to
promote the establishment of multinational
treaties
General Agreement on Tariffs and Trade(GATT)
band its successor, the World Trade
Organization(WTO); the International Monetary
Fund(IMF) and its sister institution, the World
Bank; and the United Nations(UN).
All these institutions were created by voluntary
agreement between individual nation-states and
their functions are enshrined in international
treaties
1. World Trade Organization
• primarily 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
• responsible for facilitating the
establishment of additional
multinational agreements among
WTO member-states
• the WTO has promoted the
lowering of barriers to cross-border
trade and investment
• the WTO has been the instrument
of its member-states, which have
sought to create a more open global
business system unencumbered by
barriers to trade and investment
between countries
2. International Monetary Fund & World
Bank
• they were both created in 1944 by
44 nations that met at Bretton
Woods, New Hampshire
• significant players in the global
economy
World Bank
• was set up to promote economic
development in the world's poorer
nations
• it has focused on making low-
interest loans to cash strapped
governments in poor nations that
wish to undertake significant
infrastructure investments (such as
building dams or roads)
International Monetary Fund
• was established to maintain order
in the international monetary system
• is often seen as the lender of last
resort to nation-states whose
economies are in turmoil and whose
currencies are losing value against
those of other nations
3. United Nations
• was established October 24, 1945,
by 51 countries committed to
preserving peace through
international cooperation and
collective security.
• UN Charter, an international
treaty that establishes basic
principles of international relations.
• UN has four purposes:
i. to maintain international
peace and security;
ii. to develop friendly relations
among nations;
iii. to cooperate in solving
international problems and
in promoting respect for
human rights;
iv. and to be a center for
harmonizing the actions of
nations.
• UN is perhaps best known for its
peacekeeping role
4. 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. e
• established to formulate a
coordinated policy response to
financial crises in developing
nations,.
DRIVERS OF GLOBALIZATION
• used to describe on who are the main
operator for globalization
 • refers on what empowers globalization and
on how it continuously works
1. 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
• Many of the barriers to international trade
took the form of high tariffs on imports of
manufactured goods. The typical aim of
such tariffs was to protect domestic
industries from foreign competition
2. THE ROLE OF TECHNOLOGICAL
CHANGES
• refers to as "the spread of technology
across global economy"
• The lowering of trade barriers made
globalization of markets and production a
theoretical possibility. Technological
change has made it a tangible reality
• Since the end of World War II, the world
has seen major advances in
communication, information processing,
and transportation technology, including
the explosive emergence of the Internet
• the role of technological change:
(1) Microprocessors and
Telecommunications;
(2) The Internet;
(3) Transportation Technology ;
(4) Implications for the Globalization
of Production;
(5) Implications for the Globalization
of Markets.
Microprocessors and
Telecommunications
• enabled the explosive growth of
high-power, low-cost computing,
vastly increasing the amount of
information that can be processed
by individuals and firms
• microprocessor also underlies
many recent advances in
telecommunications technology
• Over the past 30 years, global
communications have been
revolutionized by developments in
satellite, optical fiber, wireless
technologies, and the Internet
• Moore’s law predicts that the
power of microprocessor
technology doubles and its cost of
production falls in half every 18
months
The Internet
• The explosive growth of the
Internet since 1994 when the first
web browser was introduced is the
latest expression of this
development
• The Internet has developed into
the information backbone of the
global economy
• The Internet makes it much easier
for buyers and sellers to find each
other
Transportation Technology
• the development of commercial jet
aircraft and superfreighters and the
introduction of containerization,
which simplifies transhipment from
one mode of transport to another
• Containerization-has
revolutionized the transportation
business, significantly lowering the
costs of shipping goods over long
distances
Implications for the Globalization of
Production
• As transportation costs associated
with the globalization of production
have declined, dispersal of production
to geographically separate locations has
become more economical
• These developments make it
possible for a firm to create and then
manage a globally dispersed production
system, further facilitating the
globalization of production.
• A worldwide communications
network has become essential for many
international businesses
 Implications for the Globalization of
Markets
• Low-cost global communications
networks, including those built on top
of the Internet, are helping to create
electronic global marketplaces
• low-cost transportation has made
it more economical to ship products
around the world, thereby helping
create global markets
• low-cost jet travel has resulted in
the mass movement of people between
countries. This has reduced the cultural
distance between countries and is
bringing about some convergence of
consumer tastes and preferences.
• At the same time, global
communications networks and global
media are creating a worldwide culture
• media are primary conveyors of
culture;
The Changing Demographics of the Global
Economy
• This evolution will have a big impact on
the global economy
• A shrinking labor pool limits an economy's
growth potential as fewer people can
produce goods and services
• The growth slowdown in the global
working population is a major cause of the
decline in potential economic growth
1. THE CHANGING WORLD OUTPUT AND
WORLD TRADE PICTURE
2. THE CHANGING FOREIGN DIRECT
INVESTMENT PICTURE
• The stock of foreign direct investment
(FDI) refers to the total cumulative
value of foreign investments
3. THE CHANGING NATURE OF THE
MULTINATIONAL ENTERPRISE
• A multinational enterprise (MNE) is
any business that has productive
activities in two or more countries.
Since the 1960s, two notable trends in
the demographics of the multinational
enterprise have been
(1) the rise of non-U.S. multinationals
and
(2) the growth of mini-multinationals.
Non-U.S. Multinationals
The Rise of Mini-Multinationals
• Another trend in international business
has been the growth of medium-size
and small multinationals (mini-
multinationals).
4. THE CHANGING WORLD ORDER
• are high, but so may be the returns.
5. THE GLOBAL ECONOMY OF THE
TWENTY-FIRST CENTURY
The Globalization Debate
• Many influential economists, politicians,
and business leaders seem to think that the
shift toward a more integrated and
interdependent global economy a good
thing
• They argue that falling barriers to
international trade and investment are the
twin engines driving the global economy
toward greater prosperity
• They say increased international trade and
cross-border investment will result in
lower prices for goods and services
• They believe that globalization stimulates
economic growth, raises the incomes of
consumers, and helps create jobs in all
countries that participate in the global
trading system
1. ANTI-GLOBALIZATION PROTESTS
2. GLOBALIZATION, JOBS, AND INCOME
• The critics argue that falling trade barriers
allow firms to move manufacturing
activities to countries where wage rates are
much lower
3. GLOBALIZATION, LABOR POLICIES,
AND THE ENVIRONMENT
• A second source of concern is that free
trade encourages firms from advanced
nations to move manufacturing facilities to
less developed countries that lack adequate
regulations to protect labor and the
 environment from abuse by the
unscrupulous
4. GLOBALIZATION AND NATIONAL
SOVEREIGNTY
• Another concern voiced by critics of
globalization is that today’s increasingly
interdependent 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
5. GLOBALIZATION AND THE WORLD’S
POOR
• Critics of globalization argue that despite
the supposed benefits associated with free
trade and investment, over the past
hundred years or so the gap between the
rich and poor nations of the world has
gotten wider
Managing in the Global Marketplace
• An international business is any firm that
engages in international trade or
investment
• In sum, managing an international
business is different from managing a
purely domestic business for at least four
reasons:
(1) countries are different
(2) the range of problems confronted by a
manager in an international business is
wider and the problems themselves more
complex than those confronted by a
manager in a domestic business
(3) an international business must find
ways to work within the limits imposed by
government intervention in the
international trade and investment system
(4) international transactions involve
converting money into different currencies
CHAPTER 2
POLITICAL ECONOMY of a nation - how the
political, economic, and legal systems of a country
are interdependent.
➢ They interact and influence each other
➢ They affect the level of economic well-
being in the nation
POLITCAL SYSTEM - the system of
government in a nation.
Assessed according to:
1. the degree to which the country
emphasizes COLLECTIVISM as opposed
to INDIVIDUALISM
2. the degree to which the country is
DEMOCRATIC or TOTALITARIAN
COLLECTIVISM AND INDIVIDUALISM
COLLECTIVISM– refers to a political
system that stresses the primacy of collective
goals over individual goals.
➢ Manage to benefit society as a whole,
rather than individual capitalists.
➢ traced to the Ancient Greek philosopher
Plato (427 – 347 B.C.).
Karl Marx
➢ He argued that the few benefit at the
expense of the many in a capitalist society
where individual freedoms are not
restricted.
➢ postulated that the wages earned by the
majority of workers in a capitalist society
would be forced down to subsistence
levels.
➢ argued that capitalists expropriate for
their own use the value created by
workers, while paying workers only
subsistence wages in return.
➢ the pay of workers does not reflect the full
value of their labor.
➢ He advocate state ownership of the basic
means of production, distribution, and
exchange.
HOW DOES MODERN-DAY SOCIALISM
LOOK?
socialism split into broad camps.
➢ COMMUNISM- believed that socialism
can only be achieved through violent
revolution and totalitarian dictatorship.
➢ SOCIAL DEMOCRATS - socialism is
achieved through democratic means
INDVIDUALISM - Refers to philosophy that an
individual should have freedom in his or her own
economic and political pursuits.
▪ traced to ancient Greek philosopher,
Aristotle
➢ Individual diversity and private ownership
are desirable.
• two central tenets
o guaranteeing individual freedom
and self-expression.
o The welfare of society is best
served by letting people pursue
their own economic self-interest.
➢ Individual economic and political
freedoms are the ground rules on which a
society should be based
DEMOCRACY AND TOTALITARIANISM
DEMOCRACY - is a political system in
which government is by the people, exercised
either directly or through elected
representatives.
➢ is based on the belief that citizens
should be directly involved in decision
making.
TOTALITARIANISM - is a form of
government in which one person or political
party exercises absolute control over all
spheres of human life, and opposing political
parties are prohibited
FOUR MAJOR FORMS OF
TOTALITARIANSIM
1. COMMUNIST TOTALITARIANISM
▪ advocates achieving socialism through
totalitarian dictatorship .
2. THEOCRACTIC
TOTALITARIANISM
▪ political power is monopolized by a party,
group, or individual that governs according
to religious principles
3. TRIBAL TOTALITARIANISM
▪ a political party that represents the
interests of a particular tribe monopolizes
power.
4. RIGHT WING TOTALITARIANISM
▪ individual economic freedom is allowed
but individual political freedom is
restricted in the belief that it could lead to
communism
PSEUDO-DEMOCRACIES
➢ Commonly refers to the political system
that identifies itself as democratic in nature
but in reality, offers no real choice for the
citizens.
WHAT IS AN ECONOMIC SYSTEM?
three types of economic systems
A. MARKET ECONOMY- all productive
activities are privately owned and
production is determined by the interaction
of supply and demand.
➢ For a market to work in this manner,
supply must not be restricted. A supply
restriction occurs when a single firm
monopolizes a market
B. COMMAND ECONOMIES -
government plans the goods and services
that a country produces, the quantity that is
produced, and the prices as which they are
sold.
➢ the objective of a command economy is
for government to allocate resources for
“the good of society.”
➢ all businesses are state owned, the
rationale being that the government can
then direct them to make investments that
are in the best interests of the nation
➢ mobilize economic resources for the public
good, the opposite often seems to have
occurred.
➢ dynamism and innovation are absent
from command economies.
C. MIXED ECONOMIES - certain sectors
of the economy are left to private
ownership and free market mechanisms
while other sectors have significant state
ownership and government planning
WHAT IS AN LEGAL SYSTEM?
LEGAL SYSTEM of a country – refers
to the rules, or laws, that regulate behavior
along with the processes by which the laws
are enforced and through which redress for
grievances is obtained.
➢ The legal system of a country is influence
by the prevailing political system
WHAT ARE DIFFERENT LEGAL SYSTEM?
three types of legal systems: Common Law,
Civil Law, and Theocratic Law.
 1. COMMON LAW - – is based on
tradition, precedent, and custom.
2. CIVIL LAW – is based on detailed set of
laws organized into codes.
3. THEOCRACTIC LAW – is based on
religious teachings.
DIFFERENCES IN CONTRACT
➢ 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
➢ United Nations Convention on Contracts
for the International Sale of Goods (CIGS).
o 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.
➢ When firms do not wish to accept the CIGS,
they often opt for arbitration
HOW PROPERTY RIGHTS AND
CORRUPTION ARE RELATED?
PROPERTY RIGHTS - –refers 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
Property rights can be violated through
PRIVATE ACTION - refers to theft, piracy, and
blackmail.
PUBLIC ACTION - can be done through legal
mechanism. It can also be done through illegal
means, or corruption, by demanding bribes from
businesses.
➢ NOTE: No society is immune to corruption
➢ Transparency International,
an independent nonprofit organization
dedicated to exposing and fighting corruption,
has also measured the level of corruption
among public officials in different countries.
➢ Foreign Corrupt Practices Act. This law
makes it illegal to bribe a foreign government
official to obtain or maintain business over
which that foreign official has authority, and it
requires all publicly traded companies to keep
detailed records that would reveal whether a
violation of the act has occurred.
HOW CAN INTELLECTUAL PROPERTY BE
PROTECTED?
INTELLECTUAL PROPERTY – refers to
property that is the product of intellectual activity.
Can me protected using:
PATENTS - an exclusive rights for a defined
period to the manufacture, use, or sale of that
invention
COPYRIGHTS - are the exclusive legal rights of
authors, composers, playwrights, artists, and
publishers to publish and disperse their work as
they see fit
TRADEMARKS are design and names by which
merchants or manufacturers designate and
differentiate their products.
➢ World Intellectual Property Organization,
all of which have signed international treaties
designed to protect intellectual property,
including the oldest such treaty, the Paris
Convention for the Protection of Industrial
Property,
➢ Trade to cover intellectual property. Under the
new agreement, known as the Trade-Related
Aspects of Intellectual Property Rights
(TRIPS), as of 1995 a council of the World
Trade Organization is overseeing enforcement
of much stricter intellectual property
regulations
WHAT IS PRODUCT SAFETY AND
LIABILITY?
PRODUCT SAFETY LAWS - set certain
standards to which a product must adhere.
➢ Both civil and criminal product liability laws
exist.
➢ Civil laws call for payment and monetary
damages.
➢ Criminal liability laws result in fines or
imprisonment.
➢ PRODUCT LIABLITY - involves holding a
firm and its officers responsible when a
product causes injury, death, or damage.
CHAPTER 3
• GNI (GROSS NATIONAL INCOME) is
regarded as a yardstick for the economic
activity of a country; it measures the total
annual income received by residents of a
nation.
• common measure of economic
development
• purchasing power parity (PPP) An adjustment
in gross domestic product per capita to reflect
differences in the cost of living
BROADER CONCEPTIONS OF
DEVELOPMENT: AMARTYA SEN
Amartya Sen – argued 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 should be seen as a process
of expanding the real freedoms thatpeople
experience
▪ development is not just an economic
process, but is a political one too, and to
succeed requires the “democratization” of
political communities
Human Development Index (HDI) - an
attempt by the UN to assess the impact of a
number of factors on the quality of human life in
a country.
o HDI is scaled from 0 to 1.
▪ Countries scoring less than 0 -low
human development
▪ Scoring from 0.5 to 0.8 - medium
human development
▪ score above 0.8 - high human
development
▪ HDI is based on three measures
o life expectancy at birth
o educational attainment
o whether average incomes, based on PPP
estimates, are sufficient to meet thebasic
needs of life in a country
Innovation - development of new products,
processes, organizations, management practices,
and strategies and seen as the product of
entrepreneurial activity
Entrepreneurs - Those who first commercialize
innovations
POLITICAL ECONOMY AND
ECONOMIC PROGRESS
country’s economic development is a
function of its economic and political
systems
INNOVANTION AND
ENTREPRENEURSHIP ARE ENGINES OF
GROWTH
Innovation - development of new products,
processes, organizations, management practices,
and strategies and seen as the product of
entrepreneurial activity
Entrepreneurs - Those who first
commercialize innovations
INNOVATION AND
ENTREPRENEURSHIP REQUIRE A
MARKET ECONOMY
argued that the economic freedom associated with
a market economy creates greater incentives for
innovation and entrepreneurship than either a
planned or a mixed economy
In a planned economy, the state owns all means of
production
Main Factors in the economic stagnation:
❖ Lack of economic freedom
❖ Incentives for innovation
❖ Monopoly
Privatization refers to the process of selling state-
owned enterprises to private investors.
INNOVATION AND
ENTREPRENEURSHIP REQUIRE
STRONG PROPERTY RIGHTS
State can expropriate the profits from innovation
through legal means or through illegal means.
Hernando de Soto - argued that much of the
developing world will fail to reap the benefits of
capitalism until property rights are better defined
and protected
• he says the key problem is not the risk of
expropriation, but the chronic inability of
property owners to establish legal title to
the property they own
THE REQUIRED POLITICAL SYSTEM
Five of the fastest growing economies of the
past 30 years—China, South Korea,
Taiwan, Singapore, and Hong Kong
 common at the start of their economic
growth: undemocratic governments.
Lee Kuan Yew - believe that a country
needs to develop discipline more than
democracy.
totalitarian regime that is committed to a
market system and strong protection of
property rights is capable of promoting
economic growth.
ECONOMIC PROGRESS BEGETS
DEMOCRACY
subsequent economic growth often leads to
establishment of a democratic regime.
GEOGRAPHY, EDUCATION,
AND ECONOMIC DEVELOPMENT
Jeffrey Sachs- argues throughout history, coastal
states, with their long engagements in
international trade, have been more supportive of
market institutions than landlocked states,
He also argues that, irrespective of the
economic and political institutions a
country adopts, adverse geographic
conditions—
Education emerges as another important
determinant of economic development
The general assertion is that nations that invest
more in education will have higher growth rates
because an educated population is a more
productivepopulation.
STATES IN TRANSITION
TWO TRENDS that made the political
economy of many of the world’s nation-states
changed radically since the late 1980’s:
o wave of democratic
revolutions
o a strong move away from
centrally planned and mixed
economies and toward a
more free market economic
model
THE SPREAD OF DEMOCRACY
❖ One notable development of the past
30 years
❖ Political freedom into three broad
groupings:
“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, often in the context of corruption, weak
rule of law,ethnic strife, or civil war.
Not free” countries - the political process is
tightly controlled and basic freedoms are denied.
Three main reasons account for the spread of
democracy:
many totalitarian regimes s failed to
deliver economic progress to the vast
bulk of their populations.
new information and communication
technologies
economic advances have led to the
emergence of increasingly prosperous
middle and working classes that have
pushed for democratic reforms.
THE NEW WORLD ORDER AND GLOBAL
TERRORISM
❖ Francis Fukuyama- goes on to say
that the war of ideas may be at an end
and that liberal democracy has
triumphed
Samuel Huntington - the late influential political
scientist n argued there is no “universal”
civilization based on widespread acceptance of
Western liberal democratic
theorized that modernization in non-
Western societies can result in a retreat
toward the traditional
Global terrorism - is a product of the tension
between civilizations and the clash of value
systems and ideology
THE SPREAD OF MARKET-
BASED SYSTEMS
HERITAGE FOUNDATION - a
politically conservative U.S. research
foundation, gives some idea of the
degree to which the world has shifted
toward market-based economic systems
THE NATURE OF ECONOMIC
TRANSFORMATION
The shift toward a market-based economic
system often entails a number of steps:
deregulation, privatization, and creation of a
legal system to safeguard property rights.
A. DEREGULATION - Removal of
government restrictions concerning the
conduct of a business.
❖ command economies
exercised tight control over
prices and output, setting both
through detailed state planning
❖ mixed economies - the role of the
state was more limited
B. PRIVATIZATION - transfers the
ownership of state property into the
hands of private individuals, frequently
by the sale of state assets through an
auction.
❖ a way to stimulate gains in
economic efficiency by giving
new private owners a powerful
incentive—the reward of greater
profits
C. LEGAL SYSTEMS - Without a legal
system that protects property rights, and
without the machinery to enforce that
system, the incentive to engage in
economic activity can be reduced
substantially by private and public
entities, including organized crime, that
expropriate the profits generated by the
efforts of private-sector entrepreneurs.
BENEFITS, COSTS, RISKS, AND OVERALL
ATTRACTIVENESS OF DOING BUSINESS
INTERNATIONALLY
BENEFITS. the long-run monetary benefits of
doing business in a country are a:
1. Function of the size of the market
2. the present wealth (purchasing power) of
consumers
3. future wealth of consumers.
❖ By identifying and investing early in a
potential future economic star,
international firms may build brand loyalty
and gain experience in that country’s
business practices. Early entrants into
potential future economic stars may be able
to reap substantial first- mover advantages.
▪ First-mover advantages -
Advantages accruing to the first to
enter a market.
- ❖ Late entrants may find that they lack the
brand loyalty and experience necessary to
achieve a significant presence in the
market. Late entrants may fall victim to
late-moverdisadvantages.
▪ Late-Mover Disadvantages -
Handicaps experienced by being a
late entrant in a market.
COSTS. A number of political, economic, and
legal factors determine the costs of doing
business in a country.
▪ political factors - a company may have 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. It may be more
costly to do business in relatively
primitive or undeveloped economies
because of the lack of infrastructure and
supporting businesses.
▪ legal factors
o 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, and the
like.
o costly to do business in a country
that lacks well-established laws
for regulating business practice.
RISKS. As with costs, the risks of doing
business in a country are determined by a
number ofpolitical, economic, and legal factors.
▪ Political Risk - The likelihood that
political forces will cause drastic
changes in a country’s business
environment that will adversely affect
the profit and other goals of a particular
business enterprise.
▪ Economic Risk -The likelihood that
events, including economic
mismanagement, will cause drastic
changes in a country’s business
environment that adversely affect the
profit and other goals of a particular
business enterprise.
o indicator of economic
mismanagement: country’s
inflation rate, the level of
business and government debt in
the country.
▪ Legal Risk - The likelihood that a
trading partner will opportunistically
break a contractor expropriate
intellectual property rights.
OVERALL ATTRACTIVENESS
❖ The overall attractiveness of a country as a
potential market or investment site for an
international business depends on balancing
the benefits, costs, and risks associated with
doing business in that country
CHAPTER 5
Ethics serves as the foundation for
what people do or not, and ultimately
whatcompanies engage in globally.
▪ refers to accepted principles
of right or wrong that govern
the conduct of aperson, the
members of a profession, or
the actions of an organization.
Business Ethics - Accepted principles
of right or wrong governing the
conduct ofbusiness people
Ethical Strategy- A course of action that
does not violate a company’s business
ethics.
ETHICAL ISSUES IN INTERNATIONAL
BUSINESS
A. EMPLOYMENT PRACTICES
B. HUMAN RIGHTS
▪ One of the most obvious historic
examples was South Africa
during the days ofwhite rule and
apartheid, which did not end
until 1994.
▪ General Motors, which had
significant activities in South
Africa adopted theSullivan
principles.
▪ SULLIVAN PRINCIPLES –
named after Leon Sullivan
o Two principles must be
followed:
▪ the company should not obey the
apartheid laws in its own South
African operations
▪ the company should do
everything within its power to
promotethe abolition of
apartheid laws.
C. ENVIRONMENTAL POLLUTION
▪ The atmosphere and oceans can be
viewed as a global commons.
▪ tragedy of the commons
occurs when a resource held in
common by all, butowned by no
one, is overused by individuals,
 resulting in its degradation
▪ Corporations can contribute to
the global tragedy of the
commons.
D. CORRUPTION
▪ The Lockheed case was the
impetus for the 1977 passage of
the Foreign Corrupt Practices
Act
▪ Foreign Corrupt Practices Act
U.S. - law regulating behavior
regarding the conduct of
international business in the
taking of bribes and other
unethical actions.
o act was subsequently
amended to allow for
“facilitating payments.”
Sometimes known as
speed money or grease
payments
▪ Convention on Combating
Bribery of Foreign Public
Officials in International
Business Transactions - An
OECD convention that
establishes legally binding
standards to criminalize bribery
of foreign public officials in
international business
transactions and provides for a
host of related measures that
makethis effective.
E. MORAL OBLIGATIONS OF
MULTINATIONAL CORPORATIONS.
ETHICAL DILEMMAS
Ethical Dilemma - A situation in which
there is no ethically acceptable solution.
THE ROOTS OF UNETHICAL
BEHAVIOR
A. PERSONAL ETHICS - are the
generally accepted principles
of right and wrong governing
the conduct of individuals.
first step to establishing a strong sense of
business ethics
B. DECISION-MAKING PROCESSES
C. ORGANIZATION CULTURE - The
values and norms shared among an
organization’s employees. It
deemphasizes business ethics, reducing
all decisions to the purely economic.
▪ Values are abstract ideas about
what a group believes to be
good, right, and desirable
▪ Norms are the social rules and
guidelines that prescribe
appropriate behavior in
particular situations
D. UNREALISTIC PERFORMANCE
GOALS
▪ pressure from the parent
company to meet unrealistic
performance goals that can be
attained only by cutting corners
or acting in an unethical manner.
E. LEADERSHIP
▪ Other employees in a business
often take their cue from
business leaders, and if those
leaders do not behave in an
ethical manner, they might not
either
F. SOCIETAL CULTURE
▪ the study found that enterprises
headquartered in cultures where
individualism and uncertainty
avoidance are strong were more
likely to emphasize the
importance of behaving ethically
than firms headquartered in
cultures where masculinity and
power distance are important
cultural attributes
PHILOSOPHICAL APPROACHES
TO ETHICS
STRAW MEN. raised by business ethics scholars
primarily to demonstrate that they offer
 inappropriate guidelines for ethical decision
making in a multinational enterprise
FOUR APPROACHES OF STRAW MEN.
A. The Friedman Doctrine
▪ Milton Friedman – his basic position is the “
the social responsibility of business is to
increase profits,” so long as the company
stays within the rules of law
▪ He explicitly rejects the idea that businesses
should undertake social expenditures beyond
those mandated by the law and required for
the efficient running of a business
B. Cultural Relativism - The belief that
ethics are culturally determined and that
firms should adopt the ethics of the
cultures in which they operate.
▪ implicitly rejects the idea that
universal notions of morality
transcend differentcultures
C. The Righteous Moralist - One who
claims that a multinational’s home-
country standards of ethics are the
appropriate ones for companies to
follow in foreign countries. This
approach typically associated with
managers from developed nations.
D. The Naive Immoralist - One who 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
1. Utilitarian Approaches to Ethics - These hold
that the moral worth of actions or practices is
determined by their consequences.
▪ The utilitarian approach to business
ethics dates to philosophers such as
David Hume (1711–1776), Jeremy
Bentham (1748–1832), and John Stuart
Mill (1806–1873).
▪ Utilitarianism is committed to the
maximization of good and the
minimization of harm
2. Kantian Ethics - The belief that people
should be treated as ends and never as means
to the ends of others.
Kantian ethics is based on the philosophy of
Immanuel Kant (1724– 1804)
RIGHTS THEORIES
A twentieth-century theory that
recognizes that human beings have
fundamental rightsand privileges that
transcend national boundaries and
cultures.
Moral theorists argue that fundamental
human rights form the basis for the
moralcompass
Universal Declaration of Human
Rights - A United Nations document that
lays down thebasic principles of human
rights that should be adhered to.
Moral agent is any person or
institution that is capable of moral
action such as agovernment or
corporation)
JUSTICE THEORIES
❖ focus on the attainment of a just
distribution of economic goods and
services.
❖ JUST DISTRIBUTION- A
distribution of goods and services
that is considered fair andequitable.
❖ JOHN RAWLS - argues that all economic
goods and services should
bedistributed equally except when
an unequal distribution would work
to everyone’s advantage
❖ VEIL OF IGNORANCE - everyone
is imagined to be ignorant of all of his
or her particular characteristics.
❖ DIFFERENCE PRINCIPLE -
formulated by Jon Rawls, which is
that inequalities are justified if they
benefit the position of the least-
advantagedperson.
MAKING ETHICAL DECISIONS
 INTERNATIONALLY Refers to the idea that businesspeople should
7 actions that an international business and its consider the social consequences of economic
managers can take to make sure ethicalissues actions when making business decisions and that
are considered in business decisions: there should be a presumption in favor of decisions
that have both good economic and social
1. HIRING AND PROMOTION -
consequences.
businesses should strive to hire and
noblesse oblige (is a French term that refers to
promote people whohave a strong
honorable and benevolent behavior considered
sense of personal ethics and would not
the responsibility of people of high (noble) birth)
engage in unethical or illegal behavior.
6 SUSTAINABILITY
2. ORGANIZATION CULTURE
The core idea of sustainability is that the
AND LEADERSHIP - build an
organization—through its actions— does not
organizational culture and
exert a negative impact upon the ability of future
exemplify leadership behaviors
generations to meet their own economic needs
that place a high value on ethical
and that its actions impart long-runeconomic and
behavior.
social benefits on stakeholders.
▪ CODE OF ETHICS -
SUSTAINABLE STRATEGIES- Strategies
which is a formal
that not only help the multinational firm make
statement of the ethical
good profits, but that do so without harming the
prioritiesa business
environment, while simultaneously ensuring that
adheres to.
the corporation acts in a socially responsible
3. DECISION-MAKING
manner with regard to its multiple stakeholders
PROCESS -business people must
be able to think through theethical
implications of decisions in a
systematic way.

STAKEHOLDERS - The individuals or groups

that have an interest, stake, or claim in the actions
and overall performance of a company.
INTERNAL STAKEHOLDERS - People who
work for or own the business such as employees,
directors, and stockholders.
EXTERNAL STAKEHOLDERS- Individuals
or groups that havesome claim on a firm such as
customers, suppliers, and unions.
4. ETHICS OFFICERS - To make
sure that a business behaves in an
ethical manner, firms now must have
oversight by a high-ranking person or
people known to respect legal and
ethical standards.
4.DEVELOP MORAL COURAGE

5 CORPORATE SOCIAL
RESPONSIBILITY
CHAPTER 8
FOREIGN DIRECT INVESTEMNT (FDI)
• occurs when a firm invests directly in
facilities to produce or market a product in
a foreign country.
• is a category of cross-border investment in
which an investor resident in one economy
establishes a lasting interest in and a
significant degree of influence over an
enterprise resident in another economy.
FDI TAKES 2 FORMS
1. GREENFIELD INVESTMENT - which
involves the establishment of a new
operation in a foreign country.
2. ACQURING OR MERGING – existing
firm in the foreign country
FLOW OF FDI – amount of FDI undertaken
over a given time period (normally a year)
STOCK OF FDI – total accumulated value of
foreign-owned assets at a given time
TRENDS IN FDI
1.firms still fear protectionist pressures
2. increase in FDI has been driven by the political
and economic changes
US- largest source country of FDI
DIFFICULTIES TO DO BUSINESS IN
CHINA
1. Lack of purchasing power
2. Highly regulated environment
3. Problems with local joint
Merger and Acquisitions – are typically quicker
to execute than building something from literally
ground up
When contemplating FDI, when do firms
prefer to acquire existing assets rather than
undertake greenfield investments?
1. Many firms apparently believe that if
they do not acquire a desirable target
firm, then their global rivals will.
2. Second, foreign firms are acquired
because those firms have valuable
strategic assets, such as brand loyalty,
customer relationships, trademarks
3. Third, firms make acquisitions because
they believe they can increase the
efficiency of the acquired unit by
transferring capital, technology, or
management skills.
3 Theories of FDI
1. seeks to explain why a firm will favor
direct investment as a means of entering a
foreign market when two other
alternatives, exporting and licensing, are
open to
2. seeks to explain why firms in the same
industry often undertake foreign direct
investment at the same time and why they
favor certain locations over others as
targets for foreign direct investment
3. known as the eclectic paradigm, attempts
to combine the two other perspectives into
a single holistic explanation of foreign
direct investment
Exporting – sale of products produced in one
country to residents
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
NOTE: FDI is expensive because a firm must
bear the costs of establishing production facilities
in a foreign country or of acquiring a foreign
enterprise.
FDI is risky because of the problems associated
with doing business in a different culture where
the rules of the game may be very different
LIMITATION OF EXPORTING
• Exporting strategy is often constrained by
o Transportation costs
o Trade barriers
LIMITATION OF LICENSING
Internationalization - refer to a company that
takes steps to increase its footprint or capture
greater market share outside of its country of
domicile by branching out into international
markets
According to internalization theory, licensing
has three major drawbacks as a strategy for
exploiting foreign market opportunities
1. Licensing may result in a firm giving away
valuable technological know-how to a potential
foreign competitor.
2. Licensing does not give a firm the tight control
over manufacturing, marketing, and strategy in a
foreign country that may be required to maximize
its profitability.
3. the firm’s competitive advantage is based not as
much on its products as on the management,
marketing, and manufacturing capabilities that
produce those products.
FDI IS MORE PROFITABLE THAN
LICENSING WHEN
1. Firm has valuable know-how that cannot
be adequately protected by licensing
contract
2. when the firm needs tight control over a
foreign entity to maximize its market share
and earnings in that country
3. when a firm’s skills and know-how are not
amenable to licensing
Strategic Behavior
One theory is based on the idea that FDI flows are
a reflection of strategic rivalry between firms in
the global marketplace.
oligopoly is 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.
John Dunning
• Argues that location-specific advantages
are also of considerable importance in
explaining both the rationale for and the
direction of foreign direct investment.
Eclectic Paradigm –
• argument that combining location specific
assets or resource endowments and the
firm’s own unique assets often requires
FDI; it requires the firm to establish
production facilities where those foreign
assets or resource endowments are located.
Location-Specific Advantages
• Advantages that arise from using resource
endowments or assets that are tied to a
particular foreign location
• comes from the sheer concentration of
intellectual talent in this area
• arises from a network of informal contacts
that allows firms to benefit from each
other’s knowledge generation.
• Economists refer to such knowledge
“spillovers” as externalities.
POLITICAL IDEOLOGY AND FDI
• Between these two extremes is an
approach that might be called pragmatic
nationalism.
RADICAL VIEW
• traces its roots to Marxist political and
economic theory.
• FDI by the MNEs of advanced capitalist
nations keeps the less developed countries
of the world relatively backward and
dependent on advance capitalist nations for
investment, jobs, and technology.
• no country should ever permit foreign
corporations to undertake FDI,
• multinational enterprise (MNE) is an
instrument of imperialist domination.
FREE MARKET VIEW
• traces its roots to classical economics and
the international trade theories of Adam
Smith and David Ricardo.
• this view has been strengthened by the
internalization explanation of FDI.
• argues that international production should
be distributed among countries according
to the theory of comparative advantage.
• MNE is an instrument for dispersing the
production of goods and services to the
most efficient locations
PRAGMATIC NATIONALISM
• The pragmatic nationalist 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.
BENEFITS AND COST OF FDI
The main benefits of FDI for a host country arise
from:
(1) Resource transfer effect
(2) Employment effects
(3) Balance-of-payments effects
(4) Effects on competition and economic
growth.
Resource Transfer Effect
Resource-transfer effects can be categorized
based on their effects on capital, technology
and management resources. Such resource
transfer can stimulate the economic growth of
the host country
A. Availability of Capital:
B. Availability of modern technology:
C. Exploitation of natural resources:
EMPLOYMENT EFFECT
• Increase in Employment
• Cynics argue that not all the “new jobs”
created by FDI represent net additions in
employment.
Economic theory- tells us that the efficient
functioning of markets depends on an adequate
level of competition between producers.
HOST COUNTRY COST
Three cost of FDI concerned in host country, is
that they arise the following:
(1) Possible adverse effects on competition
(2) Adverse effects on balance of payment
• the set is against the initial capital inflow
that comes with FDI must be subsequent
outflow earnings from the subsidiaries to
its parent company.
• Secondly, the concern arises when a
foreign subsidiary imports a substantial
number of inputs from abroad which
results in a debit in a current amount of
host country balance of payment.
(3) The perceived loss of national sovereignty and
autonomy
NATIONAL SOVEREIGNTY AND
AUTONOMY
Political scientist Robert Reich has noted that
such concerns are the product of outmoded
thinking because they fail to account for the
growing interdependence of the world economy.
HOME COUNTRY BENEFITS
There are three(3) ways a home country would
benefit from FDI:
(1) The home country's balance of payments
benefits from inward flow from foreign earnings
(2) Benefits from outward flow of FDI
employment effects
(3) Learning of valuable skills needed for greater
production
HOME COUNTRY COST
The most important concern in FDI within the
home country comes in two
ways.
(1) Center of balance of payments
(2) Employment effects of outward FDI
Some key consideration regarding the home
country cost of FDI includes:
Capital Outflows: initial capital outflow from
home nation to host nation adversely affects the
BPO position of Home Nation.
Job Displacement: if FDI by Home nation has
replaced the export mode, it adversely effects the
exports of home nation.
Trade Imbalances: if FDI replaced the trade, then
the goods which were earlier manufactured in
home nation are now manufactured in host
GOVERNMENT POLICY INSTRUMENTS
AND FDI
HOME-COUNTRY POLICIES
Is where the FDI comes from albeit Domestic
Corporations of said country or Government
funds.
Encouraging Outward FDI
Many investor nations now have government-
backed insurance programs to cover major types
of foreign investment risk. The types of risks
insurable through these programs include the risks
of expropriation (nationalization), war losses, and
the inability to transfer profits back home
Restricting outward FDI
Virtually all investor countries, including the
United States, have exercised some control over
outward FDI from time to time. One policy has
been to limit capital outflows out of concern for
the country’s balance of payments. nation. So
investment mode promotes unemployment in
home nation.
Host countries adopt policies designed both to
restrict and to encourage inward FDI.
Encouraging Inward FDI
• It is common for governments to offer
incentives to foreign firms to invest in
their countries. Such incentives take many
forms, but the most common are tax
concessions, low-interest loans, and grants
or subsidies.
Restricting Inward FDI
• Host governments use a wide range of
controls to restrict FDI in one way or
another. The two most common are
 ownership restraints and performance  eliminates all barriers to the trade of goods
requirements. and services among member
• Ownership restraints can take several countries, but members determine
forms. In some countries, foreign their own trade policies for nonmembers.
companies are excluded from specific
European Free Trade Association
fields.
(EFTA)- (between Iceland,
THREE TYPES OF INDUSTRIES Liechtenstein, and Switzerland)
and
1. High-technology industries in which North American Free Trade
protecting firm-specific expertise is Agreement (NAFTA)- (between the
of paramount importance and licensing is U.S, Canada and Mexico) are both free
hazardous. trade areas.
2. Global oligopolies, in which competitive 2. Customs Union
interdependence requires that
multinational firms maintain tight control over  eliminates trade barriers between member
foreign operations so that countries and adopts a common external
they have the ability to launch coordinated attacks trade policy.
against their global  most countries that enter a customer union
competitors.
desire further integration in the future
3. Industries in which intense cost pressures Ex. The Andean Community
require that multinational firms maintain tight (formerly known as Andean Pact) -
control over foreign operations (so that they can between Bolivia, Columbia, Ecuador
disperse manufacturing to locations around the and Peru.
globe where factor costs are most favourable in
order to minimize costs). 3. Common market

 has no barriers to trade between member

CHAPTER 9: countries, a common external trade policy,
and the free movement of the factors of
Regional Economic Integration production.
INTRODUCTION MERCOSUR (between Brazil,
 Regional Economic Integration→ means Argentina, Paraguay, and Uruguay) is
the agreement among countries in a aiming for common market status.
geographic region to reduce, and
ultimately remove, tariff and nontariff 4. Economic Union
barriers to the free flow of goods, services,  involves the free flow of products and
and factors of production between each factors of production among member
other. countries and the adoption of a common
• In this future scenario, free trade will external trade policy, but it also requires a
exist within each bloc, but each bloc common currency, harmonization of
will protect its market from outside m
competition with high tariffs e
m
b
LEVELS OF ECONOMIC INTEGRATION- e
r
There are 5 levels of economic integration: s
1. Free Trade Area ’

t
 ax rates, and a common monetary and
fiscal policy.
The European Union (EU) is an
economic union, although an imperfect
one since not all members of the EU
have adopted the euro, and differences
in tax rates across countries still
remain Economic Union.
5. Political Union
 involves a central political apparatus that
coordinates the economic, social, and
foreign policy of member states.
the EU is headed toward at least partial
political union
the United States is an example of even
closer political union
THE CASE FOR REGIONAL INTEGRATION-
NATHALIE
 THE ECONOMIC CASE FOR
INTEGRATION
 regional economic integration is an attempt
to achieve additional gains from the free
flow of trade and investment between
countries beyond those attainable under
international agreements such as the WTO.
 since it is easier to form an agreement with
a few countries than across all nations,
there has been a push toward regional
economic integration.
 THE POLITICAL CASE FOR
INTEGRATION
→ Linking countries together, making
them increasingly dependent on each
other:
•
creates incentives for political
cooperation and reduces the
likelihood of violent conflict
• gives countries greater political
clout when dealing with other
nations.
 IMPEDIMENTS TO INTEGRATION
Despite the strong economic and political
arguments in support, integration has never
been easy to achieve or sustain for two main
reasons:
(1) although economic integration
aids the majority, it has its costs.
While a nation as a whole may
benefit significantly from a regional
free trade agreement, certain groups
may lose.
• people in some industries will
(2) arises from concerns over
national sovereignty
• it can result in a loss of
national sovereignty
• countries still want to protect
certain goods
❖ ex) Mexico and its
oil
• integration of monetary policies
can be complex
❖ ex) UK and the
pound/euro
THE CASE AGAINST REGIONAL
INTEGRATION-SHEILA
Regional Economic Integration is only beneficial
if the amount of trade it creates exceeds the
amount it diverts
 Trade creation→ occurs when high-
cost domestic producers are replaced by
low-cost producers within the free trade
area. It may also occur when highercost
external producers are replaced by
lower-cost external producers within the
free trade area.
 Trade diversion→ occurs when lower-
cost external suppliers are replaced by
higher-cost suppliers within the free
trade area.
REGIONAL ECONOMIC INTEGRATION IN
EUROPE
 Europe has two trade blocs
 1. The European Union (EU) with 28
members
2. The European Free Trade Association
(EFTA) with 4 members
 The EU is seen to become as the world’s
economic and political superpower as
the United States.
 EVOLUTION OF THE EUROPEAN
UNION
 The European Union (EU) is the product
of two political factors:
(1) the devastation of western
Europe during two world wars, and
the desire for a lasting peace, and
(2) the European nations’
desire to hold their own on the
world’s political and economic
stage.
 The forerunner of the EU, the European
Coal and Steel Community, was formed in
1951 by Belgium, France, West Germany,
Italy, Luxembourg, and the Netherlands.
• Its objective was to remove barriers to
intragroup shipments of coal, iron,
steel, and scrap metal.
 The Treaty of Rome established the
European Economic Community in 1957
with the goal of becoming a common
market.
• the name changed to the EU in 1993
 POLITICAL STRUCTURE OF THE
EUROPEAN UNION
The four main institutions of the EU:
1. The European Commission→
responsible for proposing EU legislation,
implementing it, and monitoring
compliance with EU laws by member-
states.
2. The European Council→ the heads of
state of EU members and the president of
the European Commission.
3. The European Parliament→ is directly
elected by the populations of the
memberstates. It debates legislation
proposed by the commission and
forwarded to it by the council.
• 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.
• The Treaty of Lisbon also created a
new position, a president of the
European Council, who serves a 30-
month term and represents the
nation-states that make up the EU.
4. The Court of Justice: comprised of one
judge from each country, is the supreme
appeals court for EU law.
 THE SINGLE EUROPEAN ACT
 was born out of frustration among EC
members that the community was not
living up to its promise
 was adopted by the EU in 1987
 committed EC countries to work toward
establishment of a single market by
December 31, 1992.
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 o
Cabotage- the right of foreign
truckers to pick up and deliver goods
within another member-state’s
borders—by the end of 1992
Impact of the Single European Act
 THE ESTABLISHMENT OF THE
EURO
 EC members signed the Maastricht use a single exchange rate as an
Treaty instrument of macro-economic policy.
• Treaty agreed to in 1992, but not • Countries may react differently
ratified until January 1, 1994, that to changes in the euro
committed the 12 member-states of
the European Community to a
closer economic and political union
The Euro Experience: 1999 to the
 The euro is used by 18 of the 28 member- Sovereign Debt Crisis
states of the European Union; these 17
states are members of what is often  Since its establishment January 1,
referred to as the euro zone. 1999, the euro has had a volatile
trading history against the world’s
 By adopting the euro, the EU has created
major currency, the U.S. dollar.
the second largest currency zone in the
world after that of the U.S dollar.  Initially, the euro was valued at $1.17,
then fell in value relative to the dollar,
 Three long-term EU members—Great
but strengthened to an all-time high of
Britain, Denmark, and Sweden—are still
$1.54 in March ,2008
sitting on the sidelines.
 Reflecting persistent concerns over
Benefits of the Euro slow economic growth and large
budget deficits among several EU
 There are savings from having to
member-states, particularly Greece,
handle one currency, rather than
Portugal, Ireland, Italy, and Spain.
many.
 The adoption of a common currency
 ENLARGEMENT OF THE
makes it easier to compare prices
EUROPEAN UNION
across Europe.
 many countries, particularly from Eastern
 Faced with lower prices, European
Europe, have applied for membership
producers have been forced to look for
ways to reduce their production costs  To qualify for EU membership, the
to maintain their profit margins. applicants had to privatize state assets,
deregulate markets, restructure industries,
 A common currency has given a boost
and tame inflation. They also had to
to the development of a highly liquid
enshrine complex EU laws into their own
panEuropean capital market.
systems, establish stable democratic
 The development of a pan-European, governments, and respect human rights
euro denominated capital market will
 10 countries joined in 2004, expanding the
increase the range of investment
EU to 25 states, with population of 450
options open to both individuals and
million people, and a single continental
institutions.
economy with a GDP of 11 trillion
Costs of the Euro euros450 million people, and a single
continental economy with a GDP of 11
 The drawback, for some, of a single trillion
currency is that national authorities
 In 2007, Bulgaria and Romania joined, and
have lost control over monetary
in 2013 Croatia joined, bringing total
policy.
membership to 28 nations.
 Another drawback of the euro is that
 The new members were not able to adopt
the EU is not optimal currency area,
the euro for several years, and free
where similarities in the underlying
movement of labor among the new and
structure of economic activity make it
existing members was prohibited until then
feasible to adopt a single currency and
 → Turkey has been denied full member • access to a large and increasingly
because of concerns over human rights prosperous market and lower prices
for consumers from goods
REGIONAL ECONOMIC INTEGRATION IN produced in Mexico
THE AMERICAS- NATH & SHEILA
 U.S. and Canadian firms with production
 There is a move toward greater regional sites in Mexico are more competitive in
economic integration in the Americas. world markets
 The biggest effort is the North American The Case against NAFTA
Free Trade Agreement (NAFTA).
 Other efforts include the Andean  jobs could be lost, and wage levels could
Community and Mercosur. decline in the U.S. and Canada
 Mexican workers could emigrate north
THE NORTH AMERICAN FREE  Mexico would lose its sovereignty
TRADE AGREEMENT
NAFTA: The Results
 NAFTA became law January 1, 1994
 Canada, Mexico, and the United States are  Initial effects muted → overall impact has
the NAFTA’s participants. been small but positive - Increased trade
partnership.
NAFTA’S CONTENTS:  Employment
effects of
 Abolished tariffs on 99% of the goods NAFTA have
traded between members been moderate
 Removed barriers on the cross-border flow to small.
of services  Overall impact
 Protects intellectual property rights of NAFTA →
 Removes most restrictions on FDI between Small
members
 Allows each country to apply  THE ANDEAN COMMUNITY
environmental standards  A 1969 agreement among Bolivia, Chile,
 Established two commissions to impose Ecuador, Colombia, and Peru to establish a
fines and remove trade privileges when customs union.
environmental standards or legislation  Based on the EU model, but was far less
involving health and safety, minimum successful at achieving its stated goals.
wages, or child labor are ignored.  By the mid-1980s, the Andean Pact had all
but collapsed and had failed to achieve any
The Case for NAFTA
of its stated objectives
Proponents of NAFTA have argued that the free • No tariff-free trade among
trade area should be viewed as an opportunity to member countries, no
create an enlarged and more efficient productive common external tariff, and
base for the entire region. no harmonization of
economic policies.
 Mexico would benefit from
• Political and economic
• increased jobs as low-cost production problems seem to have
moves south and will see more hindered cooperation among
rapid economic growth as a result member countries.
 U.S. and Canada would benefit from  Countries of the Andean Pact have had to
deal with low economic growth,
 hyperinflation, high unemployment,
political unrest, and crushing debt burdens
 Additionally, countries during this period
tended toward the radical-socialist end of
the political spectrum and so ideology
towards free market economic principles
were hostile.
 In 1990, the pact was relaunched and
renamed the Andean Community
 MERCOSUR
 originated in 1988 as a free trade pact
between Brazil and Argentina.
 Helped bring about 80% increase in trade
between Brazil and Argentina in the late
1980s
 Expanded to include Paraguay and
Uruguay in 1990
 Critics → Mercosur countries might not be
able to compete globally once the group’s
external trade barriers come down.
 Later on due to recession, progress slowed
down
 CENTRAL AMERICAN COMMON
MARKET, CAFTA, AND CARICOM
 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.
 Central America Free Trade Agreement
(CAFTA): the agreement of the
memberstates of the Central American
Common Market joined by the Dominican
Republic to trade freely with the United
States.
 CARICOM (establish in 1973): an
association of English-speaking Caribbean
states that are attempting to establish a
customs union.
• Experienced repeated failure but
has seen growth in membership →
eventually led to CSME
 Caribbean Single Market and Economy
(CSME): The six CARICOM members
that agreed to lower trade barriers and
harmonize macroeconomic and monetary
policies.
 FREE TRADE AREA OF THE
AMERICAS (FTAA)
 was proposed on December 1994 at the
hemispherewide Summit of the Americans.
→ talks begin in April 1998 to establish an
FTAA by January 1, 2005
 The FTAA was not established and now
support from the U.S. and Brazil is mixed
• the U.S. wants stricter enforcement
if intellectual property rights
• Brazil and Argentina want the U.S.
to eliminate agricultural subsidies
and tariffs
 If the FTAA is established, it will have
major implications for cross-border trade
and investment flows within the
hemisphere
• would create a free trade
area of 850 million people
who accounted for nearly
$18 trillion in GDP in 2008
REGIONAL ECONOMIC INTEGRATION
ELSEWHERE
 Numerous attempts at regional economic
integration have been tried throughout
Asia and Africa.
 The most significant is the Association of
Southeast Asian Nations (ASEAN).
 In addition, the Asia-Pacific Economic
Cooperation (APEC) forum has recently
emerged as the seed of a potential free
trade region.
 ASSOCIATION OF SOUTHEAST
ASIAN NATIONS
 Formed in 1967, an attempt to establish a
free trade area among Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Vietnam, and
Thailand.
 Objective: To foster freer trade among
member countries and to achieve
cooperation in their industrial policies.
 In 2003, an ASEAN free trade area
(AFTA) between the six original members
 of ASEAN came into full effect to reduce Regional economic integration threats
import tariffs among members.
 The lowering of barriers to trade and
 ASEAN signed a free trade agreement with
investment among countries has led to
China in 2010 that removes tariffs on 90
increased price competition throughout the
percent of traded goods between China and
EU and NAFTA.
ASEAN members more than tripled during
the first decade of the twenty-first century, • Increased competition within the
and this agreement should spur further EU is forcing EU firms to become
growth. more efficient, and stronger global
competitors
 ASIA-PACIFIC ECONOMIC  Firms outside of trading areas is the threat
COOPERATION (APEC) of being shut out of the single market by
the creation of a “trade fortress.”
 was founded in 1990 at the suggestion of
Australia.  The EU is increasingly willing and able to
intervene and impose conditions on
 currently has 21 member-states, including
companies proposing mergers and
as the United States, Japan, and China.
acquisitions. This is a threat insofar as it
 The stated aim of APEC is to increase
limits the ability of firms to pursue the
multilateral cooperation in view of the
corporate strategy of their choice.
economic rise of the Pacific nations and
the growing interdependence within the
region.

 REGIONAL TRADE BLOCS IN

AFRICA
 There are now nine trade blocs on the
African continent.
 Although the number of trade groups is
impressive, progress toward the
establishment of meaningful trade blocs
has been slow.
 Kenya, Uganda, and Tanzania committed
to re-launching the East African
Community (EAC) in 2001, however so
far, the effort appears futile.
 FOCUS ON MANAGERIAL
IMPLICATIONS
Regional economic integration opportunities

 formerly protected markets are now open

to exports and direct investment
 the free movement of goods across
borders, the harmonization of product
 standards, and the simplification of tax
regimes means that firms can realize
potentially enormous cost economies by
centralizing production in those locations
where the mix of factors costs, and skills is
optimal