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Government Intervention in International Business

International Business: Strategy, Management, and the New Realities

The Nature of Government Intervention

An important dimension of country

risk. Governments intervene in trade and investment to achieve political, social, or economic objectives. Intervention alters the competitive landscape by hindering or helping the ability of firms to compete internationally. But, intervention is at odds with the theory of comparative advantage, which argues for more international trade, not less
International Business: Strategy, Management, and the New Realities

Key Concepts
Protectionism: national economic policies

that restrict free trade, usu. intended to raise revenue or protect domestic industries from foreign competition.

Government intervention arises in various


Tariff -- a tax on imports (e.g., citrus,

textiles) Nontariff trade barrier -- government policy, regulation, or procedure that impedes trade Quota -- quantitative restriction on imports of a specific product (e.g., imports of Japanese cars)
International Business: Strategy, Management, and the New Realities

Example of Protectionism: U.S. Steel Industry Bush administration imposed tariffs on imports of foreign steel to protect U.S. steel manufacturers from foreign competition, aiming to give the U.S. steel industry time to restructure and revive itself. Resulting higher steel costs:
increased production costs for firms that use

steel, such as Ford, Whirlpool and General Electric reduced prospects for selling products in world markets International made U.S. Business: Strategy, Management, andcompetitive steel firms less the New Realities

In 1980s, the U.S. government imposed

Example of Protectionism: Auto Industry

voluntary export restraints (quotas) on imports of cars from Japan, to insulate U.S. auto industry. Result 1: Detroit automakers had less of an incentive to improve quality, design, and overall product appeal. Result 2: Detroits ability to compete in the global auto industry was weakened.
International Business: Strategy, Management, and the New Realities

Price inflation Reduced variety, fewer choices

Consequences of Protectionism Reduced supply of goods to buyers

available to buyers Reduced industrial competitiveness Various adverse unintended consequences (e.g., while the U.S. dithers, other countries can race ahead)

International Business: Strategy, Management, and the New Realities

Rationale for Government Intervention

1. Tariffs and other barriers can generate 2.

3. 4. 5. 6.

government revenue. Safety, security, and welfare of citizens (e.g., FDA barriers on drug imports; barriers intended to protect national security) Broad-based economic, political, or social objectives (e.g., job creation) Reduce foreign competition Protect infant industries Preserve national culture and identity
International Business: Strategy, Management, and the New Realities

Special Interest Groups Trigger Protectionism

In a trade dispute, the U.S. government

imposed a $50 per ton duty on the import of Mexican cement after U.S. cement makers lobbied the U.S. Congress. Mexican imports can reach 10 percent of U.S. domestic cement consumption. The U.S. is one of the worlds largest cement consumers and, suffers from shortages, which are exacerbated by import restrictions. Mexico proposed substituting import quotas instead of the high cement import tariffs.
International Business: Strategy, Management, and the New Realities

Tariffs are Widespread

common. Advanced economies -- tariffs still a factor mainly in textiles, clothing, and agricultural products (e.g., the U.S. recently collected more tariff revenue on shoes than on cars; $1.63 billion vs. $1.60 billion in 2001). The European Union applies tariffs of up to 236 percent on meat, 180 percent on cereals, and 17 percent on tennis shoes. United Nations estimates that trade barriers in general cost developing economies over $100 billion in lost trading International Business: with developed countries opportunitiesStrategy, Management, and the New Realities
Developing economies -- tariffs are


WTO: A Force for Reducing Tariffs

Governments have tended to reduce

tariffs over time. Tariff reduction was the primary goal of the General Agreement on Tariffs and Trade (GATT) In 1995, the GATT became the World Trade Organization (WTO). Countries as diverse as Chile, Hungary, Turkey, and South Korea have liberalized their previously protected markets, lowering trade barriers.
International Business: Strategy, Management, and the New Realities


Nontariff Trade Barriers

Government policies that restrict trade without imposing a direct tax or duty. Quotas restrict the physical volume or value of products that firms can import into a country. Voluntary export/import restraints are voluntary quotas imposed by governments whereby firms agree to limit exports or imports of certain products. Import license a formal permission to import, which restricts imports in a way that is similar to quotas- a complicated, bureaucratic process in some countries Government regulations and technical standards e.g., safety regulations for motor vehicles, health regulations for hygienic food preparation, labeling requirements identifying country of origin, etc. Administrative Strategy, Management, and the New Realities International Business: or bureaucratic procedures


Investment Barriers
FDI and ownership restrictions are common in industries such as broadcasting, utilities, air transportation, military technology, and financial services, oil, fisheries, etc. Examples Canada government restricts foreign ownership of local movie studios and TV shows to protect its indigenous film and TV industry from excessive foreign influence. Mexico government restricts FDI by foreign investors to protect its oil industry. International Business: Strategy, Management, and the New Realities Services sector FDI and ownership restrictions


Currency Controls
Restricts the outflow of hard currencies

(such as the U.S. dollar, the euro, and the yen), and occasionally the inflow of foreign currencies. Repatriation of profits restrictions on revenue transfer from profitable operations back to the home country. Used to conserve valuable hard currency, reduce capital flight; particularly common in developing countries.
International Business: Strategy, Management, and the New Realities


Government grants (monetary or

other resources) to firms or industries, intended to ensure their survival by facilitating production at reduced prices, or encouraging exports. Examples: cash disbursements, material inputs, services, tax breaks, provision of infrastructure, government contracts at inflated prices. For example, in France the government provides large subsidies
International Business: Strategy, Management, and the New Realities


Examples of Subsidies
China- Firms such as China Minmetals ($12 b.

annual sales) and Shanghai Automotive ($12 b. annual sales), are in fact state enterprises partly owned by the Chinese government, receiving huge financial resources. In Europe and the U.S., governments provide agricultural subsidies to supplement the income of farmers and help manage the supply of agricultural commodities. In Europe, the Common Agricultural Policy (CAP) is a system of subsidies that represents about 40 percent of the European Union's budget, amounting to billions of euros annually. The U.S. government grants subsidies for such International Business: Strategy, Management, and the New Realities commodities as wheat, barley, cotton, milk,


Investment Incentives
Similar to subsidies, transfer payments

or tax concessions made directly to individual foreign firms to entice them to invest in the country. Examples Hong Kong government put up most of the cash $1.74 billion to build Hong Kong Disneyland. Austin, TX and Albany, NY competed to have Samsung Electronics build a semiconductor plant in their regions. Austin won, offering $225m in tax relief
International Business: Strategy, Management, and the New Realities


Market Liberalization in India

Independence from Britain in 1947. Adopted quasi-socialist model of isolationism

and strict government control. Poor economic performance due to high trade and investment barriers, state intervention in labor and financial markets, a large public sector, heavy regulation of business, and central planning. Early 1990s markets opened to foreign trade and investment, free-trade reforms, privatization of state enterprises. Protectionism has declined, but high tariffs (averaging International 20%) and Business: Strategy, Management, andare still in place. FDI limitations the New Realities


Market Liberalization in China

1949 Mao Tse Tung established a

communist regime, featuring centralized economic planning, agricultural sector, inefficient state-run industries, very limited international trade. 1980s began to liberalize economy. 1992 joined Asia-Pacific Economic Cooperation (APEC) group, a free-trade organization. 2001 joined the WTO; committed to reducing trade barriers and protecting intellectual property. International Business: Strategy, Management, and the New Realities 2004 Chinas GDP was four times the


How Firms Should Respond to Government Intervention 1. Research to gather knowledge and

intelligence. Understand the extent and nature of trade and investment barriers, and government intervention in each target market. 2. Choose the most appropriate entry strategies. Most firms choose exporting as their initial strategy. But, if high tariffs are present, FDI, joint ventures, or licensing may be better alternatives.
International Business: Strategy, Management, and the New Realities


How Firms Should Respond (contd) 3. Take advantage of foreign trade zones.
Areas where imports receive preferential tariff treatment. E.g., maquiladoras, assembly plants in northern Mexico that produce components typically destined for the U.S. Maquiladoras enable firms from the U.S., Asia, and Europe to tap low-cost labor, favorable tariffs, and government incentives. 4. Seek favorable customs classifications for exported products. Reduce exposure to trade barriers by appropriately classifying products according to the harmonized product code.
International Business: Strategy, Management, and the New Realities


How Firms Should Respond 5. (contd) Take advantage of investment incentives

and other government support programs. Government assistance in the form of subsidies and incentives helps reduce costs.

6. Lobby for freer trade and investment. For example, Mid-2000s the Doha round of WTO negotiations sought to make trade more equitable for developing countries. To increase lobbying effectiveness, foreign firms may hire former government officials. In the long run, firms undertake negotiations with public-sector decision makers
International Business: Strategy, Management, and the New Realities