IBM 2702 International Business Environment

Chapter 1 Globalization

Globalization refers to the shift toward a more integrated and interdependent

world economy.

Globalization of market: the merging of historically distinct and separate

national markets into one huge global marketplace.

o It has been argued for some that the taste and preference of

consumer in different nation are beginning to converge on some

global norm.

o It create global product.

Globalization of production: the sourcing of goods and services from

locations around the globe to take advantage of national differences in

the cost and quality of factor of production (such as labor, energy, land,

and capital).

Drivers of Globalization

Declining trade and investment barriers

o International trade occurs when firm exports goods or services to

consumers in another country.

o Foreign direct investment (FDI) occurs when a firm invests

resource in business activities outside its home country.

o Lower barriers to international trades then firm will increase

export and import so the market will be a single market.

The role of technological change

o Microprocessors and telecommunications

o Internet and world wide web

o Transportation technology

Globalization debate

Globalization , jobs and income

o Protest:

Globalization destroy manufacturing jobs in wealthy

develop nations.

Income inequality between skilled and unskilled labor in

develop nations.

o Support:

Countries specialize in production of goods that they can

produce efficiently.

Import goods that produce inefficiently cheaper.

Labor policies and the environment

o Protest :

Free trade leads to increase pollution and exploit the labor

of less developed nation.

o Support :

Growth rate and income of developing country is increasing

and tougher environment and labor law.

Globalization and nation sovereignty

o Protests:

Globalization limits nation’s ability to control its own

destiny

It shift economic power away from national government

and toward supranational organization

o Support:

WTO and UN exist to serve the collective interest of

members

If they fail to serve collectives, member-state will withdraw

support and thy will collapse.

Globalization and the world’s poor

o Protests:

Globalization is widening gap in income between rich and

poor nations.

o Supports:

Reason for economic stagnation of poor nation

Suffered from totalitarian government

Rapidly expanding population

Highly indebted poor countries

Chapter 2 National differences in political economy

Political system is the system of government in a nation.

Collectivism and individualism

o Collectivism

A political system that emphasizes collective goals over

individual goals.

Need of society as a whole are more important than

individual freedom.

Individual rights should be sacrificed for the good of

majority.

Property should be owned in common(No private property)

Socialism is a political philosophy advocating substantial

public involvement, through government ownership, in the

means of production and distribution.

1. Communist: socialism can be achieved only though

revolution and totalitarian dictatorship.

2. Social Democrats: those committed to achieving

socialism by democratic means.

o Individualism

Emphasis on the important of guaranteeing individual

freedom and self-expression

The welfare of society is best served by letting people

pursue their own economic interest

Interest individual should take precedence over the

interests of the state

Private property is more highly productive than communal

property

Democracy and totalitarianism

o Democracy is a political system in which government is by the

people, exercised either directly or through elected representative

Pure democracy: all citizens directly involve in political

decision making

Representative Democracy:

1. Citizens periodically elect individuals to present them

2. Elected representatives from a government, to make

a decisions on the behalf of electorate

An Ideal Representative Democracy in constitutional law

1. An individual’s right to freedom expression, opinion

and organization

2. A free media

3. Regular election

4. Universal adult suffrage

5. Limited terms for elected representatives

6. A fair court system that is independent from the

political system

7. A nonpolitical state bureaucracy

8. A nonpolitical police force and armed services

9. Free access to information

o Totalitarianism

Communist Totalitarianism: A version of collectivism

advocating that socialism can be achieved only though a

totalitarian dictatorship

Theocratic Totalitarianism: A political system in which

political power is monopolized by a party, group, or

individual that governs according to religious principles.

Tribal Totalitarianism: A political system in which a party,

group, or individual that represents the interests of a

particular tribe (ethnic group) monopolizes political power.

Right wing totalitarianism: A political system in which

political power is monopolized by a party, group, or

individual that generally permits individual economic

freedom but restricts individual political freedom, including

free speech, frequently on the ground that it would lead to

the rise of communism.

Economic system

1. Market economy

o All productivities activities are privately owned

o Demand and supply determines price and quantity produced

o Purchasing patterns of consumers determine what is produced

and in what quantity

o Supply must not be restricted(no monopoly exists)

o Role of government: encourage free and fair competition between

private producers.

o Free market system is more likely in individualism country

2. Command economy

o All productivities activities are state owned

o Government plans: what the goods and services that a country

produces, quantity and price

o Economy where collective goals are dominant

3. Mixed economy

o Some sectors of economy are private ownership while some

others have state ownership

o Number of mixed economies in the world today is falling due to

poor state-own enterprise management

o Government tend to take over troubled firms that are considered

to be vital to national interest

Legal system: Refer to the rules, or law, that regulate behavior

Processes by which the laws of a country are enacted &

enforced

Through which redress for grievances is obtained

Three types of legal system

1. Common law

Originated in England, it is used in U.S. legal system

Based on tradition precedent and usage

Common law system is flexible

Business contracts tend to be lengthy because they must consider

the many possible contingencies that can arise

2. Civil law

Civil law based on a detailed set of written rules and law that

organizes into a code

Less adversarial than common law

Less flexibility

Found in over 80 countries, including Germany, France, Japan, and

Russia

3. Theocratic law

Based on religious teachings

Three prominent theocratic legal system are Islamic, Hindu, and

Jewish law

Property right and corruption

Property: a resource that an individual or business owns

Property right: legal rights over the use and made of any income that may be

derived from that resource

Property rights can be violated in two ways

1. Private action

Theft, piracy, blackmail, and the like by private individuals or

groups

2. Public action

Public officials export income or resources from property holders

i. Excessive taxation

ii. Requiring expensive licenses or permits from property

holders

iii. Expropriation: taking assets into state ownership without

compensating the owners

iv. Corruption: demand bribes from businesses

Protection of intellectual property

Intellectual property

o Property that is the product of intellectual activity

Intellectual property rights

o Patent: Give in inventor of a product or process exclusive rights to

the manufacture, use, or sale of that invention for a define period

o Copy right: Exclusive legal right of authors composers,

playwrights, artists, and publisher to publish and dispose of their

work as they see fit

o Trademarks: designs and names, often officially registered, by

which merchants or manufacturers designate and differentiate

their products

Product safety and product liability

Product safety laws

o Set certain safety standards to which a product must adhere, ex.

Health

Product liability law

o Holding a firm and its officers responsible when a product causes

injury, death, or damage

o Liability laws are usually least extensive in less developed

countries

Determinants of economic development

Gross national income (GNI) per head of population

o Measures the total annual income received by a nation’s residents

o Yardstick for measuring economics growth

o GNI per person can be misleading because they don’t consider

differences in cost of living

A purchasing power parity(PPP)

o Adjustment GNI to reflect difference in cost of livings in different

country

o Not only GNI &PPP must consider growth rates also

Human development index (HDI)

o Measurement the quality of human life in a different countries

o UN creates HDI based on 3 factors

Life expectancy

Education attainment

Average income

Nature of economic transition

1. Deregulation

Removing legal restrictions on the free play of markets

Private enterprises are permitted

Removing price control

Removing barriers on foreign direct investment & international

trade

2. Privatization

Transfers the ownership of state property into the hands of

private investors

The sales of state assets through an auction

Private investor are motivated by potential profit to increase

productivity

For privatization to work, it must also be with deregulation and

opening economy

3. Legal system

Require law that protects property rights

Private mechanisms for contract enforcement

Chapter 3 differences in culture

What the culture?

Culture is a system of values and norms that are shared among a group

of people and that when taken together constitute a design for living

Collective programming of the mind which distinguishes the member of

one group to another

Society is a group of people who share a common set of values and

norms.

o Value

Abstract idea about what a group believes to be good,

right, and desirable

Values from the bedrock of culture

Values can affect attitudes toward political and economic

system

Value provide the context to establish a society’s norms

o Norms

The social rules and guidelines that prescribe appropriate

behavior in particular situations

Folkways: Routine conventions of everyday life like

dress codes, social banner, and neighborly behavior.

: Violation of folkways are not to a serious matter,

but can have a negative effect on business

Mores

o Norms that is central to functioning of a society

and its social life.

o Much greater significant than folkways

o Violating mores can bring serious retribution

ex. Indictment against theft, adultery

o In many societies, mores may be enacted to

become laws

The determination of culture

Political

Economic philosophy

Social structure

Religion

Language

Education

Social structure

1. Individual and group

a. Individual

i. western countries emphasize the individual achievement

ii. benefit: high level of entrepreneurship innovation

iii. harmful: lack of loyalty and commitment, difficult to build

work team group, no cooperation

b. Group

i. An association of two or more individuals who have a share

sense of identify

ii. Interact with each other on the basis of a common set of

expectations about each other’s behavior

iii. Group-oriented is common in many Asian societies, such as

japan

iv. Benefit: high level of cooperation & teamwork

2. Social stratification

: Social strata is hierarchy social categories based on family background,

occupation and income

Two dimension of society

Degree of social mobility

o The extent to which individuals can move out the strata into

which they are born

o Castes system: closed and most rigid system stratification.

Social position is determined by the family into which a

person is born. Can’t change in that position.

o Class system: open and less rigid system. The position a

person has by birth can be changed through achievement or

luck. Social mobility is possible.

Significance of social stratification for business

o Depend on class consciousness: a condition where people

tend to perceive themselves in term of their class

background

o Highly class conscious : less mobility, greater class conflict,

high antagonism between labor and management

o lower class conscious: encourage mobility, less conflict

3. Religion & ethical system

a. Religion

i. A system of shared beliefs and rituals that are concerned

with the realm of the sacred

b. Ethical systems

i. A set of moral principles, or value that are used to guide

and shape behavior

ii. Ethical practices are often closely intertwined with religion

4. Language

a. Spoken language

i. Include both spoken and written vocabulary.

ii. Language shapes the way people perceive the world

b. Unspoken language

i. Hand gestures

ii. Facial expressions

iii. Physical greetings

5. Education

a. Medium through which individuals learn many of language,

conceptual, and mathematical skills

b. Benefit of high education: high skilled workers, higher

productivity, higher economic growth

Hofetede framework

1. Power distance

a. How society deal with the fact that people are unequal in physical

and intellectual capabilities

b. High: inequality in power and wealth, High distance between

supervisor and subordinates

c. Low: greater equality

2. Individualism versus collectivism

a. Focus on relationship between the individual and his or her

follows

b. Individual

i. Ties between people are loose

ii. Individual achievement and freedom

iii. Hard work, faster innovation

c. Collectivism

i. Ties between people are tight

ii. Work toward collective goal

iii. Feel strong association to group

3. Uncertainty avoidance

a. The extent to which the members can accept ambiguous situation

and tolerate uncertainty

b. High: value job security, retirement benefits and strong need for

rules and regulations, lower employee turnover

c. Low: great readiness to take risk and change, innovation &

entrepreneurship

4. Masculinity versus femininity

a. Masculinity: sex roles are sharped differentiated

b. Femininity: little differentiation between men and women in same

job, relax lifestyles

5. Long-term orientation

a. Confucian teaching affect attitude toward time and persistence

b. High: strong long –term business relationship

c. Low: think about present status only

i. Protection of face

ii. Respect for tradition

iii. Reciprocation of gifts

Implication for international business

Cross cultural literacy

o An understanding of how cultural differences across and within

nations can affect the way in which business practiced

o Should be developed

o Doing business in different cultures require adaptation to conform

with value & norm of that culture

o Company may employ local managers

Ethnocentricity

o Belief that one’s own culture is superior to that of others

o Often result in disregard or contempt for the culture of other

countries

o Should be avoid

Chapter 4 ethics in international business

Ethical issues in international business

1. Employment practice

a. Wage, working hours, and working environment

b. Ethical question: when working conditions in a host nation are

poorer to those in a multinational’s home nation, what standard

should be applied?

Home (b) host (c)something in between

It depends on your ethic

2. Human right

a. Basic human rights still are not respected in many countries

b. Human rights such as freedom of speech, freedom of assembly,

freedom of movement, and so on

c. Those are taken for granted in developed countries, but are not

universally accepted

d. Ethical question: Is it ethical for MNE to do business in nation that

violates human right?

e. MNE can be a force of political and social progress that ultimately

improves the right of people in regressive regime.

3. Environmental pollution

a. Arise when environmental regulations in host nations are far

inferior to those in the home nation.

b. Ethical question: should MNE feel free to pollute in a developing

nation to have cost advantage?

4. Corruption

a. Ethical question: Is it ethical to make payments to foreign

government officials to gain economic advantage?

b. Foreign corrupt practices act

Outlawed the payment of bribes to foreign government

officials in order to gain business

But allow for facilitating payment=grease payment=speed

money

It is not payments to receive contracts or to obtain

preferential treatment

They are payments to ensure receiving the standard

treatment

c. Convention on combating bribery of foreign public officials in

international business transactions

Adopted by the organization for economic cooperation

and development

Obliges member states to make the bribery of foreign

public officials a criminal offense

Exclude facilitating payments made a expedite routine

government action are allowed

5. Moral obligation

a. Ethic question: should MNE have a responsibility to give

something back to the societies that made them grow and

prosper

b. Social responsibility

Idea that business people should take the social

consequences of economic actions into account when

making business decisions

Successful business need to know noblesse oblige and give

something back to society

Focus on managerial implications

What then is the best way for managers in a multinational firm to make sure

that ethical considerations figure into international business decisions?

1. Hiring and promotion

a. Favor hiring and promoting people with well-grounded sense of

personal ethics

b. Hire people who have a strong sense of personal ethics

c. Should not promote those who have displayed poor ethic

d. Prospective employee should find out as much as they can about

the ethical climate in an organization

2. Organization: build an organizational culture that places a high value on

ethical behavior by

a. Business must explicitly articulate values that place a string

emphasis on ethical behavior

i. Code of ethics: a formal statement of the ethical priorities a

business adheres to

b. Leader should give life and meaning to the code of ethics

c. Business should put in place a system of incentives

3. Leadership

a. Make sure that leaders within the business not only articulate the

rhetoric of ethical behavior

b. But also act in manner that is consistent with that rhetoric

4. Decision making process

a. Require people to consider the ethical dimension of business

decisions

Five step manager need to

1. Identify which stakeholder a decision would affect and in what

way

a. Internal stakeholders: people who work own the

business include all employees, the board of directors,

and stockholder

b. External stakeholders: the individuals or group who have

some claim on firm include customer, suppliers, lender,

government, union and general public

c. Moral imagination: stand in shoes of a stakeholder and

ask how a proposed decision might impact the

stakeholder

2. Determine whether a proposed would violate the fundamental

rights of any stakeholders

3. Establish moral intent: business must resolves to place moral

concerns ahead of other concerns

4. Company should engage in ethical behavior

5. Audit decision: business should review decision to ensure that

they were consistent with ethical principle

5. Develop moral courage

Employees in an international business may need

significant moral courage

Manager need to be able to walk away from decisions that

are profitable, but unethical

Employees need to be able to say no action that are

unethical

Chapter5 international trade theory

Free trade

A situation where a government does not attempt to influence

international trade

No tariffs & quotas

Citizens can guy from another country sell to another country freely

International trade theory

I. Mercantilism

a. An economic philosophy advocating that countries should

simultaneously encourage exports and discourage imports

b. Government intervention to achieve a surplus in the balance of

trade.

c. Recommended policies to maximize exports and minimize

imports.

d. Imports were limited by tariffs and quotas, while exports were

subsidized.

e. The flaw with mercantilism was that it viewed trade as a zero-sum

game.

f. A zero sum game is one in which a gain by one country results in a

loss by another

II. Absolute advantage

a. A country has an absolute advantage in the production of a

product when it is more efficient than any other country in

producing it.

b. This trade is a zero-sum game

c. Countries should specialize in the production of goods for which

they have an absolute advantage and then trade these for goods

produced by other countries

III. Comparative advantage

a. Occur when a country can produce a good with lower opportunity

cost than other

b. Comparative advantage arises from differences in labor

productivity

c. Comparative advantage is also positive sum game

d. Even a country does not have absolute advantage in any product,

both countries can benefit from trade.

Qualifications and assumptions

1. We have assumed a simple world in which there are only two countries

and two goods. In the real word, there are many countries and many

goods.

2. We have assumed away transportation costs between countries.

3. We have assumed away differences in the prices of resources in

different countries.

4. We have assumed that resources can move freely from the production

of one good to another within a country. In reality, this is not always the

case.

5. We have assumed constant return to scale; units of resources required

to produce a good are assumed to remain constant.

6. We have assumed that each country has a fixed amount of resource,

resources can’t move between countries.

7. We have assumed away the effects to trade on income distribution

within a country.

Heckscher-Ohlin theory

They argued that comparative advantage arises from differences in

national factor endowment

By factor endowments they meant the extent to which country is

endowed with such resource as land, labor, and capital.

The more abundant a factor, the lower cost

They predicts that countries will export those goods that make

intensive use of factors that are locally abundant, while importing

goods that make intensive use of factors that are locally scarce.

The Leontief Paradox

The United States was relatively abundant in capital compared to

other nations; the United States would be an exporter of a capital-

intensive goods and importer of labor-intensive goods.

He found that U.S. exports were less capital intensive than U.S.

imports

One possible explanation in that the United States has a special

advantage in producing new products or goods made with innovative

technologies.

The product life-cycle theory

A country will begin by exporting its product and later undertake

foreign direct investment as the product moves through its life cycle

and eventually become its import.

Raymond Vernon initially proposed the product life-cycle theory.

Vernon argued that wealth and size of the U.S. market gave U.S. firm

a strong incentive to develop new consumer products.

Over time, demand for the new product start to grow in other

advanced countries.

As it does, it becomes worthwhile for foreign producers to begin

producing for their home markets.

U.S. firms might set up production facilities for those advanced

countries where demand is growing.

As the market in the United States and other advanced nations

matures, the product becomes more standardized, and price

becomes the main competitive weapon.

The cycle by which the United States lost its advantage to other

advanced countries might be repeated once more, as developing

countries.

New trade theory

1. Increasing product variety and reducing cost

Economies of scale: unit cost reductions associated with a large

scale of output.

Ability to spread fixed cost over a large volume

Volume of production is higher :specialization is increase : cost per

unit will be decrease

2. Economies of scale (EOS) and first mover advantage

Economic and strategic advantages accruing to the first(early) to

enter the market

Ability to capture EOS ahead of later entrant

First movers can create a barrier to entry

Country can dominate in the export of certain goods because

I. EOS are important

II. World market is not large enough to support many firms

III. Firms located in countries where the first to capture EOS

Implications of new trade theory

I. Nation may benefit from trade even when they do not differ

in resource endowments or technology.

II. A country may predominate in the export of good simply

because it was lucky enough to have one or more firms

among the first to produce that good.

National competitive advantage

Explain why a nation achieves international success in particular industry

Attributes of a nation shape the environment in which local firm

compete

These attributes promote or impede competitive advantage

Porter’s diamonds

o Factor endowments: a nation’s position in factor of production

such as skilled labor or the infrastructure necessary to compete in

a given industry.

o Demand condition: the nature of home demand for the industry’s

product or service.

o Relating and supporting industries: the presence or absence of

supplier industries and related industries that is internationally

competitive.

o Firm strategy, structure, and rivalry: the conditions governing how

companies are created, organized, and managed and the nature

of domestic rivalry

Focus on managerial implications

I. Location

a. Difference countries have advantages in different productive

activities

b. Influence a firm’s decision about where to locate productive

activities

c. A firm should disperse its productive activities to those countries

where they can be performed most efficiently

II. First mover advantage

a. Firm that establish a first-mover advantage in the production of a

new product may later dominate global trade in that product

b. A firm can invest resources in trying to build first mover advantage

c. Even if it means losses for a few years before a venture becomes

profitable

III. Government policy

a. Business can exert a string influence on government policy

b. Lobbying to promote free trade or trade restriction

c. Business should urge government to

i. Increase investment in education, infrastructure, and basic

research

ii. Adopt policies that promote strong competition within

domestic market.

Chapter 6 The Political Economy of International Trade

Instruments of trade policy

I. Tariffs is a tax levied on imports

a. Specific tariff: a tariff levied as a fixed charge for each unit of good

imported.

b. Ad valorem tariff: a tariff levied as a proportion of the value of an

imported good.

II. Subsidy is a government payment to a domestic producer.

a. Cash grants, low-interest loan, tax break, and government equity

participation in domestic firm.

b. Help domestic producer in two ways

i. Competing against foreign imports

ii. Gaining export markets

Import quotas and voluntary export restraints

Import quota is a direct restriction on the quantity of some good that

may be imported into a country.

Tariff rate quota is the process of applying a lower tariff rate to imports

within the quota than those over the quota.

Voluntary export restriction is a quota on trade imposed by the

exporting country, typically at the request of the importing country’s

government.

Quota rent is the extra profit producers make when supply is artificially

limited by an import quota.

Local content requirements

A requirement that some specific traction of a good be produced

domestically.

Administrative policy

Bureaucratic rules designed to make it difficult for import to enter a

country.

Antidumping policy

Dumping is selling goods in a foreign market at below their costs of

production or below their fair market value.

Antidumping policy is designed to punish foreign firms that engage in

dumping and thus protect domestic producers from unfair foreign

competition.

The case for government intervention

Political arguments for intervention

o Protecting job & industry from unfair foreign competition.

o National security

It is necessary to protect certain industries because they are

important for national security.

It is dangerous to rely primarily on foreign producers.

Limit export to other nations

o Retaliation

Argue that government should use the threat to intervene

in trade policy as a bargaining tool to help open foreign

markets.

And force trading partners to play by the rule of the game.

o Protecting consumers

Argue that government use trade policy to protect

consumers from unsafe products.

Government should limit or ban import of unsafe product

o Furthering foreign policy objective

Government used trade policy to support their foreign

policy objective.

Government may grant preferential trade terms to a

country which it wants to build strong relations

Trade policy also is used to pressure or punish rouge states

that do not abide by international law.

o Protecting human rights

Government used trade policies to improve human rights

for trading partners.

o Protect environment

Suggests the relationship between income levels and

pollution is not a linear one.

It is argued that government should place tariff on import

goods from countries where environmental regulation are

lax.

Economic arguments for intervention

o Infant industry argument

New industries in developing countries must be temporarily

protected from international competition to help them

reach a position where they can compete on world markets

with the firms of developed nations.

o Strategic trade policy

Government policy aimed at improving the competitive

position of a domestic industry or domestic firm in the

world market.

The revised case for free trade

Retaliation and trade war

o Strategic trade policies are beggar-thy-neighbor policy

o That boosts national income at the expense of other countries.

o Using trade policies may provoke retaliation

o Result a trade war: all countries will worse off than if a hands off

approach.

Domestic policy

o Government do not always use trade policies for national interest

o They can be influenced by special interest groups.