International Business

GOVERNMENT ATTITUDE
TOWARDS FDI
 Importance of Economic
Environments
• Company managers study economic
environments to estimate how trends affect their
performance
• A country’s economic policies are a leading
indicator of government’s goals and its planned
use of economic tools and market reforms.
• Economic development directly impacts citizens,
managers, policymakers, and institutions.

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 Elements of the Economic
Environment
• Gross national income (GNI): the income
generated both by total domestic
production as well as the international
production activities of national companies
• Gross domestic product (GDP): the total
value of all goods and services produced
within a nation’s borders over one year, no
matter whether domestic or foreign-owned
companies make the product.

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 Some Understanding
Gross national income (GNI) Gross domestic product (GDP)
comprises the value within a country refers to the market value of all final
(i.e. Its GDP) together with its income goods and services produced within a
received from other countries (notably country in a given period.
interest and dividends), less similar
payments made to other countries.

GDP is the value produced within a country’s borders, whereas the

GNI is the value produced by all the citizens.

GNI = GDP + income from non-resident

sources abroad
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 ...cont’d (Some Understanding)

World GNI – US$72 trillion

World GDP – US$59 trillion

High Income Countries -those with GNI per capita of more than US$12,196
(around 70 countries) – accounted for 80% of world’s GNP but have less than
15% of the world's population)

GNI per capita is a good first step toward understanding the country’s
economic strengths and needs, as well as the general standard of living
enjoyed by the average citizen.

A country’s GNI per capita tends to be closely linked with other indicators that
measure the social, economic, and environment well-being of the country and
its people

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 Other features of an economy
• Inflation
• Unemployment
• Debt
• Income distribution
• Poverty
• Labor costs
• Productivity
• Balance of payments
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 Definition of Economic System
• A mechanism that deals with the
production, distribution, and consumption
of goods and services
• Types:
 Market economy
 Command economy
 Mixed economy

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12 Pillars of competitiveness –
World Economic Forum

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Global Competitive Index 2010-2011

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 Evaluating the Impact of FDI
• FDI is Foreign Direct Investment
• Foreign direct investment is investment of foreign
assets into domestic structures, equipment, and
organizations
• The large size of some MNEs
(Multinational Enterprise) causes
concern for some countries
• MNEs and countries need to
understand the impact of FDI in
home and host countries

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 Considering the Logic of FDI
• Need to consider relationship between
those who make foreign investments
(MNEs) and possible effects on receiving
countries
• Areas to consider:
 Stakeholder trade-offs
 Cause-and-effect relationships
 Individual and aggregate effects

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The Economic Impact of the MNE
• Balance-of-Payments effects:
 Net import effect
 Net capital flow
• Growth and Employment effects:
 Home-country losses
 Host-country gains
 Host-country losses

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Why Companies Care About Ethical
Behavior
• Instrumental in achieving two objectives:
 To develop competitive advantage
 To avoid being perceived as irresponsible

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The Cultural Foundations of Ethical
Behavior
• Relativism vs. Normativism: do truths
depend on the values of the groups or are
there universal standards
• Negotiating between evils
• Respecting cultural identity

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 The Legal Foundations of Ethical
Behavior
• Legal justification for ethical behavior may
not be sufficient because not everything
that is unethical is illegal
• The law is a good basis because it
embodies local cultural values
• Laws will become similar in different
countries

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 Ethics and Bribery
• Bribes are payments or promises to pay cash or
anything of value
• Bribes used to get government contracts or to
get officials to do what they should be doing
anyway
• Problems with bribery:
 Affects performance of company & country
 Erodes government authority
 Damage reputations when disclosed
 Increases cost of doing business

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 Possible impacts of import
restrictions designed to create
domestic employment
• May lead to retaliation by other countries.
• Are less likely retaliated against effectively
by small economies.
• Are less likely to be met with retaliation if
implemented by small economies.
• May decrease export jobs because of
price increases for components.
• May decrease export jobs because of
lower incomes abroad.
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 Protecting “Infant-Industries”
• The infant-industry argument for protection
holds that governmental prevention of
import competition is necessary to help
certain industries move from high-cost to
low-cost production

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 Developing an Industrial Base
• Countries seek protection to promote
industrialization because that type of production:
 Brings faster growth than agriculture.
 Brings in investment funds.
 Diversifies the economy.
 Brings more income than primary products do.
 Reduces imports and promotes exports.
 Helps the nation-building process.

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 Economic Relationships
with Other Countries
• Trade controls are used to improve economic
relations with other countries
• Their objectives include improving the balance of:
 payments
 raising prices to foreign consumers
 gaining fair access to foreign markets
 preventing foreign monopoly prices
 assuring that domestic consumers get low prices
 lowering profit margins for foreign producers

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 Maintaining essential industries
• In protecting essential industries, countries
must:
 Determine which ones are essential.
 Consider costs and alternatives.
 Consider political consequences.

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 Preventing Shipments to
“Unfriendly” Countries
• Considerable governmental interference in
international trade is motivated by:
 political rather than economic concerns
 maintaining domestic supplies of essential
goods
 preventing potential enemies from gaining
goods that would help them achieve their
objectives

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Maintaining or extending spheres of
influence
• Governments give aid and credits to, and
encourage imports from, countries that join
a political alliance or vote a preferred way
within international bodies.
• A country’s trade restrictions may coerce
governments to follow certain political
actions or punish companies whose
governments do not.

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 Preserving national identity
• To sustain this collective identity that sets
their citizens apart from those in other
nations, countries limit foreign products
and services in certain sectors.

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 Instruments of Trade Control
• Trade controls that directly affect price and
indirectly affect quantity include:
 tariffs
 subsidies
 customs-valuation methods
 special fees

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Nontariff Barriers: Quantity Controls
• Trade controls that directly affect quantity and
indirectly affect price include:
 quotas
 voluntary export restraint  (VERs)
 “buy local” legislation
 standards and labels
 licensing arrangements
 specific permission requirements
 administrative delays
 reciprocal requirements
 restrictions on services
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 Dealing With Governmental Trade
Influences
• When facing import competition,
companies can:
 Move abroad
 Seek other market niches
 Make domestic output competitive
 Try to get protection

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• The General Agreement on Tariffs and
Trade (GATT), begun in 1947, created a
continuing means for countries to
negotiate the reduction and elimination of
trade barriers and to agree on simplified
mechanisms for the conduct of
international trade

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• The World Trade Organization (WTO)
replaced GATT in 1995 as a continuing
means of trade negotiations that aspires to
foster the principle of trade without
discrimination and to provide a better
means of mediating trade disputes and of
enforcing agreements

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 Regional Economic Integration
• Efforts at regional economic integration
began to emerge after World War II as
countries saw benefits of cooperation and
larger market sizes
• The major types of economic integration
are:
 the free trade area
 the customs union
 the common market

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 The Effects of Integration
• Once protection is eliminated among
member countries, trade creation allows
MNEs to specialize and trade based on
comparative advantage
• Trade diversion occurs when the supply of
products shifts from countries that are not
members of an economic bloc to those
that are

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 European Union
• Regional, as opposed to global, economic integration
occurs because of the greater ease of promoting
cooperation on a smaller scale
• The European Union (EU) is an effective common
market that has abolished most restrictions on factor
mobility and is harmonizing national political, economic,
and social policies
• The EU is comprised of 27 countries, including 12
countries from mostly Central and Eastern Europe that
joined since 2004
• The EU has abolished trade barriers on:
 intrazonal trade
 instituted a common external tariff
 created a common currency, the euro

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 Implications of the EU for
corporate strategy
• Companies need to determine where to
produce products.
• Companies need to determine what their
entry strategy will be.
• Companies need to balance the
commonness of the EU with national
differences.

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 The North American Free Trade
Agreement (NAFTA)
• The North American Free Trade
Agreement (NAFTA) is designed to
eliminate tariff barriers and liberalize
investment opportunities and trade in
services
• Key provisions in NAFTA are labor and
environmental agreements

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Regional economic integration in the
Americas
• Caribbean Community (CARICOM)
• Central American Common Market (CACM)
• Central American Free Trade Agreement
(CAFTA-DR)
• Andean Community (CAN)
• The Southern Common Market (MERCOSUR)
• The proposed South American Community of
Nations.

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 Regional economic integration in
Asia & Africa
• Association of Southeast Asian Nations
(ASEAN)
• Asia Pacific Economic Cooperation
(APEC)
• The African Union

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