Finals WK4 Manmgt3

SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
MANMGT3 INTERNATIONAL BUSINESS

AND TRADE / BUSINESS
AGREEMENTS
Prepared by:
A Self-regulated Learning Module
Ruby R. Buccat, LPT, PHD
A Self-regulated Learning Module 1
TABLE OF CONTENTS
Cover
Table of Contents
Guidelines ………………………………………………………………………………………………………………………….…3
Chapter 1 Globalization ………………………………………………………………………………………………..… 4

Chapter 2 National Differences in Political Economy ……………………………………………..… 10
Chapter 3 Political and Economic Development ………………………………………………………….... 15
Chapter 4 Differences in Culture ………………………………..……………………………….………………..… 20
Chapter 5 Ethics in International Business …………………………………………………………………………. 27
Chapter 6 International Trade Theory …………………………………………………………………………. 31
Chapter 7 The Political Economy of International Trade ……………………………….…………….… 36
Chapter 8 Foreign Direct Investment ……………………………………………………………………….… 40
Chapter 9 Regional Economic Integration ……………………………………………………………………...… 44
Chapter 10 The Foreign Exchange Market ……………………………………………………………………….… 52
Chapter 11 International Monetary System …………………………………………………………………………. 56
Chapter 12 The Strategy of International Business …………………………………………………………….… 60
Chapter 13 The Organization of International Business ………………………………….………….… 66
Chapter 14 Entry Strategy and Strategic Alliances ………………………………………………………….… 76
Chapter 15 Exporting, Importing, and Countertrade ……………………………………………………..…..… 82
Chapter 16 Global Production, Outsourcing, and Logistics …………………………………………….…. 87
Chapter 17 Global Marketing and R&D ……………………………………………………………………...… 91
Chapter 18 Global Human Resources Management ……………………………………………………………. 97
Chapter 19 Accounting and Finance in the International Business ………………………………..… 103
References ………………………………………………………………………………………………………………………….…109
Evaluation of the Course ………………………………………………………………………………………………….. 112

MNGMNT3 – International Business and Trade / Business Agreements
International Trade provides a host of topics on international trade agreements, trade policies and restrictions, counter
trade, world trade, tariffs, foreign exchange and balance of payments. This course provides materials to students to enable
them to capsulize their knowledge of international trade especially entered into by ASEAN-member nations. The course also
equips students with fundamental knowledge on trade among nations in preparation for globalization.
Each chapter in this module is based on the approved MANMGT3 syllabus. In short, whether you choose to learn with
the use of this module or online, or both, you basically get the same lessons. What will differentiate you from the other
learners will be how much time and effort you spend to learn more about each and every topic at hand.
The objectives indicated in each chapter can only be achieved if and when the learner actively involves himself/herself in
this learning process. There are three icons that you have to watch out for:
This icon means you need to research.
There will be information that you need to research on so

you can answer the questions or accomplish the activities
required
This icon means you need to think/reflect.
There are opinionated questions that you need to answer to

demonstrate how much you understand the concepts you
need to learn
This icon means you need to read.
There are links provided that you should access so that you
can read the articles that will help you better understand the
concepts presented in each chapter
To assess how much you have learned, quizzes will be given regularly. Likewise, to supplement what you learn via this
module, assignments will be given from time to time. To access your quiz and/or assignment, you have to go online and check what
are posted on your Canvas Account.
You may get in touch with me through the following contact details:
Looking forward to a fruitful term ahead!

CHAPTER 1
GLOBALIZATION
At the end of the unit, the students must have:

OBJECTIVES
1. Discussed the meaning of globalization.

2. Explained the drivers of globalization.
3. Articulated how globalization is advantageous and/or disadvantageous to different
countries.
GLOBALIZATION
Globalization is a process of interaction and integration among the people, companies, and governments of
different nations, a process driven by international trade and investment and aided by information technology. This
process has effects on the environment, on culture, on political systems, on economic development and prosperity, and
on human physical well-being in societies around the world.
To simplify, globalization refers to the shift toward a more integrated and interdependent world economy.
Globalization has several facets, including the globalization of markets and the globalization of production.
FACETS OF GLOBALIZATION
1. Globalization of Markets
2. Globalization of Production
The Globalization of Markets

This refers to the merging of historically distinct and separate national markets into one huge global
marketplace. Some reasons can be attributed to this:
Falling barriers to border trade

Falling barriers to border trade have made it easier to sell internationally. Technological change,
social, political, and economic development have in recent decades, a driven the world towards a
“global village” or a homogenized united global market.
Impact of technological advances

The relatively low cost of global communication networks has helped create electronic global
marketplaces. Low cost transportation has made it more economical to ship products around the world,
thereby helping to create global markets. There is also a growing number of airline companies offering
budget fares that resulted in the mass movement of people between countries, reducing cultural
distance between countries and bringing about convergence of consumer tastes and preferences. A
worldwide culture has also been created by the growth of global communication networks and global
media.

Tastes and preferences of consumers in different nations
There is now greater convergence in consumer tastes, preferences, and needs between
different national markets -- at least for some goods and services. For many consumer goods, customer
tastes and preferences are quite similar in many parts of the developed and developing worlds,
especially in major towns and metropolitan areas. For a lot of intermediate, industrial goods, such as
parts and components, the needs of customers are essentially identical worldwide. The same is true for
many service providers, whose global customers need similar, if not identical, services wherever they
are.
The Globalization of Production

This refers to the sourcing of goods and services from location around the globe to take advantage of
national differences in the cost and quality of the factors of production. By doing this, companies hope to lower
their overall costs structure or improve the quality of functionality of their product offering, thereby allowing
them to compete more effectively.
WHY DO WE NEED GLOBAL INSTITUTIONS?

Global institutions help manage, regulate, and police the global marketplace and promote the establishment of
multinational treaties to govern the global business system.
General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade was a free trade agreement between 23 countries that
eliminated tariffs and increased international trade. As the first worldwide multilateral free trade agreement,
GATT governed a significant portion of international trade between January 1, 1948 and January 1, 1995. The
agreement ended when it was replaced by the more robust World Trade Organization (WTO).
World Trade Organization

The World Trade Organization (WTO) is the only global international organization dealing with the rules
of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the
world’s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly,
predictably and freely as possible. The WTO has over 164 member countries representing 98 per cent of world
trade. Over 20 countries are seeking to join the WTO.
Date established: _______________________________

Headquarters: _________________________________
Head: ________________________________________
International Monetary Fund (IMF)

The International Monetary Fund is an organization of 190 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world.
The IMF's primary purpose is to ensure the stability of the international monetary system—the system
of exchange rates and international payments that enables countries (and their citizens) to transact with each
other. The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector issues that
bear on global stability.

Year of establishment: __________________________________________
Headquarters: ________________________________________________
Head: _______________________________________________________
What are Special Drawing Rights (SDRs)? ___________________________
_____________________________________________________________
World Bank (WB)

The World Bank is a vital source of financial and technical assistance to developing countries around the
world. We are not a bank in the ordinary sense but a unique partnership to reduce poverty and support
development. The World Bank Group comprises five institutions managed by their member countries.
Year of establishment: __________________________________

Headquarters: ________________________________________
Head: _______________________________________________
What are the five organizations that make up the World Bank Group?
1. ___________________________________________________
2. ___________________________________________________
3. ___________________________________________________
4. ___________________________________________________
5. ___________________________________________________
United Nations (UN)

Due to the powers vested in its Charter and its unique international character, the UN can take action on
the issues confronting humanity in the 21st century, such as peace and security, climate change, sustainable
development, human rights, disarmament, terrorism, humanitarian and health emergencies, gender equality,
governance, food production, and more. It is currently made up of 193 Member States. Each of the 193
Member States of the United Nations is a member of the General Assembly. The UN is comprised of five organs
all of which were established in the same year when the UN was founded.
In what year was the UN founded? ___________________________

Who coined the name “United Nations”? ______________________
Headquarters: ________________________________________
Head: _______________________________________________
What are the five organs of the United Nations?
1. ___________________________________________________
2. ___________________________________________________
3. ___________________________________________________
4. ___________________________________________________
5. ___________________________________________________
G20
The Group of Twenty, or the G20, is the premier forum for international economic cooperation. The G20
brings together the leaders of both developed and developing countries from every continent.
Collectively, G20 members represent around 80% of the world’s economic output, two-thirds of global
population and three-quarters of international trade. Throughout the year, representatives from G20 countries

gather to discuss financial and socioeconomic issues.
When and where did the first G20 Leaders’ Summit take place?
_________________________________________________________
20 Countries that make up the G20
1. _______________________________________
2. _______________________________________
3. _______________________________________
4. _______________________________________
5. _______________________________________
6. _______________________________________
7. _______________________________________
8. _______________________________________
9. _______________________________________
10. ______________________________________
*a new logo is introduced 11. ______________________________________
each summit 12. ______________________________________
13. ______________________________________
14. ______________________________________
15. ______________________________________
16. ______________________________________
17. ______________________________________
18. ______________________________________
19. ______________________________________
20. ______________________________________
DRIVERS OF GLOBALIZATION
Declining Trade and Investment Barriers

Many of the barriers to international grade took the form of high tariffs on imports of manufactured
goods. Usually, the reason for imposing tariffs was to protect domestic businesses from foreign competitors.
High tariffs lead to high price of foreign goods which prevent these goods to compete with local goods.
Governments used to provide subsidies to important local industries. This reduced the cost of production of
domestic goods. Consequently, foreign products could not compete.
Globalization, which has increased in recent decades, has been characterized by a decline in trade and
investment barriers. Lower barriers to trade and investment mean that firms can view the world as their market
and locate production in the most optimal location for that activity.
Technological Change
Technology is the vital force in the modern form of business globalization. Technology has
revolutionized the global economy and has become critical competitive strategy. Many companies have
invested in technology to help them become outperform rivals and ward off new entrants.
Technology has helped us in overcoming the major hurdles of globalization and international trade such
as trade barriers, lack of common ethical standards, transportation costs and delays in information exchange,
thereby changing the market place.

THE CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY
The United States has dominated the world economy and world trade for many years but history will tell
us that it has not always been number one decades or even centuries ago. In the recent years, there had been
many stories about America’s decline. What does the future hold for the land of milk and honey after suffering
through a massive financial crisis, a tepid recovery, and two decades of now wage growth? And then there’s the
exponential growth of China, a nation of 1.4 billion people with seemingly limitless potential.
The Changing World Output and World Trade Picture

In 1960, U.S. GDP represented 40% of global GDP. By 2014, America’s economic contribution had been
cut in half. In contrast, the share of world output accounted for by developing nations is rising. OECD’s longer-
term forecasts suggest that today’s developing and emerging countries are likely to account for nearly 60% of
world GDP by 2030.
The Changing Foreign Direct Investment Picture

In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows. Today, the United
States accounts for less than one-fifth of worldwide FDI flows. In 2017, Europe was the largest destination of
foreign direct investment stocks in the world, accounting for more than one third (35 %) of the world’s inward
investment positions. Europe was the leading outward investor, accounting for more than two fifths (41 %) of
the world’s outward investment positions.
The Changing Nature of the Multinational Enterprise

Multinational enterprises (also multinational corporations or companies) are organizations that operate
in more than one country other than the home country. Two notable trends in the demographics of the MNE
are (1) the rise of non-U.S. multinationals and (2) the growth of mini-multinationals.
The Top 10 largest companies in terms of revenues Fortune Global 500 (2021)
companies are listed below. On the space provided, write the home country of each of
the companies.
Company Revenues ($M) Country
1. Walmart $559,151
2. State Grid $386,617.7
3. Amazon $386,064
4. China National Petroleum $283,957.6
5. Sinopec Group $283,727.6
6. Apple $274,515
7. CVS Health $268,706
8. UnitedHealth Group $257,141
9. Toyota Motor $256,721.7
10. Volkswagen $253,965
The Changing World Order

Many former communist nations in Europe and Asia are now committed to democratic politics and free
market economies. This creates new opportunities for international businesses.
China and Latin America are moving toward greater free market reforms. Between 1983 and 2010, FDI
in China increased form less than $2 billion to $100 billion annually.

The Global Economy of the Twenty-First Century
The world is moving toward a more global economic system. Barriers to the free flow of goods, services,
and capital have been coming down. The move toward a global economy has been further strengthened by the
widespread adoption of liberal economic policies by countries that had firmly opposed them for a very long
time. The world may be moving toward a more global economic system, but globalization is not inevitable.
Countries may pull back from the recent commitment to liberal economic ideology if their experiences do not
match their expectations.
THE GLOBALIZATION DEBATE

Supporters believe that increased trade and cross-border investment mean lower prices for goods and services,
greater economic growth, higher consumer income, and more jobs. On the other hand, critics worry that globalization
will cause job losses, environmental degradation, national sovereignty and cultural imperialism of global media and
MNEs.
What is your stand on globalization? Are you pro or anti? Choose one and defend.
Globalization and its challenges

https://www.philstar.com/business/2019/09/25/1954636/globalization-and-its-
challenges

CHAPTER 2
National differences in
political economy

OBJECTIVES
1. Differentiated the political systems in different countries

2. Evaluated the economic systems in different countries
3. Analyzed the legal systems in different countries
POLITICAL ECONOMY
Political economy is defined by investopedia.com as an interdisciplinary branch of the social sciences that
focuses on the interrelationships among individuals, governments, and public policy. In short, it is how the political,
economic, and legal systems of a country are interdependent.
POLITICAL SYSTEM
McLoughlin and Scott (2014) define political systems as the formal and informal political processes by which
decisions are made concerning the use, production and distribution of resources in any given society. Political systems
can be assessed according to two related dimensions. The first is the degree to which they emphasize collectivism as
opposed to individualism. The second is the degree to which they are democratic or totalitarian.
Collectivism
Collectivism stresses the primacy of collective goals over individual goals. Collectivism holds that a
group – such as a nation, a community, or a race – is the primary unit of reality and the ultimate standard of
value. This view stresses that the needs and goals of the individual must be subordinate to those of the
group. Collectivism is a cultural pattern found in most traditional societies, especially in Asia, Latin America, and
Africa.
Communism and Socialism

Communism and socialism are umbrella terms referring to two left-wing schools of economic thought;
both oppose capitalism. These ideologies have inspired various social and political movements since the 19th
century (Floyd, 2020).
Capitalism
Capitalism is an economic system in which private individuals or businesses own capital goods. The
production of goods and services is based on supply and demand in the general market—known as a market
economy—rather than through central planning—known as a planned economy or command economy
(Chappelow, 2020).
Individualism
Individualism refers to philosophy that an individual should have freedom in his own economic and

political pursuits. Individualism is a cultural pattern found mostly in Western Europe, North America, Australia,
and New Zealand.)
Democracy
Democracy refers to a political system in which government is by the people, exercised either directly or
through elected representatives. It is usually associated with individualism. Pure democracy is based on the
belief that citizens should be directly involved in decision making. Most modern democratic states
practice representative democracy where citizens periodically elect individuals to represent them.
Totalitarianism
Totalitarianism refers to an authoritarian political system or states that regulates and controls nearly
every aspect of the public and private sectors. In a totalitarian country, all the constitutional guarantees on which
representative democracies are built are denied to the citizens.
There are four major forms of totalitarianism that exist in the world today.
COMMUNIST
found in states where the communist party monopolizes power.
TOTALITARIANISM
Does this form of totalitarianism still exist? encircle one  yes no

If yes, in which countries does this form of totalitarianism still exist? Enumerate
THEOCRATIC found in states where political power is monopolized by a party,

TOTALITARIANISM group, or individual that governs according to religious principles.

TRIBAL found in states where a political party that represents the interests
TOTALITARIANISM of a particular tribe monopolizes power.

RIGHT-WING permits some individual economic freedom, but restricts individual

TOTALITARIANISM political freedom.

ECONOMIC SYSTEM
An economic system is a means by which societies or governments organize and distribute available resources,
services, and goods across a geographic region or country. Economic systems regulate factors of production, including
capital, labor, physical resources, and entrepreneurs. An economic system encompasses many institutions, agencies,
and other entities.

There are four types of economic systems:
TRADITIONAL based on goods, services, and work, all of which follow certain established
ECONOMIC trends. It relies a lot on people, and there is very little division of labor or
SYSTEM specialization. In essence, the traditional economy is very basic and the most
ancient of the four types.
COMMAND the government plans the goods and services that a country produces, the
ECONOMIC quantity in which they are produced, and the prices at which they are sold.
SYSTEM
 Name countries that have

this system
based on the concept of free markets. In other words, there is very little
MARKET
government interference. The government exercises little control over
ECONOMIC
resources, and it does not interfere with important segments of the
SYSTEM
economy. Instead, regulation comes from the people and the relationship
between supply and demand.
combines the characteristics of the market and command economic

MIXED systems. Certain sectors of the economy are left to private ownership and
ECONOMIC free market mechanisms while other sectors have significant state
SYSTEM ownership and government planning. In the most common types of mixed
economies, the market is more or less free of government ownership except
for a few key areas like transportation or sensitive industries like defense
and railroad.
LEGAL SYSTEM
The 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 grievance is obtained. This is of immense importance to
international business because they define how business transaction are executed and identify the rights and obligations
of parties involved in business transactions.
There are three main types of legal systems in use around the world:
based on a detailed set of laws organized into codes. When law courts
CIVIL LAW interpret civil law, they do so with regard to these codes.
based on tradition, precedent, and custom. Relative to civil law, common

COMMON LAW law has more flexibility because judges have to resolve specific disputes
based on their interpretation of the law.
THEOCRATIC based on religious teachings. Only Islamic Law is the surviving example of a
LAW theocratic legal system that is formally practiced by some governments.

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 the enforcement of the contract.
Under a common law system, contracts tend to be very detailed with all contingencies spelled out. Under a civil law
system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code.
When contract disputes arise in international trade, which country’s laws should apply? To resolve this issue, a
number of countries have ratified the United Nations Convention on Contracts for International Sale of Goods (CISG).
This established a uniform set of rules governing certain aspects of the making and performance of everyday commercial
contracts between buyers and sellers who have their places of business in different nations. Many of the world’s larger
trading nations, the United Kingdom, have not ratified the CISG. United Kingdom has not ratified the CISG because the
ministers do not see the ratification of the convention as a legislative priority (Moss, 2006).
PROPERTY RIGHTS
These 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. Often referred to as a Bundle of Rights, property rights have four broad
components:
• the right to use the good (thing that is owned),
• the right to earn an income from it,
• the right to transfer it to others, and
• the right to enforce property rights.
Property rights can be violated in two ways: private action and public action. In this context, private action
refers to theft, piracy, blackmail, and the like by private individuals or groups. Public action occurs when public officials,
such as politicians and government bureaucrats, extort income, resources, or the property itself from property holders.
FOREIGN CORRUPT PRACTICES ACT

Enacted in the United States in 1977, the Foreign Corrupt Practices Act generally prohibits the payment of bribes
to foreign officials to assist in obtaining or retaining business. In 1997, trade and finance ministers from the member
states of the Organization for Economic Cooperation and Development (OECD), adopted the Convention on Combating
Bribery of Foreign Public Officials in International Business Transactions. The convention obliges member states to make
the bribery of foreign public officials a criminal offense. However, both the U.S. law and OECD convention include
language that allows for exceptions known as facilitating or expediting payments (also known as grease payments or
speed money), the purpose of which is to expedite or secure the performance of a routine governmental action.
List down the countries that are on the top 10 (least corrupt) and bottom 10 (most corrupt)
according to 2021 Corruption Perceptions Index (CPI)
Top 10 Bottom 10

THE PROTECTION OF INTELLECTUAL PROPERTY
The Intellectual Property of the Philippines defines intellectual property as creations of the mind. It can be an
invention (patent / utility model), a design (industrial design), a brand name (trademark, or a literary and artistic work
(copyright).
Define the following terms
Copyright
Patent
Trademark
PRODUCT SAFETY AND LIABILITY

Product safety laws set certain safety standards to which a product must adhere. Product liability involves
holding a firm and its officers responsible when a product causes injury, death, or damage. Product liability can be much
greater if a product does not conform to required safety standards. Liability laws are typically least extensive in less
developed nations.
Lego wins court case against Chinese copycats

https://news.abs-cbn.com/business/11/06/18/lego-wins-court-case-against-
chinese-copycats

CHAPTER 3
Political and economic
development
OBJECTIVES

1. Discuss what determines the level of economic development of a nation.
2. Describe how transition economies are moving toward market-based systems.
GROSS NATIONAL INCOME (GNI)

GNI is defined as gross domestic product, plus net receipts from abroad of compensation of employees,
property income and net taxes less subsidies on production. One of its biggest criticisms is that it does not provide any
indication of the living standards in a nation. Official figures can also be misleading because they do not account for
black economy transactions. In addition, GNI and PPP data are static and do not consider economic growth rates. So,
while China and India are currently categorized as being poor, they are growing more rapidly than many developed
nations and are expected to become among the largest economies in the world.
*The World Bank Atlas method of conversion is used to smooth fluctuations in prices and exchange rates in the cross-country comparison of
national incomes. The conversion factor averages the exchange rate for a given year and the two preceding years, adjusted for the difference
between the rate of inflation in the country and that in Japan, the United Kingdom, the United States, and the Euro Zone.
*GNI is gross national income (GNI) converted to international dollars using purchasing power parity rates. An international dollar has the same
purchasing power over GNI as a U.S. dollar has in the United States. GNI is the sum of value added by all resident producers plus any product taxes
(less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from
abroad.
Nobel-prize winner Amartya Sen argues economic development should be seen as a process of expanding the
real freedoms that people experience. According to Sen, development is about creating freedom for people and
removing obstacles to greater freedom. Greater freedom enables people to choose their own destiny. Obstacles to
freedom, and hence to development, include poverty, lack of economic opportunities, corruption, poor governance, lack
of education and lack of health.
The United Nations used Sen’s ideas to develop the Human Development Index (HDI) which is a summary

measure of average achievement in key dimensions of human development: a long and healthy life, being
knowledgeable and have a decent standard of living.
FACTORS THAT INFLUENCE ECONOMIC DEVELOPMENT

Innovation and entrepreneurship are the engines of long-run economic growth. Entrepreneurs can help
commercialize innovative new products and processes
Innovation and entrepreneurship help increase economic activity by creating new markets and products that did
not previously exist. Innovation in production and business processes results in more productive labor and capital
further boosting economic growth rates.
Innovation and entrepreneurship require a market economy. There is little incentive to develop new
innovations in planned economies because the state owns all means production and thus, gains. It is often maintained
that economic freedom underlies high levels of economic growth (de Haan & Sturm, 2000).
Innovation and entrepreneurship require strong property rights. The existence of strong property rights
depends on the political system in each country. Property rights are only secure in well-functioning, mature
democracies.
Countries with favorable geography are more likely to engage in trade, and so, be more open to market-based
economic systems, and the economic growth they promote. Jeffrey Sachs studied economic growth rates between 1965
and 1990 and found that
• Landlocked countries grew more slowly than coastal economies
• Being totally landlocked reduced a country’s growth rate by 0.7% per year
• Tropical countries grew more slowly than countries in temperate zones.
Nations that invest more in education have higher growth rates because the workforce is more productive.
Name the 5 richest countries in the world as of 2021 (list in order)
1.
2.
3.
4.
5.
STATES IN TRANSITION
Since the late 1980s, two trends have emerged: (1) the spread of democracy; (2) the spread of market-based
systems.
The Spread of Democracy

• Many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations.
• New information and communication technologies have broken down the ability of the state to control
access to uncensored information
• Economic advances of the last 25 years have led to increasingly prosperous middle and working classes who
have pushed for democratic reforms
• Author Francis Fukuyama argues that 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
The Spread of Market-Based Systems

• More countries have moved away from centrally planned and mixed economies toward the market-based
model
• Command and mixed economies failed to deliver the sustained economic growth achieved in market-based
countries.
• The shift toward a market-based system involves deregulation, privatization, and the creation of a legal
system to safeguard property rights
removal of legal restrictions to the free play of markets, the

DEREGULATION establishment of private enterprises, and the manner in which private
enterprises operate.
the process by which a piece of property or business goes from being

owned by the government to being privately owned. It generally helps
PRIVATIZATION
governments save money and increase efficiency, where private
companies can move goods quicker and more efficiently.
Without a legal system that protects property rights, and without the
machinery to enforce that system, the incentive to engage in economic
LEGAL SYSTEM 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.
Give one industry/sector in the Philippines which you believe is better owned and
controlled by the government rather than by the private sector. Why?

WHAT DOES THE CHANGING ECONOMY MEAN FOR MANAGERS?
Markets that were formerly off-limits to western business are now open
Many of the national markets for Eastern Europe, Latin America, Africa, and Asia may still be underdeveloped
and impoverished, but they have huge potential. Just imagine China with 1.44 billion people, India with 1.38 billion
people, and Latin America has more than half a billion potential consumers.
Countries with democratic regimes, market based economic policies, and strong property rights protection are more
likely to have higher sustained rates of economic growth.
These markets are more attractive to international businesses. It follows that the benefits, costs, and risks
associated with doing business in a country are a function of that country’s political, economic, and legal systems.
The benefits of doing business in a country are a function of the market’s size, the purchasing power of its consumers,
and their likely future wealth.
While some markets are very large when measured by number of consumers, low living standards may imply
limited purchasing power and therefore a relatively small market when measured in economic terms.
By identifying and investing early in potential future economic stars, firms may be able to gain first mover advantages
and establish loyalty and experience in a country.
Late entrants may find that they lack the brand loyalty and experience necessary to achieve a significant
presence in the market. Back in 1980, China was the seventh-largest economy and in 2010, it overtook Japan as the
world’s second-largest economy. Businesses who invested in China when it initiated market reforms in 1978 have
reaped the benefits of being first movers.
The risks of doing business in a country are determined by a number of political, economic, and legal factors.
Political risk is brought about by the 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. Economic risk is brought
about by the likelihood that economic mismanagement will cause drastic changes in a country’s business environment
that hurt the profit and other goals of a particular business enterprise. Legal risk is brought about by the likelihood that
a trading partner will opportunistically break a contract or expropriate property rights.
OVERALL ATTRACTIVENESS
The overall attractiveness of a country as a potential market and/or investment site for an international
business depends on balancing the benefits, costs, and risks associated with doing business in that country. Other
things being equal, the benefit-cost-risk trade-off is likely to be most favorable in politically stable developed and
developing nations that have free market systems and no dramatic upsurge in either inflation rates or private sector
debt.

CHAPTER 4
DIFFERENCES IN CULTURE

OBJECTIVES
1. Explained what is culture.

2. Demonstrate appreciation or different cultures.
3. Discussed the implications of differences in culture.
4. Elaborated the effects of cultural change.
CULTURE
“That complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities acquired
by man as a member of society.” – Edward Taylor
“The collective programming of the mind which distinguishes the members of one human group from another…
Culture, in this sense, includes systems of values; and values are among the building blocks of culture.” – Geert Hofstede
“Culture is an integrated system of learned behavior patterns that are characteristic of the members of any given
society. Culture is the total way of life of particular groups of people. It includes everything that a group of people
thinks, says, does and makes — its systems, attitudes and feelings. Culture is learned and transmitted from generation
to generation.” – Robert Kohls
Values and Norms

Values form the bedrock of a culture. They provide the context within which a society’s norms are established
and justified. They may include a society’s attitudes toward such concepts as individual freedom, democracy, truth,
justice honesty, social obligations, collective responsibility, and so on.
Norms are the social rules that govern people’s actions toward one another. It can be 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, eating with the correct utensils, etc. Mores are norms that are seen
as central to the functioning of a society and to its social life. They have much greater significance than folkways.

DETERMINANTS OF CULTURE
SOCIAL STRUCTURE
Crothers (2015) defined social structure as a concept and term used to capture the collective properties
exhibited by social entities and to identify the characteristics of and specify the relationships among their component
elements. Two dimensions are particularly important when explaining differences between cultures. The first is the
degree to which the basic unit of social organization is the individual, as opposed to the group. The second dimension is
the degree to which a society is stratified into classes or castes.
A group is an association of two or more people 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. Societies place
different values on groups.
The Individual
In western societies, there is a focus on the individual. The value systems of many western societies for instance,
emphasize individual achievement. High level of entrepreneurship in the U.S. and the dynamism of the U.S. economy
are said to be the result of individualism. However, individualism creates a lack of company loyalty and failure to gain
company specific knowledge. It has been observed that the emphasis on individualism may make it difficult to build
teams within the organization as competition between and among individuals is high and it may be difficult for them to
cooperate.
The Group
In many Asian societies, the group is the primary unit of social organization. The primacy of the value of group
identification also discourages managers and workers from moving from company to company. It encourages lifetime
employment systems. Moreover, it leads to cooperation in solving business problems. However, the primacy of the
group is not always beneficial as it might also suppress individual creativity and initiative.
Social Stratification
All societies are stratified on a hierarchical basis into social categories, or social strata. These strata are
typically defined on the basis of characteristics such as family background, occupation, and income. Individuals

are born into a particular stratum. Although all societies are stratified to some degree, they differ in two related
ways. First, they differ from each other with regard to the degree of mobility between social strata; second,
they differ with regard to the significance attached to social strata in business contexts.
Social Mobility
This is the extent to which individuals can move out of the strata into which they are born.
Caste System
Closed system of stratification in which social position is determined by the family into which a
person is born, and change in that position in usually not possible during an individual’s lifetime. India’s
caste system is a social structure that divides different groups into ranked categories. Members of
“higher” castes have a greater social status than individuals of a “lower” caste. Indian law prohibits
discrimination by caste, although caste identities remain of great significance at the local level,
especially in relation to marriage (Elwes, 2014).
Class System
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.
Class Consciousness
This is a condition where 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 is a system of shared beliefs and rituals that are concerned with the realm of the sacred. Ethical
systems on the other hand refer to a set of moral principles, or values, that are used to guide and shape behavior.
Four religions dominate the world today

• The most widely practiced religion in the world.
CHRISTIANITY • Found throughout Europe, the Americas, and other countries
settled in by Europeans.
• The second largest of the world’s major religions.

• There is only one true omnipotent God
• Associated in western media with militants, terrorists, and
violent upheavals.
ISLAM • Fundamentalists have gained political power and blame the
west for many social problems.
• Asserts that all property is a favor from Allah and man only act
as stewards.
• Practiced primarily on the Indian subcontinent.

• Focuses on the importance of achieving spiritual growth and
development, which may require material and physical self-
denial.
HINDUISM
• Hindus are valued by their spiritual rather than material
achievements.
• Promotion and adding new responsibilities may not be
important, or may be infeasible due to the employee’s caste.
• Stresses spiritual growth and the afterlife, rather than

achievement while in this world.
BUDDHISM • Does not emphasize wealth creation
• Entrepreneurial behavior is not stressed
• Does not support the caste system, individuals do have some
mobility and can work with individuals from different classes.
What is Confucianism?
• An ideology, not a religion
• Teaches the importance of attaining personal salvation through right action
• High morals, ethical conduct, and loyalty to others are stressed
• Three key teachings: loyalty, reciprocal obligations, and honesty
LANGUAGE
This refers to the spoken and the unspoken means of communication.
Spoken Language
Because language shapes the way people perceive the world, it also helps define culture. Countries with
more than one language often have more than one culture. English is increasingly becoming the language of
international business. International businesses that do not understand the local language can make major

blunders through improper translation. For example, the Sunbeam Corporation used the English words for its
“Mist-Stick” mist-producing hair curling iron when it entered the German market, only to discover after an
expensive advertising campaign that mist means excrement in German.
Research on 3 products that had problems due to language issues.

1.
2.
3.
Unspoken Language
This refers to nonverbal communication. We knowingly and unknowingly communicate through facial
expressions, personal space, hand gestures, body language, etc. A failure to understand nonverbal cues of
another culture can lead to communication failure. For example, the thumbs-up gesture is usually used to
indicate that “it’s all right” or “good.” But in Greece, this gesture is considered obscene.
EDUCATION
Formal education plays an important role in a society. It is the medium through which individuals learn many of
the language, conceptual, and mathematical skills that are indispensable in a modern society. Japan’s excellent
education system is an important factor explaining the country’s postwar success. The general education level of a
country is also a good index of the kind of products that might sell in a country and of the type of promotional material
that should be used.
CULTURE AND THE WORKPLACE

Management process and practices may need to vary according to culturally determined work-related values.
The most famous study of how culture relates to values in the workplace was that of Geert Hosfstede. He collected data
on IBM employee attitudes and values from more than 100,000 individuals from 1967 to 1973. The data he collected
enabled him to compare dimensions of culture across 40 countries. He isolated identified four dimensions that
summarized different cultures.
This expresses the degree to which the less powerful members of a

society accept and expect that power is distributed unequally: beliefs
about the appropriate distribution of power in society.
POWER DISTANCE People in societies exhibiting a large degree of Power Distance accept a
hierarchical order in which everybody has a place and which needs no
further justification. In societies with low Power Distance, people strive
to equalize the distribution of power and demand justification for
inequalities of power.

This expresses the degree to which the members of a society feel
uncomfortable with uncertainty and ambiguity.
Countries exhibiting a high Uncertainty Avoidance maintain rigid codes
UNCERTAINTY of belief and behavior and are intolerant of unorthodox behavior and
AVOIDANCE ideas. These countries often need many rules to constrain uncertainty.
Countries with a low Uncertainty Avoidance index maintain a more
relaxed attitude in which practice counts more than principles, tolerance
for ambiguity is accepted and the need for rules to constrain uncertainty
is minimal.
The high side of this dimension, called individualism, can be defined as a

preference for a loosely-knit social framework in which individuals are
INDIVIDUALISM VS expected to take care of only themselves and their immediate families.
Its opposite, collectivism, represents a preference for a tightly-knit
COLLECTIVISM
framework in society in which individuals can expect their relatives or
members of a particular in-group to look after them in exchange for
unquestioning loyalty.
The Masculine side of this dimension represents a preference in society

for achievement, heroism, assertiveness and material rewards for
MASCULINITY VS
success. Society at large is more competitive. Its opposite, femininity,
FEMININITY
stands for a preference for cooperation, modesty, caring for the weak
and quality of life.
CULTURAL CHANGE
All cultures change through time. No culture is static. However, most cultures are basically conservative in that
they tend to resist change. Social turmoil is an inevitable outcome of cultural change. As countries become
economically stronger, cultural change is particularly common. Globalization also brings about cultural change.
WHAT DO CULTURAL DIFFERENCES MEAN FOR MANAGERS?

It is important to develop cross-cultural literacy. Companies that are ill-informed about the practices of another
culture are unlikely to succeed in that culture. To avoid being ill-informed consider hiring local citizens and/or transfer
executives to foreign locations on a regular basis. Managers must also guard against ethnocentrism. Ethnocentrism is a
belief in the superiority of one’s own ethnic group or culture.
The value systems and norms of a nation influence the costs of doing business there. The costs of doing
business in a nation influence the ability of firms to establish a competitive advantage in the global marketplace.

How does Culture Affect International Business?
https://www.languageinsight.com/blog/2019/how-does-culture-affect-international-
business/
11 countries, 11 business cultures: office life around the world

https://www.textmaster.com/blog/business-cultures-office-life-around-the-world/

CHAPTER 5
Ethics in international business

OBJECTIVES
1. Discussed the ethical issues faced by international businesses

2. Identified causes of unethical behavior by managers
3. Proposed solutions to unethical behaviors in business
ETHICS
This is a branch of philosophy that is concerned with human conduct, more specifically the behavior of
individuals in society. Ethics examines the rational justification for our moral judgments; it studies what is morally right
or wrong, just or unjust.
Business Ethics
The study of how a business should act in the face of ethical dilemmas and controversial situations.
Ethical Strategy
Strategy or course of action that does not violate accepted principles.
ETHICAL ISSUES IN INTERNATIONAL BUSINESS

Many of the ethical issues in international business are rooted in the fact that political systems, law, economic
development, and culture vary significantly from nation to nation.
The following are the most common ethical issues in business involve:
• employment practices
o When work conditions in a host nation are clearly inferior to those in a multinational’s home
nation, what standards should be applied? The standards of the home nation? The host nation?
Something in between?
• human rights
o What is the responsibility of a foreign multinational when operating in a country where basic
human rights are not respected?
• environmental pollution
o When environmental regulations in host nations are far inferior to those in the home nation,
ethical issues arise?

What is the Tragedy of the Commons?
• Corruption
o Is it ethical to make payments to government officials to secure business?
• moral obligations
o Do MNEs have a responsibility to give back to societies that enable them to grow and prosper?
ETHICAL DILEMMAS
An ethical dilemma (ethical paradox or moral dilemma) is a problem in the decision-making process between
two possible options, neither of which is absolutely acceptable from an ethical perspective. Although we face many
ethical and moral problems in our life, most of them come with relatively straightforward solutions.
THE ROOTS OF UNETHICAL BEHAVIOR
Personal Ethics
Business ethics reflect personal ethics which are the generally accepted principles of right and wrong
governing the conduct of individuals. An individual with a strong sense of personal ethics is less likely to behave
in an unethical manner in a business setting. Home country managers working abroad as expatriate managers
may experience more than the usual degree of pressure to violate their personal ethics.
Decision-Making Process
Business people sometimes do not realize that they are behaving unethically. The fault lies in processes
that do not incorporate ethical considerations into business decision making.

Organization Culture
Unethical behavior may exist in firms with an organization culture that does not emphasize business
ethics. Values and norms shape the culture of a business organization, and that culture has an important
influence on the ethics of business decision making.
Unrealistic Performance Expectations

Pressure from the parent company to meet performance goals that are unrealistic, and can only be
attained by cutting corners or acting in an unethical manner can cause unethical behavior.
Leadership
If a firm’s leaders fail to act in an ethical manner, other employees may not act ethically. Leaders help
establish the culture of an organization, and they set the example that other follow.
Societal Culture
This may well have an impact on the propensity of people, and organizations, to behave in an unethical
manner. Ethical policies differ by countries.
PHILOSOPHICAL APPROACHES TO ETHICS
STRAW MEN APPROACHES

Offer inappropriate guidelines for ethical decision making in an MNE. The following are the common
straw men approaches:
Suggests that the only social responsibility of business is to

FRIEDMAN DOCTRINE increase profits, so long as the company stays within the rules
of law.
Argues that ethics are culturally determined and that firms

CULTURAL RELATIVISM should adopt the ethics of the cultures in which they operate
Claims that an MNE’s home country standards of ethics should

RIGHTEOUS MORALIST
be followed in foreign countries.
Asserts that if a manager of an MNE sees that firms from other

NAÏVE IMMORALIST nations are not following ethical norms in a host nation, that
manager should not either.
UTILITARIAN AND KANTIAN

Utilitarian Approach – the moral worth of actions or practices is determined by their consequences. An
action is judged desirable if it leads to the best possible balance of good consequences over bad consequences.
Kantian Ethics – based on the philosophy of Immanuel Kant who argued that people should be treated
as ends and never purely as means to the ends of others.

RIGHTS THEORIES
Recognize that human beings have fundamental rights and privileges that transcend national boundaries
and culture. Moral theorists argue that fundamental human rights form the basis for the moral compass that
managers should navigate by when making decisions that have an ethical component.
JUSTICE THEORIES
Focus on the attainment of a just distribution (one that is considered fair and equitable) of economic
goods and services. This theory is attributed to philosopher John Rawls. Rawls argues that all economic goods
and services should be distributed equally except when an unequal distribution would work to everyone’s
advantage.
IMPLICATIONS FOR MANAGERS

To ensure that ethical issues are considered in business decisions, managers should:
• Favor hiring and promoting people with a well-grounded sense of personal ethics
o Businesses should strive to identify and hire people with a strong sense of personal ethics.
• Build an organizational culture that places a high value on ethical behavior

o Businesses need to build an organization culture that places high value on ethical behavior. They
must explicitly articulate values that place a strong emphasis on ethical behavior.
• Make sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also
act in manner that is consistent with that rhetoric
• Put decision-making processes in place that require people to consider the ethical dimension of business
decisions
o How would a decision affect stakeholders?
o Determine if a proposed decision violates the fundamental rights of nay stakeholders
o Establish moral intent
o Engage in ethical behavior
o Audit decisions
• Develop moral courage

o Moral courage is the strength to use ethical principles to do what one believes is right even
though the result may not be to everyone’s liking or could occasion personal loss. In
organizations, some of the hardest decisions have ethical stakes: it is everyday moral courage
that sets an organization and its members apart.
Doing Business with Integrity in High-Risk Countries

https://www.worldbank.org/content/dam/Worldbank/document/WEurope/2014/20
14_PSLO_INT_Presentation_DB.pdf

CHAPTER 6
INTERNATIONAL TRADE THEORY

OBJECTIVES

1. Understood the need for international trade.
2. Differentiated the different trade theories.
FREE TRADE
Refers to a situation where 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.
Free trade is beneficial because international trade allows a country to specialize in the manufacture and export
of products and services that it can produce efficiently. It also allows the country to import products and services that
can be produced more efficiently in other countries. There may be countries that may implement limits on imports so as
to protect the interest of domestic producers but this may not be beneficial for domestic consumers.
PATTERN OF INTERNATIONAL TRADE

Some patterns of trade are fairly easy to explain: why Ghana exports cocoa, Brazil exports coffee, and Saudi
Arabia exports oil. However, much of the observed pattern of international trade is more difficult to explain. For
example, why does Japan export consumer electronics and automobiles? Why does Switzerland export chemicals,
pharmaceuticals, watches, and jewelry? Or why does Bangladesh exports garments?
TRADE THEORY AND GOVERNMENT POLICY

Although all these theories agree that international trade is beneficial to a country, they lack agreement in their
recommendations for government policy. Mercantilism makes a crude case for government involvement in promoting
exports and limiting imports. The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for unrestricted
free trade. The argument for unrestricted free trade is that both import controls and export incentives (such as
subsidies) are self-defeating and result in wasted resources. Both the new trade theory and Porter's theory of national
competitive advantage can be interpreted as justifying some limited government intervention to support the
development of certain export-oriented industries.
MERCANTILISM
• Suggests that it is in a country’s best interest to maintain a trade surplus
• Advocates government intervention to achieve a surplus in the balance of trade
• Mercantilism stands in contrast to the theory of free trade – which argues countries economic well-being
can be best improved through the reduction of tariffs and fair free trade.
• Views trade as a zero-sum game

ABSOLUTE ADVANTAGE
• Adam Smith (1776)
• Uncontested superiority of a country or business to produce a particular good better.
• A country has an absolute advantage in the production of a product when it is more efficient than any other
country in producing it.
• Countries should specialize in the production of goods for which they have an absolute advantage and then
trade these goods for goods produced by other countries.
• Trade is a positive sum game
COMPETITIVE ADVANTAGE
• David Ricardo (1817)
• Introduced opportunity cost as a factor for analysis in choosing between different options for production
diversification.
• Countries should specialize in the production of goods they produce most efficiently and buy goods that they
produce less efficiently from other countries (even if it means buying goods from other countries that they could
produce more efficiently at home).
• Trade is a positive sum game
• Opening a country to trade could increase a country’s stock of resources as increased supplies become available
from abroad, the efficiency of resource utilization and so free up resources for other uses, and economic
growth.
• Unrestricted free trade is beneficial, but the gains may not be as great as the simple model of comparative
advantage suggest. The following have to be considered:
 immobile resources
 diminishing returns
 dynamic effects and economic growth
 Samuelson Critique (Paul Samuelson's critique looks at what happens when a rich country enters
into a free trade agreement with a poor country that rapidly improves its productivity after the
introduction of a free trade regime. Samuelson's model suggests that in such cases, the lower
prices that the rich country's consumers pay for goods imported from the poor country following
the introduction of a free trade regime may not be enough to produce a net gain for the rich
country's economy if the dynamic effect of free trade is to lower real wage rates in the rich
country.)
HECKSCHER-OHLIN
• Eli Heckscher (1919) and Bertil Ohlin (1933)
• Comparative advantage arises from differences in national factor endowments (extent to which a country is
endowed with resources like land, labor, and capital)
 The more abundant a factor, the lower its cost
• Heckscher and Ohlin predict that countries will export goods that make intensive use of locally abundant factors
and import goods that make intensive use of factors that are locally scarce.
• Using this theory, Wassily Leontief theorized that since the U.S. was relatively abundant in capital compared to
other nations, the U.S. would be an exporter of capital intensive goods and an importer of labor intensive goods.
To his surprise, he found that U.S. exports were less capital intensive than U.S. imports. Since this result was at
variance with the predictions of the theory, it became known as the Leontief Paradox.

PRODUCT LIFE-CYCLE
• Ray Vernon (mid 1960s)
 At this time, most of the world’s new products were developed by U.S. Firms and sold first in the
U.S.
• As products mature, both the location of sales and the optimal production location will change affecting the
flow and direction of trade.
Figure shows the growth of production and consumption over time

in the U.S., other advanced countries, and developing countries.
• It accurately explains what has happened for products like photocopiers and other high technology products
developed in the U.S. in the 1960s and 1970s.
 Globalization and integration of the world economy has made this theory less valid today.
• Viewed from an Asian or European perspective, Vernon's argument that most new products are developed
and introduced in the United States seems ethnocentric and increasingly dated; production today is

dispersed globally and products today are introduced in multiple markets simultaneously.
NEW TRADE THEORY

• Paul Krugman
• Suggests that the ability of firms to gain economies of scale can have important implications for
international trade. In these global industries with very large economies of scale, there is likely to be
limited competition, with the market dominated by early firms who entered, leading to a form of
monopolistic competition.
• Through its impact on economies of scale, trade can increase the variety of goods available to
consumers and decrease the average cost of those goods.
o Without trade, nations might not be able to produce those products where economies of scale
are important; with trade, markets are large enough to support the production necessary to
achieve economies of scale.
• In those industries where output required to attain economies of scale represents a significant
proportion of total world demand, the global market may only be able to support a small number of
enterprises.
o First mover advantage - refers to an advantage gained by a company that first introduces a
product or service to the market. The first-mover advantage allows a company to establish
strong brand recognition and product/service loyalty before other entrants.
• Nations may benefit from trade even when they do not differ in resource endowments or technology.
Governments should consider strategic trade policies that nurture and protect firms and industries
where first-mover advantages and economies of scale are important.
NATIONAL COMPETITIVE ADVANTAGE: PORTER’S DIAMOND

• Michael Porter (1990)
o Porter identified four attributes that promote or impede the creation of competitive advantage
Factor endowments – a nation’s position in factors of production necessary to compete in a given

industry can lead to competitive advantage. These can either be basic (natural resources, climate,
location, etc) or advanced (skilled labor, infrastructure, technological know-how, etc)
Demand conditions – the nature of home demand for the industry’s product or service influences the
development of capabilities. Sophisticated and demanding customers pressure firms to be competitive.
Related and supporting industries – the presence or absence of supplier industries and related industries

that are internationally competitive can spill over and contribute to other industries; successful industries
tend to be grouped in clusters in countries.
Firm strategy, structure, and rivalry – the conditions governing how companies are created, organized,
and managed, and the nature of domestic rivalry. Two important points (1) different nations are
characterized by different management ideologies, which either help them or do not help them to build
national competitive advantage; (2) There is a strong association between vigorous domestic rivalry and
the creation and persistence of competitive advantage in an industry. Vigorous domestic rivalry induces
firms to look for ways to improve efficiency, which makes them better international competitors.
• Government policy can affect demand through product standards; influence rivalry through regulation
and antitrust laws; and impact the availability of educated workers and advanced transportation
infrastructure.
BALANCE OF PAYMENTS
Balance of payments (BOP) is the record of all international trade and financial transactions made by a country's
residents (Amadeo, 2020).
The BOP has three main accounts. What are they? Briefly define/describe each.
1.
2.

CHAPTER 7
THE POLITICAL ECONOMY OF
INTERNATIONAL TRADE
OBJECTIVES

1. Discussed the policy instruments used by governments to influence international trade flows.
2. Understood why governments sometimes intervene in international trade.
FREE TRADE
Refers to a situation where 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.
Although many nations are nominally committed to free trade, they tend to intervene in international trade to
protect the interests of politically important groups or promote the interests of key domestic producers. There are
political and economic reasons why governments intervene in international trade. When governments intervene, they
often do so by restricting imports of goods and services into their nation, while adopting policies that promote domestic
production and exports. Normally their motives are to protect domestic producers.
INSTRUMENTS OF TRADE POLICY
• These are custom taxes that governments levy on imported and

some exported goods.
• Two categories:
TARIFFS o Specific – levied as fixed charge for each unit of a good
imported
o Ad valorem – levied as a proportion of the value of the
imported good.
• A subsidy is a government payment to a domestic producer. Subsidies

take many forms, including cash grants, low-interest loans, tax
SUBSIDIES breaks, and government equity participation in domestic firms. By
lowering production costs, subsidies help domestic producers in two
ways: (1) competing against foreign imports and (2) gaining export
• An import quota is a direct restriction on the quantity of some good

that may be imported into a country. The restriction is usually
enforced by issuing import licenses to a group of individuals or firms.
IMPORT QUOTAS
• A common hybrid of a quota and a tariff is known as a tariff rate
quota. Under a tariff rate quota, a lower tariff rate is applied to
imports within the quota than those over the quota.

• A voluntary export restraint (VER) is a quota on trade imposed by the
VOLUNTARY EXPORT exporting country, typically at the request of the importing country's
RESTRAINTS government.
• The extra profit that producers make when supply is artificially
limited by an import quota is referred to as a quota rent.
• A local content requirement is a requirement that some specific

fraction of a good be produced domestically. The requirement can be
LOCAL CONTENT expressed either in physical terms or in value terms.
REQUIREMENTS • Local content regulations provide protection for a domestic producer
of parts in the same way an import quota does: by limiting foreign
competition.
• These are bureaucratic rules designed to make it difficult for imports

ADMINISTRATIVE to enter a country.
POLICIES • As with all instruments of trade policy, administrative instruments
benefit producers and hurt consumers, who are denied access to
possibly superior foreign products.
• In the context of international trade, dumping is variously defined as

selling goods in a foreign market at below their costs of production
ANTIDUMPING or as selling goods in a foreign market at below their "fair" market
value.
POLICIES
• Antidumping policies are designed to punish foreign firms that
engage in dumping.
• antidumping duties are often called countervailing duties
POLITICAL ARGUMENTS FOR INTERVENTION

- concerned with protecting the interests of certain groups within a nation (normally producers), often
at the expense of other groups (normally consumers)
1. protecting jobs
- the most common political reason for trade restrictions
2. protecting industries deemed important for national security
- industries are often protected because they are deemed important for national security
3. retaliation for unfair foreign competition
- industries are often protected because they are deemed important for national security
4. protecting consumers from dangerous products
- limit “unsafe” products
5. furthering the goals of foreign policy
- preferential trade terms can be granted to countries that a government wants to build
strong relations with
6. protecting the human rights of individuals in exporting countries
- through trade policy actions
7. protecting the environment
- international trade is associated with a decline in environmental quality

ECONOMIC ARGUMENTS FOR INTERVENTION
- concerned with boosting the overall wealth of a nation – benefits both producers and consumers
1. The infant industry argument
- an industry should be protected until it can develop and be viable and competitive internationally
2. Strategic trade policy
- first mover advantages can be important to success
WHY SHOULD GOVERNMENTS AVOID USING TRADE BARRIERS?

Paul Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in
a global industry are beggar thy-neighbor policies that boost national income at the expense of other countries.
Countries that attempt to use such policies will probably provoke retaliation. Krugman argues that since special interest
groups can influence governments, strategic trade policy is almost certain to be captured by such groups who will distort
it to their own ends.
DEVELOPMENT OF THE WORLD TRADING SYSTEM

Most countries had some degree of protectionism until the Great Depression of the 1930s. After the second
world war, the U.S. and other nations realized the value of freer trade. The General Agreement on Tariffs and Trade
(GATT), signed on Oct. 30, 1947, by 23 countries, was a legal agreement minimizing barriers to international trade by
eliminating or reducing quotas, tariffs, and subsidies while preserving significant regulations. The GATT was intended to
boost economic recovery after World War II through reconstructing and liberalizing global trade.
During the 1980s and early 1990s, the world trading system erected by the GATT came under strain as pressures
for greater protectionism increased around the world.
In 1986, GATT members embarked on their eighth round of negotiations to reduce tariffs. This is known as the
Uruguay Round. It focused on services and intellectual property and the creation of the World Trade Organization.
As of the end of 2019, there are 164 WTO member nations. The WTO encompassed GATT along with two sister
organizations: the General Agreement on Trade in Services (GATS) which is working to extend free trade agreements to
services and the agreement on Trade and Related Aspects of Intellectual Property Rights (TRIPS) which is working to
develop common international rules for intellectual property rights.
The current agenda of the WTO focuses on the rise of anti-dumping policies; high level of protectionism in
agriculture; lack of strong protection for intellectual property rights in many nations; and continued high tariffs on non-
agricultural goods and services in many nations.
The WTO launched a new round of talks at Doha, Qatar in 2001. The agenda includes cutting tariffs on industrial
goods and services; phasing out subsidies to agricultural producers; reducing barriers to cross-border investment; and
limiting the use of anti-dumping laws.
WHAT DO TRADE BARRIERS MEAN FOR MANAGERS?

Managers need to consider how trade barriers affect the strategy of the firm and the implications of
government policy on the firm:
- trade barriers raise the cost of exporting products to a country
- VERs may limit a firm’s ability to serve a country from locations outside that country

- to conform to local content requirements, a firm may have to locate more production activities in a given
market than it would otherwise
Managers have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have
to change strategies.

CHAPTER 8
Foreign direct investment

OBJECTIVES

1. Explained foreign direct investment.
2. Differentiated the forms of foreign direct investment.
FOREIGN DIRECT INVESTMENT (FDI)

FDI pertains to international investment in which the investor obtains a lasting interest in an enterprise in
another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding
improvements to such a facility, in the form of property, plants, or equipment. There are two forms of FDI: greenfield
investment which involves the establishment of a new operation in a foreign country and acquiring or merging with an
existing firm in the foreign country.
refers to the amount of FDI undertaken over a given

Flow of FDI
time period.
refers to the total accumulated value of foreign-
Stock of FDI
owned assets at a given time.
Outflow of FDI refers to the flow of FDI out of a country.
Inflow of FDI Refers to the flow of FDI into a country.
TRENDS IN FDI
There has been a marked increase in both the flow and stock of FDI in the world economy. FDI has grown more
rapidly than the world trade and world output. The growth of FDI is a result of (1) a fear of protectionism and executives
see FDI as a way to circumvent trade barriers; (2)political and economic changes such as deregulation, privatization, etc
has encouraged FDI; (3) new bilateral investment treaties designed to facilitate investment; and (4) globalization of the
world economy. The U.S. remained the largest recipient of FDI in 2019, attracting $251 billion in inflows, followed by
China with flows of $140 billion and Singapore with $110 billion.
DIRECTION OF FDI
Historically, most FDI has been directed at the developed nations of the world as firms
based in advanced countries invested in the others' markets. Even though developed nations still account for the largest
share of FDI inflows, FDI into developing nations has increased.
The records of the United Nations Conference on Trade and Development (UNCTAD) show that inflows to the
Russian Federation more than doubled to $33 billion and FDI in the United Kingdom went down by 6% as Brexit unfolds.
Latin America emerged as the next most important region in the developing world for FDI inflows. The UNCTAD

monitor shows that FDI in Brazil went up by 26% at the start of a privatization programme. Analysis of the different
developing regions showed the highest growth for Latin America and the Caribbean.
Another way of looking at the importance of FDI inflows is to express them as a percentage of gross fixed capital
formation. Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office
buildings, and the like.
SOURCE OF FDI
Since World War II, the United States has been the largest source country for FDI, a position it retained during
the late 1990s and early 2000s. Other important source countries include the United Kingdom, France, Germany, the
Netherlands, and Japan. The Asia-Pacific region has become the largest destination and source of foreign direct
investment (FDI) globally, according to a new report launched by the United Nations Economic and Social Commission
for Asia and the Pacific (ESCAP).
ACQUISITIONS VERSUS GREENFIELD INVESTMENT

FDI can take the form of a greenfield investment in a new facility or an acquisition of or a merger with an
existing local firm. The majority of cross-border investment is in the form of mergers and acquisitions rather than
greenfield investments.
Firms prefer to acquire existing assets because M&As are quicker to execute than greenfield investments; it is
easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up; and firms believe
that they can increase the efficiency of an acquired unite by transferring capital, technology, or management skills.
EXPORTING AND LICENSING

Exporting is the marketing and direct sale of domestically-produced goods in another country. Exports can be
limited by transportation costs and trade barriers. FDI may be a response to actual or threatened trade barriers such as
import tariffs or quotas.
Licensing is defined as a business arrangement, wherein a company authorizes another company by issuing a
license to temporarily access its intellectual property rights, i.e. manufacturing process, brand name, copyright,
trademark, patent, technology, trade secret, etc. for adequate consideration and under specified conditions. Based on
internalization theory (also known as market imperfections theory), compared to FDI, licensing is less attractive due to
the following reasons:
o firms could give away valuable technological know-how to a potential foreign competitor
o does not give a firm the control over manufacturing, marketing, and strategy in the foreign country
o the firm’s competitive advantage may be based on its management, marketing, and manufacturing
capabilities.
PATTERN OF FDI
Observation suggests that firms in the same industry often undertake foreign direct investment at about the
same time. Also, firms tend to direct their investment activities toward certain locations. According to F.T.
Knickerbocker, FDI flows are a reflection of strategic rivalry between firms in the global marketplace. Multipoint
competition arises when two or more enterprises encounter each other in different regional markets, national markets,
or industries. Vernon argued that often the same firms that pioneer a product in their home markets undertake FDI to
produce a product for consumption in foreign markets. His view is that firms undertake FDI at particular stages in the

life cycle of a product they have pioneered.
ECLECTIC PARADIGM
According to John Dunning’s eclectic paradigm, firms need to have ownership, location, and internalization
advantages in order to cross borders and engage in foreign direct investment. He argued that in addition to the various
factors discussed above, location-specific advantages are also of considerable importance in explaining both the
rationale for and the direction of foreign direct investment. By location-specific advantages, Dunning means the
advantages that arise from utilizing resource endowments or assets that are tied to a particular foreign location and that
a firm finds valuable to combine with its own unique.
THEORETICAL APPROACHES TO FDI

The radical view - the MNE is an instrument of imperialist domination and a tool for exploiting host countries to
the exclusive benefit of their capitalist-imperialist home countries.
The free market view – international production should be distributed among countries according to the theory
of comparative advantage.
Pragmatic Nationalism – FDI has both benefits and costs. FDI should be allowed only if the benefits outweigh
the costs.
BENEFITS OF FDI TO THE HOST COUNTRY

1. Resource transfer effects
2. Employment effects
3. Balance of payment effects
4. Effects on competition and economic growth
COSTS OF FDI TO THE HOST COUNTRY

1. Adverse effects of FDI on competition within the host nation
2. Adverse effects on the balance of payments
3. Perceived loss of national sovereignty and autonomy
BENEFITS OF FDI TO THE HOME COUNTRY

1. The effect on the capital account of the home country’s balance of payments from the inward flow of foreign
earnings
2. The employment effects that arise from outward FDI
3. The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the
home country
COSTS OF FDI TO THE HOME COUNTRY

1. Home country’s balance of payments can suffer from the initial capital outflow required to finance the FDI; if the
purpose of the FDI is to serve the home market from a low cost labor location; and if the FDI is a substitute for
direct exports.
2. Employment may also be negatively affected if the FDI is a substitute for domestic production

INFLUENCE OF THE GOVERNMENT ON FDI
Governments can encourage outward FDI by providing government-backed insurance programs to cover major
types of foreign investment risk. On the other hand, governments can restrict outward FDI by limiting capital outflows,
manipulating tax rules, or outright prohibition of FDI.
Government can encourage inward FDI by offering incentives to foreign firms to invest in their countries. On the
other hand, governments can restrict inward FDI through the use of ownership restraints and performance
requirements.
INFLUENCE OF INTERNATIONAL INSTITUTIONS ON FDI

Until the 1990s, there was no consistent involvement by multinational institutions in the governing of FDI.
Today, the WTO is changing this by trying to establish a universal set of rules designed to promote the liberalization of
FDI.
DECISION FRAMEWORK FOR FDI
Philippines urged to view free trade as opportunity to increase FDI

https://www.bworldonline.com/philippines-urged-to-view-free-trade-as-opportunity-
to-increase-fdi/

CHAPTER 9
Regional economic integration

OBJECTIVES

1. Differentiated the levels of regional economic integration
2. Evaluated the effects of integration in different regions in the world
REGIONAL ECONOMIC INTEGRATION

This refers to agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the
free flow of goods, services, and factors of production between each other. It has enabled countries to focus on issues
that are relevant to their stage of development as well as encourage trade between neighbors. In theory, regional trade
agreements promote free trade but the world may be moving toward a situation in which a number of regional trade
blocks compete against each other.
LEVELS OF ECONOMIC INTEGRATION

All barriers to the trade of goods and services among member
countries are removed. In the theoretically ideal free trade
FREE TRADE AREA area, no discriminatory tariffs, quotas, subsidies, or
administrative impediments are allowed to distort trade
between members.
Give 3 FREE TRADE AGREEMENTS/AREAS/ASSOCIATIONS existing in the world and

enumerate the member nations for each.
1
A customs union between countries does two main things: it

removes tariffs – duties paid on particular imports or exports –
between members and it sets up a common external tariff to
CUSTOMS UNION non-members. The common external tariff means that,
generally, the same tariff is charged wherever a member
imports goods from outside the customs union.
Give 3 CUSTOMS UNIONS existing in the world and enumerate the member nations
for each.
1
This has no barriers to trade between member countries,

includes a common external trade policy, and allows factors of
COMMON MARKET production to move freely between members. Labor and
capital are free to move because there are no restrictions on
immigration, emigration, or cross-border flows of capital
between member countries.
Give 3 COMMON MARKETS existing in the world and enumerate the member
nations for each.
1

This involves the free flow of products and factors of
production between member countries and the adoption of a
common external trade policy, but it also requires a common
ECONOMIC UNION currency, harmonization of members' tax rates, and a
common monetary and fiscal policy. Such a high degree of
integration demands a coordinating bureaucracy and the
sacrifice of significant amounts of national sovereignty to that
bureaucracy.
Give 3 ECONOMIC UNIONS existing in the world and enumerate the member
nations for each.
1
POLITICAL UNION This involves a central political apparatus coordinates the

economic, social, and foreign policy of the member states.
THE ECONOMIC AND POLITICAL CASE FOR INTEGRATION

All countries gain from free trade and investment because there will be less barriers. This will also lead into
linking countries together, making them more dependent on each other. Such will create incentives for political
cooperation and reduces the likelihood of violent conflict and give countries greater political clout when dealing with
other nations.
IMPEDIMENTS TO INTEGRATION
Economic integration can be difficult because while a nation as a while may benefit from a regional free trade
agreement, certain groups may lose and it implies a loss of national sovereignty. Concerns about national sovereignty
arise because close economic integration demands that countries give up some degree of control over such key issues as
monetary policy, fiscal policy (e.g., tax policy), and trade policy.
THE CASE AGAINST REGIONAL INTEGRATION

Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts.
Trade creation occurs when low-cost producers within the free trade area replace high cost domestic producers. Trade
diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers,
REGIONAL ECONOMIC INTEGRATION IN EUROPE

Europe has two trade blocs:
• European Union (EU) which has 27 member nations as of 2020
• European Free Trade Association (EFTA) which has 4 member nations

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. In addition, many Europeans were aware of the potential economic benefits of closer economic integration of the
countries.
The forerunner of the EU, the European Coal and Steel Community (ECSC), was formed in 1951. Its objective was
to remove barriers to intragroup shipments of coal, iron, steel, and scrap metal. With the signing of the Treaty of Rome
in 1957, the European Community (EC) was established. The name changed again in 1994 when the European
Community became the European Union following the ratification of the Maastricht Treaty.
The Single European Act was born of a frustration among members that the community was not living up to its
promise. This committed the EC countries to work toward the establishment of a single market by December 31, 1992.
It provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic
growth than would otherwise have been the case.
The four main institutions that make up the political structure of the EU:
EUROPEAN The ultimate controlling authority within the EU since draft legislation
COUNCIL from the commission can become EU law only if the council agrees.
EUROPEAN This is responsible for proposing EU legislation, implementing

COMMISSION it, and monitoring compliance with EU laws by member states.
It debates legislation proposed by the commission and forwarded to it

EUROPEAN by the council. It can propose amendments to that legislation, which
PARLIAMENT the commission and ultimately the council are not obliged to take up
but often will.
COURT OF
The supreme appeals court for EU law
JUSTICE
The Maastricht Treaty committed the EU to adopt a single currency. It created the second largest currency zone
in the world after that of the U.S. dollar. For a while it was used by 17 out of all the member states. Countries like Great
Britain, Denmark, and Sweden opted out.
Benefits of the Euro:

o savings from having to handle one currency, rather than many
o it is easier to compare prices across Europe, so firms are force to be more competitive
o gives a strong boost to the development of highly liquid pan-European capital market
o increases the range of investment options open both to individuals and institutions

Costs of the Euro:
o loss of control over national monetary policy
o EU is not an optimal currency area
What countries were the original members of the ECSC?

_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
How many EU countries now use the Euro? __________
What countries are currently working to become part of the EU?
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
ECONOMIC INTEGRATION IN THE AMERICAS

The most significant attempt that comes close to the EU is the North American Free Trade Agreement (NAFTA)
and there are other trade blocs in the Americas.
NORTH AMERICAN FREE TRADE AGREEMENT

This includes United States, Canada, and Mexico. This agreement included the following:
o abolished tariffs on 99% of the goods traded between members
o removed barriers on the cross-border flow of services
o protects intellectual property rights
o removes most restrictions on FDI between members
o allows each country to apply its own environmental standards
o establishes 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
Supporters of NAFTA claimed that Mexico would benefit from increased jobs as low cost
production moves south and will see more rapid economic growth as a result. They also claimed that the U.S. and
Canada would benefit by having access to a large and increasingly prosperous market, lower prices for consumers
from goods produced in Mexico, low cost labor and the ability to be more competitive on world markets, and
increased imports by Mexico.
On the other hand, critics of NAFTA claimed that 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, and Mexico would lose its sovereignty.
ANDEAN COMMUNITY
Originally known as the Andean Pact, the Andean Community was formed in 1969 using the EU model. It had
more or less failed by the mid-1980s and was re-launched in 1990, and now operates as a customs union. It was
renamed the Andean Community in 1997. It signed an agreement in 2003 with MERCOSUR to restart
negotiations towards the creation of a free trade area.

What countries created the Andean Pact?
_________________________ _________________________
_________________________ _________________________
_________________________
MERCOSUR
This originated in 1988 as a free trade pact between Brazil and Argentina and was expanded in 1990 to
include Paraguay and Uruguay and in 2005 with the addition of Venezuela. It initially made progress on
reducing trade barriers between member states, but more recently efforts have stalled.
MERCOSUR is actually an acronym.

What does it stand for?
What is the English translation of the MERCOSUR?
CENTRAL AMERICAN TRADE AGREEMENT, CAFTA, AND CARICOM

Two other trade pacts in the Americas have not made much progress. In the early 1960s, Costa Rica, El
Salvador, Guatemala, Honduras, and Nicaragua attempted to set up a Central American Common Market. It
collapsed in 1969 when war broke out between Honduras and El Salvador after a riot at a soccer match between
teams from the two countries. Since then the member countries have made some progress toward reviving
their agreement (the five founding members were joined by the Dominican Republic). The proposed common
market was given a boost in 2003 when the United States signaled its intention to enter into bilateral free trade
negotiations with the group. These cumulated in a 2005 agreement to establish a free trade agreement between
the six countries and the United States. Known as the Central America Free Trade Agreement, or CAFTA, the
aim is to lower trade barriers between the United States and the six countries for most goods and services.
A customs union was to have been created in 1991 between the English-speaking Caribbean countries
under the auspices of the Caribbean Community. Referred to as CARICOM, it was established in 1973. However,
it repeatedly failed to progress toward economic integration. CARICOM expanded to 15 members by 2005. In
early 2006, six CARICOM members established the Caribbean Single Market and Economy (CSME). Modeled on
the EU's single market, CSME's goal is to lower trade barriers and harmonize macroeconomic and monetary
policy between member states.
FREE TRADE AREA OF THE AMERICAS

Talks began in April 1998 to establish a Free Trade of the Americas (FTAA) by 2005. The FTAA was not
established and now support from the U.S. and Brazil is mixed. U.S. wants stricter enforcement of intellectual
property rights while 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.

REGIONAL ECONOMIC INTEGRATION ELSEWHERE
ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN)

This formed in 1967 with the basic objective of fostering freer trade between member countries and to
achieve cooperation in their industrial policies.
Enumerate the member countries of the ASEAN
____________________________ ____________________________
____________________________ ____________________________
____________________________ ____________________________
____________________________ ____________________________
____________________________ ____________________________
ASEAN FREE TRADE AREA (AFTA)

The creation of the ASEAN Free Trade Area (AFTA) was agreed at the 1992 ASEAN Summit in Singapore.
The main objectives of the AFTA are to:
o create a single market and an international production base;
o attract foreign direct investments; and
o expand intra-ASEAN trade and investments.
ASIA-PACIFIC ECONOMIC COOPERATION (APEC)

The APEC is a regional economic forum established in 1989 to leverage the growing interdependence of
the Asia-Pacific. It aims to create greater prosperity for the people of the region by promoting balanced,
inclusive, sustainable, innovative and secure growth and by accelerating regional economic integration.

Enumerate the member countries of the APEC
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________
ECONOMIC INTEGRATION IN AFRICA

Many countries are members of more than one of the many blocs in the region. However, since many countries
support the use of trade barriers to protect their economies from foreign competition, meaningful progress are slow.

CHAPTER 10
THE FOREIGN EXCHANGE MARKET

OBJECTIVES

1. Explained the importance of foreign exchange in international trade.
2. Identified the different currencies.
FOREIGN EXCHANGE MARKET

This is a market for converting the currency of one country into that of another country. One function of the
foreign exchange market is to provide some insurance against the risks that arise from such volatile changes in exchange
rates, commonly referred to as foreign exchange risk.
Exchange Rate
This refers to the rate at which one currency is converted into another.
FUNCTIONS OF THE FOREIGN EXCHANGE MARKET
CURRENCY CONVERSION
Tourists are minor participants in the foreign exchange market; companies engaged in
international trade and investment are major ones. International businesses have four main uses of foreign
exchange markets. First, the payments a company receives for its exports, the income it receives from foreign
investments, or the income it receives from licensing agreements with foreign firms may be in foreign
currencies. Second, international businesses use foreign exchange markets when they must pay a foreign
company for its products or services in its country's currency. Third, international businesses also use foreign
exchange markets when they have spare cash that they wish to invest for short terms in money markets.
INSURING AGAINST FOREIGN EXCHANGE RISK

A second function of the foreign exchange market is to provide insurance against foreign exchange risk,
which is the possibility that unpredicted changes in future exchange rates will have adverse consequences for
the firm. When a firm insures itself against foreign exchange risk, it is engaging in hedging.
rate at which a foreign exchange dealer converts one currency

SPOT EXCHANGE RATE
into another currency on a particular day.
exchange rate governing a transaction in which two parties

FORWARD EXCHANGE
agree to exchange currency and execute the deal at some
RATE
specific date in the future.

the simultaneous purchase and sale of a given amount of
foreign exchange for two different value dates. Swaps are
CURRENCY SWAPS transacted between international businesses and their banks,
between banks, and between governments when it is desirable
to move out of one currency into another for a limited period
without incurring foreign exchange risk.
NATURE OF THE FOREIGN EXCHANGE MARKET

The foreign exchange market is not located in any one place. It is a global network of banks, brokers, and foreign
exchange dealers connected by electronic communications systems. When companies wish to convert currencies, they
typically go through their own banks rather than entering the market directly. Two features of the foreign exchange
market are of particular note. The first is that the market never sleeps. The second feature of the market is the
integration of the various trading centers. High-speed computer linkages between trading centers around the globe have
effectively created a single market. If exchange rates quoted in different markets were not essentially the same, there
would be an opportunity for arbitrage - the process of buying a currency low and selling it high.
ECONOMIC THEORIES OF EXCHANGE RATE DETERMINATION

At the most basic level, exchange rates are determined by the demand and supply of one
currency relative to the demand and supply of another. Three factors that have an important impact on future
exchange rate movements are: a country’s price inflation, a country’s interest rate, and market psychology.
PRICES AND EXCHANGE RATES

To understand how prices and exchange rates are linked, it is important to understand the Law of One
Price and the theory of Purchasing Power Parity. The Law of One Price states that in competitive markets free
of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must
sell for the same price when their price is expressed in terms of the same currency. If the law of one price were
true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any
individual set of prices. By comparing the prices of identical products in different currencies, it would be possible
to determine the "real" or PPP exchange rate that would exist if markets were efficient. (An efficient market has
no impediments to the free flow of goods and services, such as trade barriers.)
INTEREST RATES AND EXCHANGE RATES

Economic theory tells us that interest rates reflect expectations about likely future
inflation rates. In countries where inflation is expected to be high, interest rates also will be high, because
investors want compensation for the decline in the value of their money.
INVESTOR PSYCHOLOGY AND BANDWAGON EFFECTS

Evidence reveals that various psychological factors play an important role in determining the expectations of
market traders as to likely future exchange rates. The bandwagon effect occurs when expectations on the part of
traders turn into self-fulfilling prophecies, and traders join the bandwagon and move exchange rates based on group
expectations.
EXCHANGE RATE FORECASTING

A company's need to predict future exchange rate variations raises the issue of whether it is worthwhile for the
company to invest in exchange rate forecasting services to aid decision-making.

Efficient Market School - one in which prices reflect all available public information. If forward rates reflect all
available information about likely future changes in exchange rates, a company cannot beat the market by
investing in forecasting services.
Inefficient Market School - one in which prices do not reflect all available information. In an inefficient market,
forward exchange rates will not be the best possible predictors of future spot exchange rates.
APPROACHES TO FORECASTING
Fundamental Analysis - draws on economic theory to construct sophisticated econometric models for predicting
exchange rate movements. The variables contained in these models typically include those we have discussed,
such as relative money supply growth rates, inflation rates, and interest rates. In addition, they may include
variables related to balance-of-payments positions.
Technical Analysis - uses price and volume data to determine past trends, which are expected
to continue into the future. This approach does not rely on a consideration of economic fundamentals.
CURRENCY CONVERTIBILITY
when the country's government allows both residents and

FREELY CONVERTIBLE nonresidents to purchase unlimited amounts of a foreign currency
with it.
EXTERNALLY when only nonresidents may convert it into a foreign currency

CONVERTIBLE without any limitations.
NONCONVERTIBLE when neither residents nor nonresidents are allowed to convert it into
a foreign currency.
EXCHANGE RATE RISKS
TRANSACTION the extent to which the income from individual transactions is

EXPOSURE affected by fluctuations in foreign exchange values.
TRANSLATION the impact of currency exchange rate changes on the reported

EXPOSURE financial statements of a company. Translation exposure is concerned
with the present measurement of past events.
the extent to which a firm's future international earning power is

ECONOMIC EXPOSURE affected by changes in exchange rates. Economic exposure is
concerned with the long run effect of changes in exchange rates on
future prices, sales, and costs

REDUCING TRANSLATION AND TRANSACTION EXPOSURE
A lead strategy involves attempting to collect foreign currency receivables (payments from customers} early
when a foreign currency is expected to depreciate and paying foreign currency payables (to suppliers} before they are
due when a currency is expected to appreciate. A lag strategy involves delaying collection of foreign currency
receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.
REDUCING ECONOMIC EXPOSURE

The key to reducing economic exposure is to distribute the firm's productive assets to various locations so the
firm's long-term financial well-being is not severely affected by adverse changes in exchange rates.
OTHER STRATEGIES TO MANAGE FOREIGN EXCHANGE RISK

To further manage foreign exchange risk, firms should:
o Establish central control to protect resources and ensure that each sub-unit adopts the correct mix of tactics
and strategies;
o Distinguish between transaction, translation, and economic exposure;
o Attempt to forecast future exchange rates;
o Establish good reporting systems;
o Produce monthly foreign exchange exposure reports.
List down the Top 10 Strongest Currencies as of 2021
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________

CHAPTER 11
INTERNATIONAL MONETARY SYSTEM

OBJECTIVES
1. Explained the roles played by the World Bank and IMF in the international monetary system.
2. Compared and contrasted between fixed and floating exchange rate system.
3. Discussed the implications of the global monetary system for currency management and
business strategy.
INTERNATIONAL MONETARY SYSTEM

This refers to the institutional arrangements that countries adopt to govern exchange rates.
FLOATING EXCHANGE RATE exists when a country allows the foreign exchange market to
SYSTEM determine the relative value of a currency
exists when a country fixes the value of its currency relative to

a reference currency
PEGGED EXCHANGE RATE Dirty Float - exists when a country tries to hold the value of its
SYSTEM currency within some range of a reference currency such as the
U.S. dollar
FIXED EXCHANGE RATE Exists when countries fix their currencies against each other at
SYSTEM some mutually agreed on exchange rate
THE GOLD STANDARD

This refers to a system in which countries peg currencies to gold and guarantee their convertibility. This
standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value.
Given a common gold standard, the value of any currency in units of any other currency was easy to determine. The
great strength of the gold standard was that it contained a powerful mechanism for achieving balance-of-trade
equilibrium by all countries. The gold standard worked well from the 1870s until 1914 but many governments financed
their World War I expenditures by printing money and so, created inflation. People lost confidence in the system and
demanded gold for their currency putting pressure on countries’ gold reserves, and forcing them to suspend gold
convertibility. By 1939, the gold standard was dead.

BRETTON WOODS SYSTEM
The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United
Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Under the Bretton Woods System,
gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. Under the new
agreement, a fixed exchange rate system was established, all currencies were fixed to gold, but only the U.S. dollar was
directly convertible to gold, devaluations could not be used for competitive purposes, and a country could not devalue
its currency by more than 10% without IMF approval.
The Bretton Woods Agreement also established two multinational institutions: the International Monetary Fund
and the World Bank.
The IMF
o fixed exchange rates which stopped competitive devaluations and brought stability to the world trade
environment
o fixed exchange rates imposed monetary discipline on countries, limiting price inflation
o in cases of fundamental disequilibrium, devaluations were permitted
o lent foreign currencies to members during short periods of balance-of-payments deficit, when a rapid
tightening of monetary or fiscal policy would hurt domestic employment
The World Bank

o Countries can borrow from the WB in two ways:
o Under the IBRD scheme, money is raised through bond sales in the international capital market
o Through the IDA; IDA loans go only to the poorest countries
THE COLLAPSE OF THE FIXED EXCHANGE RATE SYSTEM

The system of fixed exchange rates established at Bretton Woods worked well until the late 1960s, when it
began to show signs of strain. The increase in inflation and the worsening of the U.S. foreign trade position gave rise to
speculation in the foreign exchange market that the dollar would be devalued. Because the system relied on an
economically well managed U.S., when the U.S. began to print money, run high trade deficits, and experience high.
JAMAICA AGREEMENT
A new exchange rate system was established in 1976 at a meeting in Jamaica. The rules that were agreed on
then are still in place today.
Under the Jamaican agreement:

o floating rates were declared acceptable
o gold was abandoned as a reserve asset
o total annual IMF quotas were increased
EXCHANGE RATES SINCE 1973

Since 1973, exchange rates have been more volatile and less predictable than they were between 1945 and
1973 because of
o the 1971 and 1979 oil crises

o the loss of confidence in the dollar after U.S. inflation in 1977-78
o the rise in the dollar between 1980 and 1985
o the partial collapse of the EMS in 1992

o the 1997 Asian currency crisis
o the global financial crisis of 2008–2010; sovereign debt crisis of 2010–2011
WHAT TYPE OF EXCHANGE RATE SYSTEM IS IN PRACTICE TODAY?

Various exchange rate regimes are followed today
o 21% of IMF members follow a free float policy
o 23% of IMF members follow a managed float system
o 5% of IMF members have no legal tender of their own
o excludes Euro Zone countries
o the remaining countries use less flexible systems such as pegged arrangements, or adjustable pegs
CURRENCY BOARD
Countries using a currency board commit to converting their domestic currency on demand into another
currency at a fixed exchange rate
o the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100%
of the domestic currency issued
o the currency board can issue additional domestic notes and coins only when there are foreign exchange
reserves to back them
IMF’S ROLE
Today, the IMF focuses on lending money to countries in financial crisis. The three main types of financial crises
are: currency crisis, banking crisis, and foreign debt crisis.
Currency Crisis - occurs when a speculative attack on the exchange value of a currency results in
a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international
currency reserves and sharply increase interest rates in order to defend prevailing exchange rates.
Banking Crisis – refers to a situation in which a loss of confidence in the banking system leads to a run on the
banks, as individuals and companies withdraw their deposits.
Foreign Debt Crisis – situation in which a country cannot service its foreign debt obligations, whether private
sector or government debt.
MEXICAN CURRRENCY CRISIS OF 1995

The Mexican currency crisis of 1995 was a result of high debts, and a pegged exchange rate that did not allow
for a natural adjustment of prices. To keep Mexico from defaulting on its debt, the IMF created a $50 billion aid package
which required tight monetary policy and cuts in public spending.
ASIAN CURRENCY CRISIS

The 1997 Southeast Asian financial crisis was caused by events that took place in the previous decade including
o an investment boom – fueled by huge increases in exports
o excess capacity – investments were based on projections of future demand conditions
o high debt – investments were supported by dollar-based debts
o expanding imports – caused current account deficits

By mid-1997, several key Thai financial institutions were on the verge of default and there was
speculation against the Thai Baht. Thailand then abandoned the Baht peg and allowed the currency to float. The IMF
provided a bailout loan package and this required higher taxes, public spending cuts, privatization of state-owned
businesses, and higher interest rates.
Speculation caused other Asian currencies including the Malaysian Ringgit, the Indonesian Rupiah, and the
Singapore Dollar to fall. These devaluations were mainly driven by excess investment and high borrowing, much of it in
dollar denominated debts and a deteriorating balance of payments position. The IMF provided an aid package for
Indonesia which required public spending cuts, closure of troubled banks, a balanced budget, and an end to crony
capitalism. Likewise aid package was provided by IMF to South Korea and this required a more open banking system
and economy, and restraint by chaebol.
EVALUATING IMF’S POLICY PRESCRIPTIONS

One criticism is that the IMF's traditional policy prescriptions represent a "one-size-fits all" approach to
macroeconomic policy that is inappropriate for many countries. In the case of the Asian crisis, critics argue that the tight
macroeconomic policies imposed by the IMF are not well suited to countries that are suffering not from excessive
government spending and inflation, but from a private-sector debt crisis with deflationary undertones.
A second criticism of the IMF is that its rescue efforts are exacerbating a problem known to economists as moral
hazard. Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.
The final criticism of the IMF is that it has become too powerful for an institution that lacks any real mechanism
for accountability.
IMPLICATION FOR MANAGERS

Managers need to understand how the international monetary system affects currency management, business
strategies, and corporate-government relations.

CHAPTER 12
THE STRATEGY OF INTERNATIONAL
BUSINESS

OBJECTIVES
1. Discussed the different strategies used by companies operating in different countries.

2. Proposed strategies that companies can use to be more competitive.
To compete more effectively in a global economy, managers must consider: the benefits of expanding into
foreign markets, which strategies to pursue in foreign markets, the value of collaboration with global competitors, and
the advantages of strategic alliances.
A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm. For most
firms, the preeminent goal is to maximize the value of the firm for its owners, its shareholders. To maximize the value of
a firm, managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth
over time. To increase profitability and to ensure growth, firms can add value, lower costs, sell more in existing markets,
and expand internationally.
VALUE CREATION
Value creation is the primary aim of any business entity. Creating value for customers helps sell products and
services, while creating value for shareholders, in the form of increases in stock price, insures the future availability of
investment capital to fund operations. The two basic strategies for creating value are: differentiation and low cost.
STRATEGIC POSITIONING
To maximize profitability, a firm must:
o Pick a position on the efficiency frontier that is viable (enough demand to support the choice)
o Configure internal operations to support the position
o Have the right organization structure in place to execute the strategy

THE FIRM AS A VALUE CHAIN
A firm’s operations are like a value chain composed of a series of distinct value creation activities. All of these
activities must be managed effectively and be consistent with firm strategy.
PRIMARY ACTIVTIES
These involve creating the product, marketing and delivering the product to buyers, and providing support and
after-sale service to the buyers of the product.
SUPPORT ACTIVITIES
These involve providing the inputs that allow the primary activities of production and marketing to occur.

GLOBAL EXPANSION AND PROFITS
Firms that operate internationally can
o Expand the market for their domestic product offerings by selling those products in international
markets
o Realize location economies by dispersing individual value creation activities to locations around the
globe where they can be performed most efficiently and effectively
o Realize greater cost economies from experience effects by serving an expanded global market from a
central location, thereby reducing the costs of value creation
o Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring
them to other entities within the firm’s global network of operations
LEVERAGING PRODUCTS AND COMPETENCIES

To increase growth, a firm can sell products or services developed at home in foreign markets. Success depends
on the type of goods and services, and the firm’s core competencies (skills within the firm that competitors cannot
easily match or imitate- exist in any value creation activity). These core competencies enable the firm to reduce the
costs of value creation and create perceived value so that premium pricing is possible.
LOCATION ECONOMIES
Multinationals that take advantage of location economies create a global web of value creation activities. Under
this strategy, different stages of the value chain are dispersed to those locations around the globe where perceived
value is maximized or where the costs of value creation are minimized.
EXPERIENCE CURVE
The systematic reductions in production costs that have been observed to occur over the life of a product. A
product’s production costs decline by some quantity about each time cumulative output doubles. Learning effects are
cost savings that come from learning by doing. Labor productivity increases when individuals learn the most efficient
ways to perform particular tasks and management learns how to manage the new operation more efficiently.

EXPERIENCE EFFECTS
Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product.
Sources of economies of scale include: the ability to spread fixed costs over a large volume, the ability of large firms to
employ increasingly specialized equipment or personnel to utilize production facilities more intensively, and the ability
to increase bargaining power with suppliers. Serving a global market from a single location is consistent with moving
down the experience curve and establishing a low-cost position.
LEVERAGING SUBSIDIARY SKILLS

To help increase firm value, managers should:
o Recognize that valuable skills can be developed anywhere within the firm’s global network (not just at the
corporate center)
o Use incentive systems to encourage local employees to acquire new skills
o Develop a process to identify when new skills have been created
o Act as facilitators to transfer valuable skills within the firm
COMPETITIVE PRESSURES
There are two competitive pressures: pressures for cost reductions and pressures to be locally responsive.
Pressures for Cost Reductions

Pressures for cost reductions are greatest:
o In industries producing commodity type products that fill universal needs - needs that exist when
the tastes and preferences of consumers in different nations are similar if not identical
o When major competitors are based in low cost locations
o Where there is persistent excess capacity
o Where consumers are powerful and face low switching costs
To respond to these pressures, firms need to lower the costs of value creation.
Pressures for Local Responsiveness

1. Differences in consumer tastes and preferences
2. Differences in infrastructure and traditional practices
3. Differences in distribution channels
4. Host government demands

CHOOSING A STRATEGY
GLOBAL STANDARDIZATION STRATEGY

This focuses on increasing profitability and profit growth by reaping the cost reductions that come from
economies of scale, learning effects, and location economies. The goal is to pursue a low-cost strategy on a global scale.
This makes sense when there are strong pressures for cost reductions and demands for local responsiveness are
minimal.
LOCALIZATION STRATEGY
This focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good
match to tastes and preferences in different national markets. This makes sense when there are substantial differences
across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense.
TRANSNATIONAL STRATEGY
This tries to simultaneously:
o Achieve low costs through location economies, economies of scale, and learning effects
o Differentiate the product offering across geographic markets to account for local differences
o Foster a multidirectional flow of skills between different subsidiaries
This makes sense when there are both high cost pressures and high pressures for local responsiveness.
INTERNATIONAL STRATEGY
This involves taking products first produced for the domestic market and then selling them internationally with
only minimal local customization. This makes sense when there are low cost pressures and low pressures for local
responsiveness.
THE EVOLUTION OF STRATEGY

An international strategy may not be viable in the long term. Localization may give a firm a competitive edge,
but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures.
The choice of strategy is not static. As competition increases, international and localization strategies become less
viable. To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of

competitors.

CHAPTER 13
THE ORGANIZATION OF INTERNATIONAL
BUSINESS

OBJECTIVES
1. Explained how organization can be matched to strategy to improve the performance of an

international business.
2. Evaluated what is required for an international business to change its organization so that it
better matches its strategy.
ORGANIZATION ARCHITECTURE
This refers to the totality of a firm’s organization - formal organizational structure, control systems and
incentives, organizational culture, processes, and people.
Organization Architecture
CONTROLS
These are the metrics used to measure the performance of subunits and make judgments about how
well the subunits are run.
INCENTIVES
These are the devices used to reward appropriate managerial behavior.
PROCESSES
These refer to the manner in which decisions are made and work is performed.

ORGANIZATIONAL CULTURE
This is composed of the norms and value systems that are shared among the employees.
PEOPLE
They are the employees and the strategy used to recruit, compensate, and retain those individuals in
terms of their skills, values, and orientation.
So, to attain superior performance and earn a high return on capital, a firm’s strategy must make sense given
market conditions:
o The operations of the firm must support the firm’s strategy-the elements of the organizational
architecture must be internally consistent
o The organizational architecture of the firm must match the firm’s operations and strategy
o If market conditions shift, so must the firm’s strategy, operations, and organization-the strategy and
architecture must be consistent with each other, and consistent with competitive conditions
Strategic Fit
ORGANIZATIONAL STRUCTURE
This refers to the formal division of the organization into subunits. The location of decision-making
responsibilities within that structure is either centralized or decentralized. Organizational structure refers to the
establishment of integrating mechanisms to coordinate the activities of subunits including cross functional teams and or
pan-regional committees.
Organizational structure has three dimensions
VERTICAL refers to the location of decision-making responsibilities within

DIFFERENTIATION a structure
HORIZONTAL
refers to the formal division of the organization into subunits
DIFFERENTIATION
INTEGRATING
mechanisms for coordinating subunits
MECHANISMS

Vertical differentiation determines where decision-making power is concentrated. Centralized decision making
facilitates coordination, ensures decisions are consistent with the organization’s objectives, gives managers the means
to bring about organizational change, and avoids duplication of activities. On the other hand, decentralized decision
making relieves the burden of centralized decision making, has been shown to motivate individuals, permits greater
flexibility, can result to better decisions, and can increase control.
Horizontal differentiation refers to how the firm divides into subunits. It is usually based on function, type of
business, or geographical area. Most firms begin with no formal structure, but as they grow, split into functions
reflecting the firm’s value creation activities – functional structure. Functions are coordinated and controlled by top
management, decision making is centralized, and product line diversification requires further horizontal differentiation.
A typical Functional Structure
Firms may switch to a product divisional structure to solve problems of coordination and control.
When firms expand internationally, they often group all of their international activities into an international

division. Over time, manufacturing may shift to foreign markets. Firms with a functional structure at home would
replicate the functional structure in the foreign market while firms with a divisional structure would replicate the
divisional structure in the foreign market. In either case, there is the potential for conflict and coordination problems
between domestic and foreign operations.
International Division Structure
Firms that continue to expand will move to either a worldwide product division structure - adopted by firms that
are reasonably diversified. This allows for worldwide coordination of value creation activities of each product division,
helps realize location and experience curve economies, facilitates the transfer of core competencies, and does not allow
for local responsiveness.

Worldwide Product Division Structure
Or, it may move to a worldwide area structure which is favored by firms with low degree of diversification and a
domestic structure based on function. This divides the world into autonomous geographic areas, decentralizes
operational authority, and facilitates local responsiveness. It can result in a fragmentation of the organization and is
consistent with a localization strategy.
Worldwide Area Structure

How does organizational structure change over time?
The global matrix structure tries to minimize the limitations of the worldwide area structure and the worldwide
product divisional structure. This allows for differentiation along two dimensions: product division and geographic area.
This also allows for dual decision making: product division and geographic area have equal responsibility for operating
decisions. However, it can be bureaucratic and slow, it can result in conflict between areas and product divisions, and
can result in finger-pointing between divisions when something goes wrong.
Global Matrix Structure

INTEGRATING MECHANISMS
Regardless of the type of structure, firms need a mechanism to integrate subunits
– need for coordination is lowest in firms with a localization strategy and highest in transnational
firms
– coordination can be complicated by differences in subunit orientation and goals
– simplest formal integrating mechanism is direct contact between subunit managers, followed by
liaisons
– temporary or permanent teams composed of individuals from each subunit is the next level of
formal integration
– the matrix structure allows for all roles to be integrating roles
Formal Integrating Mechanisms
Firms with a high need for integration have been experimenting with an informal integrating mechanism:
knowledge networks that are supported by an organization culture that values teamwork and cross-unit cooperation. A
knowledge network - network for transmitting information within an organization that is based not on informal
contacts between managers and on distributed information systems. This is a non-bureaucratic conduit for
knowledge flows and for it to work it must embrace as many managers as possible and managers must adhere to a
common set of norms and values that override differing subunit orientations.
A Simple Management Network

CONTROL SYSTEMS AND INCENTIVES
A major task of a firm's leadership is to control the various subunits of the firm-whether they be defined on the
basis of function, product division, or geographic area-to ensure their actions are consistent with the firm's overall
strategic and financial objectives. Firms achieve this with various control and incentive systems.
TYPES OF CONTROL SYSTEMS
• control by personal contact with subordinates

PERSONAL CONTROLS
• most widely used in small firms
• control through a system of rules and procedures that

directs the actions of subunits
BUREAUCRATIC
• The most important bureaucratic controls in subunits
CONTROLS
within multinational firms are budgets and capital
spending rules
• involve setting goals for subunits to achieve and

expressing those goals in terms of relatively objective
OUTPUT CONTROLS
performance metrics such as profitability, productivity,
growth, market share, and quality.
CULTURAL CONTROLS • exist when employees "buy into" the norms and value
systems of the firm.
Incentives refer to the devices used to reward appropriate employee behavior. Incentives are usually closely
tied to performance metrics used for output controls. It should vary depending on the employee and the nature of the
work being performed. Incentives should promote cooperation between managers in sub-units and should reflect
national differences in institutions and culture. It is important for managers to recognize that incentive systems can
have unintended consequences.
Performance ambiguity exists when the causes of a sub-unit’s poor performance are not clear. It is common
when a sub-unit’s performance is dependent on the performance of other subunits. Performance ambiguity is lowest in
firms with a localization strategy and higher in international firms. It is still higher in firms with a global standardization
strategy and highest in transnational firms.
The link between control, incentives, and strategy is summarized in the following table

ORGANIZATIONAL CULTURE
An organization's culture comes from several sources. First, there seems to be wide agreement that founders or
important leaders can have a profound impact on an organization's culture, often imprinting their own values on the
culture. Another important influence on organizational culture is the broader social culture of the nation where the firm
was founded. A third influence on organizational culture is the history of the enterprise, which over time may come to
shape the values of the organization.
Managers in companies with a “strong” culture share a relatively consistent set of values and norms that have a
clear impact on the way work is performed. A “strong” culture is not always good. It may not lead to high performance
and could be beneficial at one point, but not at another. Companies with adaptive cultures have the highest
performance.
A SYNTHESIS OF STRATEGY, STRUCTURE, AND CONTROL SYSTEMS
For a firm to succeed, the firm’s strategy must be consistent with the environment in which the firm operates
and the firm’s organization architecture must be consistent with its strategy.
ORGANIZATIONAL CHANGE
Organizational change is the movement of an organization from one state of affairs to another. A change in the
environment often requires change within the organization operating within that environment. Multinational firms
periodically have to alter their architecture so that it conforms
to the changes in the environment in which they are competing and the strategy they are pursuing.
To implement organization change

1. Unfreeze the organization through shock therapy
– requires taking bold actions like plant closures or dramatic structural reorganizations
2. Move the organization to a new state through proactive change in architecture
– requires a substantial and quick change in organizational architecture so that it matches the
desired new strategic posture
3. Refreeze the organization in its new state
– requires that employees be socialized into the new way of doing things

Organizations are difficult to change. Within most organizations are strong inertia forces. These forces come
from a number of sources. One source of inertia is the existing distribution of power and influence within an
organization. Another source of organizational inertia is the existing culture, as expressed in norms and value systems.
Organizational inertia might also derive from senior managers' preconceptions about the appropriate business model or
paradigm. Institutional constraints might also act as a source of inertia.

CHAPTER 14
ENTRY Strategy and strategic
alliances
OBJECTIVES

1. Explained the different entry modes.
2. Discussed the pros and cons of strategic alliances.
3. Compared and contrasted greenfield venture and acquisition.
BASIC ENTRY DECISIONS

Firms expanding internationally must decide
1. Which markets to enter
2. When to enter them and on what scale
3. Which entry mode to use
a. Exporting
b. licensing or franchising to a company in the host nation
c. establishing a joint venture with a local company
d. establishing a new wholly owned subsidiary
e. acquiring an established enterprise
Several factors affect the choice of entry mode including

o transport costs
o trade barriers
o political risks
o economic risks
o costs
o firm strategy
The optimal mode varies by situation – what makes sense for one company might not make sense for another.
WHICH FOREIGN MARKETS TO ENTER

The choice of foreign markets will depend on their long-run profit potential. The favorable markets are the ones
with the following characteristics:
o are politically stable
o have free market systems
o have relatively low inflation rates
o have low private sector debt

Markets are also more attractive when the product in question is not widely available and satisfies an unmet
need. The less desirable markets are the ones that:
o are politically unstable
o have mixed or command economies
o have excessive levels of borrowing
WHEN TO ENTER A FOREIGN MARKET

Once attractive markets are identified, the firm must consider the timing of entry. Entry is early when the firm
enters a foreign market before other foreign firms. On the other hand, entry is late when the firm enters the market
after firms have already established themselves in the market.
Why enter a foreign market early?

First-mover advantages include
o the ability to preempt rivals by establishing a strong brand name
o the ability to build up sales volume and ride down the experience curve ahead of rivals
and gain a cost advantage over later entrants
o the ability to create switching costs that tie customers into products or services making
it difficult for later entrants to win business
Why enter a foreign market late?

First-mover disadvantages include
o pioneering costs - arise when the foreign business system is so different from that in
the home market that the firm must devote considerable time, effort and expense to
learning the rules of the game
o the costs of business failure if the firm, due to its ignorance of the foreign
environment, makes some major mistakes
o the costs of promoting and establishing a product offering, including the cost of
educating customers
ON WHAT SCALE SHOULD A FIRM ENTER FOREIGN MARKETS

After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry.
Firms that enter a market on a significant scale make a strategic commitment to the market. Small scale entry has the
advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that
market.
There are no “right” decisions when deciding which markets to enter, and the timing and scale of entry – just
decisions that are associated with different levels of risk and reward.
WHICH ENTRY MODE TO USE

Exporting - defined as the sale of products and services in foreign countries that are sourced or made in the
home country. This has two distinct advantages: First, it avoids the often substantial costs of establishing
manufacturing operations in the host country. Second, exporting may help a firm achieve experience curve and
location economies. Exporting has a number of drawbacks. First, exporting from the firm's home base may not
be appropriate if lower-cost locations for manufacturing the product can be found abroad. A second drawback
to exporting is that high transport costs can make exporting uneconomical, particularly for bulk products. It is
also possible for agents in a foreign country not to act in exporter’s best interest.

Turnkey Projects - is a contract under which a firm agrees to fully design, construct and equip a manufacturing/
business/ service facility and turn the project over to the purchaser when it is ready for operation for
remuneration. The contractor handles every detail of the project for a foreign client, including the training of
operating personnel. Turnkey projects are attractive because they are a way of earning economic returns from
the know-how required to assemble and run a technologically complex process and they can be less risky than
conventional FDI. Turnkey projects are unattractive because the firm has no long-term interest in the foreign
country, the firm may create a competitor, and if the firm’s process technology is a source of competitive
advantage, then selling this technology through a turnkey project is also selling competitive advantage to
potential and/or actual competitors.
Licensing - is an arrangement whereby a licensor grants the rights to intangible property to another entity (the
licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee.
Licensing is attractive for the following reasons:

o the firm avoids development costs and risks associated with opening a foreign market
o the firm avoids barriers to investment
o the firm can capitalize on market opportunities without developing those applications itself
Licensing is unattractive for the following reasons:

o the firm doesn’t have the tight control required for realizing experience curve and location
economies
o the firm’s ability to coordinate strategic moves across countries is limited
o proprietary (or intangible) assets could be lost to reduce this risk, use cross-licensing
Franchising - a form of business by which the owner (franchisor) of a product, service or method obtains
distribution through affiliated dealers (franchisees).
Franchising is attractive because

o it avoids the costs and risks of opening up a foreign market
o firms can quickly build a global presence
Franchising is unattractive because

o it inhibits the firm’s ability to take profits out of one country to support competitive attacks in
another
o the geographic distance of the firm from its franchisees can make it difficult to detect poor
quality
Joint Venture (with a host country firm) - entails establishing a firm that is jointly owned by two or more
otherwise independent firms. Establishing a joint venture with a foreign firm has long been a popular mode for
entering a new market.
Joint ventures are attractive because:

o firms benefit from a local partner’s knowledge of the local market, culture, language, political
systems, and business systems
o the costs and risks of opening a foreign market are shared
o they satisfy political considerations for market entry

Joint ventures are unattractive because
o the firm risks giving control of its technology to its partner
o the firm may not have the tight control to realize experience curve or location economies
o shared ownership can lead to conflicts and battles for control if goals and objectives differ or
change over time
Wholly-owned subsidiary - is a company whose entire stock is held by another

company, called the parent company. The subsidiary usually operates independently of its parent company –
with its own senior management structure, products and clients – rather than as an integrated division or unit of
the parent.
Wholly-owned subsidiaries are attractive because

o they reduce the risk of losing control over core competencies
o they give a firm the tight control in different countries necessary for global strategic
coordination
o they may be required in order to realize location and experience curve economies
Wholly-owned subsidiaries are unattractive because the firm bears the full cost and risk of setting up overseas
operations.
WHICH ENTRY MODE IS BEST?
INFLUENCE OF CORE COMPETENCIES ON ENTRY MODE

The optimal entry mode depends on the nature of a firm’s core competencies. When competitive advantage is
based on proprietary technological know-how, avoid licensing and joint ventures unless the technological advantage is
only transitory, or can be established as the dominant design. When competitive advantage is based on management
know-how, the risk of losing control over the management skills is not high, and the benefits from getting greater use of
brand names is significant.

INFLUENCE OF COST REDUCTION PRESSURES ON ENTRY MODE
When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and
wholly-owned subsidiaries allow the firm to achieve location and scale economies and retain some control over product
manufacturing and distribution. Firms pursuing global standardization or transnational strategies prefer wholly-owned
subsidiaries.
GREENFIELD VERSUS ACQUISITION

A greenfield venture is a form of market entry strategy with establishment of a new wholly owned subsidiary in
a foreign country by constructing its facilities from start. Through Greenfield Venture, a business enters a new market
without the help of another business which is already present there. Although the process of setting up a Greenfield
Venture, in most cases, is complex and more expensive, yet it provides maximum control to the firm. This is because the
firm develops the project from the beginning thereby building its own culture and structure.
The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of
subsidiary company that it wants. But greenfield ventures are slower to establish. Greenfield ventures are also risky.
Acquisition strategy involves finding a methodology for the acquisition of target companies that generates value
for the acquirer. The use of an acquisition strategy can keep a management team from buying businesses for which
there is no clear path to achieving a profitable outcome. Instead of simple growth, an acquirer must understand exactly
how its acquisition strategy will generate value.
Acquisitions are attractive for the following reasons:

o they are quick to execute
o they enable firms to preempt their competitors
o they may be less risky than greenfield ventures
Acquisitions can fail when

o the acquiring firm overpays for the acquired firm
o the cultures of the acquiring and acquired firm clash
o anticipated synergies are slow and difficult to achieve
o there is inadequate pre-acquisition screening
To avoid these problems, firms should carefully screen the firm to be acquired and move rapidly to implement
an integration plan.
STRATEGIC ALLIANCES
This refer to cooperative agreements between potential or actual competitors. The number of international
strategic alliances has risen significantly in recent decades. Strategic alliances are attractive because they:
o Facilitate entry into a foreign market
o Allow firms to share the fixed costs and risks of developing new products or processes
o Bring together complementary skills and assets that neither partner could easily develop on its own
o Can help establish technological standards for the industry that will benefit the firm
The drawbacks of strategic alliances include giving competitors low-cost routes to new
technology and markets and unless a firm is careful, it can give away more in a strategic alliance than it receives.

MAKING ALLIANCES WORK
The success of an alliance is a function of:
o Partner selection
A good partner:
• Helps the firm achieve its strategic goals and has the capabilities the firm lacks and that
it values
• Shares the firm’s vision for the purpose of the alliance
• Does not expropriate the firm’s technological know-how while giving away little in
return
o Alliance structure
A good alliance should:
 Be designed to make it difficult to transfer technology not meant to be transferred
 Have contractual safeguards to guard against the risk of opportunism by a partner
 Involve an agreement in advance to swap skills and technologies to ensure a chance for
equitable gain
 Extract a significant credible commitment from the partner in advance
o The manner in which the alliance is managed
A good alliance:
 Requires managers from both companies to build interpersonal relationships Should
promote learning from alliance partners
 Should promote the diffusion of learned knowledge throughout the organization

CHAPTER 15
Exporting, importing, and
countertrade
OBJECTIVES

1. Discussed the benefits a country may enjoy from exporting and importing.
EXPORTING
This is a way to increase market size and profits. Lower trade barriers under the WTO and regional economic
agreements such as the EU and NAFTA make it easier than ever. Large firms often proactively seek new export
opportunities, but many smaller firms export reactively. Companies are often intimidated by the complexities of
exporting.
Exporting firms need to identify market opportunities, deal with foreign exchange risk, navigate import and
export financing, and understand the challenges of doing business in a foreign market. The common pitfalls of exporting
include:
o poor market analysis
o poor understanding of competitive conditions
o a lack of customization for local markets
o a poor distribution program
o poorly executed promotional campaigns
o problems securing financing
o a general underestimation of the differences and expertise required for foreign market penetration
o an underestimation of the amount of paperwork and formalities involved
Many firms are unaware of export opportunities available. Likewise, they need to collect information. Firms can
get direct assistance from some countries and/or use export management companies. Germany and Japan have
developed extensive institutional structures for promoting exports. Japanese exporters can use knowledge and contacts
of sogo shosha. Sogo shosha are Japanese companies that trade in a wide range of products and materials. In addition
to acting as intermediaries, sogo shosha also engage in logistics, plant development and other services, as well as
international resource exploration.

Who are the “Big Five” sogo shosha of Japan?
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________
Export Management Companies

These are export specialists that act as the export marketing department or international department
for client firms. Two types of assignments are common:
a. EMCs start export operations with the understanding that the firm will take over after they are
established
b. EMCs start services with the understanding that the EMC will have continuing responsibility for
selling firm’s products
To reduce the risks of exporting, firms should

o hire an EMC or export consultant to identify opportunities and navigate paperwork and regulations
o focus on one, or a few markets at first
o enter a foreign market on a small scale in order to reduce the costs of any subsequent failures
o recognize the time and managerial commitment involved
o develop a good relationship with local distributors and customers
o hire locals to help establish a presence in the market
o be proactive
o consider local production
LACK OF TRUST
Because trade implies parties from different countries exchanging goods and payment the issue of trust is
important. Due to trust issues, exporters prefer to receive payment prior to shipping goods, but importers prefer to
receive goods prior to making payments. To get around this difference of preference, many international transactions
are facilitated by a third party – normally a reputable bank. This adds an element of trust to the relationship.
A letter of credit (L/C) is used in international commercial transactions. A letter of credit, or "credit letter" is a
letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.
In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or
remaining amount of the purchase.

A draft, sometimes referred to as a bill of exchange is an order written by an exporter instructing an importer,
or an importer’s agent, to pay a specified amount of money at a specified time. The instrument normally used in
international commerce for payment. A sight draft is payable on presentation to the drawee while a time draft allows
or a delay in payment; normally 30, 60, 90, or 120 days. Once a time draft has been “accepted” it becomes a negotiable
instrument that can be sold at a discount from its face value.
The bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves three
purposes: receipt, contract, and a document of title.
The illustration below shows how an international trade transaction work
COUNTERTRADE
A system of exchange in which goods and services are used as payment rather than money.
It denotes a whole range of barter-like agreements; its principle is to trade goods and services for other goods and
services when they cannot be traded for money.

TYPES OF COUNTERTRADE
• the direct exchange of goods and/or services between two

parties without a cash transaction.
BARTER • the most restrictive countertrade arrangement
• used primarily for one-time-only deals in transactions with
trading partners who are not creditworthy or trustworthy
• reciprocal buying agreement.

COUNTERPURCHASE • occurs when a firm agrees to purchase a certain amount of
materials back from a country to which a sale is made.
• similar to a counterpurchase insofar as one party agrees

to purchase goods and services with a specified
OFFSET percentage of the proceeds from the original sale. The
difference is that this party can fulfill the obligation with
any firm in the country to which the sale is being made.
• occurs when a firm builds a plant in a country-or supplies

BUYBACK technology, equipment, training, or other services to the
country-and agrees to take a certain percentage of the
plant's output as partial payment for the contract.
• refers to the use of a specialized third-party trading

house in a countertrade arrangement.
• When a firm enters a counterpurchase or offset
agreement with a country, it often ends up with what are
SWITCH TRADING
called counterpurchase credits, which can be used to
purchase goods from that country.
• Switch trading occurs when a third-party trading house
buys the firm's counterpurchase credits and sells them to
another firm that can better use them.
PROS AND CONS OF COUNTERTRADE
Countertrade is attractive because it gives a firm a way to finance an export deal when other means are not
available and it gives a firm a competitive edge over a firm that is unwilling to enter a countertrade agreement. It may
be required by the government of a country to which a firm is exporting goods or services.
Countertrade is unattractive because it may involve the exchange of unusable or poor-quality goods that the
firm cannot dispose of profitably. Also, it requires the firm to establish an in-house trading department to handle
countertrade deals.

Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network
of contacts to dispose of goods acquired in countertrade deals.
List down the top 5 exports of the Philippines to all countries as of

December 2019 according to the Philippine Statistics Authority
_________________________________________________
_________________________________________________
_________________________________________________
_________________________________________________
_________________________________________________

CHAPTER 16
Global production,
outsourcing, and logistics

OBJECTIVES
1. Explained why production and logistics decisions are of central importance to many
multinational businesses.
2. Discussed how country differences, production technology, and product features all affect the
choice of where to locate production activities.
3. Proposed strategies to efficiently coordinate a globally dispersed production system.
PRODUCTION refers to activities involved in creating a product
LOGISTICS refers to the procurement and physical transmission of material through the supply chain, from
suppliers to customers
The production and logistics functions of an international firm have a number of important strategic objectives.
One is to lower costs. Dispersing production activities to various locations around the globe where each activity can be
performed most efficiently can lower costs. Costs can also be cut by managing the global supply chain efficiently so as to
better match supply and demand. A second strategic objective shared by production and logistics is to increase quality
by eliminating defective products from both the supply chain and the manufacturing process.
The principal tool that most managers now use to increase the reliability of their product offering is the Six
Sigma quality improvement methodology. This is a direct descendant of total quality management (TQM). Six Sigma is
a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs
throughout a company. In the EU, firms must meet ISO 9000 standards before gaining access to the EU marketplace.
The illustration below shows how quality can be improved. It also shows the relationship between quality and
costs.

WHERE TO PRODUCE
An essential decision facing an international firm is where to locate its production activities
to best minimize costs and improve product quality.
COUNTRY FACTORS
Manufacturing should be located where economic, political, and cultural conditions are most conducive
to the performance of that activity. Also important in some industries is the presence of global concentrations
of activities at certain locations. The role of location externalities in influencing foreign direct investment
decisions is important. Externalities include the presence of an appropriately skilled labor pool and supporting
industries. Of course, other things are not equal. Differences in relative factor costs, political economy, culture,
and location externalities are important, but other factors also loom large. Formal and informal trade barriers
obviously influence location, as do transportation costs and rules and regulations regarding foreign direct
investment.
TECHNOLOGICAL FACTORS
The type of technology a firm uses to perform specific manufacturing activities can be pivotal in location
decisions. In other cases, the technology may make it feasible to perform an activity in multiple locations. Three
characteristics of a manufacturing technology are of interest here: the level of fixed costs, the minimum efficient
scale, and the flexibility of the technology.
PRODUCT FACTORS
Two product features affect location decisions. The first is the product's value-to-weight ratio because
of its influence on transportation costs. Many electronic components and pharmaceuticals have high value-to-
weight ratios; they are expensive and they do not weigh very much. The other product feature that can
influence location decisions is whether the product serves universal needs, needs that are the same all over the
world. When products serve universal needs, the need for local responsiveness falls, and concentrating
manufacturing in a central location makes sense.
LOCATING PRODUCTION FACILITIES

There are two basic strategies for locating production facilities: concentrating them in a centralized location and
serving the world market from there, or decentralizing them in various regional or national locations that are close to
major markets. The following table shows how a strategic choice can be made considering certain factors.

STRATEGIC ROLE OF FOREIGN FACTORIES
The strategic role of foreign factories and the strategic advantage of a particular location can change over time.
Factories established to take advantage of low cost labor evolve into facilities with advance design capabilities. Many
companies now see foreign factories as globally dispersed centers of excellence. This supports the development of a
transnational strategy. A major aspect of a transnational strategy is a belief in global learning - the idea that valuable
knowledge does not reside just in a firm's domestic operations; it may also be found in its foreign subsidiaries. Foreign
factories that upgrade their capabilities over time are creating valuable knowledge that might benefit the whole
corporation.
OUTSOURCING PRODUCTION: MAKE-OR-BUY DECISIONS

International businesses frequently face make-or-buy decisions, decisions about whether they should perform a
certain value creation activity themselves or outsource it to another entity.
Outsourcing decisions pose plenty of problems for purely domestic businesses but even more problems for
international businesses. These decisions in the international arena are complicated by the volatility of countries'
political economies, exchange rate movements, changes in relative factor costs, and the like.
The advantages of MAKE include lowering costs, facilitating specialized investments, protecting proprietary
product technology, accumulating dynamic capabilities, and improving scheduling.
The advantages of BUY include strategic flexibility, lower costs, and offsets.
STRATEGIC ALLIANCES WITH SUPPLIERS

Firms can capture the benefits of vertical integration without the associated organizational problems by forming
long-term alliances with key suppliers. However, these commitments may actually limit strategic flexibility and risk
giving away key technological know-how to a supplier.

MANAGING A GLOBAL SUPPLY CHAIN
Logistics encompasses the activities necessary to get materials from suppliers to a manufacturing facility,
through the manufacturing process, and out through a distribution system to the end user. The goal is to manage a
global supply chain at the lowest possible cost and in a way that best serves customer needs.
JUST-IN-TIME SYSTEM
The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers
directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste
by receiving goods only as they need them for the production process, which reduces inventory costs. This method
requires producers to forecast demand accurately.
WEB-BASED INFORMATION SYSTEM

This is an information system that utilizes web technologies to deliver information and services to users or other
information systems/applications.
ELECTRONIC DATA INTERCHANGE

This is the computer-to-computer exchange of business documents in an electronic format between business
partners.
PHL not top choice for Japan firms moving from China
https://www.bworldonline.com/phl-not-top-choice-for-japan-firms-moving-from-
china/

CHAPTER 17
Global marketing and r&D

OBJECTIVES
1. Explained why it might make sense to vary the attributes of a product from country to country.
2. Recognized why and how a firm’s distribution strategies and pricing strategies might vary
among countries.
3. Discussed why and how advertising and promotional strategies might vary among countries.
GLOBALIZATION OF MARKETS AND BRANDS

According to Theodore Levitt, world markets are becoming increasingly similar making it unnecessary to localize
the marketing mix. Most experts believe that while there is a trend towards global markets, cultural and economic
differences among nations act as a major brake on any trend toward global consumer tastes and preferences. Trade
barriers and differences in product and technical standards also limit the ability of firms to sell a standardized product to
a global market.
MARKET SEGMENTATION
This involves identifying distinct groups of consumers whose purchasing behavior differs from others in
important ways. Markets can be segmented in numerous ways: by geography, demography, sociocultural factors, and
psychological factors. Global market segments are more likely to exist in industrial products than in consumer products.
PRODUCT ATTRIBUTES
A product can be viewed as a bundle of attributes. Products sell well when their attributes match consumer
needs. Consumer needs vary from country to country depending on culture and levels of economic development. So,
the ability of firms to sell the same product worldwide is limited. National differences in product and technological
standards can also force a customized marketing mix.
DISTRIBUTION STRATEGY
A firm’s distribution strategy is a critical element of the marketing mix. The main differences between distribution
systems across countries are retail concentration, channel length, channel exclusivity, and channel quality.

Retail Concentration
In some countries, the retail system is very concentrated but it is fragmented in others. In a
concentrated retail system, a few retailers supply most of the market. This is more common in developed
countries.
A fragmented retail system is one in which there are many retailers, no one of which has a major share
of the market. This is more common in developing countries.
Channel Length
This refers to the number of intermediaries between the producer and the consumer. If the producer
sells directly to the consumer, the channel is very short. If the producer sells through an import agent, a
wholesales, and a retailer, a long channel exists.
Channel Exclusivity
An exclusive distribution channel is one that is difficult for outsiders to access.
Channel Quality
This refers to the expertise, competencies, and skills of established retailers in a nation, and their ability
to sell and support the products of international businesses. The lack of high-quality channel may impede
market entry, particularly in the case of new or sophisticated products that require significant point-of-sale
assistance and after-sales services and support. When channel quality is poor, an international business may
have to devote considerable attention to upgrading the channel, for instance, by providing extensive education
and support to existing retailers.
The choice of distribution strategy depends on the relative costs and benefits of each alternative. Since
each intermediary in a channel adds its own markup to the products, there is a link between channel length and
profit margin. If price is important, a shorter channel is better. If a retail sector is very fragmented, a long
channel is better.

COMMUNICATION STRATEGY
A number of communication channels are available to a firm, including direct selling, sales promotion, direct
marketing, and advertising. A firm's communication strategy is partly defined by its choice of channel.
BARRIERS TO INTERNATIONAL COMMUNICATION
This can make it difficult to communicate messages across

cultures. Because of cultural differences, a message that
CULTURAL BARRIERS
means one thing in once country may mean something quite
different in another.
These occur when the receiver of the message evaluates the

message on the basis of status or image of the sender. These
can be damaging for an international business when potential
SOURCE EFFECTS
consumers in a target country have a bias against foreign
firms. A subset of source effects is referred to as country of
origin effects.
Noise refers to the amount of other messages competing for a

NOISE LEVELS potential consumer’s attention, and this too varies across
countries.
PUSH VERSUS PULL STRATEGIES

Firms must choose between a push strategy and a pull strategy. The choice between the strategies
depends upon product type and consumer sophistication, channel length, and media availability. A push
strategy emphasizes personal selling rather than mass media advertising in the promotional mix. Although
effective as a promotional tool, personal selling requires intensive use of a sales force and is relatively costly. A
pull strategy depends more on mass media advertising to communicate the marketing message to potential

consumers.
Product Type and Consumer Sophistication

Firms in consumer goods industries that are trying to sell a large segment of the market
generally favor a pull strategy. On the other hand, firms that sell industrial products or other complex
products favor a push strategy.
Channel Length
The longer the distribution channel, the more intermediaries there are that must be persuaded
to carry the product for it to reach the consumer. This can lead to inertia in the channel, which can
make entry difficult.
Media Availability
A pull strategy relies on access to advertising media. A firm’s ability to sue a pull strategy is
limited in some countries by media availability. Media availability is limited by law in some cases.
GLOBAL ADVERTISING
Standardized advertising makes sense when:
o It has significant economic advantages
o Creative talent is scarce and one large effort to develop a campaign will be more successful
than numerous smaller efforts
o Brand names are global
Standardized advertising is not appropriate when:

o Cultural differences among nations are significant
o Country differences in advertising regulations block the implementation of standardized
advertising
PRICING STRATEGY
International pricing strategy is an important component of the overall international marketing mix.
PRICE DISCRIMINATION
This is the practice of charging a different price for the same good or service. It is a complicated price
strategy that tries to extract consumer surplus and deadweight loss, so as to increase profits, relative to the
benchmark case of uniform pricing. First degree price discrimination which is alternatively known as perfect
price discrimination occurs when a firm charges a different price for every unit consumed. Second degree price
discrimination means charging a different price for different quantities, such as quantity discounts for bulk
purchases. Third degree price discrimination means charging a different price to different consumer groups.
Price elasticity of demand is the measure of the responsiveness of demand to changes in price.
Demand is said to be elastic when a small change in price produces a large change in demand. On the other
hand, demand is inelastic when a large change in price produces only a small change in demand. Elasticity of
demand is determined by income level and competitive conditions. Price elasticity tends to be greater in
countries with lower income levels and greater numbers of competitors.
STRATEGIC PRICING
The concept of strategic pricing has three aspects, which we will refer to as predatory
pricing, multipoint pricing, and experience curve pricing. Both predatory pricing and experience curve pricing

may violate antidumping regulations.
• Using price as a competitive weapon to drive weaker

competition out of a national market
PREDATORY PRICING • Firms then raise prices to enjoy high profits
• Firms normally have profitable position in another national
market
• Two or more international firms compete against each

other in two or more national markets
MULTIPOINT PRICING
• A firm’s pricing strategy in one market may impact a rival
in another market.
• Firms price low worldwide to build market share

EXPERIENCE CURVE • Incurred losses are made up as company moves down
PRICING experience curve, making substantial profits.
• Cost advantage over its less-aggressive competitors
GOVERNMENT-MANDATED PRICE CONTROLS

The use of either price discrimination or strategic pricing may be limited by national or international regulations.
Anti-dumping rules set a floor under export prices and limit firm’s ability to pursue strategic pricing. Many developed
nations have regulations promoting competition and restricting monopoly practices.
CONFIGURING THE MARKETING MIX

Standardization versus customization is not an all or nothing concept. Most firms standardize some elements
and customize others. Decisions about what to standardize and what to customize should be made after exploring the
costs and benefits of each option.
NEW PRODUCT DEVELOPMENT

Firms need to develop and market new products. Technological innovation is important in new product
development. Product life cycles are shorter than in the past because technological innovation generates creative
destruction.
LOCATION OF R&D
Firms need to invest in R&D and apply the technology to developing products that meet consumer
needs, and that can be manufactured in a cost-effective way. New-product development is greater when:
o More money is spent on basic and applied R&D
o Demand is strong
o Consumers are affluent
o Competition is intense
INTEGRATING R&D, MARKETING, AND PRODUCTION

Commercialization of new technologies in international firms may require different versions of a new product to
be produced for different countries. New product development efforts should be closely coordinated with the

marketing, production, and materials management functions. This integration will ensure that customer needs are met
and that the company performs all its value creation activities efficiently.
CROSS-FUNCTIONAL TEAMS
One way to achieve cross-functional integration is to establish cross-functional product development teams
composed of representatives from R&D, marketing, and production. Because these functions may be located in different
countries, the team will sometimes have a multinational membership. The objective of a team should be to take a
product development project from the initial concept development to market introduction.
Effective cross functional teams should:

o Be led by a heavyweight project manager with status in the organization
o Have members from all the critical functional areas
o Have members located together
o Have clear goals
o Have an effective conflict resolution process
BUILDING GLOBAL R&D CAPABILITIES

R&D and marketing need to be integrated to adequately commercialize new technologies. Many firms establish
a global network of R&D centers to develop the basic technologies that will become new products. These technologies
are then applied by local R&D groups in regional country units.
List down the top 10 companies with the highest spending on R&D in 2018 according to
Statista.com and write beside the name of the company the amount invested in R&D

CHAPTER 18
Global human resource
management
OBJECTIVES

1. Summarized the strategic roles of human resource management in the international business
2. Discussed how and why compensations systems might vary across nations.
3. Proposed strategies to improve human resource management to be more competitive.
HUMAN RESOURCE MANAGEMENT (HRM)

This refers to the activities an organization carries out to use its human resources effectively. 2 These activities
include determining the firm's human resource strategy, staffing, performance evaluation, management development,
compensation, and labor relations. HRM must also deal with a host of issues related to expatriate managers. An
expatriate manager is defined as one who is not a resident of the country where he is working, but is employed because
of his specialized operational abilities or due to his knowledge of the employing organization.
The role of HR in shaping organizational architecture
STAFFING POLICY
This is concerned with the selection of employees for particular jobs. At one level, this involves selecting
individuals who have the skills required to do particular jobs. At another level, staffing policy can be a tool for developing
and promoting the desired corporate culture of the firm.

TYPES OF STAFFING POLICY
ETHNOCENTRIC one in which all key management positions are

APPROACH filled by parent-country nationals.
requires host-country nationals to be recruited to manage

POLYCENTRIC APPROACH subsidiaries, while parent-country nationals occupy key
positions at corporate headquarters.
seeks the best people for key jobs throughout the organization,
GEOCENTRIC APPROACH
regardless of nationality.
ETHNOCENTRIC APPROACH
Firms pursue this approach for the following reasons:
o Firm may believe the host country lacks qualified individuals to fill senior management
positions.
o Firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate
culture.
o Firm is trying to create value by transferring core competencies to a foreign operation, as
firms pursuing an international strategy are, it may believe that the best way to do this is to
transfer parent-country national who have knowledge of that competency to the foreign
operation.
POLYCENTRIC APPROACH
Requires host-country nationals to be recruited to manage subsidiaries, while parent-country nationals
occupy key positions at corporate headquarters. One advantage of adopting a polycentric approach is that the firm is
likely to suffer from cultural myopia. Another advantage is that this approach may be less expensive to implement,
reducing the costs of value creation.
This also has drawbacks. Host-country national have limited opportunities to gain experience outside their own
country and thus cannot progress beyond senior positions in their own subsidiary. Another drawback is the gap that
can form between host-country managers and parent-country managers.
GEOCENTRIC APPROACH
A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of
nationality. It enables the firm to make the best use of its human resources. It also enables the firm to build a cadre of
international executives who feel at home working in a number of cultures. However, it is time-consuming and
expensive to implement.

Which staffing policy is best?
EXPATRIATE FAILURE
Firms using an ethnocentric or geocentric staffing strategy will have expatriate managers. Expatriate failure
refers to the premature return of an expatriate manager to the home country.
Some reasons for Japanese expatriate failure are:

o Inability to cope with larger overseas responsibility
o Difficulties with the new environment
o Personal or emotional problems
o A lack of technical competence
o The inability of spouse to adjust
The main reasons for U.S. expatriate failure are

o Inability of an expatriate’s spouse to adapt
o The manager’s inability to adjust
o Other family-related reasons
o Manager’s personal or emotional maturity
o Manager’s inability to cope with larger overseas responsibilities
The reason for European expatriate failure is

o Inability of the manager’s spouse to adjust
REDUCING EXPATRIATE FAILURE

Firms can reduce expatriate failure through improved selection procedures:
1. Self-orientation
The attributes of this dimension strengthen the expatriate's self-esteem, self-confidence, and mental
well-being.

2. Others-orientation
The attributes of this dimension enhance the expatriate's ability to interact effectively with host-country
nationals.
3. Perceptual ability
This is the ability to understand why people of other countries behave the way they do, that is, the
ability to empathize.
4. Cultural toughness
This dimension refers to the relationship between the country of assignment and how well an expatriate
adjusts to a particular posting.
TRAINING AND MANAGEMENT DEVELOPMENT

Selection is just the first step in matching a manager with a job. The next step is training the manager to do the
specific job. Training focuses upon preparing the manager for a specific job. This may include cultural training, language
training, and practical training.
Management development is concerned with developing the skills of the manager over time. Historically, most
firms focus more on training than on management development.
Training and development should include preparing and developing expatriate managers for reentry into their
home country organization. There will be a need for programs for re-integrating expatriates back into work life within
their home country organization and utilizing the knowledge they acquired while abroad.
PERFORMANCE APPRAISAL
Evaluating expatriates can be especially complex. Typically, both host nation managers and home office
managers evaluate the performance of expatriate managers. But, both types of managers are subject to unintentional
bias. Home country managers rely on hard data when evaluating expatriates. Host country managers on the other
hand, can be biased towards their own frame of reference.

COMPENSATION
There are two key issues on compensation: (1) how to adjust compensation to reflect differences in economic
circumstances and compensation practices and (2) how to pay expatriate managers.
A compensation package has five components
normally in the same range as the base salary for a similar

BASE SALARY
position in the home country
FOREIGN SERVICE extra pay the expatriate receives for working outside his country
PREMIUM of origin
VARIOUS ALLOWANCES hardship, housing, cost of living, education
TAX DIFFERENTIALS may have to pay income tax to both the home country and the
host country governments
BENEFITS many firms provide the same level of medical and pension
benefits abroad that employees receive at home
List down the top 10 countries with the highest minimum wages in the world.
On the second column indicate the amount in US Dollars

INTERNATIONAL LABOR RELATIONS
From a strategic perspective, the key issue in international labor relations is the degree to which organized
labor can limit the choices of an international business. A firm’s ability to integrate and consolidate its global
operations to realize experience curve and location economies can be limited by organized labor, constraining the
pursuit of a transnational or global standardization strategy.
Labor unions generally try to get better pay, greater job security, and better working conditions for their
members through collective bargaining with management. The bargaining power of unions is derived largely from
their ability to threaten to disrupt production, either by a strike or some other form of work protest.
A principal concern of domestic unions about multinational firms is that the company can counter its
bargaining power with the power to move production to another country.
Another concern of organized labor is that an international business will keep highly skilled tasks in its
home country and farm out only low-skilled tasks to foreign plants.
Another union concern arises when an international business attempts to import employment practices
and contractual agreements from its home country.
A Critical Analysis of Amazon’s Approach to People Management

https://businessteacher.org/reports/critical-analysis-of-amazons-approach-to-people-
management.php
Ten Steps to a Global Human Resources Strategy

https://www.strategy-business.com/article/9967?gko=c9dff

CHAPTER 19
Accounting and finance in the
international business
OBJECTIVES

1. Explained the national differences in accounting standards.
2. Understood the basic techniques for global money management.
FINANCIAL MANAGEMENT
This involves
1. Investment decisions – what to finance
2. Financing decisions –how to finance those decisions
3. Money management decisions –how to manage the firm’s financial resources most
efficiently
ACCOUNTING
Accounting is the language of business. It is the way firms communicate their financial positions. It is more
complex for international firms because of differences in accounting standards from country to country.
Differences make it difficult for investors, creditors, and governments to evaluate firms. It is difficult to compare
financial reports from country to country because of national differences in accounting and auditing standards.
NATIONAL DIFFERENCES IN ACCOUNTING STANDARDS

Several variables influence the development of a country’s accounting system including:
o the relationship between business and the providers of capital
o political and economic ties with other countries
o the level of a country’s economic development
o the prevailing culture in a country
One result of national differences in accounting and auditing standards was a general lack of comparability of
financial reports from one country to another. Such differences would not matter much if there were little need for a
firm headquartered in one country to report its financial results to citizens of another country. The rapid expansion of
transnational financing and investment has been accompanied by a corresponding growth in transnational financial
reporting. However, the lack of comparability between accounting standards in different nations caused some
confusion.
Developed nations tend to have more sophisticated accounting systems than developing countries. Larger,
more complex firms create accounting challenges and providers of capital require detailed reports. Many developing
nations have accounting systems that were inherited from former colonial powers. Another problem is the lack of
trained accountants.

Diverse accounting practices were enshrined in national accounting and auditing standards. Accounting
standards are rules for preparing financial statements; they define what is useful accounting information. Auditing
standards specify the rules for performing an audit-the technical process by which an independent person (the auditor)
gathers evidence for determining if financial accounts conform to required accounting standards and if they are also
reliable.
INTERNATIONAL ACCOUNTING STANDARDS

The growth of transnational financing and transnational investment has created a need for transnational
financial reporting. Many companies obtain capital from foreign providers who are demanding greater consistency.
Standardization of accounting practices across national borders is probably in the best interests of the world economy.
This will help facilitate the development of global capital markets.
GLOBAL STANDARDS FOR GLOBAL MARKETS

Modern economies rely on cross-border transactions and the free flow of international capital. More than a
third of all financial transactions occur across borders, and that number is expected to grow. Investors seek
diversification and investment opportunities across the world, while companies raise capital, undertake transactions or
have international operations and subsidiaries in multiple countries.
In the past, such cross-border activities were complicated by different countries maintaining their own sets of
national accounting standards. This patchwork of accounting requirements often added cost, complexity and ultimately
risk both to companies preparing financial statements and investors and others using those financial statements to
make economic decisions.
Applying national accounting standards meant amounts reported in financial statements might be calculated on
a different basis. Unpicking this complexity involved studying the details of national accounting standards, because
even a small difference in requirements could have a major impact on a company’s reported financial performance and
financial position—for example, a company may recognize profits under one set of national accounting standards and
losses.
ACCOUNTING ASPECTS OF CONTROL SYSTEMS

One role of corporate headquarters in large complex enterprises is to control subunits within the organization to
ensure they achieve the best possible performance. In the typical firm, the control process is annual and involves three
main steps:
o head office and subunit management jointly determine subunit goals for the coming year;
o throughout the year, the head office monitors subunit performance against the agreed goals;
o if a subunit fails to achieve its goals, the head office intervenes in the subunit to learn why the shortfall
occurred, taking corrective action when appropriate.
EXCHANGE RATE CHANGES AND CONTROL SYSTEMS

Budgets and performance data are usually expressed in the corporate currency, normally the home currency. It
facilitates comparisons between subsidiaries but can create distortions in financial statements.

The Lessard-Lorange Model proposes that firms can deal with the problems of exchange rates and control in
three ways:
o The initial rate, the spot exchange rate when the budget is adopted.
o The projected rate, the spot exchange rate forecast for the end of the budget
period (i.e., the forward rate).
o The ending rate, the spot exchange rate when the budget and performance are being compared.
The Lessard-Lorange Model suggests that firms use the projected spot exchange rate to translate budget and
performance figures into the corporate currency. Firms can also use the internal forward rate which is the company-
generated forecast of future spot rates.
SEPARATION OF SUBSIDIARY AND MANAGER PERFORMANCE

Subsidiaries operate in different environments which influence profitability and so the evaluation of a subsidiary
should be kept separate from evaluation of its manager. A manager’s evaluation should consider the country’s
environment for business and must take place after making allowances for those items over which managers have not
control.
FINANCIAL MANAGEMENT: The Investment Decision

One role of the financial manager in an international business is to try to quantify the various benefits, costs,
and risks that are likely to flow from an investment in a given location. A decision to invest in activities in a given country
must consider many economic, political, cultural, and strategic variables.
CAPITAL BUDGETING
One role of the financial manager in an international business is to try to quantify the various benefits,
costs, and risks that are likely to flow from an investment in a given location. A decision to invest in activities in a
given country must consider many economic, political, cultural, and strategic variables.

Capital budgeting is more complicated in international business for the following reasons:
o a distinction must be made between cash flows to the project and cash flows to the parent company
o political and economic risk
o the connection between cash flows to the parent and the source of financing must be recognized
PROJECT AND PARENT CASH FLOWS

Cash flows to the project and cash flows to the parent company can be quite different. Parent companies are
interested in the cash flows they will receive, not the cash flows the project generates. Cash flows to the parent may be
lower because of host country limits on the repatriation of profits, host country local reinvestment requirements, etc.
ADJUSTING FOR POLITICAL AND ECONOMIC RISK
POLITICAL RISK
This refers to the likelihood that political forces will cause drastic changes in a country’s business
environment that hurt the profit and other goals of a business. It tends to be higher in countries with social
unrest or disorder, or where the nature of the society increases the chance for social unrest. Political change
can result in the expropriation of a firm’s assets, or complete economic collapse that renders a firm’s assets
worthless.
ECONOMIC RISK
This refers to the likelihood that economic mismanagement will cause drastic changes in a country’s
business environment that hurt the profit and other goals of a business. The biggest economic risk is inflation
and this is reflected in falling currency values and lower project cash flows.
Firms analyzing foreign investment opportunities can adjust for risk by raising the discount rate in
countries where political and economic risk is high. They can also lower future cash flow estimates to account
for adverse political or economic changes that could occur in the future.
FINANCING DECISIONS: The Financing Decision

When considering its options for financing, an international business must consider how the foreign investment
will be financed. The cost of capital is typically lower in the global capital market, by virtue of its size and liquidity, than
in many domestic capital markets, particularly those that are small and relatively illiquid. The governments of some
countries require, or at least prefer, foreign multinationals to finance projects in their country by local debt financing or
local sales of equity. In countries where liquidity is limited, this raises the cost of capital used to finance a project. Most
experts suggest that firms adopt the structure that minimizes the cost of capital, whatever that may be.
FINANCING DECISIONS: Global Money Management

Money management decisions attempt to manage the firm's global cash resources-its working capital-most
efficiently. This involves minimizing cash balances, reducing transaction costs, and minimizing the corporate tax burden.
Minimizing cash balances

Companies need cash balances on hand for notes payable and unexpected demands. Companies usually
invest cash reserves in money market accounts that offer low rates of interest. When firms invest in money
market accounts, they have unlimited liquidity, but low interest rates. But when they invest in long-term
instruments they have higher interest rates, but low liquidity.

Reduce transaction costs
Transaction costs are the cost of exchange. Every time a firm changes cash from one currency into
another currency it must bear a transaction cost-the commission fee it pays to foreign exchange dealers for
performing the transaction. Most banks also charge a transfer fee for moving cash from one location to another;
this is another transaction cost.
Multilateral netting allows a multinational firm to reduce the transaction costs that arise when many
transactions occur between its subsidiaries by reducing the number of transactions. Multilateral netting is an
extension of bilateral netting.
Limit tax liability

Different countries have different tax regimes. Many nations follow the worldwide principle that they
have the right to tax income earned outside their boundaries by entities based in their country.
Double taxation occurs when the income of a foreign subsidiary is taxed by the host-country
government and by the home-country government. Taxes can be minimized through tax credits, tax treaties,
deferral principle, and tax havens.
allows an entity to reduce the taxes paid to the home

TAX CREDITS government by the amount of taxes paid to the foreign
government
agreement specifying what items of income will be taxed by the

TAX TREATIES authorities of the country where the income is earned
specifies that parent companies are not taxed on foreign

DEFERRAL PRINCIPLE
source income until they actually receive a dividend
a country with an exceptionally low, or even no, income tax-

TAX HAVENS firms can avoid income taxes by establishing a wholly-owned,
non-operating subsidiary in the country
MOVING MONEY ACROSS BORDERS

Pursuing the objectives of utilizing the firm's cash resources most efficiently and minimizing the firm's global tax
liability requires the firm to be able to transfer funds from
one location to another around the globe. International businesses use a number of techniques
to transfer liquid funds across borders. These include dividend remittances, royalty payments and fees, transfer prices,
and fronting loans.
Dividend Remittances
Payment of dividends is the most common method by which firms transfer funds from foreign
subsidiaries to the parent company. The dividend policy typically varies with each subsidiary depending on such
factors as tax regulations, foreign exchange risk, the age of the subsidiary, and the extent of local equity
participation.

Royalty Payments and Fees
Royalties represent the remuneration paid to the owners of technology, patents, or trade names for the
use of that technology or the right to manufacture and/or sell products under those patents or trade names. It is
common for a parent company to charge its foreign subsidiaries royalties for the technology, patents, or trade
names it has transferred to them. Royalties may be levied as a fixed monetary amount per unit of the product
the subsidiary sells or as a percentage of a subsidiary's gross revenues. A fee is compensation for professional
services or expertise supplied to a foreign subsidiary by the parent company or another subsidiary.
Transfer Prices
Any international business normally involves a large number of transfers of goods and services between
the parent company and foreign subsidiaries and between foreign subsidiaries. Transfer prices can be used to
position funds within an international business. Transfer prices can be manipulated to:
o reduce tax liabilities by shifting earnings from high-tax countries to low-tax countries
o move funds out of a country where a significant currency devaluation is expected
o mover funds from a subsidiary to the parent when dividends are restricted by the host
government
o reduce import duties when ad valorem tariffs are in effect
But, using transfer pricing can be problematic because:

o Governments think they are being cheated out of legitimate income
o Governments believe firms are breaking the spirit of the law when transfer prices are
used to circumvent restrictions of capital flows.
o It complicates management incentives and performance evaluation.
Fronting Loans
A fronting loan is a loan between a parent and its subsidiary channeled through a financial intermediary,
usually a large international bank. In a direct intrafirm loan, the parent company lends cash directly to the
foreign subsidiary, and the subsidiary repays it later. In a fronting loan, the parent company deposits funds in an
international bank, and the bank then lends the same amount to the foreign subsidiary.
Firms use fronting loans to circumvent host-country restrictions on the remittance of funds from a
foreign subsidiary to the parent company and to gain tax advantages.

REFERENCES:
Amadeo, Kimberly (2020). GENERAL AGREEMENT ON TARFIFFS AND TRADE (GATT) GATT: Definition, Purpose, History,
Pros, and Cons: How GATT Saved the World. Retrieved from https://www.thebalance.com/gatt-purpose-history-pros-
cons-3305578
Corruption Perceptions Index (2021). Retrieved from https://www.transparency.org/en/cpi/2021
Costa, R. (2020). Global trading blocs through the lens of ICP 2017 results. Retrieved from
https://blogs.worldbank.org/opendata/global-trading-blocs-through-lens-icp-2017-results
Foreign Direct Investments. Retrieved from https://ec.europa.eu/eurostat/web/economic-globalisation/globalisation-

in-business-statistics/foreign-direct-investments.
Trade and International Business. Retrieved from https://www.csis.org/topics/economics/trade-and-international-

business
WTO in Brief. Retrieved from https://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr_e.htm

What lesson or activity did I enjoy most? Why?
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___________________________________________________________
What is the most important lesson which I can apply in my daily life?
__________________________________________________________________________________________________
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___________________________________________________________
What are the new insights/discoveries that I learned?

__________________________________________________________________________________________________
__________________________________________________________________________________________________
___________________________________________________________
What topic/s do I find least important?

__________________________________________________________________________________________________
__________________________________________________________________________________________________
___________________________________________________________
What possible topics should have been included?

__________________________________________________________________________________________________
__________________________________________________________________________________________________
___________________________________________________________

POLITICAL ECONOMY OF
INTERNATIONAL TRADE
WEEK4_MANMGT3
OBJECTIVES

1. Discussed the policy instruments
goverments to influence internartional trade
flows.
2. Understood why govenment sometimes
intervene in international trade.
POLITICAL REALITY OF INTERNATIONAL TRADE
GOVERNMENT INTERVENE IN TWO WAYS
INTRUMENTS OF TRADE POLICY
INTRUMENTS OF TRADE POLICY: TARIFFS
A tariff is a tax levied on imports that effectively raises the
cost of imported products relative to domestic products.
ØSpecific tariffs are levied as a fixed charge for each unit of
a good imported
ØAd valorem tariffs are levied as a proportion of the value
of the imported good
INTRUMENTS OF TRADE POLICY: TARIFFS
International price of car: $10,000

Cost of parts for assembly: $8,000
Assemblers value added is $2000 (i.e. 10,000 – 8,000)
Assume a country wants to promote an auto industry, it
imposes a tariff of 20% on auto. Hence:
Domestic price of auto would now be $12,000.
Cost of parts for assembly remains the same.
Assemblers value added now is $4,000 (12,000 – 8,000).
Note: The nominal protection was 20%.
INTRUMENTS OF TRADE POLICY: SUBSIDIES
A subsidy is a government payment to a domestic
producer. Subsidies help domestic producers in two
ways:
ü they help them compete against low-cost foreign
imports
ü they help them gain export markets
Consumers typically absorb the costs of subsidies.
Country Focus: Subsidized Wheat Production in Japan

INTRUMENTS OF TRADE POLICY (JAPAN SUBSIDY
This feature explores the subsidies Japan continues to

pay its wheat farmers. Tens of thousands Japanese
farmers continue to grow wheat despite the fact the
wheat grown in North America, Argentina, and Australia
is far cheaper and of superior quality. The Japanese
farmers stay in business thanks to the hefty subsidies
paid by the Japanese government. As a result, wheat
prices in Japan are substantially higher than they would
be if a free market were allowed to operate.
Import Quotas
An import quota is a direct restriction on the

quantity of some good that may be imported into
a country.
ü tariff rate quotas are a hybrid of a quota and a
tariff where a lower tariff is applied to imports
within the quota than to those over the quota
Voluntary Export Restraints (VER)

ü voluntary export restraints are quotas on trade
imposed by the exporting country, typically at the
request of the importing country’s government
ü a quota rent is the extra profit that producers make
when supply is artificially limited by an import quota
import quotas and voluntary export restraints benefit

domestic producers by limiting import competition, but
they raise the prices of imported goods
Administrative Policies
Administrative trade polices are bureaucratic

rules that are designed to make it difficult for
imports to enter a country.
These polices hurt consumers by denying

access to possibly superior foreign products
POLITICAL ARGUMENTS FOR GOVERNMENT INTERVENTION
POLITICAL ARGUMENTS FOR GOVERNMENT INTERVENTION
ECONOMIC ARGUMENTS FOR GOVERNMENT INTERVENTION
IMPLICATION FOR MANAGERS
Trade Barriers and Firm Strategy
ü Trade barriers raise the cost of exporting products to a
country
ü Voluntary export restraints (VERs) may limit a firm’s
ability to serve a country from locations outside that
country
ü To conform to local content requirements, a firm may
have to locate more production activities in a given
market than it would otherwise
All of these can raise the firm’s costs above the level that could be
achieved in a world without trade barriers
POLICY IMPLICATIONS
ü International firms have an incentive to lobby for
free trade, and keep protectionist pressures from
causing them to have to change strategies
ü While there may be short run benefits to having

governmental protection in some situations, in the
long run these can backfire and other
governments can retaliate.
FOREIGN DIRECT
INVESTMENT
WEEK4B_MANMGT3
OBJECTIVES
At the end of the unit, the students

must have:
1. Explained foreign direct
investment.
2. Differentiated the forms of
foreign direct investment.
FOREIGN DIRECT INVESTMENT (FDI)
Foreign direct investment (FDI) occurs

when a firm invests directly in new
facilities to produce and/or market in a
foreign country
• Once a firm undertakes FDI it becomes a
multinational enterprise
• There are two forms of FDI
• A greenfield investment (the
establishment of a wholly new
operation in a foreign country)
• Acquiring or merging with an existing
firm in the foreign country
Foreign Direct Investment in the World Economy
• There are two ways to look at FDI

• The flow of FDI refers to the amount of
FDI undertaken over a given time
period
• The stock of FDI refers to the total
accumulated value of foreign-owned
assets at a given time
• Outflows of FDI are the flows of FDI out of
a country
• Inflows of FDI are the flows of FDI into a
country
Trends in FDI
• Both the flow and stock of FDI in the world economy has increased
over the last 20 years
FDI has grown more rapidly than world trade and world output
because
• firms still fear the threat of protectionism
• the general shift toward democratic political institutions and
free market economies has encouraged FDI (deregulation,
privatization)
• new bilateral investment treaties that facilitate investment
• the globalization of the world economy is prompting firms to
undertake FDI to ensure they have a significant presence in
many regions of the world
Direction of FDI
•Historically, most FDI has been directed at the
developed nations of the world, with the United States
being a favorite target
•FDI inflows have remained high during the early 2000s

for the United States, and also for the European Union
•South, East, and Southeast Asia, and particularly China,

are now seeing an increase of FDI inflows
•Latin America is also emerging as an important region

for FDI
Direction of FDI
• FDI can also be expressed as a percentage of gross
fixed capital formation summarizes (the total amount of
capital invested in factories, stores, office buildings, and
the like)
• All else being equal, the greater the capital investment in

an economy, the more favorable its future prospects are
likely to be
• So, FDI can be seen as an important source of capital

investment and a determinant of the future growth rate
of an economy
The Source of FDI
• Since World War II, the U.S. has been the largest source
country for FDI
• Other important source countries include the United

Kingdom, the Netherlands, France, Germany, and Japan
• These countries also predominate in rankings of the

world’s largest multinationals
The Source of FDI
Form of FDI: Acquisitions vs Greenfield Investments
• The majority of cross-border investment involves mergers
and acquisitions rather than greenfield investments
Firms prefer to acquire existing assets because
• mergers and acquisitions are quicker to execute than
greenfield investments
• it is easier and perhaps less risky for a firm to acquire
desired assets than build them from the ground up
• firms believe they can increase the efficiency of an
acquired unit by transferring capital, technology, or
management skills
The Shift to Services
• In the last two decades, there has been a shift towards FDI
in services. The shift to services is being driven by
üthe general move in many developed countries toward
services
üthe fact that many services cannot be exported
üa liberalization of policies governing FDI in services
üthe rise of Internet-based global telecommunications
networks that have allowed some service enterprises to
relocate some of their value creation activities to
different nations to take advantage of favorable factor
costs
Theories of Foreign Direct Investment
Exporting is the marketing and direct sale of domestically-

produced goods in another country.
ü Exports can be limited by transportation costs and trade
barriers.
ü FDI may be a response to actual or threatened trade
barriers such as import tariffs or quotas.
Licensing is defined as a business arrangement,

wherein a company authorizes another company
by issuing a license to temporarily access its
intellectual property rights
ü manufacturing process,
ü brand name, copyright, trademark, patent,
technology, trade secret, etc.
for adequate consideration and under specified
conditions
1. Limitations of Exporting
• The viability of an exporting strategy can be
constrained by transportation costs and trade
barriers
üWhen transportation costs are high, exporting can
be unprofitable
üForeign direct investment may be a response to
actual or threatened trade barriers such as import
tariffs or quotas
2. Limitations of Licensing
• Internalization theory (also known as market
imperfections) suggests that licensing has three
major drawbacks
1. it may result in a firm’s giving away valuable
technological know-how to a potential foreign
competitor
2. it 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. It may be difficult if the firm’s competitive
advantage is not amenable to licensing
The Pattern of Foreign Direct Investment
3. Advantages of Foreign Direct Investment
• A firm will favor FDI over exporting as an entry
strategy when
• transportation costs are high
• trade barriers are high
• A firm will favor FDI over licensing when
• it wants control over its technological know-how
• it wants over its operations and business strategy
• the firm’s capabilities are not amenable to
licensing
The Pattern of Foreign Direct Investment
It is common for firms in the same industry to :

1. have similar strategic behavior and undertake
foreign direct investment around the same
time
2. direct their investment activities towards
certain locations at certain stages in the
product life cycle
The Eclectic Paradigm
• John Dunning’s eclectic paradigm argues that in
addition to the various factors discussed earlier, two
additional factors must be considered when explaining
both the rationale for and the direction of foreign direct
investment
• location-specific advantages (that arise from using
resource endowments or assets that are tied to a
particular location and that a firm finds valuable to
combine with its own unique assets)
• externalities (knowledge spillovers that occur when
companies in the same industry locate in the same
area)
KNOWLEDGE SPILLOVER THEORY
https://link.springer.com/article/10.1007/s11187-013-9526-4
THEORETICAL APPROACHES TO FDI
Ø The radical view- the MNE is an instrument of
imperialist domination and a tool for exploiting host
countries to the exclusive benefit of their capitalist-
imperialist home countries.
Ø The free market view– international production should
be distributed among countries according to the theory
of comparative advantage.
Ø Pragmatic Nationalism – FDI has both benefits and
costs. FDI should be allowed only if the benefits
outweigh the costs.
Shifting Ideology
• In recent years, there has been a

strong shift toward the free
market stance creating
üa surge in the volume of FDI
worldwide
üan increase in the volume of
FDI directed at countries that
have recently liberalized their
regimes
Benefits and Costs of FDI
The benefits and costs of FDI must be explored from the
perspective of both the host (receiving) country and the
home (source) country
The main benefits of inward FDI for a host country are

1. the resource transfer effect
2. the employment effect
3. the balance of payments effect
4. effects on competition and economic growth
Host Country Costs
There are three main costs of inward FDI
1. the possible adverse effects of FDI on

competition within the host nation
2. adverse effects on the balance of payments
3. the perceived loss of national sovereignty
and autonomy
Home Country Benefits
• The benefits of FDI to the home country include
1. the effect on the capital account of the home country’s

balance of payments from the inward flow of foreign
earnings
2. the employment effects that arise from outward FDI
3. the gains from learning valuable skills from foreign
markets that can subsequently be transferred back to the
home country
International Trade Theory and FDI
• International trade theory suggests that home country

concerns about the negative economic effects of
offshore production (FDI undertaken to serve the home
market) may not be valid
üFDI may actually stimulate economic growth by
freeing home country resources to concentrate on
activities where the home country has a
comparative advantage
üConsumers may also benefit in the form of lower
prices
Government Policy
•A host government’s attitude toward FDI is an
important in decisions about where to locate foreign
production facilities and where to make a foreign direct
investment
•A firm’s bargaining power with the host government is
highest when
the host government places a high value on what the
firm has to offer
when there are few comparable alternatives
available
when the firm has a long time to negotiate
Government Policy Instruments and FDI
• FDI can be regulated by both home and
host countries
• Governments can implement policies to

1. encourage FDI
2. discourage FDI
International Institutions and the Liberalization of FDI
• Until recently there has been no consistent

involvement by multinational institutions in the
governing of FDI
• The formation of the World Trade Organization in

1995 is changing this
• The WTO has had some success in establishing a
universal set of rules to promote the liberalization
of FDI
Implications for Managers
Question: What does FDI mean for international

businesses?
• The theory of FDI has implications for strategic

behavior of firms
• Government policy on FDI can also be important for

international businesses
The Theory of FDI
• The location-specific advantages argument associated
with John Dunning help explain the direction of FDI
• However, internalization theory is needed to explain why

firms prefer FDI to licensing or exporting
• Exporting is preferable to licensing and FDI as long as
transportation costs and trade barriers are low
The Theory of FDI
• Licensing is unattractive when
üthe firm’s proprietary property cannot be properly
protected by a licensing agreement
üthe firm needs tight control over a foreign entity in
order to maximize its market share and earnings in
that country
üthe firm’s skills and capabilities are not amenable
to licensing
A Decision
Framework
for FDI

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SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

MANMGT3 INTERNATIONAL BUSINESS

Chapter 1 Globalization ………………………………………………………………………………………………..… 4

A Self-regulated Learning Module 2

This icon means you need to research.

There will be information that you need to research on so

There are opinionated questions that you need to answer to

Looking forward to a fruitful term ahead!

A Self-regulated Learning Module 3

At the end of the unit, the students must have:

1. Discussed the meaning of globalization.

The Globalization of Markets

Falling barriers to border trade

Impact of technological advances

A Self-regulated Learning Module 4

The Globalization of Production

WHY DO WE NEED GLOBAL INSTITUTIONS?

General Agreement on Tariffs and Trade (GATT)

World Trade Organization

Date established: _______________________________

International Monetary Fund (IMF)

A Self-regulated Learning Module 5

World Bank (WB)

Year of establishment: __________________________________

United Nations (UN)

In what year was the UN founded? ___________________________

A Self-regulated Learning Module 6

Declining Trade and Investment Barriers

A Self-regulated Learning Module 7

The Changing World Output and World Trade Picture

The Changing Foreign Direct Investment Picture

The Changing Nature of the Multinational Enterprise

The Changing World Order

A Self-regulated Learning Module 8

THE GLOBALIZATION DEBATE

Globalization and its challenges

A Self-regulated Learning Module 9

At the end of the unit, the students must have:

1. Differentiated the political systems in different countries

Communism and Socialism

A Self-regulated Learning Module 10

Does this form of totalitarianism still exist? encircle one  yes no

THEOCRATIC found in states where political power is monopolized by a party,

Does this form of totalitarianism still exist? encircle one  yes no

Does this form of totalitarianism still exist? encircle one  yes no

RIGHT-WING permits some individual economic freedom, but restricts individual

Does this form of totalitarianism still exist? encircle one  yes no

A Self-regulated Learning Module 11

 Name countries that have

combines the characteristics of the market and command economic

based on tradition, precedent, and custom. Relative to civil law, common

A Self-regulated Learning Module 12

FOREIGN CORRUPT PRACTICES ACT

A Self-regulated Learning Module 13

Define the following terms

PRODUCT SAFETY AND LIABILITY

Lego wins court case against Chinese copycats

A Self-regulated Learning Module 14

At the end of the unit, the students must have:

GROSS NATIONAL INCOME (GNI)

A Self-regulated Learning Module 15

FACTORS THAT INFLUENCE ECONOMIC DEVELOPMENT